The exploding demand for energy to power hyperscaler data centers is leading to consideration of co-locating new generation (nuclear or otherwise) and data centers.  As we explained in Part 1 of this blog, co-location is attractive to hyperscalers because of its potential to provide those data centers with contractually committed energy supplies, delivered over dedicated wires, thereby minimizing impacts on both the regional transmission grid and the local utility electric distribution system.  Theoretically, the concept of co-location could mitigate FERC’s reliability concerns and avoid shifting costs to other end-use energy customers.  But—and this is a big but—there are currently no FERC-recognized or State-approved regulatory pathways for co-location of large base-load generation units to directly serve single end-users with massive load.  Consequently, there remain regulatory barriers and uncertainties to implementing co-location arrangements.  In this blog, we discuss the sources of regulatory uncertainty and some recent FERC developments.  

Federal-State Overlapping Jurisdiction

There are a number of complex reasons for regulatory uncertainty facing data center co-location arrangements. One major factor is a fundamental jurisdictional split between federal and state authority.  Generally speaking, state law, not federal, governs whether and under what terms and conditions retail end-users can purchase and receive energy directly from a generation facility.  So-called consumer choice laws and rules that permit bypass of the local electric utility vary from state to state and were generally not adopted with data center co-location in mind.  Of course, states may choose to amend these laws in the near future as they compete to attract hyperscaler data centers.  State regulatory agencies also generally approve the building and location of new generation and usually do so in the larger context of long-term planning for both their local utility systems and the regional electric grid.  Approval of new generation to serve a single end-use customer, such as a hyperscaler data center, is not typically accommodated under state rules and regulations. 

On the other hand, under the Federal Power Act, FERC has jurisdiction over wholesale sales of power.  FERC also regulates the transmission of electricity on the electric grid, and the “interconnection” of generating facilities to the grid in a manner that ensures reliable operation of that grid and the equitable allocation of costs for use of and upgrades to the transmission grid. 

Co-location arrangements must navigate these overlapping federal and state jurisdictional responsibilities.  Theoretically, co-locators could avoid or minimize FERC jurisdiction by delivering electricity directly from the dedicated generator to the data center in a “behind-the meter” arrangement.  Key to this regulatory result is establishing that the co-location connection between generation source and data center eliminates or minimizes the use by both the generator and the data center of the regional, FERC-regulated transmission grid.    

FERC Precedent

Some parties have claimed that behind-the-meter data center load can be fully isolated from the grid, if there are measures in place to prevent the load from receiving power from the grid.[1]  Others contend that these claims of full isolation from the grid ignore the realities that the reliability of the grid will be affected, and co-located data centers will benefit, at least in certain circumstances, from the generator’s interconnection to the grid.[2]  If reliability of the regional grid is implicated by a proposed co-location arrangement, it must be studied, adverse impacts mitigated, and costs of such mitigation appropriately allocated to those who benefit from the co-location and any network upgrades.

There is considerable uncertainty as to the reach of FERC regulation of co-location arrangements and the means, if any, by which co-located generators and data centers can minimize such regulation and achieve any cost certainty.  Regional transmission organization tariffs generally do not address co-located facilities, regardless of whether they are isolated from the grid or interconnected.  FERC has so far not authorized regulatory pathways for co-location of generation and large data centers.    

In one prominent order issued last year, FERC was presented with a plan by which the operator of the Susquehanna nuclear plant hoped to dedicate a substantial and growing portion of its existing capacity, which had been previously interconnected to the regional grid under FERC-approved agreements, to serve directly a “behind-the-meter” co-located data center.  See PJM Interconnection, L.L.C., 189 FERC ¶ 61,078 (Nov. 1, 2024) (“Susquehanna Order”), reh’g denied by operation of law, subject to further consideration, in Notice issued Dec. 23, 2024, pet’ns for review filed in Fifth Cir. Ct. of App., Jan. 17, 2025, and Jan. 24, 2025.  Because the existing nuclear facility was already subject to a FERC-approved interconnection agreement that contemplated a much lower amount of capacity to be dedicated to the co-located data center, the new plans required FERC approval of amendments to the interconnection agreements and changes in operating parameters and procedures.  Many stakeholders active in the PJM regional transmission organization and its electricity markets filed comments and protests of the proposed arrangements. 

