When tech giants build massive data centers to power AI, they’re often negotiating confidential deals with utilities that few people will ever see — but that everyone might pay for.
Harvard legal expert Ari Peskoe has uncovered a pattern across 40 state regulatory proceedings: special contracts between utilities and data centers being approved with minimal public scrutiny, potentially shifting billions in infrastructure costs to regular ratepayers.
With tech companies planning up to $1 trillion in spending on AI infrastructure, some utilities project their energy sales could nearly double by 2030. Are state regulators allowing utilities and tech companies to ink billion-dollar contracts, and pass the costs on to ratepayers without transparently proving the system-wide benefits?
This week, Ari Peskoe, Director of the Electricity Law Initiative at Harvard Law School, joins us to talk about the new report he co-authored, “How utility customers are paying for Big Tech’s power.”
This hidden cost transfer is just one front in a broader battle over energy regulation. At the federal level, the White House is making an unprecedented grab for control over FERC, the independent commission governing interstate energy markets.
Meanwhile, another executive order gives the Department of Energy extraordinary authority to force struggling coal plants to stay open regardless of economics — creating what critics describe as a consumer-funded bailout for uneconomic generation. We talk with Ari about how these regulatory battles are shaping up, and why they could be so damaging.
Credits: Co-hosted by Stephen Lacey, Jigar Shah, and Katherine Hamilton. Produced and edited by Stephen Lacey. Original music and engineering by Sean Marquand.
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Transcript
Stephen Lacey: Ari, do you use ChatGPT?
Ari Peskoe: I use it occasionally on the web interface. I don’t have it on my phone.
Stephen Lacey: Are you polite?
Ari Peskoe: I think so.
Katherine Hamilton: Oh yeah, because it’s always like, “Would you like me to make a chart of that?” And I’m like, “Oh, yes, please,” or, “No, thank you,” because that’s just the way I talk.
Stephen Lacey: You’re causing a serious problem. Did you know that this is costing tens of millions of dollars in computing power? Sam Altman said this week that saying, “Please” and, “Thank you” to ChatGPT, has cost the company tens of millions of dollars in energy because of additional computing.
Katherine Hamilton: Yeah, but what happens if we decide to just be rude to ChatGPT? Which that’s fine. But then do we just become that way on our regular emails and our regular texts with people? I’m very worried that we’re going to lose kindness.
Ari Peskoe: Yeah. I mean, aren’t we all like teaching ChatGPT, so if we’re not polite to it’s not going to be polite to everyone else, right?
Jigar Shah: The $10 million we’re spending on being polite is helping to train ChatGPT to not take over the world.
Stephen Lacey: I thought you could put this in your recommendations in your report, Ari, if you want to lower the rate payer impacts of data centers, tell people to stop being nice to chatbots.
Stephen Lacey: From Latitude Media, this is Open Circuit. This week, who’s really paying for the AI boom? New research uncovers how tech giants and utilities are inking special deals that could shift billions in infrastructure costs to rate payers. How do we support data center growth while also making sure they pay their fair share of grid upgrades? Meanwhile, at the federal level, an assault on America’s energy governance is underway. The White House is making a power grab over the independent regulator that oversees interstate grid and gas pipelines. Former commissioners from both parties are warning about the dangers and a sweeping executive order aims to keep struggling coal plants online, creating a consumer-funded subsidy for uneconomic generation. It all comes down to one central question, who controls the rules of the energy system and who ultimately pays? That’s all coming right up.
The FERC power play
Stephen Lacey: I am Stephen Lacey, executive editor at Latitude Media. Welcome. Katherine Hamilton is the chair of 38 North Solutions. Hello, Katherine. Did you do anything on Earth Day aside from crawl into the fetal position?
Katherine Hamilton: I constantly refresh the executive order website just to see what they were going to do potentially to try to go after nonprofits, which they did not do.
Stephen Lacey: Jigar Shah is a clean energy investor and former director of DOE’s Loan Programs Office. And you are in Illinois today to receive an award. What are you getting, Jigar?
Jigar Shah: Oh, I have no idea, but I’ve already gotten this weird mug-
Stephen Lacey: Don’t downplay it.
Jigar Shah: … that is very large. But no, it’s a distinguished alumni award, so I’m very grateful.
Stephen Lacey: It’ll all be worth it if you get the tote bag too.
Jigar Shah: Yeah, no, I did get a tote bag. They gave me a tote bag and then a pen and all sorts of swag, so my son will be happy.
Stephen Lacey: Today we’re also joined by Ari Peskoe, director of the Electricity Law Initiative at Harvard Law School, who is an expert on all things regulation in the power sector. Hey, Ari.
Ari Peskoe: Hey, thanks so much for having me.
Stephen Lacey: Thanks for being here. And I love your Just and Reasonable T-shirt that you’re wearing right now.
Ari Peskoe: Yeah, custom designed and happy to send you guys some.
Stephen Lacey: So this week we have Ari here to dive into two very high-stakes stories on regulation. In the first half of the show, we’re going to catch up on what’s happening at the Federal Energy Regulatory Commission, including the erosion of independence and this coal bailout. And in the second half we’re going to talk about research that Ari co-authored on how utilities may be shifting the cost of serving data centers to rate payers.
