Guest Blog: Connecting Data Centers to the Grid: An Innovative and Controversial Proposal from AEP Ohio – Climate Law Blog

Concerns about the growth in data centers and the associated increases in power demand have received substantial press coverage. As the scale of the burden that data centers impose on the electricity grid becomes clearer to the public, more and more people are asking the unavoidable question: who will pay for the grid upgrades needed to support these facilities? One Ohio-based utility recently imposed a moratorium on new data center applications and put forward a novel proposal that it says will ensure data centers pay for the costs they impose on the grid, but the application is facing strong pushback from data center operators, blockchain groups, and competitive power suppliers. Opponents argue that the proposal violates the utility’s duty to provide service on a non-discriminatory basis; the utility – Ohio Power Company (AEP Ohio) – disagrees.

As data centers continue to expand across the nation, whether and in what form AEP Ohio’s proposal moves forward could have important implications for how utilities deal with data centers.

The Data Center Boom

There is growing concern among energy regulators and others that the proliferation of data centers across the United States will lead to unprecedented increases in power demand. A recent report from the Federal Energy Regulatory Commission (FERC) estimates that U.S. data center demand will double this decade from 17 GW in 2022 to 35 GW by 2030. Electricity consumption by data centers, which currently accounts for approximately 2.5% of the U.S. total, could account for 7.5% of U.S. electricity consumption by 2030. Other estimates project that number could reach up to 9% by 2030.

These projections have led to questions about where all the electricity needed by data centers will come from. Much has already been written about the potential for data center growth to drive up fossil fuel generation and associated greenhouse gas, imperiling U.S. climate goals. Questions have also been raised about who will bear the cost of the grid upgrades necessary to serve data centers. The cost of transmission facilities built to serve new customers is socialized across all users of the system, including present-day ratepayers. The scale of the data center loads is leading utilities and regulators to question the traditional assumption that the revenues earned from new customers is sufficient to pay for any new transmission facilities necessary to serve them.

The financial impacts of this expansion are already being felt by customers. On April 8, 2024, FERC approved a $5.1 billion proposal from PJM Interconnection – the nation’s largest electricity market – for new transmission that aims to, in part, accommodate the electricity growth from Northern Virginia’s “Data Center Alley.”

The cost allocation debate has caused tensions in regions of the U.S. where data center growth is concentrated. States such as Ohio, Virginia, Illinois, California, Florida Georgia, Texas, Arizona, and Oregon have emerged as major data center hubs and are now faced with the challenge of upgrading their grids to bring more electricity to them. While regional transmission upgrades are under FERC jurisdiction, state agencies have jurisdiction over how the costs of the upgrades are passed onto retail customers. FERC itself is publically struggling with how to deal with meeting the energy needs of data centers and crypto miners (see here, for example).

AEP Ohio’s Application for Data Center Tariffs

On May 13, 2024, AEP Ohio filed an application with the Public Utilities Commission of Ohio to create two new customer classifications and associated tariffs for data centers. Pending review of the application, AEP Ohio also placed a moratorium on new hookups, which is to remain in place until the new rate is put into effect.

The two proposed customer classifications are (1) data centers with a monthly maximum demand of 25 MW or greater and (2) mobile data centers (i.e., cryptocurrency miners) with a monthly maximum demand of 1 MW or greater. AEP Ohio’s proposed tariffs also include several new obligations for these customer classes::

• a minimum demand charge of 90% for class (1) (data centers) and 95% for class (2) (mobile data centers), as opposed to the standard 60% for other customers in the general service rate class;
• requirements to enter into electric service agreements (ESAs) for an initial term of ten years, as opposed to the typical initial term of one to five years for other customers in the general service rate class;
• requirements to pay an exit fee equal to three years of minimum charges should the customer choose to cancel the ESA after five years;
• requirements to provide a parent guarantee or collateral in the form of a letter of credit or cash equal to 50% of the customer’s minimum charges if the customer has credit ratings less than A- from S&P Global Inc. and A3 from Moody’s Corporation;
• requirements to reduce its demand upon the Company’s system during an RTO or Company-declared emergency event; and
• requirements to participate in a separate auction by AEP Ohio to procure energy for non-shopping (i.e., standard offer service) customers.

AEP Ohio argues that the new tariffs are necessary due to the recent unprecedented growth of data centers in the utility’s service territory and the costly transmission upgrades required to serve those data centers. In her direct testimony, Lisa Kelso – AEP Ohio’s Vice President of Customer Experience – explained that data center load in central Ohio has grown from 100 MW in 2020 to around 600 MW in 2024. She further noted that AEP Ohio has signed ESAs with data center customers that will bring that number to 5,000 MW by 2030, which is more than double the existing peak demand in central Ohio. Additionally, AEP Ohio has received interest from data center customers, which have signaled that they could add more than 30,000 MW of new load.

AEP Ohio asserts that accommodating this additional 30,000 MW of load in central Ohio would require the expansion of its 765 kV extra-high-voltage (EHV) transmission system, which could cost billions of dollars and take seven to ten years to build. Central Ohio does not have any RTO-controlled generation and imports all of its electricity through EHV transmission lines, meaning that large upgrades to the transmission system are necessary to accommodate future data center growth. In March 2023, AEP Ohio placed a temporary moratorium on taking new data center service requests in order to address this issue.

