Rule2024-24528
Compensation for Reactive Power Within the Standard Power Factor Range
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Published
November 26, 2024
Effective
January 27, 2025
Issuing agencies
Energy DepartmentFederal Energy Regulatory Commission
Abstract
In this final determination, the Federal Energy Regulatory Commission (Commission) finds that allowing transmission providers to charge transmission customers for a generating facility's provision of reactive power within the standard power factor range is unjust and unreasonable. The Commission, therefore, is revising Schedule 2 of its pro forma open-access transmission tariff (OATT), section 9.6.3 of its pro forma large generator interconnection agreement (LGIA), and section 1.8.2 of its pro forma small generator interconnection agreement (SGIA) to prohibit the inclusion in transmission rates of any charges related to the provision of reactive power within the standard power factor range by generating facilities.
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[Federal Register Volume 89, Number 228 (Tuesday, November 26, 2024)]
[Rules and Regulations]
[Pages 93410-93456]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-24528]
[[Page 93409]]
Vol. 89
Tuesday,
No. 228
November 26, 2024
Part II
Department of Energy
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Federal Energy Regulatory Commission
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18 CFR Part 35
Compensation for Reactive Power Within the Standard Power Factor Range;
Final Rule
Federal Register / Vol. 89, No. 228 / Tuesday, November 26, 2024 /
Rules and Regulations
[[Page 93410]]
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DEPARTMENT OF ENERGY
Federal Energy Regulatory Commission
18 CFR Part 35
[Docket No. RM22-2-000; Order No. 904]
Compensation for Reactive Power Within the Standard Power Factor
Range
AGENCY: Federal Energy Regulatory Commission.
ACTION: Final determination.
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SUMMARY: In this final determination, the Federal Energy Regulatory
Commission (Commission) finds that allowing transmission providers to
charge transmission customers for a generating facility's provision of
reactive power within the standard power factor range is unjust and
unreasonable. The Commission, therefore, is revising Schedule 2 of its
pro forma open-access transmission tariff (OATT), section 9.6.3 of its
pro forma large generator interconnection agreement (LGIA), and section
1.8.2 of its pro forma small generator interconnection agreement (SGIA)
to prohibit the inclusion in transmission rates of any charges related
to the provision of reactive power within the standard power factor
range by generating facilities.
DATES: Effective January 27, 2025.
FOR FURTHER INFORMATION CONTACT:
Paul Robinson (Technical Information), Office of Energy Market
Regulation, 888 First Street NE, Washington, DC 20426, (202) 502-8460,
<a href="/cdn-cgi/l/email-protection#f4a4958198daa69b969d9a879b9ab492918697da939b82"><span class="__cf_email__" data-cfemail="eebe8f9b82c0bc818c87809d8180ae888b9c8dc0898198">[email protected]</span></a>
Jennifer Enos (Legal Information), Office of the General Counsel, 888
First Street NE, Washington, DC 20426, (202) 502-6247,
<a href="/cdn-cgi/l/email-protection#86cce3e8e8efe0e3f4a8c3e8e9f5c6e0e3f4e5a8e1e9f0"><span class="__cf_email__" data-cfemail="5c16393232353a392e721932332f1c3a392e3f723b332a">[email protected]</span></a>
SUPPLEMENTARY INFORMATION:
Table of Contents
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Paragraph
Nos.
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I. Background............................................... 3
A. Historical Framework Including Order Nos. 888 and 3
2003...................................................
B. Notice of Inquiry and Notice of Proposed Rulemaking.. 16
II. Discussion.............................................. 20
A. Need for Reform...................................... 27
1. Comments............................................. 29
2. Commission Determination............................. 49
B. Cost of Producing Reactive Power..................... 62
1. Comments............................................. 66
2. Commission Determination............................. 89
C. Cost Recovery........................................ 109
1. Comments............................................. 113
2. Commission Determination............................. 141
D. Reliability.......................................... 155
1. Comments............................................. 157
2. Commission Determination............................. 165
E. Investment........................................... 170
1. Comments............................................. 171
2. Commission Determination............................. 178
F. Additional Comments.................................. 187
1. Comments............................................. 187
2. Commission Determination............................. 201
III. Compliance Procedures.................................. 202
A. Revisions to Eliminate Compensation for Reactive 202
Power Supply Within the Standard Power Factor Range....
1. Revise Schedule 2 of the Commission's Pro Forma OATT. 203
2. Revise Section 9.6.3 of the Pro Forma Large Generator 204
Interconnection Agreement..............................
3. Revise Section 1.8.2 of the Pro Forma Small Generator 205
Interconnection Agreement..............................
4. Compliance Procedures................................ 206
B. Transition Period.................................... 207
1. Comments............................................. 210
2. Commission Determination............................. 224
IV. Information Collection Statement........................ 228
V. Environmental Analysis................................... 242
VI. Regulatory Flexibility Act.............................. 243
VII. Document Availability.................................. 247
VIII. Effective Date and Congressional Notification......... 250
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1. In this final determination, pursuant to section 206 of the
Federal Power Act (FPA), the Federal Energy Regulatory Commission finds
that allowing public utility transmission providers (transmission
providers) \1\ to charge transmission customers for a generating
facility's provision of reactive power within the standard power factor
range is unjust and unreasonable. The Commission, therefore, is
revising Schedule 2 of the
[[Page 93411]]
Commission's pro forma OATT to prohibit transmission providers from
including in their transmission rates any charges associated with the
provision of reactive power within the standard power factor range from
generating facilities and requiring transmission providers to make
compliance filings to update Schedule 2 of their OATTs accordingly.\2\
The final determination further revises the Commission's pro forma LGIA
and pro forma 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 generating facilities for the same service, and the final
determination requires transmission providers to make compliance
filings to update their pro forma interconnection agreements
accordingly. As a result of this final determination, transmission
providers will be required to pay an interconnection customer for
reactive power only when the transmission provider requests or directs
the interconnection customer to operate its facility outside the
standard power factor range set forth in its interconnection agreement.
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\1\ Section 201(e) of the FPA, 16 U.S.C. 824(e), defines
``public utility'' to mean ``any person who owns or operates
facilities subject to the jurisdiction of the Commission under this
subchapter.'' As stated in the Order No. 888 pro forma OATT,
``transmission provider'' is a ``public utility (or its Designated
Agent) that owns, controls, or operates facilities used for the
transmission of electric energy in interstate commerce and provides
transmission service under the Tariff.'' Promoting Wholesale
Competition Through Open Access Non-Discriminatory Transmission
Servs. by Pub. Utils.; Recovery of Stranded Costs by Pub. Utils. &
Transmitting Utils., Order No. 888, FERC Stats. & Regs. ] 31,036
(1996) (cross-referenced at 75 FERC ] 61,080), order on reh'g, Order
No. 888-A, FERC Stats. & Regs. ] 31,048 (cross-referenced at 78 FERC
] 61,220), order on reh'g, Order No. 888-B, 81 FERC ] 61,248 (1997),
order on reh'g, Order No. 888-C, 82 FERC ] 61,046 (1998), aff'd in
relevant part sub nom. Transmission Access Pol'y Study Grp. v. FERC,
225 F.3d 667 (D.C. Cir. 2000), aff'd sub nom. N.Y. v. FERC, 535 U.S.
1 (2002); Pro forma OATT section I.1 (Definitions). The term
``transmission provider'' includes a public utility transmission
owner when the transmission owner is separate from the transmission
provider, as is the case in regional transmission organizations
(RTO) and independent system operators (ISO).
\2\ Operating ``inside the standard power factor range'' refers
to a generating facility providing reactive power within the power
factor range set forth in the generating facility's interconnection
agreement when the unit is online and synchronized to the
transmission system. The standard power factor range is sometimes
referred to as the ``deadband.'' Compensation for Reactive Power
Within the Standard Power Factor Range, Notice of Proposed
Rulemaking, 89 FR 21,454 (Mar. 28, 2024) (cross-referenced at 186
FERC ] 61,203, at P 2 n.1) (NOPR).
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2. As discussed below, the Commission has a statutory duty to
ensure that transmission rates are and remain just and reasonable. We
find that this reform will ensure that transmission providers do not
pass onto transmission customers unjust and unreasonable charges that
lack a sufficient economic basis or justification and yield no
commensurate benefit for ratepayers.
I. Background
A. Historical Framework Including Order Nos. 888 and 2003
3. Almost all bulk electric power is generated, transported, and
consumed in alternating current (AC) networks. Reactive power, which is
measured in megavolt-amperes reactive (MVAr),\3\ is a critical
component of operating an AC electricity system and is required to
control system voltage within appropriate ranges for efficient and
reliable operation of the transmission system. Reactive power supports
the voltages that must be controlled to provide for delivery of real
power and for system reliability. Reactive power can be produced or
absorbed \4\ by generating facilities, power electronic equipment such
as flexible AC transmission system devices, transmission lines and
equipment, and load. As relevant here, generating facilities must
either produce or absorb reactive power for the transmission system to
maintain voltage levels required to reliably supply real power from
generation to load.
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\3\ MVAr is the typical unit of measurement for reactive power.
\4\ A generating facility's leading reactive power indicates its
ability to absorb reactive power, and its lagging reactive power
indicates its ability to produce reactive power.
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4. In Order No. 888, the Commission required that reactive supply
and voltage control from generating facilities be offered as a discrete
ancillary service by transmission providers and, to the extent
feasible, charged for on the basis of the amount required.\5\ The
Commission explained that there are two ways of supplying reactive
power and controlling voltage. One is to install facilities as part of
the transmission system, the cost of which is part of the cost of basic
transmission service. The second is to use generating facilities to
supply reactive power and voltage control, which must be unbundled from
basic transmission service.
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\5\ Order No. 888, FERC Stats. & Regs. ] 31,036, at 31,705-07 &
n.359.
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5. With respect to compensation, the Commission stated that the
transmission provider's ``rates for ancillary services should be cost-
based.'' \6\ The Commission expected, however, that transmission
customers would be able to change the amount of reactive power service
they required. The Commission also identified the possibility that
reactive power could potentially be supplied by ``a competitive market
for such service'' if ``technology or industry changes'' made such a
market possible.\7\
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\6\ Id. at 31,720.
\7\ Id. at 31,707 & n.359.
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6. The Commission's policy on reactive power compensation has
evolved since issuing Order No. 888 in 1996.\8\ In Order No. 2003, the
Commission adopted a standard agreement for the interconnection of
large generating facilities (the pro forma LGIA), and specifically
addressed the circumstances under which a transmission provider must
pay an interconnection customer for reactive power depending upon
whether such reactive power was inside or outside the standard power
factor range.\9\ This standard agreement included the requirement that
interconnection customers maintain a composite power delivery at a
continuous rate of power output at the generating facility's point of
interconnection at a power factor within the range of 0.95 leading to
0.95 lagging when synchronized to the transmission system, unless the
transmission provider has established a different power factor
range.\10\ Order No. 2003 required that a transmission provider
compensate an interconnection customer for reactive power when the
transmission provider requests that the interconnection customer
operate its generating facility outside the established power factor
range. With respect to reactive power within the established power
factor range, the Commission concluded in Order No. 2003 that the
interconnection customer should not be compensated for reactive power
when operating within the range established in the interconnection
agreement because doing so ``is only meeting [the generating
facility's] obligation.'' \11\ However, in Order No. 2003-A, the
Commission clarified that ``if the Transmission Provider pays its own
or its affiliated generators for reactive power within the established
range, it must also pay the Interconnection Customer.'' \12\ This
standard is generally referred to as the ``comparability standard.''
\13\
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\8\ Id. at 31,705-07 & n.359.
\9\ Standardization of Generator Interconnection Agreements &
Procs., Order No. 2003, 68 FR 49846 (Aug. 19, 2003), 104 FERC ]
61,103, at P 546 (2003), order on reh'g, Order No. 2003-A, 69 FR
15932 (Mar. 26, 2004), 106 FERC ] 61,220, order on reh'g, Order No.
2003-B, 70 FR 265 (Jan. 4, 2005), 109 FERC ] 61,287 (2004), order on
reh'g, Order No. 2003-C, 70 FR 37661 (June 30, 2005), 111 FERC ]
61,401 (2005), aff'd sub nom. Nat'l Ass'n of Regul. Util. Comm'rs v.
FERC, 475 F.3d 1277 (D.C. Cir. 2007).
\10\ The power factor is the ratio of a generating facility's
real power to its apparent power, where apparent power is the total
power output of the system (both real and reactive power). Power
factors can range from 1.0 to 0.0, with 1.0 representing only real
power and 0.0 representing only reactive power.
\11\ Order No. 2003, 104 FERC ] 61,103 at P 546.
\12\ Order No. 2003-A, 106 FERC ] 61,220 at P 416. Order No.
2003-A also exempted wind generating facilities from maintaining the
established power factor range. Id. P 34.
\13\ In Order No. 2006, the Commission adopted identical power
factor and compensation requirements for small generating facilities
(those with a capacity of 20 MW or less) and initially exempted
small wind generating facilities from the reactive power requirement
before Order No. 827 eliminated such exemptions. Reactive Power
Requirements for Non-Synchronous Generation, Order No. 827, 81 FR
40793 (June 23, 2016), 155 FERC ] 61,277, order on clarification and
reh'g, 157 FERC ] 61,003 (2016); Standardization of Small Generator
Interconnection Agreements & Procs., Order No. 2006, 111 FERC ]
61,220, order on reh'g, Order No. 2006-A, 70 FR 71760 (Nov. 30,
2005), 113 FERC ] 61,195 (2005), order granting clarification, Order
No. 2006-B, 71 FR 42587 (July 27, 2006), 116 FERC ] 61,046 (2006).
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[[Page 93412]]
7. Order No. 661 established technical requirements for
interconnecting large wind resources and maintained the exemption from
providing reactive power, except where the transmission provider
showed, through a system impact study, that reactive power capability
was required to ensure safety or reliability.\14\ In Order No.
2006,\15\ the Commission adopted identical power factor and
compensation requirements for small generating facilities (facilities
that have a capacity of no more than 20 megawatts (MW)) but exempted
small wind generating facilities from the reactive power requirement.
Subsequently, in Order No. 827,\16\ the Commission eliminated the
exemptions for both small and large wind generating facilities, thus
requiring those facilities to provide reactive power. The Commission
explained that it had previously exempted wind generators from the
uniform reactive power requirement because, historically, the costs to
design and build a wind generator that could provide reactive power
were high and could have created an obstacle to the development of wind
generation. But the Commission found in Order No. 827 that, due to
technological advancements since the establishment of those exemptions,
the cost of providing reactive power no longer presented an obstacle to
the development of wind generation, and therefore found that the
exemptions had become unjust and unreasonable.\17\ The Commission
therefore required all newly interconnecting non-synchronous generating
facilities to provide reactive power within the range of 0.95 leading
to 0.95 lagging at the high-side of the generator substation
transformer as a condition of interconnection.
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\14\ Interconnection for Wind Energy, Order No. 661, 70 FR 34993
(June 16, 2005), 111 FERC ] 61,353, order on reh'g, Order No. 661-A,
70 FR 75005 (Dec. 19, 2005), 113 FERC ] 61,254 (2005).
\15\ Order No. 2006, 111 FERC ] 61,220.
\16\ Order No. 827, 155 FERC ] 61,277.
\17\ See also PJM Interconnection, L.L.C., 151 FERC ] 61,097, at
P 28 (2015) (finding that, since Order No. 661, the cost of the
technology necessary for a non-synchronous resource to provide
reactive power has lessened such that the cost of installing
equipment that is capable of providing reactive power is comparable
to the costs of a traditional generator).
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8. In sum, ``Order Nos. 2003 and 2003-A establish a reactive power
compensation policy that, in the first instance, treats the provision
of reactive power inside the [standard power factor range] as an
obligation of good utility practice rather than as a compensable
service and permits compensation inside the [standard power factor
range] only as a function of comparability.'' \18\ ``Put differently,
reactive support by generating facilities operating within the standard
power factor range ensures that when these facilities inject real
power--the product that their facilities exist to create and sell--onto
the grid under normal conditions, they can do their part to maintain
adequate voltages and to not threaten reliability.'' \19\ By contrast,
reactive power provided outside of the standard power factor range is
considered an ancillary service for transmitting power across the
transmission system to serve load,\20\ and thus, the Commission has
required compensation for such service.
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\18\ Bonneville Power Admin. v. Puget Sound Energy, Inc., 120
FERC ] 61,211 (2007) (BPA), order denying reh'g and granting
clarification, 125 FERC ] 61,273, at P 18 (2008) (BPA Rehearing
Order). See also BPA Rehearing Order, 125 FERC ] 61,273 at P 15 &
n.24 (``[N]either affiliated nor non-affiliated generators have an
inherent right to any compensation for reactive power inside the
deadband.''). Accord., Midcontinent Indep. Sys. Operator, Inc., 182
FERC ] 61,033 (MISO), order on reh'g, 184 FERC ] 61,022, at P 23
(2023) (MISO Rehearing Order); Sw. Power Pool, Inc., 119 FERC ]
61,199 (SPP), order on reh'g, Sw. Power Pool, Inc., 121 FERC ]
61,196, at 61,968 (2007) (SPP Order on Rehearing) (``[R]eactive
power is required for an interconnecting generator to deliver its
power and reactive power produced within the deadband and is,
therefore, generally not compensable.''); Mich. Elec. Transmission
Co., 97 FERC ] 61,187, at 61,852-53 (2001) (METC Rehearing Order)
(``Providing reactive power within design limitations is not
providing an ancillary service; it is simply ensuring that a
generator lives up to its obligations.''); Consumers Energy Co., 94
FERC ] 61,230, at 61,834 (2000) (affirming the Commission's
rejection of generators' request for reactive power compensation
when operating within a facility's reactive power design limitation,
stating that as a condition of interconnecting to the transmission
provider's system, ``to ensure system security,'' the generator was
required to provide equipment, ``at its own cost, to meet its
reactive power obligations as provided for in [its interconnection
agreement].''(emphasis added)); cf. Dynegy Midwest Generation, Inc.,
125 FERC ] 61,280, at P 16 (2008) (``Reactive power is a localized
service that is quickly used by transmission system components and
cannot be transported over long distances.'').
\19\ MISO Rehearing Order, 184 FERC ] 61,022 at P 23.
\20\ See, e.g., id. at PP 23-24 (citing METC Rehearing Order, 97
FERC at 61,852-53).
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9. Consistent with Order Nos. 2003 and 2003-A and Commission
precedent that pre-dated those Orders, the Commission has permitted
transmission providers to eliminate separate compensation for
generating facilities providing reactive power within the standard
power factor range.\21\ In these cases, the Commission affirmed its
determination that the provision of reactive power within the standard
power factor range is not compensable except as a matter of
comparability. For example, in BPA, the Commission granted a complaint
filed by Bonneville Power Administration (BPA) arguing that the rate
schedules of certain independent power producers (IPP) for reactive
power within the standard power factor range, often referred to as a
``deadband,'' were no longer just and reasonable given BPA's decision
to no longer pay its own or affiliated generators for providing this
service.\22\ The Commission found that ``Commission policy clearly
allows BPA to discontinue paying all its merchants for inside the
deadband reactive power service,'' explaining that ``[t]he Commission's
policy is not new; we confirmed it in Order No. 2003, when we stated
that an interconnecting generator `should not be compensated for
reactive power when operating its Generating Facility within the
established power factor range, since it is only meeting its
obligation.'' \23\
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\21\ See, e.g., MISO, 182 FERC ] 61,033 at PP 52-53; MISO
Rehearing Order, 184 FERC ] 61,022 at PP 26-27; Pub. Serv. Co. of
N.M., 178 FERC ] 61,088, at PP 29-31 (2022) (PNM); Nev. Power Co.,
179 FERC ] 61,103, at PP 20-21 (2022); BPA, 120 FERC ] 61,211 at P
20; E.ON U.S. LLC, 119 FERC ] 61,340, at P 15 (2007); Entergy
Servs., Inc., 113 FERC ] 61,040, at P 38 (2005).
\22\ BPA, 120 FERC ] 61,211 at PP 19-20; BPA Rehearing Order,
125 FERC ] 61,273 at PP 10-11.
\23\ BPA, 120 FERC ] 61,211 at PP 19-20 (citing Order No. 2003,
FERC Stats. & Regs. ] 31,146 at P 546); METC Rehearing Order, 97
FERC at 61,852 (``Providing reactive power within design limitations
is not providing an ancillary service; it is simply ensuring that a
generator lives up to its obligations.'').
