US utilities: What data center politics could mean for investors

Data center growth supports utility investment outlook

Regulated electric utilities are extending their investment plans to connect data centers and modernize the power grid. In our view, this potentially supports stronger long-term earnings growth.

The main pressure point is affordability, which is leading to greater regulatory scrutiny. The issue is most relevant in competitive electricity markets with unregulated generation, such as PJM in Washington D.C., and the Energy Reliability Council of Texas (ERCOT). It is also a key issue in states such as Pennsylvania and Indiana.

In some markets, electricity supply isn’t growing fast enough to meet demand. This is pushing capacity prices higher, raising retail electricity bills, and adding to consumer pushback.

That pressure can lead to less favorable regulatory proceedings, rate freezes, or lower allowed returns. Local delays can also affect utility earnings. For example, while the ERCOT interconnection pause in Texas could potentially delay expected revenue recognition, it could simultaneously create a modest headwind for utilities with Texas exposure.

How regulators are responding to data center electricity demand

In our view, the regulatory response is already taking two main forms:

• Moratoriums and reduced incentives
  Statewide moratoriums on new data center approvals have been enacted or proposed in several states, including New York and Texas. Other states are cutting back or repealing sales tax exemptions and property tax abatements that once helped attract data center developers.
• Greater cost allocation and ratepayer protections
  Utility commissions are tightening cost allocation rules and protections for ratepayers. The goal is to reduce the risk that utilities are left with stranded investments or regulatory disallowances that could lower returns.

The clearest example is the move toward “cost-causer-pays” frameworks. For instance, an order in Virginia moves Dominion Energy toward requiring data centers to fully fund their direct-connect transmission upgrades.

Community pushback goes beyond individual data center projects

Community opposition that later leads to calls for state moratoriums has tended to start with speculative proposals. In some cases, the concerns are tied to real events. A speculative developer, for example, may have failed to address community concerns around an early-stage project. But opposition has spread well beyond those cases.

Communities are also reacting to broader headlines about electricity demand, water usage, and other possible impacts, and large speculative figures are adding to the concern. One example is the 400 GW-plus queue in Texas, whether that proposed demand becomes real or not.

In many cases, moratoriums are being enacted in areas where no data center has even been proposed or rumored.

Data center policy becoming midterm election issue

In the US, most legislative sessions are now closed and primaries are nearly complete, with Florida’s gubernatorial candidates being among the last of note. Attention is now shifting to the gubernatorial and federal races in November.

Several gubernatorial candidates won primaries, in part, by running on data center reform. Others added reform proposals after their primaries. This is why moratoriums could remain an issue in 2027, even though state-level efforts have largely failed this year.

In the meantime, we expect incumbent policymakers to keep reinforcing and enforcing existing rules. We have already seen this in New York and more recently in Texas.

In our view, this reduces the risk heading into 2027 but does not remove it.

Regulating data centers: States to watch

• Ohio and Florida: Candidates from both parties are campaigning on data center reform. One candidate in each state is proposing a moratorium if elected.
• Iowa and Pennsylvania: A similar political pattern is developing, though candidate proposals have generally been less far-reaching.
• Georgia and Michigan: One candidate in each state is campaigning on reform and polling well as of this writing. The Georgia proposal is more focused on a moratorium than the Michigan proposal. Still, Michigan remains one of the more contentious states overall.
• Texas: Texas remains in focus. We continue to expect the audit process to be framed as a “win-win” and to keep projects on schedule. Of note, New York took a similar pre-emptive approach that has worked well in reducing data centers as an election issue. Whether these issues affect the outcomes of either race remains to be seen.

Moratoriums are likely to have varying effects by market

Importantly, a moratorium in Georgia or Michigan would likely be viewed as a growth-moderation event. In Texas, however, a moratorium has the potential to become a broader planning and market-structure event.

Georgia and Michigan operate under regulated utility models, which means much of the expected data center demand is already included in utility resource plans, transmission investments, and rate-base forecasts.

Texas, though, is different. ERCOT has hundreds of gigawatts of data center requests that are shaping expectations for future electricity demand, generation development, and transmission expansion.

Michigan may be even less vulnerable than Texas as its regulatory framework includes stronger protections against speculative growth.

State policymakers and regulators have stressed that data center developers should pay the full cost of the infrastructure needed to serve them. This can help protect residential customers from subsidizing new projects.

Why utilities regulation matters for investors

A utility must balance the interests of customers, regulators, and shareholders — but these groups do not always want the same things. However, their interests are still connected, and shareholders tend to benefit when utilities stay aligned with customers and regulators. This is why the current political and regulatory debate matters for investors.

Utility segments and exposure levels

From a relative-exposure standpoint, water utilities may be protected from the affordability debate. Gas utilities may also be better protected.

The greatest exposure is likely in states with unregulated electricity generation. Where generation is regulated, new electricity supply usually flows through the traditional utility system, allowing for more orderly cost recovery. In unregulated states like Texas and Pennsylvania, affordability concerns are showing up through higher capacity payments. There is also a risk that the cost of new generation could fall on the back of residential customers.

Implications for US utilities going forward

The political pushback around data centers matters because it can affect the timing, regulation, and economics of utility investment. In our view, however, it does not change the broader constructive picture for the sector.

Strong electricity demand, grid modernization, and data center interconnections continue to support utility investment and long-term growth opportunities.

At the same time, affordability, cost allocation and regulatory alignment remain important factors in helping to determine how much of that potential growth translates into shareholder returns.

For investors, the question is not simply whether data center growth continues, but where that growth takes place, how the local utility market is regulated, and who pays for the supporting infrastructure.

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