How Does AEP Work?

Author: Frank Swigonski, Director, Market Design

As anyone familiar with a state utility rate case can attest, cost-of-service ratemaking can often be litigious and tedious. Reactive power rate cases are no exception. There are very few pieces of generating equipment that are solely dedicated to providing reactive power. A step-up transformer, for example, does not merely provide reactive power but also plays a crucial role in providing real power. The AEP methodology attempts to simplify the process of allocating costs between reactive and real power by establishing allocation factors for certain categories of equipment. However, AEP still requires a certain degree of accounting judgement and discretion that lends itself to dispute.

Whenever a filing is made at FERC, an affected party such as a transmission customer can dispute the costs proposed by a generator. When a filing is contested, FERC often sets reactive power filings for hearing and settlement procedures in which an administrative law judge will hold a hearing and encourage parties to negotiate a settlement. If no settlement can be reached, an administrative law judge will issue an initial decision based on the record established at the hearing and submit that decision to FERC to consider before determining a rate. At present, the PJM Interconnection, L.L.C. (PJM) is the only region in the US that uses the AEP method to compensate generators for reactive power.