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10. The Commission has also found that a transmission provider's
decision to end compensation for reactive power within the standard
power factor range does not compromise a generating facility's ability
to recover costs that it may incur in producing reactive power within
this range.\24\ For example, the Commission has observed that
generating facilities ``may be able to recover the costs for reactive
power within the deadband in other ways--such as through higher power
sales rates of their own.'' \25\ In response to arguments by certain
independent power producers that such recovery is infeasible because of
competition, the Commission has found that ``since the incremental cost
of reactive power service within the deadband is minimal, the
infeasibility argument lacks plausibility. The purpose for which
generation assets are built (including reactive power capability to
maintain voltage levels for generation entering the grid) is to make
sales of real power.'' \26\
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\24\ Id. PP 19-22.
\25\ Id. P 21 (citing Sw. Power Pool, Inc., 119 FERC ] 61,199,
at P 39).
\26\ Id.
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11. The Commission made similar findings in MISO, wherein it
accepted an FPA section 205 application by
[[Page 93413]]
Midcontinent Independent System Operator, Inc. (MISO) transmission
owners to end generator compensation for the provision of reactive
power within the standard power factor range.\27\ In accepting MISO
transmission owners' proposal, the Commission reiterated its
longstanding policy ``that the provision of reactive power within the
standard power factor range is, in the first instance, an obligation of
the interconnecting generator and good utility practice,'' such that
``MISO [transmission owners] do not have an obligation to continue to
compensate an independent generator for reactive power within the
standard power factor range when its own or affiliated generators are
no longer being compensated.'' \28\ The Commission also rejected any
reliance arguments, reasoning in part that the provision of reactive
power within the standard power factor range required little or no
incremental investment given that, for both synchronous and non-
synchronous generating facilities,\29\ the same equipment is used for
the production of real power and reactive power.\30\ In addition, the
Commission found that generating facilities have other opportunities,
beyond Schedule 2, to seek to recover their costs of providing reactive
power.\31\
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\27\ MISO, 182 FERC ] 61,033 at P 53 (``Bearing in mind that the
provision of reactive power within the standard power factor range
is, in the first instance, an obligation of the interconnecting
generator and good utility practice, MISO [transmission owners] do
not have an obligation to continue to compensate an independent
generator for reactive power within the standard power factor range
when its own or affiliated generators are no longer being
compensated.'' (citation omitted)); see also PNM, 178 FERC ] 61,088
at PP 29, 33 (accepting PNM's revisions to eliminate compensation
for reactive service under Schedule 2 and rejecting generators'
arguments that it is ``just and reasonable for it to be compensated
for investments made'' to provide reactive support consistent with
interconnection requirements even though PNM elected to no longer
pay its own or affiliated generators for such reactive power).
\28\ MISO, 182 FERC ] 61,033 at P 53. The Commission found
``those protests that challenge these well-established policies to
be collateral attacks on these earlier determinations.'' Id.
\29\ Synchronous generating facilities (e.g., coal, gas, nuclear
resources) produce electricity in sync with the transmission system
at the system frequency. Non-synchronous generating facilities
(e.g., solar, wind, battery storage resources) produce electricity
that is initially not in sync with the transmission system and use
inverters to convert their electrical output to synchronize with the
transmission system. See FERC, Payment for Reactive Power, 7 (Apr.
22, 2014) (2014 Staff Report), <a href="https://www.ferc.gov/sites/default/files/2020-05/04-11-14-reactive-power.pdf">https://www.ferc.gov/sites/default/files/2020-05/04-11-14-reactive-power.pdf</a>.
\30\ MISO Rehearing Order, 184 FERC ] 61,022 at PP 29-30 (citing
S. Co. Servs., Inc., 80 FERC ] 61,318, at 62,091 (1997) (noting also
that the primary function of a generating plant is to produce real
power; thus, if costs were allocated based on the ``predominant''
function of the equipment, ``all of the costs of generation would
thus be assigned to real power production and there would be no
basis for any separate reactive power charge''); BPA, 120 FERC ]
61,211 at P 21 (finding that the incremental cost of reactive power
service within the standard power factor range is minimal); METC
Rehearing Order, 97 FERC at 61,852-53 (``[R]eactive power provided,
not as an ancillary service, but rather as a `no cost' service
within reactive design limitations, may therefore, be provided
without compensation.'').
\31\ MISO Rehearing Order, 184 FERC ] 61,022 at PP 40-42; SPP,
119 FERC ] 61,199 at P 39 (stating that IPPs ``are free to negotiate
rates that they charge their customers for real power that are
sufficient to compensate them for any costs that they may incur in
producing reactive power within their deadbands, just as affiliated
generators may seek to negotiate rates that they charge their
customers that are sufficient to compensate them for the costs of
any reactive power that they provide within their deadbands.'').
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12. Consistent with Order Nos. 2003 and 2003-A and other Commission
precedent, multiple RTOs/ISOs and non-RTO/ISO transmission providers
have elected not to compensate generating facilities for providing
reactive power within the standard power factor range under Schedule 2
of their OATTs.\32\
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\32\ See, e.g., MISO, 182 FERC ] 61,033 at PP 52-53; MISO
Rehearing Order, 184 FERC ] 61,022 at P 26; PNM, 178 FERC ] 61,088
at PP 29-31; Nev. Power Co., 179 FERC ] 61,103 at PP 20-21; BPA, 120
FERC ] 61,211 at P 20; E.ON U.S. LLC, 119 FERC ] 61,340 at P 15;
Entergy Servs., Inc., 113 FERC ] 61,040 at P 38.
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13. Of the six Commission-jurisdictional RTOs/ISOs, only three
currently compensate generating facilities for reactive power provided
within the standard power factor range. Generating facilities in PJM
Interconnection, L.L.C. (PJM) \33\ generally use the cost-based AEP
Methodology to calculate cost-of-service rates for the production of
reactive power.\34\ Because the same generation equipment contributes
to the production of both real power and reactive power, the AEP
Methodology allocates the costs of each piece of equipment to real
power service and reactive power service by assigning the cost of each
piece of equipment to either real power service, reactive power
service, or both. ISO New England Inc. (ISO-NE) \35\ and New York
Independent System Operator, Inc. (NYISO) \36\ compensate generating
facilities for reactive power under flat rate designs that are adjusted
for inflation.\37\
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\33\ PJM Interconnection, L.L.C., Intra-PJM Tariffs, OATT
Schedule 2, (Reactive Supply and Voltage Control from Generation or
Other Sources Service) (4.0.0).
\34\ The AEP Methodology derives its name from Opinion No. 440,
where the Commission approved AEP's, a vertically integrated
utility, method for calculating the costs of synchronous generation
equipment associated with the production of reactive power. See Am.
Elec. Power Serv. Corp., Opinion No. 440, 88 FERC ] 61,141 (1999),
order on reh'g, 92 FERC ] 61,001 (2000). In WPS Westwood, the
Commission recommended that all generating facilities that have
actual cost data and support documentation use the AEP Methodology.
See WPS Westwood Generation, LLC, 101 FERC ] 61,290, at P 14 (2002).
\35\ ISO New England Inc., ISO New England Inc. Transmission,
Markets and Services Tariff, Schedule 2 (Reactive Supply and Voltage
Control Service) (8.0.0).
\36\ New York Independent System Operator, Inc., NYISO Tariffs,
NYISO OATT, Sec. 6.2 OATT Schedule 2 (Charges For Voltage Support
Service) (6.0.0).
\37\ Both ISO-NE and NYISO proposed their respective reactive
power capability compensation mechanisms pursuant to section 205
filings. See ISO New England Inc., 122 FERC ] 61,056, at P 1 (2008)
(settling, in part, for a new flat rate in $/kVAR-yr). N.Y. Indep.
Sys. Operator, Inc., Docket No. ER02-617-000 (Feb. 5, 2002)
(delegated order accepting NYISO's amended Rate Schedule 2 of the
Market Administration and Control Area Services Tariff).
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14. California Independent System Operator Corporation (CAISO),\38\
Southwest Power Pool, Inc. (SPP),\39\ and MISO \40\ do not pay
separately for reactive power within the standard power factor range.
---------------------------------------------------------------------------
\38\ CAISO never provided compensation for reactive power within
the standard power factor range. See Cal. Indep. Sys. Operator
Corp., 160 FERC ] 61,035, at P 7 (2017) (explaining that CAISO
considered the possibility of compensating generating facilities for
reactive power in its stakeholder process, but decided against it,
reasoning that the ability to provide reactive power is part of a
generator's fixed costs, which are recovered through power purchase
agreements).
\39\ SPP, 119 FERC ] 61,199 at P 30.
\40\ MISO, 182 FERC ] 61,033 at PP 52-66; MISO Rehearing Order,
184 FERC ] 61,022 at PP 23-55.
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15. Outside the RTOs/ISOs, transmission providers that pay for the
provision of reactive power within the standard power factor range
generally use the AEP Methodology to set reactive power compensation on
an individual generating facility basis. Many non-RTO/ISO transmission
providers do not pay separately for reactive power provided within the
standard power factor range.\41\
---------------------------------------------------------------------------
\41\ See, e.g., Arizona Public Service Company, FERC Electric
Tariff Vol. No. 2, Schedule 2 (Reactive Supply and Voltage Control
from Generation or Other Sources Service) (6.0.0) (``This service
will be provided at no charge until [Arizona Public Service Company]
has developed a rate that has been filed with the Commission and
allowed to be implemented; however, Transmission Customers taking
service at transmission voltage levels shall be responsible for
maintaining a power factor of <plus-minus> 95.0%, and Transmission
Customers taking service at distribution voltage levels shall
maintain a power factor of not less than 90% lagging but in no event
leading, unless agreed to by [Arizona Public Service Company].'');
Public Service Company of New Mexico, PNM Open Access Transmission
Tariff, Schedule 2 (Reactive Supply and Voltage Control from
Generation or Other Sources Service) (2.1.0) (``As of October 1,
2021, the Effective Date of this Schedule 2, the Transmission
Provider is not charging for Reactive Supply and Voltage Control
from Generation or Other Sources Service from its own resources. As
a result, there will be no separate charge for such service.'').
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[[Page 93414]]
B. Notice of Inquiry and Notice of Proposed Rulemaking
16. On November 18, 2021, the Commission issued a Notice of Inquiry
(NOI) \42\ in this proceeding, seeking comment on various issues
regarding reactive power compensation and market design as a result of
the significant changes that have taken place in the electric industry
in the last two decades, including changes in the generation resource
mix and a general shift away from cost-of-service rates for generating
facilities selling into Commission-jurisdictional markets. Generally,
the Commission sought to ``examine whether the current regime for
reactive power capability compensation requires revisions to ensure
that payments for reactive power capability accurately reflect the
costs associated with reactive power capability.'' \43\
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\42\ Reactive Power Capability Compensation, Notice of Inquiry,
177 FERC ] 61,118 (2021) (NOI).
\43\ Id. P 19.
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17. On March 21, 2024, the Commission issued a NOPR in this same
proceeding. Based on a review of the comments submitted in response to
the Commission's NOI in the instant docket, as well as the Commission's
experience in the years since the issuance of Order Nos. 2003 and 2003-
A, the NOPR 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, as they include costs without a sufficient
economic basis or justification. In support of such preliminary
finding, the NOPR explained that generating facilities provide reactive
power within the standard power factor range at no cost or de minimis
cost, and that providing reactive power within the standard power
factor range is already an obligation of the generating facility as an
interconnection customer and consistent with good utility practice.\44\
The NOPR also stated that current compensation may result in undue
compensation or other market distortions. The NOPR proposed, pursuant
to FPA section 206,\45\ that a just and reasonable replacement rate was
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 a generating facility.
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\44\ Real power, which accomplishes useful work (e.g., runs
motors), is typically measured in MWs.
\45\ 16 U.S.C. 824e.
---------------------------------------------------------------------------
18. Specifically, the NOPR proposed to add the following sentence
to the end of Schedule 2 of the pro forma OATT: \46\ ``However, such
rates shall not include compensation to generating facilities for the
supply of reactive power within the power factor range specified in its
interconnection agreement.'' Second, the NOPR proposed to remove the
following clause from section 9.6.3 of the pro forma LGIA: \47\
``provided that if Transmission Provider pays its own or affiliated
generators for reactive power service within the specified range, it
must also pay Interconnection Customer.'' Third, the NOPR proposed to
remove the following sentence from section 1.8.2 of the pro forma SGIA:
\48\ ``In addition, if the Transmission Provider pays its own or
affiliated generators for reactive power service within the specified
range, it must also pay the Interconnection Customer.''
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\46\ See pro forma OATT, Schedule 2.
\47\ See pro forma LGIA, Sec. 9.6.3.
\48\ See pro forma SGIA, Sec. 1.8.2.
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19. Comments on the NOPR were due on June 26, 2024. Thirty-one
parties filed comments.\49\ Comments were submitted by RTOs/ISOs and
other transmission providers, generating facilities, generation
developers, transmission owners, load-serving entities (LSE),
Monitoring Analytics, LLC, acting in its capacity as the Independent
Market Monitor for PJM (PJM IMM), trade associations representing
specific generation technologies, and consumer advocates. Of these, and
with few exceptions, transmission owners, LSEs, the PJM IMM,
independent filers,\50\ and consumer advocates supported or did not
oppose the NOPR proposal to eliminate compensation in the standard
power factor range,\51\ while generating facilities, generation
developers, and trade associations representing specific generation
technologies oppose the NOPR proposal.\52\
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\49\ See app. A.
\50\ C T Gaunt states that reactive power cannot be delivered
and also that it cannot be lost in transmission through a
transformer or power system. Thus, C T Gaunt claims that there are
no grounds for arguing against the Commission's determination in the
NOPR. C T Gaunt Reply Comments at 2-3.
\51\ American Electric Power Service Corporation (AEP) (on
behalf of itself and its affiliates, including Appalachian Power
Company, Indiana Michigan Power Company, Kentucky Power Company,
Kingsport Power Company, Ohio Power Company, Wheeling Power Company,
Public Service Company of Oklahoma, Southwestern Electric Power
Company, AEP Appalachian Transmission Company, Inc., AEP Indiana
Michigan Transmission Company, Inc., AEP Kentucky Transmission
Company, Inc., AEP Ohio Transmission Company, Inc., AEP West
Virginia Transmission Company, Inc., AEP Oklahoma Transmission
Company, Inc., and AEP Southwestern Transmission Company, Inc.);
Ameren Service Company (Ameren) (on behalf of Ameren Illinois
Company d/b/a Ameren Illinois, Union Electric Company d/b/a Ameren
Missouri and Ameren Transmission Company of Illinois); C T Gaunt;
New England Consumer Advocates (consisting of the Office of
Massachusetts Attorney General Andrea Joy Campbell, the Connecticut
Office of Consumer Counsel, the Maine Office of Public Advocate, the
New Hampshire Office of Consumer Advocate, and the Rhode Island
Division of Public Utilities and Carriers); Joint Consumer Advocates
(including the Illinois Attorney General, Illinois Citizens Utility
Board, Maryland Office of People's Counsel, the New Jersey Division
of Rate Counsel, the North Carolina Utilities Commission Public
Staff, the Office of the People's Counsel for the District of
Columbia, and the West Virginia Consumer Advocate Division of the
Public Service Commission), Joint Customers (including Old Dominion
Electric Cooperative, Northern Virginia Electric Cooperative, Inc.,
and Dominion Energy Services, Inc. on behalf of Virginia Electric
and Power Company d/b/a Dominion Energy Virginia); Liberty Utilities
(Granite State Electric) Corp. d/b/a Liberty (Liberty); MISO; MISO
Transmission Owners (including Ameren, as agent for Union Electric
Company d/b/a Ameren Missouri, Ameren Illinois Company d/b/a Ameren
Illinois, and Ameren Transmission Company of Illinois; Arkansas
Electric Cooperative Corporation; City Water, Light & Power;
Cooperative Energy; Dairyland Power Cooperative; East Texas Electric
Cooperative; Entergy Arkansas, LLC; Entergy Louisiana, LLC; Entergy
Mississippi, LLC; Entergy Texas, Inc.; Great River Energy;
Indianapolis Power & Light Company; Lafayette Utilities System;
MidAmerican Energy Company; Minnesota Power (and its subsidiary
Superior Water, L&P); Missouri River Energy Services; Montana-Dakota
Utilities Co.; Northern States Power Company, a Minnesota
corporation, and Northern States Power Company, a Wisconsin
corporation, subsidiaries of Xcel Energy Inc.; Northwestern
Wisconsin Electric Company; Otter Tail Power Company; Prairie Power,
Inc.; Southern Indiana Gas & Electric Company (d/b/a CenterPoint
Energy Indiana South); and Southern Minnesota Municipal Power
Agency); the Ohio Office of the Federal Energy Advocate of the
Public Utilities Commission of Ohio (Ohio FEA); Portland General
Electric Company (PGE); PJM; the PJM IMM; the Transmission Access
Policy Study Group (TAPS) (an association of transmission dependent
utilities in 35 states). For convenience, we have listed each
commenter and the parties they represent. For brevity, for the
remainder of this rule, we will refer to each commenter by their
abbreviated names as defined in this footnote.
\52\ The American Council on Renewable Energy (ACORE); Calpine
Corporation (Calpine); Eagle Creek Reactive Generators (including
Mahoning Creek Hydroelectric Company, LLC, York Haven Power Company,
LLC, Eagle Creek Reusens Hydro, LLC, Great Falls Hydroelectric
Company Limited Partnership, Lake Lynn Generation, LLC, PE Hydro
Generation, LLC, Black River Hydroelectric, LLC, All Dams
Generation, LLC, and Eagle Creek Hydro Power, LLC); EDP Renewables
North America LLC (EDPR); Elevate Renewables F7, LLC (Elevate);
Generation Developers (including Vistra Corp. and Dynegy Marketing
and Trade, LLC); Glenvale LLC (Glenvale); Indicated Reactive Power
Suppliers (including KMC Thermo, LLC, Bitter Ridge Wind Farm, LLC,
Guernsey Power Station LLC, Moxie Freedom LLC, Safe Harbor Water
Power Corporation, BIF III Holtwood LLC, Brookfield Power Piney &
Deep Creek LLC, Erie Boulevard Hydropower, L.P., Carr Street
Generating Station, L.P., Bear Swamp Power Company LLC, Brookfield
White Pine Hydro LLC, Brookfield Renewable Trading and Marketing LP,
and Reworld Waste, LLC f/k/a Covanta; Independent Power Producers of
New York, Inc. (IPPNY); Indicated Trade Associations (including
Electric Power Supply Association, The PJM Power Providers Group the
New England Power Generators Association, Inc., Independent Power
Producers of New York, Inc., the Coalition of Midwest Power
Producers); ISO-NE; Middle River Power LLC (including Coalition of
Midwest Power Producers, the Electric Power Supply Association, the
PJM Power Providers Group, the New England Power Generators
Association, Inc., and the Independent Power Producers of New York,
Inc.); National Hydropower Association (NHA) (a national trade
association with over 320 member companies); New England Power
Generators Association, Inc. (NEPGA); New England Power Pool
(NEPOOL); New England States Committee on Electricity (NESCOE);
Nuclear Energy Institute (NEI); North American Generator Forum
(NAGF); NYISO; Onward Energy Holdings, LLC (Onward Energy); PSEG
(including Public Service Electric and Gas Company, PSEG Power LLC,
and PSEG Energy Resources & Trade LLC, and each wholly owned, direct
or indirect subsidiaries of Public Service Enterprise Group
Incorporated) (PSEG); Reactive Service Providers (including CIP, D.
E. Shaw Renewable Investments, L.L.C., Invenergy Renewables LLC,
Leeward Renewable Energy, LLC, Lightsource Renewable Energy
Operations, LLC, NextEra Energy Resources, LLC,1 [Oslash]rsted Wind
Power North America, LLC, and RWE Clean Energy, LLC); Clean Energy
Associations (including Solar Energy Industries Association (SEIA)
and American Clean Power Association (ACP)). For brevity, for the
remainder of this rule, we will refer to each commenter by their
abbreviated names as defined in this footnote.
