July 28, 2004

Public Interest Comment on Midwest ISO Proposal Concerning Reactive Power Procurement

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Summary of RSP Comment: 

The Midwest Independent Transmission System Operator, Inc. (Midwest ISO) has proposed amending its Open Access Transmission Tariff to provide a means to compensate independent power producers for providing reactive supply and voltage control services. Management of reactive power is a fundamental aspect of maintaining a stable and reliable electric transmission system. While compensating generators and others who provide value to energy consumers by supporting the reliable operation of the transmission system is important, the cost-based method proposed fails to ensure that reactive power provision will be accomplished in an efficient manner. In addition, contrary to the recommendation of the U.S.-Canada Power System Outage Task Force in its final report on the August 14, 2003 blackout, the proposal fails to provide a means of paying generators for any loss of profits associated with a reduction in real power sales made necessary by responding to a call for increased reactive power. The result will be a system that increases costs to energy consumers in the Midwest ISO region, but fails to insure that generators face proper incentives to supply reactive power.

The proposed cost-based approach fails to provide the economic signals needed to spur efficient behavior in either the supply of or demand for reactive power. In addition, the proposal does not bring the Midwest ISO tariff into compliance with recommendations in the Task Force Final Report with respect to compensation for reactive power, and so misses the opportunity to eliminate a risk factor inherent to a cost-based methodology.

The Commission should instead direct the Midwest ISO to adopt a method similar to that used in PJM's Schedule 2. The PJM methodology is not an ideal system for reactive power. It focuses on recovery of historic costs rather than value provided to customers, and it therefore subject to many of the criticisms discussed above. However, by encompassing all generators within the RTO under a consistent framework and specifically providing for the payment of opportunity costs to generators required to reduce real power sales, the PJM Schedule 2 methodology avoids the most significant flaws of the instant proposal. The Commission should direct the Midwest ISO to adopt PJM's Schedule 2 methodology for reactive power as an interim solution, and require the ISO to explore alternative market designs for reactive power and voltage support services that would be technology neutral and efficiency enhancing.

Adoption of the PJM approach represents making a safe choice, rather than an ideal choice; the ISO's proposed Schedule 21 offers neither a safe nor an ideal choice. It would not be not safe because it could create conflict between commercial incentives and system reliability at times during which the system is under stress. It would not be ideal because the lack of transparency and failure to provide price signals will impair the efficiency of both short run and long run decisions concerning reactive power. At this stage in the Midwest ISO's development, the safe choice is the better choice.