On February 3, 2009, FERC denied a complaint by the Maine Public Utilities Commission (“Maine PUC”) alleging that ISO New England Inc.’s (“ISO-NE”) Open Access Transmission Tariff (“OATT”) compensates generators supplying reactive power for certain capital costs twice.

In order to maintain transmission voltages within acceptable limits, ISO-NE may direct generators to provide reactive service. Those generation resources are compensated for such reactive service under Schedule 2 of the ISO-NE OATT. The compensation methodology under Schedule 2 includes four components: (1) the capacity cost payment (“CC Rate”), (2) lost opportunity component, (3) cost of energy consumed component, and (4) cost of energy produced component (“PC component”).

The CC Rate component is a negotiated rate designed to compensate qualified VAR-capable resources for their fixed capital costs related to the installation and maintenance of equipment necessary to provide reactive power. The lost opportunity component compensates generators for the value of lost opportunities in the energy market when they are directed to reduce their real power output to provide more reactive power. The cost of energy consumed component compensates generators for the cost of energy they consume to provide reactive power support. Finally, the PC component compensates generators for the difference between the locational marginal price (“LMP”) and the generator’s offer price for each hour it provides reactive power and where the LMP is lower than the offer price.

Separately, during the transition to a Forward Capacity Market (“FCM”) in ISO-NE, fixed payments will be paid to all generators, regardless of their ability to provide reactive service. These payments are designed to ensure resource adequacy. On February 28, 2007, FERC issued an order finding that the FCM transition payments do not compensate resources for their reactive power capabilities because they are below the cost of new entry. However, the Commission stated that it was concerned about double recovery during the first Forward Capacity Auction because the payments equal the cost of new entry. FERC required ISO-NE to amend tariff provisions before June 1, 2010 to ensure that generators providing reactive service and eligible for CC Rate payments do not receive double compensation.

The Maine PUC filed a complaint with FERC arguing that the CC Rate component combined with the FCM transition payments results in double recovery of capital costs associated with the generating equipment used to provide energy and reactive service and was thus unjust. Maine PUC requested that that the Commission order ISO-NE to modify the CC Rate component to provide compensation only for a generator’s capability to provide reactive service beyond the level the generator is required to provide as part of the FCM transition payments.

FERC held that the CC Rate payments and the FCM transition payments are for “two distinct services, designed to achieve different purposes.” The Commission stated that Maine PUC had not met its burden of proof that the CC Rate component of Schedule 2, when combined with the FCM payments, is an unjust or unreasonable double recovery of capital costs for generating equipment used to produce energy and reactive power. The Commission stated that the CC Rate was negotiated across ISO-NE and was not designed to compensate for the costs associated with the equipment of individual generators. The Commission agreed with ISO-NE that eliminating the CC Rate would likely lead to new resources raising their offers to cover the lost payments resulting in the same total compensation for generators and causing the FCM clearing price to be higher.

The order is available on the Commission’s website under Docket No. EL07-38.