Regulation and Data Center Risk

Keep in mind that in the restructured states the electric utility only provides transmission level service (i.e., 138kv) to large customers with a high voltage transmission line and a substation. Notably, the electric energy is procured by that new customer itself in the local FERC-regulated ISO wholesale power market, and the utility simply passes the electric energy through to the customer.  There are a number of rate treatments for the utiliy’s cost of the transmission line and the substation required by the large data center customer,   Let’s look at the standard practices involved in allocating costs.

If the new data center requires an upgrade to the line conductor or substation, or a line extension from the existing high voltage existing transmission system, or both, the well accepted “line extension” policies would require the new customer to pay for any costs in excess of what is currently embedded in rates for a customer in that rate class. The data center customer would pay the excess, and it would be booked by the utility as “contributed plant.” It would not flow into rates for other customers.

Another option, depending on the specific facts, might be to create a new customer class tailored to fit the usage characteristic of the data center class. This new rate would include the higher new costs of service specific to that class of customers. No additional costs would be allocated to existing customer who did not benefit from the new investment.

For the traditional electric utility, the utility franchise requires the utility to (1) serve all customers and (2) to do so without “undue discrimination.”  Different rates for electricity consumers based on a fair and reasonable cost allocation methodology are allowable under that standard. Putting it another way, “different costs lead to different rates.”

Traditional utilities would generally have the same line extension policies as restructured utilities. Access to power supply, however, is via the incumbent electric utility. The data center has the option of self-generating all or part of its power requirement. The incumbent electric utility can add generation or purchase at wholesale rates  additional generation needed for the data center.  Neither method needs to raise rates to other customers with a utility regulatory commission that ensures the data center is on a tariffed rate with the accepted methods of cost allocation.

There have been occasions when legislative policy (not the regulator) has sought special rate tariffs to promote economic development zones or incentivize specific customers for employment or opportunity outcomes. The allocation of fair costs under legislatively mandated special rate tariffs sometimes depart from the Bonbright and accepted “fair and reasonable” standards as political decisions, not the economic regulator’s standard, and may well pass costs on to other customers of the utility.  In these cases, the legislature determines, and the regulator by law must enact a special rate tariff which is believed to foster economic benefits for certain customers in the development zones, with costs passed on generally to all customers.  In fact, these are policy-ordered subsidies, and a form of price discrimination, which when applied should be used sparingly out of concern for “fair and reasonable” regulatory practice and the benefit to the target audience vs the cost to ratepayers monitored.

So far we have discussed cost allocation when a data center first arrives in a utility’s service territory.  But what happens in the case an investment is made for a data center which goes out of business a few years hence? Do the remaining customers get stuck with the costs incurred by the utility on behalf of the data center?

There would need to be some facts determined.  Are there other new customers who could benefit from the original investment? If a data center went bankrupt could a new owner find it economically feasible to continue operation and continue purchasing electricity  services? Did the rate design for the data center electric service include higher depreciation rates aligned with a shorter service period, in which case the data center has already paid for its full impact on the incumbent’s utility system?

When it comes to the matter of how long an entity will be part of an electric utility’s service load, it is at best a guess, because so many circumstances are beyond any reasonable degree of control. Ultimately, a regulated traditional electric utility, losing permanently a large electric load could end up with “stranded costs” in generation and transmission. (A restructured utility would only have transmission and substation related costs “stranded” for the data center.) The options for treatment of stranded costs are numerous.  I won’t list them all. The key question is whether the IOU investors or ratepayers will absorb the stranded costs.

One approach to solving the problem is for the regulator to find that some of the generation and or/transmission capacity is now no longer “used and useful” (and won’t be so in the future) and should be written off by the utility now with the costs borne by the equity investor. The other approach to solving the problem is for the economic regulator to find that the transmission related investment for the data center was legally mandated by the utility franchise’s universal service requirement and neither the utility management, which proposed rates for the new Data Centers, nor the PSC regulator. who approved the rates, had access to a crystal ball which could foresee the earlier than anticipated loss of customer load. Thus, in this second approach, the stranded costs are a cost of doing business and should be recovered in rates to remaining customers.