Many states are seeing higher energy bills as a result of new energy-guzzling “hyperscale” data centers — the massive buildings storing computer equipment that use hundreds of megawatts of power to process services like artificial intelligence.
Kentucky has new tax incentives to lure such data centers to the state, but its largest utility companies have now devised what they say is a mechanism to protect existing ratepayers from their costs. Consumer and environmental advocates argue these protections still aren’t strong enough, urging state regulators to do more to shield them from risks that could be felt in their monthly bills.
Louisville Gas & Electric and Kentucky Utilities are seeking permission from state regulators in their Certificate of Public Convenience and Necessity (CPCN) case to spend nearly $3 billion to build two new 645 megawatt natural gas plants, as well as extend the life of two coal plants. They say this is needed largely because of their forecast of huge energy demand from future data centers they expect will be built here.
In five hours of public comments across three Public Service Commission meetings this summer, Kentuckians expressed concern not just about how more fossil fuel plants would worsen climate change and pollution, but also how the companies’ plan to serve data centers could affect their utility bills, citing recent examples from other states.
The utilities now say they’ve crafted a new way to charge future data centers for service that will ensure current ratepayers aren’t the ones bearing the burden, citing their proposed settlement agreement reached in late July with Attorney General Russell Coleman and the Kentucky Coal Association in that CPCN case.
Under this agreement, LG&E and KU say that any new data center expecting to use at least 100 megawatts of power will have to sign up to be charged under a new “extremely high load factor” tariff rate. This EHLF tariff would require such customers to pay for at least 80% of the energy they say they will consume each month — even if they wind up using less — for a period of 15 years.
In their hearing before the Kentucky Public Service Commission in early August, company executives compared their agreement to one that was approved in July by Ohio regulators, with the support of both the state’s largest utility and consumer advocates. This lifted a 2023 moratorium on new data centers being connected in Ohio because of their inability to meet the surge in power demand at the time. The Ohio utility company is now allowed to serve new data centers, with provisions requiring minimum payments.
However, environmental and ratepayer advocates in Kentucky remain skeptical on the specifics of the LG&E/KU agreement, highlighting several differences to the compromise reached in Ohio.
Whereas Ohio implemented a moratorium while they worked through an agreement on how to charge data centers, the Kentucky utilities are first seeking approval from state regulators to build power plants for potential data centers before receiving approval for the new EHLF tariff rates.
The Public Service Commission must rule on the buildout of the power plants by Oct. 28, even though the new EHLF tariff rates for data centers are in a separate PSC case that likely won’t be decided until next year. If the CPCN is approved, LG&E/KU essentially promise in the meantime to sign up any new data center customers under a special contract with the new terms, and to not start constructing the new gas plants if they discover it’s more difficult than anticipated.
In his public comments to the commission in the Frankfort hearing, Rev. Elwood Sturdivant of Louisville read an article about the Ohio moratorium and settlement, asking Kentucky regulators to follow the same process.
“Can we have a moratorium here in Kentucky to take the time that this issue deserves, to figure out how to handle it responsibly for everyone?” Sturdivant asked, to the applause of supporters in the room.
Byron Gary, an attorney for environmental advocacy group Kentucky Resources Council and several joint intervenors in the CPCN case, agrees that LG&E/KU are seeking to flip the order in which Ohio addressed the issue. He said that is especially risky because of the speculative nature of the companies’ data center forecast, as they’ve still not signed an electric service agreement with any such customer. That risk would fall on ratepayers, if state regulators approve of the utilities’ plans.
“That should be the first step, getting a tariff in place that is sufficiently protective of existing ratepayers,” Gary said. “Not only is it cart before the horse, it's cart before the horses.”
LG&E calls new tariff ‘more protective’ of ratepayers than Ohio
In his testimony before the commission, Lonnie Bellar — a top executive at PPL Corporation, the parent company of LG&E/KU — laid out the details of their proposed settlement with the Kentucky attorney general.
Noting that the new EHLF tariff rates and cost recovery mechanism for the new plants “will not be approved in this proceeding,” Bellar added that “it does offer very good customer protections.”
Bellar laid out a specific hypothetical for how this would work with a 525 megawatt data center — the same wattage of one that’s been proposed for Louisville this year.
“If a 525 megawatt data center were to locate and sign our EHLF tariff, they would be obligated — at a minimum — to pay $1.4 billion worth of demand charges to the company for over a 15 year period,” Bellar said. “And to be clear, that's whether they operate one year and decide to leave, or they operate the whole 15 years. And that's the minimum. That's 80% of what that 525 megawatt customer would otherwise pay.”
