Policy Framework

Key Takeaways

• No single agency regulates data centers—authority is fragmented across federal, state, and local levels
• FERC regulates grid interconnection and wholesale markets; states regulate utilities and rates; localities control land use
• Current frameworks weren't designed for gigawatt-scale single facilities, creating governance gaps
• Policy must balance competing goals: speed vs. community input, environmental protection vs. economic development
• Regional variation means location determines regulatory experience—PJM differs from ERCOT differs from MISO

The Governance Gap

In December 2024, Microsoft announced plans to partner with Constellation Energy to restart Three Mile Island's Unit 1 nuclear reactor—the non-damaged reactor adjacent to the site of America's worst nuclear accident. The reactor would generate 835 MW of electricity exclusively for Microsoft's data centers under a 20-year power purchase agreement.

The announcement raised immediate questions: Who approved this deal? What agency reviewed whether dedicating an entire nuclear plant to a single company's private use serves the public interest? Who evaluated grid reliability impacts if that power is removed from the market? Who ensured the arrangement doesn't raise electricity rates for other customers?

The answer, uncomfortably, is: it's complicated. The Nuclear Regulatory Commission oversees reactor safety. FERC regulates interstate wholesale power markets. The Pennsylvania Public Utility Commission regulates retail electricity service. The PJM Interconnection manages grid reliability. Local authorities control land use at the data center sites. The EPA oversees environmental compliance.

But no single agency has comprehensive authority to evaluate the overall arrangement and its public interest implications. This is the governance gap at the heart of the AI infrastructure buildout: massive industrial developments involving critical infrastructure, enormous capital, and profound community impacts are unfolding without coherent, comprehensive regulation.

Federal Authority

The federal government plays important but limited roles in data center regulation. Constitutional restrictions on federal power, combined with the historical evolution of utility regulation, mean federal agencies control specific aspects while lacking overall authority.

FERC: The Grid Gatekeeper

The Federal Energy Regulatory Commission is perhaps the most important federal player. FERC regulates:

• Interstate transmission: High-voltage power lines crossing state boundaries
• Wholesale electricity markets: The trading of power between utilities and generators
• Interconnection rules: The process by which new loads and generators connect to the transmission grid

For data centers, FERC's interconnection authority matters most. When a gigawatt-scale facility seeks to connect to the grid, the Regional Transmission Organization (RTO) managing that territory conducts studies to evaluate system impacts. FERC establishes the rules governing these studies, approval timelines, and cost allocation.

However, FERC cannot:

• Approve or deny specific data center projects
• Set retail electricity rates (that's state jurisdiction)
• Override state or local land use decisions
• Regulate water consumption or other non-electricity environmental impacts

FERC can make the grid connection faster or slower, cheaper or more expensive. But FERC can't decide whether a data center should be built in the first place.

EPA: Environmental Regulations

The Environmental Protection Agency regulates specific environmental impacts:

• Clean Water Act: Discharge permits for water used in cooling systems
• Clean Air Act: Emissions from backup generators and, indirectly, from power plants serving data center load
• CERCLA (Superfund): Liability for contaminated site redevelopment

But EPA authority is categorical, not holistic. The agency evaluates whether specific permits meet statutory standards, not whether the overall project serves the public interest or aligns with community goals.

Commerce Department: Export Controls

The Department of Commerce, through the Bureau of Industry and Security, controls exports of advanced computing hardware to foreign countries, particularly China. These export controls shape domestic data center development by ensuring that frontier AI training occurs primarily within the United States and allied nations.

However, Commerce has no authority over domestic siting, operation, or impacts of data centers—only over whether and where the technology can be exported.

What the Federal Government Doesn't Control

Crucially, federal agencies don't regulate:

• Whether a data center project should be approved overall
• Where data centers can locate within states
• How much tax incentives states and localities offer
• Retail electricity rates charged to consumers
• Most water use decisions (except federal water projects)
• Local community impacts beyond specific environmental permits

These gaps mean that coordination across agencies is difficult and that fundamental policy questions often go unaddressed at the federal level.

State Authority

State governments exercise broader authority over data center development than the federal government. But state power is also divided among multiple agencies and policy domains.

Public Utility Commissions: Rate Regulation

Every state has a Public Utility Commission (PUC), Public Service Commission, or similarly named agency regulating investor-owned utilities. These agencies:

• Approve or deny utility rate increases
• Review major utility investments (transmission lines, substations, power plants)
• Ensure utilities serve customers reliably and affordably
• Allocate infrastructure costs among customer classes

When a utility proposes to build $500 million in transmission infrastructure to serve a data center, the PUC must approve both the investment and how costs will be recovered through rates. This is where ratepayer protection happens—or doesn't.

PUC decisions vary dramatically by state philosophy. Some commissions aggressively protect residential ratepayers, requiring data centers to fund more infrastructure directly. Others prioritize economic development and approve cost socialization more readily. The same project proposal might be approved in Texas but rejected in Oregon based purely on regulatory philosophy.

