California lawmakers have taken a step toward addressing the growing energy demands of data centers, but their efforts to impose stricter regulations were significantly diluted. A new law now requires regulators to produce a report on the energy impact of data centers by 2027, replacing earlier proposals for direct oversight.
The legislation, championed by State Sen. Steve Padilla, originally aimed to shield households and small businesses from rising electricity costs by creating a separate rate for data centers. However, under pressure from Big Tech, business groups, and Governor Gavin Newsom, the measure was scaled back to focus solely on an energy study.
"The final version of his law ‘was not the one we would have preferred,’" Padilla acknowledged. He noted that the measure does clarify the California Public Utilities Commission’s (CPUC) authority to study the issue, adding, "(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."
Consumer advocates like Matthew Freedman, staff attorney for The Utility Reform Network, criticized the legislation as a "toothless" measure. "It amounts to a ‘toothless’ measure, directing the utility regulator to study an issue it already has the authority to investigate", Freedman remarked.
Data centers, which are critical to powering artificial intelligence, are at the heart of California’s energy debate. With developers requesting 18.7 gigawatts of service capacity - enough to supply every household in the state - the industry’s energy consumption has raised questions about the need for costly grid upgrades. Efforts to regulate these facilities, however, have encountered strong resistance from Big Tech.
Governor Newsom, who vetoed a related bill requiring data centers to disclose water use, emphasized concerns about California’s competitiveness in his veto message. He stated his reluctance to impose new requirements on data centers "without understanding the full impact on businesses and the consumers of their technology."
Big Tech lobbyists echoed these concerns, warning that stricter regulations could drive investments to other states. Ahmad Thomas, CEO of the Silicon Valley Leadership Group, highlighted Texas’s $40 billion data center deal with Google as an example of the competitive landscape. "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", Thomas said.
Dan Diorio, vice president of state policy for the Data Center Coalition, argued against treating data centers differently from other industries. "To single out one industry is not something that we think would set a helpful precedent", Diorio stated.
While the newly mandated report may not be available in time to influence 2026 legislative efforts, some lawmakers see it as a foundation for future policy discussions. Freedman suggested that the findings could "help the Legislature to understand the magnitude of the problem and potential solutions." He added, "It could also inform the CPUC’s own review of the reasonableness of rates for data center customers, which they are likely to investigate."
Despite last year’s setbacks, lawmakers like Padilla and Assemblymember Rebecca Bauer-Kahan remain committed to revisiting the issue. Padilla plans to introduce a bill addressing long-term grid costs for data centers, while Bauer-Kahan will push for electricity use disclosure requirements.
Critics argue that fears of job losses and industry flight are overstated. Shaolei Ren, an AI researcher at UC Riverside, noted that the location of data centers is often driven by factors like energy prices and land availability, not proximity to AI researchers. "These two things are sort of separate, they’re decoupled", Ren said.
Freedman offered a possible bargaining strategy for lawmakers, suggesting that developers’ priority may be speed and certainty rather than cheaper power. "There’s so much money in this business that the energy bills - even though large - are kind of like rounding errors for these guys", he 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."
Although California’s initial attempts to regulate data centers largely fell short, the new energy study sets the stage for continued scrutiny. As the demand for artificial intelligence grows, so too does the urgency to address the environmental and financial impact of the state’s data centers. The upcoming report could serve as a critical tool for shaping future legislation and balancing the interests of Big Tech, consumers, and the state.
