United States: Oh Dear! Does Whitetail Spell The End Of Reactive Power Rates For DERs In PJM?

PJM has long permitted generators to collect revenues for the provision of reactive power and voltage support (reactive power) under Schedule 2 of the PJM Tariff. Innumerable generating facilities have availed themselves of this opportunity. Nearly every such reactive revenue requirement case has settled. Although the vast majority of PJM transmission owners (TOs), whose ratepayers pay the majority of the reactive power rates, have divested their generation, few Transmission Owners (TOs), and fewer state commissions/consumer advocates representing such retail ratepayers, challenge these reactive revenue requirement filings. For some years, this left FERC Trial Staff as the only adverse participant, as regardless of the lack of protests in such cases, FERC usually suspends the revenue requirements and sets it for settlement and hearing. In recent years, however, PJM's Independent Market Monitor (IMM) has taken the role of the Protestor-in-Chief for reactive revenue requirements filed by PJM generating facilities.

In response to the filings of several facilities seeking Schedule 2 compensation, starting in 2020, the IMM decided to challenge whether facilities connected to the distribution systems of TOs or Distribution Owners (i.e., DERs) actually were entitled to reactive rate revenue under PJM Schedule 2. Before such time, an unknown number of DERs had filed and settled cases involving their reactive revenue requirements. Unsurprisingly, given the all or nothing stakes, the parties could not settle and a hearing was held on the threshold issue of eligibility for compensation, resulting in an Initial Decision in July 2022. FERC reviewed that I.D. and has now issued Opinion No. 583, (Whitetail Solar 3, LLC, et al.) rejecting the compensation claims.

FERC held that to be eligible for compensation under Schedule 2, a facility must be: "(1) under the control of PJM, and (2) operationally capable of providing voltage support to PJM's transmission facilities such that PJM could rely on that facility to maintain transmission voltages." FERC elaborated that to qualify, "a generation facility must be operationally capable of providing voltage support to PJM's transmission facilities such that PJM can rely on that generation facility to maintain transmission voltages." Simply being capable of injecting VARs at the point of interconnection was deemed insufficient to meet this criterion.

In applying the two-part test above, there was no dispute that the facilities at issue were under PJM operational control as they were market participants. In assessing whether the facilities in question had the operational capability to provide reactive power, FERC found PJM's views warranted substantial weight. PJM "credibly explained that it is unable to rely on the Facilities for voltage support because they are not directly connected to the transmission system" and "nothing in PJM's responses suggests that it would be able to rely on the Facilities for voltage support during an emergency." Other rulings on the various technical bases for finding the facilities unable to meet the operationally capable criterion that were affirmed included: 1) voltage regulation conflicts would arise if PJM were to call on the facilities for voltage support because PJM stated that it was industry practice to direct voltage regulation to the nearest electrical interconnection in order to avoid voltage regulation conflicts, and the nearest interconnections were with distribution buses that it did not control; 2) the electrical distance between the facilities and transmission system may dissipate any voltage support provided by the facilities; and 3) power flow models that showed "some" impact on transmission were insufficient and flawed.

The applicants argued that they were eligible for compensation no matter their specific technical capabilities on numerous grounds that were all rejected. FERC rejected applicants' reliance on their Interconnection Service Agreements (ISAs) as proof of eligibility, because the ISAs explicitly state that "payments ... for reactive power shall be in accordance with Schedule 2." Similarly, a detrimental reliance argument based on the ISA wording was rejected. FERC ruled that a PJM Technical Manual did not address compensation. FERC refuted an undue discrimination argument based on location on the grounds differing locations meant facilities were not similarly situated. Applicants asserted that a lack of eligibility will discourage DER deployment, but FERC countered that there was no evidence in the record that suggested doing so would adversely affect reliability in PJM or the deployment of renewable generation. FERC noted that MISO, before ending reactive compensation altogether last year, made DERs ineligible in 2013 without adverse impacts. The applicants used Order No. 2222 to claim eligibility, but FERC noted that it only removed barriers for market participation for facilities that are technically capable of providing ancillary services.

Perhaps the most difficult factual issue FERC faced in addressing eligibility is that for many years it routinely accepted settlements filed by DERs compensating them for reactive power under PJM Schedule 2. The applicants naturally pointed this fact out. FERC held that its approval of prior settlements which may have granted reactive power rate schedule treatment in PJM did not constitute approval of, or precedent regarding the issue before it. FERC, however, did not upset existing settlement agreements. Similarly, the applicants located a case where FERC accepted a reactive power rate schedule for a DER in PJM without suspension or hearing. FERC dismissed this argument as well, noting that the "detailed factual record developed at hearing in this proceeding supports a determination different than that reached in the delegated order referenced by Applicants." Indeed, FERC's greatest challenge, if a rehearing is submitted and the case appealed, likely will be that it is regulating similarly-situated entities differently, which the D.C. Circuit has found improper on several occasions. But, were an appellate case remanded on such grounds, FERC could take the opportunity to resolve any "discriminatory regulation" problem by issuing a show cause order applicable to all DERs receiving Schedule 2 compensation.

Unquestionably, the opinion raises the question as to whether any DER is entitled to reactive power compensation in PJM (or elsewhere) and whether and what action the IMM or others (i.e., state commissions, consumer advocates, TOs, or FERC itself) may take in light of the decision. There are several dockets in process where the same issue has been raised. In any case, the writing appears to be on the wall and further challenges to FERC policy may result in a more consistent application of this policy.

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