In summary
A new law orders regulators to study the cost impacts of fast-growing, energy-hungry AI data centers. Lawmakers are expected to revisit tougher rules as utilities, advocates and tech groups battle over who pays for the grid upgrades.
Tools that power artificial intelligence devour energy. But attempts to shield regular Californians from footing the bill in 2025 ended with a law requiring regulators to write a report about the issue by 2027.
If that sounds pretty watered down, it is. Efforts to regulate the energy usage of data centers — the beating heart of AI — ran headlong into Big Tech, business groups and the governor.
That’s not surprising given that California is increasingly dependent on big tech for state revenue: A handful of companies pay upwards of $5 billion just on income tax withholding.
The law mandating the report is the lone survivor of last year’s push to rein in the data-center industry. Its deadline means the findings won’t likely be ready in time for lawmakers to use in 2026. The measure began as a plan to give data centers their own electricity rate, shielding households and small businesses from higher bills.
It amounts to a “toothless” measure, directing the utility regulator to study an issue it already has the authority to investigate, said Matthew Freedman, a staff attorney with The Utility Reform Network, a ratepayer advocate.
Data centers’ enormous electricity demand has pushed them to the center of California’s energy debate, and that’s why lawmakers and consumer advocates say new regulations matter.
For instance, the sheer amount of energy requested by data centers in California is prompting questions about costly grid upgrades even as speculative projects and fast-shifting AI loads make long-term planning uncertain. Developers have requested 18.7 gigawatts of service capacity for data centers, more than enough to serve every household in the state, according to the California Energy Commission.
But the report could help shape future debates as lawmakers revisit tougher rules and the CPUC considers new policies on what data centers pay for power – a discussion gaining urgency as scrutiny of their rising electricity costs grows, he said.
“It could be that the report helps the Legislature to understand the magnitude of the problem and potential solutions,” Freedman said. “It could also inform the CPUC’s own review of the reasonableness of rates for data center customers, which they are likely to investigate.”
State Sen. Steve Padilla, a Democrat from Chula Vista, says that the final version of his law “was not the one we would have preferred,” agreeing that it may seem “obvious” the CPUC can study data center cost impacts. The measure could help frame future debates and at least “says unequivocally that the CPUC has the authority to study these impacts” as demand from data centers accelerates, Padilla added.
“(Data centers) consume huge amounts of energy, huge amounts of resources, and at least in the near future, we’re not going to see that change,” he said.
Earlier drafts of Padilla’s measure went further, requiring data centers to install large batteries to support the grid during peak demand and pushing utilities to supply them with 100% carbon-free electricity by 2030 — years ahead of the state’s own mandate. Those provisions were ultimately stripped out.
How California’s first push to regulate data centers slipped away
California’s bid to bring more oversight to data centers unraveled earlier this year under industry pressure, ending with Gov. Gavin Newsom’s veto of a bill requiring operators to report their water use. Concerns over the bills reflected fears that data-center developers could shift projects to other states and take valuable jobs with them.
A September Stanford report on powering California data centers said the state risks losing property-tax revenue, union construction jobs and “valuable AI talent” if data-center construction moves out of state.
The idea that increased regulation could lead to businesses or dollars in some form leaving California is an argument that has been brought up across industries for decades. It often does not hold up to more careful or long-term scrutiny.
In the face of this opposition, two key proposals stalled in the Legislature’s procedural churn. Early in the session, Padilla put a separate clean-power incentives proposal for data centers on hold until 2026. Later in the year, an Assembly bill requiring data centers to disclose their electricity use was placed in the Senate’s suspense file – where appropriations committees often quietly halt measures.
Newsom, who has often spoken of California’s AI dominance, echoed the industry’s competitiveness worries in his veto message of the water-use reporting requirement. The governor said he was reluctant to impose requirements on data centers, “without understanding the full impact on businesses and the consumers of their technology.”
Despite last year’s defeats, some lawmakers say they will attempt to tackle the issue again.
Padilla plans to try again with a bill that would add new rules on who pays for data centers’ long-term grid costs in California, while Assemblymember Rebecca Bauer-Kahan — a Democrat from San Ramon — will revisit her electricity-disclosure bill.
Big Tech warns of job losses but one advocate sees an opening
After blocking most measures last year — and watering down the lone energy-costs bill — Big Tech groups say they’ll revive arguments that new efforts to regulate data centers could cost California jobs.
At a CalMatters event in November, Silicon Valley Leadership Group CEO Ahmad Thomas argued that California must compete to attract investments like the $40 billion data-center project Texas secured with Google. Any policy making deals like that tougher next year would provoke conflict, he added.
“When we get to the details of what our regulatory regime looks like versus other states, or how we can make California more competitive…that’s where sometimes we struggle to find that happy medium,” he said.
Despite having more regulations than some states, California continues to toggle between the 4th and 5th largest economy in the world and has for some time, suggesting that the Golden State is very competitive.
Dan Diorio, vice president of state policy for the Data Center Coalition, another industry lobbying group, said new requirements on data centers should apply to all other large electricity users.
“To single out one industry is not something that we think would set a helpful precedent, ” Diorio said. “We’ve been very consistent with that throughout the country.”
Critics say job loss fears are overblown, noting California built its AI sector without the massive hyperscale facilities that typically gravitate to states with ample, cheaper land and streamlined permitting.
Data-center locations — driven by energy prices, land and local rules — have little to do with where AI researchers live, said Shaolei Ren, an AI researcher at UC Riverside.
“These two things are sort of separate, they’re decoupled,” he said.
Freedman, of TURN, said lawmakers may have a bargaining chip: if developers cared about cheaper power, they wouldn’t be proposing facilities in a state with high electric rates. That means speed and certainty may be the priority, giving lawmakers the space to potentially offer quicker approvals in exchange for developers covering more grid costs.
“There’s so much money in this business that the energy bills – even though large – are kind of like rounding errors for these guys,” Freedman said. “If that’s true, then maybe they shouldn’t care about having to pay a little bit more to ensure that costs aren’t being shifted to other customers.”
