In a widely-discussed New York Times article, journalist James Glanz outlines how data centers' revolve around the sale of electricity—or, at least, access to it.
Data centers are used to store computer systems and energy-intensive technologies and lease out space based on how much electricity could possibly be consumed. Troy Tazbaz, a data center design engineer for Oracle, confirms that notion:
Tenants contract for access to more electricity than they actually wind up needing. But many data centers charge tenants as if they were using all of that capacity — in other words, full price for power that is available but not consumed. [...] Since tenants on average tend to contract for around twice the power they need, Mr. Tazbaz said, those data centers can effectively charge double what they are paying for that power.
Data centers are de facto selling access to reliable electricity. But data centers are mostly unregulated: many designate themselves as real estate investment trusts (REIT) in the eyes of the Internal Revenue Service (IRS). REITs receive incredibly friendly tax rates and data centers inevitably are benefiting from this lack of regulation. Meanwhile, utility regulators remain largely unaware of data centers' role in selling electricity. For example, one data center in Atlanta "steadily burns 25 million to 32 million watts," approximately the amount needed to power 15,000 homes. And the industry is making a massive profit for their services:
Generally, the sale or resale of power is subject to a welter of regulations and price controls. For regulated utilities, the average “return on equity” — a rough parallel to profit margins — was 9.25 percent to 9.7 percent for 2010 through 2012, said Lillian Federico, president of Regulatory Research Associates, a division of SNL Energy.
Of course, the data centers see themselves as providing an entirely separate service from utilities. Data centers pay for utilities' electricity and provide customers with access to not only that electricity, but physical space, surge protection and back-up generation, thereby practically guaranteeing access to electricity. Chris Crosby, CEO of Compass Datacenters, says as much:
That backup equipment “is why people pay for our business,” Mr. Crosby said.
But what about utility regulators—what do they think? They seem to be uninvolved or, more worrying, unaware:
Bernie Neenan, a former utility official now at the Electric Power Research Institute, said that an industry operating outside the reach of utility regulators and making profits by reselling access to electricity would be a troubling precedent. Utility regulations “are trying to avoid a landslide” of other businesses doing the same.
The industry has essentially become an electricity middleman for those in need of more reliable access. While data centers clearly do not provide the same services as utilities, the U.S. government may be forced to take a look at their business model and identify whether or not their services need to be regulated as utilities are.
What do you think? Are utilities getting squeezed even further out of the electricity business by data centers or do they serve entirely different sets of consumers? And do you think the data center business needs regulation? Should it be similar to the regulation the utility industry currently faces? Let us know on LinkedIn.
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