Ohio Utility Proposes New Data Center Tariffs, Angers Tech Giants

In May 2024, AEP Ohio opened a proceeding (Docket 24-05058) with the Public Utilities Commission of Ohio, proposing to create two new tariffs designed to help the company accommodate an unprecedented amount of anticipated load growth from an influx of new data centers within its service territory:

• A “Data Center Power” tariff for new data center customers with a monthly demand of 25 MW or more
• A “Mobile Data Center” tariff for new mobile data center customers, such as cryptocurrency miners, with a monthly demand more than 1 MW

These proposed changes stem from a desire to protect existing customers from “bearing the burden of new transmission if new large load customers do not ultimately connect to the system after committing.”

The roster of intervenors in this docket, featuring some of the largest names in the technology industry, as well as key players in retail and manufacturing, furnishes a clue about its importance: Meta, Amazon, Google, Microsoft, Walmart, and Constellation, among others.

The (New) Cost of Doing Business

The existing rider at the heart of this docket is AEP Ohio’s Basic Transmission Cost Rider (BTCR) through which the company currently recovers transmission costs. AEP Ohio asserts the BTCR’s “minimum demand charge,” which is based on 60% of contract capacity, is too low for data centers. For example, under the current BTCR:

• The minimum demand charge for a new data center with 500 MW of contracted capacity would be based on 60% of its contracted load, or 300 MW, totaling $26.8 million annually.
• If that same data center used 100% of its anticipated load (all 500 MW), its charge would be $44.7 million annually.

With a spread this large between the potential minimum and maximum charges under the existing rider, AEP Ohio wants data centers’ minimum demand to instead be based on 90% of their contract capacity. Using the same data center in the example above, the transmission charge would be based on 450 MW and equal $40.2 million annually. In addition, crypto/mobile data centers would be required to pay minimum demand charges based on 95% of their contract capacity under the proposed tariffs.

Beyond narrowing the range between minimum and maximum demand charges, AEP Ohio also wants data centers to commit to ten-year service contracts. AEP Ohio’s primary concern is that data center projects might be cancelled or use significantly less power than planned. This is problematic because, to serve the anticipated load at new data centers, AEP Ohio will need to spend billions of dollars over the next seven to ten years to plan, design, site, and construct extra-high-voltage transmission lines.

Data centers would also have a collateral requirement unlike other industrial customers: they would need to have A- or A3 (or higher) credit ratings from S&P and Moody’s, respectively, and cash equivalent to ten times the collateral requirement. Otherwise, they would need to provide a guarantee equal to 50% of the customer’s minimum charges for the full term of the contract.

In the above example, a 500 MW data center would pay ~$402 million in demand charges over ten years. This means it would need $201 million in collateral if it didn’t have both the minimum credit rating and ~$4 billion in cash. Therefore, the idea is to protect AEP Ohio against a data center’s later insolvency.

In short, AEP Ohio seeks to lessen the risk that the forecasted load growth shown in Figure 1 “may not show up at the level and time indicated or that transmission facilities will be overbuilt to serve the actual load that develops.”

Figure 1: Central Ohio Data Center Load Growth

Source: AEP Ohio

The Intervenors Respond

Intervenor comments, all of which AEP Ohio contested in July reply comments, all expressed concerns about undue harm. Specific objections included:

• Meta and Amazon already own several data centers in AEP Ohio’s territory and are wary that AEP Ohio might apply the new tariff retroactively. The new tariffs could negatively impact their terms of service, as Amazon stated in its filed comments. Meta also asserts the “tariffs depart from traditional rate making principles by classifying customers by business type rather than by their load characteristics.”
• Google has invested $4 billion in data centers across Central Ohio. It suggested in its filed comments that “changes to rate classifications and customer charges should be considered in a base rate case where cost of service, rate of return, and rate design issues can be comprehensively addressed, rather than through a tariff filing.”
• The Data Center Coalition, the national membership association for the data center industry, asserts the new tariffs contradict state policy that “explicitly prohibits public utilities from granting undue preference or imposing undue disadvantage on customers. The proposal is a one-sided commitment that places all obligations on data center customers and is notably deficient in actual analysis, economic or otherwise, that demonstrates how AEP Ohio’s solution would solve the problem it articulates.”

Conclusion

As evidenced by this docket, the U.S. is at a critical moment in grid-planning and management. Precedents are being set and strategies formed for how to accommodate the influx of data center load. The outcome of this proceeding will likely provide some early insight into the thinking of regulatory bodies as they seek to effectively manage the unprecedented and highly uncertain load growth associated with data center expansion, an issue currently facing many regions of the country.

FactSet currently provides coverage of rate design and cost of service rider issues through its Differentiated Ratemaking Report. This semi-annual report provides a detailed look at differentiated ratemaking mechanisms, like the rider at the heart of this docket, in each jurisdiction in the United States. For all jurisdictions, capital investment mechanisms are categorized along the lines of the utility value chain and listed by primary emphasis: generation, transmission, and/or distribution. In doing so, the Differentiated Ratemaking Report eases the shareholder’s task in finding riders that promote or otherwise account for capital investment.

This blog post is for informational purposes only. The information contained in this blog post is not legal, tax, or investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.