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[[Page 93415]]
II. Discussion
20. In this final determination, the Commission adopts the NOPR as
proposed, except with respect to the timing of the compliance
procedures and implementation. Based on our review of the record, we
find there is substantial evidence to support the conclusion that
allowing transmission providers to charge transmission customers for a
generating facility's provision of reactive power within the standard
power factor range results in unjust and unreasonable transmission
rates. As explained in the NOPR, generating facilities providing
reactive power within the standard power factor range are only meeting
their obligations under their interconnection agreements and in
accordance with good utility practice, and in doing so, incur no or at
most de minimis variable costs beyond the cost of providing real power.
Moreover, providing compensation for the provision of reactive power
within the standard power factor range risks overcompensation and
market distortion in ways that did not exist prior to the existence of
organized markets.
21. We find that these reforms will not adversely impact
reliability. We also find that generating facilities have the
opportunity to seek to recover any costs associated with providing
reactive power within the standard power factor range through their
rates for selling real power, including energy or capacity sales,
whether in organized or bilateral markets. Given that the primary
function of a generating facility is to produce real power and that the
provision of reactive power within the standard power factor range is
necessary for the provision of real power, we find that the existing
means of cost recovery for real power are not only reasonable but also
the most logical outcome.
22. Based on more than two decades of experience since Order No.
2003, and the record developed in this proceeding, we find that, even
as a function of comparability, charging transmission customers under
Schedule 2 for the provision of reactive power within the standard
power factor range has become unjust and unreasonable. As explained
above and for the reasons discussed below, in Order No. 2003, the
Commission found generators should not receive compensation for the
provision of reactive power within the standard power factor as it was
an obligation of good utility practice. Based on rehearing requests, in
Order No. 2003-A, the Commission agreed that where vertically
integrated transmission owners continued to have rate schedules
providing payment to their affiliated generating facilities for
reactive power service within the standard power factor range, such
transmission owners were also required to pay non-affiliated
interconnection customers for the same provision of reactive power. At
the time of Order Nos. 2003 and 2003-A, functional unbundling of
transmission service \53\ and the development of organized wholesale
electricity markets \54\ were relatively nascent, and so too was the
Commission's experience with the impacts of establishing the
comparability standard for the provision of reactive power within the
standard power factor range. At the time, establishing the
comparability standard appeared consistent with Order No. 2003's stated
intent of ``minimiz[ing] opportunities for undue discrimination and
expedit[ing] the development of new generation, while protecting
reliability and ensuring that rates are just and reasonable.'' \55\
---------------------------------------------------------------------------
\53\ Order No. 888, FERC Stats. & Regs. ] 31,036 at 31,654 (``We
conclude that functional unbundling of wholesale services is
necessary to implement non-discriminatory open access
transmission.'').
\54\ Regional Transmission Orgs., Order No. 2000, FERC Stats. &
Regs. ] 31,089 (1999) (cross-referenced at 89 FERC ] 61,285) (``We
conclude that properly structured RTOs throughout the United States
can provide significant benefits in the operation of the
transmission grid.''), order on reh'g, Order No. 2000-A, FERC Stats.
& Regs. ] 31,092 (2000) (cross-referenced at 90 FERC ] 61,201),
aff'd sub nom. Pub. Util. Dist. No. 1 of Snohomish Cty. v. FERC, 272
F.3d 607 (D.C. Cir. 2001).
\55\ See, e.g., Order No. 2003, 104 FERC ] 61,103 at P 12
(explaining that standard interconnection procedures and a standard
agreement will: ``(1) limit opportunities for Transmission Providers
to favor their own generation; (2) facilitate market entry for
generation competitors by reducing interconnection costs and time;
and (3) encourage needed investment in generator and transmission
infrastructure'').
---------------------------------------------------------------------------
23. Since Order No. 2003, however, many industry changes have
occurred. Some vertically integrated utilities have divested their
generation. Competitive markets have developed, leading many generators
to recover their costs through market-based rather than cost-based
rates. The development of competitive markets makes even more
challenging any allocation of costs between real power production,
under market-based rates, and reactive power service, under cost of
service rates.\56\ When rates are market-based, challenges in
allocation will affect the competitive positions of the entities.\57\
New technologies have developed that provide reactive power through
different means and to which the AEP Methodology that predates these
technologies does not squarely apply. With fewer vertically integrated
utilities, the continued development of competitive markets, and new
technologies, the initial justification for compensation (i.e., that
the Commission required separate compensation on a comparable basis
because vertically integrated transmission owners continued to have
rate schedules providing payment to their affiliated generating
facilities for reactive power service) is no longer broadly applicable.
Indeed, the wide-ranging rates for reactive power resulting from cost-
of-service proceedings further undermine the principle of comparability
as some generating facilities now receive substantially higher rates
for the provision of reactive power within the
[[Page 93416]]
standard power factor range than others.\58\
---------------------------------------------------------------------------
\56\ See In re Permian Basin Area Rate Cases, 390 U.S. at 804
(``There is ample support for the Commission's judgment that the
apportionment of actual costs between two jointly produced
commodities, only one of which is regulated by the Commission, is
intrinsically unreliable.''); A.A. Poultry Farms, Inc. v. Rose Acre
Farms, Inc., 881 F.2d 1396, 1400 (7th Cir. 1989) (``How does one
allocate the cost of activities that have joint products? Agencies
engaged in ratemaking struggle with these problems for years, even
decades, without producing clear answers.''); Richard A. Posner,
Natural Monopoly and Its Regulation, 21 Stan. L. Rev. 548, 595
(1969) (``where services involve joint or common costs a rational
allocation is impossible even in theory. How much of the cost of a
telephone handset is assignable to local and how much to interstate
telephone service?'').
\57\ When both real power and reactive power rates were cost-
based, the only effect of the allocation was to change the
allocation of costs and the rates for transmission and generation
service; the transmission provider would not exceed its total
revenue requirement.
\58\ The PJM IMM notes that total settled reactive power revenue
requirements for oil-fueled steam units average $993/MW-year whereas
other units have settled reactive power revenue requirements as high
as $18,750/MW-year. IMM Initial Comments at 5.
---------------------------------------------------------------------------
24. All of these changes taken together, coupled with the record
developed here, make clear that separate compensation for the provision
of reactive power within the standard power factor range results in
unjust and unreasonable rates to transmission customers, because such
compensation is not necessary for comparability or to ensure continued
investment in the capability of generating facilities to provide
reactive power within the standard power factor range.\59\ We
acknowledge that this final determination represents a change in
policy,\60\ a change we find appropriate based on the record before us,
as explained in detail herein.\61\
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\59\ See, e.g., PJM IMM Initial Comments at 11-12 (``The salient
difference between PJM and CAISO, SPP, and MISO is that PJM
customers paid $388,044,837.00 in out of market payments for
reactive capability in 2023, and customers in CAISO, SPP and MISO,
paid $0.00''); For Schedule 2 service in 2023, PJM paid $388
million, NYISO paid $75 million, and ISO-NE paid $18 million. See
PJM 2023 Annual Report at 5, <a href="https://services.pjm.com/annualreport2023/">https://services.pjm.com/annualreport2023/</a>); 2023 NYISO Voltage Support Service Rates,
<a href="https://www.nyiso.com/documents/20142/35126567/2023-OATT-MST-Schedule-2-VSS-Rates-FINAL-for-posting.pdf/f59317b0-41c6-9f41-5d61-e7f502af82c2">https://www.nyiso.com/documents/20142/35126567/2023-OATT-MST-Schedule-2-VSS-Rates-FINAL-for-posting.pdf/f59317b0-41c6-9f41-5d61-e7f502af82c2</a>); 2023 Annual Markets Report at 154, <a href="http://iso-ne.com/static-assets/documents/100011/2023-annual-markets-report.pdf">iso-ne.com/static-assets/documents/100011/2023-annual-markets-report.pdf</a>.
\60\ See Order No. 2003-C, 111 FERC ] 61,401 at P 42 (finding
that because providing reactive power within the established range
is an ``important service,'' payment for such service does not
constitute a ``windfall'').
\61\ PJM Power Providers Grp. v. FERC, 88 F.4th 250, 271-72 (3d
Cir. 2023), amended sub nom. PJM Power Provisers Grp. v. FERC, No.
21-3068, 2024 WL 259448 (3d Cir. Jan. 24, 2024) (``An agency may
alter its `view of what is in the public interest.' The fact that
contrary agency precedent exists `gives us no more power than usual
to question the Commission's substantive determinations.' The agency
need not establish that `the reasons for the new policy are better
than the reasons for the old one; it suffices that the new policy is
permissible under the statute, that there are good reasons for it,
and that the agency believes it to be better.' '') (citing FCC v.
Fox Television Stations, Inc., 556 U.S. 502, 515 (2009)); In re
Permian Basin Area Rate Cases, 390 U.S. 747, 784 (1968) (Permian
Basin); see also Motor Vehicle Mfrs. Ass'n of U.S., Inc. v. State
Farm Mut. Auto. Ins. Co., 463 U.S. 29, 42 (1983) (``[W]e fully
recognize that regulatory agencies do not establish rules of conduct
to last forever.'') (internal quotations omitted); Greater Bos.
Television Corp. v. FCC, 444 F.2d 841, 852 (D.C. Cir. 1970) (an
agency may change its course as long as it ``suppl[ies] a reasoned
analysis indicating that prior policies and standards are being
deliberately changed, not casually ignored.''), cert. denied, 403
U.S. 923 (1971)).
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25. Accordingly, we are modifying Schedule 2 of the pro forma OATT,
section 9.6.3 of the pro forma LGIA, and section 1.8.2 of the pro forma
SGIA, and we are requiring transmission providers to make corresponding
revisions to their OATTs and pro forma interconnection agreements, to
prohibit transmission providers from including in their transmission
rates any charges associated with the provision of reactive power
within the standard power factor range from generating facilities.
26. We discuss below the issues raised in the comments.
A. Need for Reform
27. The NOPR preliminarily found that where transmission providers
require transmission customers to pay for generating facilities'
provision of reactive power within the standard power factor range,
transmission rates may be unjust and unreasonable, as such rates may
include costs without a sufficient economic basis or justification and
such costs may not result in transmission customers receiving
commensurate reliability benefits.\62\ In support of the need for
reform, the NOPR preliminarily found that generating facilities
providing reactive power within the standard power factor range are
only meeting their obligations under their interconnection agreements
and in accordance with good utility practice, and in doing so, incur no
or at most a de minimis increase in variable costs beyond the cost of
providing real power.\63\ The NOPR also highlighted various adverse
impacts of the Commission's policy on reactive power compensation,
which have been exacerbated by the increasing volume of filings for
reactive power compensation and in turn, increasing reactive power-
related costs to transmission customers.\64\ For example, in many
regions, generating facilities are sited without regard to where there
is a geographic need for reactive power, which is significant given
that unlike real power, reactive power cannot be efficiently
transmitted long distances.\65\ Additionally, adjudicating cost-of-
service reactive power rates has become increasingly administratively
burdensome and may result in inconsistent rate treatment across
generating facilities.\66\ Furthermore, in regions where generating
facilities may seek to recover their costs by participating in
organized competitive wholesale markets, providing separate
compensation for the provision of reactive power within the standard
power factor range risks overcompensation and market distortion in ways
that did not exist prior to the existence of organized markets.\67\
Finally, as explained in the NOPR, the costs to transmission customers
have increased substantially without any commensurate increase in
benefits.\68\
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\62\ NOPR, 186 FERC ] 61,203 at PP 25, 40.
\63\ Id. PP 28-33.
\64\ Id. PP 34-40.
\65\ Id. P 35.
\66\ Id. PP 36-38.
\67\ Id. P 39.
\68\ Id. P 40.
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28. The NOPR also preliminarily found that cessation of payments
for reactive power within the standard power factor range for
generating facilities does not compromise a generating facility's
ability to recover costs-if any-that it may incur in producing reactive
power within such range because generating facilities have the
opportunity to seek to recover such costs in other ways, such as
through energy or capacity sales.\69\
---------------------------------------------------------------------------
\69\ Id. P 42.
---------------------------------------------------------------------------
1. Comments
29. AEP, Ameren, Joint Consumer Advocates, Joint Customers, MISO
Transmission Owners, New England Consumer Advocates, Ohio FEA, PGE,
PJM, the PJM IMM, and TAPS agree there is a need for reform and,
accordingly, support the NOPR proposal to eliminate compensation for
reactive power within the standard power factor range.\70\
---------------------------------------------------------------------------
\70\ AEP Initial Comments at 1-2; Ameren Initial Comments at 2-
3; Joint Consumer Advocates Initial Comments at 1; Joint Customers
Initial Comments at 2; MISO Transmission Owners Initial Comments at
1, 5; New England Consumer Advocates Initial Comments at 6; Ohio FEA
Initial Comments at 3; PGE Initial Comments at 1; PJM Initial
Comments at 1, 3; PJM IMM Initial Comments at 2; TAPS Initial
Comments at 1.
---------------------------------------------------------------------------
30. Many commenters argue that there is substantial evidence to
support the conclusion that allowing transmission providers to charge
transmission customers for a generating facility's provision of
reactive power from within the standard power factor range results in
unjust and unreasonable transmission rates.\71\ They also agree that
current generator compensation for the provision of reactive power
within the standard power factor range lacks sufficient economic basis
or justification,\72\ and that customers may
[[Page 93417]]
not be receiving commensurate reliability benefits.\73\
---------------------------------------------------------------------------
\71\ See, e.g., Joint Customers Reply Comments at 10-11
(``Standing on its own, the record in this proceeding is sufficient
to justify the conclusion that compensating generators, any
generators, for reactive service within the standard power factor
range is not just and reasonable. Through the NOI comments, the
development of the NOPR, and comments to the NOPR, the Commission
has supported its conclusions and addressed potential concerns.'').
\72\ Joint Consumer Advocates Initial Comments at 1, 5; Joint
Customers Initial Comments at 5-6; Joint Customers Reply Comments at
1-2; MISO Transmission Owners Reply Comments at 2; PGE Initial
Comments at 5; TAPS Initial Comments at 3.
\73\ Joint Customers Initial Comments at 13-17; MISO
Transmission Owners Reply Comments at 8, 19; New England Consumer
Advocates Initial Comments at 4-6; TAPS Initial Comments at 3.
---------------------------------------------------------------------------
31. Joint Customers maintain, for example, that the NOPR builds on
longstanding Commission policy, reaffirmed since Order No. 2003, that
no compensation is appropriate for reactive service within the standard
power factor range and that challenges to the sufficiency of the record
or the process are unfounded.\74\ Joint Customers explain that ``[t]he
only change the Commission is making in the NOPR is to determine that
transmission providers no longer should have the option to compensate,
affiliate and non-affiliate alike. And for that discrete change, that
the exception to the general rule on compensation should be closed, the
Commission has plainly created a sufficient record.'' \75\
---------------------------------------------------------------------------
\74\ Joint Customers Reply Comments at 10-11.
\75\ Id. at 11 (emphasis in original).
---------------------------------------------------------------------------
32. PJM supports the NOPR and asserts that it would largely
eliminate the problems with the current reactive power compensation
regime in PJM, including the resource-intensive administrative burdens
of reactive power rate proceedings and the ``black box'' settlements
that ``seem[ ] at odds with the Commission's general precedent on
efficient energy and ancillary service price formation.'' \76\ MISO
explains that it has not experienced reliability concerns since
eliminating compensation for reactive power within the standard power
factor range in December 2022 \77\ and that it would not expect to see
any effect on reliability through eliminating compensation for reactive
power within the standard power factor range.\78\
---------------------------------------------------------------------------
\76\ PJM Initial Comments at 1-3.
\77\ MISO Initial Comments at 2.
\78\ Id.
---------------------------------------------------------------------------
33. MISO Transmission Owners support the need for reform, arguing
that the current framework for reactive power compensation is neither
just nor reasonable given that it results in transmission customers
being required to pay for a service that generators already are
required to provide and that costs them little or nothing to
provide.\79\
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\79\ MISO Transmission Owners Initial Comments at 5.
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34. Many commenters agree that the current reactive power framework
does not result in commensurate reliability benefits.\80\ First, many
commenters agree that compensation for providing reactive power within
the standard power factor range is unnecessary to maintain
reliability.\81\ Second, many commenters also agree with the NOPR that
under the current framework, compensation for reactive power within the
standard power factor range is not tied to whether there is a
particular geographic need for reactive power.\82\ TAPS, for example,
contends that the existing approach to reactive power capability
compensation does not adequately consider a generator's actual
contribution to reliability or lack thereof and thus requires consumers
to pay excessive charges for reactive power that may not be needed or
is in the wrong location.\83\ Similarly, Joint Customers contend that
``[t]his incentive structure to provide payment based on reactive
capability results in the building of unnecessary capabilities in
locations it is not or may not be needed and does not allocate the
costs associated with reactive capability in a manner that is at least
roughly commensurate with the benefits received.'' \84\
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\80\ Joint Customers Initial Comments at 12; MISO Transmission
Owners Initial Comments at 19; MISO Transmission Owners Reply
Comments at 3-5; New England Consumer Advocates Initial Comments at
4-6; TAPS Initial Comments at 3-5.
\81\ See, e.g., PJM IMM Initial Comments at 11-12 (``There will
be no adverse reliability impacts in PJM (or other similarly
situated regions) for the same reasons that . . . there have been no
observable impacts in regions that do not compensate generating
facilities for the supply of reactive power with the standard power
factor range. As in the case of CAISO, SPP and MISO, new and
existing generating facilities in PJM are required to provide
reactive power within the standard power factor range as a condition
of obtaining and maintaining interconnection service. There is no
evidence that expanding the just and reasonable approach to
compensation already in place in CAISO, SPP and MISO to PJM will
have any adverse impact on reliability in PJM.''); MISO Transmission
Owners Initial Comments at 13 (``When the MISO Transmission Owners
proposed to eliminate compensation for producing reactive power
within the deadband, the most common protest from generators was
that it would impact the reliability of the grid. However, such
claims are not supported by evidence and distract from the
underlying fact that generators are obligated to provide reactive
power within the deadband whether or not they are compensated for
it.'' (citations omitted)).
\82\ See, e.g., Ohio FEA Initial Comments at 5 (``As a result,
in areas like PJM, generators currently receive compensation
regardless of proximity to locations on the transmission system
where there is an actual need for additional reactive power.'');
Joint Customers Initial Comments at 17 (``Further, the failure to
account for transmission system needs or grid geography in the
current regime in regions like PJM undermine the reliability
benefits of generators that interconnect to the system with reactive
capabilities, whether meeting or exceeding their baseline
interconnection requirements. The current paradigm has resulted in
the development and deployment of generator based reactive
capability that is ill-suited to the needs of the transmission
system, and specifically that is well in excess of needs.
Eliminating the incentive to overbuild reactive capability will not
negatively impact reliability.'').
\83\ TAPS Initial Comments at 4-5.
\84\ Joint Customers Initial Comments at 12 (citing Ill. Com.
Comm'n. v. FERC, 576 F.3d 470, 477 (7th Cir. 2009)).
---------------------------------------------------------------------------
35. Further, like PJM, many commenters agree with the NOPR
regarding the administrative burden for all parties to determine
Schedule 2 rates.\85\ Joint Consumer Advocates argue that ``the
existing compensation framework for generators that supply reactive
power has led to unjust and unreasonable rates'' and note that ``[d]ue
to limited resources, the [Joint Consumer Advocates] have generally
been unable to participate in the numerous reactive proceedings and
assist the Commission with the review and scrutiny of generator
submissions. But such review and scrutiny are essential given the sheer
number of filings and the absence of standardized accounting for the
costs claimed in them by generators.'' \86\
---------------------------------------------------------------------------
\85\ AEP Initial Comments at 4-6; Joint Customers Initial
Comments at 1-5; PJM IMM Initial Comments at 9.
\86\ Joint Consumer Advocates Initial Comments at 7. See also
PJM IMM Initial Comments at 9 (``Applying cost of service rules is
costly, burdensome and unnecessary. Most reactive proceedings for
generators in PJM are resolved in black box settlements that require
substantial time and resources from all parties, fail to address the
merits of the cost support provided, result from an unsupported
split the difference approach, and that produce a wide, unreasonable
and discriminatory disparity among the rates per paid per MW-year
for the same service.''); Joint Customers Initial Comments at 7
(``As well documented in comments to the NOI and described in the
NOPR, the current individualized consideration of reactive filings
purporting to apply the AEP [M]ethodology places a heavy burden on
customers, Transmission Providers, and the Commission while
resulting in customer charges with dubious connection to any clear
benefits to the customers paying those charges. This combination
created an intolerable condition necessitating Commission action to
reform the compensation structure.'').
