On October 17, 2024, the Federal Energy Regulatory Commission (FERC) issued Order No. 904, Compensation for Reactive Power Within the Standard Power Factor Range, 188 FERC ¶ 61,034 (2024) (Final Rule). With this Final Rule, FERC is eliminating all compensation for reactive power provided by generators within the standard power factor range of 0.95 leading to 0.95 lagging.
FERC’s current reactive power compensation policy is that the provision of reactive power inside the standard power factor range is an obligation of good utility practice rather than as a compensable service. Prior to the Final Rule, FERC permitted compensation inside the standard power factor range only as a function of comparability, i.e., only if a Transmission Provider compensated its own or its affiliated generators for reactive power within the standard power factor range. Currently, PJM Interconnection, L.L.C. (PJM), New York Independent System Operator, Inc. (NYISO) and ISO New England Inc. (ISO-NE) are the only Regional Transmission Organization (RTO) regions that provide such compensation.[1] FERC will allow several months for these regions and other non-RTO transmission providers to submit the appropriate compliance filings to eliminate compensation provisions in their tariff. Compensation is still available for generators supplying reactive power outside of the standard power factor range and in other limited circumstances as discussed below.[2]
History of Reactive Power Compensation
There are several key reactive power compensation orders that led up to FERC’s issuance of Order No. 904:
Order No. 888 (1996). FERC 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.[3] FERC identified two ways to supply reactive power and controlling voltage: (1) install facilities as part of the transmission system and charge the cost of those facilities as part of basic transmission service cost; and (2) use generating facilities to supply reactive power and voltage control, the cost of which must be unbundled from basic transmission service. In either case, rates must be cost-based.
Order No. 2003 (2003). FERC adopted the pro forma Large Generator Interconnection Agreement (LGIA), and required interconnection customers to 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.[4] Transmission providers were required to 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. In Order No. 2003-A, FERC held that for comparability reasons, if a transmission provider compensates its own or its affiliated generators for reactive power within the established range, it must also pay the interconnection customer for reactive power within the established range.[5]
Order No. 661 (2005). FERC 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.[6]
Order No. 2006 (2005). FERC 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.[7]
Order No. 827 (2016). Due to technological advancements, FERC eliminated the previous exemptions and required both small and large wind generating facilities to provide reactive power.[8] The cost of providing reactive power no longer presented an obstacle to the development of wind generation, and therefore FERC found that the exemptions had become unjust and unreasonable. FERC 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.
BPA and MISO cases. FERC allowed transmission providers to end compensation for reactive power for their own generator affiliates, and thus end all compensation for generators within the standard power factor range.[9] FERC reasoned that, generating facilities can recover their reactive power costs within the standard range by charging higher rates for power sales.[10] FERC rejected arguments that generators rely on the compensation to recover costs. According to FERC, the provision of reactive power within the standard power factor range required little or no incremental fixed cost investment because the same equipment is used for the production of real power and reactive power.[11]
FERC’s policy evolution regarding reactive power compensation has been to steadily narrow the instances in which compensation is available and to acknowledge that technical advances can make provision of reactive power standardized for most generation types within the standard power factor range.
Rationale for FERC’s Proposed Policy Changes in the NOPR
In the NOPR, FERC proposed to eliminate the ability of transmission providers to compensate their own or affiliated generators for reactive power service within the established power factor range.[12] According to FERC, eliminating reactive power compensation would be a policy shift but only to the extent it was allowed for comparability purposes. FERC stated that “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.”[13] By contrast, reactive power provided outside of the standard power factor range would still be considered an ancillary service for transmitting power across the transmission system to serve load, and thus, the Commission has required compensation for such service.[14]
According to FERC, reform was needed because generating facilities that provide reactive power within the standard power factor range are only meeting their interconnection agreement obligations and they incur at most a de minimis increase in variable costs beyond the cost of providing real power.[15] FERC’s past policy of providing compensation within the standard power factor range was having the adverse impacts, including: (1) increasing the volume of filings for reactive power compensation and as a result, increasing costs to transmission customers without regard to where there is a geographic need for reactive power; (2) adjudicating cost-of-service reactive power rates has become increasingly administratively burdensome for FERC; (3) individual rate proceedings can result in inconsistent rate treatment across generating facilities; (4) where generators participate in organized markets, providing separate compensation for reactive power within the standard power factor range risks overcompensation and market distortion; and (5) the costs to transmission customers have increased substantially without any commensurate increase in benefits. [16]
In the NOPR, FERC preliminarily found that ending reactive power compensation within the standard power factor range does not compromise a generator’s ability to recover its costs because generating facilities have the opportunity to seek to recover such costs – if any additional costs are being incurred – through rates for energy or capacity sales.
