This summary concerns the Order Addressing Arguments Raised on Rehearing regarding reactive power compensation in MISO (Rehearing Order).
Background: On November 30, 2022, in Docket No. ER23-523, MISO, on behalf of the MISO Transmission Owners (MISO TO), submitted proposed revisions to Schedule 2, Reactive Supply and Voltage Control from Generation or Other Sources Service of OATT. The MISO TOs proposed to eliminate all charges under Schedule 2 for the provision of reactive power within the standard power factor range for the MISO TOs’ own and affiliated generation resources. Based on the Commission’s “comparability standard,” MISO TOs stated that their proposal also terminates the obligation under Schedule 2 to pay unaffiliated generation resources in MISO for reactive power within the standard power factor range. In its Reactive Power Order, FERC accepted the MISO TOs’ proposed Schedule 2 revisions, effective December 1, 2022. This means that the $220 million being paid in MISO to generators for the provision of reactive power ended December 1, 2022.
Several parties requested rehearing. On July 12, 2023, FERC issued its Order on Rehearing (Rehearing Order - 184 FERC ¶ 61,022), modifying the discussion in the Reactive Power Order and continuing to reach the same conclusion. Here are the items FERC discussed in its Rehearing Order:
Comparability Standard: FERC restated that electric power consists of two components: real power, which is “the power that does real work—and thus the power that sellers are looking to sell and that buyers are looking to buy;” and reactive power, which is necessary to maintain adequate voltages so that real power can be transmitted. The provision of reactive power by generating facilities involves two different concepts. Where reactive power is provided outside of the standard power factor range, it is “an ancillary service for transmitting power across the grid to serve load.” By contrast, where the generating facility is operating within the standard power factor range, “it is meeting its obligation as a generator to maintain the appropriate power factor in order to maintain voltage levels for energy entering the grid during normal operations.” Put differently, reactive support by generating facilities operating within the standard power factor range ensures that when these facilities inject real power—the product that their facilities exist to create and sell—onto the grid under normal conditions, they can do their part to maintain adequate voltages and not to threaten reliability. FERC’s longstanding policy is “that the provision of reactive power within the standard power factor range is, in the first instance, an obligation of the interconnecting generator and good utility practice,” such that “MISO TOs do not have an obligation to continue to compensate an independent generator for reactive power within the standard power factor range when its own or affiliated generators are no longer being compensated.
Order No. 2003 reflects the distinction between these two different reactive power concepts. When the transmission provider asks the interconnecting generator to operate its facility outside the established power factor range, the transmission provider is required to pay the interconnecting generator for the provision of such reactive power. By contrast, compensation for reactive power when the generating facility is operating within the established power factor range is not required. The sole exception FERC identified was that “if the Transmission Provider pays its own or its affiliated generators for reactive power within the established range, it must also pay the Interconnection Customer.” This is referred to as the comparability standard. In the Reactive Power Order, the Commission accepted MISO TOs’ proposal to eliminate all charges under Schedule 2 for the provision of Reactive Service. The effect of this order was not to “categorically prohibit new generation resources from seeking to recover the costs of their investment in reactive power capability.” Rather, this order eliminated only Schedule 2’s mandated, separate stream of compensation for the capability of providing Reactive Service, which had been required in MISO consistent with the comparability standard. This result is not unusual and is in fact already the case in other large RTOs or ISOs: for example, Southwest Power Pool, Inc. has eliminated compensation within the power factor range, and CAISO never provided such stand-alone compensation for Reactive Service.
In its Rehearing Order, FERC stated that for synchronous resources, there is little or no incremental capital expenditure associated with the equipment necessary to produce reactive power because the same equipment is used to produce real power. FERC went on to state that its conclusion that the same equipment used for Reactive Service is also necessary to produce real power is also supported by application of the AEP cost allocation methodology that apportions costs for synchronous generating plants. As to non-synchronous resources, the principal piece of equipment required for non-synchronous resources to produce reactive power is the inverter, which is already necessary to convert the direct current produced by non-synchronous resources to alternating current—i.e., to supply real power that can be injected into alternating current power systems. On rehearing and in earlier protests, no party points to any other equipment costs incurred by non-synchronous generating facilities that are attributable to providing Reactive Service.
