Data Centers and Electric Utility Rate Cases Holland & Knight is involved in all areas of energy-related regulatory, legislative, transactional and litigation matters. We have extensive experience throughout the United States regarding ratemaking matters, including rate cases and other cost of service rate proceedings.
GOAL
Our team can assist data centers in advocating for reduced electric utility service rates in recognition of the fact that they have near 100 percent load factors – i.e., data centers use almost exactly the same amount of electricity every hour of every day, all year long – and electricity is their most expensive cost input.
BACKGROUND
Rate cases for electric utilities typically involve two parts. The first part establishes the utility's cost of service, or "revenue" requirement (e.g., rate of return, operation and maintenance expense, etc.). The second part allocates that revenue requirement across various rate classes and designs rates to recover that amount from ratepayers. Cost allocation and rate design generally are supposed to follow the principle of cost causation. Typically, the higher the load factor (i.e., the less variability in the demand profile), the cheaper it is to serve that customer on a cost per kilowatt-hour ($/kWh) basis. Applying these cost allocation and rate design principles, data centers (with their near 100 percent load factors) should be entitled to favorable rates as compared with other types of customers. Even if data centers are served under an existing industrial tariff, they likely would pay too much because their load factors are even higher than most factories that make up the existing industrial class. Thus, they stand to gain significantly by participation in a utility's rate case. However, data centers have not historically been active in these cases. Customer classes who do not actively participate in these proceedings often pay disproportionate rates in order to accommodate the positions of those who intervene (i.e., certain industries, agriculture, big-box stores, etc.). Given the amount of electricity consumed by data centers, even a reduction of rates by a small percentage can have a large effect in total dollars. An individual utility is not likely to have a rate case often, typically about once every four years. Consequently, an improvement in rates from a single rate case often will have a multiyear effect.
PROCESS
As an initial step, Holland & Knight would intervene in utility rate cases before state utility commissions on behalf of a data center or a coalition of multiple data centers. This would allow the data center(s) to participate in both the cost of service phase of the proceeding as well as the cost allocation and rate design phase. In the cost allocation/rate design phase, our team would advocate for the establishment of a rate class that more closely matches the operational characteristics of data centers (i.e., a near 100 percent load factor) in order to closely match the actual cost to the utility from serving a load with these characteristics and minimize the amount of cross-subsidy that data centers suffer by paying rates disproportionate to their cost to serve.
CONTACTS Dane McKaughan
Partner | Austin 512.954.6528 dane.mckaughan@hklaw.com
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