Environmental Agencies: State-Level Permits

State environmental agencies issue permits for:

• Water withdrawal from surface water or groundwater
• Air quality impacts from generators and equipment
• Stormwater management during construction
• Wetlands impacts if present on the site

These permitting processes can be cursory rubber stamps or serious obstacles depending on the state, the specific resources involved, and political priorities. Arizona's water permits for data centers have faced increasing scrutiny as drought conditions persist. Michigan's environmental permitting process includes public comment periods that have surfaced community opposition.

Economic Development: Incentive Programs

State economic development agencies administer incentive programs: tax credits, sales tax exemptions, property tax abatements, workforce training grants, and infrastructure investments. These agencies generally advocate for project approval rather than exercising regulatory oversight.

The tension is inherent: the same state government that provides incentives to attract data centers also regulates their impacts through PUCs and environmental agencies. When different agencies have different missions, coherent policy is difficult to achieve.

Legislatures: Tax Policy and Enabling Laws

State legislatures set the overall policy framework through:

• Tax codes defining property tax treatment and sales tax exemptions
• Environmental laws setting permitting standards
• Energy policy goals (renewable mandates, emissions targets)
• Land use enabling statutes that define local authority

Virginia's legislature exempted data center equipment from sales tax in 2010, creating one of the nation's most favorable incentive environments. This single legislative choice shaped billions of dollars in subsequent investment.

But legislatures typically don't regulate specific projects. They set rules that apply broadly, leaving implementation to agencies and localities.

Local Authority

Despite their limited resources, local governments often make the most consequential decisions about data center development.

Zoning Boards: Land Use Control

Cities, counties, and townships exercise "police power"—the inherent authority to regulate land use for public health, safety, and welfare. This power is expressed through zoning ordinances that designate which land uses are permitted in different areas.

Data centers don't fit neatly into traditional zoning categories. They're not retail, not residential, not exactly manufacturing. Agricultural and rural residential zones—where many data centers seek to locate due to power access—typically don't list "data center" as a permitted use.

This creates a gap: developers must request zoning variances or conditional use permits, triggering public hearings and discretionary approval processes. Local zoning boards—often volunteer positions held by residents with day jobs—suddenly find themselves evaluating billion-dollar industrial projects.

Planning Commissions: Development Review

Planning commissions review site plans, evaluate consistency with comprehensive plans, and make recommendations to legislative bodies (city councils, county boards, township trustees). These commissions consider:

• Traffic impacts and road adequacy
• Water and sewer capacity
• Compatibility with surrounding land uses
• Visual impacts and setbacks
• Environmental site conditions

But planning commissions rarely have the technical capacity to evaluate gigawatt-scale electrical loads, regional grid impacts, or sophisticated water cooling systems. They're applying tools designed for evaluating housing subdivisions and strip malls to fundamentally different challenges.

Township Boards: Final Approval Authority

In most rural jurisdictions, township boards or county commissions hold final approval authority for conditional use permits and development agreements. These are elected officials, typically part-time, balancing competing interests:

• Tax revenue needs versus community character concerns
• Job creation promises versus land use impacts
• Developer assurances versus resident skepticism
• State government pressure versus local autonomy

The Democracy Deficit

The asymmetry is stark. On one side: multi-billion dollar corporations, sophisticated legal teams, experienced developers, and state-level political pressure. On the other side: volunteer board members, small municipal budgets, limited technical expertise, and constituents with limited information.

Public hearings provide opportunities for community voice. But three-minute comment periods during evening meetings don't create genuine deliberation about complex industrial developments. And once a project is approved, local authorities have little leverage to enforce conditions or respond to unforeseen impacts.

Some townships hire specialized consultants to evaluate proposals independently. Others lack resources for such expertise and rely on developer-provided information. The quality of local decision-making varies enormously, with profound consequences for communities.

Key Federal Actions

While federal authority is fragmented, recent FERC orders have attempted to address interconnection backlogs and transmission planning challenges.

FERC Order 2023: Cluster Studies

Issued in July 2023, Order 2023 reformed the interconnection queue process that had become severely backlogged. Key changes include:

• Cluster-based studies: Instead of studying each project sequentially, RTOs now study groups of projects together, reducing total study time
• Financial commitments: Higher deposits required earlier in the process to discourage speculative projects
• Site control requirements: Applicants must demonstrate land control before entering the queue
• Faster study timelines: Target of 150 days for initial studies, down from 12-18+ months in practice

Order 2023 addresses process efficiency but doesn't resolve underlying challenges: there are simply more projects seeking grid access than the transmission system can accommodate in the near term. Faster studies don't create additional transmission capacity.

