Reactive Power

Federal Energy Regulatory Commission

Open Meeting

December 15, 2004

Reactive Power Policy

• Review of Current Policy– Blackout– New Generation Filings

• Staff White Paper in Progress

• March 3, 2005 Technical Conference (tentative date)

Reactive Power Sources & Users

Photos courtesy of Areva Transmission & Distribution, Hitachi, and NREL

Sources: Generators, Transmission Equipment (Capacitors, Static Var Compensators)

Users: Transmission Lines, Transformers, Loads (motors)

AEP Methodology

1) Generator and its exciter;2) Accessory electric equipment that supports

the operation of the generator exciter; and3) Remaining total production investment

required to provide real power and operate the exciter

* Apply allocation factor to sort annual revenue requirements of these components between real and reactive power

AEP’s Financial Impact

• Estimate of all Form 1 reactive power charges is $3.5 to $4.0 billion

Goal of Reactive Power Policy

• Promote Reliable and Efficient Infrastructure Investment, Production, and Customer Use

Market Issues

• Comparable Treatment of Generation Resources

• Interconnection Standards

• Reactive Power Planning and Procurement

• Supply Incentives

• Demand Side Incentives

• Public Good

Reactive Power Capacity Options

• Cost of Service

• Forward Market Procurement

• Pay Nothing

Reactive Power Real-Time Options

• No Payment within Bandwidth, Opportunity Costs Outside

• Strict Opportunity Cost

• Market Clearing Prices

• Fixed Payment

Major Conclusions• Align incentives with desired outcomes

– Pay for reactive power

• Apply comparability to reactive power

• Treat capability and production differently– Pay more for dynamic than static capability– Review AEP method– Pay all sources same price for production

• Mitigate existing market power– Entry may reduce future market power