On January 27, 2023, FERC approved the Midcontinent Independent System Operator, Inc. (“MISO”) Transmission Owners’ (“TOs”) proposal to terminate reactive power charges and compensation under MISO’s Open Access Transmission, Energy, and Operating Reserve Markets Tariff (“Tariff”), effective December 1, 2022.  As a result, MISO will no longer charge transmission customers for reactive power service within the standard power range, and no generators, whether affiliated with the MISO TOs or not, will receive compensation for providing reactive power service within the standard power factor range.  Nevertheless, FERC’s determination does not affect MISO generators’ ongoing obligation to provide reactive power.  If MISO directs a generator to provide reactive power outside of the standard power factor range, the generator will be compensated based on existing mechanisms already included in MISO’s Tariff.  

As part of its order, FERC explained that Order Nos. 2003 and 2003-A (which adopted a standard agreement for the interconnection of large generation facilities) require interconnecting generators to maintain a standard power factor range of 0.95 leading to 0.95 lagging.  Order No. 2003-A also set out a “comparability standard.”  That is, if the transmission provider pays its own or affiliated generators for reactive power within the standard range, it must also pay unaffiliated interconnection customers.  Compensation for reactive power service is governed by Schedule 2 of MISO’s Tariff.  Under Schedule 2, reactive service must be provided for each transaction on MISO’s transmission system, and MISO will compensate generators (or other sources providing reactive service) for offering such service. 

In accepting the MISO TOs’ proposal, FERC explained that providing reactive power within the standard power factor range is “in the first instance, an obligation of the interconnecting generator and good utility practice.” According to FERC, the comparability standard under Order Nos. 2003 and 2003-A entitles a generator to compensation for reactive power within the standard power factor range if, and only if, the transmission provider pays its own or affiliated generators for reactive power within the standard power factor range.  Where a transmission provider does not separately compensate its own or affiliated generators, it is not required to separately compensate non-affiliated generators.  FERC added that Order Nos. 2003 and 2003-A do not prevent a transmission provider from discontinuing such compensation, and that its prior precedent permits the elimination of compensation for reactive power within the standard power factor range for all generators. 

FERC’s order also rejected certain protests arguing: that generators rely on compensation for reactive service to remain financially viable; that eliminating reactive power compensation will negatively impact system reliability by forcing uneconomic generators into retirement; and that doing so discriminates against independent power producers. Addressing reliability concerns, FERC noted that protestors’ claims that uneconomic generators would be forced into retirement were speculative, and that providing reactive power service within the standard power factor range requires little or no incremental investment.  Regarding concerns that the MISO TOs’ own generation will have a competitive advantage over independent power producers because they will be able to recover their lost revenue through retail rates, FERC acknowledged this as a possibility, but held that the MISO TOs are treating their own and affiliated generators comparably to independent power producers’ generators given that neither will receive reactive power compensation.  In addition, FERC pointed out that both TO-affiliated generators and non-affiliated generators may pursue recovery of any lost revenue in other ways, including through power purchase agreements.

Commissioner Danly issued a dissenting opinion, explaining that the MISO TOs did not meet their burden to provide substantial evidence that eliminating reactive power compensation is just and reasonable.  Commissioner Danly highlighted that reactive power compensation is currently a $220 million (and increasing) annual revenue requirement and that eliminating all reactive power rates will have a negative rate impact on generators not affiliated with the MISO TOs.  Commissioner Clements issued a concurring opinion explaining that this decision should have incorporated more stakeholder input, and that MISO stakeholders should consider more effective alternatives to cost-based reactive power compensation going forward.

A copy of the order, issued in docket ER23-523 et al., can be found here.