On October 17, 2024, the Federal Energy Regulatory Commission (FERC) issued Order No. 904, a Final Rule establishing that it is unjust and unreasonable for transmission providers to charge transmission customers for a generating facility’s provision of reactive power within the standard power factor range, finding that such charges result in unjust and unreasonable transmission rates.  FERC noted that 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.”  Generating facilities providing reactive power within the standard power factor range are only meeting their interconnection agreement obligations, in accordance with good utility practice, and incur no or at most de minimis variable costs beyond the cost of providing real power. 

FERC with Order No. 904 revises Schedule 2 of the pro forma open-access transmission tariff (OATT) to prohibit transmission providers from including in transmission rates any charges for the provision of reactive power within the standard power factor range by generators.  The Final Rule requires transmission providers to submit compliance filings changing the Schedule 2 provisions of their OATTs or provisions relating to charges and payments for reactive power, as well as their pro forma Large Generator Interconnection Agreements (LGIAs) and pro forma Small Generator Interconnection Agreements (SGIAs) in their OATTs to effectuate the change.  

FERC directs transmission providers, except certain regional transmission organizations (RTOs)—ISO New England Inc. (ISO-NE); PJM Interconnection, L.L.C. (PJM); and New York Independent System Operator, Inc. (NYISO)—to file their compliance filings 60 days after the effective date of Order No. 904 and directs that the compliance filings propose an effective date within 90 days from the date of the compliance filing.  Order No. 904 will take effect 60 days following its publication in the Federal Register.

Background on Reactive Power Compensation

FERC’s former policy on reactive power compensation largely stemmed from Order No. 2003 and its progeny, which adopted a standard agreement for the interconnection of large generating facilities (i.e., the pro forma LGIA).  The pro forma LGIA included a general requirement that the interconnection customer maintain a composite power delivery with continuous rated power output at the point of interconnection with a power factor in the range of 0.95 leading to 0.95 lagging when synchronized to the transmission system, unless the transmission provider required otherwise.  Order No. 2003 also required that a transmission provider compensate an interconnection customer for any reactive power provided outside the established power factor range if requested by the transmission provider to operate outside the standard power factor range.  FERC clarified in Order No. 2003-A that, if the transmission provider pays its own or its affiliated generators for reactive power within the standard power factor range, it must also pay interconnection customers comparably (a policy known as the “comparability standard”).

FERC Finds Current Reactive Power Compensation Unjust and Unreasonable & Adopts Reforms

Order No. 904 adopts FERC’s preliminary findings from its Notice of Proposed Rulemaking (NOPR) proceeding concerning the need for reform.  As such, FERC finds that allowing transmission providers to compensate generating facilities (both those affiliated and unaffiliated with transmission owners) for providing reactive power within the standard range has resulted in unjust and unreasonable transmission rates.  

FERC also finds that reactive power compensation within the standard power factor range is unjust and unreasonable for three reasons related to its cost.  First, FERC finds that tariff-based provisions requiring reactive power result in no or a de minimis increase in the variable costs to generators beyond the cost of providing real power.  Second, FERC finds that reactive power compensation within the standard range may result in undue compensation and other market distortions.  Third, FERC finds that generating facilities must already abide by such reactive power obligations as interconnection customers, to maintain good utility practice.

FERC finds that separate compensation for providing reactive power within the standard power factor range is not needed in order for generating facilities to have opportunities to recover costs.  FERC explicitly finds no identifiable fixed costs sustained by generators providing reactive power within the standard power factor range beyond what the generators pay for equipment already necessary to generate real power.

FERC also finds that eliminating compensation for reactive power service within the standard power factor range will not negatively impact reliability, based on the record developed in its NOPR proceeding.  To that end, FERC also finds that the adopted reforms will not significantly affect investment in new generating facilities.

Given those findings, the Final Rule prohibits transmission providers from including in their transmission rates any charges associated with the supply from a generating facility of reactive power within the standard power factor range.  The Final Rule effectuates that prohibition by (1) revising Schedule 2 of FERC’s pro forma OATT and removing from FERC’s pro forma LGIA and pro forma SGIA compensation for reactive power within the standard range; and (2) requiring transmission providers to adopt these revisions within their own OATTs at Schedule 2 as well as their pro forma LGIA and pro forma SGIA. 

FERC will continue to require transmission providers to pay interconnection customers for reactive power provided when the transmission providers request generating facilities to operate outside the standard power factor range.  The Final Rule welcomes RTOs to clarify their compensation scheme for reactive power service outside the standard power factor range, if necessary.

FERC Requires Compliance Within 60 Days of the Final Rule’s Effective Date, But Allows Certain RTOs Additional Time for Compliance

FERC requires each transmission provider to submit a compliance filing within 60 days of the effective date of the Final Rule and will permit appropriate entities to seek “regional reliability variations” or “independent entity variations” from the proposed revisions to its OATT, pro forma LGIA, and pro forma SGIA.  The Final Rule will be effective 60 days from its publication in the Federal Register.  Implementation of the proposed reforms must be effective within 90 days from the date of the compliance filings. 

An exception to that directive is that the Final Rule allows ISO-NE, NYISO, and PJM to request a later effective date to allow them to develop and propose changes to their market rules necessary to accommodate the Final Rule’s elimination of compensation for the provision of reactive power within the standard power factor range.  But FERC notes that these RTOs must, as with any request, affirmatively demonstrate why their requested effective date is necessary.