---------------------------------------------------------------------------
36. AEP states that it supports the Commission's proposal to
prospectively terminate reactive power compensation to generators for
maintaining the ability to produce reactive power within the standard
power factor range because it ``will more equitably balance the
interests of customers and generators, ensure that reactive power will
continue to be provided as a requirement of interconnection, and
significantly decrease the administrative burdens associated with
individualized, opaque, and inconsistent cost-of-service reactive power
rate proceedings.'' \87\
---------------------------------------------------------------------------
\87\ AEP Initial Comments at 4-5.
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37. Similarly, New England Consumer Advocates state that
``[t]ransmission rates have been rising in recent years and costs are
only expected to increase in the near term to accommodate projected
future transmission system
[[Page 93418]]
needs. At this time of increasingly onerous retail energy costs,
particularly in New England, the Commission must ensure that
transmission providers are passing on to consumers only those costs
which are just and reasonable, and for which consumers receive
commensurate benefit.'' \88\
---------------------------------------------------------------------------
\88\ New England Consumer Advocates Initial Comments at 3-4. See
also PJM IMM Initial Comments at 5 (``Most recent cases settled
prior to issuance of the NOPR have settled for costs well in excess
of the average cost and well in excess of the ARR offset amount. The
issue is growing in significance.''); MISO Transmission Owners
Initial Comments at 5 (``The Commission's preliminary findings that
led to the changes proposed in the NOPR are accurate. The current
framework for reactive power compensation can result in transmission
customers being required to pay for a service that generators
already are required to provide and that costs them little or
nothing to provide. Therefore, the current framework allows for
compensation that is neither just nor reasonable.'').
---------------------------------------------------------------------------
38. The PJM IMM argues that opposing comments come largely from
generation owners opposed to the removal of subsidies that have
benefited them, even though such subsidies are primarily the result of
the ``nonsensical, wasteful and unworkable'' attempts to allocate a
portion of costs recoverable in markets to a guaranteed reactive
payment based on an outdated and arbitrary cost-of-service approach
referred to as the AEP Methodology.\89\
---------------------------------------------------------------------------
\89\ PJM IMM Reply Comments at 1-2.
---------------------------------------------------------------------------
39. Other commenters opposed the NOPR, arguing that existing
reactive power rates remain just and reasonable.\90\ Reactive Service
Providers argue that ``changes to cost allocation'' following Order No.
888 (i.e., functional unbundling) do not warrant a change to reactive
power compensation.\91\ Reactive Service Providers contend that
reactive power supply being unaffected in regions where transmission
providers no longer pay for reactive power is not evidence that
reactive power compensation is unjust and unreasonable,\92\ that the
``comparability'' policy cannot be used as a basis to end
compensation,\93\ that administrative burden is not a basis to find
that compensation is unjust and unreasonable,\94\ and that inconsistent
rate treatment across generating facilities does not mean that
compensation is unjust and unreasonable.\95\
---------------------------------------------------------------------------
\90\ Clean Energy Associations Initial Comments at 2-3;
Indicated Trade Associations Reply Comments at 16; NEI Initial
Comments at 1.
\91\ Reactive Service Providers Initial Comments at 4, 29-34.
\92\ Id. at 41-43.
\93\ Id. at 43-48.
\94\ Id. at 48-52.
\95\ Id. at 53-54.
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40. Reactive Service Providers argue that the Commission should
study individual generating facilities to determine if reactive power
is still needed.\96\ Reactive Service Providers also argue that the
Commission must ensure that compensation for providing reactive power
outside the standard power factor range is adequate.\97\
---------------------------------------------------------------------------
\96\ Id. at 76-77.
\97\ Id. at 77.
---------------------------------------------------------------------------
41. Indicated Trade Associations assert that the NOPR would grant
transmission providers unlawfully preferential treatment, creating a
preference for higher cost transmission solutions, and suggest that the
Commission should withdraw the NOPR proposal and refocus its efforts on
improving the methodologies used to determine reactive power rates.\98\
Further, Indicated Trade Associations assert that concerns raised about
the AEP Methodology being burdensome and a lack of refund protections
for customers do not justify eliminating reactive power compensation
within the standard power factor range altogether.\99\
---------------------------------------------------------------------------
\98\ Indicated Trade Associations Reply Comments at 16-17.
\99\ Id. at 8-9.
---------------------------------------------------------------------------
42. ISO-NE argues that ISO-NE's Schedule 2 VAR compensation program
should not be disturbed.\100\ ISO-NE asserts that its treatment of
reactive power is distinct from its energy and capacity markets.\101\
ISO-NE further states that its VAR service is not based on cost-of-
service and is different from the standard AEP Methodology but is
instead based on a resource's capability to provide reactive power.
ISO-NE explains that its VAR service compensates resources at a uniform
payment rate (i.e., a single rate for reactive power provided within
and outside of the standard power factor range) and is not resource-
intensive to calculate.\102\ ISO-NE adds that total VAR payments
amounted to 0.25% of the total energy, ancillary services, and capacity
markets combined (or approximately 18-20 million dollars) for the same
given period. NEPOOL argues that one of the reasons Schedule 2 has
worked well for New England is that it provides a simple fixed rate for
the main component of VAR service, which pays part of the costs of a
reactive power resource's capability to provide VAR service to the
transmission system when needed. NEPOOL explains that this same fixed
rate is provided to all qualified resources without further analysis
of, or dispute about, resource-specific costs.\103\ NEPOOL argues that
one of the reasons Schedule 2 has worked well for New England is that
it provides a simple fixed rate for the main component of VAR service,
which pays part of the costs of a reactive power resource's capability
to provide VAR service to the transmission system when needed, without
further analysis of, or dispute about, resource-specific costs.\104\
---------------------------------------------------------------------------
\100\ ISO-NE Initial Comments at 1-2, NESCOE Reply Comments at
2; NEPGA Reply Comments at 6-7; NEPOOL Reply Comments at 6-7. ISO-NE
explains that its VAR service consists of four components: (1) the
fixed Capacity Cost (CC) rate, under which Qualified Reactive
Resources are eligible to receive VAR payments for their measurable
capability to provide VAR service to the New England Transmission
System; (2) the variable Lost Opportunity Cost, which compensates
for the value of a resource's lost opportunity in the wholesale
energy market in situations where a resource that would otherwise be
economically dispatched is directed by the ISO to reduce real power
output to provide more reactive power; (3) the variable Cost of
Energy Consumed, which compensates for the cost of energy consumed
by the resource solely to provide reactive power; and (4) the Cost
of Energy Produced, which compensates for the difference between the
locational marginal price and a resource's offer price, if the
locational marginal price is lower than the offer price, for each
hour the resource provides reactive power. ISO-NE Initial Comments
at 3-4. ISO-NE notes that the components other than the CC component
may occur infrequently and are far less than the CC rate component.
ISO-NE Initial Comments at 4 n.5.
\101\ ISO-NE Initial Comments at 1-2.
\102\ Id. at 3-5, 14. The ISO New England Ancillary Service
Schedule 2 Business Procedure is available on the ISO-NE website:
<a href="https://www.iso-ne.com/static-assets/documents/rules_proceds/operating/gen_var_cap/schedule_2_var_business_procedure.pdf">https://www.iso-ne.com/static-assets/documents/rules_proceds/operating/gen_var_cap/schedule_2_var_business_procedure.pdf</a>.
Operating Procedures include primarily: ISO New England Operating
Procedure No. 12--Voltage and Reactive Control, available at <a href="https://www.iso-ne.com/static-assets/documents/rules_proceds/operating/isone/op12/op12_rto_final.pdf">https://www.iso-ne.com/static-assets/documents/rules_proceds/operating/isone/op12/op12_rto_final.pdf</a>; and ISO New England Operating
Procedures No. 23--Generating Resource Auditing, available at <a href="http://www.iso-ne.com/static-assets/documents/rules_proceds/operating/isone/op23/op23_rto_final.pdf">http://www.iso-ne.com/static-assets/documents/rules_proceds/operating/isone/op23/op23_rto_final.pdf</a>.
\103\ NEPOOL Reply Comments at 6-7.
\104\ Id. at 6-7.
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43. NYISO challenges the Commission's preliminary conclusion that
compensating generating facilities for providing reactive power within
the standard power factor range has resulted in unjust and unreasonable
transmission rates and urges the Commission to allow NYISO to maintain
its current reactive power compensation program.\105\ NYISO states that
it supports the NOPR's objective to avoid administratively burdensome
processes and procedures to determine individualized cost-of-service
reactive power rates for generation facilities. NYISO adds that NYISO's
existing reactive power and Voltage Support Service (VSS) compensation
structure, which uses a flat dollars per MVAr-year structure, is just
and reasonable.\106\ NYISO maintains that this structure aligns costs
directly with services provided, ensures reliability benefits
[[Page 93419]]
commensurate with expenses,\107\ provides market-like incentives, and
encourages resources to offer reactive power cost-effectively by
rewarding increased capability and maintaining necessary
equipment,\108\ which reduces the need for complex, individualized
cost-based payments and integrates reactive power support efficiently
into the broader market framework, promoting economic efficiency and
reliability.\109\ NYISO contends that a uniform implementation approach
is not suitable given the varying regional needs and existing effective
compensation frameworks.\110\
---------------------------------------------------------------------------
\105\ NYISO Initial Comments at 1.
\106\ Id. at 2; IPPNY Reply Comments at 1-2.
\107\ NYISO Initial Comments at 2-5.
\108\ Id. at 7-8.
\109\ Id. at 7-8.
\110\ Id. at 14.
---------------------------------------------------------------------------
44. Indicated Trade Associations, Generation Developers, NEI and
PSEG raise constitutional claims with respect to the NOPR proposal.
Indicated Trade Associations argue that the proposed rule violates the
Takings Clause of the Fifth Amendment to the United States
Constitution.\111\ They argue that public utilities have the statutory
and constitutional right to compensation for the services they provide,
including reactive power, and the Commission cannot deprive public
utilities of just and reasonable compensation simply by characterizing
the provision of reactive power as a condition of interconnection,
particularly where it was the Commission that established this
condition. Similarly, Generation Developers argue that forcing
generators to supply an identifiable portion of the reactive power they
generate, without any compensation, as a condition of interconnection
to the transmission system, falls squarely within the kinds of takings
prohibited by the Takings Clause.\112\ PSEG states that, in accordance
with the FPA and the Supreme Court precedent in Hope, the Commission
has a duty to protect public utilities from rates that are
confiscatory.\113\ PSEG argues that the proposed rule, not unlike the
Commission denying transmission owners the opportunity to earn a return
on network upgrades in Ameren, essentially compels generators to
provide a service without the ability to recover their fixed associated
costs, which is unjust and unreasonable, unduly discriminatory, and
confiscatory and in violation of the FPA and judicial precedent.\114\
---------------------------------------------------------------------------
\111\ Indicated Trade Associations Initial Comments at 22-24
(citing Smyth v. Ames, 169 U.S. 466, 546 (1898)).
\112\ Generation Developers Initial Comments at 26 (citing Horne
v. Dept. of Ag., 576 U.S. 350, 359, 367 (2015); FPC v. Hope Nat. Gas
Co., 320 U.S. 591, 603 (1944); Bluefield Waterworks & Improvement
Co. v. Pub. Serv. Comm'n, 262 U.S. 679, 690 (1923)).
\113\ PSEG Initial Comments at 18-19 (citing Bluefield
Waterworks & Improvement Co. v. Pub. Serv. Comm'n, 262 U.S. at 690;
Duquesne Light Co. v. Barash, 488 U.S. 299, 308 (1989) (``If the
rate does not afford sufficient compensation, the State has taken
the use of the utility property without paying just
compensation.'')).
\114\ PSEG Initial Comments at 19-20 (citing Ameren Servs. Co.
v. FERC, 880 F.3d 571, 581-82 (D.C. Cir. 2018)).
---------------------------------------------------------------------------
45. MISO Transmission Owners disagree with commenters arguing that
the NOPR proposal constitutes an unconstitutional taking.\115\ They
contend that the commenters' claim that the Order No. 2003 requirement
for generators to provide reactive power within the standard power
factor range violates the Takings Clause of the U.S. Constitution is a
collateral attack on Order No. 2003. They contend that, while some
contractual rights are considered ``property'' within the meaning of
the Takings Clause of the Fifth Amendment, the contractual relationship
entered into when a generator interconnects with a transmission system
does not implicate a taking that must be compensated.\116\ MISO
Transmission Owners state that the Commission determined in Order No.
2003 that generators ``should not be compensated for reactive power
when operating [their] Generating Facilit[ies] within the established
power factor range, since [they are] only meeting [their] obligation.''
Moreover, they state that ``as `legislation [that] readjust[s] rights
and burdens is not unlawful solely because it upsets otherwise settled
expectations,' the Commission's action implementing the changes in the
NOPR would not constitute an unconstitutional taking just because the
changes would `impact the benefits and burdens' of the agreement
entered into by generators interconnecting with the Transmission
System.'' \117\ They contend that ``[g]enerators have only a unilateral
expectation of payment for the provision of reactive power and not a
legitimate claim of entitlement to compensation.'' \118\
---------------------------------------------------------------------------
\115\ MISO Transmission Owners Reply Comments at 12 n.33.
\116\ Id. (citing Transmission Plan. & Cost Allocation by
Transmission Owning & Operating Pub. Utils., Order No. 1000-A, 77 FR
32184 (May 31, 2012), 139 FERC ] 61,132, at P 368 (citing Connolly
v. Pension Guar. Corp., 475 U.S. 211, 224 (1986)), order on reh'g
and clarification, Order No. 1000-B, 77 FR 64890 (Oct. 24, 2012),
141 FERC ] 61,044 (2012), aff'd sub nom. S.C. Pub. Serv. Auth. v.
FERC, 762 F.3d 41 (D.C. Cir. 2014)).
\117\ Id. (citing Order No. 1000-A, 139 FERC ] 61,132 at P 369
(citing Connolly v. Pension Guar. Corp., 475 U.S. at 223)).
\118\ Id. (citing Bd. of Regents of State Coll. v. Roth, 408
U.S. 564, 577 (1972) (``To have a property interest in a benefit, a
person clearly must have more than an abstract need or desire for
it. He must have more than a unilateral expectation of it. He must,
instead, have a legitimate claim of entitlement to it.''); Del.
Riverkeeper Network v. FERC, 895 F.3d 102, 108-09 (D.C. Cir. 2018)
(citing Town of Castle Rock, Colo. v. Gonzales, 545 U.S. 748, 756
(2005)).
---------------------------------------------------------------------------
46. Eagle Creek and the NHA both assert that existing reactive
service rates enjoy the Mobile-Sierra presumption. The NHA asserts
that, in order for the Commission to disallow the existing reactive
service rates, each rate on-file must be demonstrated by the Commission
to ``seriously harm the public interest.'' \119\ Eagle Creek and the
NHA both note that, given the highly localized nature of reactive
power, it is unclear how the Commission could assess these individual
contracts without conducting a case-by-case analysis through individual
section 206 proceedings.\120\ Eagle Creek and the NHA claim that absent
such proceedings, generating facilities would be deprived of their
current just and reasonable compensation and previous investments made
by generating facilities would be compromised.\121\ The NHA and Eagle
Creek assert that, by relying on a generic rulemaking to effectively
cancel all reactive power rates, the NOPR is an ``act of convenience''
and ``an indirect attempt to strip the value of existing rates without
facing the legal challenge that the Mobile-Sierra doctrine presents.''
\122\
---------------------------------------------------------------------------
\119\ Eagle Creek Initial Comments at 4; NHA Initial Comments at
8-9.
\120\ Eagle Creek Initial Comments at 4; NHA Initial Comments at
8.
\121\ Eagle Creek Initial Comments at 4-5; NHA Initial Comments
at 8.
\122\ NHA Initial Comments at 8-9; see also Eagle Creek Initial
Comments at 4-5.
---------------------------------------------------------------------------
47. Joint Customers disagree with Eagle Creek and the NHA's
argument that the Commission cannot eliminate compensation within the
standard power factor range without initiating individual rate
proceedings.\123\ Joint Customers explain that precedent cases, such as
PNM and MISO, demonstrate that changes to the underlying Schedule 2
tariff provisions effectively eliminate compensation for third-party
generators without separate rate challenges.\124\
---------------------------------------------------------------------------
\123\ Joint Customers Reply Comments at 13-14.
\124\ Id. (``There is no validity to the argument that
individual rate challenges must be pursued by the Commission or
complainants, and it is well established that a change to the
underlying Schedule 2 in a transmission provider's tariff, as
proposed by the Commission in the NOPR, will contemporaneously end
compensation to third-party generators with no further action
required.''); see also PJM IMM Initial Comments at 9 (``The NOPR
does not propose a new Commission policy. Rather, it extends and
makes uniform policies that have long applied in jurisdictional
markets.'').
---------------------------------------------------------------------------
48. Reactive Service Providers and Generation Developers argue that
the NOPR violates the D.C. Circuit's holding
[[Page 93420]]
in Atlantic City.\125\ They assert that by using the Commission's
authority under section 206 of the FPA to eliminate reactive power
compensation, the NOPR essentially strips generating facilities of
their ability to make filings under section 205 of the FPA to recover
the costs of the reactive power service that they provide.\126\
---------------------------------------------------------------------------
\125\ Atl. City Elec. Co. v. FERC, 295 F.3d 1 (D.C. Cir. 2002)
(Atl. City).
\126\ Generation Developers Initial Comments at 31-32 (citing
Atl. City, 295 F.3d at 9-10); Reactive Service Providers Initial
Comments at 54.
---------------------------------------------------------------------------
2. Commission Determination
49. Based on our review of the record, we find that there is
substantial evidence to support the conclusion that transmission rates
are unjust and unreasonable to the extent they include charges
associated with the provision of reactive power within the standard
power factor range. We therefore adopt the preliminary findings in the
NOPR concerning the need for reform \127\ and, pursuant to section 206
of the FPA, conclude that certain revisions to Schedule 2 of the pro
forma OATT, pro forma LGIA, and pro forma SGIA are necessary to ensure
rates that are just, reasonable, and not unduly discriminatory or
preferential.
---------------------------------------------------------------------------
\127\ NOPR, 186 FERC ] 61,203 at PP 24-27, 28.
---------------------------------------------------------------------------
50. We agree with commenters that the current framework allows for
transmission rates that are ``neither just nor reasonable'' and ``can
result in transmission customers being required to pay for a service
that generators already are required to provide and that costs them
little or nothing to provide.'' \128\ As reflected in the record,
absent reform, transmission customers would be required to continue to
pay charges associated with generating facilities' provision of
reactive power within the standard power factor range even though such
charges are without a sufficient economic basis and do not result in
transmission customers receiving commensurate reliability benefits. The
need for reform is particularly acute given that ``transmission rates
have been rising in recent years and costs are only expected to
increase in the near term to accommodate projected future transmission
system needs.'' \129\
---------------------------------------------------------------------------
\128\ See, e.g., MISO Transmission Owners Initial Comments at 5;
Joint Customers Initial Comments at 6-16, PJM IMM Initial Comments
at 1-4, 6-9; PJM IMM Reply Comments at 2-3, 6-7; Ameren Initial
Comments 2-3; AEP Initial Comments at 4-5; Ohio FEA Initial Comments
at 5-6; TAPs Initial Comments at 1, 3-8; PGE Initial Comments at 3-
4.
\129\ See, e.g., New England Consumer Advocates Initial Comments
at 3 & n.7 (citing, e.g., Massachusetts Attorney General Maura
Healey, Initial Comments, Docket No. RM21-17-000, at 28 (filed Aug.
17, 2022); see also New England States Committee on Electricity, New
England States' Vision for a Clean, Affordable, and Reliable 21st
Century Regional Electric Grid (2020), <a href="https://nescoe.com/resource-center/vision-stmt-oct2020/">https://nescoe.com/resource-center/vision-stmt-oct2020/</a>).
