Who pays for AI’s power? California watchdog urges new data center rules

California’s growing data center industry, particularly with the rise of AI technology, risks shifting substantial electricity costs to households, according to a report released Tuesday by the Little Hoover Commission, an independent bipartisan watchdog agency.

“The costs that data centers impose on the electrical grid should be paid by the centers themselves, not by average California families already struggling with high utility bills,” said Pedro Nava, chair of the commission.

The timely report offers more than a dozen recommendations for managing the industry’s impact on California’s power grid, electricity prices, and climate goals. It emerges as Sacramento lawmakers prepare to introduce new proposals aimed at regulating the rapidly expanding sector after similar efforts stalled last year following opposition from tech companies and business groups.

The scale of projected electricity demand from data centers presents the most pressing concern. Pacific Gas & Electric, California’s largest utility provider, informed regulators last year that pending data center projects could add approximately 10 gigawatts of electricity demand over the next decade. This figure represents roughly four times the generating capacity of the Diablo Canyon nuclear plant. For perspective, the entire Sacramento region uses just over 3 gigawatts during peak demand periods.

Industry experts acknowledge that many proposed data centers never materialize or operate below full capacity. Companies often propose large facilities without firm commitments while AI computing requirements and cooling technologies continue to evolve rapidly. Nevertheless, the commission emphasizes that California needs a more precise understanding of where this increased electrical load will ultimately materialize.

Among its key recommendations, the report calls for confidential facility-level reporting of data center electricity consumption. This would enable regulators to better forecast demand, identify areas where the grid can accommodate new projects, and assess local reliability and environmental impacts more effectively.

The potential grid infrastructure costs associated with the data center boom raise significant concerns for consumer advocates. Even a fraction of the projected demand could necessitate billions in new infrastructure investments – costs that might ultimately fall on residential ratepayers if not properly managed.

To address this, the commission recommends creating a special electricity rate category for extremely large power users. This would require data centers to prepay for grid infrastructure, contribute toward wildfire safety initiatives, and commit to paying for their proportional share of requested power capacity.

“Data center growth has as much potential to increase electricity rates as it does to decrease rates if not done properly,” warned Mark Toney, executive director of The Utility Reform Network, a consumer advocacy organization.

Assemblymember Cottie Petrie Norris, a Democrat from Irvine who chairs the Assembly’s energy and utilities committee, expressed strong support for the commission’s approach. “The recommendations put forward by the Little Hoover Commission are one hundred percent aligned with the Assembly’s priorities,” she stated. “We are moving expeditiously to pass a package of bills that will protect Californians from any rate increases and ensure that data centers pay their fair share.”

Beyond rate impacts, data centers pose challenges to California’s environmental and climate objectives. Researchers have documented sharp increases in electricity consumption and carbon emissions from these facilities as AI technology expands. The commission highlights additional concerns about air pollution from diesel backup generators and significant demands on local water supplies for cooling systems.

To mitigate these environmental impacts, the report recommends implementing stricter limitations on pollution from backup generators, incentivizing cleaner backup power alternatives, and mandating improved reporting to help regulators track the environmental footprint of large facilities more comprehensively.

The report’s recommendations represent a crucial framework for balancing California’s position as a technology leader with its ambitious climate goals and commitment to affordable electricity for residents. As the AI revolution accelerates, policymakers face mounting pressure to establish clear guidelines that ensure the tech industry’s growth doesn’t come at the expense of household budgets or environmental objectives.