California Puts New Rules Around Data Center Growth

Key Takeaways

• California Tightens Data Center Oversight: Gov. Gavin Newsom signed seven bills addressing electricity costs, water use, environmental review and resource reporting.
• Communities Get More Information: New disclosure and planning requirements are intended to give local governments a clearer picture of the resources proposed data centers will consume.
• Developers Face More of the Cost: The measures seek to prevent infrastructure and electricity costs associated with data centers from being shifted onto other ratepayers.
• Growth Comes With Tradeoffs: California still faces difficult questions over how to balance data center investment with demands on water, electricity and local infrastructure.
• Local Decisions Will Matter: Communities may reach very different conclusions about whether the economic benefits of individual projects justify their resource demands.

Deep Dive

California Gov. Gavin Newsom signed seven bills on September 21 establishing new requirements for data centers, including measures governing electricity costs, water-use disclosures, resource reporting and environmental review. The package is intended to give communities more information about proposed facilities while preventing the costs of serving them from being shifted onto ordinary utility customers.

The laws arrive as data centers have become an increasingly visible part of California's debate over artificial intelligence and the infrastructure needed to support it. These are sprawling facilities with substantial demands for electricity and, depending on their cooling systems, water. What once could be treated largely as a question of development is becoming a question of who pays for that development and who gets a say in it.

That is where California's new approach begins. Three of the measures (Senate Bills 1168 and 886 and Assembly Bill 2383) address electricity and the costs associated with bringing large data center loads onto the grid. The legislation calls for rules designed to keep infrastructure and power costs associated with data centers from being shifted to other ratepayers. AB 2383, for example, directs the California Public Utilities Commission to establish requirements governing electrical service to data centers, while the broader package is intended to make operators bear the costs of upgrades needed to serve their facilities.

Water gets its own set of rules. AB 2469 and AB 2619 require greater disclosure and planning around data center water demand. Developers seeking certain local approvals will have to provide information about expected water use and supply, while new or expanded facilities face requirements around water assessments and scarcity planning. Where upgrades to a water system are necessary to accommodate a project, the developer is expected to cover those costs.

AB 1577 adds another layer of transparency by requiring reporting on data center energy use and efficiency, while SB 887 changes the environmental review equation. Data centers will no longer be eligible for blanket environmental exemptions under the state's expedited environmental review framework. Facilities seeking streamlined treatment will instead have to meet standards involving energy, water and fuel consumption, among other requirements.

The laws begin to answer a question California has largely been forced to confront project by project: how does a state eager to remain at the center of the technology economy account for the physical footprint required to sustain it?

More Information, More Decisions

Giving communities more information does not necessarily make the decisions in front of them simple. California's water supplies are already divided among cities, farms, businesses and environmental needs, with scarcity varying considerably across the state. Electricity presents its own problem. A large new data center can require not only enormous amounts of power but new infrastructure capable of delivering it.

The new laws attempt to draw a clearer line around who should bear those costs. But they also leave communities with the task of weighing the economic benefits of a proposed facility against its demands on local resources.

How will communities determine whether water is being fairly allocated? What happens when the infrastructure necessary to support a data center becomes too expensive? And could higher development costs eventually push some projects elsewhere?

Those questions are no longer entirely hypothetical. Business groups have warned that heavier regulation could make California less competitive for data center investment. The Data Center Coalition, which opposed portions of the regulatory push, has argued that policymakers need to balance responsible development with keeping California competitive as a market for digital infrastructure. Environmental and ratepayer advocates, meanwhile, have argued that communities should not be left paying for the water and electrical infrastructure required by some of the world's largest technology companies.

There is another complication. The effects will not necessarily look the same from one community to the next. A city with abundant infrastructure and a large commercial tax base may look at a proposed data center differently than a smaller community facing tighter water supplies or expensive electrical upgrades. Giving local governments greater information and leverage could therefore produce different answers to the same question depending on where a project is proposed.

That possibility gets at something the legislation itself cannot settle. More transparency can tell communities what a data center is expected to consume. It can establish who pays for infrastructure. It can force developers to account for water, electricity and environmental consequences before construction begins.

It cannot decide for a community whether the project is worth it. California has chosen, at least for now, to put more of that judgment into the hands of the people and governments closest to these projects. The result will test whether the state can accommodate the infrastructure behind its growing artificial intelligence economy without asking communities to absorb costs they did not agree to bear.

And as data centers continue to spread, the harder question may not be whether California needs them. It will be what California is willing to give them—in water, electricity and land—and what it expects in return.

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