Who’s really paying AI’s power bill?

Summary

Open Circuit Podcast Summary

Episode: Who’s Really Paying AI’s Power Bill?
Release Date: April 25, 2025
Host/Author: Latitude Media

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Introduction

In this episode of Open Circuit, Latitude Media delves into the intricate relationship between the booming AI industry and its substantial energy consumption. The discussion navigates through the regulatory landscape, data center expansions, and the financial implications borne by ratepayers. Experts Ari Pesko, Kathryn Hamilton, and Jigger Shah provide insightful analysis on how tech advancements intersect with energy policies and utility operations.

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The High Cost of Politeness in AI

The episode kicks off with a light-hearted yet revealing conversation about the unintended consequences of interacting politely with AI systems like ChatGPT.

• Stephen Lacy (00:22): "You're causing a serious problem. Did you know that this is costing tens of millions of dollars in computing power?"

• Jigger Shah (00:56): "The $10 million we're spending on being polite is helping to train ChatGPT to not take over the world."

This segment underscores how seemingly minor user behaviors can escalate energy consumption, highlighting the broader implications of AI interactions on power usage.

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Federal Energy Regulatory Commission (FERC) Under Pressure

A significant portion of the discussion centers on the Federal Energy Regulatory Commission (FERC) and the recent executive orders attempting to alter its independent regulatory framework.

• Kathryn Hamilton (06:02): "FERC was created in August 1977... to ensure fair and efficient energy markets and protect consumers."

• Ari Pesko (09:03): "This administration has come in and tried to assert control over a range of institutions... putting FERC under political control... will have adverse consequences for renewable deployment."

The hosts express concern that these executive orders undermine FERC’s ability to operate objectively, potentially skewing energy policies in favor of traditional fossil fuels over renewable sources.

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Executive Orders and Their Implications

The conversation delves deeper into specific executive orders affecting FERC:

• Ari Pesko (12:49): "The EO lists the statutes relevant for FERC, and it includes a law that Congress repealed in 1987... clearly written by somebody who has no idea what FERC does."

• Kathryn Hamilton (14:50): "This cuts both ways. Agencies would like to have more discretion than the law allows."

The panel critiques the lack of understanding and potential overreach in these orders, questioning their feasibility and impact on existing regulations.

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Staff Reductions and Operational Strain at FERC

Concerns are raised about impending staff cuts at FERC and how they might impede the commission's functionality.

• Ari Pesko (15:56): "If you cut too much staff, you slow FERC's capacity to adequately respond to those filings... it's going to end up losing in court."

The discussion highlights the delicate balance FERC must maintain to regulate effectively amidst political and administrative pressures.

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Coal Plant Bailouts and Energy Reliability

The episode explores recent executive orders aimed at preventing coal plant retirements, raising questions about energy reliability and environmental impacts.

• Ari Pesko (16:21): "It tasks the Department of Energy with developing a methodology for assessing the resource adequacy of each region."

• Kathryn Hamilton (19:01): "In the first Trump administration they tried to do something with coal as well... FERC ruled 5 to nothing against this because there was no evidence."

The panel debates the legal and practical challenges of maintaining older, less efficient energy sources in the face of evolving energy demands and environmental considerations.

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Data Centers and Ratepayer Burden

A pivotal segment of the episode examines how the rapid expansion of data centers, driven by AI and tech growth, is impacting utility costs and ratepayers.

• Ari Pesko (31:46): "Our concern is that the data centers are not paying for their fair share... enabling this cost shift from competitive market onto captive ratepayers."

• Jigger Shah (29:39): "Consumers could be subsidizing big tech's energy consumption without even knowing it."

The discussion brings to light how special contracts between utilities and data centers often bypass public scrutiny, leading to hidden cost allocations that ultimately burden regular consumers.

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Case Studies: Duke Energy and Meta's Data Center

Real-world examples are scrutinized to illustrate the broader issues:

• Duke Energy (37:53): The panel discusses Duke’s strategy of offering substantial discounts to municipal utilities, later passing the costs onto ratepayers. This was uncovered through litigation, revealing a systemic issue in how utilities manage large contracts.

• Meta's Data Center in Louisiana (41:00): The conversation highlights Meta's massive data center plans supported by Entergy, where the lack of transparency in energy demands and financial commitments poses significant risks to ratepayers.

  • Ari Pesko (42:12): "We don't know how much of this infrastructure is actually needed for Meta or how much is Entergy trying to fast track through this process."

These cases exemplify the challenges in ensuring that large-scale tech investments do not disproportionately impact utility customers.

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Proposed Solutions and Regulatory Recommendations

The hosts and guests propose several strategies to mitigate the financial strain on ratepayers:

• Separate Customer Classes: Creating distinct rate classes for data centers to ensure transparency and fair cost allocation.

  • Kathryn Hamilton (39:33): "If we could create a separate class of customers that are data centers... it would provide a lot more transparency."

• Encouraging Renewable Integration: Promoting the development of clean energy solutions specific to data centers to reduce their reliance on the grid.

  • Ari Pesko (44:01): "We need good regulation... state legislators engaged on these issues to make sure that consumers are protected."

• Demand-Side Solutions: Implementing flexibility requirements for data centers to minimize their impact during peak energy demands.

  • Jigger Shah (40:08): "You have to make sure that your load profile is flexible enough to not increase cost to everybody else within the grid."

These recommendations aim to balance the growth of the tech industry with sustainable and equitable energy practices.

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Conclusion

The episode wraps up with a consensus on the urgent need for robust regulation to manage the intersection of AI-driven data center expansion and energy consumption. The speakers emphasize that without proactive measures, the financial burden on ratepayers will continue to escalate, undermining both energy affordability and progress toward renewable energy goals.

• Ari Pesko (51:20): "We're just going back to old solutions because that's sort of the status quo bias that's embedded throughout the system, rather than trying to take advantage of new technologies and build infrastructure that can actually ultimately lower costs."

The hosts reiterate the importance of vigilance and informed policymaking to navigate the complex landscape of energy regulation in the age of AI.