---------------------------------------------------------------------------
51. As described below, most commenters agree or do not dispute
that real and reactive power are provided as joint products,\130\ with
joint costs.\131\ Similarly, most commenters agree or do not dispute
that, under their interconnection agreements and in accordance with
good utility practice, generating facilities have a long-standing
obligation to provide reactive power within the standard power factor
range in order to interconnect reliably to the transmission system.
Most commenters agree or do not dispute that generating facilities must
produce reactive power within the standard power factor range to allow
the generating facilities' real power to reliably flow to load.\132\ As
such, we disagree with some commenters who challenge the Commission's
preliminary finding that providing reactive power within the standard
power factor range has no or de minimis costs \133\ and find, as
discussed in greater detail below, that there is substantial evidence
to conclude that in satisfying such obligations generating facilities
incur no incremental investment, or fixed costs, and at most de minimis
variable costs over and above those needed to provide real power.\134\
This is because no additional equipment is required to provide reactive
power; rather the same equipment that is needed to produce, and is used
to produce, real power also provides reactive power functions, at no
additional capital cost. Variable costs, if any, are limited to the
fuel costs (in synchronous facilities) or the cost of foregone direct
current power (in non-synchronous facilities) necessary to provide the
reactive power and to reliably inject real power into the transmission
system.\135\ For example, in Panda Stonewall the annual revenue
requirement of $2,051,894 included just $10,018 of identified variable
costs.\136\ In light of this evidence, we find that charging
transmission customers for the provision of reactive power within the
standard power factor range results in unjust and unreasonable
rates.\137\
---------------------------------------------------------------------------
\130\ See PSC VSMPO-Avisma Corp. v. U.S., 688 F.3d 751, 756
(Fed. Cir. 2012) (``[J]oint products [are] two dissimilar end
products that are produced from a single production process.'')
(citing Robert A. Anthony & James S. Reece, Accounting Principles
442 (5th ed. 1983).
\131\ A joint cost is an expenditure that benefits more than one
product, and for which it is not possible to separate the
contribution to each product. Permian Basin, 390 U.S. at 761 n.25
(citing Accounting Tools, The Supply and Price of Natural Gas 25
(1962)) (``Joint costs `are incurred when products cannot be
separately produced.'''); <a href="https://www.accountingtools.com/articles/joint-cost">https://www.accountingtools.com/articles/joint-cost</a>.
\132\ See SPP, 119 FERC ] 61,199, at P 28 (``[I]f a generator is
to sell (and be able to deliver) its power to a customer, reactive
power is essential to the transaction. Thus, it is hardly surprising
that the Commission has concluded, . . . , that the provision of
sufficient reactive power is an obligation of a generator
interconnected to the system, and that, . . . , a generator is not
entitled to separate compensation for providing reactive power
within its deadband.'').
\133\ See, e.g., Eagle Creek Initial Comments at 3-4; Indicated
Trade Associations Initial Comments at 7; ACORE Initial Comments at
2; Elevate Renewables Initial Comments at 9-12; Generation
Developers Initial Comments at 13; Glenvale Initial Comments at 9-
10; Indicated Reactive Power Suppliers Initial Comments at 2, 9-10;
Indicated Trade Associations Initial Comments at 2, 6; Middle River
Power Initial Comments at 2-3; NEI Initial Comments at 4-5, 8-9; NHA
Initial Comments at 2, 4-5.
\134\ Although the Commission found in the MISO Rehearing Order,
and earlier, that ``Reactive Service requires little or no
incremental investment'' see, e.g., MISO Rehearing Order, 184 FERC ]
61,022 at P 29 (emphasis added), we note that beyond vague
assertions that incremental fixed costs are incurred, no evidence of
investment or fixed costs specific to providing reactive power was
provided in response to requests for such costs in the MISO
Rehearing Order, the NOI, or the NOPR. As such, the Commission
concludes below that there are no incremental or fixed costs to
provide reactive power beyond those to provide real power.
\135\ Under certain transmission system conditions, the
generating facility may operate at a power factor of 1.0, which
represents zero incremental variable costs and thus zero total costs
of providing reactive power. A generating facility operating at any
reactive power level (i.e., a power factor other than 1.0) will
incur some amount of incremental fuel cost, but the Commission
generally considers these costs de minimis within the standard power
factor range. See, e.g., APS, 94 FERC at 61,080 (``We note that
operating a generating unit within the proposed [standard power
factor range] does not affect the generation output of a unit.'');
Commission Staff Report, Principles for Efficient and Reliable
Reactive Power Supply and Consumption, Docket No. AD05-1-000, at 96
(2005 Staff Report) (2005) (``The marginal cost of providing
reactive power from within a generator's capability curve (D-curve)
is near zero.'').
\136\ Panda Stonewall, LLC, 176 FERC ] 61,072, at P 6 n.9
(2021). We note that the heating losses component reflects the
incremental fuel cost of providing reactive power. See, e.g., Panda
Stonewall, LLC, 174 FERC ] 61,266, at P 155 (2021) (``The AEP
methodology already has a means in place to provide compensation for
the small amount of additional fuel used during the production of
reactive power, which is a heating loss calculation based on the MW-
hours of actual reactive power production and the usage charges for
fuel.'').
\137\ See Belmont Mun. Light Dep't v. FERC, 38 F.4th at 173,
179, 186 (2022) (finding that the Commission's approval of a portion
of ISO-NE's Inventoried Energy Program ``was not reasoned
decisionmaking'' and ``thwart[ed] the [Commission's] own
`longstanding policy that rate incentives must be prospective and
that there must be a connection between the incentive and the
conduct meant to be induced''' because it would compensate market
participants for conduct they already engage in as part of standard
business operations).
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52. ISO-NE and NYISO oppose the NOPR and seek flexibility to
preserve their existing reactive power compensation regimes. We deny
their requests. ISO-NE and NYISO principally argue that their flat-rate
[[Page 93421]]
compensation regimes are transparent, not administratively burdensome,
designed to prevent double-recovery, and able to procure significant
reliability benefits at ``reasonable'' or ``low'' cost. However, these
arguments ignore the preliminary findings of the NOPR, namely that
generating facilities providing reactive power within the standard
power factor range are only meeting their obligations under their
interconnection agreements in accordance with good utility practice,
and in doing so incur no or at most a de minimis increase in variable
costs beyond the cost of providing real power. As explained in this
final determination and decades of prior Commission precedent, in order
to reliably interconnect to the transmission system and deliver real
power to customers, generating facilities must be capable of
maintaining voltage levels for injecting real power into the
transmission system.\138\ As relevant here, these findings apply
equally to flat-rate compensation regimes like ISO-NE's and NYISO's, as
well as the compensation regimes of PJM and certain non-RTO regions.
Thus, the ISO-NE and NYISO regimes, while easier to implement
administratively, also impose unreasonable and unsupportable costs on
transmission customers.
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\138\ See, e.g., BPA, 120 FERC ] 61,211 at P 21 (``The purpose
for which generation assets are built (including reactive power
capability to maintain voltage levels for generation entering the
grid) is to make sales of real power.''); SPP, 119 FERC ] 61,199 at
P 28 (``[I]f a generator is to sell (and be able to deliver) its
power to a customer, reactive power is essential to the
transaction''). See also PJM Interconnection, L.L.C., 145 FERC ]
61,280, at P 17 (2013) (approving tariff revisions that require
interconnection customers to pay for upgraded telecommunication
equipment (phasor measurement units) as the ``data is integral to
improved communication and to the reliability of the system and, as
such, benefits both the system and the generators'').
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53. ISO-NE's and NYISO's claims regarding transparency,
administrative burden, and preventing double recovery all presuppose
that compensation is due, and thus that a compensation method is
needed. But, where compensation is found to be unjust and unreasonable,
as we find here, such a compensation methodology will necessarily
result in unjust and unreasonable rates and thus is not permissible.
54. Additionally, we agree with New England Consumer
Advocates,\139\ who argue that any payment for reactive power
capability within the standard power factor range must yield some
roughly commensurate incremental benefit above and beyond that which
would accrue absent payment.\140\ As discussed below,\141\ ISO-NE and
NYISO allude generally to reliability benefits from reactive power
compensation over the full range of a resource's capability to provide
reactive power--that is, both within and outside of the standard power
factor range--rather than the narrower focus of this final
determination. And, in both ISO-NE (except for certain circumstances as
explained by ISO-NE) \142\ and NYISO, as everywhere, generating
facilities must provide reactive power within the standard power factor
range to make sales of real power regardless of whether they receive
separate compensation.\143\
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\139\ New England Consumer Advocates Initial Comments at 5 (``To
the extent . . . benefits are achieved by compliance with a
generating facility's interconnection agreement and/or as `good
utility practice,' [New England Consumer Advocates] agree[] with the
Commission that ratepayers should not be paying separately for the
costs to produce a joint reactive power product.'').
\140\ See, e.g., Ill. Com. Comm'n. v. FERC, 576 F.3d at 476
(``[The Commission] is not authorized to approve a pricing scheme
that requires a group of utilities to pay for facilities from which
its members derive no benefits, or benefits that are trivial in
relation to the costs sought to be shifted to its members.'').
\141\ See infra II.D.2.
\142\ ISO-NE notes that not all generating facilities are
obligated to provide reactive power within the standard power factor
range. ISO-NE Initial Comments at 9. Specifically, ISO-NE notes that
several older generating facilities in New England have
interconnection agreements that pre-date the obligation to provide
reactive power within the standard power factor range. Id. ISO-NE
states that these resources choose to participate in the Schedule 2
VAR compensation program, incurring an obligation to maintain and
provide VAR service in New England. Id. Any generating facilities
with individualized bilateral contracts providing for reactive power
compensation within the standard power factor range may pursue
claims that they have an independent contractual right to reactive
power compensation within the standard power factor range, but we
express no opinion here as to whether any such generator would be
entitled to such compensation.
\143\ See, e.g., BPA, 120 FERC ] 61,211 at P 21 (``The purpose
for which generation assets are built (including reactive power
capability to maintain voltage levels for generation entering the
grid) is to make sales of real power.''); SPP Order on Rehearing,
121 FERC ] 61,196 at P 15 (``As we have previously explained,
reactive power is required for an interconnecting generator to
deliver its power and reactive power produced within the [standard
power factor range] and is, therefore, generally not compensable.''
(emphasis added)).
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55. We do not dispute that the provision of reactive power within
the standard power factor range provides reliability benefits, only
that there are no incremental fixed costs other than joint costs that
are also associated with the production of real power and at most de
minimis incremental variable costs that would warrant a separate
compensation mechanism. We also find that there is substantial evidence
to conclude that, under the current reactive power compensation
framework, reactive power-related transmission charges are not tied to
geographic need and result in excess reactive power capability that is
not required for interconnection and does not provide transmission
customers with commensurate reliability benefits.\144\ Accordingly, we
deny ISO-NE's and NYISO's respective requests for flexibility to
include in transmission rates charges associated with the provision of
reactive power within the standard power factor range.
---------------------------------------------------------------------------
\144\ Joint Customers Initial Comments at 12 (``This incentive
structure to provide payment based on reactive capability results in
the building of unnecessary capabilities in locations it is not or
may not be needed and does not allocate the costs associated with
reactive capability in a manner that is at least roughly
commensurate with the benefits received.'' (citing Ill. Com. Comm'n.
v. FERC, 576 F.3d at 477)); MISO Transmission Owners Initial
Comments at 8 (``Moreover, the capability-based compensation
methodology currently permitted by the Commission . . . allows and
even incentivizes generators to add as much reactive equipment as
they desire, i.e., to gold plate a facility's reactive capability,
regardless of whether that reactive support is needed at that point
on the grid.''); TAPS Initial Comments at 4-5 (``Nor can customers
be assured they are receiving reliability benefits commensurate to
the reactive power compensation paid under the current approach. The
existing approach to reactive power capability compensation does not
adequately consider a generator's actual contribution to
reliability, or lack thereof. For example, that approach does not
account for relevant factors such as location, the need for reactive
power, deliverability to where reactive power may be needed,
possible degradation in generator performance or other changes over
time. The result is that the current approach to reactive power
compensation requires consumers to pay excessive charges for
reactive power that may not be needed or is in the wrong location.''
(citations omitted)). See Belmont Mun. Light Dep't v. FERC, 38 F.4th
at 187-90 (finding that the Commission's acceptance of ISO-NE's
Inventoried Energy Program ``was not reasoned decision making''
because record evidence indicated that certain types of generating
facilities ``would not change their behavior in response to
payments.'').
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56. We reject commenters' arguments that the final determination
violates the Fifth and Fourteenth Amendments of the U.S. Constitution.
The final determination's elimination of reactive power payments for
the provision of reactive power within the standard power factor range
is not confiscatory and would not amount to a taking of property. As
noted above, generating facilities incur no or at most a de minimis
increase in variable costs beyond the cost of providing real power and
have the opportunity to seek recovery of any costs they do incur. In
addition, commenters' arguments that the obligation to provide reactive
power within the standard power factor range is unconstitutional are
impermissible
[[Page 93422]]
collateral attacks on our prior determinations and unpersuasive.\145\
---------------------------------------------------------------------------
\145\ MISO Transmission Owners Reply Comments at 12 n.33
(``Moreover, as `legislation [that] readjust[s] rights and burdens
is not unlawful solely because it upsets otherwise settled
expectations,' the Commission's action implementing the changes in
the NOPR would not constitute an unconstitutional taking just
because the changes would `impact the benefits and burdens' of the
agreement entered into by generators interconnecting with the
Transmission System. Generators have only a unilateral expectation
of payment for the provision of reactive power and not a legitimate
claim of entitlement to compensation.'') (citations omitted). See
also MISO, 182 FERC ] 61,033 at P 62; MISO Rehearing Order, 184 FERC
] 61,022 at PP 52-54 (``Vistra has not persuaded us that it has a
property interest in continued Reactive Service compensation under
the Tariff, nor that MISO TOs' proposal would unconstitutionally
deprive generators of that putative property interest under the
Takings Clause or Due Process Clause of the Fifth Amendment.'').
---------------------------------------------------------------------------
57. The Commission has repeatedly held that ``the provision of
sufficient reactive power is an obligation of a generator
interconnected to the system, and . . . as a general matter, a
generator is not entitled to separate compensation for providing
reactive power within its deadband.'' \146\ A generating facility must
in fact produce reactive power to move real power from the generating
facility to the transmission system to deliver its real power to
customers, while maintaining system reliability.\147\ It is only by
virtue of comparability that generating facilities were previously
entitled to reactive power compensation.\148\
---------------------------------------------------------------------------
\146\ See, e.g., MISO, 182 FERC ] 61,033 at P 62 (citing SPP,
119 FERC ] 61,199 at P 28); MISO Rehearing Order, 184 FERC ] 61,022
at P 52 (finding that protesters constitutional claims were
impermissible collateral attacks on the Commission's prior
determinations given ``[t]he obligation to provide Reactive Service
exists independent of, and was not altered by, MISO TOs' proposal:
it was stated in Order No. 2003 and applies to individual generators
through their GIAs.'').
\147\ See, e.g., MISO Rehearing Order, 184 FERC ] 61,022 at P 53
(``[T]he function of generators' Reactive Service is to ensure that
generators' real power can enter the transmission grid while
maintaining system reliability.''); SPP, 119 FERC ] 61,199 at P 28
(explaining that if a generator is to sell (and be able to deliver)
its power to a customer, reactive power is essential to the
transaction).
\148\ NOPR, 186 FERC ] 61,203 at P 4 (citing Order No. 2003-A,
106 FERC ] 61,220 at P 416). See also MISO Rehearing Order, 184 FERC
] 61,022 at P 26 (``On rehearing, we continue to reject, as
collateral attacks on that longstanding policy, arguments that
stand-alone compensation for Reactive Service is generically
required--for example, to ensure that generators can recover their
costs for Reactive Service capability. These arguments would negate
the conclusions in Order Nos. 2003 and 2003-A that such compensation
should not be provided, except as required by the comparability
standard.'').
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58. Simply stated, the obligation to provide reactive power within
the standard power range exists independent of, and was not altered by,
the NOPR's proposal: it was stated in Order No. 2003 and applies to
individual generating facilities through their interconnection service
agreements. This final determination changes only the allowance for
transmission providers to provide compensation at their discretion to
their own and affiliated generating facilities, and then to third-party
generating facilities under the comparability standard for the
provision of reactive power within the standard power factor range.
This change eliminates a stream of revenue under Schedule 2, but we
find here that such elimination is just and reasonable given that the
record demonstrates that generating facilities incur no or at most a de
minimis increase in variable costs beyond the cost of providing real
power.\149\ Moreover, to the extent that generating facilities have any
costs associated with providing reactive power within the standard
power factor range, generating facilities may seek to recover these
costs through energy or capacity sales.\150\ Accordingly, and
consistent with precedent, commenters have not persuaded us that they
have a property interest in continued compensation under Schedule 2, or
that this final determination would unconstitutionally deprive
generating facilities of that putative property interest under the
Takings Clause or Due Process Clause of the Fifth Amendment.
---------------------------------------------------------------------------
\149\ See MISO Transmission Owners Initial Comments at 6 (``The
MISO Transmission Owners' experience supports the Commission's
preliminary finding that providing reactive power within the
standard power factor range requires little or no cost to
generators. Generators incur little or no costs beyond what is
already needed to produce real power because the same equipment used
to produce real power includes reactive power functions.''
(citations omitted)); PJM IMM Reply Comments at 3 (``Neither the
[Indicated Trade Associations] nor any other opposing commenter, nor
any of the precedent relied upon by opposing commenters, identify
any additional costs or more than de minimis costs incurred by
generators in order to provide reactive capability.'').
\150\ MISO Rehearing Order, 184 FERC ] 61,022 at P 53; BPA, 120
FERC ] 61,211 at P 20; BPA Rehearing Order, 125 FERC ] 61,273 at P
11; see also NOPR, 186 FERC ] 61,203 at P 24; see also MISO
Transmission Owners Initial Comments at 6; PJM IMM Reply Comments at
3.
---------------------------------------------------------------------------
59. We disagree with Eagle Creek's and the NHA's assertions that
most reactive service rate schedules on file enjoy the Mobile-Sierra
presumption and as a result, in order for the Commission to disallow
the existing reactive service rates, each rate on file must be
demonstrated by the Commission to ``seriously harm the public
interest.'' \151\ While the Mobile-Sierra doctrine establishes a more
rigorous application of the just and reasonable standard when the
Commission proposes to change an individual contract negotiated at
arms-length,\152\ reactive power-related transmission rates are not
individually negotiated contract rates, but rather transmission owner
tariff-based rates of general applicability reflected in the
transmission owner's Schedule 2.\153\ The fact that the Commission has
accepted generating facilities' rate filings setting forth reactive
power rates covering the provision of reactive power within the
standard power factor range establishes only the rate at which the
generating facility is obligated to sell reactive power to a
transmission provider; that rate does not establish an obligation for
the transmission provider to purchase such reactive power. Those
individual rates establish only the charges that transmission providers
will include in transmission rates if, and only if the transmission
providers' OATTs require the payment of compensation for reactive
power.\154\
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\151\ Eagle Creek Initial Comments at 4; NHA Initial Comments at
8-9.
\152\ The Commission has explained that the Mobile-Sierra
``public interest'' presumption applies to an agreement only if the
agreement has certain characteristics that justify the presumption.
In ruling on whether the characteristics necessary to justify a
Mobile-Sierra presumption are present, the Commission must determine
whether the agreement at issue embodies either: (1) individualized
rates, terms, or conditions that apply only to sophisticated parties
who negotiated them freely at arm's length; or (2) rates, terms, or
conditions that are generally applicable or that arose in
circumstances that do not provide the assurance of justness and
reasonableness associated with arm's-length negotiations. Unlike the
latter, the former constitute contract rates, terms, or conditions
that necessarily qualify for a Mobile-Sierra presumption. E.g.,
Linden VFT, LLC v. Pub. Serv. Elec. & Gas Co., 161 FERC ] 61,264, at
P 27 (2017); PJM Interconnection, L.L.C., 161 FERC ] 61,262, at P 18
(2017); Sw. Power Pool, Inc., 144 FERC ] 61,059, at P 127 (2013),
order on reh'g and compliance, 149 FERC ] 61,048, at P 94 (2014)
(citations omitted); Midwest Indep. Transmission Sys. Operator,
Inc., 142 FERC ] 61,215, at P 177 (2013), order on reh'g and
compliance, 147 FERC ] 61,127, at P 108 (2014) (citations omitted).