FERC rejected the co-location arrangement on technical grounds, holding that the generator had not met its burden of proof to justify the proposed amendments.  Unfortunately, while noting that the co-location arrangement may have been “first of its kind,” FERC did not specify the facts necessary for the applicants (PJM and Susquehanna) to carry their burden of proof.  FERC noted, finally, that it was mindful of the increasing need for reliable and affordable energy resources and did not rule out approving pathways for co-location interconnections in the future.

Thus, technical and consequential legal issues remain outstanding after FERC’s rejection of the particular tariff amendments in the Susquehanna Order.  One area of uncertainty is whether it will be easier to establish arrangements for co-location of a new generator with a new or expanded data center.  Susquehanna involved an existing generator bound by its complex of agreements, which may distinguish it from an entirely new co-location arrangement.  Although there is no clear consensus as to how FERC should proceed in regulating data center co-location proposals, there is a consensus that FERC action is indispensable to provide both regulatory and cost certainty. 

Next Steps for FERC

President Trump has elevated Commissioner Mark Christie (R) to be the new Chair of FERC.  Then-Commissioner Christie joined in FERC’s order denying Susquehanna’s proposed amendments to its FERC-approved interconnection agreement.  He wrote a concurring opinion in which he emphasized that “co-location arrangements present an array of complicated, nuanced, and multi-faceted issues, which collectively could have huge ramifications for grid reliability and consumer costs. … Given these ramifications, the Commission truly needs to ‘get it right’ when it comes to evaluating co-location issues.”  Susquehanna Order (Christie, concurring), p. 2.  In his early statements after being elevated to Chair, Commissioner Christie has seemed to acknowledge the importance to the Administration’s agenda of finding regulatory pathways for rapid build-out of data centers.  He is quoted as saying: “Co-location is a huge issue that we need to get in front of … There is a strong consensus that we need to move forward.”  On the other hand, he has also said that is too soon to say when or how FERC will take up the issue.

The President’s Executive Orders issued to date do not prescribe any regulatory pathways for co-location.  Nor do they purport to empower FERC to disregard the Federal Power Act or FERC precedent.  That, of course, could change in the coming weeks.

Working under existing law, Commissioner Christie and the other FERC commissioners may be expected to craft regulatory pathways borrowing from the numerous proposals and comments made by stakeholders in the FERC Technical Conference on co-location held in November 2024.  See FERC Technical Conference on Large Loads Co-Located at Generating Facilities, FERC Docket No. AD24-11-000.  Building upon ideas presented in the Technical Conference, FERC may propose generally applicable regulations, or it may choose to develop new policy on a case-by-case basis as applicants present new co-location proposals.  Moreover, the regional transmission organizations, such as PJM, may try to develop stakeholder consensus on regulatory pathways and file new tariff proposals intended to accommodate the build-out of data centers, including hyperscaler co-location arrangements. 

Only time will tell how FERC will choose to address co-location.  Of course, time is of the essence to enable the rapid build-out of hyperscaler co-located data centers that seems to be contemplated in the President’s executive orders. 

[1]           See Complaint of Constellation Energy Generation, LLC v. PJM Interconnection, L.L.C., FERC Docket No. EL25 -20, p.1 (Nov. 22, 2024) (arguing that PJM Tariff is unjust and unreasonable and unduly discriminatory because it does not contain rules for interconnected generators to follow when providing service to fully isolated co-located load) (“Constellation Complaint”).

[2]           See Answer of PJM Interconnection, L.L.C. to Constellation Complaint (Jan. 20, 2025).