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Key Takeaways

• Regulatory Independence: Preserving FERC's autonomy is crucial for unbiased energy market regulation.
• Transparent Contracts: Special utility contracts with data centers must undergo public scrutiny to prevent hidden cost shifts to consumers.
• Sustainable Solutions: Emphasizing renewable energy and demand-side flexibility can mitigate the environmental and financial impacts of data center growth.
• Legislative Action: State-level interventions are necessary to enforce fair cost allocations and protect ratepayer interests.

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This episode of Open Circuit provides a comprehensive examination of the multifaceted challenges at the nexus of AI technology, energy consumption, and regulatory frameworks. It underscores the imperative for equitable policies that safeguard consumer interests while fostering technological advancement.

Transcript

[Ari Pesko]

Latitude Media podcast at the frontier of climate technology.

[Stephen Lacy]

Ari, do you use ChatGPT?

[Ari Pesko]

I use it occasionally on the web interface. I don't have it on my phone.

[Stephen Lacy]

Are you, are you polite?

[Ari Pesko]

I think so.

[Kathryn Hamilton]

Oh yeah. Because they're always like, would you like me to make a chart of that? And I'm like, oh, yes, please or no, thank you. Because that's just the way I talk.

[Stephen Lacy]

You're causing a serious problem. Did you know that this is costing tens of millions of dollars in computing power? Sam Altman said this week that saying please and thank you to ChatGPT has cost the company tens of millions of dollars in energy because of additional computing.

[Kathryn Hamilton]

Yeah, but what happens if we decide to just be rude to ChatGPT, which I'm, you know, that's fine, but then do we just become that way on our regular emails and our regular texts with people? I'm very worried that we're going to lose kindness.

[Ari Pesko]

Yeah, I mean, aren't we all like teaching ChatGPT? Or if we're not polite to it, it's not going to be polite to everyone else. Right.

[Jigger Shah]

The $10 million we're spending on being polite is helping to train ChatGPT to not take over the world.

[Stephen Lacy]

I thought you could put this in your recommendations, in your report. Ari, if you want to lower the ratepayer impacts of data centers, tell people to stop being nice to chatbots from Latitude Media. This is Open Circuit. This week, who's really paying for the AI boom? New research uncovers how tech giants and utilities are inking special deals that could shift billions in infrastructure costs to ratepayers. How do we support data center growth while also making sure they pay their fair share of grid upgrades? Meanwhile, at the federal level, an assault on America's energy governance is underway. The White House is making a power grab over the independent regulator that oversees interstate grids and gas pipelines. Former commissioners from both parties are warning about the dangers. And a sweeping executive order aims to keep struggling coal plants online, creating a consumer funded subsidy for uneconomic generation. Generation. It all comes down to one central question. Who controls the rules of the energy system and who ultimately pays? That's all coming right up. Open Circuit is brought to you by On Energy. Some industries simply can't afford power failures. Data centers, airports, manufacturers. When the power goes out, operations grind to a halt. That's where onenergy comes in. They design, build, own and operate megawatt scale battery storage to keep businesses running and grids stable. With proprietary energy management software and in house expertise. They make energy more reliable, efficient and resilient. Need backup, peak shaving, faster interconnections One energy has the solutions because when reliability matters, their track record speaks for itself. Learn more at on energy OpenCircuit is supported by Kraken, the only proven AI powered operating system for utilities. Kraken's tech is helping utilities create happier teams and happier customers while significantly reducing operating costs. That is a magic combination. Click the link in the show notes or go to Kraken Tech to learn more about how Kraken is transforming operations for leading businesses across 30 countries. Upgrade your utility with Kraken Foreign I'm Stephen Lacy, Executive Editor at Latitude Media. Welcome. Kathryn Hamilton is the chair of 38 North Solutions. Hello Katherine. Did you do anything on Earth Day? Aside from crawl into the fetal position?

[Kathryn Hamilton]

I constantly refresh the executive order website just to see what they were going to do to potentially to try to go after nonprofits, which they did not do.

[Stephen Lacy]

Hmm. Jigger Shah is a clean energy investor and former director of DOE's loan programs office, and you are in Illinois today to receive an award. What are you getting, Jigger?

[Jigger Shah]

Oh, I have no idea, but I've already gotten this like, weird.

[Stephen Lacy]

Don't downplay it.

[Jigger Shah]

That like is very large. But no, it's a distinguished alumni award, so I'm very grateful.

[Stephen Lacy]

It'll all be worth it if you get the tote bag too.

[Jigger Shah]

Yeah, no, I did get a tote bag. They gave me a tote bag and then like a pen and all sorts of swag. So my son will be happy.

[Stephen Lacy]

Today we're also joined by Ari Pesko, director of the Electricity Law Initiative at Harvard Law School, who is an expert on all things regulation in the power sector. Hey, Ari.

[Ari Pesko]

Hey. Thanks so much for having me.

[Stephen Lacy]

Thanks for being here. And I love your just and reasonable T shirt that you're wearing right now.

[Ari Pesko]

Yeah, custom designed and happy to send you guys some.

[Stephen Lacy]

So this week we have Ari here to dive into two very high stakes stories on regulation. In the first half of the show, we're going to catch up on what's happening at the Federal Energy Regulatory Commission, including the erosion of independence and this coal bailout. And in the second half, we're going to talk about research that Ari coauthored on how utilities may be shifting the cost of serving data centers to ratepayers. And so let's turn first to what's happening right now with energy regulation at the federal level. This is the place where I insert my obligatory line about how, yes, FERC might Sound boring to some and quite wonky. But I promise this is highly consequential and very interesting. We have a series of executive orders from the White House that are systematically challenging the independence of ferc. And we talked a little bit about this when we launched this show. This was a conversation that we had, but a lot has happened since then. There was this February executive order declaring that independent agencies must submit all significant regulatory actions to the White House for review. Then another order giving the Department of Justice more control over legal interpretations coming from independent agencies like ferc. Then in April, yet another order requiring agencies to add five year sunset provisions to all its regulations, everything from basic accounting rules to procedural requirements. And Catherine, we did discuss this on our first episode, but just remind us, why is FERC structured the way it is and how is this series of executive orders designed to break that structure?