And so let’s turn first to what’s happening right now with energy regulation at the federal level. This is the place where I insert my obligatory line about how yes, FERC might sound boring to some and quite wonky, but I promise this is highly consequential and very interesting. We have a series of executive orders from the White House that are systematically challenging the independence of FERC, and we talked a little bit about this when we launched this show. This was a conversation that we had, but a lot has happened since then.
There was this February executive order declaring that independent agencies must submit all significant regulatory actions to the White House for review. Then another order giving the Department of Justice more control over legal interpretations coming from independent agencies like FERC. Then in April, yet another order requiring agencies to add five-year sunset provisions to all its regulations, everything from basic accounting rules to procedural requirements. And, Katherine, we did discuss this on our first episode, but just remind us why is FERC structured the way it is and how is this series of executive orders designed to break that structure?
Katherine Hamilton: Yeah, so FERC was created in August 1977 after the 1973 oil crisis. Previous to that, there was a federal power commission that had been created in 1920 to kind of coordinate hydropower projects, and we have talked about that before. And it was created in 1977 as an independent commission within the Department of Energy. So it was made to ensure fair and efficient energy markets and protect consumers to provide just and reasonable rates and to make sure the system was all reliable. And they made this independent so that it could be very focused on the mission that it wouldn’t have the undue influence of the White House.
Not to say that different commissioners bring different political lenses to the table, but that it was really made to be not subject to the political whims of any administration and to really base everything it does on evidence. And that’s why I’ve always been what Politico calls Congressman Sean Casten, a FERC enthusiast. And I would put myself into that category because I’m not an expert, I’m not an attorney, especially not a FERC attorney, but I’m an enthusiast because I like the fact that this is an evidence-based process. And I’ll give you one example of a way that this has worked that I think everybody can kind of relate to, which was way back in 2013, Beacon Power, which was a flywheel energy storage company, wanted to have access to… In fact, their entire business model was based on gaining access to the wholesale markets, and they could provide ancillary services in the form of frequency response and frequency regulation.
And the way they were able to do that was to show evidence. They tracked every single way their flywheel was able to respond, and they showed that as evidence and consequently FERC order 784 was created and that order allowed energy storage to have access to those markets. Over time, in 2018, order 841 was issued, which allowed energy storage to have access to all of the wholesale markets. And then in 2020 order 2222 was put into place, which included not just energy storage but all forms of distributed energy resources. And so you can see over time that the evidence was built to show how facilities should have access to the markets based on evidence, based on a lot of comment from stakeholders and based on physical evidence, and of course they do a lot of technology conferences and things to be able to discuss those issues.
But that’s what I’ve always liked about FERC is that if you can build your case, you have a really good chance of getting something done that is completely not political, but simply based on being able to compensate something for what it is able to provide to the markets.
Stephen Lacey: So, Ari, can you comment on that a little bit more and talk about how you would characterize the White House’s attempts to change that structure and why this is worrisome for the FERC enthusiasts?
Ari Peskoe: Look, over the past few months, this administration has come in and tried to assert control over a range of institutions, both in the federal government and across civil society, law firms, universities, media companies, etc., so trying to control FERC’s agenda is certainly consistent with what they’ve been trying to do. I think you could make a case for a clean energy perspective that, look, we really want a White House that when we have our team in the White House that’s pro clean energy, let’s have a FERC that’s completely in line with that. But now you’re going to see the danger of that sort of political control because this administration’s energy agenda when it comes to the power sector as I see it, is trying to devalue the contributions of wind and solar trying to stop their development, particularly wind. We’ve seen a lot of actions outside of FERC targeting wind development. So I think putting FERC under political control, I think is going to unfortunately have adverse consequences for renewable deployment.
Jigar Shah: Well, the concern I have is I don’t understand what the through line is exactly. I mean, in general, FERC is interested in I think keeping rates affordable, and plentiful, and maintaining resiliency, and some of these other things. I don’t see how any of these executive orders do that. And so then what ends up happening is once you start breaking down the framework of exactly what FERC is solving for, which I think is what this is doing, then you have to replace it with something else which they’re not doing. And then I don’t quite understand which issues Katherine should bring in front of FERC or which clients should bring ideas to FERC because you don’t actually know what they’re solving for.
And so keeping coal plants that are very unaffordable, not just open, which I think that we’re going to keep them open just through capacity auctions, but actually having them forced to run longer means that everyone pays more. And the people it hurts is actually natural gas plants. It doesn’t affect solar and wind at all. So I don’t understand what the inter-fuel war it looks like between the natural gas industry and the coal industry within these executive orders and what they’re solving for.
Katherine Hamilton: So we have a long way to go before we get to FERC changing everything it does because what it does is in statute, and so executive orders are not statute. And so there would be many steps that we would have to go through before you’re able to change everything that FERC does that’s in the Federal Power Act.
Ari Peskoe: Yeah, and I would say some of our concerns at this point are theoretical. The earlier executive orders from February targeted all independent agencies, which includes the Securities and Exchange Commissions, the CFTC. And so it’s possible that FERC wasn’t really in the administration’s crosshairs and just got sort of swept up in that one. And I don’t know that we’ve seen any actual consequences from FERC of those earlier executive orders. And then you mentioned the executive order that requires energy agencies including FERC to sunset their regulations after five years. I mean, that just makes zero sense. So people have asked me about it and try to pick it apart, but there’s no point in really diving into it. I mean, just to give you an example of what FERC regulations include, they include the accounting rules for every utility in the country, and state utility commissions use those accounting rules in every rate case across the country. It makes no sense to just have those regulations disappear. So I can’t imagine FERC is actually, at least with the current chair, Mark Christie, actually going to seriously implement that EO.