However, that cost recovery mechanism is only for the $1.4 billion cost of building the Mill Creek 6 gas plant in Louisville, with no specific cost recovery mechanism proposed for Brown 12, the new gas plant intended to be built in Mercer County for roughly the same cost.
LG&E/KU had previously argued that cost recovery should apply broadly to all new power generation, but Bellar said the attorney general’s office and other parties to the settlement wanted it to only apply to Mill Creek 6. Asked if there will be a specific cost recovery for Brown 12, he answered that “we don’t have any plans that I’m aware of to make that request of the commission.”
Bellar and LG&E/KU Vice President Robert Conroy also testified to other details of the settlement agreement, including a threshold of at least 100 megawatts and collateral requirements of up to $100 million for customers to sign up under the EHLF tariff.
The companies also agreed to begin updating the commission in semi-annual meetings next year about their construction plans, economic development and load forecasts, should their CPCN request be approved.
Bellar said the companies looked closely at the Ohio tariff settlement when developing its own, calling the companies’ tariff “even more protective” of ratepayers than their neighbors to the north.
As for the Ohio tariff agreement, the only stakeholder to come out strongly against it was the Data Center Coalition, an industry group representing large hyperscaler companies like Google, Amazon, Microsoft and Meta. The group said its regulations would artificially inflate data center costs in Ohio and make it less attractive to do business there compared to other states.
Asked by PSC chair Angie Hatton if their proposed tariff may take prospective data center companies by surprise or scare them off, Conroy assured her it would not, as “we worked with the Data Center Coalition on the parameters that are in that tariff.”
“We developed parameters that we believe will protect customers, but they’re not such that it will deter data centers from coming to the state,” Conroy said. “The whole goal — for the General Assembly and the governor and everybody else — is to attract businesses to the state. And we don't want to be in the way of that.”
Skeptics say ratepayers may still be ‘left holding the bag’
Gary — the attorney representing joint intervenors Kentuckians for the Commonwealth, Kentucky Solar Energy Society, Metropolitan Housing Coalition and Mountain Association — said the proposed tariff of LG&E and KU had some provisions they’d support, but they are not as strong as Ohio.
For instance, Ohio requires at least a minimum payment of 85% of what a data center says they will use every month, larger than the 80% proposed in the LG&E/KU agreement. Kentucky would also have a much higher 100 megawatt threshold to be subject to the EHLF tariff, as opposed to 25 megawatts in Ohio. A new tariff proposed by the East Kentucky Power Cooperative utility has an even lower threshold of 15 megawatts.
Ultimately, Gary said the weakest aspect of what LG&E and KU are proposing is its pursuit of an expensive buildout of plants and extension of coal plants before its tariffs and customers are lined up, which is “the opposite order that other utilities across the nation seem to be going in.”
“Other commissions have rightfully put a hold on things to make sure that they get the cost recovery right first, so that not all of us are left holding the bag if all of this falls through and we see another dot-com bubble,” Gary said.
Gary and others have noted that other states’ utilities have objective measures of future data center load forecasts, such as whether a prospective company has all of the zoning approvals and permits it needs, or a signed electric service agreement with the utility — which are not part of the current calculations of LG&E and KU.
In a press conference outside the PSC hearing on Aug. 4, Andy McDonald of the Kentucky Solar Energy Society said the protective terms of the tariff won’t matter if data centers don’t materialize — like the ones proposed in Oldham County this year that pulled out after local opposition.
“We still bear the risk that they will build the gas plants and the data centers don't appear,” McDonald said. “So the protection of this tariff is only protection if the data centers actually get built.”
Even if data centers are built, McDowell brought up the possibility of a data center company going bankrupt amid a potential burst of an AI industry bubble.
“(LG&E) said they would be obligated, even if they leave after a year,” he said. “But if they're bankrupt and the company dissolves, who's there left to pay the bill? The ratepayers.”
Sarah Lynn Cunningham of Louisville Climate Action Network added that if LG&E and KU wanted to protect ratepayers, they would not just make the cost recovery mechanism apply to the new Mill Creek 6 plant in Louisville.
“We would like to see them come to a public meeting and explain to us how we're being protected, especially if the mechanism only applies to one of the two gas plants,” she said.
Gary also called the new Brown 12 gas plant “the huge elephant in the room that’s not covered at all by this cost recovery mechanism.”