Final Rule Findings
FERC made several key findings in support of its NOPR proposal to discontinue compensation for reactive power within the standard power factor range.
First, and central to FERC’s conclusions, FERC found that “[m]ost 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.”[17] In addition, FERC found substantial evidence in the record that generating facilities incur no additional fixed costs, and de minimis variable costs, above those which are needed to provide real power. FERC thus concluded that because no additional equipment is needed and a generating facility must produce reactive power with the standard range to deliver its real power to customers in any event, “it is only by virtue of comparability that generating facilities were previously entitled to reactive power compensation.”[18]
FERC acknowledged that the Final Rule eliminates a stream of revenue for generators under transmission providers’ tariff Schedule 2, but FERC found 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.”[19] According to FERC, eliminating compensation does not prevent generators from recovering their costs through other means, such as higher power sales rates. FERC dismissed arguments that reactive power rate schedules are entitled to the higher Mobile-Sierra presumption of reasonableness. Because reactive power rate schedules are rate schedules of general applicability and not individually negotiated contract rates, they are subject to the ordinary just and reasonable standard for modifications.[20]
Second, FERC found that within the standard power factor range, generators must produce reactive power to comply with their interconnection agreement and to supply real power to customers. Consequently, reactive power opportunity costs are only an issue when providing reactive power outside of the standard power factor range, which could limit the amount of real power delivered.[21]
Third, FERC found that eliminating compensation for reactive power within the standard power factor range will not lead to an insufficient supply of reactive power. FERC noted that in regions where there has been no reactive power compensation (e.g., California Independent System Operator (CAISO), Southwest Power Pool, Inc. (SPP), Midcontinent Independent System Operator, Inc. (MISO) and certain non-RTO regions), there has not been an insufficient supply of reactive power and generators have been able to recover their costs.[22] FERC acknowledged that some market rules in PJM, ISO-NE and NYISO may need to be revised to the extent they require reactive power revenue offsets.[23]
Fourth, FERC found that the record lacked evidence showing whether generators factored reactive power costs into their PPAs. According to FERC, “[e]ven if a generator were able to demonstrate that eliminating compensation under our rule might impact some generating facility’s profitability, we do not believe that potential disrupted expectations weigh in favor of a different outcome in this situation. As a general matter, the risk of regulatory change is inherent in any long-term PPA.”[24]
Fifth, FERC found that eliminating reactive power compensation within the standard power factor range does not result in undue discrimination between merchant generators and transmission providers with generation affiliates that can recover costs through retail rates. Transmission facilities that provide reactive power (e.g., capacitor banks) are transmission facilities that are distinct from generation facilities that provide reactive power. The former are properly recoverable in transmission rates as a component of transmission service. FERC reasoned that to the extent that generators are able to recover any reactive power in an affiliated incumbent utility’s retail rates, so too are Independent Power Producers able to recover their costs through higher power sales rates.[25]
Sixth, FERC found no evidence that eliminating reactive power compensation within the standard power factor range would have an adverse impact on reliability. Specifically, FERC found no merit to the claims that investment in reactive power capability would decline given that reliability has not declined in regions that do not provide compensation.[26] Additionally, FERC found that eliminating compensation would not have a significant impact on generation investment in general. According to FERC, “developers have been on notice since at least the issuance of Order Nos. 2003 and 2003-A that reactive power is not compensable within the standard power factor range (other than for comparability reasons), and so could not have relied, reasonably or otherwise, on the permanence of such compensation for investment purposes.”[27] FERC also noted that no commenter presented evidence that that the lack of reactive power compensation within the standard range would render an otherwise profitable project unprofitable.[28]
Compliance Requirements
FERC proposed to require changes to Schedule 2 of the pro forma OATT to state that reactive power rates “shall not include compensation to generating facilities for the supply of reactive power within the power factor range specified in its interconnection agreement.” FERC also proposed changes to section 9.6.3 of the pro forma LGIA (and 1.8.2 of the pro forma Small Generator Interconnection Agreement (SGIA)) to remove the comparability language that “if the Transmission Provider pays its own or affiliated generators for reactive power service within the specified range, it must also pay Interconnection Customer.”
Transmission providers are required to demonstrate compliance within 60 days of the effective date of the rule. Any proposed changes made on compliance must be effective within 90 days of the date of the compliance filing. PJM, NYISO and ISO-NE are permitted to request a later effective date to the extent any changes to their market rules require more time to implement.