Stephen Lacey: I got a kick from your response to this executive order on X. You said, “This EO should be ruthlessly mocked. It was written by Grok at the direction of a 19-year-old DOGE staffer. There’s no other explanation. It’s based on a fundamental misunderstanding of how agencies work. It makes zero sense.” Is ruthlessly mocked a legal term?
Ari Peskoe: Well, look, the EO lists the statutes relevant for FERC, and it includes a law that Congress repealed in 1987. So, technically, if you go to the FERC regs, there’s a couple of definitions that are still on the books for some reason from that law, but there’s nothing that FERC does under this law. There’s no reason you would include that even if you were trying to take this executive order seriously, so it’s clearly written by somebody who has no idea what FERC does and what its regulations are supposed to do.
Stephen Lacey: And what is the generous interpretation of what they think they’re trying to do here?
Ari Peskoe: I don’t think there is one. Look, Elon Musk said something back in February that he thought all regulations across the entire federal government should sunset and we should basically start anew. And so I think, I don’t know, somebody decided that, “Well, Elon said it, so let’s turn it into an executive order.” That’s my only explanation. And they actually made it more narrow. They just applied it to certain energy regulatory agencies and they didn’t do it across the federal government.
Katherine Hamilton: One of the court cases that the executive order cites is Loper Bright, which is removing Chevron deference. In other words, agencies can’t just make sweeping decisions that instead, Congress has to be very specific. Well, first of all, when the Supreme Court made that decision, I do not believe they meant for it to go backwards and for all of these previously issued regulatory guidance and rules to be pulled back as a result of it, but just remember that that cuts both ways. So I think that as you look at what are the agencies able to do and not do, I believe some of the agencies would like to have more discretion than the law allows. So not only is it not lawful in any way this executive order, but it also doesn’t really get them what they want because they’re two sides to the same coin.
Stephen Lacey: There’s also coming staff reductions at FERC. How might the staff reductions affect the commission’s ability to function?
Ari Peskoe: Most of what FERC does is respond to industry filing. So on the power sector, it’s every time the utility wants to change its rates, its interstate rates, or the RTOs want to change their market rules. From the gas side, again, there’s rate changes or there’s applications to build new pipelines. The industry can’t move forward without FERC responding to what it wants to do. And so if you cut too much staff, you slow FERC’s capacity to adequately respond to those filings. And, also, if FERC isn’t doing a good job, it’s going to end up losing in court. So it has to be thorough with the orders that it issues or else we’re just sort of going in circles once FERC loses in court. So, Mark Christie recently said that FERC was going to lose about 55 employees due the government-wide cuts, but I don’t know that there’s been any accounting publicly of which departments within FERC that’s coming from, so it’s hard to assess what the consequences might be.
Stephen Lacey: Let’s look at another big regulation story. This month, the administration issued an executive order that gives the Department of Energy unprecedented authority over which power plants can close. It’s like a mechanism for the energy secretary to force coal plants to stay open even when utilities and grid operators might otherwise retire them for economic reasons. So, Ari, help us understand what this executive order actually does.
Ari Peskoe: It tasks the Department of Energy with developing a methodology for assessing the resource adequacy of each region of the bulk power system and then create a protocol for identifying power plants that are needed for reliability and then potentially issuing orders to retain those power plants to prevent them from retiring. And it sets a pretty quick timeline for doing all of this, and it’s going to do it all in the shadows without any sort of public comment, period.
Jigar Shah: Ari, I mean, under the Federal Power Act, the DOE runs something called Section 202(c), which is really the sort of emergency powers the DOE has. They use it often during hurricanes or weather events, etc. How narrow is that supposed to be and where is the executive order sort of pushing DOE to take it?
Ari Peskoe: Yeah, I think there’s several legal problems with what the EO envisions here. You’ve hit on one of them, which is that this is a provision designed for short-term disturbances, not long-term resource adequacy challenges. So I think Section 202(c) is a poor fit for what the administration is attempting to do here. It’s also problematic that they’re doing this without any public input because the EO says this is effectively a way that they’re going to streamline how they implement 202(c). The Department of Energy has rules that go back several decades about 202(c). You can’t change federal rules without doing a notice and comment rulemaking. And the industry already has mechanisms by which it assesses resource adequacy and retains needed generation capacity.
Presumably, the administration’s going to do something different from what the industry is already doing, and a court’s going to find that arbitrary and capricious under federal law unless you have really good evidence. But if you’re going to develop that evidence in secret, it seems unlikely that you’re going to have that evidence. And then there’s one final legal problem. Well, I shouldn’t say final. I’m sure lawyers will come up with many more, but something called the major questions doctrine that the Supreme Court unveiled a few years ago when EPA issued a rule that was going to effectively reduce the amount of coal-fired power on the system by setting emission limits in a novel way. And the Supreme Court said, “Well, you need clear authorization from Congress if you think an agency is going to determine how much coal-fired power we’re going to have on the system.” Well, here we’re doing exactly the same thing, but in reverse. So there’s clearly no clear authorization in the law for using Section 202(c) in this way.