[Kathryn Hamilton]

Yeah, so FERC was created in August 1977 after the 1973 oil crisis. Previous to that, there was a federal power commission that had been created in 1920 to kind of coordinate hydropower projects. And we have talked about that before. And it was created in 1977 as an independent commission within the Department of Energy. So it was made to ensure fair and efficient energy markets and protect consumers, to provide just and reasonable rates and to make sure the system was all reliable. And they made this independent so that it could be very focused on the mission, that it wouldn't have the undue influence of the White House. Not to say that different commissioners bring different political lenses to the table, but that it was really made to be not subject to the political whims of any administration and to really base everything it does on evidence. And that's why I've always been what Politico calls Congressman Sean Kasten, a FERC enthusiast. And I would put myself into that category because I'm not an expert. I am not an attorney, especially not a FERC attorney, but I am an enthusiast because I like the fact that this is an evidence based process. And I'll give you one example of a way that this has worked that I think everybody can kind of relate to, which was way back in 2013, Beacon Power, which was a flywheel energy storage company, wanted to have access to to. In fact, their entire business model was based on gaining access to the wholesale markets and they could provide ancillary services in the form of frequency response and frequency regulation. And the way they were able to do that was to show evidence. They tracked every single way their flywheel was able to respond. And they showed that as evidence. And consequently FERC Order 784 was created and that order allowed energy storage to have access to those markets over time. In 2018, Order 841 was issued which allowed energy storage to have access to all of the wholesale markets. And then in 2020, Order 2222 was put into place which included not just energy storage, but all forms of distributed energy resources. And so you can see over time that the evidence was built to show how facilities should have access to the markets based on evidence, based on a lot of comment from stakeholders and based on physical evidence. And they, of course they do a lot of technology conferences and things to kind of be able to discuss those issues. But that's what I've always liked about FERC is that if you can build your case, you have a really good chance of getting something done that is completely not political, but simply based on being able to compensate something for what it is able to provide to the markets.

[Stephen Lacy]

So, Ari, can you comment on that a little bit more and talk about how you would characterize the White House's attempts to change that structure and why this is worrisome for the FERC enthusiasts?

[Ari Pesko]

Look, over the past few months, this administration has come in and tried to assert control over a range of institutions, both in the federal government and across civil society, law firms, universities, media companies, et cetera. So trying to control FERC's agenda is certainly consistent with what they've been trying to do. I think you could make a case for a clean energy perspective that, look, we really want a White House, that when we have our team in the White House that's pro clean energy, let's have a FERC that's completely in line with that. But now you're going to see the danger of that sort of political control because this administration's energy agenda, when it comes to the power sector, as I see it, is trying to devalue the contributions of wind and solar, trying to stop their development, particularly wind. We've seen a lot of actions outside of FERC targeting wind development. So I think putting FERC under political control, I think is going to be unfortunately have adverse consequences for renewable deployment.

[Jigger Shah]

Well, the concern I have is I don't understand what the through line is exactly right. I mean, in general, FERC is interested in, I think, keeping rates affordable and plentiful and maintaining resiliency and some of these other things. I don't see how any of these executive orders do that. And so then what ends up happening is once you start breaking down the framework of exactly what FERC is solving for, which I think is what this is doing, then you have to replace it with something else, which they're not doing. And then I don't quite understand which issues Catherine should bring in front of FERC or which client should bring ideas to ferc because you don't actually know what they're solving for. Right. And so keeping coal plants that are very unaffordable, not just open, which I think we're going to keep them open just through capacity auctions, but actually having them forced to run longer means that everyone pays more. And the people it hurts is actually natural gas plants. It doesn't affect solar and wind at all. So I don't understand what the inter fuel war it looks like between the natural gas industry and the coal industry within these executive orders and what they're solving for.

[Kathryn Hamilton]

So we have a long way to go before we get to FERC changing everything it does, because what it does is in statute. And so executive orders are not statute. And so there would be many steps that we would have to go through before you're able to change everything that FERC does that's in the Federal Power Act.

[Ari Pesko]

Yeah, And I would say some of our concerns at this point are theoretical. You know, the earlier executive orders from February targeted all independent agencies, which includes like the securities and Exchange Commissions, the cftc. And so it's possible that FERC wasn't really in the administration's crosshairs and just got sort of swept up in that one. And I don't know that we've seen any actual consequences from FERC of those earlier executive orders. And then you mentioned the executive order that requires energy agencies, including ferc, to sunset their regulations after five years. I mean that just makes zero sense. So you know, people have asked me about it and like, you know, try, try to pick it apart, but there's just, there's no point in really diving into it. I mean, just to give you an example of what, what FERC regulations include, they include the accounting rules for every utility in the country and state utility commissions use those accounting rules in every rate case across the country. It makes no sense to just have those regulations disappear. So, you know, I can't imagine FERC is actually, at least with the current chair, Mark Christie, actually going to seriously implement that eo.

[Stephen Lacy]

I got a kick from your response to this executive order on X. You said this EO should be ruthlessly mocked. It was written by Grok at the direction of a 19 year old doge staffer. There's no other explanation. It's based on a fundamental misunderstanding of how agencies work. It makes zero sense, is ruthlessly mocked. A legal term.

[Ari Pesko]

Well, look, the EO lists the statutes relevant for FERC, and it includes a law that Congress repealed in 1987. So technically, if you go to the FERC regs, there's a couple of definitions that are still on the books for some reason from that law. But there's nothing that FERC does under this law. There's no reason you would include that even if you were trying to take this executive order seriously. So it's clearly written by somebody who has no idea what FERC does and what its regulations are supposed to do.

[Stephen Lacy]

And what is the generous interpretation of what they think they're trying to do here?

[Ari Pesko]

I don't think there is one. Look, Elon Musk said something back in February that he thought all regulations across the entire federal government should sunset and we should basically start anew. And so I think, you know, I don't know, somebody decided that. Well, Elon said it, so let's turn it into an executive order. That's my only explanation. And they actually made it more narrow. They just applied it to certain energy regulatory agencies, and they didn't do it across the federal government.

