Since nobody has really explained it yet, and this could potentially be a difficult concept if you've never seen if before, this is why power factor happens:
Straight resistor circuits are simple. Volts = Amps x Ohms. When you put in more voltage, more current flows. If you look a a sinusoidal plot of 60Hz AC power over time, the Voltage and Ampere curves will be perfectly aligned.
Everyone has probably turned a coil of wire around a nail and created an electromagnet- that's a good example of inductance, where flowing current creates a magnetic field. In AC circuits, that field is constantly being built up and drained away, and that stores and releases energy. Capacitors behave in a similar way. So, inductors and capacitors store energy and release it, but not in phase with the voltage! Current flow through an inductor will peak before the voltage peaks. Current flow through a capacitor will peak after the voltage peaks. In both cases, all the energy stored in the inductor or capacitor is released later in the cycle- leading to a condition where you're not really adding or subtracting any power overall, but there is a lot more current flowing!
In the real world, nothing is ideal. Inductors and capacitors all have some resistance. A straight piece of wire acts as an inductor (that's how clamp ammeters work). And there is always some capacitance between "hot" wires and the ground. So even a very simple circuit will have some power factor that's not exactly 1.0
In our circuits, motors and transformers often have large inductive components, which usually leads to "leading" power factor. Now, as luck has it, inductors and capacitors are diametrically opposed- current stored in a capacitor while it's being released by an inductor. If you match the two together, they cancel out perfectly. So, devices with poor power factor usually can be "corrected" with capacitors.
[This message has been edited by SteveFehr (edited 02-14-2007).]