AEP Ohio emphasizes in its application that the newly proposed tariff commitments aim to strike a balance between being stringent enough to mitigate the risk of infrastructure investments for speculative data center projects and lenient enough to avoid stifling data center development. In his direct testimony, Matthew McKenzie – AEP Ohio’s Vice President of Regulatory and Finance – said the heightened commitments (such as a higher minimum demand charge, a ten-year initial term, and an exit fee) “give data centers skin in the game” before billions of ratepayer dollars are invested in transmission infrastructure. The tariff requirements serve to incentivize data centers to more accurately predict their load and avoid a scenario in which the costs of the transmission buildout fall upon AEP Ohio’s other customers. McKenzie further justified singling out data centers from other large-load customers based on the scale of potential loads, expectations of future growth, newness of data centers, and their economic impact. According to McKenzie, all of these factors make data centers “unique customers who pose unique challenges.”

Current Status of the Application

A broad range of entities have filed comments on the AEP Ohio application with the state Public Utilities Commission. Residential consumers, large commercial and industrial customers, and other public utility companies in Ohio have generally been supportive of the application. Ohio Energy Group, a group that describes itself as “an organization of large energy-intensive, trade-exposed utility customers who share a common aim of securing reliable service at competitive rates,” described the proposal as “the minimum that should be done to protect other consumers while at the same time promoting reasonable data center development in Ohio,” and the Office of the Ohio Consumers’ Counsel went further to argue that more could be done to safeguard existing consumers from being unfairly burdened.

Data center customers and other interested parties have pushed back, arguing that the Ohio Public Utilities Commission should reject or reform the proposed tariffs. Here we focus on two main arguments from opponents of the proposal: 1) that the proposed tariffs discriminate against data centers in an unlawful manner and 2) that the temporary moratorium violates the utility’s duty to serve.

• Discrimination against data centers

Ohio Revised Code (R.C.) 4905.35 prohibits public utilities from giving “undue or unreasonable preference or advantage” to some customers over others, and R.C. 4905.33 prohibits public utilities from collecting different charges for “a like and contemporaneous service under substantially the same circumstances and conditions.” The Data Center Coalition (DCC), the Ohio Manufacturers’ Association Energy Group (Ohio Manufacturers), One Energy Enterprises, and the Ohio Blockchain Council argue that AEP Ohio is targeting data center customers in violation of R.C. 4905.33 and 4905.35. The DCC and One Energy Enterprises both write that targeting customers based on industrial end-use rather than electric usage characteristics is unduly discriminatory and sets a dangerous precedent. They assert that AEP Ohio should not treat data centers any differently from other large electricity users, such as traditional manufacturing facilities, steel mills, or other commercial and industrial customers. Data center customers such as Microsoft and Amazon Data Services similarly claim that AEP Ohio should not single out data centers from other large-load customers.

In its reply comments, AEP Ohio argues that the proposed tariffs are not discriminatory because data centers have distinct characteristics “based upon some actual and measurable differences in the furnishing of services to the consumer.” In this regard, the Supreme Court of Ohio has held that R.C. 4905.33 “does not prohibit rate discrimination per se,” but only prohibits discrimination in cases where the utility is performing a like and contemporaneous service. Two important considerations in the proceedings of this case will be 1) whether accommodating the unprecedented load growth expectations from data centers will be considered “a like and contemporaneous service” to serving other large-load customers, and 2) whether the non-discriminatory provisions in the Ohio statute allow public utilities to treat data centers differently from other large electricity consumers.

FERC, too, has been struggling with this question.  While FERC’s views are not binding on Ohio, it’s notable that FERC recently rejected a proposed from Basin Electric Cooperative in Wyoming to establish a separate rate class for data center customers, citing undue discrimination concerns and that Basin has “not met its burden to demonstrate that its proposal to treat all Crypto Loads differently from non-crypto loads is just and reasonable and not unduly discriminatory or preferential.” Even so, FERC stated that it was “sympathetic to Basin’s concerns regarding its ability to serve expected load growth reliably and economically” and rejected the proposal without prejudice, leaving ultimate disposition at the federal level uncertain.

• Temporary moratorium and the duty to serve

The duty to serve is an obligation imposed on public utilities, requiring them to provide services to all present and reasonably anticipated future users within their service territory. The state imposes this obligation on utilities in exchange for the grant of monopoly power. The goal is to protect the public’s access to an essential service – electricity – when only one provider is authorized to operate in a given area. R.C. 4905.22 and R.C. 4933.83 codify the duty to serve in Ohio, requiring public utilities to “furnish necessary and adequate service and facilities [that are] in all respects just and reasonable.”

The DCC and Ohio Manufacturers argue that AEP Ohio violated its duty to serve all customers by establishing a temporary moratorium on data center service requests. Ohio Manufacturers writes that the moratorium “cannot logically be interpreted as deploying services to meet the reasonable needs of those customers or rendering physically adequate service to those customers.”

AEP Ohio replies that the comments from the DCC and Ohio Manufacturers take “a tortured reading of Ohio law” by interpreting the duty to serve as absolute and unbridled. Both R.C. 4905.22 and R.C. 4933.83 characterize the service that the public utility is obligated to provide as being “reasonable.” AEP Ohio argues that the temporary moratorium, which is based on the technical limitations of the EHV transmission network, is reasonable and does not violate the duty to serve. They further claim that the moratorium and the proposed tariffs are necessary to ensure that AEP Ohio fulfills its duty to serve both new and existing customers.

Implications for the Future

The outcome of AEP Ohio’s application will be significant, not only to the 30,000 MW of potential data center load growth in central Ohio, but also to the growth of data centers across the nation. Most states have similar statutory language to Ohio regarding the duty to serve all customers in a reasonable and non-discriminatory manner. The Ohio proceeding will be the first to decide how those century-old provisions apply to the novel issue of data center growth and what leeway public utilities may have for treating data centers differently.