\153\ See, e.g., Wabash Valley Power Ass'n, Inc. v. FERC, 45
F.4th 115, 120 (D.C. Cir. 2022) (``[A] contract requiring the
purchaser to pay a utility's `going rate' on file with FERC, without
more, does not eliminate review under the ordinary just-and-
reasonable standard.'').
\154\ Cf. Whitetail Solar 3, LLC, Opinion No. 583, 184 FERC ]
61,145, at P 45 (2023) (affirming the Presiding Judge's finding that
Schedule 2, not Applicants' interconnection agreements, determines
whether generating facilities are eligible for compensation,
therefore, ``there is no reason for the Commission to amend the
[interconnection agreements] of all existing distribution-connected
generation, as Applicants suggest would be necessary in light of the
Initial Decision.''); see also MISO, 182 FERC ] 61,033 at P 63 (``As
described above, MISO [Transmission Owners] have the unilateral
right to change Schedule 2 through an FPA section 205 filing and by
doing so, they automatically change the rate payable for Reactive
Service that generators contractually agreed to in section 9.6.3 of
their GIAs.'' (citations omitted)).
---------------------------------------------------------------------------
60. As discussed above, the final determination requires revisions
to
[[Page 93423]]
Schedule 2 to prohibit the inclusion in transmission rates of charges
associated with reactive power in the standard power factor range and,
for consistency, also requires conforming revisions to the pro forma
LGIA and pro forma SGIA to remove language related to the comparability
standard. Since Schedule 2 is a tariff-based rate, that rate can be
modified under the ordinary just and reasonable standard.\155\ However,
this final determination does not affect the ability of generating
facilities to pursue claims that they have an independent contractual
right to reactive power compensation within the standard power factor
range, based on a bilateral agreement with the relevant transmission
owner.\156\
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\155\ See Joint Customers Reply Comments at 14 (``There is no
validity to the argument that individual rate challenges must be
pursued by the Commission or complainants, and it is well
established that a change to the underlying Schedule 2 in a
transmission provider's tariff, as proposed by the Commission in the
NOPR, will contemporaneously end compensation to third-party
generators with no further action required.'').
\156\ For example, ISO-NE and NEPOOL claim that certain
agreements exist that do not obligate certain non-generator
resources to provide reactive power either within or outside of the
standard power factor range and are still entitled to compensation.
See supra n.142; ISO-NE Initial Comments at 9; NEPOOL Reply Comments
at 9. We express no opinion here as to whether any such generating
facility, such as those situations noted by ISO-NE and NEPOOL, would
be entitled to such compensation under such agreements.
---------------------------------------------------------------------------
61. We also find that Generation Developers' and Reactive Service
Providers' \157\ assertions that the final determination would violate
Atlantic City by depriving generating facilities of their FPA section
205 filing rights lack merit. The Commission is not depriving
generating facilities of their filing rights. The commenters' arguments
fundamentally misunderstand generating facility compensation under the
Commission's pro forma OATT and interconnection agreements. The final
determination is not adjusting, overturning, or reducing to zero any
generating facility's rate for reactive power within the standard power
factor range. The final determination addresses only the justness and
reasonableness of transmission rates chargeable to transmission
customers under Schedule 2 and by extension, payable to the
transmission providers' own generating facilities or affiliated
generating facilities and third-party generating facilities under the
comparability standard, consistent with their interconnection
agreements, not any independent right of generating facilities to
establish a rate under FPA section 205. While this does result in
generating facilities, affiliated and non-affiliated, no longer being
entitled to compensation for the provision of reactive power within the
standard power factor range as a function of comparability, the
Commission has found that such an outcome does not undermine the
generating facilities' FPA section 205 filing rights.\158\
---------------------------------------------------------------------------
\157\ Generation Developers Initial Comments at 31-32 (citing
Atl. City, 295 F.3d at 9-10); Reactive Service Providers Initial
Comments at 54.
\158\ Cf. MISO, 182 FERC ] 61,033 at P 65 (``[W]e find that MISO
TOs' proposal does not restrict independent power producers' FPA
section 205 rights to file a rate for reactive power; instead, the
proposal addresses only the rates chargeable to transmission
customers under Schedule 2 and by extension, payable to resources
consistent with their GIAs, not any independent right of generators
to seek compensation under FPA section 205.''); Opinion No. 583, 184
FERC ] 61,145 at P 45 (``Applicants' [interconnection agreements] do
not establish an independent right outside the context of Schedule 2
to reactive power compensation for merely meeting the technical
requirements required for interconnection.''); see also Joint
Customers Initial Comments at 14 (``Without comparability as an
issue, it is existing Commission policy that it is inappropriate to
compensate within the standard power factor range. The Order No.
2003 determination that compensation should not be paid for reactive
service meeting interconnection requirements remains well
supported.'' (emphasis in original)). We also note that individual
generating facility reactive power tariffs themselves do not
establish a payment obligation, only the rate that a buyer will pay
if it takes service. A tariff rate is an offer to sell service at
the stated rate; it does not establish an obligation on any party to
pay that rate. See 18 CFR 35.2(c)(1) (``The term tariff as used
herein shall mean a statement of (1) electric service as defined in
paragraph (a) of this section offered on a generally applicable
basis) (emphasis added)); Sw. Power Pool, Inc., 149 FERC ] 61,048 at
P 106 (``The Commission's use of the term `tariff rates' as
generally applicable rates is justified by the definition of the
term `tariff' set forth in the Commission's regulations under the
FPA, which state, in part, that a tariff is `a statement of . . .
electric service . . . offered on a generally applicable basis.'
''). In order to constitute an obligation, a party must sign a pro
forma or other service agreement. See Cal. Indep. Sys. Operator
Corp., 100 FERC ] 61,234, at 61,834 (2002) (``[T]he Commission moved
to a paradigm of standard agreements in which terms and conditions
that are included in a public utility's OATT and bilateral contracts
are replaced by pro forma service agreements''). Therefore, if
transmission providers revise their Schedule 2's to eliminate
compensation for the provision of reactive power within the standard
power factor range, no party will exist to pay the generating
facility's filed tariff rate. See, e.g., PNM, 178 FERC ] 61,088
(finding that the transmission owner is not required to pay for
reactive power, but not instituting section 206 proceedings to
cancel reactive power tariffs).
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B. Cost of Producing Reactive Power
62. The NOPR preliminarily found that providing compensation for
the provision of reactive power within the standard power factor range
is unjust and unreasonable. The Commission relied on three key points
to support this preliminary finding.
63. First, the NOPR relied on the Commission's prior findings that,
for both synchronous and non-synchronous generating facilities, because
all equipment used to produce reactive power is also necessary to
produce and deliver real power to the transmission system, there are no
incremental fixed costs associated with the provision of reactive power
within the standard power factor range.\159\ The NOPR also explained
that the Commission has repeatedly found, that ``[v]ariable costs of
generating reactive power are de minimis'' and ``generally limited to
changes in losses within the generating facility which are part of the
overall efficiency of the resource and, as such, are typically captured
in the resource offers.'' \160\ Thus, by providing reactive power
within the standard power factor range, both synchronous and
nonsynchronous facilities incur no additional fixed costs and at most
de minimis variable costs beyond which they already incur to provide
real power.\161\
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\159\ NOPR, 186 FERC ] 61,203 at PP 29-31 (``[S]ynchronous and
non-synchronous resources provide real and reactive power as joint
products, with joint costs.'').
\160\ Id. P 31.
\161\ Id. PP 8, 28.
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64. Second, the NOPR relied on the fact that all generating
facilities must provide reactive power within the standard power factor
range as an obligation of good utility practice and to meet the
obligations under their interconnection agreements.\162\
[[Page 93424]]
Additionally, the NOPR emphasized that ``reactive support by generating
facilities operating within the standard power factor range ensures
that when these facilities inject real power--the product that their
facilities exist to create and sell--onto the grid under normal
conditions, they can do their part to maintain adequate voltages and to
not threaten reliability.'' \163\ In other words, a generating facility
must produce reactive power within the standard power factor range in
order to generate and safely inject real power into the transmission
system and comply with reliability requirements. As such, providing
reactive power within the standard power factor range can be regarded
as a joint product with providing real power, with joint costs.
---------------------------------------------------------------------------
\162\ Id. P 33 (citing MISO, 182 FERC ] 61,033 at P 53
(``Bearing in mind that the provision of reactive power within the
standard power factor range is, in the first instance, an obligation
of the interconnecting generator and good utility practice, MISO
[transmission owners] do not have an obligation to continue to
compensate an independent generator for reactive power within the
standard power factor range when its own or affiliated generators
are no longer being compensated.'' (citations omitted)); id. P 54
(``We find unpersuasive protesters' arguments that it is not just
and reasonable to eliminate compensation for Reactive Service within
the standard power factor range because generators have come to rely
on the compensation for Reactive Service in order for the generators
to remain financially viable. The Commission has previously rejected
such arguments, finding that all newly interconnecting generators
are required to provide reactive power within the power factor range
of 0.95 leading to 0.95 lagging as a condition of interconnection.''
(citations omitted)); PNM, 178 FERC ] 61,088 at PP 29, 33 (rejecting
generating facility's arguments that it is ``just and reasonable for
it to be compensated for investments made'' to provide reactive
support consistent with interconnection requirements even though
transmission provider elected to no longer pay its own or affiliate
generators for such reactive power); Nev. Power Co., 179 FERC ]
61,103 at P 22 (finding that the generating facility's argument,
``that it is not just and reasonable to eliminate their compensation
for reactive service because they made investments in their
generating facilities based on the expectation that they would
receive compensation for reactive service,'' unpersuasive because
all newly interconnecting generators are required to provide
reactive power within the standard power factor range as a condition
of interconnection); Order No. 2003, 104 FERC ] 61,103 at P 546.
\163\ NOPR, 186 FERC ] 61,203 at P 13 (citing MISO Rehearing
Order, 184 FERC ] 61,022 at P 23).
---------------------------------------------------------------------------
65. Third, the NOPR noted that in regions where generating
facilities recover their costs by participating in organized
competitive wholesale markets, providing separate compensation for the
provision of reactive power within the standard power factor range
risks overcompensation and market distortions in ways that did not
exist prior to the existence of organized markets.\164\ The NOPR
explained that the AEP Methodology was created in an era of vertically
integrated utilities, when most utilities filed FERC Form No. 1s, used
the Uniform System of Accounts (USofA) to classify their costs, and
recovered those costs through cost-based rates.\165\ Today, however,
most generating facilities recover their costs through competitive
markets in both RTO/ISO and non-RTO/ISO regions, so the imprecision of
the AEP Methodology, the NOPR explained, becomes more significant
because it can lead to arbitrary increases in the utility's total
recovery when cost-based reactive power payments are added to any
market recoveries.\166\ The NOPR added that this is especially true
when markets fail to account for separate, cost-based reactive power
revenues by using standard rate making techniques.\167\
---------------------------------------------------------------------------
\164\ Id. at P 39.
\165\ Id.
\166\ Id.
\167\ Id. at 39 & nn.100-02. The Commission noted that, in PJM
for example, while the capacity market rules currently account for
reactive power payments to resources by assuming average reactive
power compensation of $2,546 per MW-year, reactive power revenue
requirements in PJM range from roughly $1,000 per MW-year to $13,000
per MW-year. The Commission noted that this wide range of actual
compensation, which is both above and below the assumed reactive
power compensation in the capacity market rules, can lead to market
distortions.
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1. Comments
66. Many commenters support the NOPR's finding that transmission
charges for generating facilities' provision of reactive power within
the standard power factor range are unjust and unreasonable.\168\
Likewise, many commenters support the NOPR's preliminary finding that
generating facilities already provide reactive power within the
standard power factor range at no cost or de minimis cost.\169\ Ameren
and MISO Transmission Owners agree with the NOPR that providing
reactive power within the standard power factor range requires little
or no cost to generators because the same equipment used to produce
real power includes reactive power functions.\170\ In support, MISO
Transmission Owners point to MISO and the MISO Rehearing Order wherein
the Commission also concluded that, based on that record, reactive
power service within the standard power factor range required little or
no incremental investment. MISO Transmission Owners add that, as the
Commission found in the MISO Rehearing Order, even newer wind turbines
use inverters that allow generating facilities to produce and control
reactive power without costly additional equipment.\171\ MISO
Transmission Owners also state that generating facility equipment
typically comes with reactive power capabilities that not only meet the
standard range requirements (i.e., 0.95 leading and 0.95 lagging) but
exceed them (e.g., 0.80-0.90).\172\ MISO Transmission Owners argue that
since generating facilities bear no or at most de minimis incremental
costs to provide reactive power within the standard power factor range,
one must consider what the actual purpose is of compensating generating
facilities for such service.\173\
---------------------------------------------------------------------------
\168\ AEP; Ameren; Joint Consumer Advocates; Joint Customers;
MISO Transmission Owners; New England Consumer Advocates; Ohio FEA;
PGE; PJM; the PJM IMM; the Transmission Access Policy Study Group.
\169\ See Ameren Initial Comments at 3; Joint Customers Reply
Comments at 11-13; MISO Transmission Owners Initial Comments at 5-7;
New England Consumer Advocates Initial Comments at 4-6; PJM IMM
Initial Comments at 4.
\170\ Ameren Initial Comments at 3 (citing BPA, 120 FERC ]
61,211 at P 21 (``Evidence from numerous reactive power rate filings
demonstrates newly interconnecting resources have the capability to
provide reactive power, some well in excess of the required 0.95
leading to 0.95 lagging. It is also well-documented that the same
equipment used to produce real power includes reactive power
functions and thus there is little, if any, incremental cost
associated with providing reactive power.'')); MISO Transmission
Owners Initial Comments at 5-7 (citing MISO, 182 FERC ] 61,033 at P
55; MISO Rehearing Order, 184 FERC ] 61,022 at PP 25 n.76, 29-30,
34, 41-42 (``[T]he record establishes, that Reactive Service
requires little or no incremental investment.'')); MISO Transmission
Owners Reply Comments at 9; see also Ohio FEA Initial Comments at 3.
\171\ MISO Transmission Owners Initial Comments at 7 & n.18
(citing MISO Rehearing Order, 184 FERC ] 61,022 at P 30 n.98
(``[O]lder wind generators could not produce and control reactive
power without the use of costly equipment [ ] `because they did not
use inverters like other non-synchronous generators' but modern
turbines now use inverters and newer wind generators now can.'')).
\172\ Id. at 7.
\173\ Id. at 9.
---------------------------------------------------------------------------
67. Joint Customers state that attempts to undermine the NOPR, such
as challenging the assertion that incremental costs of providing
reactive service within the standard power factor range are de minimis,
are meritless.\174\ Joint Customers argue that the costs incurred by
generators to meet interconnection requirements are necessary for safe
and reliable grid operations and that arguments against the de minimis
designation often misrepresent the incremental costs involved in
meeting interconnection requirements versus providing additional
reactive capability.\175\ Joint Customers note that claims of excessive
costs for non-synchronous generators to comply with power factor
requirements are collateral attacks on prior Commission orders,
particularly Order No. 827.\176\
---------------------------------------------------------------------------
\174\ Joint Customers Reply Comments at 11-13.
\175\ Id.
\176\ Id. at 13 (citing Order No. 827, 155 FERC ] 61,277 at P 11
(``Prior to Order No. 827, non-synchronous generators were exempt
from complying with power factor requirements. The entire point of
Order No. 827 was to find that technological advancements had
reduced the cost of compliance such that non-synchronous generators
no longer needed the exemption. The order also explicitly maintained
the compensation scheme for reactive power, with all that means for
the elimination of compensation if not justified by
comparability.'').
---------------------------------------------------------------------------
68. The PJM IMM, MISO Transmission Owners, and several other
commenters assert that providing reactive power within the standard
power factor range is an obligation of interconnection and consistent
with good utility practice.\177\ The PJM IMM asserts that the
Commission has a long
[[Page 93425]]
standing policy that ``treats the provision of reactive power inside
the [standard power factor range] as an obligation of good utility
practice rather than as a compensable service and permits compensation
inside the [standard power factor range] only as a function of
comparability.'' \178\
---------------------------------------------------------------------------
\177\ PJM IMM Initial Comments at 6-9 (citing PJM, OATT,
Attachment O, Sec. Sec. 4.7.1.1.1., 4.7.1.2. (3.0.0)); Joint
Consumer Advocates Initial Comments at 6-7; MISO Transmission Owners
Reply Comments at 4; TAPS Initial Comments at 6; Ohio FEA Initial
Comments at 5; Joint Customers Initial Comments at 14-16; PGE
Initial Comments at 4 (citing MISO, 182 FERC ] 61,033 at P 53
(noting that in the acceptance of the MISO Transmission Owners
application to end compensation within the standard power
application, the Commission reiterated its policy ``that the
provision of reactive power within the standard power factor range
is, in the first instance, an obligation of the interconnecting
generator and good utility practice.'')).
\178\ PJM IMM Initial Comments at 6-8 (citing NOPR, 186 FERC ]
61,203 at P 5 (citing BPA Rehearing Order, 125 FERC ] 61,273 at P
18)); see also MISO Transmission Owners Initial Comments at 10-12.
---------------------------------------------------------------------------
69. The PJM IMM states that reactive power is not the only design
obligation the generation interconnection customers assume.\179\ The
PJM IMM notes, for example, that generating facilities are required to
provide primary frequency response capability, but the PJM OATT does
not provide an out of market payment for such service because it is
treated as an obligation assumed by generation interconnection
customers for receiving interconnection service.\180\ MISO Transmission
Owners also point out that the SEIA, the national trade association for
the U.S. solar industry, has acknowledged that reactive power
compensation does not affect a generator's operations and that
provision of reactive power within the standard power factor range is
required regardless of compensation.\181\
---------------------------------------------------------------------------
\179\ PJM IMM Initial Comments at 8.
\180\ Id. (citing PJM, OATT, Attachment O Sec. 4.7.2. (3.0.0)).
\181\ MISO Transmission Owners Initial Comments at 9 & n.24
(citing SEIA, Reactive Power Compensation: How to Unlock New Revenue
Opportunities for Solar and Storage Projects, Solar Energy
Industries Association 4 (July 29, 2020), <a href="https://old.seia.org/sites/default/files/2023-01/Speaker%20Q&A%20-%20Reactive%20Power%20Compensation%20Webinar.pdf">https://old.seia.org/sites/default/files/2023-01/Speaker%20Q&A%20-%20Reactive%20Power%20Compensation%20Webinar.pdf</a> (also attached as
Exhibit I) (``Filing for and receiving reactive revenues has no
impact on the generator's operating profile. The ISO/RTOs have a
right to dispatch generators to provide reactive service as needed
to maintain reliability.'')). The MISO Transmission Owners also add
that ``[a]t the same time MISO was experiencing a dramatic increase
in the amounts transmission customers paid for reactive power
service prior to its elimination of compensation for reactive power
service within the deadband, SEIA highlighted that MISO was one of
the two `most lucrative' regions for reactive power compensation,
where generators received millions of dollars in compensation for
having the capability to produce reactive power within the deadband,
a capability that was already a condition of obtaining
interconnection.'' Id. at 9-11.
---------------------------------------------------------------------------
70. Additionally, MISO Transmission Owners agree that the
Commission's line of precedent since Order No. 2003 has required
interconnecting generators to be able to provide reactive power within
the standard power factor range without compensation, with few
exceptions.\182\ MISO Transmission Owners argue that generators are
incented by their own reliability requirements to install the equipment
that will help keep their projects on-line and delivering real power,
and that ``skimping'' on equipment that can provide reactive power
across a range of operating conditions is not in generators' best
operational interests or consistent with good utility practice.\183\
MISO Transmission Owners state that generating facilities are also
required by the North American Electric Reliability Corporation (NERC)
reliability standards to operate in automatic voltage control mode and
maintain a voltage set point provided by the transmission
provider.\184\
---------------------------------------------------------------------------
\182\ Id. at 10-11 (citing Order No. 2003, 104 FERC ] 61,103 at
P 546; Order No. 2003-A, 106 FERC ] 61,220 at PP 410, 416; Order No.
