How Will Data Center Growth Impact California Ratepayers?

Data centers are poised to power the future of AI and cloud computing. In California, they could either help create downward pressure on rising electricity costs – or conversely, drive up costs for everyday households and small businesses.

As demand for these facilities grows, utilities are planning billions of dollars in upgrades to the state's electric grid to serve them. Policymakers in California (and across the nation) are now grappling with how to fairly allocate the costs of serving data centers so they do not place an undue burden on existing ratepayers.

The Public Advocates Office is advocating for safeguards to ensure that residents and small businesses are not left paying for infrastructure built primarily to serve data centers. Below, we highlight key considerations for developing fair and transparent policies for large-load customers, ensuring that California’s clean energy transition remains affordable for all ratepayers.

The Data Center Challenge

As demand for data center services grows, companies are racing to develop new facilities as quickly as possible. Interconnecting these data centers to the grid poses risks for ratepayers because of the enormous infrastructure costs required to serve them. These costs may ultimately be passed on to all ratepayers, especially if the facilities use less energy than projected or shut down before the utility has recovered its associated interconnection costs.

Energy Intensive Loads

Data centers are unique in their extraordinary energy intensity, consuming 10 to 50 times more energy per square foot than a typical commercial office building. Data center developers in California increasingly plan to develop facilities with loads exceeding 50 to 100 megawatts at a single site – roughly the equivalent of the residential energy use of Santa Rosa or Huntington Beach.

Accommodating these new, concentrated loads generally requires large-scale infrastructure upgrades. The California Independent System Operator (CAISO) has identified billions of dollars in transmission upgrades needed over the next decade to serve the anticipated load from new data centers.

In May 2025, CAISO approved a cluster of transmission network upgrades in the South Bay Area largely intended to serve 2.5 gigawatts (GW) of concentrated data center and electrification load growth between 2026 and 2039. The cost of these upgrades exceeds $2 billion. These transmission network upgrades represent only one portion of the costs to serve data centers, with each individual project requiring a direct interconnection that can range from a few million dollars to more than $100 million.

Speculative Interconnection Requests

Driven by industry competition to expand computing capacity, data center developers often submit speculative and duplicate interconnection requests to utilities that inject significant uncertainty into California’s transmission planning. A single developer may submit multiple applications across different utilities but only plan to build at one site.

Speculative requests can inflate load forecasts and lead to potential overbuilding. This is because the California Energy Commission (CEC) uses information from utilities’ interconnection requests to develop its official load forecasts. The CEC’s load forecasts, in turn, inform CAISO’s transmission planning. If forecasts are inflated by speculative projects, ratepayers could end up paying for costly infrastructure upgrades that may not be needed for many years – or at all.

Even after a data center customer interconnects, there remains a risk that it could terminate service or use much less energy than expected.

How Could Electric Bills Rise?

Under Federal Energy Regulatory Commission (FERC) ratemaking rules, the costs of major transmission network upgrades are socialized across all ratepayers within the CAISO territory.  Utilities have optimistically asserted that data centers will generate enough revenue over time to offset the costs of the transmission investment needed to serve them and create downward pressure on rates.

However, if those revenues fall short – because projects are canceled or withdrawn from interconnection, loads are smaller than projected, or service is terminated prematurely – the costs of new infrastructure will not disappear. Instead, the significant costs that utilities incurred to serve these data centers will be passed on to existing ratepayers. In short, residential and small-business ratepayers may face higher bills to pay for underutilized or "stranded" assets.

Mitigating Ratepayer Risks

Remedying these risks will require new safeguards that ensure data center developers, not existing ratepayers, bear the financial responsibility for their associated transmission infrastructure upgrades.

The California Public Utilities Commission (CPUC) is considering a proposal from Pacific Gas and Electric Company (PG&E) to create a new rule for large-load customers interconnecting on the transmission system.  Specifically, PG&E proposes that customers interconnecting at voltages above 50 kV would pay the actual costs of interconnection and be reimbursed as they ramp up their load. While this is a step forward, PG&E’s proposal lacks other protections that would effectively mitigate financial risks to ratepayers. The Public Advocates Office is actively advocating for stronger measures to ensure existing ratepayers are not left with the bill for interconnecting large-load customers. 

Other states with rapid data center growth, such as Ohio and Indiana, have already implemented new rules similar to the ratepayer protections our office is advocating for here in California. These include:

• Minimum demand charges – ensuring that data centers pay for a portion of the grid capacity they request, even if they ultimately use less.  This provides a steady revenue stream to cover the costs of new infrastructure.
• Early termination fees – requiring data centers to pay a specified fee if they end their service contract before the agreed term.  This ensures that data centers cover some or all of the costs of the facilities built to serve them if they shut down prematurely.

The Public Advocates Office is assessing the appropriate mechanisms to ensure that the combination of rate revenues and any additional charges paid by data center customers align with the true costs that utilities incur to serve them.

While these measures increase the certainty that data centers contribute revenues toward covering infrastructure costs, they do not entirely eliminate the risks of shifting costs to ratepayers.  At the system-wide level, concentrated data center loads may drive such costly transmission upgrades that ratepayers still see a portion of those costs reflected in their bills.

Enabling Dynamic Planning

Beyond adopting protective regulatory measures, it is also important that the state's long-term transmission planning accurately reflects the reality of data center development to avoid overbuilding the grid in response to speculative projects.

The Public Advocates Office is also advocating for proactive planning between the CPUC, the CEC, and CAISO to regularly reassess the need for new transmission projects – particularly when forecasted data center interconnection requests are withdrawn or stalled.  This approach would help ensure that transmission investments are made only for projects that are certain to proceed, thus protecting ratepayers from the costs of unnecessary infrastructure buildout.