A recent decision by the U.S. Court of Appeals for the D.C. Circuit demonstrates the Federal Energy Regulatory Commission’s (FERC’s) vulnerability to judicial review when it fails to address contested issues. In Capital Power Corporation v. FERC, No. 23-1134, 2025 WL 2738420 (D.C. Cir. Sept. 26, 2025), the court reviewed FERC’s approval of the Midcontinent Independent System Operator’s (MISO’s) 2022 tariff amendments, which eliminated separate compensation for generators providing “deadband” reactive power — i.e., reactive power that helps maintain stable voltage across the electric grid. In what proved to be a fatal flaw for judicial review, FERC accepted MISO’s tariff revisions to become effective the day after MISO’s filing, effectively making the elimination of reactive service compensation immediate.
The court vacated and remanded FERC’s orders, holding FERC had acted arbitrarily and capriciously by failing to fully consider the short-term reliance interests of generators that made investments and entered contracts based on an expectation of continued reactive-power compensation. The court did not assess the validity of the elimination of reactive-power compensation and, in fact, referred to FERC’s rulemaking, which did just that on a nationwide basis in mid-October 2024. That nationwide order is currently under review in the Fifth Circuit.
While the court’s MISO order does not have any immediate impact on reactive power compensation, and may never impact such compensation, it reflects the boundaries of FERC’s authority, even in areas that are often uncontroversial and rarely disputed such as tariff effective dates.
Background and Regulatory Context
Compensation for reactive power has been litigated at FERC in different contexts for decades. It began when FERC issued Order No. 2003 adopting standard generator interconnection procedures. The pro forma interconnection agreements adopted in Order No. 2003 required generators to operate within a prescribed power factor range, called the “deadband.” FERC initially found that generators should not receive separate compensation for reactive power within the deadband because it was a requirement for the agreement. FERC reconsidered its position on rehearing, and in Order No. 2003-A, which required transmission providers to compensate generators for reactive power if the transmission providers’ own generators were paid for such service in light of FERC’s “comparability standard.” This requirement was embedded in the pro forma large generator interconnection agreement. In MISO and elsewhere, generators were long able to submit a cost-based rate schedule to obtain compensation for reactive service, and the primary conflicts arose as to the level of that compensation.
In 2022, MISO proposed tariff amendments to eliminate reactive‑power compensation for all generators, effective one day after MISO’s filing. MISO sought waiver of FERC’s statutory 60-day notice period on the basis that “elimination of current [reactive power] charges will result in a rate decrease for customers.” FERC approved the proposal, including the immediate effective date, over generators’ objections. The commission’s grant of the effective date was supported by a single sentence and a citation to the commission’s “prior notice” orders that stated that FERC will generally grant waivers of effective dates “for filings that reduce rates and charges, such as rate decreases.” Several generators and industry groups petitioned the D.C. Circuit for review, substantively challenging FERC’s authority to direct elimination of reactive rate compensation through a rulemaking.
The Court’s Decision
The D.C. Circuit determined that FERC failed to adequately consider the generators’ short-term reliance interests and did not reasonably explain why those interests were inconsequential or outweighed by countervailing considerations. The court emphasized that FERC entirely failed to consider whether a phase‑in period was warranted for such significant tariff changes. The court granted the petitions for review, set aside FERC’s orders and remanded for further proceedings.
Notably, the D.C. Circuit did not address the substantive validity of MISO’s proposal under section 205 or the elimination of reactive‑power compensation. Indeed, the court explicitly stated that it was not ruling on the substance of the proposal and acknowledged that FERC subsequently issued a nationwide final rule eliminating reactive-power compensation within the deadband.
Rather, the court focused on FERC’s failure to provide a satisfactory explanation for immediate implementation in light of the generators’ documented reliance interests. The court remanded the case for further proceedings, providing FERC the opportunity to reasonably consider whether a phase-in period was warranted and more adequately explain its decision concerning such significant tariff changes.
FERC’s Nationwide Rule
As noted by the court, while the MISO case was pending, FERC issued a separate nationwide rule eliminating reactive‑power compensation within the deadband (Order No. 904) in mid-October 2024. The impact of Order No. 904 and MISO’s tariff revisions are the same — both eliminate compensation within the deadband. However, unlike the challenged orders in Capital Power, which became effective immediately, FERC’s nationwide rule under Order No. 904 included traditional notice and implementation periods. Specifically, Order No. 904 required transmission providers to submit compliance filings within 60 days of the effective date of the final rule and a proposed effective date within 90 days from the date of the compliance filing, with a special exception for certain RTOs/ISOs to request a later effective date. Many transmission providers already submitted compliance filings and no longer provide any compensation for reactive-power service within the deadband.
On March 28, 2025, MISO filed proposed tariff revisions in Docket No. ER25-1814-000 to comply with the requirements of Order No. 904. Although MISO previously eliminated all charges under Schedule 2 of its tariff for the provision of reactive power within the standard power factor range, MISO proposed additional revisions to Schedule 2 to replace the last paragraph of Schedule 2 with substantially identical language used by the commission’s revised pro forma Schedule 2. The commission accepted MISO’s proposed revisions effective March 29, 2025.
At least one transmission provider, PJM Interconnection, has not yet eliminated reactive-power service and instead sought and obtained approval to delay implementation in light of existing market mechanisms that would be affected by elimination of reactive rate compensation. PJM initially proposed to phase out compensation for reactive power effective April 1, 2025, eliminating reactive-power payments to some generators before June 1, 2026, when PJM would wholly eliminate reactive-power compensation within the standard power factor range. FERC rejected PJM’s proposed transition period and directed PJM to submit a further compliance filing. PJM’s pending second compliance filing (see Docket No. ER5-1073-001) proposes reactive rate compensation to be wholly eliminated for all resources as of the same effective date, June 1, 2026.
In the meantime, Order No. 904 is under review in the Fifth Circuit where generators are challenging the validity of the order through (at present) five consolidated cases. FERC was ordered to file the administrative record with the court by Nov. 17, 2025.
Looking Ahead
Practically, the order may be viewed as a sign that courts are leaning away from deference to agencies in the wake of the U.S. Supreme Court’s decision in Loper Bright Enterprises v. Raimondo. While this case does not involve the type of statutory interpretation issues impacted by Loper Bright, it shows the D.C. Circuit’s willingness to take FERC to task when its decisions are wholly unsupported in the record. Regulated entities making filings at FERC seeking waivers of FERC’s 60-day notice requirement or otherwise seeking tariff changes that meaningfully impact reliance interests and may warrant a phase-in period should also take note. They should be sure to include appropriate justifications in their filings for FERC to rely on, particularly in cases in which there may be arguments about reliance interests.
The McGuireWoods FERC team is monitoring these issues and is available to assist with any FERC compliance questions. For advice on this issue, contact the authors.