On October 17, 2024, the Federal Energy Regulatory Commission ("FERC") issued Order No. 904, finding on a generic basis that allowing transmission providers to charge customers for a generating facility's provision of reactive power within the standard power factor range is unjust and unreasonable.1 The Final Rule directs transmission providers to revise their pro forma open-access transmission tariffs ("OATT") and pro forma small generator interconnection agreements to remove compensation for reactive power services.
Order No. 904 becomes effective 60 days after its date of publication in the Federal Register. Order No. 904 was published in the Federal Register on November 26, 2024. In the Final Rule, FERC directs transmission providers to submit compliance filings within 60 days of the effective date or on or before January 27, 2025. Each compliance filing must include a proposed effective date within 90 days from the date of the filing. We anticipate, therefore, that many filings will be made on January 27, 2025, with proposed effective dates of April 26, 2025. Order No. 904 recognizes that some RTO/ISOs likely need time to harmonize the Order's changes with capacity markets. Therefore, Order No. 904 also provided ISO-NE, NYISO and PJM to request a later effective date past the 90 days from the date of filing. Thus, transmission providers may expect reactive power revenue to remain available in these regions for another 9 months, or more, depending on the specific effective date proposed by each region in their compliance filings. Also, it is possible that FERC may grant extensions of the initial 60-day compliance deadline of January 27, 2025. That has occurred from time-to-time, and FERC is sensitive to ISO/RTO compliance filings that are subject to internal processes, such as stakeholder processes, that can cause delays with developing and finalizing proposals to implement new requirements.
Background
Previously, in Order No. 888, 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 based on the amount required. In response to industry evolution, the Commission issued Order Nos. 2003 and 2003-A, which treated the "provision of reactive power inside the standard power factor range as an obligation of good utility practice rather than as a compensable service." However, Order Nos. 2003 and 2003-A still permitted transmission providers to receive compensation for the provision of reactive power inside the standard power factor range so long as it was a function of comparability – when the "Transmission Provider pays its own or its affiliated generators for reactive power within the established range, it must also pay the Interconnection Customer [non-affiliated generation owner]." Since the issuance of Order Nos. 2003 and 2003-A, some organized markets (including MISO) have already eliminated compensation for reactive power services.
New Order No. 904
In Order No. 904, FERC provides three primary reasons that charging transmission customers for a generating facility's provision of reactive power within the standard power factor range results in unjust and unreasonable transmission rates:
- Generating facilities that provide "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."
- In organized markets, "providing compensation for the provision of reactive power within the standard power factor range risks overcompensation and market distortion."
- Finally, the Commission reasoned 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" since "the provision of reactive power within the standard power factor range is [already] necessary for the provision of real power."
As stated above, Order No. 904 becomes effective 60 days after its date of publication in the Federal Register or November 26, 2024. In the Final Rule, FERC directs each transmission provider to submit compliance filings within 60 days of the effective date or on or before January 27, 2025. Each compliance filing must include a proposed effective date within 90 days from the date of the compliance filing – with many compliance filings being made on the 60th day after publication in the Federal Register, we anticipate many of the proposed changes will be implemented by April 26, 2025. As noted above, certain ISOs, NYISO, ISO-NE and PJM will likely seek an implementation date of more than 90 days from the date of the compliance filing.
Finally, it is worth noting that Pursuant to Section 313(a) of the Federal Power Act and Rule 713 of the Rules of Practice and Procedure of the Commission, several entities have submitted requests for rehearing of Order No. 904. Among other things, these requests claim that Order No. 904's decision to change reactive power compensation is arbitrary and capricious, results in unjust and unreasonable or unduly discriminatory rates in violation of the FPA and is not supported by reasoned decision making. However, despite these allegations, it is doubtful that the Commission will change course regarding Order No. 904 on rehearing.
Footnote
1. Compensation for Reactive Power Within the Standard Power Factor Range, 89 Fed. Reg. 93,410 (November 26, 2024) (to be codified at 18 C.F.R. pt. 35).
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