LG&E vows ‘prudency’ if CPCN granted
Under questioning from Gary and attorneys for the Sierra Club, which is also intervening in the CPCN case, LG&E and KU executives noted that if the PSC grants them permission to build out the new plants, that doesn’t necessarily mean the company will do so immediately, or continue to in the face of changing circumstances.
“We’re subject to the prudency standard,” said Bellar of PPL, adding that the companies’ past actions show they are capable of that trust. “The regulatory construct is that when we receive a CPCN, in general that does not dictate cost recovery, that prudency is still required.”
Conroy of LG&E/KU noted the same, saying they’ve reevaluated after past CPCNs were granted and would keep the commission updated every six months if their circumstances change.
Hatton further probed if the companies would update the commission immediately if there was a major development, instead of just semi-annually.
“And I assume if something drastic happened in between that six month period, we hear from you?” Hatton asked. “Some sort of bottom falls out of a market, or a giant company moves in that needs a ton of capacity, or if something falls through — a contract that you thought was about to happen? Or if we figure out a way for AI to not use so much electricity?”
“That'll all be part of those discussions,” Conroy answered.
Gary of Kentucky Resources Council says this illustrates another reason why a tariff needs to be finalized before LG&E and KU are granted permission to build out plants that could end up as stranded assets.
“The companies are basically just saying: 'Trust us, we won't build it if we don't need it,'” Gary said. “And that sort of obfuscates the role of state government and the Public Service Commission in overseeing monopoly utilities in Kentucky. It is their job to determine whether there is a need or not, and whether this is just wasteful duplication.”
Multiple tenants, multiple tariff contracts
One area of questioning in the August PSC hearing was who would actually sign tariff contracts with LG&E and KU, considering that data centers projects announced in Kentucky so far this year have come from developers who intend to lease the facilities to unknown end users.
Bellar, Conroy and LG&E executive John Bevington all indicated that the company who is the end user of a data center would likely be the one signing onto the EHLF tariff, not the landlord.
The 525 megawatt data center that Poe Companies and PowerHouse Data Centers have announced they intend to build in Louisville would be made up of six different buildings, but the companies have not revealed who they intend to lease it to.
Bevington said if the Louisville site has multiple data center tenants, that would mean LG&E and KU may hypothetically have multiple services contracts with multiple companies.
A Sierra Club attorney asked Bellar what would happen if a data center was split up into multiple end users who each used 99 megawatts — just under the 100 megawatt threshold for service under the EHLT tariff terms.
Bellar answered that the utility would not allow customers to “circumvent the rationale behind why that tariff was developed.” In that hypothetical, he said LG&E and KU would seek to put the company on a special contract that had the same terms as customers using 100 or more megawatts.
‘What the governor wants, what the General Assembly wants’
LG&E/KU executives testified in the hearing that time is of the essence on several levels.
They say that new power plants need to be built if Kentucky is going to attract data center companies and other major economic development projects that require large amounts of energy. If not, Kentucky will lose those opportunities to other states.
“The question we have is, are we going to have enough generation to serve what the governor wants, what the General Assembly wants to attract to the state of Kentucky,” Conroy said.
While the Oldham County data center developers abandoned those projects, Bevington testified that there’s a long line of companies who are willing to fill that gap, so long as LG&E/KU can build the new gas plants.
“We've been given the order from the General Assembly through its passage of a sales tax exemption bill, which is essentially… the enabling factor in asking hyperscalers to look at our territory,” Bevington said. “So while we don't have one yet, the floodgates absolutely opened when that sales tax exemption bill was passed.”
Bellar also testified that the longer LG&E/KU have to wait to build the new gas plants, the more expensive it will be.
When the PSC denied the companies’ request to build the new Brown 12 plant two years ago, it was projected to cost less than $1 billion. Today, its projected cost has grown to $1.4 billion, which Bellar said will only continue to go up with high demand for such components and access to gas pipelines.
Hatton, the PSC chair, asked Bellar if Kentucky legislators are rethinking the importance of attracting data centers, noting that some states like Virginia are rethinking their costs and benefits.
“They're putting moratoriums, or they're pumping the brakes a bit, so as not to have a race to the bottom and offer tax incentives and inducements to come into their state, and I guess trying to figure out whether it's worth it for that sort of economic development,” Hatton said. “Do you think that Kentucky is rethinking that paramount importance that they placed on data centers?”
“I'm not aware of any backing off from that incentive, because their incentive was made to produce results,” Bellar answered. “And it hasn't produced any yet.”
State government and politics reporting is supported in part by the Corporation for Public Broadcasting.
