Generators in PJM ask FERC for Clarification on Reactive Power Revenue Requirements

In early May, in Docket No. EL19-70, a group of generators in PJM requested a declaratory order from FERC on several reactive power issues for which there is uncertainty in the FERC methodology.  The generators requested that FERC find the following as to reactive power revenue requirement calculations:
 

1. A merchant generator in PJM can use, as a proxy for its capital structure and return on equity, the capital cost and capital structure determined in PJM’s Commission-approved “Cost of New Entry” study (“CONE Study”). This proxy is already used in PJM’s tariff for its capacity market, and results from a detailed study of the cost of building new merchant generation within PJM.  The alternative measure for capital cost and capital structure traditionally used in reactive power rate cases—that of the interconnecting transmission owner—is a less accurate proxy than the CONE Study, because a merchant generator faces significantly greater risk than a transmission owner, as FERC has repeatedly acknowledged. Thus, a merchant generator requires a different capital structure with a higher cost of debt and a greater return on equity.
2. A generator may include the fixed costs of firm fuel delivery in the calculation of its reactive power rate, like any other fixed operating & maintenance (O&M) cost. These costs reflect infrastructure improvements needed to serve the generator, and not the cost of fuel itself. Accordingly, these costs should be treated just like other fixed costs incurred by the generator, a portion of which may be included in the fixed charge rate used to determine the annual revenue requirement.
3. FERC provide guidance on the type of evidence on which a merchant generator can rely to show the construction costs incurred by its Engineering, Procurement, and Construction (“EPC”) Contractor. Increasingly, merchant generation plants are turn-key investments constructed entirely by an EPC Contractor, which is paid an all-in amount for the plant under a closed-book contract.  A merchant generator seeking reactive power rate recovery for such a plant is faced with the challenge of identifying which of the EPC Contractor’s costs should be assigned to the major equipment categories comprising the reactive power investment, when the merchant generator itself typically has no insight into the specific amounts incurred by the EPC Contractor to build different parts of the plant, and when the EPC Contractor does not use, and is not required to use, the FERC Uniform System of Accounts. FERC should declare that a generator, for purposes of its reactive power tariff, may rely on the EPC Contractor’s apportionment of the project costs among the major equipment categories relevant under the AEP methodology. If the resulting accounting entries are within the range of reasonableness as compared to the reactive power tariffs of other similar plants, then the generator should be deemed to have carried its burden.
4. Confirm the types of indirect costs that may be included in a generator’s reactive power tariff. In the Chehalis decision, FERC made clear that indirect costs may be recovered, and FERC approved a subsequent compliance filing setting forth categories of indirect costs that would be recovered.  FERC should issue a declaration stating that the categories of indirect costs set forth in the Chehalis compliance filing and in Bluegrass are, as a general matter, recoverable in a reactive power tariff.
5. FERC should confirm its existing precedent that a generator may seek recovery for its reactive power costs based on its full reactive power capability—rather than the minimum capability required under the PJM tariff.  Though a FERC order holds as much, but the Independent Market Monitor has nevertheless insisted on litigating the issue in recent, and pending, reactive power cases.  FERC’s confirmation of its prior order will prevent unnecessary litigation costs and facilitate settlement. 
6. Concerning the methodology for allocating to reactive power the costs of accessory electric equipment, FERC has established a methodology in its Dynegy decision.  FERC should confirm that this existing precedent remains the Commission’s policy.  This precedent is that a reactive power provider can allocate accessory electric equipment to the generator and exciter using the ratio of generator-exciter auxiliary load to total plant auxiliary load.