A Tariff on Data Centers Could Help Them Pay Their Fair Share

The first in our new “Energy Corner” series, this post looks at how California could design a rate structure for large load customers to join the electric grid without burdening ratepayers.

A flurry of new comments was filed last month in Pacific Gas & Electric’s (PG&E) proposal to implement a new electric tariff bill, one specific to large-load customers (read: data centers). Such tariffs determine the electricity rates a utility can charge each class of customer, and the conditions under which it must provide service. PG&E’s intent to create a specific large-load tariff follows the example of utilities across the country, which are all attempting to design rates that are attractive to data centers without unfairly shifting costs to other ratepayer classes. Action is being taken at the national level as well. This month, the Federal Energy Regulatory Commission (FERC) directed all regional grid operators to consider the rules that govern how large energy users connect to the electric grid, and to ensure that rigorous consumer safeguards are present to prevent undue cost-shifting.

Welcome to “Energy Corner,” an ongoing series from E-CELL at UCLA that explores policy ideas for making clean energy affordable for all Californians.

PG&E is the first investor-owned utility in California to propose such a tariff, but it likely won’t be the last. As such, this proceeding is attracting significant attention from ratepayer advocacy groups like the Utility Reform Network (TURN) and the California Public Advocates Office (Cal Advocates). The stakes are high. In this proceeding, the California Public Utilities Commission can set the ground rules data centers will have to abide by if they want to access the grid in our state. The amount of attention this tariff is drawing reflects the urgency of the proceeding: Amidst already soaring electricity rates, it is more important than ever that new customers pay for the infrastructure upgrades their entrance requires, and that other ratepayers are not left footing the bill. How to design rates that achieve that goal is an open question, and has led to some contention between PG&E and ratepayer protection groups like TURN and CalAdvocates. In PG&E’s proceeding specifically, there are three main sticking points: (1) whether the California PUC has jurisdiction to determine cost allocation for certain transmission facilities, (2) who will pay for the transmission facilities required to serve large-load customers, and (3) how to avoid cost or risks shifting onto other customer classes.

The PUC’s Jurisdiction

Jurisdiction over our electric grid is divided between state and federal regulatory authorities. Energy sold at wholesale is regulated at the federal level, while retail sales fall under state jurisdiction. In practice, this typically means that transmission facilities are regulated federally, by FERC, whereas distribution facilities are usually overseen by state utility commissions. The energy PG&E plans to sell to large load customers would be at transmission voltage, but the customers would not go on to resell electricity at retail, as wholesalers typically do. PG&E argues that, since these would be transmission-level customers, the California PUC cannot impose conditions on how facilities to serve these customers should be paid for. Utilities in other states have made similar arguments, in the hope that bypassing state PUC proceedings will avoid delays and provide certainty about national interconnection standards.

Consumer advocates have pushed back on this asserted lack of jurisdiction. Even though large load customers take power at transmission voltage, they are still purchasing electricity at retail. Retail sales remain within the CPUC’s jurisdiction, and as such any facilities involved in producing and transmitting this energy fall within the Commission’s jurisdiction.

The CPUC has not rendered a decision yet, but the spirit of the Federal Power Act would favor the advocates’ reading of the statute. PG&E is not selling energy to data centers for further resale; the data centers are its final customer. Regardless of the voltage they purchase at, or the infrastructure required to serve them, that still constitutes a retail sale. From a policy perspective, too, the CPUC should be hesitant to relinquish authority over these sales lest it create a loophole that future industrial customers of any type can exploit simply by purchasing electricity at high voltages. The CPUC should instead assert its authority over these sales so as to ensure that California ratepayers are not unduly harmed by the appearance of large load customers on PG&E’s grid.

Type 4 Facilities

The second, closely related question, is who will pay for so-called “Type 4” facilities, or transmission network upgrades (“TNUs”). Large load customers will place significant demands on the transmission system, which will require infrastructure upgrades to keep up. Those upgrades, advocates argue, are caused solely by the appearance of large-load customers, and thus should be paid for by those customers up front. If it later turns out that the upgrades generate benefits for other customers, that should be reflected in ex post refunds to large-load customers.  PG&E disagrees. In their view, the need for transmission network upgrades stems from myriad factors: electrification, adoption of EVs, organic demand growth, and so on. The utility does not want to ask its data center customers to front funds for infrastructure upgrades, but instead wants to rate-base all required transmission upgrades. In other words, it wants to simply recover costs from all customers, similar to how the utility would recover cost for any other expenditure type. Under the structure it proposes, PG&E does not want to count as attributable to a large load customer any system upgrades that—in PG&E’s opinion—support future load growth. This shifts risks to customers, who may be saddled with a bill for infrastructure upgrades they did not need if the large load customer’s projected demand does not materialize.

