The Federal Energy Regulatory Commission’s (FERC) Order No. 904, Compensation for Reactive Power Within the Standard Power Factor Range, 189 FERC ¶ 61,034 (2024), eliminating most compensation for reactive power service provided within the standard power factor range, will become effective Jan. 27, 2025, after being published in the Federal Register, 89 Fed. Reg. 93,410 (Nov. 26, 2024).
Entities are challenging FERC’s orders to eliminate compensation for reactive services, including Order No. 904, at FERC and before the U.S. Court of Appeals for the D.C. Circuit. While those legal challenges play out, transmission providers must submit compliance filings by March 28, 2025, to implement the final rule.
Background
Compensation for reactive power services has been in FERC’s crosshairs for many years. In 2021, FERC issued a notice of inquiry, 177 FERC ¶ 61,118 (2021), seeking comments on reactive power capability compensation and market design in the context of whether and how the predominant methodology for calculating compensation, the “AEP Methodology,” should be modified. FERC cited the changing landscape of the energy industry, including the change in generation mix, as its motivation for exploring potential issues with the reactive power capability compensation scheme. The notice of inquiry’s questions fell into four categories: (1) “failure to account for the degradation of a resource of a resource’s reactive power capability over time,” (2) “any difficulties associated with applying the AEP Methodology to non-synchronous resources,” (3) “any difficulty in verifying the revenue requirements proposed by owners of resources that have been granted waiver of certain accounting and reporting requirements” and (4) “any potential overcompensation in PJM stemming from the reactive power offset used in the PJM capacity market.”
On March 21, 2024, FERC issued a notice of proposed rulemaking, 186 FERC ¶ 61,203 (2024) (NOPR), proposing to revise its pro forma open access transmission tariff, pro forma large generator interconnection agreement (LGIA) and its pro forma small generator interconnection agreement (SGIA) “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.” FERC posited that such compensation may be unjust and unreasonable and the elimination of it would not affect reliability because generation facilities are already required to provide reactive power within the standard power factor band (sometimes referred to as the “deadband”) pursuant to their interconnection agreements. While the NOPR sought feedback on several issues, they primarily related to timing and transition period, leaving many in the industry to assume the end was near.
Final Rule
FERC issued Order No. 904 on Oct. 17, 2024, prospectively eliminating reactive power compensation within the standard power factor range. FERC adopted the NOPR as proposed except with respect to the timing of the compliance procedures and implementation.
In enacting the final rule, FERC relied on its NOPR reasoning that compensating generating facilities for producing reactive power is unnecessary because generators are required to provide reactive power under their respective interconnection agreements and providing reactive power is at no cost or de minimis cost to the generators. As FERC found that reactive power is essential to a generator’s ability to sell real power to a customer, any allocation of joint fixed costs between real and reactive power is inherently arbitrary.
FERC dismissed arguments that elimination of existing compensation would be a confiscatory taking, dismissed constitutional arguments as collateral attacks and held that generating facilities may recover costs through cost recovery of real power. The final rule does not apply to or affect compensation that a transmission provider requests for reactive power produced outside of the standard power factor range, nor to individualized bilateral contracts providing for reactive power compensation within the standard power factor range. Additionally, FERC explicitly stated that the final rule does not affect generators’ rights to establish a rate under Section 205 of the Federal Power Act to adapt markets to accommodate the final rule and to clarify compensation schemes for reactive power service outside of the standard power factor range.
FERC denied legacy treatment for generating facilities with reactive rate schedules filed prior to the effective date of the final rule. Consequently, generating facilities that were previously compensated for providing reactive power within the standard power factor range will no longer be compensated.
Compliance and Looking Ahead
The final rule revises the following pro forma tariff language:
- Schedule 2 to the pro forma open access transformation tariff (OATT);
- Section 9.6.3 of the pro forma LGIA; and
- Section 1.8.2 of the pro forma SGIA.
Transmission providers must submit a compliance filing to make corresponding changes to Schedule 2 of their pro forma OATT, section 9.6.3 of their pro forma LGIA and section 1.8.2 of their pro forma SGIA. Compliance filings are due March 28, 2025, with a proposed effective date within 90 days of the compliance filing date.
Certain regional transmission organizations and independent system operators with market rules impacted by changes to reactive power compensation, such as ISO New England, New York Independent System Operator and PJM Interconnection, may seek a later effective date. They must affirmatively demonstrate why the delay is necessary (e.g., by referencing existing market rules and how they must be changed).
Five entities filed timely requests for rehearing of Order No. 904 and may seek appeal depending on FERC’s action or inaction on rehearing. A case reviewing FERC’s acceptance of a filing to eliminate compensation in the Midcontinent Independent System Operator market, Capital Power Corp. et al v. FERC, is already pending before the U.S. Court of Appeals for the D.C. Circuit. While that proceeding does not directly impact Order No. 904, it raises many of the same issues that challengers of Order No. 904 may raise if they seek appellate review. Transmission providers must comply with Order No. 904 notwithstanding these pending legal challenges.
For more information, see the full text of the final rule. The McGuireWoods energy team is available to answer any questions. For advice on this issue, please contact the authors.