Reliance: Numerous parties assert that independent power producers have come to rely on Schedule 2 compensation and argue that FERC erred in accepting MISO TOs’ proposal. At the outset, FERC again noted that its acceptance of MISO TOs’ proposal considering the comparability standard was an application of the Commission’s long-standing policy in Order Nos. 2003 and 2003-A, consistent with its numerous subsequent decisions. The parties on rehearing are, in effect, urging that generators’ unilateral business decisions to treat Schedule 2 compensation as irrevocable should amount to a new exception—in addition to the comparability standard—to Order No. 2003’s determination that compensation for Reactive Service should not be provided. FERC rejected that argument in the Reactive Power Order and sustained that determination on rehearing.
Reliability: FERC disagreed that it failed to adequately consider the effects of eliminating Schedule 2 compensation on grid reliability. The Reactive Power Order considered the potential reliability impacts of MISO TOs’ proposal, and FERC sustained its conclusions for the reasons articulated therein. Moreover, arguments that accepting MISO TOs’ proposal erodes the incentive to invest in reactive power capability are unpersuasive. Under Order Nos. 2003 and 2003-A, reactive power capability within the standard power factor range (i.e., Reactive Service) is and remains mandatory for generator interconnection, without incentives. The financial and other incentives for generators to invest in equipment to ensure reliability by providing reactive power outside of the standard power factor range are unaltered by and, in fact, not at issue in MISO TOs’ proposal.
Retail Rates: Certain parties argue, primarily relying on Conway, that the possibility that generation owned or controlled by MISO TOs might recover the costs of reactive power capability from retail customers requires that independent power producers must also be compensated for such costs in their wholesale rates. But this amounts to a generic argument that Schedule 2 compensation for Reactive Service is required not just when the transmission owner “pays its own or its affiliated generators for reactive power within the established range” but also when the transmission owner can recover its costs through its bundled retail rates. Neither Order Nos. 2003 and 2003-A, nor any of the Commission’s prior decisions, have ever suggested this requirement. Arguments that Schedule 2 compensation is required unless transmission owners disclaimed the opportunity to recover Reactive Service costs in their retail rates were brought as challenges to Order No. 2003 and are not now properly before FERC. FERC concluded that the possibility of compensation through retail rates did not give rise to a comparability issue or dictate that the Commission requires compensation under Schedule 2. FERC further noted that Conway concerned allegations of actual anticompetitive behavior, namely that a public utility engaged in the sale of energy at both retail and wholesale sought to raise its wholesale rates in a way that would squeeze its customers, who competed with it in the retail market, out of that retail market. The U.S. Supreme Court held that FERC has jurisdiction to consider the interplay between retail and wholesale rates in assessing a proposal to change a wholesale rate. Here, by contrast, there are no allegations of anticompetitive behavior parallel to those in Conway, and—as noted in the Reactive Power Order—FERC concluded that the comparability principle is satisfied by the fact that Schedule 2 compensation is being terminated for all generation, notwithstanding that the particular alternative avenues available to seek to recover Reactive Service costs may differ between transmission owners and independent power producers.
Filing Rights and Procedures: Some interveners argued that MISO TOs’ proposal failed to follow the appropriate procedures under Appendix K of the MISO TO Agreement in that the filing was not supported by the required majority vote nor was it the result of the required stakeholder process. FERC found these arguments unpersuasive as there no requirement that the filing be supported by a public vote of eligible MISO TOs, under which the identity of those voting and how they voted must be disclosed, and FERC had no reason to doubt MISO TOs’ statement as to the outcome of the vote. In the Reactive Power Order, FERC also rejected arguments that MISO TOs lacked authority to file their proposal under FPA section 205 because MISO TOs only have unilateral filing rights as to their own generators. FERC explained it had previously found, and the D.C. Circuit in Dynegy affirmed, that pursuant to the settlement adopting section 9.6.3 of the MISO pro forma GIA, “transmission owners and the Midwest ISO share the same section 205 filing right, which is the right to submit filings under FPA section 205 to govern the rates, terms, and conditions applicable to the provision of ancillary services.” FERC further concluded—consistent with the reasoning in the Reactive Power Order—that arguments asserting that accepting MISO TOs’ proposal undermines generators’ FPA section 205 filing rights reflect a misunderstanding of how compensation is provided for reactive service in MISO. Specifically, whatever rights interconnection customers (including independent power producers) may have to compensation for Reactive Service must be consistent with the terms of their GIAs. Section 9.6.3 of the MISO pro forma GIA provides that such payments shall be “pursuant to any tariff or rate schedule filed by Transmission Provider and approved by the FERC.” Thus, generators who have GIAs with this or a similar provision have agreed to make their compensation for reactive power contingent on the contents of Schedule 2, which MISO (and MISO TOs through Appendix K) have the right to revise through an FPA section 205 filing. Prior to FERC’s acceptance of MISO TOs’ proposal, Schedule 2 provided that the amount of such compensation for Reactive Service was determined by reference to generators’ annual reactive power revenue requirements. MISO TOs’ proposal altered Schedule 2—and only Schedule 2—to provide that “there will be no separate charge to compensate any generation resource for reactive service within the standard power factor range.” In other words, MISO TOs’ proposal did not adjust, overturn, or reduce to zero any generator’s annual revenue requirement for reactive power, but rather revised the Tariff such that those revenue requirements are no longer cross-referenced as the basis for determining the amount of compensation for Reactive Service.
