Overview
This Insight examines how a key ratemaking element, minimum billing demand (MBD), is being used nationwide by utilities trying to meet the anticipated power needs of data centers while protecting the interests of existing ratepayers. Increasing the stringency of MBD is now a common strategy across jurisdictions, potentially impacting hundreds of millions of dollars in utility revenue. As such, an understanding of MBD is crucial to understanding the emerging ratemaking strategies for serving data centers.
Context and Recent Trends
MBD is not a new construct. An MBD is a contractual obligation for a large-load customer to pay a minimum amount for service each month, even if the customer’s actual electric demand is significantly below its contracted capacity. Put another way, it is a minimum monthly “demand charge” designed to recover the fixed costs associated with serving a large-load customer. MBD is expressed as a percentage of contract capacity and provides the utility with revenue certainty, effectively serving as a backstop shielding ratepayers from potential impacts related to these unrecovered costs.
What is new in recent proceedings is that MBD is now being proposed at higher percentages for data centers than for other commercial and industrial customers. The following table shows a sample of the range of proposed MBD levels from various recent regulatory proceedings.
In all cases, the pending proposals and/or approved tariffs would require data-center customers to pay minimum monthly charges based upon 80%–100% of contracted levels.
While no parties in these proceedings object to utilities requiring data centers to enter long-term contracts with an MBD as a condition of service, the appropriate level of MBD is contentious.
To be effective, the implemented MBD percentage must reflect:
Data-center owners (Microsoft, Amazon, Google, et al.) caution that it is unnecessary for utilities to recover the entire cost of investment through MBD revenues. Data centers may have actual demands that exceed contracted levels, and they may remain in service well beyond the minimum contract term, obviating the need for an overly stringent MBD. Any excess generation capacity built also creates an opportunity for the utility to earn revenue through market sales. In addition, utility staff in various dockets have noted that the phrase "stranded asset," although pervasively used, is a misnomer in the long-term context. Even if a data center ceases taking service, the generation built for it will be needed anyway in the future (e.g., to replace retiring generation and/or meet other load growth). The generation is simply being built earlier than it would have been had the data center not shown up.
However, proposing a low-end MBD percentage draws protests from ratepayer advocates whose mission it is to protect residential ratepayers from paying for the investments required to serve data centers. These intervenors argue that the magnitude of the proposed load growth, along with the swift implementation timelines and the high level of uncertainty around both load size and duration, necessitate stringent MBD levels in order to protect other customers.
Revenue Impact Example
An example of the impact of the inclusion of an MBD clause is presented in the table below.
Assuming a customer with 100 MW of installed capacity achieves an actual peak demand of just 60 MW in each year of a 15-year contract, the inclusion of an 80% MBD clause in the tariff results in ~$109MM in additional revenue for the utility.
Conclusion
Public Utility Commissions (PUC) and utilities across the U.S. are now faced with distinct engineering and planning challenges as they attempt to navigate unprecedented load growth related to the proliferation of data centers. PUCs also face a U.S. Department of Energy proposal for federal jurisdiction over large-load consumer interconnection (FERC docket RM26-4). PUCs and regional transmission organizations assert this proposal may cause protracted litigation and regulatory uncertainty, disrupt orderly grid planning, lead to resource adequacy and reliability challenges, and frustrate speed-to-market objectives.
While approaches to the engineering and planning issues differ significantly from jurisdiction to jurisdiction, MBD clauses represent a near-universal constant in the strategies employed by PUCs to serve this demand while implementing consumer safeguards. As such, an understanding of MBD is crucial to gaining an understanding of the emerging tariff landscape and may also provide important insights into the level of risk individual PUCs are willing to accept in order to attract data-center customers and the economic benefits they bring with them. Careful scrutiny of proposed and approved MBD clauses is warranted for anyone with an interest in the data center sector.
Be sure to register for FactSet’s upcoming webinar diving into how the rapid expansion of AI data centers is driving electricity load growth and reshaping energy landscapes across the United States.
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