Katherine Hamilton: And guess who brought that case with West Virginia versus EPA in the major questions doctrine? That would’ve been Lindsay See, commissioner, who was then the solicitor general of West Virginia. I would also note that in the first Trump administration, they tried to do something with coal as well, and they gave this project to our friend of the pod, Travis Fisher, and said, “You need to come up with a report that shows that coal is more reliable than other resources, and we want FERC to open a docket.” Now, DOE can’t force FERC to do anything, but they asked FERC too, so FERC opened a docket to discuss this. Alison Silverstein did an incredible job with her report showing zero evidence based on facts, there was zero evidence that coal was more reliable, and FERC ruled five to nothing against this because there was no evidence. So, again, this was not a political decision in any way. It was all evidence-based. And so I would suspect that this would have an impact too in the way they ruled this executive order out.
Stephen Lacey: And how do we expect this in particular to work its way through courts?
Ari Peskoe: It’s a great question because they’re trying to avoid any sort of public input and therefore any sort of judicial review, my expectation is that in about 90 days, they’ll come out with a list of power plants that they think need to be retained. And if there’s an existing mechanism in that particular region for paying those power plants, they already have, for example, RMR agreements ready to go, then FERC may not be able to get involved at all. But if you’re in a region where there is no compensation mechanism or where DOE is asking that power plant to do something new that it doesn’t usually do under 202(c) like produce a certain amount of energy, that might also lead to a rate making process at FERC.
But the bottom line is, I don’t know that anybody’s going to be able to challenge anything in court until FERC issues that order that identifies the power plants or until FERC takes up the compensation issue. And there’s no track record of any successful challenges to 202(c) orders, but that’s because these are always short-term orders that typically sometimes they apply for only a couple of days, and there’s often sort of little point in litigating them.
Jigar Shah: One thing I’m curious about though, Ari, is when you referred to the Project 2025 documents, the folks that wrote that section, Dan Lee and McNamee, they really want to return our country back to sort of the Southern company type model. They’re sort of anti-deregulation, they’re anti-regional transmission operators, they’re anti-independent system operators. And so I’m trying to understand what the actual plan is that they had in mind when they wrote that section of Project 2025, because I feel like it’s far reaching, it’s not just about being anti-renewables.
Ari Peskoe: Yeah, I would add that I think it’s also anti-technological progress, their vision of the power sectors that has to run based on traditional fossil and nuclear units that we’ve had since the ’60s and ’70s, and that’s the way you run a power system, and anything else is going to just create problems. And yes, they’re also anti-regionalization, anti-RTOs, but I think to me, what kind ties it all together is the anti-renewable sentiment and that the problem with the RTOs is that they’ve been too generous in allowing these resources to connect and the subsidies that these resources are receiving are distorting all the markets and that is just generating all these problems. So I think I agree with your assessment, and I think it just sort of from their perspective works hand in hand with the anti-renewables rhetoric.
Jigar Shah: The reason I think this matters so much, Ari, is just because I’m trying to understand the sequence of events, because we saw Willie Phillips, I think just announced his retirement, I think from the FERC.
Katherine Hamilton: He was asked to leave.
Jigar Shah: Yes, very true. And it’s very obvious to me that Mark Christie is unlikely to survive as FERC chair just because he really does care deeply about affordability. And I don’t see how this White House would allow another sort of Neil Chatterjee moment to occur here where Neil stood up to a lot of the coal stuff that they were doing in the last term. And so I think Mark Christie would do the same thing if he thought that this was going to lead to higher electricity rates.
And so part of what I’m concerned about is that, because in this particular case, not in other cases, but in this case, the frog is boiling in the pot so slowly, I think people are just not understanding that there is a plan here. And the plan is actually to eviscerate a lot of these institutions that frankly, Pat Wood probably put in place when he came in with the George W. Bush administration. I think they want to reverse all of those precedents from 25 years.
Ari Peskoe: Yeah, I think the industry restructuring is now 30 years old. There’s really no way to quite undo that, but you can try to weaken it, and I’m not quite sure what mechanisms they’re going to try to use to do that. They certainly want to stop its expansion. They certainly want Southern Company to continue to exist as Southern Company forever, as Southern Company completely intends to do, but you can’t undo PJM. So I don’t know exactly what they’re going to try to do other than force rules on the system that are going to arm wind and solar and maybe storage as well.
Katherine Hamilton: Yeah. So one thing I’m watching related to that is that some of the renewable energy resources that are waiting in interconnection queues to come online, were waiting based on unused transmission capacity from expected coal plant retirement. So if those coal plants don’t retire, it might be that that transmission capacity is still blocked up and they would need to redo interconnection studies, which just makes everything take so long, takes so long anyway, so I’m just wondering if that’s something, it seems like a short-term issue and we don’t really know how that’s going to spin out, but I’m interested in what you think of that.
Ari Peskoe: It’s a great flag. I hadn’t thought of that consequence, so I’m not sure I have anything else on that.
