On July 16, 2020, FERC responded to a petition for declaratory order filed by a group of merchant generators (“Petitioners”) requesting that the Commission provide guidance and clarification on six areas of its cost-based reactive power ratemaking policy. While FERC declined to address five of Petitioners’ specific requests, explaining that it would address them in another ongoing reactive rate proceeding, FERC established paper hearing procedures on a single question: “what proxies, if any, may be used by merchant generators for reactive power service ratemaking purposes other than the use of the capital structure and the cost of capital of the interconnected utility.”
On May 3, 2019, Petitioners filed a petition with FERC seeking guidance regarding the Commission’s cost-based methodology used to compensate generators for the provision of reactive supply service under Schedule 2 of the PJM Interconnection, L.L.C. (“PJM”) Tariff. The petition followed closely on the heels of a FERC Administrative Law Judge’s rejection of these same arguments in the Panda Stonewall litigation as inconsistent with Commission policy (see FERC Docket No. ER17-1821). Petitioners argued that certain ambiguities in the application of the current cost-based methodology (the so-called “AEP methodology”) have hindered efforts by merchant generators to recover their actual costs of providing reactive power. In particular, Petitioners requested guidance and clarification in six areas, asking the Commission to declare that:
- the cost of capital and capital structure reflected in PJM’s cost of new entry (“CONE”) Study is a reasonable proxy to determine a merchant generator’s capital structure and cost of capital;
- fixed fuel transportation costs are includable in a reactive power revenue requirement;
- the engineering, procurement and construction (“EPC”) contractor costs, as apportioned among the relevant major equipment categories by the reactive power provider’s EPC contractor, is sufficient for a generator to meet its burden concerning EPC contractor costs;
- the categories of indirect cost accepted in Chehalis Power Generating, L.P. and Bluegrass Generation Co., L.L.C. are recoverable indirect costs under the AEP methodology;
- a generator may recover a reactive power annual revenue requirement based on its full reactive capability; and
- reactive power filers may use actual plant load, rather than engineering judgment, to determine the Accessory Equipment Allocation Factor.
FERC declined to address last five of Petitioners’ specific requests, explaining that it would address them in the above-referenced Panda Stonewall proceeding, in which the Initial Decision awaits Commission action. FERC, however, agreed to consider the question of the appropriate cost of capital for a merchant generator in a cost-based rate for reactive power. FERC concluded that the existing record was insufficient to determine what proxies, “if any,” could be used by merchant generators for reactive ratemaking purposes other than the interconnected utility’s capital structure and the cost of capital, which is today’s common practice.
In establishing paper hearing procedures, FERC invited initial and reply comments on questions questions relating to the capital structure and cost of capital issues for merchant generators in the context of cost-based reactive power rates. Specifically, FERC asked for comments addressing (but not limited to):
- whether the PJM CONE Study would be an appropriate proxy;
- whether the adjustments to the Commission’s standard methodology for determining the rate of return that PJM utilizes in its CONE study would be appropriate for use in determining the cost of capital for reactive power determinations;
- whether the risks of a merchant generator providing reactive power service should be equated with the overall risk of a merchant generator;
- whether there are proxies based on transmission owner return on equity that are superior to relying on the interconnection transmission utility;
- whether there are other proxy approaches the Commission should consider in PJM; and
- whether publicly-available data on merchant generators or companies in PJM could be used to develop a proxy.
FERC’s Order provided that initial comments would due no later than August 30, 2020, and reply comments would be due September 29, 2020. For non-parties wishing to submit comments and participate as parties in the paper hearing, FERC provided that they must move to intervene on or before August 30, 2020.
A copy of the order can be found here.