FERC Order 1920: Long-Term Transmission Planning

Issued in May 2024, Order 1920 requires RTOs to conduct 20-year forward-looking transmission planning exercises, considering:

• Anticipated load growth (including data centers)
• Generator retirements and new resources
• Extreme weather and reliability risks
• State and federal policy goals

The order aims to shift planning from reactive (responding to individual interconnection requests) to proactive (building transmission before it's needed).

However, Order 1920 doesn't mandate transmission construction or resolve cost allocation disputes. States and utilities can still block transmission projects through siting authority and investment objections. Planning is necessary but insufficient for actually expanding the grid.

What These Orders Don't Address

Neither order addresses:

• Whether data centers should receive priority access over other loads
• How to balance speed of connection with community and environmental review
• Who pays for transmission expansion: developers, all ratepayers, or some hybrid
• State-level policy fragmentation
• Local governance capacity and authority

FERC can improve process efficiency within its jurisdiction. But the fundamental policy tensions require political resolution beyond any single agency's authority.

Policy Tensions

The governance gap exists partly because policy goals conflict. No framework can optimize simultaneously for competing values.

Speed vs. Community Input

Data center developers want rapid approvals—12-18 months from land acquisition to construction start. Communities want time to understand proposals, evaluate impacts, and negotiate conditions—often requiring 24-36 months of study and deliberation.

Streamlined processes favor developers. Extensive review processes protect communities but may cause projects to locate elsewhere. There's no neutral ground: any timeline choice advantages one party.

Environmental Protection vs. Economic Development

Data centers consume enormous water and electricity, with associated environmental impacts. But they also bring tax revenue, jobs, and economic activity. States face pressure to both:

• Enforce environmental standards rigorously to protect resources
• Streamline environmental review to remain competitive with other states

The "race to the bottom" dynamic means states that impose strict environmental requirements may simply push development to states with looser standards—transferring impacts rather than preventing them.

National Security vs. Local Control

Federal officials increasingly frame AI infrastructure as national security priority, essential to maintaining American technological leadership against Chinese competition. This framing suggests that local objections or state-level delays threaten national interests.

But the American federal system reserves substantial authority to states and localities. Land use control has traditionally been local. Utility regulation has traditionally been state-level. Overriding these structures for national security purposes requires political will that may not exist—and raises questions about whether AI infrastructure truly warrants such override.

Ratepayer Protection vs. Industry Growth

Utilities and PUCs must balance:

• Protecting existing residential and commercial ratepayers from cost increases
• Enabling economic development that may benefit the broader economy
• Maintaining utility financial viability and creditworthiness

If data centers fund all infrastructure costs, projects may not be financially viable. If ratepayers fund infrastructure, electricity bills increase. If utilities absorb costs, shareholders suffer and credit ratings decline. Every choice has consequences, and agencies must decide which stakeholders bear risks.

Regional Variation

The fragmented policy framework creates enormous variation in how data center development unfolds across different regions.

PJM: Rigorous but Slow

The PJM Interconnection, covering 13 states from Illinois to New Jersey, operates the nation's most complex wholesale electricity market. Interconnection studies are thorough, considering impacts across a vast multi-state grid.

This thoroughness creates delays: 4-8 years from application to approval is common. The 300+ GW queue backlog represents decades of projects at current approval rates.

But PJM's rigor also provides reliability. The grid rarely fails, and cost allocation methodologies have been refined through decades of practice. Developers accept slower timelines in exchange for certainty that approved projects will actually connect as planned.

ERCOT: Fast but Risky

The Electric Reliability Council of Texas operates a grid serving most of Texas, almost completely isolated from neighboring interconnections. This isolation means:

• No interstate coordination required for interconnection approvals
• Faster study timelines (12-24 months vs. 4-8 years)
• Simplified cost allocation (Texas-only stakeholders)

But isolation also means Texas can't import power during emergencies. Winter Storm Uri in February 2021 demonstrated this vulnerability: the grid nearly collapsed when generation failed during extreme cold, causing days-long outages and hundreds of deaths.

Data center developers increasingly choose Texas despite reliability concerns because interconnection speed matters more than long-term risk for projects racing to capture market opportunities.

MISO and SPP: Middle Ground

The Midcontinent ISO (MISO) and Southwest Power Pool (SPP) occupy middle positions between PJM's complexity and ERCOT's independence. Interconnection timelines run 2-4 years—slower than Texas, faster than PJM.

Both RTOs cover largely rural service territories with agricultural economies. Local governments in these regions have less experience with large industrial developments, creating greater variation in local approval processes.

The Patchwork Challenge

Developers navigating this patchwork must adapt strategies to regional contexts:

• In PJM: Accept long timelines, focus on securing queue position early
• In ERCOT: Move quickly, accept reliability risks
• In MISO/SPP: Invest in local relationships and political coalitions

There is no unified "American" approach to data center regulation—only fifty state variations operating within a loose federal framework.