Stephen Lacey: All right, so we’re less than a hundred days into this administration. We’ve yet to see how these changes are going to play out at an agency like FERC. Let’s game this out over a year or a few years, Ari. How could these changes potentially shift the risk calculations for investors that are putting billions into long-term infrastructure? What are some of the worst case scenarios if we put all this stuff together and it plays out as the administration wants?
Ari Peskoe: I’m going to be very interested to see who they nominate both for Willie Phillips’ position and see what happens with Mark Christie’s position. His term is up in a couple of months, and so whether they renominate him or go in another direction, and I think that’ll tell us a lot about where FERC is going. I mean, there’s a long history of nominating former or current state regulators, nominating folks from Senate staff or have other connections to US Senators. And so there’s a lot of standard picks they might choose here or they could go in other more radical directions. And so that’ll tell us a lot. We’ll know a lot more in a few months, I think.
Stephen Lacey: Katherine, as a FERC enthusiast, what is the story or set of stories you’re watching most closely?
Katherine Hamilton: So what I don’t want to do is send investors into a panic, which is how you’ve teed us up.
Stephen Lacey: I think we might already be there.
Katherine Hamilton: I think we need to see what happens. I completely agree with Ari that the makeup of FERC means a lot. And what I have found interesting is I’ve had several meetings with all the commissioners and Commissioner See, whom I mentioned before, was part of the West Virginia case on major questions doctrine. She has been very reasonable to work with and to speak with and to present to. And I don’t know if she’s just waiting and learning, but I think when people get into FERC, they have a lot to learn first of all, if they haven’t ever been at FERC, I would say Commissioner Rosner has the most experience because he worked at FERC for years, so he understands how it works.
But people who come in new, it’s just a huge learning curve and they begin over time to really respect the organization and how it functions. And I think they realize, I’m looking at the evidence maybe with a different lens than someone else, but in the end, we’re going to come up with a reasoned response, and so let’s wait and see what the makeup is and what the positions they start taking are.
Who pays for data centers?
Stephen Lacey: Let’s turn now to another story about regulatory power. Who decides how we’re going to pay for all these new data centers? Jigar, Ari wrote the report of your dreams.
Jigar Shah: Oh.
Stephen Lacey: You’re constantly talking about how rate payers are going to suffer from these large infrastructure investments in data centers, and so I feel like he heeded the call in exploring this.
Jigar Shah: Well, it’s one of those things where I think a lot of this was intuitive, but actually digging into the data and getting someone to show the math I think was critical, which is why Ari’s report was so important. But it is clear that if you don’t deal with super peaks and you just make them higher, then the cost to the entire system is gargantuan and they’re not paying for all of it. So they’re sharing a lot of that cost. But no, I thought Ari’s work is really important in this really important conversation that we’re having right now.
Stephen Lacey: So what is that work? Let me explain. We know, of course, the big tech companies are pouring hundreds of billions of dollars into data center development. We could see a trillion dollars in capital investments and data center infrastructure in the next few years. A huge amount, a majority of that investment will be in the US. And some utilities are projecting that their total energy sales could nearly double by the early 2030s, primarily because of data centers. And of course, these are not ordinary customers. These are facilities that can consume as much power as a midsize city. But when these tech giants want to build a new data center, they often negotiate special contracts with utilities. Contracts that are frequently kept confidential and approved with minimal public scrutiny.
So, Ari, and Harvard Legal fellow, Eliza Martin, reviewed some 40 state regulatory proceedings involving data center contracts and found patterns that suggest these deals may not be as beneficial to regular consumers as utilities claim. So, Ari, the headline finding in your report is that consumers could be subsidizing big tech’s energy consumption without even knowing it. Walk us through what your investigation found.
Ari Peskoe: Yeah, look, just to state the obvious here, utilities are monopolies and we are concerned that a monopolist might exploit its captive rate payers. And this is a constant concern of utility regulators that when utilities operate in a competitive market, they may sort of not play fairly because they have an opportunity to sort of shift costs from the competitive market over to the captive market. And so that was our concern, is that, look, the data center hype train has been moving along pretty quickly over the past year or so with all these load projections, and this is a massive profit opportunity for utilities to spend capital in order to meet the needs of these new data centers, and our concern is that the data centers are not paying for their fair share. So what we tried to do is identify the sort of subtle mechanisms that may be hidden in utility rate structures that are allowing, enabling these cost shifts from data centers to regular consumers.
Stephen Lacey: Yeah. So what are those subtle tools you found what you call secret contracts between utilities and data centers? Can you explain what makes these agreements different?
Ari Peskoe: Yeah. So the secret contracts sort of side deals between utilities and data centers are highly problematic for a few reasons, but just take a brief step back, utility rates are regulated by a public utility commission, they’re set by a rate case that is a public proceeding that allows all parties to come to the table and tell the utility commission how they think rates ought to be structured. These side deals happen outside of that public process. They’re negotiated between a large energy user, like a data center, and a utility, are often reviewed, approved by a utility regulator. But the problem is, unlike a rate case where a lot of parties are coming to the table to offer competing evidence, in these proceedings about these secret contracts, it’s often just the utility that’s there.
