On November 18, 2021, FERC issued a Notice of Inquiry (“NOI”) inviting comments on reactive power capability compensation and market design. The NOI highlights various issues with reactive power filings that have resulted from significant changes to electric markets and the generation resource mix, including the potential for overcompensation. The NOI seeks comment on various aspects of reactive power compensation, as well as potential alternative approaches that could be used to develop reactive power capability revenue requirements.

Reactive power is needed to support voltages on the transmission system, which must be controlled for system reliability. Reactive power supply is one of the six ancillary services that transmission providers must include in an open access transmission tariff. FERC has determined that its rules for procuring reactive power affect whether adequate reactive power supply is available, as well as whether it is procured efficiently from the most reliable and lowest-cost resources. In 2002, FERC recommended that the “AEP methodology” be used to establish reactive power rates for all resources that have actual cost data. Acknowledging that electric markets and the generation resource mix have undergone significant changes since then, and in particular the increased reliance on market based rate (“MBR”) authority along with waivers to maintain accounts under the USofA rules and file FERC Form No. 1, FERC noted an increase in reactive power filings being set for hearing and settlement procedures because of the challenges in evaluating those reactive power filings (see September 29, 2021 edition of the WER).

The NOI details several issues with the AEP methodology, including its failure to account for the degradation of a resource’s reactive power capability over time, difficulties associated with applying the AEP methodology to non-synchronous resources, difficulty in verifying the revenue requirements proposed by owners of resources that have been granted waiver of certain accounting and reporting requirements, and potential overcompensation in PJM stemming from the reactive power offset used in the PJM capacity market. The NOI also details various alternative compensation approaches, including a flat rate methodology, which would be based on the total reactive power payments made by transmission customers in a region divided by the MVARs consumed in the region, as well as a replacement cost ratemaking approach in which the lowest-cost technology capable of providing reactive power would be used to establish a per-MVAR-year rate to then be applied to all resources based upon their tested MVAR capability. Finally, the NOI addresses issues regarding distribution-connected resources and whether such resources should be eligible for reactive power compensation.

The NOI provides a list of specific questions for comment, which are due 60 days after the date of publication in the federal register. Reply comments are due 90 days after the publication.

A copy of the NOI is available here.