The D.C. Circuit Court of Appeals on Sept. 26 vacated a FERC order allowing MISO to end reactive power compensation, though the decision has no bearing on the nationwide discontinuation of payments for reactive power in Order 904 (23-1134).
The court said that when FERC greenlit MISO’s move to eradicate reactive power revenues, it failed to fully consider the generators’ short-term financial health. The court remanded the matter back to FERC for a fresh decision.
MISO in 2023 ended reactive power charges in transmission rates along with cost-based compensation for generators’ production of reactive power (ER23-523). (See FERC Ends MISO Compensation for Reactive Power Supply.) Since then, the RTO has treated reactive power within the standard power factor range — which plays a hand in stabilizing voltage levels across the grid — as an incidental product of generation and transmission and doesn’t facilitate sales.
Several generators objected and argued that MISO’s immediate removal would disturb their investment-backed interests. The D.C. Circuit agreed, saying FERC neglected to “consider important aspects of the problem before it.”
“The generators explained that they had incurred significant debt and contractual obligations relying on MISO’s longstanding practice of allowing generators to recover cost-based compensation for reactive power. In approving MISO’s proposal to eliminate that compensation, FERC failed to explain why these financial concerns were unjustified, entitled to no weight or outweighed by other considerations,” the court said.
In late 2024, FERC issued Order 904, prohibiting transmission providers from including charges in their rates to compensate generators for reactive power within the deadband range (0.95 leading to 0.95 lagging). The commission decided the normal range of reactive power would simply be a condition of interconnection (RM22-2).
The court acknowledged that FERC’s nationwide ban on reactive power compensation remains in place despite its order to revisit the MISO decision. The court said that the “dispute here remains live because both orders are still under review” and said the generators are free to separately challenge the proceedings “even though success in only one proceeding might not fully redress [their] injury.”
Although its ruling doesn’t restore reactive power compensation in MISO, it does remove one barrier and help establish redressability, the court said.
It pointed out that MISO had been compensating generators for deadband-level reactive power production since the mid-2000s. Before the end of the practice, MISO paid about 400 generators for reactive power, which totaled $200 million annually according to one estimate. The “overnight” elimination of the revenue stream had generators claiming their wholesale power contracts would become unprofitable and undermine their ability to service debt and attract capital, the court noted.
FERC’s reasoning that marginal costs of producing deadband-level reactive power are minor ignores that revenues in MISO have been significant, the court found. It also said FERC’s solution that generators either renegotiate prices in existing power purchase agreements or increase asking prices in new contracts was unsatisfactory.
The court said FERC erroneously tasked generators with proving they relied on reactive power revenue when the commission should have burdened MISO with proving that an immediate end to the compensation was reasonable. It pointed out that FERC never considered a more gradual end to the compensation in MISO, even while Order 904 contained a 60-day phase-in period.
Order 904 is under review in the 5th U.S. Circuit Court of Appeals. The D.C. Circuit said that did not foreclose FERC “from giving a more thorough explanation in support of MISO’s amendments on remand.”
