Part 2 of powering through the AI future: Regulatory and market issues in supplying electricity to data centers

Part 2: The role of the U.S. Federal Energy Regulatory Commission

Introduction

Supplying power to data centers is subject to the jurisdiction of both the States, acting through their public service or public utility commissions, and the U.S. federal government, acting through the Federal Energy Regulatory Commission (FERC). The States have jurisdiction over the retail sale of power (i.e., the sale of power to an end-user). As a result, the sale of power by an electric generator or other power seller to a data center is subject to State regulation. 

By contrast, FERC has jurisdiction over the wholesale sale of power (i.e., the sale of power for resale). That means that if an electric generator sells power to a third party, and that third party resells that power to a data center, the generator’s sale to the third party is subject to FERC jurisdiction. In addition, FERC has jurisdiction over the interstate transmission grid, which is typically defined to include power lines rated at 69 kV and above. FERC’s jurisdiction extends to the interconnection of generation and data centers to the transmission grid.  

This article describes recent actions by FERC in connection with the growth of demand for electricity to power data centers. 

FERC’s technical conference on co-located load

On November 1, 2024, in response to various proceedings initiated by industry participants before FERC, FERC held a Commissioner-led Technical Conference on Co-Located Load.¹ “Co-Located Load” refers to large industrial end-users, such as data centers, that are located adjacent to existing or new electric generation resources. Broadly speaking, there are two types of Co-Located Load configurations. The first is referred to as “behind-the-meter” (BTM) load. In this configuration, the data center is directly interconnected to the generator (i.e., the data center is located “behind” the meter where  the generator interconnects with the grid). When the generator is operating, power flows from the generator to the data center without passing into or through the grid. However, in many arrangements, the data center can obtain power from the grid if the generator is off-line or not producing sufficient power to meet the data center’s needs. In other instances, however, the data center is solely reliant on the co-located generator and power will never flow from the grid to the data center.

The second configuration is referred to as “front-of-the-meter” load, which resembles ordinary electric service. In this configuration, the data center is directly interconnected to the grid and not to the co-located generator. The data center can enter into an arrangement to buy power from the co-located generator, but the power is considered power “from the grid” and is treated as such for regulatory purposes.²

In his opening statement at the Technical Conference, former FERC Chairman Phillips³ provided the following context for the role of FERC:

In my opinion, data centers, artificial intelligence [(AI)], indeed the full panoply of information-related technologies that are transforming the world are national resources, with generational significance, and vast national security and national economic consequences. They belong to the United States, and I believe that the federal government, including this agency should be doing the very best it can to nurture and foster their development.⁴

It became clear throughout the industry panel discussions during at the Technical Conference that the controversy surrounding co-located load reflects the broader challenges created by the proliferation of data centers in the U.S. Increased demand for electricity will test “resource adequacy” frameworks, i.e., the regulatory and market structures designed to ensure that there will be sufficient generation to meet anticipated power demand, including the reserve margins needed to manage extreme system conditions. Resource adequacy in many areas of the U.S. has already been under strain over the past few years because of the retirement of fossil fuel and nuclear generation and extreme weather events. Ensuring adequate resources to meet the needs of existing customers, new data centers, and other sources of load growth, such as electrification of homes and transportation and the onshoring of manufacturing, will require not only additional generation facilities, but also additional transmission facilities and/or transmission upgrades to support that generation. Current regulatory and market frameworks were not designed with this sort of rapid expansion in mind, and have already demonstrated significant limitations even in periods of relatively flat demand. 

As discussed at the Technical Conference, co-locating large industrial end-users with existing generation allows new data centers to be added quickly to meet the increasing need of computer processing capacity for both commercial and national security purposes. Co-location also reduces the need to build transmission lines to serve new data centers in rural and exurban areas; however, it can also seriously impact grid operations, requiring other modifications and improvements to the transmission system to compensate. Likewise, co-location with existing generation may allow projects to avoid clogged and inefficient interconnection queues, but cannot address the system planning and cost allocation issues those queues are designed to address. The challenge facing the U.S. power sector is to determine how to meet the increased demand while ensuring reliability and resilience, and, perhaps even more challenging, determine who should pay for it.  

Another major topic of discussion at the Technical Conference was the exact demarcation between the jurisdiction of FERC and the States in supplying power to data centers. As noted above, it is the States that have jurisdiction over retail sales – i.e., the sale of an electron to a data center for consumption. But FERC has jurisdiction over the wholesale power markets and, significantly, the nation’s transmission grid, to which generation and data centers generally must interconnect. This fundamental aspect of “cooperative federalism” in the U.S. power sector raises a host of issues in the data center context. For example, can a data center avoid state retail requirements by interconnecting directly to a generator in a BTM arrangement? At the Technical Conference, State regulators and others in the industry asked FERC to provide its views on this jurisdictional divide to provide the industry with some regulatory certainty going forward.