[Kathryn Hamilton]

One of the court cases that the executive order cites is Loper Bright, which is removing Chevron deference. In other words, agencies can't just make sweeping decisions that instead, Congress has to be very specific. Well, first of all, when the Supreme Court made that decision, I do not believe they meant for it to go backwards and for all of these previously issued regulatory guidance and rules to be pulled back as a result of it. But just remember that that cuts both ways. So I think as you look at sort of what are the. What are the agencies able to do and not do? I believe some of the agencies would like to have more discretion than the law allows. So not only is it not lawful in any way, this executive order, but it also doesn't really get them what they want because they're two sides to the same coin.

[Stephen Lacy]

There's also coming staff reductions at ferc. How might these staff reductions affect the Ability Commission's ability to function?

[Ari Pesko]

Most of what FERC does is respond to industry filings. So on the power sector, it's every time the utility wants to change its rates, its interstate rates, or the RTOs want to change their market rules from the gas side, again, there's rate changes or there's applications to build new pipelines, the industry can't move forward. Without FERC responding to what it wants to do. And so if you cut too much staff, you slow FERC's capacity to adequately respond to those filings. And also if FERC isn't doing a good job, it's going to end up losing in court. So it has to be thorough with the orders that it issues or else we're just sort of going in circles once FERC loses in court. So, you know, Mark Christie recently said that FERC was going to lose about 55 employees due to the sort of government wide cuts. But I don't know that there's been any accounting publicly of sort of which departments within FERC that's coming from. So it's hard to assess what the consequences might be.

[Stephen Lacy]

So let's look at another big regulation story. This month, the administration issued an executive order that gives the Department of Energy unprecedented authority over which power plants can close. It's like a mechanism for the Energy Secretary to force coal plants to stay open even when utilities and grid operators might otherwise retire them for economic reasons. So, Ari, help us understand what this executive order actually does.

[Ari Pesko]

It tasks the Department of Energy with developing a methodology for assessing the resource adequacy of each region of the bulk power system and then create a protocol for identifying power plants that are needed for reliability and then potentially issuing orders to retain those power plants to prevent them from retiring. And it sets a pretty quick timeline for doing all of this. And it's going to do it all in the shadows without any sort of public comment, period.

[Jigger Shah]

Ari. I mean, under the Federal Power act, the doe, you know, run something called, you know, It's a section 202C which is really the sort of emergency powers the DOE has. They use it often during hurricanes or, you know, sort of weather events, etc. You know, how narrow is that supposed to be? And where is the, you know, the executive order sort of pushing DOE to take it?

[Ari Pesko]

Yeah, I think there's several legal problems with what the EO envisions here. You've hit on one of them, which is that this is a provision designed for short term disturbances, not long term resource adequacy challenges. So I think section 202C is a poor fit for what the administration is attempting to do here. It's also problematic that they're doing this without any public input because the EO says this is effectively a way that they're going to streamline how they implement 202C. The Department of Energy has rules that go back several decades about 202C. You can't change federal rules without doing a notice and comment rulemaking. And the industry already has mechanisms by which it assesses resource adequacy and retains needed generation capacity. Presumably the administration is going to do something different from what the industry is already doing. And a court's going to find that arbitrary and capricious under federal law unless you have really good evidence. But if you're going to develop that evidence in secret, it seems unlikely that that you're going to have that evidence. And then there's one final legal problem. Well, I shouldn't say final. I'm sure lawyers will come up with many more, but something called the major questions doctrine that the Supreme Court unveiled a few years ago when EPA issued a rule that was going to effectively reduce the amount of coal fired power on the system by setting emission limits in a novel way. And the Supreme Court said, well, you need clear authorization from Congress if you're going to determine if you think an agency is going to determine how much coal fired power we're going to have on the system. Well, here we're doing exactly the same thing, but in reverse. So you know, there's clearly no clear authorization in the law for using section 202 in this way.

[Kathryn Hamilton]

And guess who brought that case with West Virginia versus EPA and the major questions doctrine. That would have been Lindsey C. For commissioner, who was then the Solicitor General of West Virginia. I would also note that in the first Trump administration they tried to do something with coal as well. They said, and they gave this project to our friend of the pod, Travis Fisher, and said, you need to come up with a report that shows that coal is more reliable than other resources and we want FERC to open a docket. Now, DOE can't force FERC to do anything, but they asked FERC too. So FERC opened a docket to discuss this. Alison Silverstein did an incredible job with her report showing zero evidence based on facts. There was zero evidence that coal was more reliable. And FERC ruled 5 to nothing against this because there was no evidence. So again, that's, this was not a political decision in any way. It was all evidence based. And so I would suspect that this would have an impact too in the way they rolled this executive order out.

[Stephen Lacy]

And how do we expect this in particular to work its way through courts?

[Ari Pesko]

It's a great question because they're trying to avoid any sort of public input in there for any sort of judicial review. My expectation is that in about 90 days they'll come out with a list of power plants that they think need to be retained. And if there's an existing mechanism in that particular region for paying those power plants like they already have, for example, RMR agreements ready to go, then FERC may not be able to get involved at all. But if you're in a region where there is no compensation mechanism or where DOE is asking that power plant to do something new that it doesn't usually do under 202C, like produce a certain amount of energy, that might also lead to a rate making process at ferc. But the bottom line is I don't know that anybody's going to be able to challenge anything in court until FERC issues that order that identifies the power plants or until FERC takes up the compensation issue. And there's no track record of any successful challenges to 202 orders. But that's because these are always short term orders that typically sometimes they apply for only a couple of days and there's often sort of little point in litigating them.

[Jigger Shah]

One thing I'm curious about though, Ari, is when you referred to the Project 2025 documents, you know, the folks that wrote that section, right, dan Lee and McNamee, like they really want to return our country back to sort of the Southern company type model, right? They're sort of anti deregulation, they're anti regional transmission operators, they're anti independent system operators. And so, you know, like I'm trying to understand what the actual plan is that they had in mind when they wrote that section of Project 2025 because I feel like it's far more, it's far reaching. It's not just about being anti renewables.

