While the Federal Energy Regulatory Commission (“FERC” or the “Commission”) has never required a uniform structure for reactive power compensation, in light of the growing number of new technologies, particularly wind and solar photovoltaic generation facilities, the changing landscape of the electricity industry and emerging reliability concerns, the Commission held a workshop on April 22, 2014 to examine the third-party provision of reactive supply and voltage control and regulation and frequency response services.  The Commission is seeking more information on the technical, economic and market issues concerning the provision of these particular ancillary services before it determines if, and how, it will revise its regulations to increase transparency around payment for these services.  The roundtable discussion led by FERC Staff involved various stakeholders including representatives for independent system operators, electric associations, and electric generators.

Stakeholders overwhelmingly agreed that ensuring generators are compensated for the services they provide is an important issue and one that may not have a “one-size-fits-all” solution.  Many panelists highlighted difficulties associated with creating competitive “markets” for reactive power, including the extremely locational nature of reactive power.  Certain panelists also emphasized the need to leverage new opportunities and provide ways for certain “untapped resources,” including wind, solar and energy storage technologies that are capable of providing reactive power, to become active and appropriately-compensated players in the reactive power supply market.  The panelists and FERC Staff all agreed that developing an appropriate compensation structure and setting obligations that fit properly within that structure will be a “marathon” rather than a “sprint.”

Stakeholders seemed generally in favor of pay for performance constructs as a mechanism for compensating resources for frequency response services.  However, when asked whether there should be penalties assessed against resources that absorb frequency response (i.e., worsen responsiveness), some stakeholders cautioned against the use of penalties because of their potential to disincentivize investment.

The Commission emphasized that it has no end state in mind and that its review of these issues is preliminary.  Accordingly, it is not possible to predict whether a market-based mechanism of some type will be implemented to compensate generators for providing reactive power or frequency response service, but it is an option that the Commission will continue to consider.  The afternoon session of the technical conference focused on an additional set of considerations, horizontal market power concerns associated with reactive supply, regulation, and frequency response services.

In preparation for the workshop, FERC issued a Staff Report on payment for reactive power that is available on its website at: http://www.ferc.gov/CalendarFiles/20140414101009-04-11-14-reactive-power.pdf.  The Commission will accept written comments filed by June 9, 2014.  Interested parties are encouraged to provide input as the Commission continues to consider these issues.