827, 155 FERC ] 61,277 at P 59).
\183\ Id. at 11 & n.29 (citing MISO Rehearing Order, 184 FERC ]
61,022 at P 35 n.116 (``[G]enerators have incentives to install
equipment to ensure that their generation remains online and
delivering real power.'')).
\184\ Id. at 11-12 (citing Reliability Standard VAR-002-3--
Generator Operation for Maintaining Network Voltage Schedules), at 2
(Aug. 1, 2014), <a href="http://www.nerc.com/pa/Stand/Reliability%20Standards/VAR-002-3.pdf">http://www.nerc.com/pa/Stand/Reliability%20Standards/VAR-002-3.pdf</a> (``R2 . . . Generator Operator
shall maintain the generator voltage or Reactive Power schedule
(within each generating Facility's capabilities).'').
---------------------------------------------------------------------------
71. MISO Transmission Owners and the PJM IMM agree with the NOPR's
preliminary finding that the current reactive power compensation
framework allows for undue compensation and potential market
distortions, and they argue that the current compensation framework
leads to ``black-box'' settlements that lack transparency and result in
vastly disparate rates.\185\ The PJM IMM argues that separately
compensating resources based on a judgment-based allocation of capital
costs is not appropriate in the PJM markets.\186\ The PJM IMM argues
that cost-of-service compensation for reactive power distorts markets
and undermines competition.\187\ The PJM IMM asserts that the current
rules create strong incentives for generating facilities to attempt to
maximize the allocation of capital costs to reactive service in order
to maximize guaranteed, nonmarket revenues.\188\ The PJM IMM claims
that there is no reasonable basis for the disparity in the price to
customers from different types of generators for the same service and
that reactive power is a homogeneous product which should have the same
price for all sellers. The PJM IMM notes that the most recent reactive
power rate cases settled prior to issuance of the NOPR have resulted in
costs well in excess of the reactive power revenue offset assumed in
PJM's capacity market.\189\
---------------------------------------------------------------------------
\185\ Id. at 8; PJM IMM Initial Comments at 4-6; see also Joint
Customers Initial Comments at 4-6.
\186\ PJM IMM Initial Comments at 3-4.
\187\ Id. at 4-6.
\188\ Id. at 4. The PJM IMM asserts that these revenues provide
a nonmarket advantage to generating facilities that receive them,
resulting in an arbitrary and nonmarket-based advantage (i.e.,
distortionary).
\189\ Id. at 6 (explaining that in PJM's capacity market, ``the
parameters that define the demand curve . . . are based on the costs
of new entry of a reference generating unit, less net revenues from
other PJM markets'' such as reactive power revenues). The PJM IMM
explains that the level of these net revenues that are subtracted,
or offset, from the costs of new entry, are based on a calculation
from the PJM IMM of the average Schedule 2 payment for reactive done
in 2008 and based on reactive rates from prior years. However, the
PJM IMM states that ``[m]ost recent cases settled prior to issuance
of the NOPR have settled for costs well in excess of the average
cost and well in excess of the [] offset amount'' and that ``[t]he
issue is growing in significance.'' Id. at 5.
---------------------------------------------------------------------------
72. Many other commenters, in contrast, challenge the Commission's
preliminary finding that providing reactive power within the standard
power factor range has no or de minimis costs.\190\ The Indicated Trade
Associations and Generation Developers emphasize that the costs of
equipment and production associated with reactive power, particularly
for renewable resources, are substantial and involve significant
capital investments.\191\ Indicated Reactive Power Suppliers, NEPGA,
and Reactive Service Providers assert that eliminating compensation for
reactive power within the standard power factor range is unjust and
unreasonable, given the substantial capital costs incurred by
generators.\192\ They argue that the NOPR's proposal fails to account
for these costs as well as for lost opportunities for real power
generation and renewable energy credits.\193\ They assert that the
[[Page 93426]]
Commission's proposal is inconsistent with the FPA's purpose of
ensuring just and reasonable returns on investment, particularly for
inverter-based resources, which incur distinct incremental costs for
reactive power provision.\194\
---------------------------------------------------------------------------
\190\ Eagle Creek Initial Comments at 3-4; Indicated Trade
Associations Initial Comments at 7; ACORE Initial Comments at 2;
Elevate Renewables Initial Comments at 9-12; Generation Developers
Initial Comments at 13; Glenvale Initial Comments at 9-10; Indicated
Reactive Power Suppliers Initial Comments at 2, 9-10; Indicated
Trade Associations Initial Comments at 2, 6; Middle River Power
Initial Comments at 2-3; NEI Initial Comments at 4-5, 8-9; NHA
Initial Comments at 2, 4-5. Indicated Trade Associations also assert
that prior Commission orders cited by the NOPR to support the
assertion that no costs or de minimis costs are incurred to provide
reactive power within the standard power factor range do not provide
evidence to support the conclusion. Indicated Trade Associations
Initial Comments at 8 (citing BPA, 120 FERC ] 61,211 at P 21; BPA
Rehearing Order, 125 FERC ] 61,273 at P 7 n.7; Ariz. Pub. Serv. Co.,
94 FERC ] 61,027, at 61,080 (2001) (APS)); Onward Energy Reply
Comments at 2.
\191\ Indicated Trade Associations Initial Comments at 10;
Generation Developers Initial Comments at 13.
\192\ Indicated Trade Associations Reply Comments at 6-7; NEPGA
Reply Comments at 3 (citing Indicated Trade Association Initial
Comments, Affidavit of Michael Borgatti, Docket No. RM22-2-000 at 9-
10 (filed May 28, 2024)); Reactive Service Providers Initial
Comments at 37-40.
\193\ See Indicated Trade Associations Initial Comments at 11-12
(``[F]or renewable resources, having to back down generation in
order to produce reactive power would also result in lost renewable
electricity production tax credits, renewable energy certificates,
and similar benefits''); Generation Developers Initial Comments at
13.
\194\ See Indicated Trade Associations Reply Comments at 7;
Generation Developers Initial Comments at 13, 20-21.
---------------------------------------------------------------------------
73. Some commenters argue that there is an insufficient legal
foundation under section 206 of the FPA to demonstrate that all
existing reactive power rates are unjust and unreasonable.\195\
Generation Developers assert that the fact that many generators are
required to provide reactive power as a condition of receiving
interconnection service and consistent with good utility practice does
not provide a basis for concluding that the compensation received by
generating facilities is unjust and unreasonable.\196\ Generation
Developers assert that the Commission's reasoning improperly assumes
that generating facilities investing in reactive power capability are
not performing a service that benefits the transmission system, but is
instead only needed to support their own deliveries.\197\ Generation
Developers assert that the NOPR's categorical determination that the
just and reasonable reactive power rate is zero, and thus all reactive
rates that are not zero are unjust and unreasonable, fails to comply
with the requirements of section 206 of the FPA.\198\ NEI adds that the
Commission failed to meet its section 206 burden because the NOPR does
not offer substantial evidence that reactive power costs are zero or
minimal, cost allocation is inappropriate, or reducing reactive power
compensation to zero would allow generators to recover their costs,
plus a reasonable rate of return.\199\
---------------------------------------------------------------------------
\195\ Generation Developers Initial Comments at 24-25; Middle
River Power Initial Comments at 4; NEI Initial Comments at 7; PSEG
Initial Comments at 2-3, 11-12; Reactive Service Providers Initial
Comments at 7-54; NYISO Initial Comments at 1.
\196\ Generation Developers Initial Comments at 25.
\197\ Id.
\198\ Id. at 31; PSEG Initial Comments at 12-13.
\199\ NEI Initial Comments at 8.
---------------------------------------------------------------------------
74. Generation Developers assert that the Commission ignores well-
documented evidence that certain types of generating facilities, namely
inverter-based generating facilities, incur distinct, incremental costs
associated with providing reactive power.\200\ Generation Developers
assert that, when the Commission first required that generating
facilities be capable of supplying reactive power within the standard
power factor range in Order No. 2003, it explicitly exempted wind
generating facilities from that requirement because most wind
generators could not maintain the power factor range.\201\ Generation
Developers state that the Commission also generally exempted wind
generators from operating within the standard power factor range in
Order No. 661 because ``for wind plants, reactive power capability is a
significant added cost.'' \202\ Generation Developers assert that while
the Commission removed this exemption in Order No. 827 \203\ after
finding that technological advancements made it so the cost of reactive
power no longer presented an obstacle to the development of wind
generation, it ``notably did not find that there were no such costs or
even de minimis costs associated with the provision of reactive power
by wind resources.'' \204\ Instead, Generation Developers argue that
the Commission removed this exemption based on its finding that
imposing an obligation on non-synchronous generating facilities to
provide reactive power within the standard power factor range was
necessary to support transmission service and reliability.\205\
Generation Developers add that, even if costs have declined over the
years, the Commission has not demonstrated that it would be just and
reasonable to nullify the rate schedules of facilities that came online
years before the technological advancements referenced in Order No. 827
and had to make incremental investments to its facility to produce
reactive power within the standard power factor range.\206\
---------------------------------------------------------------------------
\200\ Generation Developers Initial Comments at 13-17.
\201\ Id. at 13 (citing Order No. 2003, 104 FERC ] 61,103
(noting that the Commission exempted wind generation from the
requirement because ``wind generators for the most part cannot
maintain the required power factor, simply because the necessary
technology does not exist for wind generators'')).
\202\ Id. at 13-14 (citing Order No. 661, 111 FERC ] 61,353 at P
46; Order No. 661-A, 113 FERC ] 61,254). Generation Developers add
that in Order No. 661, the Commission was presented with evidence
that ``wind turbines cannot meet the proposed power factor standard
over the full range of real power output, and that dynamic VAR
control (DVAR) banks or static capacitors would have to be installed
at an additional expense to meet the proposed power factor over the
entire range.'' Generation Developers Initial Comments at 13 (citing
Order No. 661-A, 113 FERC ] 61,254 at P 45 (emphasis added)).
Generation Developers state that while Order No. 661 was limited to
wind resources, the Commission extended the exemption to other non-
synchronous resources on a case-by-case basis. Generation Developers
Initial Comments at 14 (citing Nev. Power Co., 130 FERC ] 61,147, at
P 27 (2010)).
\203\ Order No. 827, 155 FERC ] 61,277 at P 21.
\204\ Generation Developers Initial Comments at 14.
\205\ Id. (citing Order No. 827, 155 FERC ] 61,277 at P 4)
(``The Commission instead made its decision to apply reactive power
requirements to non-synchronous resources based on its `balancing
the costs to newly-interconnecting non-synchronous generators of
providing reactive power with the benefits to the transmission
system of having another source of reactive power.' '').
\206\ Id. at 17.
---------------------------------------------------------------------------
75. Generation Developers argue that the 2014 Staff Report is the
most recent and comprehensive evidence on the costs that non-
synchronous generating facilities incur in providing reactive
power.\207\ Generation Developers assert that the NOPR does not provide
any evidence to support that the costs of providing reactive power have
changed since the Commission's observations in the 2014 Staff Report,
but instead relies on a rehearing order in a proceeding concerning the
MISO transmission owners' proposal to eliminate reactive power
compensation within the standard power factor range for the proposition
that non-synchronous generating facilities have no or de minimis
costs.\208\ Generation Developers assert that the Commission's reliance
on a statement from the MISO Rehearing Order, and the purported failure
of parties in that proceeding to demonstrate costs of non-synchronous
facilities, does not satisfy the Commission's burden in this case.\209\
Generation Developers add that the Commission's reliance on cases that
pre-date the emergence of non-synchronous generating facilities for the
proposition that all generating facilities have no or de minimis costs
is misplaced.\210\ For example, Generation Developers contend that the
Commission erred in citing Duke Energy Corporation's comments to the
NOI in support of its finding that the inverter is the most critical
equipment for the production of reactive power from non-synchronous
resources.\211\
---------------------------------------------------------------------------
\207\ Id. at 14-15 (citing 2014 Staff Report (``[M]ost dynamic
reactive power, which is crucial to transmission system reliability,
is provided by generators.''). Specifically, Generation Developers
state that the 2014 Staff Report made the following findings: ``(1)
the costs of reactive power equipment for wind generators range from
3.18% to 4% of their capital costs; and (2) the costs of adding
reactive power capability to solar photovoltaic generators range
from 2% to 20% of a project's total costs, depending on project
size.'' Id. at 15 (citing 2014 Staff Report app. 2 at 2-3).
\208\ Id. at 15 (citing NOPR, 186 FERC ] 61,203 at P 29 n.70
(citing MISO Rehearing Order, 184 FERC ] 61,022 at P 30)).
\209\ Id.
\210\ Id. at 16 (citing BPA, 120 FERC ] 61,211; METC Rehearing
Order, 97 FERC at 61,852-53; APS, 94 FERC at 61,080).
\211\ Id. at 16-17 n.52 (citing Duke Energy Corporation Initial
Comments to the NOI at 4).
---------------------------------------------------------------------------
76. PSEG similarly notes that the Commission has long used the AEP
Methodology to allocate costs associated
[[Page 93427]]
with the provision of reactive power within the standard power factor
range.\212\ PSEG witness Dr. Dumais observes that the AEP Methodology
identifies four categories of equipment costs that are involved in the
production of reactive power from synchronous generating
facilities.\213\
---------------------------------------------------------------------------
\212\ PSEG Initial Comments at 9.
\213\ Id., Prepared Testimony of Dr. Paul A. Dumais at 11, 1:11.
---------------------------------------------------------------------------
77. Indicated Trade Associations argue that the cases cited to in
the NOPR to support the finding that there are no or de minimis costs
associated with producing reactive power do not support the
Commission's assertion.\214\ For example, Indicated Trade Associations
assert that in BPA, the Commission summarily stated without evidence
that ``the incremental cost of reactive power service within the
deadband is minimal.'' \215\ Indicated Trade Associations assert that,
on rehearing, however, when a party argued that `` `only the short-run
marginal cost of producing the next increment of reactive power `can
logically be described as minimal' because it excludes capability
costs,' . . . the Commission sidestepped this issue, stating that `the
issue of whether or not the cost is minimal is not relevant to whether
the independent power producers are entitled to compensation.' '' \216\
Indicated Trade Associations argue that in APS, another order cited in
the NOPR, ``the Commission simply noted that intervenors `have not
demonstrated that [the proposed reactive power] requirement will limit
the real power output of a generating unit and therefore will not
result in any lost opportunity costs.' '' \217\
---------------------------------------------------------------------------
\214\ Indicated Trade Association Initial Comments at 7-8.
\215\ Id. at 8 (citing BPA, 120 FERC ] 61,211 at P 21).
\216\ Id. (citing BPA Rehearing Order, 125 FERC ] 61,273 at
n.7).
\217\ Id. (quoting APS, 94 FERC at 61,080; citing NOPR, 186 FERC
] 61,203 at P 29 n.70).
---------------------------------------------------------------------------
78. Elevate and Glenvale further argue that the Commission's
assumption that all resource classes, including energy storage
resources, incur no or minimal costs is unsupported by evidence.\218\
Elevate asserts that recurring capital investments are required to
address battery degradation caused by the provision of reactive
power.\219\ Specifically, Elevate argues that while the level of
degradation increases as the reactive power to real power ratio moves
further from unity, even the provision of reactive power within the
standard power factor range contributes to the degradation of the
storage resource's capability.\220\ Elevate states that energy storage
resources must make significant and recurring capital investments to
address this degradation, which, in Elevate's experience, costs
approximately one percent of the resource's original capital investment
annually.\221\ Elevate asserts that the record is devoid of any
evidence that energy storage resources incur no or de minimis costs to
provide reactive power.\222\ Glenvale argues that there are marginal,
operational, and replacement costs associated with providing reactive
power within the power factor range for solar generating
facilities.\223\ Specifically, Glenvale asserts that, at the capital
investment stage, there are different inverter options that allow
generating facilities to provide reactive service outside of generating
hours (e.g., allowing solar generating facilities to provide reactive
power at night) and that this incurs additional costs which would not
be required if the generating facility were not set up to provide
reactive power at night.\224\ Glenvale also asserts that inverters use
electricity to provide reactive power, explaining that when a
generating facility is synchronized, this presents as reduced
generation, and when a generating facility is not synchronized, the
generator must either use an alternate power source or it presents as
negative generation (both of which Elevate states result in additional
costs).\225\ Glenvale also states that the provision of reactive power
can result in a reduced inverter service life.\226\ Glenvale notes that
it is difficult to allocate these costs among each of the three service
conditions--within the standard power factor range while synchronized,
within the standard power factor range at night, and outside the
standard power factor range at all times--but Glenvale asserts that at
least some of the costs are attributable to providing reactive power
within the standard power factor range.\227\ NEI asserts that there are
real costs for nuclear generating facilities to provide and maintain
reactive power capability, including: properly sized generators,
maintenance associated with normal operations to preserve reactive
power capability, and additional repairs that may be needed to address
age-related degradation to equipment that might otherwise impair
reactive power capability.\228\
---------------------------------------------------------------------------
\218\ Elevate Initial Comments at 9-12; Elevate Reply Comments
at 7-9; Glenvale Initial Comments at 9-10.
\219\ Elevate Initial Comments at 9-12; Elevate Reply Comments
at 7-9.
\220\ Elevate Reply Comments at 8.
\221\ Id.
\222\ Elevate Initial Comments at 12.
\223\ Glenvale Initial Comments at 9-10.
\224\ Id. at 9.
\225\ Id.
\226\ Id. at 9-10 & n.29 (citing Ramanathan Thiagarajan, Adarsh
Nagarajan, Peter Hacke, and Ingrid Repins, Effect of Reactive Power
on Photovoltaic Inverter Reliability and Lifetimes (2019), <a href="https://www.nrel.gov/docs/fy19osti/73648.pdf">https://www.nrel.gov/docs/fy19osti/73648.pdf</a>.) (``One characterization in
recent research is that providing reactive power within the standard
power factor range reduces service life by one year, and that
providing reactive power outside of the standard range reduces
service life by a second year.'')).
\227\ Id. at 10.
\228\ NEI Initial Comments at 5.
---------------------------------------------------------------------------
79. Relatedly, NEI explains that nuclear generators are most likely
to be called upon to provide reactive power services and thus are the
generators most likely to face accelerated degradation and damage to
reactive power equipment.\229\
---------------------------------------------------------------------------
\229\ Id. at 14-16.
---------------------------------------------------------------------------
80. Reactive Service Providers argue that there is no evidence to
support the claim that providing reactive power within the standard
power factor range requires no incremental investment, and that even if
the investment needed were de minimis, that would not be a reason to
not provide compensation.\230\ Reactive Service Providers further
contend that there is no evidence that the costs of providing reactive
service have increased since the advent of RTOs and IPPs \231\ or that
generating facilities are recovering their costs in regions where
transmission providers do not provide compensation.\232\
---------------------------------------------------------------------------
\230\ Reactive Service Providers Initial Comments at 37-40.
\231\ Id. at 31-34.
\232\ Id. at 37-41.
---------------------------------------------------------------------------
81. Eagle Creek criticizes the Commission's determination that
there are no or de minimis costs associated with the provision of
reactive power in the standard power factor range as flawed based on
its own tariff cases under the AEP Methodology and argues that
eliminating compensation for reactive power would be arbitrary and
capricious.\233\ ACORE, Indicated Reactive Power Suppliers, and Middle
River Power similarly argue that their facilities have demonstrated
just and reasonable compensation covering actual reactive power costs
during settlement negotiations.\234\
---------------------------------------------------------------------------
\233\ Eagle Creek Initial Comments at 3-4. Eagle Creek argues
that, for each of its tariff cases, it submitted evidence
documentation of the fixed and sunk costs that it invested to
increase its reactive power generation. Id.
\234\ ACORE Initial Comments at 2; Indicated Reactive Power
Suppliers Initial Comments at 9; Middle River Power Initial Comments
at 2-3 (noting that Middle River Power owns 19 fossil-fired
generating facilities that recover approximately $4.5 million in
annual reactive power revenues through their reactive service
tariffs on file with Commission, which it argues were ``demonstrated
in rigorous proceedings before the Commission'' to be just and
reasonable compensation covering actual costs).
