State Energy Regulatory Approaches to Powering Data Centers

Across the country, legislatures, public utility commissions, governors’ offices, electric utility executives and ratepayer advocates are responding to a common set of pressures from the expansion of data centers: unprecedented load growth, concerns about grid reliability, and water and land use impacts. At the same time, policymakers are weighing those pressures against the significant economic growth and tax base expansion that data centers provide. The result is a rapidly evolving energy policy landscape that is redefining how large loads are integrated into grid.

This article analyzes key emerging themes across states rather than cataloging any individual state’s statutes or dockets. State policy frameworks are evolving to address the scale and energy impacts of data center growth, even while ongoing considerations occur at the federal level to redefine the boundaries of federal versus state authority over powering data centers. As a result, until FERC intervenes and successfully defends its pending new rules in federal courts, these state-level frameworks will materially shape data center projects.

The State Role in Electricity Regulation
Understanding current state authority over and policy responses to data center load growth requires an appreciation of the traditional role states play in electricity regulation. Under the cooperative federalism balance of power set forth in the Federal Power Act (FPA), FERC has authority over wholesale sales of electricity in interstate markets, interstate transmission, and reliability standards. States retain jurisdiction under Section 201(b) of the FPA over retail electricity sales, local distribution facilities and the obligation of utilities to serve customers within their service territories—areas that are central to how data centers obtain power and connect to the grid.

State public utility commissions historically regulate retail electric service to end-use customers on a cost-of-service basis, approving tariffs and capital investments of utilities to ensure that rates are just and reasonable while allowing utilities to recover prudently incurred costs. States also oversee utility planning and infrastructure development, including the review of integrated resource plans and the approval of transmission and distribution investments that are recovered through retail rates. In addition, states, and often local governments, exercise authority over the siting and permitting of electric generating, transmission and distribution infrastructure. Since large load data centers are ultimately end-use customers, states retain primary regulatory authority and responsibility over the requirements for powering such facilities.

Against this backdrop, most state legislation and regulation affecting data centers operate within long-established areas of state authority: retail rates, distribution interconnection, utility planning and infrastructure siting. This authority gives states meaningful influence over powering data centers. As data center load grows in scale and concentration, states are reassessing assumptions embedded in traditional retail rate regulation and planning frameworks.

With respect to on-site or adjacent power generation, the regulatory framework depends on whether or not the generating asset is connected to the interstate transmission system. Increasingly, with encouragement from FERC and given the practical reality that artificial intelligence-scale data centers are experiencing four- to seven-year delays for interconnection to the grid, many operators are pursuing on-site generation (especially natural gas) under “Bring Your Own Generation” (BYOG) models that operate either fully islanded or in hybrid configurations with the grid. Projects that avoid transmission-level interconnection can reduce time to power to roughly three to six years, making BYOG a prevalent hyperscale strategy to power data centers. Such unplugged systems would only be subject to state energy regulatory jurisdiction, but they may present stranded asset risk and greater financing challenges.

Emerging State Policy Themes
State legislatures and public utility commissions are aligning in their responses to rising electricity demand from data centers, though approaches vary across the country. Recent enactments and proposals increasingly reflect a broader shift toward cost causation principles, grid reliability safeguards, and policy-driven constraints tied to clean energy and resource use. Trends among the roughly dozen states that have demonstrated regulatory approaches to data centers show the following themes:

• The states whose regulatory frameworks enable data centers to be paired with on-site or adjacent natural gas generation or behind-the-meter systems include North Dakota, Oklahoma, Texas and Wyoming.
• The states whose regulatory frameworks facilitate renewable powered hybrid models include California, Colorado, New Jersey (with BYOG) and Virginia (increasingly restrictive but favoring BYOG).
• The states with faster pathways for regulatory approvals for BYOG currently include Oklahoma, Texas and Wyoming (for industrial siting).
• The most consumer-protective states are California, New Jersey and Virginia.
• Other states with increasingly strong pushes to protect or insulate ratepayers from costs of powering data centers include Florida, Montana and Pennsylvania.

Prohibition on Cost Shifting
A central theme emerging across states is a renewed emphasis on ensuring that data centers bear the costs they cause the electricity system to incur. This policy objective shows up repeatedly in state legislative activity addressing large load interconnection standards and ratepayer protection. States are increasingly focused on preventing “cost shifts,” or the allocation of costs to upgrade the grid on residential or small commercial customers when those investments are driven primarily by new large data center load.

Minnesota provides a clear example of a state using legislation to establish guardrails around costs associated with large data center development. In 2025, the state legislature passed a bill that included ratepayer protection measures and required enhanced review of utility arrangements for large load. Infrastructure investments required to serve large data center loads—including those to support upgrading the transmission and distribution system—must be directly allocated to those customers rather than socialized across residential or small commercial customers. Similarly, Florida’s proposed framework would require large load customers to fund system upgrades triggered by their interconnection and to enter into service arrangements that mitigate the risk of stranded utility investment.

Many politicians and ratepayer advocates argue that new large load will not be broadly accretive to the electric grid. On the other hand, increased demand can actually help lower consumer prices because the transmission system already requires upgrades, meaning new load highlights an existing infrastructure need rather that creates one. However, many states are moving toward a model in which data center development is structured to avoid cross-subsidization of projects and to protect other customer classes.

