Utilities may subsidize data center growth by shifting the costs of serving the facilities to residential and other ratepayers, according to a paper released March 5 by the Harvard Electricity Law Initiative.
The paper comes as American Electric Power, Dominion Energy, FirstEnergy and other utility companies are moving to serve data center developers such as Amazon, Google and Microsoft. Late last month, PPL subsidiaries Kentucky Utilities and Louisville Gas and Electric, for example, proposed a $3.7 billion plan to add power supplies for data centers.
Typically, the cost of building power plants and transmission lines needed to broadly serve utility customers are shared by ratepayers. However, ratepayers may end up paying for the costs to serve data center owners, a narrow set of customers, according to the paper by Eliza Martin, a legal fellow at Harvard Law School’s Environmental and Energy Law Program, and Ari Peskoe, director of Harvard Law School’s Electricity Law Initiative.
“The subjectivity and complexity of ratemaking conceals utility attempts to funnel revenue to their competitive lines of business by overcharging captive ratepayers,” Martin and Peskoe said in the paper, Extracting Profits from the Public: How Utility Ratepayers Are Paying for Big Tech’s Power.
There are at least three avenues for consumers to pay for data centers’ energy costs, according to the paper.
First, utilities can enter into special contracts with data center owners, which are reviewed by state regulators through “opaque” processes, Martin and Peskoe said.
Second, disconnects between the processes for setting federally regulated transmission and wholesale power rates and state-set retail prices may cause consumers to pay for data center-related transmission costs, according to the paper. The disconnects may also lead consumers to pay for costs related to data centers that are never built, Martin and Peskoe said.
Third, colocation arrangements between data centers and existing power plants may increase wholesale electricity prices and distort electricity delivery rates, according to Martin and Peskoe.
“Without systematic changes to prevailing utility ratemaking practices, the public faces significant risks that utilities will take advantage of opportunities to profit from new data centers by making major investments and then shifting costs to their captive ratepayers,” Martin and Peskoe said. “The industry’s current approaches of luring data centers with discounted contracts or lopsided tariffs is unsustainable.”
There are steps state utility regulators can take to protect consumers from subsidizing data centers, including setting guidelines for reviewing special contracts, Martin and Peskoe said.
State utility commissions can also require utilities to shift away from serving new data centers via special contracts to broadly applicable tariffs, according to the paper. Regulators can also facilitate competition and the development of “energy parks” that are unconnected to utility-owned networks, and require utilities to provide more frequent demand forecasts, Martin and Peskoe said.
The data center industry is committed to paying its full cost of service, according to Lucas Fykes, director of energy policy at the Data Center Coalition.
The Harvard paper overlooks a December report from Virginia’s Joint Legislative Audit and Review Commission that found that data centers in the state pay their cost of service, Fykes said in an email Monday. The report, however, also found that “data centers’ increased demand will likely increase system costs for all customers, including non-data center customers … because current utility rate structures are not designed to account for sudden, large cost increases from the construction of new infrastructure to serve a relatively small number of very large customers.”
State utility commissions have the “authority, expertise, experience, and processes in place to ensure that cost allocation and rate design are fair and reasonable for all customers,” Fykes said, noting that data center customers have worked with utilities in states like Indiana to address cost issues.
There appears to have been little discussion about the potential subsidization of data center energy costs, which could be “substantial,” Peskoe said in an interview.
“In many states, it’s impossible to calculate because of the lack of transparency, and even when there is some transparency … you get into all these complicated cost allocation debates,” Peskoe said. “You have the power of the utilities to set these agendas to control these rate setting processes, and they have massive incentives.”
FirstEnergy in late February said its data center pipeline nearly doubled to almost 3 GW by 2029 after a November announcement. The Akron, Ohio-based utility also increased its five-year capital investment plan 8% to $28 billion, resulting in an expected 9% compounded annual rate-based growth during the period.