---------------------------------------------------------------------------
[[Page 93428]]
82. Indicated Trade Associations assert that the Commission fails
to reconcile the NOPR's insistence that there are no segregable costs
associated with the provision of reactive power with its longstanding
precedent of the AEP Methodology, where the Commission approved
isolating costs of providing reactive power.\235\ NEI asserts that,
rather than point to actual data that demonstrates generating facility
costs for providing reactive power, the NOPR relies on the misplaced
theory that ``because both synchronous and non-synchronous resources
provide real and reactive power as joint products, with joint costs, .
. . any allocation of joint fixed costs between real and reactive power
could be viewed as inherently arbitrary.'' \236\ NEI and Generation
Developers argue that the AEP Methodology compensates generators based
on their actual costs and reactive capabilities, providing them with a
just and reasonable opportunity to recover their investments in
reactive service capability, and asserts that the Commission has
repeatedly confirmed this cost allocation methodology and its
underlying factual predicates in numerous proceedings.\237\ Generation
Developers suggest that the Commission has allocated real and reactive
power costs using the AEP Methodology for over two decades \238\ and
has rejected arguments that the AEP Methodology results in an improper
allocation of costs or is used merely as a matter of administrative
convenience.\239\ The NHA asserts that the Commission correctly
identifies real power and reactive power as jointly produced
commodities, but it incorrectly attributes the cost of all generation
equipment to be predominantly for the production of real power.\240\
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\235\ Indicated Trade Associations Initial Comments at 9; see
also id. (citing Va. Elec. & Power Co., 114 FERC ] 61,318, at P 3
(2006)) (``[T]he Commission expressly instructed generators to use
the AEP Methodology `to compute the portion of plant investment
attributable to reactive power production . . . Because these
production plants produce real and reactive power, AEP developed an
allocation factor to segregate the reactive production function from
the real power production function. The allocation factor is used to
determine the amount of investment allocable to reactive power.' '')
(emphasis added by Indicated Trade Associations)).
\236\ NEI Initial Comments at 10 (citing NOPR, 186 FERC ] 61,203
at P 30)
\237\ Id. at 10-11; Generation Developers Initial Comments at 7-
9.
\238\ Generation Developers Initial Comments at 8-9 (citing
Dynegy Midwest Generation, Inc., 125 FERC ] 61,280 at P 11;
Bluegrass Generation Co., L.L.C., 118 FERC ] 61,214, order on reh'g,
121 FERC ] 61,018, at P 12 (2007)).
\239\ Id. (citing Bluegrass Generation Co., 121 FERC ] 61,018 at
P 12 (``This policy is not a matter of administrative convenience .
. . but the result of the Commission's deliberate determination that
the AEP methodology is a just and reasonable manner of calculating a
reactive power revenue requirement'').
\240\ NHA Initial Comments at 4-5 (noting that ``[t]here is no
basis for this assumption, especially if the Commission believes the
AEP Methodology is incapable of isolating real and reactive
cost.'').
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83. Clean Energy Associations assert that reactive power is not
always coupled with real power as they believe the Commission states in
the NOPR.\241\ Middle River Power argues that the Commission's
statement that generating facilities are being asked to provide
reactive power in order to offset the impact of the power they inject
into the system is incorrect.\242\ Similarly, Middle River Power
asserts that the Commission has previously found that generators are
being asked to supply reactive power to support load. Clean Energy
Associations argues that the Commission conflates the cost of equipment
with the cost of providing an essential transmission service and that
providing reactive power--even within the standard power factor range--
comes at the expense of providing real power.\243\ Clean Energy
Associations note that a possible solution to this problem could be
that the Commission distinguish ``reactive power capability'' from the
``reactive power service.'' \244\
---------------------------------------------------------------------------
\241\ Clean Energy Associations Initial Comments at 7.
\242\ Middle River Power Initial Comments at 3.
\243\ Clean Energy Associations Initial Comments at 6-7.
\244\ Id.
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84. ACORE asserts that a requirement to provide a service does not
negate the fact that costs are incurred to provide that service.\245\
Similarly, Elevate and Indicated Trade Associations argue that, even if
it were true that resources do not incur distinct costs associated with
reactive power, the Commission fails to point to precedent to support
its conclusion that the lack of distinct costs is an appropriate basis
on which to deny resources the ability to recover those costs.\246\ The
Indicated Trade Associations assert that the NOPR's assumption that
there are no or minimal costs associated with the provision of reactive
power directly contradicts Order No. 888, which Indicated Trade
Associations argue found that reactive service from generating
facilities must be priced at cost, thereby acknowledging that there are
distinguishable costs associated with the provision of reactive
power.\247\ Middle River Power argues that the Commission has
historically required compensation for reactive power as a separate
ancillary service.\248\
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\245\ ACORE Initial Comments at 2.
\246\ Elevate Initial Comments at 9-10; Indicated Trade
Associations Initial Comments at 9.
\247\ Indicated Trade Associations Initial Comments at 9 (citing
Order No. 888, FERC Stats. & Regs. ] 31,036 at 31,720-21).
\248\ Middle River Power Initial Comments at 2-3.
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85. Reactive Service Providers assert that the Commission has not
supported its claim that generating facilities (and specifically IPP)
already have an obligation to provide reactive service within the
standard power factor range.\249\ Reactive Service Providers argue that
the NOPR's finding is contrary to decades of Commission precedent,\250\
and the Commission ``lost its way as it proceeded to Order No. 2003 and
beyond, caught up in a myopic view that unbundling and the emergence of
the IPP industry somehow transferred the `obligation' to provide
reactive service within the standard range from the Transmission
Provider to the IPP generator.'' \251\ Reactive Service Providers
assert that transmission providers alone have the obligation to
maintain a reliable and stable transmission system, and generating
facilities are purely a tool that transmission providers use to fulfill
this obligation.\252\ Reactive Service Providers assert that in Order
No. 888, the Commission determined that various ancillary services
support the transmission system so that load can be served, but the
Commission notably did not find that generating facilities have this
obligation.\253\ Instead, Reactive Service Providers argue that the
Commission merely recognized that generating facilities were a critical
tool that transmission providers can use to maintain the safe and
reliable operation of the transmission system.\254\ Reactive Service
Providers assert that, for Reactive Supply and Voltage Control from
Generation Sources (which
[[Page 93429]]
ultimately became Schedule 2), the Commission noted that:
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\249\ Reactive Service Providers Initial Comments at 7 (citing
NOPR, 186 FERC ] 61,203 at P 5).
\250\ Id. at 9.
\251\ Id. at 8.
\252\ Id. at 8-9 (citing Affidavit of Dennis W. Bethel).
\253\ Id. at 9 (citing Order No. 888, FERC Stats. & Regs. ]
31,036 at 31,349 (noting that the Commission adopted the following
definition of ancillary services: ``Those services that are
necessary to support the transmission of capacity and energy from
resources to load while maintaining reliable operation of the
Transmission Provider's Transmission System in accordance with Good
Utility Practice'' and that the Commission determined that ``A
control area is part of an interconnected power system with a common
generation control system. It may contain one or several utilities.
The operator of the control area is responsible for balancing
generation and load and for maintaining reliable system
operation.'')).
\254\ Id.
NERC states that reactive supply is provided from both
generation resources and transmission facilities (e.g., capacitors),
and lists its provision as two services, distinguished by the
facilities that supply them. NERC further distinguishes reactive
supply service based on the source of the need for the service: (1)
reactive supply needed to support the voltage of the transmission
system; and (2) reactive supply needed to correct for the reactive
portion of the customer's load at the delivery point.\255\
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\255\ Id. at 10 (citing Order No. 888, FERC Stats. & Regs. ]
31,036 at 31,355).
Reactive Service Providers assert that NERC did not identify the
impact of generating facilities to the transmission system as a reason
or need for reactive supply, but instead only identified the
transmission system and load as needing the reactive service, noting
that generating facilities would serve those needs at the point of
interconnection.\256\ Reactive Service Providers assert that, while
both before and after Order No. 888, transmission providers
holistically relied on generation- and transmission-based reactive
assets to fulfill their obligations to maintain the voltage of the
transmission system, generating facilities never had an independent
obligation to provide reactive service, as the Commission asserts in
the NOPR.\257\
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\256\ Id.
\257\ Id. at 11.
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86. Reactive Service Providers assert that when the Commission
issued Order No. 2003, it summarily stated that, as a condition to
obtain interconnection service, the generating facility must provide
reactive service within the standard power factor range.\258\ Reactive
Service Providers argue that the Commission did not amass any evidence
in the Order No. 2003 proceeding to explain why generating facilities
have an obligation to provide reactive service within the standard
power factor range and posit that the Commission may have come to this
conclusion in Order No. 2003 and the NOPR ``because the Transmission
Provider has always relied on generators as one of its tools to enable
the Transmission Provider to fulfill its obligation to maintain the
Transmission System in a safe and reliable manner.'' \259\ Reactive
Service Providers assert that none of the transmission system
operators, NERC, and the Commission, in nearly all precedent, have ever
concluded that generation has an ``obligation'' to provide reactive
service within the standard range; the Commission's statement in Order
No. 2003 is an outlier.\260\
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\258\ Id. at 11-12.
\259\ Id. at 12.
\260\ Id. at 12-19 (citing Order No. 661, 111 FERC ] 61,353 at
PP 50-51 (``this Final Rule requires the wind plant to maintain the
required power factor range only if the Transmission Provider shows
through the System impact Study, that such capability is required of
that plant to ensure safety or reliability. . . . ``[B]ecause the
Transmission Provider is responsible for the safe and reliable
operation of its transmission system (pursuant to NERC and regional
reliability council standards), it is in the best position to
establish if reactive power is needed in individual
circumstances.''); Order No. 827, 155 FERC ] 61,277 at P 35
(``balancing the costs to newly-interconnecting non-synchronous
generators of providing reactive power with the benefits to the
transmission system of having another source of reactive power'')
(emphasis added by Reactive Service Providers)); id. at 18 (``[I]n
Order No. 901, the [Commission] continued the clear distinction
between a Transmission Provider that has the obligation to plan and
operate the Transmission System and generation that is a tool that
Transmission Providers must account for and uses to fulfill its
obligation to plan and operate the Transmission System.'') (citing
Reliability Standards to Address Inverter-Based Res., Order No. 901,
88 FR 74250 (Oct. 30, 2023) 185 FERC ] 61,042, at P 174 (2023)).
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87. Similarly, Reactive Service Providers assert that ``good
utility practice'' does not entail an obligation for generating
facilities to provide reactive power for free, and the Commission has
not explained why it believes such obligation exists.\261\ Reactive
Service Providers argue that the current compensation scheme for
reactive power is consistent with the Commission's definition of good
utility practice because it includes practices that ``could have been
expected to accomplish the desired result at a reasonable cost
consistent with good business practices, reliability, safety and
expedition.'' \262\ Reactive Service Providers assert that good utility
practice does not address what the electric industry (i.e., the
transmission provider) can achieve for free, but rather a cost that the
transmission provider must pay as a matter of ``good business
practices'' in order to fulfill its obligation.\263\ Indicated Trade
Associations argue that the Commission cannot deprive public utilities
from just and reasonable compensation for reactive power within the
standard power factor range by simply classifying it as a condition of
interconnection, particularly when the Commission established that
condition.\264\
---------------------------------------------------------------------------
\261\ Id. at 19.
\262\ Id. at 19-20 (quoting at Order No. 2003, 104 FERC ] 61,103
at P 56) (emphasis added by Reactive Service Providers). Reactive
Service Providers assert that the Commission adopted the same
definition of ``good utility practice'' in Order No. 2003 as it did
in Order No. 888. Id. at 19.
\263\ Id. at 20.
\264\ Indicated Trade Associations Initial Comments at 23
(citing Banton v. Belt Line Ry. Corp., 268 U.S. 413, 420 (1925)
(``[t]he commission under the guise of regulation may not compel the
use and operation of the company's property for public convenience
without just compensation.''); Gulf Power Co. v. U.S., 187 F.3d
1324, 1331 (11th Cir. 1999) (``[c]haracterizing the mandatory access
provision as a regulatory condition . . . cannot change the fact
that it effects a taking by requiring a utility to submit to a
permanent, physical occupation of its property'')).
---------------------------------------------------------------------------
88. Generation Developers assert that the NOPR errs in concluding
that separate compensation for reactive power may result in a windfall
to generators. Generation Developers note that many generators across
markets are in fact increasingly unable to recover their costs.\265\
Indicated Trade Associations similarly refute the NOPR's preliminary
conclusion that separate compensation for reactive power within the
standard power factor range may result in market distortions,
contending that all rates are approved by the Commission and that any
distortions are a result of PJM's capacity market rules.\266\
---------------------------------------------------------------------------
\265\ Generation Developers Initial Comments at 27 (citing
CAISO, 2022 Annual Report on Market Issues & Performance 15 (July
11, 2023), <a href="http://www.caiso.com/market/Pages/MarketMonitoring/AnnualQuarterlyReports/Default.aspx">http://www.caiso.com/market/Pages/MarketMonitoring/AnnualQuarterlyReports/Default.aspx</a>; PJM, Energy Transition in PJM:
Resource Retirements, Replacements and Risks 10 (Feb. 24, 2023),
<a href="https://insidelines.pjm.com/pjm-details-resource-retirements-replacements-and-risks">https://insidelines.pjm.com/pjm-details-resource-retirements-replacements-and-risks</a>.).
\266\ Indicated Trade Associations Reply Comments at 9.
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2. Commission Determination
89. Based on our review of the record, we conclude that
compensation for the provision of reactive power within the standard
power factor range is unjust and unreasonable because: (1) the
provision of such reactive power requires either no or at most a de
minimis increase in variable costs beyond the cost of providing real
power; (2) such compensation may result in undue compensation and other
market distortions; and (3) the provision of reactive power within the
standard power factor range is an obligation of the generating facility
as an interconnection customer and consistent good utility
practice.\267\
---------------------------------------------------------------------------
\267\ PJM IMM Initial Comments at 6-9; Joint Consumer Advocates
Initial Comments at 6-7; MISO Transmission Owners Reply Comments at
4; TAPS Initial Comments at 6; Ohio FEA Initial Comments at 5; Joint
Customers Initial Comments at 14-16; PGE Initial Comments at 4
(citing MISO, 182 FERC ] 61,033 at P 53 (noting that in the
acceptance of the MISO Transmission Owners application to end
compensation within the standard power application, the Commission
reiterated its policy ``that the provision of reactive power within
the standard power factor range is, in the first instance, an
obligation of the interconnecting generator and good utility
practice.'')).
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90. As explained in the NOPR, because real and reactive power are
provided as joint products with joint costs produced from the same
[[Page 93430]]
equipment, any allocation of joint fixed costs between real and
reactive power could be viewed as inherently arbitrary.\268\ And while
the production of reactive power within the standard power factor range
can result in certain incremental variable costs such as fuel,
maintenance, and potentially other costs, we continue to find, based on
the record and past precedent, that variable costs of generating
reactive power within the standard power factor range are at most de
minimis.\269\ With respect to fixed costs, for synchronous generating
facilities, ``the same equipment is used to provide real and reactive
power.'' \270\ Non-synchronous generating facilities use a different
physical process to produce reactive power, but ``the most critical
element in VAR production, the inverter,'' \271\ is also necessary for
non-synchronous generating facilities to produce real power that can be
reliably injected into AC systems.\272\ In other words, for both
synchronous and non-synchronous generating facilities, ``[t]here are
few if any identifiable costs incurred by generators in order to
provide reactive power'' \273\ beyond the investments in equipment
already necessary to generate and supply real power to the transmission
system.\274\
---------------------------------------------------------------------------
\268\ NOPR, 186 FERC ] 61,203 at P 30; (citing PJM IMM Initial
Comments to the NOI at 2 (``There is no reason to include complex
rules that arbitrarily segregate a portion of a resource's capital
costs as related to reactive power and that require recovery of that
arbitrary portion through guaranteed revenue requirement payments
based on burdensome cost of service rate proceedings.''); id. at 3,
5, 21, 24; Permian Basin, 390 U.S. at 804 (``There is ample support
for the Commission's judgment that the apportionment of actual costs
between two jointly produced commodities, only one of which is
regulated by the Commission, is intrinsically unreliable.'');
Richard A. Posner, Natural Monopoly and Its Regulation, 21 Stan. L.
Rev. 548, 595 (1969) (``[W]here services involve joint or common
costs a rational allocation is impossible even in theory. How much
of the cost of a telephone handset is assignable to local and how
much to interstate telephone service?''); see also A.A. Poultry
Farms, Inc. v. Rose Acre Farms, Inc., 1400 (7th Cir. 1989) (``How
does one allocate the cost of activities that have joint products?
Agencies engaged in ratemaking struggle with these problems for
years, even decades, without producing clear answers.'')).
\269\ NOPR, 186 FERC ] 61,203 at P 31 (citing SPP Initial
Comments to NOI at 2; PJM IMM Initial Comments to NOI at 4.).
\270\ Ameren Initial Comments at 3; MISO Transmission Owner
Reply Comments at 9. See also NOPR, 186 FERC ] 61,203 at P 29
(citing Edison Electric Institute Initial Comments to the NOI at 6).
\271\ Duke Energy Corporation Initial Comments to the NOI at 4.
\272\ See, e.g., MISO Transmission Owners Initial Comments at 7
(``[E]ven newer wind turbines use inverters that allow for the
generator to produce and control reactive power without costly
additional equipment.); see also MISO Rehearing Order, 184 FERC ]
61,022 at P 30 (``As to non-synchronous resources, the principal
piece of equipment required for non-synchronous resources to produce
reactive power is the inverter, which is already necessary to
convert the direct current produced by non-synchronous resources to
alternating current--i.e., to supply real power that can be injected
into alternating current power systems. On rehearing and in earlier
protests, no party points to any other equipment costs incurred by
non-synchronous generating facilities that are attributable to
providing Reactive Service.'' (citations omitted)).
\273\ PJM IMM Initial Comments to the NOI at 4; see also MISO
Transmission Owners Reply Comments at 7-8.
\274\ MISO Transmission Owners Initial Comments at 6 (``The MISO
Transmission Owners' experience supports the Commission's
preliminary finding that providing reactive power within the
standard power factor range requires little or no cost to
generators. Generators incur little or no costs beyond what is
already needed to produce real power because the same equipment used
to produce real power includes reactive power functions.''
(citations omitted)); PJM IMM Reply Comments at 3 (``Neither
[Indicated Trade Associations] nor any other opposing commenter, nor
any of the precedent relied upon by opposing commenters, identify
any additional costs or more than de minimis costs incurred by
generators in order to provide reactive capability.''); MISO
Transmission Owners Reply Comments at 9-10 & n.29. See also, BPA,
120 FERC ] 61,211 at P 21 (finding that the incremental cost of
reactive power service within the deadband is minimal); METC
Rehearing Order, 97 FERC at 61,852-53 (``[R]eactive power provided,
not as an ancillary service, but rather as a ``no cost'' service
within reactive design limitations, may therefore, be provided
without compensation.''); APS, 94 FERC at 61,080 (rejecting
generators' arguments for reactive power compensation for operating
within standard power factor range because the generators failed to
demonstrate that ``such a requirement will limit the real power
output of a generating unit and therefore will not result in any
lost opportunity costs'' or that operating a generating unit within
the proposed standard power factor range will ``affect the
generation output of a unit'').
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91. While most commenters agree or do not dispute that all
equipment used to produce reactive power, for both synchronous and non-
synchronous generating facilities, is also necessary in order to
produce and deliver to the transmission system real power, several
commenters dispute the NOPR's findings that both synchronous and non-
synchronous facilities incur no or at most a de minimis increase in
costs beyond the cost of providing real power.\275\ However, these
commenters do not identify any specific costs beyond those incurred to
ensure that real power can be reliably injected into the transmission
system.\276\ For example, Indicated Trade Associations, Generation
Developers, and Glenvale emphasize that there are costs of equipment
and production associated with reactive power, but they provide only
vague references to those specific equipment costs and identify no
distinct equipment (apart from equipment already needed for real power
production).\277\ Many of the commenters opposing the rule also
conflate the cost of providing reactive power capability within and
outside the standard power factor range.\278\ For example, commenters
suggest that there are opportunity costs to provide reactive power
capability, even within the standard power factor range, because doing
so requires a ge
[…truncated; see source link]Indexed from Federal Register on November 26, 2024.
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