Building Careers and Shaping Public Policy

5 January 2005

Dr. Richard O'Neill
Economic Group Manager
Federal Energy Regulatory Commission
888 First Street, N.E.
Washington, DC 20426

Dear Dr. O'Neill:

I am writing on behalf of IEEE-USA and its Energy Policy Committee to provide comments to the Federal Energy Regulatory Commission (FERC) on proposals for pricing of reactive power. We believe that it would be prudent at this time to deal with reactive power problems on a non-price basis, and to concentrate on making competitive-based markets for energy that are as efficient and transparent as possible. However, if a pricing strategy is to evolve, it should take full consideration of the numerous technical issues associated with the provision of reactive power.

Reactive power is an integral aspect of the physics of electricity together with real power, current and voltage, and is treated by FERC as a critical ancillary service for procurement purposes. Unless the pricing structure is done just right, reliance on price signals for reactive power could undermine the relative success of energy markets. We are concerned that improper incentives for reactive power supply could lead to the use of reactive power as a means to exercise market power not only in the procurement of reactive power but also in the primary (energy) markets. In addition there are enough possible attributes of a "public good" in reactive power to warrant careful revisiting of the compensation structure for reactive power and the current voluntary nature of the provision of reactive power. The impact of any policy decision regarding reactive power is likely to have a far wider and subtler impact on the system than may be anticipated.

Here are some of the specific issues of concern to us:

• Having sufficient reactive supplies - The primary technical objective of reactive power is to maintain and control system voltage within reliable operating limits at all locations simultaneously and at all times and reasonable system conditions.
• Recognizing the benefits of reactive power - The role of reactive power in reducing currents and real and reactive losses frees up distribution, transmission and generating capacity to supply capacity and energy.
• Utilizing the appropriate type of reactive resources - There are three basic types of reactive sources. The first type includes those reactive resources that are connected to the system at all times. The second type includes those reactive resources that are controllable or switched and are varied as system loads change. And the third type are controlled or switched on to meet various contingencies in the distribution, transmission or generation, constituting reserve reactive capacity.
• Having reactive supply in the right locations - Unlike real power, there is no easily definable wide geographic market. Sources of reactive power are not necessarily substitutable between different locations due to the localized requirements for transmission and distribution voltage control, and depend on the response and availability of generation, static and dynamic reactive sources.
• Understanding the impact of reactive supplies - There is a continuing and ongoing need for the analysis of reactive supplies in the system. A one-time study will not provide the necessary ongoing analysis.
• Planning and operating the supply of reactive power - It has been a long-established practice for utilities to design reactive compensation for their systems to provide means for controlling voltage, limit fault current and enhance the efficiency of the transmission system. Operators know that they must have reactive reserves to operate reliably. A pricing structure is unlikely to do meet all operating needs, no matter how carefully crafted. Maintaining system integrity - Reactive reserves are essential to maintaining system integrity when reasonable contingencies occur.
• Having enough reactive power available when needed - The capacity of generating resources to provide real and reactive power are not independent from each other. This must be considered not only in any pricing strategy but also in developing associated testing requirements to ensure that both are available when needed for system reliability.
• Having appropriate controls for reactive power - The improper control of reactive power can result in voltage limit violations that, in turn, can result in outages, or equipment damage, or both. There are significant "seams issues" associated with reactive power, particularly in systems that do not have a contiguous and uniform geographic extent. There are no control systems to manage (control) reactive power interchanges between control areas, as there is for real power. This opens reliability issues of one system "leaning" on another, as well as associated economic issues.

It is doubtful that, in the absence of a track record for markets in reactive power, the right amounts of reactive power will appear in the right places in sufficient amounts to operate the system efficiently. Market failures (or even market delays in responding) could have serious impacts on system reliability.

Our comments are based on principles outlined in IEEE-USA's position statement on "Principles for a Restructured Electric Industry," which is attached for reference. We would be pleased to assist FERC in addressing these concerns and to help FERC assess any proposed actions prior to their deployment.

Sincerely,

Gerald A. Alphonse
IEEE-USA President

cc: Joseph H. McClelland
Director, Division of Reliability
Office of Markets, Tariffs and Rates
Federal Energy Regulatory Commission