California Public Utilities Commission Stretches Out the Reimbursement Period for Data Center’s Energization Costs to Reduce Ratepayer Risk
November 19, 2025
Energy Law
The search for a reliable source of electricity to power data centers has led developers to explore self-generation options, virtual or real power purchase agreements, or the restart of long-shuttered nuclear power plants, in addition to the conventional reliance on retail purchases of electricity from the local public utility. But regardless of the source of electric energy, many data center developers will need to interconnect with the local utility system. In parts of California, requests for interconnection at transmission-level voltages, rather than the distribution-level voltages that are sufficient for most customers and are the basis for existing tariffs, have skyrocketed in recent years. Pacific Gas and Electric Company (PG&E), for example, reports that at the end of 2024, the megawatts (MW) of transmission-level interconnection requests for 2023-2024 exceeded existing transmission-level customers’ megawatts by over 3,000 percent.
The tariffs and procedures that govern interconnection requests in California were developed for more gradual and geographically dispersed load growth made up of customers that could interconnect at distribution-level voltages. Requests to interconnect data centers’ large, concentrated loads at transmission-level voltages require non-tariff “exceptional case” filings that raise unfamiliar issues.
The California Public Utilities Commission (CPUC) recently confronted these issues when PG&E sought approval of special provisions to enable it to serve the 90 MW load of a new Silicon Valley data center.
On October 30, 2025, the CPUC adopted Resolution E-5420, approving two agreements between PG&E and STACK Infrastructure (STACK) to interconnect and energize a 90 MW data center developed by STACK.
The first of the two agreements covered the construction of special facilities requested by STACK that exceed PG&E’s design standards. Under this agreement, STACK would pay the actual costs PG&E incurred to construct the special facilities, rather than the estimated costs as specified in PG&E’s tariffs. In addition, STACK would not receive any refund of payments made to construct the special facilities.
The second agreement outlined the scope and cost of the transmission facilities needed to interconnect the data center. Under the terms of the second agreement, STACK will pay the actual cost of work performed by PG&E as the work progresses, instead of a one-time advance payment. Furthermore, STACK is ineligible for the option, provided by PG&E’s tariffs, to receive a fifty percent discount in lieu of refunds. Finally, the agreement requires PG&E to issue refunds to STACK under the tariff’s standard methodology, subject to a cap of around $50 million. This final provision was the focus of the CPUC’s discussion in Resolution E-5420.
Under the standard refund methodology, a customer would make an up-front payment of the direct costs of energization. Once energized, the customer would receive a repayment of its up-front payment based on the customer’s current load and expected future revenues. For high-load transmission-level customers like data centers, the standard formula can result in a nearly full refund of the up-front payment in the first year after energization, well before the data center produces the revenues needed to recover the costs of energization. When the refunds paid to the data center exceed the costs recovered through rates paid by the data center, the shortfall is ultimately borne by other ratepayers.
The CPUC approved the two agreements, but it modified the refund process to account for the high cost of the transmission-level work required to energize STACK’s data center and the risk to ratepayers that would result from application of the tariff’s refund methodology to large transmission-level customers. The CPUC noted that the standard tariff methodology is appropriate for distribution-level energization requests because of the small scale of typical projects, the relative lack of rate impact if a single customer disconnects from the grid, and the consistent volume of future energization requests at the distribution level that supports an assumed level of cost recovery. By contrast, energizing the data center presents a risk of stranded costs because of the large refundable amount (estimated to be about $50 million) under the standard methodology and the possibility that costs would not be recovered if the data center did not produce the forecasted revenues or prematurely disconnected from the grid. As a result, the CPUC concluded it would be unfair for ratepayers to assume the risk of energizing STACK and “potentially being left with the costs if STACK’s anticipated load and resulting revenue does not materialize.”
On the other hand, the CPUC was aware that the data center, with its large load and high load factor, could generate significant additional revenues that could benefit other customers by covering an increased share of PG&E’s revenue requirement. The STACK data center has an estimated load factor of 85 percent, contrasted with the 30 percent load factor of a typical residential subdivision.
To balance the risk of stranded costs against the promise of additional revenues presented by the data center, the CPUC adopted a modified methodology to distribute STACK’s full refund. Over objections by PG&E and STACK, the CPUC determined that STACK will receive an annual refund limited to 75 percent of the transmission-related revenues PG&E actually collects from STACK, rather than a refund based on expected future revenues that could result in STACK receiving nearly its full up-front advance in the first year of operation. The remaining 25 percent of the collected transmission-related revenues will be held back for ongoing maintenance and broader grid upgrades that are not part of the direct energization of STACK’s facilities. Under the CPUC’s approach, STACK is expected to receive the full refund in about six years.
The CPUC emphasized that Resolution E-5420 resulted from an “exceptional case” filing not covered by existing tariffs and “should not be considered a binding precedent moving forward.” Other developments could soon supersede the approach taken in Resolution E-5420. Late last year, PG&E filed an application, Application 24-11-007, requesting approval of a new tariff, Rule 30, to address transmission-level interconnection of large-load customers like data centers. In July, the CPUC issued an interim decision that allowed PG&E to connect transmission-level retail customers who would bear the full initial interconnection costs and would provide a prefunded loan for the costs of all required network upgrades, but a decision on the terms of any refund of those costs was deferred to the final decision on PG&E’s request, expected in early 2026. In addition, the Federal Energy Regulatory Commission (FERC) has a pending proceeding addressing the interconnection of large loads to the FERC-regulated interstate transmission system, with a target decision date of April 30, 2026. The boundary between state (CPUC) and federal (FERC) jurisdiction over transmission facilities used for retail sales of electricity could be affected by FERC’s action. Companies contemplating the construction of data centers in California should track these developments.