From American Affairs Journal, Summer 2026 / Volume X, Number 2:
The American electric power sector has not grown appreciably for twenty years. To be sure, consumers pay plenty to replace infrastructure, to “transition” the sector away from the most carbon-intensive sources of energy, and to find ways to allow utilities to cram a wide variety of underutilized capital spending (think “smart meters”) into their regulated “rate base.” But demand has been stable or declining.
To the degree that profits in the sector have grown, it is because the economic regulation of the utility industry provides for a “spend more, make more” ecosystem whose profits are a function of its capital investment. The sector is still one of the few that is actively regulated through government price-setting, even in places sometimes mistakenly termed “deregulated.” So, even when demand is not rising, the business must find ways to grow earnings by spending more to serve the same level of demand. This has meant that rates, which otherwise might be declining, have been at best steady, even without increasing grid capacity, and in fact, much utility spending has been undertaken to retire reliable capacity.
This was the uninspiring landscape of American electric utilities on the eve of the boom in data centers needed to fuel the technological revolution in AI. Electricity demand forecasts are now sharply up for the balance of this decade, and a majority of this growth is concentrated in data center power needs, with growth in manufacturing a distant runner-up.1 For a power system that serves as a basis for Americans’ everyday lives and the economy writ large, it is unusual to see such a concentration amid one particular sector for its growth.
The rising power demand of the data center industry almost appears like an industry running within the integrated grid but outside the usual paradigm of the traditional electric utility sector. Indeed, it should be treated as such. Doing so calls for a variety of policy solutions that accurately price grid capacity in order to facilitate efficient usage of that scarce asset, impose regulatory requirements to furnish power generation to the system, and in the alternative, allow power demand that is more flexible to better use residual capacity. Such reforms can accomplish two important policy aims simultaneously. First, they would insulate legacy customers who have already paid their fair share and then some for the grid. Second, they would allow power industry growth in support of data centers to be unchained from traditional utility practices, which often do not reward speed or innovation.
Both of these aims, customer protection and growth, are embodied in the Ratepayer Protection Pledge, a March 2026 declaration at the White House undertaken jointly by the Trump administration and seven major hyperscaler AI companies. The 485-word document begins with an endorsement of data center infrastructure as “the foundation of the internet, cloud computing, and artificial intelligence (AI),” noting the national security implications of this. But it qualifies that “the American people should not be footing the bill for the benefit of private companies.”2
The central proposals of the Pledge are that AI companies “will pay for all new power delivery infrastructure upgrades required to service their data centers” and “will bring, build, or buy the new power generation resources and electricity needed to satisfy their new energy demands.” By directly incurring these costs, the “companies agree to protect American consumers from price hikes due to data center energy and infrastructure requirements, and lower electricity costs for consumers in the long term.” These ambitions are easier to proclaim than accomplish.
Power grids are characterized by joint costs: poles and wires, transformers, and substations that together form a network. Both the typical practice and the financial incentives of most local utility monopolies militate toward a broad socialization of costs to consumers. They do this by having rates set by utility commissions on the utility’s average, embedded costs, rather than pricing based on marginal costs or on a new customer’s willingness to pay. The Pledge wisely points the way toward value-based pricing for grid access that recovers at least the incremental cost of serving customers. This seemingly mundane change, if well implemented in an open season where data centers vie for grid access, is capable of not just protecting legacy ratepayers, but producing massive investment in the American power grid.
Meanwhile, for the power plants that generate electricity for data center consumption, the proposition that the AI industry furnish its own supply is both straightforward and, sadly, unlawful in a majority of states, which maintain local monopolies that prevent this. In these places, many proposals purporting to fulfill the Pledge fall well short of the mark. But this is not to say it is an easy story of letting the market go to work. Even in those regions where competition has been introduced to the sector, investment has been slow to materialize. The Pledge suggests clearing away barriers to new power generation, but with a corresponding regulatory mandate to match the Pledge’s ambition that AI companies bring their own generation to the grid.
The purpose of this essay is threefold: to examine the broader economic and institutional context that the Pledge must address; to put some meat on the bones of its spare but purposeful declarations; and also to take aim at some bad ideas masquerading as fulfillments of the Pledge’s ambitions. Since the two sides of the industry—price-regulated grid costs and more commoditized power generation—operate on so different a basis today, it is best to consider them in turn, but with reforms that ultimately come together, like the grid itself, in sound operation.
