Ari Peskoe is director of Harvard Law School’s Electricity Law Initiative.
Data center developers in March agreed to the White House’s ratepayer protection pledge, committing to “pay for all new power delivery infrastructure required” for their projects, including upgrades to local transmission networks. Utilities, however, are thwarting that commitment by rolling billions of dollars in data-center-driven transmission upgrades into rates that everyone pays.
To justify this approach, utilities are clinging to the Federal Energy Regulatory Commission’s 1994 transmission pricing policy. But FERC created that policy based on an old industry model and to meet a goal that has no relevance to the data center buildout.
FERC should revisit its transmission pricing policy so that it requires utilities to assign the full costs of transmission service to power-hungry data centers.
FERC’s 1994 policy sought to foster wholesale competition
FERC’s transmission pricing policy, developed over 30 years ago, aimed to prevent utilities from overcharging competing generators for access to the utility-owned transmission network. When FERC created the policy, it had yet to mandate industry-wide open access transmission service and instead sought to encourage competition through individual utility proceedings about transmission rates, terms and conditions.
The critical proceeding was initiated by Pennsylvania Electric Co. in 1991. Penelec filed a transmission service agreement with a new generator that was selling energy to a neighboring utility. Penelec claimed that transmitting the generator’s power would force it to forgo using its transmission capacity to import energy that would lower costs for its captive ratepayers.
Penelec therefore proposed to charge the generator both an embedded-cost rate that recovered Penelec’s investment in the existing transmission network and an opportunity-cost rate that reflected the lost savings of the energy it could no longer import. That combined rate, Penelec claimed, would allocate a fair share of transmission costs to the generator and protect Penelec’s ratepayers against any cost increases.
FERC said no. It concluded that embedded costs and opportunity costs were alternative ways of valuing the same scarce resource: the constrained transmission path. FERC therefore rejected Penelec’s proposal because it would “charge twice for the same transmission capacity.”
FERC allowed Penelec to charge only the “higher of” its embedded costs or opportunity costs. If Penelec chose to expand its transmission system to accommodate the generator and its own energy imports, it could then charge only the higher of embedded costs or the incremental costs of expansion.
Two years after the Penelec proceeding, FERC approved a transmission pricing policy that echoed its earlier decision. The 1994 pricing policy disallows “so-called ‘and’ pricing, which would add an embedded cost rate to an incremental cost rate for the same service over the same facilities.”
FERC’s 1994 policy could allow new pricing schemes for data centers
FERC’s prohibition of “‘so-called ‘and’” pricing prevents utilities from stacking two cost measures for the same facility. But the policy does not prevent cost recovery of different facilities using distinct cost measures.
A footnote in FERC’s policy statement immediately following the “and” pricing prohibition invited utilities to propose “embedded costs for some lines . . . and incremental cost for other lines.” FERC distinguished such “disaggregated” pricing from the forbidden practice of collecting “two measures of a single cost.”
In 2014, FERC approved contracts that applied this disaggregated framework. In that proceeding, the utility separated a wind farm’s transmission service request into three tranches, priced differently to reflect the utility’s available transmission capacity and costs of needed upgrades.
The utility priced the first tranche at the embedded cost of its existing network because there was sufficient available capacity to transmit that tranche of energy. The other two tranches reflected the “higher of” embedded costs or the costs of upgrades needed to transmit the additional energy.
Utilities could apply this tiered approach to data centers. Where the existing network can accommodate part of the data center’s demand, the utility would charge an embedded cost rate for that portion. For the data center’s remaining demand, the utility would charge a rate that reflects the higher of the incremental expansion costs or the embedded rate.
To protect ratepayers, FERC could require utilities to disclose disaggregated pricing structures. Such transparency would reveal to the public the costs of delivering power to data centers.
The tiered approach would still lead to data centers underpaying. Unlike the wind farm, a data center is not transmitting energy over a specific contract path. To receive energy that it consumes, a data center needs two types of transmission facilities: the entire network and network upgrades. It should pay fully for both.
FERC could read the footnote in its policy statement more broadly so it requires full compensation for each. Embedded costs would apply to the network. Incremental costs would apply to network upgrades. Each facility would be priced under a single cost measure so as not to violate the pricing policy’s prohibition on two prices for the same facility.
Meeting the ratepayer protection pledge requires new approaches
If FERC reads its 1994 policy narrowly and concludes it imposes a blanket prohibition on charging a data center for both the entire network and the incremental expansion costs, it should amend the policy. The policy rested on a factual premise — that embedded costs and incremental costs are “two measures of a single cost” — that does not hold for data centers.
For data centers, embedded costs and incremental costs are not “charging twice for the same transmission capacity.” They compensate for two different cost responsibilities.
First, charging for embedded costs reflects the data center’s use of the existing transmission system and future upgrades to that system that are not directly assigned to a specific customer. Second, the incremental-cost charge pays for expansion caused by the data center, which can amount to hundreds of millions of dollars. Only "and" pricing fully protects ratepayers by demanding that the data center pay its share of the utility’s entire network plus the incremental costs of the facilities built to serve it.
The prohibition on "and" pricing was never meant to prevent a power-hungry consumer from paying its full transmission costs. FERC’s 1994 policy was aimed at improving transmission access for new market entrants by stopping utilities from overcharging their competitors. Data centers are not competing with a utility in any market.
To the contrary, they are lucrative retail customers who need both a utility’s transmission network and incremental expansion. There is no competitive distortion from charging energy-intensive consumers for both the network and the new facilities needed to reliably deliver power to their industrial-scale complexes.
Once FERC amends its transmission pricing policy, it should find that all transmission rates charging data centers less than embedded costs and incremental expansion costs are unjust and unreasonable. Otherwise consumers are subsidizing data centers.
Charging data centers for the embedded costs of the utility’s local network and for network upgrades still does not ensure that data centers pay the right transmission rate. Regional transmission organizations are planning tens of billions of dollars of regional transmission projects whose costs are shared broadly across the RTO’s entire footprint.
The Southwest Power Pool is the first RTO to consider assigning regional costs to data centers. Other RTOs should follow SPP’s lead.
The White House pledge demands that hyperscalers pay “the full cost of their energy and infrastructure, no matter what,” and even “lower electricity costs for consumers in the long term.” FERC policies should not stand in the way
