States Move Cautiously to Rein in Booming Data Center Buildout

States that scrambled to lure data centers are now trying to install guardrails around their development, but attorneys say legal action likely wouldn’t be the right response for developers.

Litigation around state regulations would slow down projects and also not be smart politically, according to lawyers who work in the energy sector and on data center projects.

“Putting to the side the legal merits of a particular challenge to a law or like an order from a governor, I think there’s also a fundamental question of whether they even want to do that,” said Arjun Ramadevanahalli, a Morgan Lewis partner. “Speed to power has been the priority here.”

Data centers have proven to be a complicated issue for states.

Many have tax incentives to attract projects, but politicians are also trying to focus on stemming higher utility costs, which many worry the growth of data centers will exacerbate. In some instances, states have tried to walk back sweeteners in place to attract data center development as the public shows opposition. Thousands of centers have popped up around the US, but so far they haven’t elicited any high-profile lawsuits.

States’ Differing Approaches

Delaware is one state aiming to toe the line between attracting data centers and regulating development.

State Rep. Frank Burns (D) is sponsoring a bill to require the regulated utility sector to make a separate rate for major energy users so data center expenses are siloed. His bill currently uses industry codes to dictate what projects it applies to, but statehouse attorneys are considering changes to legally fortify the bill.

“There may be an amendment that would change that particular wording if it’s considered safer,” said Burns, who touted the construction jobs data centers could generate but said he doesn’t want to punt expenses to ratepayers.

Dan Diorio, vice president of state policy for the Data Center Coalition, called some state efforts to regulate development “reactionary.” One challenge for the industry is policies dictating terms around issues like contracts or minimum demand charges, which he says should be left up to regulators. The DCC also wants any state policies to apply to other similar projects using large amounts of energy.

“As other large users come online, those policies should also apply to them as well,” Diorio said, adding states then would “provide that long-term, durable policy where you don’t have to constantly come back to the well.”

Pennsylvania Gov. Josh Shapiro (D) announced in his February budget address a set of standards data centers must comply with if they want the state’s full support. Projects have to bring their own energy generation, engage with the community, and train and hire local workers.

“If companies adhere to these principles, they will unlock benefits from the Commonwealth, including speed and certainty in the permitting process and our available tax credits,” Shapiro said.

Some attorneys say that kind of voluntary approach could be the way to go.

“That type of legislation, I believe in general, has more of a chance to holding up if there are any legal challenges, because it’s not mandates per se,” said Martin Siegel, an attorney for Barley Snyder’s energy and environment practice. “It’s like what government does all the time. We’re conditioning our assistance, our tax relief, on you meeting certain conditions.”

Pennsylvania might be relatively unique. Justine Kasznica, a Pittsburgh-based attorney for Babst Calland, noted the state’s cheap land and water and energy supply. The governor’s energy standard is “a nod to why we think Pennsylvania is an attractive state” for data centers because of natural gas, she said. But balancing incentives with guardrails is “dancing a delicate dance.”

“We’re going to see legislation fail if it’s too restrictive initially,” Kasznica said.

Other states are pulling back olive branches. Illinois Gov. JB Pritzker (D) in his state of the state address last month proposed a two-year pause on approving new tax credits for data centers, saying “it is imperative that our growth does not undermine affordability and stability for our families.”

In New Jersey, which has tax incentives for data centers, Assemblyman Joe Danielsen (D) proposed a bill to require them to be powered by renewable or nuclear energy as long as that doesn’t result in a drop in those resources from the broader system. Data centers also would have to submit an energy usage plan.

“Data centers have proven they are always an albatross to any community that has the misfortune of seeing one built in their backyard,” Danielsen said in an emailed statement.

Potential for Legal Challenges

While lawyers said they don’t think it would be advantageous for data center developers to bring litigation over restrictions, the potential still exists.

Kasznica said it could depend on how, in Shapiro’s case, his standards were to be implemented.

“It’s not until you will lose out, you’re looking at how you’re being treated versus another like-situated industry, that you’re going to start seeing damages and opportunity for significant litigation,” she said.

Developers also aren’t the only ones who can sue over data center policies. Siegel said challenges could arise from an environmental organization pushing back on tax incentives for projects or over faster permit review being granted.

Environmental groups have shown an appetite for challenging actions that could help data centers. The Southern Environmental Law Center and Sierra Club sued Georgia for issuing a permit for Georgia Power to construct four new fossil-fuel units, which the plaintiffs allege are for meeting data center power needs.

Attorneys argue that broadly when it comes to imposing policies to govern data centers, states are standing on firm legal ground. They “have quite a bit of authority to regulate” electricity delivery, Ramadevanahalli said.

“As far as challenges go, I think that the devil will be in the details of what the states are trying to do,” he said. “If there is some kind of law that very specifically is going after a particular industry, there could be a potential cause of action there.”