William DeGrandis is a partner in the Corporate Department of Paul Hastings and a member of the firm's Global Projects Group.
Massive data center projects require large amounts of reliable and cost-effective electricity. Data center developers must consider key gating factors for siting data centers and negotiating power supply arrangements with utilities including: costs and economic incentives, regulatory requirements and utility procedures.
The first major cost consideration entails siting of the data center. In areas of constrained electricity service, significant transmission system upgrades may be needed and could be directly allocated to the data center, if upgrades are determined to be unnecessary “but for” the new load. The developer would bear these costs up front, sometimes totaling tens of millions of dollars. Such upgrades become exacerbated if an adjacent utility is affected, resulting in needed upgrades to enable power deliveries across different service areas to accommodate the data center. Thus, locations once deemed desirable may no longer be economically feasible.
Accounting for Costs and Timeframes
First, developers should request studies (known as system impact and facilities studies) indicating the costs and timing for any new transmission upgrades. The studies are invaluable in determining whether to expend time and resources on certain locations. Developers must consider the utility’s worst case timeline for transmission upgrades and confirm whether costs would be shared among all ratepayers in the area or directly assigned to the project. In areas of experienced growth, developers may receive credits to defray portions of the up-front costs as other customers utilize these transmission upgrades.
Secondly, construction and ownership of the project’s facilities will affect timing and costs. Several factors to consider are that ownership entails some operation and maintenance expense and transferring ownership to the utility may lower the voltage of power deliveries, triggering increased transmission costs. In owning the facilities, utilities will require certain structural and operational specifications.
It is imperative for developers to confirm whether transmission rates are set or whether the utility has pending rate increases. In cases of pending rate increases, developers should request that rates be “locked in” for some time period.
In order to entice larger customers such as data centers, many states and utilities have created various incentives for clean technologies and grants targeted to encourage project development in rural or economically depressed areas. Developers should determine the best incentive rate options by requesting data on specific load characteristics (capacity and energy usage) under each different rate scenario.
Considering State and Federal Regulation
Regulatory factors affecting data centers include generation use and sale restrictions, retail utility regulation and “retail choice” alternatives. Structuring the project correctly up front is essential. Developers may desire to construct back-up generation on its data center site; however, generation ownership could trigger restrictions on use and sale of the power and subject the data center to retail utility regulation. Alternatively, states may provide “retail choice,” allowing customers to acquire power from any retail supplier, rather than being required to buy from the local utility. In understanding the restrictions and conditions that apply in generation ownership and alternative retail supply, regulatory counsel is essential.
Working with Utility Procedures
Internet companies are accustomed to moving quickly to stay ahead of the market. Electric utilities, however, move at a different pace with their own specific practices and procedures. Often utilities require state-approved form contracts that may not mesh with the expectations of Internet providers and for which particular concerns may be addressed in appropriate appendices or side letter agreements.
As early as possible, developers should request copies of proposed form agreements to ensure time for review and negotiation of the necessary power supply arrangements. Contracts should state clearly right-of-way obligations, construction milestones and financial commitments. Back-up power arrangements must be confirmed to ensure the most reliable and cost-effective means of uninterrupted deliveries of needed power. Developers should document all conference calls and meetings with utilities, indicating dates and times and listing all agreed-upon terms and any follow up items.
As some utilities may be courting several large industrial projects in areas where the existing system can accommodate only a few, utilities may use a “first come, first served” method for determining access to the system and responsibility for needed upgrades. Developers must understand how utilities determine queue priority, whether based on a letter of intent or execution of an initial contract, and that changes in queue priority may trigger different milestones and financial commitments.
Establishing a common understanding with the utility will ensure that the data center is constructed and operated in the most timely, cost-effective and reliable manner.
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 By Bill DeGrandis, Partner, Paul, Hastings, Janofsky & Walker LLP. Mr. DeGrandis has negotiated data center contracts for major internet providers and high technology firms. The author thanks Karen Onaran, senior paralegal at Paul Hastings for her excellent input.