[Ari Pesko]

Yeah, I would add that I think it's also anti technological progress. Their vision of the power sector is that has to run based on sort of traditional fossil and nuclear units that you know, we've had since the 60s and 70s. And that's the way you run a power system. And anything else is going to just create problems. And yes, they're also anti regionalization, anti RTOs. But I think to me what kind of ties it all together is the anti renewable sentiment and that that's creating the problem with the RTO is that they've been too generous in allowing these resources to connect and the subsidies that these resources are receiving are distorting all the markets and that is just generating all these problems. So I think it's, I agree with your assessment and I think it just sort of, from their perspective works hand in hand with the anti renewables rhetoric.

[Jigger Shah]

The reason I think this matters so much, Ari, is just because I'm trying to understand the sequence of events. Right. Because we saw, you know, Willie Phillips, I think, just announce his retirement. I think from the first he was asked to leave. Yes, very true. And it's very obvious to me that Mark Christie is unlikely to survive as FERC chair just because he really does care deeply about affordability. And I don't see how this White House would allow another sort of Neal Chatterjee moment to occur here. Right. Where Neil stood up to a lot of the coal stuff that they were doing in the last term. And so I think Mark Christie would do the same thing if he thought that this was going to lead to higher electricity rates. And so I'm just trying to like. Part of what I'm concerned about is that because in this particular case, not in other cases, but in this case, the frog is boiling in the pot so slowly. I think people are just not understanding that there is a plan here. And the plan is actually to eviscerate a lot of these institutions that frankly, Pat Wood probably put in place when he came in with the George W. Bush administration. Right. I think they want to reverse all of those precedents from 25 years.

[Ari Pesko]

Yeah. I think the industry restructuring is now 30 years old. There's really no way to quite undo that. But you can try to weaken it. And I'm not quite sure what mechanisms they're going to try to use to do that. They certainly want to stop its expansion. They certainly want Southern Company to continue to exist as Southern Company forever, as Southern Company completely intends to do. But you can't undo pjm. So I don't know exactly what they're going to try to do other than force rules on the system that are going to harm wind and solar and maybe storage as well.

[Kathryn Hamilton]

So one thing I'm watching related to that is that some of the renewable energy resources that are waiting in interconnection queues to come online were waiting based on unused transmission capacity from expected coal plant retirement. So if those coal plants don't retire, it might be that that transmission capacity is still blocked up and they would need to redo interconnection studies, which just makes everything take so long. Take so long anyway. So I'm just wondering if that's something. It seems like a short term issue and we don't really know how that's going to spin out. But I'm interested in what you think of that.

[Ari Pesko]

It's a great flag. I hadn't thought of that consequence. So I'M not sure I have anything else on that.

[Stephen Lacy]

All right, so we're less than 100 days into this administration. We've yet to see how these changes are going to play out at an agency like ferc. Let's game this out over a year or a few years. Ari, how could these changes potentially shift the risk calculations for investors that are putting billions into long term infrastructure? What are some of the worst case scenarios if we they put all this stuff together and it plays out as the administration wants?

[Ari Pesko]

You know, I'm going to be very interested to see who they nominate both for Willie Phillips position and see what happens with Mark Christie's position. His term is up in a couple of months and so whether they renominate him or go in another direction and that I think that'll tell us a lot about where FERC is going. I mean, FERC has a long, there's a long history of nominating former or current state regulators, nominating folks from Senate staff or have other like sort of connections to US Senators. And so, you know, there's sort of a lot of standard picks they might choose here or they could go in other more radical directions. And so that'll tell us a lot. We'll know a lot more in a few months, I think.

[Stephen Lacy]

Catherine, as a FERC enthusiast, what is the story or set of stories you're watching most closely?

[Kathryn Hamilton]

Yeah, so what I don't want to do is send investors into a panic, which is how you've teed us up.

[Stephen Lacy]

I think they might already be there.

[Kathryn Hamilton]

I think we need to see what happens. I completely agree with Ari that the makeup of FERC means a lot. And what I have found interesting is I've had several meetings with all the commissioners and Commissioner C, whom I mentioned before, was part of the West Virginia case on Major Questions doctrine. She has been very reasonable to work with and to speak with and to present to. And I mean, I don't know if that if she's just waiting and learning. But I think when people get into ferc, they have a lot to learn. First of all, if they haven't ever been at ferc, I mean, I would say Commissioner Rosner has the most experience because he worked at FERC for years, so he understands how it works. But people who come in new, it's just a huge learning curve and they begin over time to really respect the organization and how it functions. And I think they realize, you know, I'm looking at the evidence maybe with a different lens than someone, someone else. But in the end we're going to come up with a reasoned response. And so let's like wait and see what the makeup is and what the positions they start taking are.

[Stephen Lacy]

Open Circuit is brought to you by onenergy1 energy is one of the fastest growing battery storage IPPS delivering storage solutions for utilities, enterprises and critical infrastructure. With 300 megawatt hours deployed across 65 projects, their proprietary battery solutions are helping helping bridge the gap to a future where energy is abundant, clean and resilient. With a vertically integrated approach covering design, financing, software and operations, On Energy seeks to make storage simple. Building on this expertise, On Energy is now expanding its focus on the data center market. As energy demands grow in an AI driven world, On Energy is redefining energy infrastructure because downtime just isn't an option. Click the link in the show notes to learn more or Visit on energy. OpenCircuit is supported by Kraken, the only proven AI powered operating system for utilities. And let's face it, utilities are grappling with an astonishing array of challenges. And Kraken removes the outdated, siloed tech that's holding back most utilities. Their unified platform streamlines and enhances operations, meaning happier teams and happier customers for a fraction of the cost. Join leading utilities across the globe and redefine the sector alongside Kraken. Click the link in the show notes or go to Kraken Tech to learn more. Let's turn now to another story about regulatory power. Who decides how we're going to pay for all these new data centers? Jigger, Ari wrote the report of your dreams.

[Jigger Shah]

Oh.

[Stephen Lacy]

You're constantly talking about how ratepayers are going to suffer from these large infrastructure investments in data centers. And so I feel like he heeded the call in exploring this.