The Economics of Regulation
Amid a framework of economic regulation that exists for the electric power industry and very few others, utility commissioners at the state and federal levels fix prices based on a utility’s “cost of service.” This form of price regulation allows the utility to recover both its invested capital and a regulated return on that capital, while generally passing operating expenses through to customers without any markup.
The math that results from cost-of-service regulation is, at its core, one big division problem. The numerator is a sum of the utility’s costs; the denominator, the volume of services the utility sells; the quotient is the rate you pay. Pricing in competitive markets settles around the cost to serve marginal demand, at least according to the basic principles of microeconomic theory. Utility pricing, however, is principally concerned with recovering the sunk costs of infrastructure, which usually serve to flatten and socialize the volatile tendencies that would be expressed in a competitive, commoditized market. “Notice how, at once, the traditional practices of public utility price regulation diverge from economic principles,” the economist and utility regulator Alfred Kahn once dryly observed of the difference between marginal-cost and average-embedded-cost pricing.3
Kahn’s ironic observation has great import today. This divergence between competitive and utility pricing has substantial implications. Consider what happens when incremental demand manifests in price-regulated utility service. In the division problem, if the numerator (costs) rises more slowly than the denominator (demand), then all other customers’ rates would decline as a result of adding a new customer to the grid when utility commissioners next reset utility rates.
There are many examples of this happy phenomenon in the utility sector, beginning in its 1920s heyday, where investment and sales volumes soared, even while rates fell.4 More recently, unassuming North Dakota emerges as the winner of the demand growth Olympics in a magisterial study conducted by Lawrence Berkeley National Laboratory and Brattle Group that evaluated retail electricity rates from 2019 to 2024; the state simultaneously notched the highest percentage demand growth and the steepest percentage reduction in retail electricity prices.5 New Mexico and Nebraska are in much the same situation.
Some have taken these historical occurrences to stand for a general principle that a rising tide of demand lifts all boats. Would that were so. The early industry’s victories on economies of scale have long been priced in. Indeed, for decades now, the sector’s new classes of capital assets have been trending smaller, predicated on diversifying risk and modular, nimble deployment. When studied closely, these recent successes are idiosyncratic demonstrations of the ingredients one would need to make a return to those halcyon days a reality. North Dakota, for example, had residual grid capacity remaindered from previous oil booms, and on the commodity side, cheap fuels and a surplus of power generation stimulated by federal tax incentives pointed at renewables. In both situations, the marginal cost to serve was lower than the average, embedded cost rate, and this supported what was, in effect, a subsidy from newcomers to legacy customers: the type of subsidy everyone cheers.
These happy conditions no longer obtain. In the circumstances that have coalesced lately, a grid with little residual capacity during peak demand conditions means that a lot of new, uninterruptible demand for power placed upon it necessitates capital spending to expand the grid. The materials on which such an expansion is predicated have inflated in price rapidly. Wires and cables, transformers, switchgear, and wood poles have inflated 152 percent, 89 percent, 77 percent, and 50 percent, respectively, since the beginning of 2019, while the overall consumer price index recorded only 29 percent cumulative inflation in the same period.6
The cost of financing these capital assets has also become more expensive. Although utilities have earned generous returns on their equity investment, their debt costs have only captured a modest premium over Treasuries, with many utility customers paying rates that reflect historical debt costs in the 3–4 percent range. With Treasuries well above that today, electric utility issuances of ten- and thirty-year debt so far in 2026 have approached 5 percent and 6 percent, respectively. This double whammy of materials’ price inflation and higher capital costs means that nearly every megawatt of demand added to an American utility will incur costs that exceed the embedded, average cost to serve the same unit. Under such circumstances, if new customers are brought online paying the same rates as legacy customers pay, it will axiomatically result in a cost shift from legacy customers to new customers: the type of subsidy no one can stomach.
In the normal operations of utility regulation, that is usually what would happen. Utilities typically have a legal obligation, in exchange for their monopoly, to serve new customers under their prevailing rates. New data center customers would be classified into existing “rate classes” and begin paying the same rates as, say, a paper mill or chemicals refiner.7
For much of the past several years, the data center industry’s hill to die on at public utility commissions was an insistence that they should not be treated in fundamentally different ways than other customers. It is hard to think of a more arcane subject for outsiders to the craft of utility regulation than the procedures by which customers are separated into rate classes. But to long-time practitioners, this debate raised the question of whether regulators were going to labor under the premise that data centers were just another category of customer that fit within the extant practices of utility ratemaking.....
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