Two months after PJM Interconnection proposed a plan that would have fundamentally changed data center development within the largest U.S. power grid, federal regulators have sent it back to the drawing board.

Late last week, the Federal Energy Regulatory Commission rejected most of PJM's proposed framework for connecting data centers to its grid system, which spans 13 states across the Mid-Atlantic and Midwest, plus Washington, D.C.

PJM has been scrambling to contend with an unprecedented, data center-driven wave of electricity demand that has threatened the grid’s stability and raised customer utility bills.

FERC’s ruling means the grid operator must scrap several measures at the heart of its proposed solution, sending PJM back to the drawing board and prolonging uncertainty for developers navigating the regulatory landscape in some of the industry’s most important data center markets.

The now-rejected framework PJM submitted to FERC in August would have imposed what amounted to a bring-your-own-capacity requirement on new data centers looking to connect to the grid. New facilities built without adding new generation or other capacity would have faced curtailment during periods when demand for power came dangerously close to exceeding supply.

The proposal would have required utilities to cut power to data centers before any action that could disrupt service for residential and commercial customers. It would also have barred these new data centers from participation in a critical power auction that has been responsible for driving up utility bills throughout the PJM system.

In its decision to reject these measures, FERC argued that PJM’s proposal overstepped its authority by intruding on retail electricity policies reserved for states under the Federal Power Act. Commissioners also said the proposed rules would have unfairly discriminated against data centers and other large-load customers beyond what is necessary to maintain grid reliability.

“We need state regulators to establish clear rules for which customers should be curtailed first when circumstances require it,” FERC Commissioner David Rosner wrote in a concurring opinion issued with the FERC ruling. “And we need PJM to be ready to adjust their operations to this evolving paradigm. But such measures should only be taken when necessary to keep the system reliable, after voluntary demand response resources have been exhausted.”

The rejection comes as PJM is warning of mounting reliability risks due to surging electricity demand, much of it from data centers.

On Monday, PJM issued a “maximum generation alert” as unusually warm fall weather pushed the system close to its limits. This prompted the Department of Energy to authorize emergency measures that could require some data centers to temporarily run on their on-site backup generation to help avoid a blackout.

PJM emphasized that this step is precautionary and that it is unlikely such curtailment measures will be needed. Still, PJM has had several previous close calls, including a near regional blackout when multiple data centers simultaneously disconnected from the grid. Data centers are also driving up electricity costs for consumers, with the price of power set to jump more than 60% in PJM's service area.

Following FERC’s ruling, PJM spokesperson Jeff Shields wrote in a statement that the grid operator is “reviewing the Commission’s order with an eye toward how we can fulfill FERC’s requirements while recognizing the responsibilities FERC indicated belong to the states and honoring the concept that existing electricity customers should not be unfairly burdened by new, energy intensive customers in the form of higher costs or decreased reliability.”

FERC’s decision is a headache for the tech companies, data center developers and power firms that had been structuring bring-your-own-capacity deals around PJM’s proposed framework, Mary Yang, former regulatory counsel for PJM and chief operating officer at 804 Advisory, told Latitude Media.

She said few developers will be panicking, as relatively few of those deals had been finalized due to ongoing uncertainty around how PJM’s framework would be implemented. But FERC’s ruling means that uncertainty will continue, making it hard for developers and power firms to get creative to advance data center projects in the region. In doing so, Yang said, it may push data center developers elsewhere in the U.S.

“It does slow down the development of these more innovative bilateral mechanisms to solve some of these problems,” Yang said. “There’s a point at which it becomes challenging to wait longer. We are seeing, anecdotally, a lot of people saying, ‘OK, PJM needs to sort itself out. Let’s go to a different region that’s got more certainty.’”

Whether PJM continues to pursue measures similar to those rejected by FERC remains to be seen. For now, the ruling will likely prolong higher utility bills in the PJM system, Jeffries analysts wrote in a client note this week. Any future efforts to require curtailment for data centers or bring-you-own power provisions likely won’t be from PJM itself but led by the states in the PJM system, according to the Jeffries analysts, with Pennsylvania and Ohio most likely to drive these efforts.

Yet some groups are urging PJM to find ways to advance its framework. The Natural Resources Defense Council, which has been closely involved with PJM’s interconnection reform efforts, blasted FERC’s ruling, saying it leaves the public exposed to rolling blackouts and higher bills caused by data center electricity demand.

Claire Lang-Ree, an advocate with the group’s Sustainable FERC Project, urged the grid operator to redraft its proposal to address the “technicalities” used to reject it and refile with FERC as soon as possible.

“At a minimum, PJM’s rules must require data centers to bring their own supply, and not allow them to raise electricity costs or cause blackouts,” Lang-Ree said in an emailed statement. “As PJM works to address FERC’s concerns, states still have a major opportunity to advance this concept through their own policies, unlocking reliable, affordable, and clean energy sources to meet the moment on powering growing energy demand.”

Despite rejecting the main pillars of PJM’s data center interconnection plan, FERC approved other elements of its proposal, including the creation of a new database to track data centers across the PJM system. The database is intended to give PJM greater visibility into facilities’ power consumption, ramp-up schedules, on-site backup generation and other data that could improve demand forecasting and improve grid planning for future load growth.