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 Photos courtesy of Areva Transmission & Distribution, Hitachi, and NREL Sources: Generators, Transmission Equipment (Capacitors, Static Var Compensators) Users: Transmission Lines, Transformers, Loads (motors)

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. AEP’s 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