LARGrizzly --
Sorry to hear that you don't trust your utility, but they do know what they're talking about (at least I hope so, considering they're generating your bill).
The penalties that you are being assessed are quite common. Without getting into details (I'll do that in a moment), most utilities impose a requirement on industrial customers to maintain a certain power factor. If that power factor is not met, penalties are charged. Believe it or not, there is a valid reason for doing so.
First off, reactive load / power factor. When a load is connected to an AC system, often times, depending on the characteristics of the load, there is a difference in the phase angle of the voltage applied to the load as compared to the current passed through the load. When the load is purely resistive, there is no difference in the phase of these waveforms. In a purely inductive (reactive) load, there is a phase angle difference of 90°, with the current lagging the voltage. In a purely capacitive load, there is also a phase angle difference of 90°, with the current leading the voltage. The power factor is basically a way of describing this relationship of the current and voltage waveforms. Mathematically, power factor is equal to the cosine of the angle difference between the two waveforms. If there is a phase angle difference of 20°, the power factor of the load is then 0.9397, or 93.97%.
The significance of this? When you have a purely resistive load, all current that is supplied to the load is actually used to do work. When you have capacitive or reactive load, the current supplied is stored by the electric and magnetic fields created by the capacitance and reactance. Because of this, if you have a load with a higher reactive component, it requires more current to supply the load than if your load is purely resistive.
The power factor is used to measure this. When you have a low power factor (say, 90%, for example), it requires 11.1% more current to supply the load than if you had a power factor of 100% (purely resistive load). This excess current requirement can mean several things: larger transformers to serve your load, higher power loss on the power system, lower voltages on the system, etc.
The good thing is that you can correct poor power factor. Remember above, where I said that capactive loads cause the current to lead the voltage? Adding capacitors to a reactive load basically brings the phase angle between current and voltage closer together, and thus reduces the overall current requirements of the load (and as such improves the power factor of the load).
In summary, what your utility representative told you was correct -- since you apparently have a poor power factor due to reactive load (as indicated by the ratio of your kWH usage to kVA usage, this is also a way to calculate power factor), you can add capacitors to improve your power factor.
Good luck....
