Reactive Power Working Group Report

1. Reactive Power Working Group Report NEPOOL Reliability Committee January 19, 2005

2. Overview of Discussions • In October 2004, NEPOOL Tariff Committee established a Working Group to review reactive power compensation for non-generator resources • November/December 2004, Working Group discussed potential reactive power compensation issues • Background on FERC consideration of reactive power compensation • Current tariff treatment of reactive power in ISO/RTO environments • Categories of Reactive Power Sources • Compensation Options • December 16, 2004 Working Group briefed Tariff Committee on options for updating ISO/RTO compensation of reactive power sources • NEPOOL Tariff Committee directed Working Group to take comprehensive review of reactive power compensation (rather than just addressing non-generator reactive power sources in isolation) • Reactive power compensation review requires coordination with existing efforts by Reliability Committee

3. Background • Under Order No. 888, FERC determined that the provision of reactive power is an ancillary service and that this service is necessary to facilitate basic transmission service within every control area. • FERC required (1) that transmission providers operate a control area to provide reactive power service; (2) transmission customers must purchase this service from the transmission provider; and (3) the service must be offered and priced separately. • FERC assumed that the primary sources of reactive power were generation sources. • FERC has called for additional “reactive power oversight, including planning, operations, and compensation” as part of the response to the Northeast Power Blackout.

4. FERC Considerations • Midwest Independent Transmission System Operator, Inc., 109 FERC ¶ 61,005 (October 1, 2004). • FERC rejected as unduly discriminatory a proposed “Schedule 21” which would have provided separate compensation scheme for IPPs that were not covered under MISO’s existing Schedule 2 for Reactive Power sources since “there is no distinction based on the type or size of generators (and what quantity of reactive power it can produce or when), its location or any other physical characteristic.” • FERC further held that “. . .Schedule 2 must be revised to provide compensation for reactive power service to both transmission owners and ITCs and also non-transmission owners or IPPs insofar as they both provide such service . . .” • California Independent System Operator Corp., 109 FERC ¶61,183 (November 19, 2004). • FERC upheld California ISO use of reliability must run units to procure voltage support but noted that “[i]n the event that additional resources can provide reliable and economical Black Start and Voltage Support, we encourage the ISO to explore these options.” • General Guidelines • All sources providing reactive power should be compensated • If different sources are to be compensated on separate basis, then such treatment must be justified based on the type or size of the resource, its location or another distinguishing physical characteristic.

5. Current Tariff Treatment of Reactive Power

6. Eligible Sources

7. Basis of Compensation

8. Testing Requirements

9. New England Overview • Present State • Both dynamic and steady-state reactive power services are needed • NEPOOL currently procures these services as an aggregated product from generators that can provide both dynamic and steady-state reactive power • Reactive Power Compensation • 2003 payments were $27.9M per year, based on 27,800 MVAR procured at approximately $1000/MVAR year • 2003 collections were estimated at $30.8M per year, based on a 30,828 MVAR procurement cap. • 2004 rates increased to $1050/MVAR year

10. Categories of Sources • Steady-State Sources - Needed to support bulk power system voltage under steady-state conditions. Sources may be active or passive devices and have limited ability to respond dynamically. • Switched capacitor banks (Low initial investment; requires Voltage/VAR SCADA strategy to be effective) • Generators • Synchronous condensers • Static VAR compensators • HVDC Light • Transformers • Shunt Reactors • Load • Reactive Power Devices on Transmission/Distribution Systems

11. Categories of Sources • Dynamic Sources- Needed for reliability, based on post-fault voltage support and dynamic (immediate) response to other contingencies. Sources tend to be more capital intensive, with finer control characteristics allowing for dynamic response and operating costs due to losses. • Generators • Synchronous condensers • HVDC Light • Others meeting technical criteria specified by the Reliability Committee

12. Costs of Service • Capital Costs • Energization costs • Cost of Energy Produced • Energy Consumption (motoring/pumped storage generators) • Lost Opportunity Costs

13. Compensation Options • Payment Formula -Use NEPOOL, Sched. 2, Part II as basis to establish payment formula for non-generator sources of reactive power. • Would need to incorporate recovery of payments into VAR ancillary service charge formula • Would likely avoid concerns regarding discriminatory/preferential treatment in compensation between generator/non-generator sources • Revenue Requirement -Establish base revenue requirement for non-generator sources • Consider lost opportunity cost payments for ISO commitments similar to NYISO & PJM approaches • Would need to incorporate recovery of payments into VAR ancillary service charge formula • Use of revenue requirement for non-generator sources may require reconsideration of compensation basis for generator sources to avoid claims of discriminatory/preferential treatment • Marginal Cost Pricing- Develop marginal cost pricing mechanism as replacement to present NEPOOL Schedule 2 that would include pricing of generation and non-generation resources with recognition of leading/lagging reactive power capabilities. • Address any market power issues that could arise in marginal cost pricing

14. Open Issues • Definition of the Reactive Power Product • Distinguish between dynamic and steady-state reactive power sources • Leading/lagging reactive power capability • Options for Determining Qualified Sources • Develop specific list of non-generator resources qualifying for payments • Identify eligible non-generation resources with requirement that resource must also meet specific standards for qualification that demonstrate actual ability to provide reactive power support • No specific list of eligible non-generation resources, require certification that resource can provide reactive power support as basis for compensation eligibility

15. Open Issues • Tariff Treatment on Non-Generator Reactive Power • Incorporation into existing Rate Schedule 2 • Wholesale revision of Rate Schedule 2 to integrate non-generator sources, address leading/lagging reactive power capabilities and compensation/recovery basis • Compensation Basis • Formula Payment • Revenue Requirement • Marginal Cost or other Market Pricing Mechanism

16. Next Steps • Review role of reactive power in long-term operation of markets • Develop recommendations on distinguishing steady-state/dynamic reactive power sources • Address breakout of leading/lagging reactive power capabilities • Review compensation basis for all reactive power sources and determine whether revenue requirement, formula rate or marginal pricing is appropriate compensation mechanism • Review allocation methodology for VAR Support Payments • Address any market power concerns raised by chosen compensation mechanism • Integration with other market reforms

17. Next Steps • FERC White Paper on Reactive Power • FERC December Meeting included briefing on Staff development of White Paper on reactive power • Release of White Paper planned for January 2005 (not yet released) • Potential technical conference on reactive power issues inMarch 2005 • Conduct Briefing Sessions for Working Group on Long-Term Issues • Treatment of steady-state/dynamic reactive power source • Integration of leading/lagging reactive power capability • Outline of treatment under each potential compensation mechanism