So regulators have to make decisions based on the record evidence before them, and when they’re only hearing from the utility, it’s going to take a lot for the regulator to reject that deal. And that’s particularly true here where there’s a lot of political momentum in a lot of states behind these data center deals. You have governors making very proud announcements about these investments in their state and what sort of utility regulator is going to get in front of that. So we don’t have a lot of evidence that the data centers are paying their fair share through these deals, and we’re just generally skeptical because of the utility incentives and the opportunities here to shift costs from the competitive market onto captive rate payers. And just one final thing on this. We have some states where utility regulators don’t actually review these deals at all. And so all we have is just the word of the utility spokesperson telling us that everything’s going to be okay.
Jigar Shah: Yeah. I mean, one of my big challenges as you know is that I don’t actually think that the data center companies are evil or are trying to pass cost to other rate payers. I think that they are at odds with utility culture. I’m not even sure the utilities are trying to run up the bill on the rest of their rate payers on purpose. I think that when I’ve talked to the utilities in Maryland, for instance, the PJM announced a bunch of transmission projects in February of this year, and all of them basically to my first-order approximation are for data center access.
And when you look at those transmission lines, particularly the ones from West Virginia to Frederick, Maryland, and then down to Virginia, that is really to subsidize Microsoft’s data centers in Frederick. And when you talk to the regulators in Maryland, they’re like, “I know Microsoft offered to pay for all the costs, but we didn’t really know how to charge them and we didn’t really want to put together these new tools and we didn’t really want to figure this out. And so we just decided to rate-base it across the whole State of Maryland and let poor people in Baltimore pay for them because whatever.”
And so my feeling is that I don’t think people are being evil about it. I think that they’re just being lazy about it, and that bothers me to no end. I think when you’re thinking about just how big these numbers are, and we are clearly at an affordability cap, one in six households in the United States now are behind on their energy bills. Behind. And so at some point you just can’t keep raising rates. It just gets worse and worse and worse from there. And I think that there are a lot of people who are wanting to be good citizens around the table, but I think we’re having a hard time figuring out exactly what tools people should use to allow them to be good citizens.
Ari Peskoe: Can I just jump in on that for a second? I just want to totally agree with the example Jigar provided of PJM transmission development trickling down to Maryland ratepayers. That’s an issue identify in the paper where Maryland, as far as I can tell, is allocating PJM transmission costs based on a formula that it established 25 years ago. And so really ought to revisit how these costs are paid for. But in terms of the utility intent here, so one example we give in the paper is a 2024 case about Duke Energy.
Duke was facing competition in North Carolina from a power plant developer that was trying to pick off Duke’s municipal utility customers. And the power plant developer eventually filed an antitrust suit in federal court against Duke because Duke was preventing it from connecting to Duke’s transmission system. And when one of the largest municipal utility customers contract was up, Duke decided to offer essentially a $325 million discount to that municipal utility. And documents that came out in litigation revealed that Duke had an internal plan to pass the cost of that discount onto its captive ratepayers. So these things do happen. I don’t have any specific evidence that there’s sort of any internal plan with regard to any specific data center, but that incentive is there, and sometimes utilities take advantage of the opportunities that they have.
Stephen Lacey: And the only reason why we knew about that shift, that cost shift of the discount was because there was a legal challenge.
Ari Peskoe: That’s right.
Jigar Shah: Yeah. If there was one utility that I do think actually plays dirty, it’s probably Duke year after year after year. I mean, remember when they forcibly let all of their coal fly ash ponds go into waterways during hurricanes-
Stephen Lacey: Oh, yes. Yeah, Yeah.
Jigar Shah: … because of the EPA stuff? And then they fought tooth and nail to make sure that their shareholders wouldn’t have to pay to clean it up. I just think that Duke definitely is probably the biggest exception.
Katherine Hamilton: One thing I wonder about, Ari, is if we could create a separate class of customers that are data centers, and certainly they’ve done this throughout various utility service territories for large industrials. And so then a large industrial customer, and I’ve had experience with this in Louisiana where the large industrials will have bilateral agreements with the utility where they lay out, “Here’s the rate that applies to us based on our usage.” Of course, those are legacy plants for the most part, but if they could create their own class of customers, it would provide a lot more transparency.
And I pull this from, especially from Citizens Utility Board of Minnesota that tries to fight for fair rates and they have a bill that’s being carried in their legislature to have large data centers pay their full cost of service, to have data centers cover the cost of infrastructure that is built to support them so that it doesn’t pass along to ratepayers for them to meet the state’s renewable and carbon-free electricity standards, because the state has its own policies for that, and then also to consider these customers as a separate class, and I’m curious what you think of that.
Ari Peskoe: Yeah, we’re seeing some states move to that model, and it’s procedurally, I think a lot better than these secret contracts because you can have an open process to try to figure out this cost allocation challenge. Now, still cost allocation is a sort of subjective exercise where every party comes to the table with their own self-interest to reduce their own rates and raise them for everybody else. So it’s not like a panacea to just say, “Well, we’re going to have a separate data center rate class.” That still leaves a lot of technical work to try to isolate, appropriately isolate, the data center costs from everybody else, but I think it’s an important step forward to move towards that model.
