Virginia’s AI Data Center Gravy Train Shows Signs of Slowing

In Virginia, home to more than a tenth of data center capacity in the entire world, lawyers who benefit from the complex work of bringing these massive projects to life see signs of a tipping point.

The costs of building in the state may soon outweigh the benefits—whether due to local opposition, the possibility of vanishing state tax breaks, or simply because power supplies can’t keep up with demand.

“It’s harder to do business and it’s more complicated to do business,” Michael Rechtin, a Chicago-based digital infrastructure lawyer with Latham & Watkins, said. “We’ll see a continued good amount of work from Virginia, but I’d say that in 18 months, that’s going to sort of flatten out.”

The impending saturation could shift the map to places like Texas for top firms competing for financing and other deals. It also will challenge the small but dedicated bar of lawyers in Virginia who help their clients navigate the regulatory aspects of both proposed and established data centers’ energy needs.

‘A Small Bar’

Law firms of all shapes and sizes are getting involved in the data center boom, both in Virginia and nationwide. Silicon Valley law firm Cooley LLP recently advised on the sale of a data center in Manassas, Va.

One way smaller, local firms are getting in on the boom is through regulatory work at the Virginia State Corporation Commission, the main utility regulator in the state.

Brian Greene is co-founder of the Richmond-based GreeneHurlocker, which has around 10 lawyers and started in the early-2010s as an energy law boutique. Now it represents Amazon at the commission, recently filing comments on behalf of the retail giant on the commission’s long-term plans to expand the power grid.

Greene said his small firm won this kind of business of by getting referrals from larger national law firms and picking up matters they can’t work on due to conflicts.

Will Keyser, a Washington-based partner at Steptoe, said firms can sometimes convince clients to waive conflicts in transactional matters, if not in litigation. “Everybody’s working towards a common goal to develop, in this case, a data center,” he said.

“Data center work is the ultimate team sport,” said Gregory Riegle, a Northern Virginia-based lawyer whose firm, McGuireWoods, counts Northern Virginia electric utility Dominion Energy as one of its clients.

When a conflict can’t be waived, smaller firms like GreeneHurlocker can sometimes step in.

“Frankly, there’s only so many of us that do commission work who wouldn’t be conflicted out,” Greene said.

“It’s a small bar,” he said. “We all know each other.”

Other Virginia-based lawyers that do this type of regulatory work for tech titans include Thompson McMullan, a Richmond-based firm of less than 30 lawyers representing Microsoft at the Commission, and Will Cleveland, a solo practitioner from Charlottesville who counts Google as one of his clients—and who also served on the transition team of Gov. Abigail Spanberger (D).

Greene acknowledged that Loudoun County, the epicenter of Northern Virginia’s “Data Center Alley,” is probably at or near capacity. But he said the state has plenty of room for new construction further south and pointed to data projects springing up there. Amazon is preparing a site in Spotsylvania County south of Washington, for example, while Google has plans in suburban Richmond.

“I think you’re starting to see more rural counties making a play for data centers because of the tax revenue and the jobs that they bring,” he said.

Why Virginia?

Northern Virginia is a desirable location for data centers due to its extensive digital infrastructure and proximity to early government networks. It also saw a huge fiber optic cable buildout during the dot-com bubble of the late 1990s.

This engendered a cluster effect, Rechtin said, with private firms building data centers near that infrastructure and then more firms arriving to be near those first data centers.

“It’s just like this unbelievable, not-replicable network,” he said. Northern Virginia is “a total unicorn on the planet Earth.”

The industry also benefited from generous tax breaks at the state level, including a waiver on sales taxes that went into effect in 2010.

Other states since have built out their own digital infrastructure, particularly Ohio and Texas. Sites in central or southern Virginia, far from Data Center Alley, now have to compete with locations in these other states.

In addition to that competition, Dominion told a utility regulator earlier this month that it would need to nearly triple its maximum power output to accommodate all of the large load connection requests currently in its queue.

Shifting Political Wins

Some Virginia lawmakers at both state and local levels have soured on data centers in recent years, both for environmental concerns and fears of inflated electricity bills.

Spanberger came into office this year after promising to make sure data centers are “paying their fair share” of energy costs and lawmakers in Richmond are considering bills that would put limits on the sales tax exemption. Loudoun County eliminated by-right zoning for data centers last year that allowed for a good degree of autonomy on the part of data centers and now requires them to get prior county approval.

“I would dare you to find a [local] jurisdiction in Virginia that has not done something to change their regulatory framework,” said McGuireWoods’ Riegle. “There is no question that the regulatory bar is higher.”

The Virginia State Corporation Commission in December of last year created a new electricity rate class for large load customers that requires higher minimum payments.

But Greene said these new and proposed changes may actually make lawyers even more essential to Virginia’s data center builders—at least in the near term.

“There’s hundreds of bills now in front of the Virginia General Assembly that are affecting data centers from all angles,” he said. “And so that’s—depends on who you ask, for better or for worse—more work for the lawyers.”