Limited Reactive Power Compensation Remains Available
As noted above, compensation is still available for generators supplying reactive power outside of the standard power factor range. Compensation is also still available in other limited circumstances:
| Compensation | Order No. 904 Eliminated | Order No. 904 Did Not Eliminate |
| Reactive power compensation within the standard power factor range of 0.95 lagging and 0.95 leading in all RTO and non-RTO regions. | √ | |
| Reactive power compensation outside the standard power factor range of 0.95 leading and 0.95 lagging in all regions. | √ | |
| Any additional reactive power capability required to satisfy specific local reliability needs, as well as the compensation for costs incurred to provide that capability (e.g., capacitors, synchronous condensers), are for the transmission provider to determine and are beyond the scope of this final rule.[29] | √ | |
| Final rule 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.[30] | √ |
Conclusion
With this Final Rule in Order No. 904, FERC has eliminated nearly all compensation for reactive power provided by generators within the standard power factor range of 0.95 leading to 0.95 lagging. FERC will allow several months for RTO/ISO and other non-RTO/ISO transmission providers that continue to provide compensation within the standard power factor range to submit the appropriate compliance filings to eliminate compensation provisions in their tariffs and market rules. Compensation is still available for generators supplying reactive power outside of the standard power factor range and in other limited circumstances as discussed above.
[1] PJM uses the AEP Methodology to calculate cost-based rates for reactive power compensation and NYISO and ISO-NE use a flat rate design. Order No. 907 at P 13.
[2] Order No. 907 at PP 167, 181, 204.
[3] Order No. 888, FERC Stats. & Regs. ¶ 31,036, at 31,705-07 & n.359 (1996).
[4] Standardization of Generator Interconnection Agreements & Procs., Order No. 2003, 104 FERC ¶ 61,103, at P 546 (2003), order on reh’g, Order No. 2003-A, 106 FERC ¶ 61,220 (2004), order on reh’g, Order No. 2003-B, 109 FERC ¶ 61,287 (2004), order on reh’g, Order No. 2003-C, 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).
[5] Order No. 2003-A at P 416. Order No. 2003-A also exempted wind generating facilities from maintaining the established power factor range. Id. at P 34.
[6] Interconnection for Wind Energy, Order No. 661, 111 FERC ¶ 61,353 (2005), order on reh’g, Order No. 661-A, 113 FERC ¶ 61,254 (2005).
[7] Standardization of Small Generator Interconnection Agreements & Procs., Order No. 2006, 111 FERC ¶ 61,220 (2005), order on reh’g, Order No. 2006-A, 113 FERC ¶ 61,195 (2005), order granting clarification, Order No. 2006-B, 116 FERC ¶ 61,046 (2006).
[8] Reactive Power Requirements for Non-Synchronous Generation, Order No. 827, 155 FERC ¶ 61,277 (2016), order on clarification and reh’g, 157 FERC ¶ 61,003 (2016).
[9] Order No. 904 at P 9. Bonneville Power Admin. v. Puget Sound Energy, Inc., 120 FERC ¶ 61,211 at PP 19-20 (2007) (BPA), order denying reh’g and granting clarification, 125 FERC ¶ 61,273, at P 18 (2008) (BPA Rehearing Order); Midcontinent Indep. Sys. Operator, Inc., 182 FERC ¶ 61,033 (2023) (MISO), order on reh’g, 184 FERC ¶ 61,022, at P 23 (2023).
[10] Order No. 904 at P 10, 151 (citing MISO, 182 FERC ¶ 61,033 at P 21).
[11] Order No. 904 at P 11; 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).
[12] Compensation for Reactive Power Within the Standard Power Factor Range, Notice of Proposed Rulemaking, 186 FERC ¶ 61,203 at P 2 & n.1 (2024) (NOPR).
[13] Order No. 904 at P 8 (citing BPA Rehearing Order 125 FERC ¶ 61,273 at P 18). See also BPA Rehearing Order, 125 FERC ¶ 61,273 at P 15 & n.24 (holding that generators do not “have an inherent right to any compensation for reactive power inside the deadband.”).
[14] See, e.g., Order No. 904 at PP 1, 6, 8, 91, 96, 151, 167, 181, 204, 225.
[15] Id. at PP 17, 20, 27, 51, 55, 56, 58, 63, 89, 91-94, 107, 141.
[16] Id. at P 27.
[17] Id. at P 51.
[18] Id. at P 57.
[19] Id. at P 58.
[20] Id. at PP 59-60.
[21] Id. at PP 91-92.
[22] Id. at P 111.
[23] Id. at P 142.
[24] Id. at P 145.
[25] Id. at P 151.
[26] Id. at P 166.
[27] Id. at P 180. See 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.”).
[28] Order No. 904 at P 184.
[29] Id. at P 144.
[30] Id. at P 60.