AEP Methodology

1
Reactive Power
Federal Energy Regulatory Commission Open
Meeting December 15, 2004
2
Reactive Power Policy

• Review of Current Policy
• Blackout
• New Generation Filings
• Staff White Paper in Progress
• March 3, 2005 Technical Conference (tentative
  date)

3
Reactive Power Sources Users
Sources Generators, Transmission Equipment
(Capacitors, Static Var Compensators) Users
Transmission Lines, Transformers, Loads (motors)
Photos courtesy of Areva Transmission
Distribution, Hitachi, and NREL
4
AEP Methodology

1. Generator and its exciter
2. Accessory electric equipment that supports the
   operation of the generator exciter and
3. 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
5
AEPs Financial Impact

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

6
Goal of Reactive Power Policy

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

7
Market Issues

• Comparable Treatment of Generation Resources
• Interconnection Standards
• Reactive Power Planning and Procurement
• Supply Incentives
• Demand Side Incentives
• Public Good

8
Reactive Power Capacity Options

• Cost of Service
• Forward Market Procurement
• Pay Nothing

9
Reactive Power Real-Time Options

• No Payment within Bandwidth, Opportunity Costs
  Outside
• Strict Opportunity Cost
• Market Clearing Prices
• Fixed Payment

10
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