Jigar Shah: The other approach you can take, of course, is really just to make the data centers look like large industrials, because the biggest problem with data centers is they just are not flexible. And so if you just said, “For these 74 hours a year where we’re hitting super peaks, we have the ability to restrict your allocation of electricity, and then you can co-locate batteries there if you want, so you could run during those 74 hours. And then once you paid for those batteries, we could use those batteries as a grid resource.” And so part of this is just saying that you have to make sure that your load profile is flexible enough to be able to not increase cost to everybody else within the grid. So that’s the other approach. And then those costs would be on their side of the ledger. By definition, they would just add that to their capital costs for their data center.
Stephen Lacey: Yeah, that feels consistent with one of the recommendations from the report too. Is that right, Ari?
Ari Peskoe: Yeah. I mean, look, we piggyback on Tyler Norris’ paper on this at a Duke, and yeah, there’s definitely value and flexibility. But look, unfortunately you guys have been talking about the value of flexibility and demand side solutions for a long time, and we know that utilities are not taking full advantage of those opportunities because it’s inconsistent with their basic incentive to deploy capital. So yes, I think this is definitely a solution, I would say, and batteries would be great. Unfortunately, most of these data centers seem to have a fleet of diesel generators on site, which presents its own challenges for local people subjected to the noise and air pollution.
Stephen Lacey: Can we talk about another example? This is Meta’s plans to build this massive new data center in Louisiana, which will get served by over 2,200 megawatts of proposed gas plants by Entergy. And one of the issues here is that Meta and its data center affiliate are not parties on the application to the public service commission, so they don’t have to release important details on energy demand and other details about the facility. So what’s the strategy here and what information should rate payers get to see?
Ari Peskoe: Yeah. I mean, this is, I think the poster child for a shady deal. So the governor of Louisiana announced this big $10 billion investment from Meta. Entergy has said it’s going to build $3 billion of infrastructure, which includes two-plus gigawatts of natural gas fired power plans to support the data center, so it has started the process in the Public Service Commission of Louisiana to get this infrastructure permitted. It wants to fast track it to avoid competition, which is itself problematic. And folks have asked it in this process, “Well, how much energy is this data center going to use?” And Entergy says, “We can’t tell you. We don’t even know.” So we don’t know how much of this infrastructure is actually needed for Meta or how much is Entergy trying to fast track through this process.
Now, how much is Meta going to actually pay for it? We don’t know that either because they have a side deal, but Entergy has taken the position that they don’t even need to file that with Louisiana regulators under the law. So we don’t know how much of this $3 billion has Meta actually agreed to pay. And what happens if there are stranded costs? I mean, what happens if Meta in a couple of years decides it wants to walk away from the project, or in fact, it only needs half of the energy that it initially anticipated? Are Louisiana ratepayers going to be on the hook for all of that? And we just have no idea.
Katherine Hamilton: And, Ari, in Mississippi, they even passed a law that would prevent the regulators from even being able to have any information or decision-making ability when they’re serving Amazon, I think it is.
Ari Peskoe: Yeah, that’s another Entergy deal, so maybe we need a special rule for Entergy. Yeah, that the legislature just said, “No public oversight of this deal at all.”
Stephen Lacey: One of your solutions is to develop renewable energy, clean energy parks, and just disconnect from the grid entirely. Tell me about that.
Ari Peskoe: Yeah. So there’s a sort of strong version of this, which is let’s develop data centers completely free of the utility system, let’s have the data center contract with a clean generator and just create their own facilities. But that would in a lot of states require amending state laws because it could be interpreted as intruding on the utilities’ monopoly.
There’s a softer version of this, which just says in states where we have vertically integrated utilities, which is about two thirds of states, let’s require the data centers to go and procure their own generation, because that can be a significant cost and opportunity for the utility to socialize that cost across the system, and that can impact other rate payers. So if we tell the data center, “Go sign a contract just with some generators,” that would insulate rate payers from those costs.
Stephen Lacey: Jigar, what do you think about that model?
Jigar Shah: I mean, look, I think that all of this is lip service because what you find with the data center companies broadly is that they make data center development companies compete with each other. And what happens is they’re all basically developing data centers and working out with utilities what the actual interconnection might look like, etc. Then they go to the hyperscale data center companies and others and say, “Would you like to buy our facility?” And the data center company is saying, “I have five such facilities that I’m choosing between. What rate did you negotiate? Oh, you negotiated a rate that’s a half a cent cheaper than the other one? Great.”
I think that what’s very obvious in this particular moment is that the hyperscale data center companies have completely abandoned their clean energy goals, and they just want the cheapest possible power, which I find flabbergasting because the CapEx to build one of these facilities is $33 billion for a 1,000 megawatt load facility. And all of the costs that we’re talking about are like $50 million a year. And that $33 billion generally gets amortized over seven years because most of it is Nvidia chips and that’s $22 billion of it, and so they get to replace the chips in seven years. So the cost of power is irrelevant to their overall cost of compute for AI. And so for them to on this side put all of these promises and goals on their website, and on this side basically say, “Well, the data center developers didn’t develop a clean transition tariff, or they didn’t figure out how to negotiate a deal with the utility to do this thing, and we’re just stepping into the deal that they had already negotiated,” it just seems highly suspect. They could have done way better.