[Jigger Shah]

Well, you know, it's one of those things where I think a lot of this was intuitive, but, you know, like actually digging into the data and getting someone to show the math, I think was critical. Right. Which is why Ari's report was so important, I think. But I mean, it is, it is clear, right, that if you don't deal with Super Peaks and you just make them higher, then the cost to the entire system is gargantuan and they're not paying for all of it. And so they're, they're, they're sharing a lot of that cost. But no, I thought Ari's work was, is really important in this really important conversation that we're having right now.

[Stephen Lacy]

So what is that work? Let me explain. We know, of course, the big tech companies are pouring hundreds of billions of dollars into data center development. We could see a trillion dollars in capital investments in data center infrastructure in the next few years. A huge amount. A majority of that investment will be in the US and some utilities are projecting that their total energy sales could nearly double by the early 2000s. Primari of data centers. And of course, these are not ordinary customers. These are facilities that can consume as much power as a midsize city. But when these tech giants want to build a new data center, they often negotiate special contracts with utilities, Contracts that are frequently kept confidential and approved with minimal public scrutiny. So Ari and Harvard legal fellow Eliza Martin reviewed some 40 state regulatory proceedings involving data center contracts and found patterns that suggest these deals may not be as beneficial to regular consumers as you utilities claim. So Ari, the headline finding in your report is that consumers could be subsidizing big tech's energy consumption without even knowing it. Walk us through what your investigation found.

[Ari Pesko]

Yeah, look, just to state the obvious here, utilities are monopolies. And we are concerned that a monopolist might exploit its captive ratepayers. And this is a constant concern of utility regulators that when utilities operate in a competitive market, they may sort of not play fairly because they have an opportunity to sort of shift costs from the competitive market over to the captive market. And so that was our concern is that, look, the data center data center hype train has been moving along pretty quickly over the past year or so with all these load projections. And this is a massive profit opportunity for utilities to spend capital in order to meet the needs of of these new data centers. And our concern is that the data centers are not paying for their fair share. So what we tried to do is identify the sort of subtle mechanisms that may be hidden in utility rate structures that are allowing, enabling these cost shifts from data centers to regular consumers.

[Stephen Lacy]

Yeah. So what are those subtle tools you found? What you call secret contracts between utilities and data centers. Can you explain what makes these agreements different?

[Ari Pesko]

Yeah, so that, that the secret contract sort of side deals between utilities and data centers are highly problematic for a few reasons. But just to take a brief step back, right. Utilities, utility rates are regulated by a public utility commission. They're set by a rate case that is a public proceeding that allows all parties to come to the table and tell the utility commission how they think rates ought to be structured. These side deals happen outside of that, that public process. They're negotiated between a large energy user like a data center and a utility are often reviewed, approved by a utility regulator. But the problem is, unlike a rate case where a lot of parties are coming to the table to offer competing evidence in these proceedings about these secret contracts, it's often just the utility that's there. So regulators have to make decisions based on the record evidence before them. And when they're only hearing from the utility, it's going to take a lot for the regulator to reject that deal. And that's particularly true here, where there's a lot of political momentum in a lot of states behind these data center deals. You have governors making very proud announcements about these investments in their state and what sort of utility regulator is going to get in front of that. So we don't have a lot of evidence that the data centers are paying their fair share through these deals. And we're just generally skeptical because of the utility incentives and the opportunities here to shift costs from the competitive market onto captive ratepayers. And just one final thing on this, we have some states where utility regulators don't actually review these deals at all. And so all we have is just the word of the utility spokesperson telling us that everything's going to be okay.

[Jigger Shah]

Yeah, I mean, one of my big challenges, as you know, is that I don't actually think that the data center companies are evil or are trying to pass costs to other ratepayers. I think that they are at at odds with utility culture. I'm not even sure the utilities are trying to run up the bill on the rest of their ratepayers on purpose. I think that when I've talked to the utilities in Maryland, for instance, the PJM announced a bunch of transmission projects in February of this year, and all of them, basically, to my first order approximation, are for data center access. And when you look at those transmission lines, particularly the ones from West Virginia to Frederick, Maryland, and then down to Virginia, that is really to subsidize Microsoft's data centers in Frederick. And when you talk to the regulators in Maryland, they're like, I know Microsoft offered to pay for all the costs, but we didn't really know how to charge them and we didn't really want to put together these new tools and we didn't really want to figure this out. And so we just decided to rate base it across the whole state of Maryland and let poor people in Baltimore pay for them, because whatever. And so, so, like, my feeling is that I don't think people are being evil about it. I think that they are just being lazy about it. And that bothers me to no end. I think when you're thinking about just how big These numbers are. And we are clearly at an affordability cap. You know, one in six households in the United States now are behind on their energy bills. Behind. Right. And so at some point, like, you just can't keep raising rates. Right. It just gets worse and worse and worse from there. And I think that there are a lot of people who are wanting to be good citizens around the table, but I think we're having a hard time figuring out exactly what tools people should use to allow them to be good citizens.

[Ari Pesko]

Can I just jump in on that for a second? I just want to totally agree with the example jigger provided of PJM transmission development trickling down to Maryland ratepayers. That's an issue identify in the paper where Maryland, as far as I can tell, is allocating PJM transmission costs based on a formula that it established 25 years ago. And so really ought to revisit how these costs are paid for. But in terms of the utility intent here. So one example we give in the paper is a 2024 case about Duke Energy. Duke was facing competition in North Carolina from a power plant developer that was trying to pick off Duke's municipal utility customers. And the power plant developer eventually filed an antitrust suit in federal court against Duke because Duke was preventing it from connecting to Duke's transmission system. And when Duke's one of the largest municipal utility customers contract was up, Duke decided to offer essentially a $325 million discount to that municipal utility. And documents that came out in litigation revealed that Duke had an internal plan to pass that the cost of that discount onto its captive ratepayers. So these things do happen. I don't have any specific evidence that there's sort of any internal plan with regard to any specific data center. But like, that incentive is there. And sometimes utilities take advantage of the opportunities that they have.

[Stephen Lacy]

Right. And the only reason why we knew about that shift, that cost shift of the discount was because there was a legal challenge.

[Ari Pesko]

That's right.