Clean Energy and Reliability 
A number of states are also focusing on the source and system impacts of the electricity serving data centers. In jurisdictions with aggressive decarbonization goals, policymakers are considering measures that would require large data centers to demonstrate alignment with clean energy targets.

California, for example, has proposed legislation that would require new large load facilities to procure or develop clean energy resources sufficient to serve their incremental demand. Alternatively, these facilities may demonstrate that their load will not impede the state’s greenhouse gas emissions reduction goals. In contrast, in Texas, the policy approach is less related to clean energy requirements and more a reliability-driven framework for large loads. Texas passed a law in 2025 that would expand oversight over large loads and require that large loads be curtailed during electric system emergencies to ensure the stability of the electric grid. These initiatives reflect the view that large load growth may be accompanied by both supply-side or demand-side solutions depending on a state’s policy priorities.

Other Environmental Constraints
In parallel with electricity-related reforms, states are increasingly scrutinizing water and environmental impacts of large data centers. In water-constrained regions across the West, particularly in parts of California and Texas, policymakers have raised concerns about the cumulative impact of data centers on local water supplies used to cool data centers. Virginia has introduced legislation that would require data center companies to submit detailed water consumption estimates as part of their planning and zoning applications. Utah is pushing for similar requirements. Resource constraints—especially water—are moving from secondary considerations to material siting and permitting issues for data centers. In some jurisdictions, they are now being directly embedded into state-level policy frameworks governing large data center projects.

Regulatory Agencies as Active Policymakers 
Importantly, these trends are not confined to legislative action. State commissions and agencies are exercising existing authority to implement similar principles through tariff revisions, interconnection policies and integrated resource planning processes. For example, Colorado regulators adopted guiding principles that highlighted the need to address cost allocation and grid impacts associated with large load customers. Commissions in multiple states have directed utilities to separately model data center load growth and assess its reliability impacts. In Virginia, which has the largest concentration of data centers in the world with more than 650, regulators have introduced specialized large load tariffs or contractual commitments to mitigate risk to existing ratepayers. These tariffs are becoming so common that tariff design for large load is now an active, tracked area of policy development rather than a purely utility-by-utility commercial exercise.

The convergence of legislative and regulatory initiatives reflects a broader shift: States are not merely reacting to data center growth but proactively reshaping the rules under which large loads are served.

Strategic Implications for Developers and Investors
Taken together, these trends at the state-level have concrete implications for data center development:

• Upfront diligence is critical. Understanding state regulations toward large loads, utility planning processes and political dynamics within a state is as important as ever.
• Cost allocation decisions are occurring earlier in the project lifecycle. States are increasingly clarifying cost allocation principles and operational obligations before projects are approved or constructed.

• Adaptive power strategies can create competitive advantages. Projects that can adapt to evolving regulatory frameworks may face fewer obstacles. For example, facilities capable of pairing load with on-site or adjacent BYOG, incorporating energy storage, or participating in demand response programs may align more easily with state policies around reliability and cost causation.

• Tariff structures matter. Demand charges, curtailment provisions and cost allocation associated with system upgrades may have a greater impact on project economics than the advertised per-kilowatt-hour price.
• Integrated planning reduces delays. Coordinating utility upgrades, procuring generation and pursuing grid studies in parallel can help prevent sequential bottlenecks that extend development timelines.

Convergence with Federal Policy and the Risk of Preemption
State-level developments are also unfolding against the backdrop of significant federal regulatory activity. FERC is actively considering whether large loads that interconnect at the transmission level should fall under expanded federal jurisdiction, potentially bypassing traditional state oversight. In December 2025, FERC signaled a more assertive federal role in this debate by ordering PJM Interconnection, the regional grid operator for 13 states in the Mid-Atlantic region, to create three new transmission services that would facilitate large loads and co-located generation where large loads are physically connected to generators on the same site. That direction was reinforced in January 2026 through a Statement of Principles backed by the White House and multiple state governors. PJM was urged to hold an emergency backstop auction and take other measures to support reliability in the region given forecasted demand from data centers.

This federal-state intersection is critical. If FERC ultimately adopts such a framework nationwide, certain aspects of state regulation—particularly those governing interconnection of large loads over 20 megawatts as well as cost allocation—may be preempted. While states would still retain authority over siting, land use and retail rate design, the balance of energy regulation of large loads could materially shift to the federal government, essentially preempting states from more comprehensive energy regulation. Any potential realignment creates legal and regulatory uncertainty, particularly for projects structured around existing interconnection frameworks or cost allocation assumptions.

Conclusion
State regulation of data centers is entering a transitional phase. The era of largely passive accommodation is giving way to a more deliberate policy approach. While states continue to compete for investment, they are placing greater emphasis on protecting ratepayers from shifted costs, maintaining grid reliability and limiting resource impacts.

At the same time, the ultimate contours of state authority may depend on how far federal regulators go in redefining jurisdiction over large loads. Until that picture becomes clear, data center developers, operators and investors should expect continued policy development at the state level and should plan accordingly.