Ari Peskoe: But I think Jigar’s comments on the relationship between the developers and the hyperscalers emphasizes the need for good regulation here, for good rules, to prevent shortcuts that are going to end up costing consumers. And these hyperscale companies, a lot of them are very engaged on these regulatory issues. They’re in a lot of these dockets. And so some of them are sort of recognizing the problem here that they may be causing, whether it’s intentional or not. And I think they’re maybe not going as far as they should though in trying to protect consumers. And so ultimately, really we need good regulation, we need state legislators engaged on these issues to make sure that consumers are protected because the industry is not going to do it itself.
Katherine Hamilton: Yeah. One state that has been really engaged on this is Virginia. So the Commonwealth of Virginia, 70% of global internet traffic goes through Northern Virginia. It’s a huge data center hub. And the Joint Assembly, the General Assembly of Virginia commissioned a report to say, “All right, how do we make sure that we allow this rapid expansion?” Which is not just affecting the customers in the commonwealth of Virginia, but all of PJM, it causes changes throughout PJM. And how do we do that and also allow for our ambitious energy transition goals to move forward? Because they have statute in place similar to Minnesota has statutes in place, so some of the Southern states don’t, but the states that do, and Virginia especially, is having to deal with this.
So some of their findings are to improve their frequency of their cost allocation factors to increase the charges. Of course, forecast do better job forecasting for demand from these centers, doing long-term service commitments with these data centers and be much more transparent about that, allow for more self-supply as we’ve talked about, and then just more direct assignment of new infrastructure costs. So I don’t think that we’re limited to facilities that are going to build dirty plants because they can’t because of state regulation and state law. So it’s interesting what Virginia is having to grapple with right now.
Jigar Shah: Katherine, I mean, I think to your point, one of the big challenges I see is that with the FERC conversation, we need to figure out how to move power around to be able to create bigger balancing areas. And you see that California is trying to do it with their new Senate bill, but you’ve got a FERC Project 2025 document that’s suggesting that we should stop with this expansion and figuring out a way to get people to trade power along greater distances. And then on the other side, you’ve got the data center companies who want to buy clean power, and at least they say that on their website, etc. And the only way for them to do that is to be able to move power around and do all these things. The notion that they’re going to build a solar farm or wind farm or whatever, basically within the county that they’re putting their data center is unlikely.
And so part of the challenge I have with this moment is that I think that we are in a place where we are going to go to dirtier sources of power. I understand what you’re saying, which is that there are state laws, but I think that if you mandate that some of these coal plants have to stay open or these natural gas plants have to stay open, then I think you are going to end up with all of those power issues. And I think it’s going to be a lot harder to build a lot of these new transmission lines because of the way in which Ari talked about, the socialization of costs happening in Maryland, etc. And so what I’m worried about is that everyone is sort of pushing for making sure that costs don’t get allocated to their customer class. And then you separately have this big megatrend on the FERC side, and I don’t think that there’s a plan. I honestly think that there’s a whole bunch of skirmishes and no one is actually plotting out exactly what this next 20 years looks like.
Katherine Hamilton: Yeah, as Senator Dale Bumpers used to say, “Everybody wants to go to heaven, but nobody wants to die.” Well, then the same way Rich Glick, when he was chair at FERC would say, “Everybody wants transmission, but nobody wants to pay.”
Ari Peskoe: And that brings us back to the affordability crisis that we’re facing. I mean, I think on the data center issue, we’re seeing a lot of states take up this issue legislatively primarily, but also at the commissions, trying to make sure that data centers are paying their share. But I share Jigar’s concern that we’re just not going to be spending efficiently as an industry. We’re going to go back to old solutions because that’s sort of the status quo bias that’s embedded throughout the system, rather than trying to take advantage of new technologies and build infrastructure that can actually ultimately lower costs.
Stephen Lacey: What a great conversation. Ari Peskoe is the director of the Electricity Law Initiative at Harvard Law School. His research with Eliza Martin is called Extracting Profits from the Public: How Utility Ratepayers Are Paying for Big Techs Power. We’re going to link to that in the show notes. And, Ari, it was a real pleasure talking to you. Thanks for being here.
Ari Peskoe: Thank you so much for having me.
Stephen Lacey: Katherine, be nice to your chatbot, please. Good to see you.
Katherine Hamilton: I will. Thank you.
Stephen Lacey: Jigar, good luck with your award today. Don’t trip on stage. I hope all goes well.
Jigar Shah: I mean, it could happen. You never know. Stranger things have happened here at the College of Engineering at the University of Illinois.
Stephen Lacey: Good to see you both. Open Circuit is produced by Latitude Media. Jigar Shah and Katherine Hamilton are my co-hosts, and the show is produced and edited by me, Stephen Lacey. Sean Marquand is our technical director, and he wrote the theme song. Anne Bailey is our senior podcast editor. Latitude is supported by Prelude Ventures. Prelude backs visionaries accelerating climate innovation that will reshape the global economy for the betterment of people and planet. You can learn more at preludeventures.com.
For more in-depth reporting on the topics we cover on the show, including a story about the report that Ari put together, you go to latitudemedia.com, sign up for our daily weekly AI-Energy Nexus newsletters. You can just hit the subscribe button right there on the homepage. And of course, find this show anywhere you get your podcasts, Apple, Spotify, YouTube, and share it with your friends, so we increase our audience. Thanks to everyone for listening. We will see you next week. Talk to you soon.