[Jigger Shah]

Yeah. If there was one utility that I do think actually plays dirty, it's probably Duke year after year after year. I mean, remember when they forcibly let all of their coal fly ash ponds go into waterways during hurricanes because of EPA stuff? And then they fought tooth and nail to make sure that their shareholders wouldn't have to pay to clean it up. I just think that Duke definitely is probably the biggest exception.

[Kathryn Hamilton]

One thing I wonder about, Ari, is if we could create a separate class of customers that are data centers. And certainly they've done that throughout various utility service Territories for large industrials. And so then a large industrial customer, and I've had experience with this in Louisiana where the large industrials will have bilateral agreements with the utility where they lay out, you know, here's the rate that applies to us based on our usage. Of course those are legacy plants for the most part. But if they could create their own class of customers, it would provide a lot more transparency. And I they pull this from, especially from Citizens Utility Board in Minnesota that tries to fight for fair rates and they have a bill that's being carried in their legislature to have large data centers pay their full cost of service, to have data centers cover the cost of infrastructure that is built to support them so that it isn't passed along to ratepayers for them to meet the state's renewable and carbon free electricity standards because the state has its own policies for that. And then also to consider these customers as a separate class. And I'm curious what you think of that.

[Ari Pesko]

Yeah, we're seeing some states move to that model and it's procedurally, I think a lot better than these secret contracts because you can have an open process to try to figure out this cost allocation challenge. Now it's still cost allocation is a sort of subjective exercise where every party comes to the table with their own self interest to reduce their own rates and raise them for everybody else. So it's not like a panacea to just say, well, we're going to have a separate data center rate class. That still leaves a lot of technical work to try to isolate, appropriately isolate the data center costs from everybody else. But I think it's an important step forward to move towards that model.

[Jigger Shah]

And the other approach you can take, of course is really just to make the data centers look like large industrials. Right. Because the biggest problem with data centers is they just are not flexible. And so if you just said for these 74 hours a year where we're hitting super peaks, we have the ability to, you know, restrict your allocation of electricity. Right. And then you can co locate batteries there if you want so you could run during those 74 hours and then once you paid for those batteries, we could use those batteries as a grid resource. Right. And so part of this is just saying that you have to make sure that your low profile is flexible enough to be able to not increase cost to everybody else within the grid. Right. So that's the other approach. And then those costs would be on their side of the ledger. Right. By definition they would just add that to their capital costs for Their data center.

[Stephen Lacy]

Yeah, that feels consistent with one of the recommendations from the report too. Is that right, Ari?

[Ari Pesko]

Yeah, I mean, look, we piggyback on Tyler Norris's paper on this at a Duke and yeah, there's definitely value and flexibility. But look, unfortunately you guys have been talking about the value of flexibility and demand side solutions for a long time and we know that utilities are not taking full advantage of those opportunities because it's inconsistent with their basic incentive to deploy capital. So yes, I think this is definitely a solution, I would say. And batteries would be great. Unfortunately, most of these data centers seem to have a fleet of diesel generators on site, which presents its own challenges for local people subjected to the noise and air pollution.

[Stephen Lacy]

Can we talk about another example? This is Meta's plans to build this massive new data center in Louisiana which will get served by over 2,200 megawatts of proposed gas plants by Entergy. And one of the issues here is that Meta and its data center affiliate are not parties on the application to the Public Service Commission, so they don't have to release important details on energy demand and other details about the facility. So what's the strategy here and, and what information should ratepayers get to see?

[Ari Pesko]

Yeah, I mean this is, I think the poster child for a shady deal. So you know, the governor of, of Louisiana announced this big $10 billion investment from Meta. Entergy has said it's going to build $3 billion of infrastructure which includes 2 plus gigawatts of natural gas fired power plants to support the data center. So it has started the process in the Public Service Commission of Louisiana to get this infrastructure permitted. It wants to fast track it to avoid competition, which is itself problematic. And it has, folks have asked it in this process, well, how big, how much energy is this data center going to use? And Entergy says we can't tell you, we don't even know. So we don't know how much of this infrastructure is actually needed for Meta or how much is Entergy trying to fast track through this process now how much is Meta going to actually pay for it? We don't know that either because they have a side deal. But Entergy has taken the position that they don't even need to file that with Louisiana regulators under the law. So we don't know how much of this 3 billion is entergy. Excuse me, has Meta actually agreed to pay? And what happens if there are stranded costs? I mean, what happens if Meta in a couple years decides it wants to walk away from the project? Or in fact it only needs half of the energy that it initially anticipated. Are Louisiana ratepayers going to be on the hook for all that? And we just have no idea.

[Kathryn Hamilton]

And Ari, in Mississippi, they even passed a law that would prevent the regulators from even even being able to have any information or decision making ability when they're serving Amazon. I think it is.

[Ari Pesko]

Yeah, that's another Entergy deal. So maybe we need a special rule for Entergy. Yeah, that the legislature just said no public oversight of this deal at all.

[Stephen Lacy]

One of your solutions is to develop renewable energy, clean energy parks, and just disconnect from the grid entirely. Tell me about that.

[Ari Pesko]

Yeah, so there's a sort of strong version of this which is let's develop data centers completely free of the utility system. Let's have the data center, you know, contract with a clean generator and just create their own facilities. But, you know, that would in a lot of states require amending state laws because it could be interpreted as intruding on the utilities monopoly. There's a softer version of this which just says in states where we have vertically integrated utilities, which is about 2/3 of states, let's require the data centers to go and procure their own generation because that can be a significant cost and opportunity for the utility to socialize that cost across the system and that can impact other ratepayers. So if we tell the utility, go sign a. Sorry, if we tell the data center, go sign a contract just with some generators that would insulate ratepayers from those costs.

[Stephen Lacy]

Jagger, what do you think about that model?