Constitutional Arguments: In the Reactive Power Order, the Commission rejected arguments that MISO TOs’ proposal violates the Takings Clause and Due Process Clause of the Fifth Amendment to the United States Constitution. The obligation to provide Reactive Service exists independent of, and was not altered by, MISO TOs’ proposal: it was stated in Order No. 2003 and applies to individual generators through their GIAs. MISO TOs proposed only to change the compensation for Reactive Service, eliminating a stream of revenue under Schedule 2. FERC thus concluded that arguments that the obligation to provide Reactive Service is unconstitutional are impermissible collateral attacks on our prior determinations. Generators do not have a property interest in continued Reactive Service compensation under the Tariff nor did MISO TOs’ proposal unconstitutionally deprive generators of that putative property interest under the Takings Clause or Due Process Clause of the Fifth Amendment.
Dissent: In the Rehearing Order, Commissioner Danly reiterated his dissention. In his dissention to the Reactive Power Order, he stated that, notwithstanding the increased rates and the administrative burden of the present compensation approach, FERC cannot simply accept the MISO TOs’ proposal unless they meet their section 205 burden that the proposed rate—in this case, the elimination of reactive power compensation—is just and reasonable based on substantial evidence in the record. He went on to state that the MISO TOs did not offer any evidence of the effects of eliminating the $220 million annual reactive power revenue requirement from the MISO tariff, and what is clear on the record is that separate reactive power compensation has been available in MISO for several years, and parties have taken this into account in their financings, bilateral contracting, power purchase agreements, and other arrangements.
 MISO TOs include: Ameren Services Company, as agent for Union Electric Company, Ameren Illinois Company, and Ameren Transmission Company of Illinois; Arkansas Electric Cooperative Corporation; City Water, Light & Power (Springfield, IL); Cooperative Energy; Dairyland Power Cooperative; East Texas Electric Cooperative; Entergy Arkansas, LLC; Entergy Louisiana, LLC; Entergy Mississippi, LLC; Entergy Texas, Inc.; Great River Energy; Indianapolis Power & Light Company; Lafayette Utilities System; MidAmerican Energy Company; Minnesota Power (and its subsidiary Superior Water, L&P); Missouri River Energy Services; Montana-Dakota Utilities Co.; Northern States Power Company, a Minnesota corporation, and Northern States Power Company, a Wisconsin corporation, subsidiaries of Xcel Energy Inc.; Northwestern Wisconsin Electric Company; Otter Tail Power Company; Prairie Power, Inc.; Southern Indiana Gas & Electric Company; and Southern Minnesota Municipal Power Agency.
 The phrase “standard power factor range” refers to the power factor range required for interconnection and set forth in the interconnecting generator’s generator interconnection agreement (GIA). MISO’s pro forma GIA prescribes a power factor range of 0.95 leading to 0.95 lagging.”
 Sw. Power Pool, Inc., 119 FERC ¶ 61,199 at P 28 (SPP), order on reh’g,
121 FERC ¶ 61,196, at PP 16-22 (2007) (SPP Order on Rehearing); see also Bonneville, 120 FERC ¶ 61,211 at P 21 (“The purpose for which generation assets are built (including reactive power capability to maintain voltage levels for generation entering the grid) is to make sales of real power.”).
 Mich. Elec. Transmission Co., 97 FERC ¶ 61,187, at 61,852-53 (2001) (emphasis added).
 Id. at 61,853 (emphasis added); SPP, 119 FERC ¶ 61,199 at P 29; cf. Dynegy Midwest Generation, Inc., 125 FERC ¶ 61,280, at P 16 (2008) (“Reactive power is a localized service that is quickly used by transmission system components and cannot be transported over long distances.”).
Dr. Paul Dumais
CEO of Dumais Consulting with expertise in FERC regulatory matters, including transmission formula rates, reactive power and more.