Again, advocacy groups have pushed back on this plan. They ask that PG&E assign any necessary TNUs to the customers that render them necessary, rather than rate-basing and spreading these costs across all transmission customers (and, through a transmission charge, ultimately all retail customers). In their view, these infrastructure investments are clearly driven by the addition of data centers to the California grid, and it would therefore be unreasonable to allocate their associated costs to customers generally. This plan would reduce risks for regular ratepayers, but still allow data centers to recoup any costs they incurred that ended up generating benefits for other ratepayers. Given the ample availability of capital in the data center industry, it seems feasible to ask these customers to shoulder the upfront risk of capital investments.

Preventing Cost-Shifts

The final question is how PG&E should structure its tariff to protect other ratepayers from the costs data centers may impose on the grid. PG&E plans to invest significant sums to serve a data center’s projected load. Yet the data center industry is in flux, and there are questions around how reliable industry projections of demand are. If demand does not materialize, ratepayers risk being stuck with stranded costs for infrastructure they do not need. Under the prudent investment standard, it is ratepayers, and not the utility, that bear the risk of paying for such infrastructure.

PG&E is proposing to address this risk in a few ways. For one, it proposes a minimum demand charge, set at 75% of contracted-for peak demand, for a period of fifteen years. The minimum charge would be subject to a load ramp period, during which the customer gradually increases its load to the projected peak. At the same time, PG&E recommends providing customers with flexibility in modifying their minimum demand charge later, which somewhat weakens the protection this provision offers ratepayers. TURN and California Advocates are looking for stronger ratepayer protections: a minimum demand charge set at 90 percent of peak contracted demand, with a fixed load ramp that cannot be retroactively modified.

Next, PG&E (responding to pressure from advocates) agreed to adopt a 15-year minimum contract term. If a customer ceases service before that term is up, it will be subject to the minimum demand charge for the remainder of its contract period. Further, the customer would be required to pay back total capital expenditures on all facility types save for TNUs, lest depreciation (a termination fee).

Finally, the utility is proposing to have large-load customers pay the upfront costs for Type 1-3 facilities (transmission service facilities; transmission interconnection upgrades; and transmission interconnection network upgrades, respectively). These facilities are those that are connected directly to the large-load customer, as opposed to Type 4 facilities, which are further upstream and serve to prepare the grid to handle increased demand generally. Over time, the utility would refund the customer using revenues collected for electric service from that customer. Essentially, the customer would receive a bill credit until the grid investments are refunded. What remains up for dispute is (1) how to calculate the size of that bill credit, and (2) how much of the investments to refund. The first issue is quite technical, and boils down to a choice between a calculation that risks overestimating the refund and one that risks underestimating it somewhat. The utility favors the former, whereas advocacy groups would like the latter. The second issue has been considered by the California PUC in Draft Resolution E-5420, where it provisionally found that a maximum refund amount of seventy-five percent of total capital expenditures is appropriate. The Commission reasoned that large load customers present unique stranded cost risks, already receive favorable energy rates, and require such a large scale of investment that limiting refund amounts would be just and reasonable. This cap is supported by advocates in the proceeding, and seems like a fair compromise that would ensure some benefits from these capital investments accrue to regular ratepayers.

Making the most of investment

The challenging part of these data center tariffs is that scaring away large-load customers altogether comes with costs as well. While not without risk, there are real upsides to attracting large load customers to the grid. Fixed costs make up a significant portion of electric rates in California, and that share is only expected to increase as utilities shift away from fuel-based generation to zero-marginal-cost renewables. Fire mitigation, too, will impose large fixed costs on ratepayers for the coming years. Fixed costs are spread across all customers on the grid, so more customers equals a smaller share of those costs will be assigned to each. That means that, so long as large load customers do not add more fixed costs to the utility’s shared rate base, their entrance can reduce the burden placed on other ratepayer classes. This is certainly the argument PG&E is making before the California PUC. Yet the utility itself has admitted that these savings are not guaranteed. They depend on the costs required to upgrade the utility’s infrastructure, and how those costs are allocated. The latter is something the PUC wholly controls.

Thus, now is the time to design a rate structure that allows large load customers to join the grid while paying their fair share (and perhaps, even place downward pressure on rates for others). Luckily, California can lean on the examples set by other states that have grappled with this issue. Colorado’s Public Utilities Commission, for example, is nearing a settlement in Xcel’s latest rate case that would cement a robust set of ratepayer safeguards. In Michigan, too, the Public Service Commission has worked with a local utility to set out a relatively solid set of ratepayer protection measures. California is not a first mover in this instance, which allows it to borrow from other states’ best practices in designing large load rates. The growth of data center load in our state is likely inevitable. Now is the time to ensure that ratepayers see some benefit from that investment, rather than suffer the costs, of that phenomenon.

The Emmett Clean Energy Law & Leadership (E-CELL) project engages with policymakers to transform the energy system and legal regimes to enable progress while training the next generation of energy leaders. Find out more here.

CPUC, data centers, large load tariff