[Jigger Shah]

I mean, look, I think that all of this is lip service because what you find with the data center companies broadly is that they make data center development companies compete with each other. And what happens is they're all basically developing data centers and working out with utilities what the actual interconnection might look like, et cetera, then they go to the hyperscale data center companies and others and say, would you like to buy our facility? And the data center company is saying, I have five such facilities that I'm choosing between. What rate did you negotiate? Oh, you negotiated a rate that's a half a cent cheaper than the other one. Great. I think that what's very obvious in this particular moment is that the hyperscale data center companies have completely abandoned their clean energy goals. Right. And they just want the cheapest possible power, which I find flabbergasting because the capex to build one of these facilities is $33 billion for a 1000 megawatt load facility. Right. And all of the costs that we're talking about are like $50 million a year. Right. And you know, that 33 billion generally gets amortized over seven years because most of it's Nvidia chips and it's, you know, that's 22 billion of it. And so they get to replace the chips in years. So the cost of power is irrelevant to their overall cost of compute for AI. Right. And so for them to, on this side put all of these promises and goals on their website and on this side basically say, well, the data center developers didn't develop a clean transition tariff or they didn't figure out how to negotiate a deal with the utility to do this thing. And we're just stepping into the deal that they had already negotiated. Just seems highly like suspect. They could have done way better.

[Ari Pesko]

But I think Jigger's comments on sort of the relationship between the developers and the hyperscalers, you know, emphasizes the need for good regulation here, for good rules to prevent sort of shortcuts that are going to end up costing consumers. And these hyperscale companies, a lot of them are very engaged on these regulatory issues. They're in a lot of these dockets. And so, you know, some of them are sort of recognizing the problem here that they may be causing, whether it's intentional or not. And I think they're maybe not going as far as they should though in trying to protect consumers. And so ultimately, really we need good regulation. We need state legislators engaged on these issues to make sure that consumers are protected because the industry is not going to do it itself.

[Kathryn Hamilton]

Yeah. One state that has been really engaged on this is Virginia. So the Commonwealth of Virginia, 70% of global Internet traffic goes through Northern Virginia, huge data center hub. And the Joint assembly, the General assembly of Virginia commissioned a report to say, all right, how do we make sure that we allow this rapid expansion, which is not just affecting the customers in the Commonwealth of Virginia, but all of pjm, it causes changes throughout pjm. How do we do that and also allow for our ambitious energy transition goals to move forward because they have statute in place, similar to Minnesota has statutes in place. So some of the southern states don't, but the states that do, and Virginia especially is having to deal with this. So some of their findings are to improve their frequency of their cost allocation factors to increase the charges, of course, forecast, do better job forecasting for demand from these centers, do long term service commitments with these data centers and be much more transparent about that, allow for more self supply as we've talked about and then just more direct assignment of new infrastructure costs. So I don't think that we're limited to facilities that are going to build dirty plants because they can't because of state regulation and state law. So it's interesting what Virginia is having to grapple with right now.

[Jigger Shah]

Katherine. I mean, I think to your point, one of the big challenges I see is that with the FERC conversation, we need to figure out how to move power around to be able to create bigger balancing areas. Right. And you see that California is trying to do it with their new Senate bill, but you've got a FERC Project 2025 document that's suggesting that we should stop with this expansion and figuring out a way to get people to trade power along greater distances. And then on the other side, you've got the data center companies who want to buy clean power. And at least they say that on their website, et cetera. And the only way for them to do that is to be able to move power around and do all these things. The notion that they're going to build. Build a solar farm or a wind farm or whatever, like basically within the county that they're putting their data center is unlikely. And so part of the challenge I have with this moment is that I think that we are in a place where we are going to go to dirtier sources of power. I understand what you're saying, which is that there are state laws. I think that if you mandate that some of these coal plants have to stay open or these natural gas plants have to stay open. Right. Then I think you are going to end up with all of those power issues. And I think it's going to be a lot harder to build a lot of these new transmission lines because of the way in which Ari talked about the socialization of costs happening in Maryland, et cetera. And so what I'm worried about is that everyone is sort of pushing for making sure that costs don't get allocated to their customer class. And then you separately have this big megatrend on the FERC side. And I don't think that there's a plan. I honestly think that there's a whole bunch of skirmishes and no one is actually plotting out exactly what this next 20 years looks like.

[Kathryn Hamilton]

Yeah. As Senator Dale Bumpers used to say, everybody wants to go to heaven, but nobody wants to die. Well, then the same way Rich Klik, when he was chair at ferc, would say, everybody wants transmission, but nobody wants to pay.

[Ari Pesko]

And that brings us back to the affordability crisis that we're facing. I mean, I think on the data center issue, we're seeing a lot of states take up this issue legislatively primarily, but also at the commissions trying to make sure that data centers are paying their share. But I share Jigger's concern that we're just not going to be spending efficiently as an industry. We're going to go back to old solutions because that's sort of the status quo bias that's embedded throughout the system, rather than trying to take advantage of new technologies and build infrastructure that can actually ultimately lower costs.

[Stephen Lacy]

What a great conversation. Ari Pesko is the Director of the Electricity Law Initiative at Harvard Law School. His research with Eliza Martin is called Extracting Profits from the How Utility Ratepayers Are Paying for Big Tech's Power. We're going to link to that in the show notes and Ari, it was a real pleasure talking to you. Thanks for being here.

[Ari Pesko]

Thank you so much for having me.

[Stephen Lacy]

Catherine, be nice to your chatbot, please. Good to see you.

[Kathryn Hamilton]

Thank you.

[Stephen Lacy]

Jigger, good luck with your award today. Don't trip on stage.

[Jigger Shah]

I mean, it could happen. You never know. Stranger things have happened here at the College of Engineering at the University of Illinois.

[Stephen Lacy]

Good to see you both. Open Circuit is produced by Latitude Media. Jinkar Shah and Katharine Hamilton are my co hosts and the show is produced and edited by me, Stephen Lacy. Sean Marquand is our Technical director and he wrote the theme song. Anne Bailey is our Senior podcast editor. Latitude is supported by Prelude Ventures. Prelude backs visionaries accelerating climate innovation that will reshape the global economy for the betterment of people and planet. You can learn more at Prelude Ventures. For more in depth reporting on the topics we cover on the show, including a story about the report that Ari put Together, go to latitudemedia.com Sign up for our daily weekly AI Energy Nexus newsletters. You can just hit the subscribe button right there on the homepage. And of course find this show anywhere you get your podcasts, Apple, Spotify, YouTube and share it with your friends so we increase our audience. Thanks to everyone for listening. We will see you next week. Talk to you soon.