The Industry’s post-technical conference comments

In December 2024, a number of industry participants submitted to FERC post-Technical Conference comments to further the discussion. Although the commenters did not converge on a solution, they did broadly agree as to the nature of the problem and the need for swift action. 

The Industrial Energy Consumers of America (“IECA”), which represents the industrial and manufacturing customers who comprise traditional “large load,”⁵ summarized the key points of contention in their comments. The IECA’s perspective is unique—their members are large end-users, like data centers, but are already established customers on the grid. They are “energy-intensive and price sensitive”  and, while they share interests with data centers because they have similar energy needs, they also share the perspective of other existing customers with respect to cost allocation. The ICEA sees the central issues as:

• Reliability concerns and capacity cost increases: Increased demand for energy means increased demand for generation capacity. With many older fossil fuel generators already slated to retire, it is very likely that the cost of capacity will increase significantly, raising the cost of electricity.
• Transmission upgrade costs and price impacts: how will the costs of new transmission and transmission upgrades be allocated. To the extent that data centers are located behind the meter, they are not served directly by the transmission system and can avoid playing transmission charges, despite potentially imposing costs on the transmission system.
• Stranded costs: If upgrades to transmission, distribution and generation are constructed to accommodate additional large load, who bears the cost responsibility if that load fails to materialize or later leaves the grid? This poses particular risk in states served by traditional, vertically integrated utilities. 

The ICEA emphasizes that the overarching issue is how these costs will be allocated, and that they should not be unfairly borne by existing customers. It notes that each data center and interconnection will be different, and any cost allocation mechanism will need to incorporate fact specific analysis.  

Other commenters mostly identified the same issues as the ICEA, though their comments naturally reflected their own interests. The Organization of PJM States emphasized the need for transparency in the process and noted that large existing generators (such as nuclear facilities) that agree to behind the meter arrangements with large load need to studied in similar ways to studying the impact of retiring generation on the grid. The Midcontinent Independent System Operator, Inc (“MISO”) noted that ongoing reform of interconnection queues could reduce the need for co-location, especially if new processes are introduced to fast track generation needed for resource adequacy. MISO also suggested studying new generation and any co-located load together.  

Speaking for the generation side, the Electric Power Supply Association (“EPSA”) asked FERC to move quickly to provide needed guidance, perhaps in the form of policy statement, and cautioned against smothering innovative arrangements that provide data centers with the power needed for “economic growth and national security.” National Grid Renewables Development, LLC (“NG Renewables”) observed that the surging demand for data center capacity might preclude a traditional utility approach to large loads, and thus the co-location process may be critical to meeting these needs. NG Renewables suggested the use of incentives to encourage co-location agreements to account for grid operations. 

Potomac Economics, which serves as independent market monitor for many of the nation’s independent grid administrators, identified what it believes are the barriers facing data center development and driving the turn to co-location – namely interconnection processes that are both slow and/or not designed to address the needs of large load, rate designs that both overcharge customers and underpay generators, and the challenges of long term system forecasting. The independent market monitor for PJM spoke strongly against co-locating load with existing generation as a solution, but in support of load coming online with corresponding generation.

Conclusion

What FERC does in response to the Technical Conference and the post-Technical Conference still remains to be seen. We believe there is a good chance that FERC could initiate a formal rulemaking proceeding to address these issues, which would be the typical approach. That being said, a rulemaking proceeding would be a lengthy process that would be unlikely to provide the industry the regulatory certainty it needs in the short term to move forward with generation development (and related transmission infrastructure upgrades) necessary to accommodate the surge in data center development. And the Trump administration has recently stated that it intends to use emergency powers to fast-track electric generation co-located with AI facilities.  

We do believe that FERC will not want to be perceived as the agency responsible delaying the development of a robust, domestic data center / AI industry, which is necessary which the new Administration has declared is necessary for national security purposes. However, interconnecting large load and generation to the nation’s transmission grid can only be expedited to a certain extent due to the need for studies to determine the potential for reliability concerns.  Additionally, the appropriate allocation of grid costs to data centers is necessary, especially given the Administration’s (and Chair Christie’s) focus on ensuring that residential and small commercial power customers do not face unnecessary power cost increases, such as those caused by data centers’ benefiting from the grid.

So, stay tuned . . .

Authored by Chip Cannon, Porter Wiseman