Newsom Issues Split Decision On California Data Center Bills

Gov. Gavin Newsom signed a bill to regulate data centers but vetoed another as California looks to balance protecting consumers with jump-starting its lagging digital infrastructure sector. 

California lawmakers introduced four bills this year that would have imposed new regulations or restrictions on data center operators. One of those bills will become law.

Over the weekend, Newsom signed legislation authorizing state officials to evaluate whether data centers are driving up the price of electricity for homeowners and other consumers. And he vetoed the only other piece of data center-focused legislation that reached his desk, a bill that would have required data center firms to disclose water usage for their facilities. 

The wave of data center legislation in California comes amid a sharp increase in initiatives from state governments across the U.S. focused on data centers’ impact on the environment and power consumers.

In a letter to lawmakers explaining his veto decision, Newsom said California needs to tread carefully when it comes to creating new hurdles for developers. It once vied with Northern Virginia for the world’s data center crown but has become an afterthought for the companies driving the building boom.

“As the global epicenter of the technology sector, California is well positioned to support the development of this critically important digital infrastructure in the state,” Newsom wrote. “While I appreciate the author’s intent, I am reluctant to impose rigid reporting requirements about operational details on this sector without understanding the full impact on businesses and the consumers of their technology.”

The data center bill he signed into law, Senate Bill 57, directs the California Public Utilities Commission to conduct a study examining the impact of data center development on Californians’ energy bills.

As utilities are inundated with power requests from data center developers, they risk devoting resources toward developing new transmission infrastructure to supply gigawatts of power for a data center campus, only to have that project canceled or scaled back. With no buyer for the electricity the infrastructure was built to deliver, the cost of developing the “stranded” grid capacity would fall to the utility’s other ratepayers, driving up retail electricity prices.

States like Ohio, Virginia, California, Texas, Utah and Georgia have enacted or are considering rules to make data center firms cover a larger share of the billions of dollars needed for grid infrastructure upgrades to support them, preventing those costs from being passed on to other ratepayers.

The original version of SB 57, introduced by Sen. Steve Padilla, a San Diego Democrat, would have implemented such targeted rate classes, but this language was removed following opposition from utility Pacific Gas and Electric Co., as well as from industry groups like the Data Center Coalition, the Silicon Valley Leadership Group and Technet.

These same groups also lobbied heavily against Assembly Bill 93, which Newsom vetoed last week. The bill would have mandated that data centers disclose their projected water usage when applying for a business license, then report their actual annual consumption.

Water usage has long been one of the primary environmental concerns tied to data center development, particularly as the industry has expanded in arid areas. As of May, more than 15 data center projects in California were in areas where water stress is considered high or extremely high, according to Bloomberg. 

Many in the data center industry pushed back on the idea that new data centers present a threat to water resources, pointing to the growing prevalence of water-free designs and other technological advances. Still, the bill’s sponsor, San Mateo Democrat Diane Papan, expressed disappointment with the governor’s veto, saying the bill was a commonsense step to help understand the data center industry’s environmental impact. 

“AB 93 represented a reasonable, transparent approach to understanding the massive water demand driven by AI and data center expansion,” Papan said in a statement.

Two other data center bills were introduced in the last legislative session but never made it to the governor’s desk. 

AB 222 would have required data centers to report their energy consumption and efficiency metrics. SB 58 would have tied eligibility for tax exemptions to data centers procuring their power from renewable energy sources. Neither bill advanced past committee. 

More than a dozen states have some form of regulatory effort focused on data centers underway, while Virginia alone saw more than 40 data center bills proposed in the last legislative session. 

But unlike other states that have experienced an unprecedented flood of data center development over the past four years, California is trying to jump-start a data center development landscape that has stagnated. 

As the global epicenter of tech and AI innovation, Silicon Valley and California as a whole would seem like an intuitive market for one of the world’s largest digital infrastructure hubs. And for years it was, with the Bay Area serving as the West Coast’s corollary to Northern Virginia’s Data Center Alley.

But so far, the global data center boom is largely skipping the state. While demand for data center capacity in California remains high, the state’s acute power shortages, along with power and development costs and regulatory hurdles that are among the highest in the nation, have pushed new construction elsewhere. Silicon Valley and Southern California have become  “edge” data center markets more than global hubs.

Adding new red tape is unlikely to spur growth in a market where industry leaders point to regulation as a key factor in keeping them away.

“Getting building permits takes years here when the market is signaling that the most important thing is speed,” Crane Data Centers CEO Matt Pfile said at a December Bisnow event. “California is just not a place that's business-friendly if you’re building anything, and we think that’s going to continue to be a constraint.”