Local opinion: TEP is committed to ensuring that data centers support energy affordability

Readers of this page have seen repeated claims, including in a March 20 op-ed from Daniel Dempsey, that Tucson Electric Power’s agreement to serve a new data center will increase costs and risks for our other customers.

That is a serious accusation. It is also incorrect, reflecting a misunderstanding of both the terms of that agreement and the basic economics of utility service.

Although Dempsey speculates about the cost impact of new generation built to serve “Project Blue,” TEP won’t need any to serve its initial phase. Because our energy supply agreement for the project only covers that phase, there is no need to recover “marginal generation costs,” no need to worry about “stranded costs,” and no basis to claim that others will “subsidize” its service.

Under the agreement, Project Blue would pay our standard, regulated rate for large, high-voltage customers, which is designed to recover their fair share of power generation expenses and other service costs. The agreement also provides financial guarantees that protect TEP customers from negative impacts if the project does not operate as expected.

There is no secret deal, no special discount, and no “blended” rate that shifts costs onto others. Under Arizona law, utilities cannot invent rates on the side or quietly move customers onto unapproved pricing. Every rate is public, regulated, and approved by the Arizona Corporation Commission (ACC).

There is also no connection between “Project Blue” and TEP’s pending request for new, higher rates. The rates charged by TEP and other regulated energy providers in Arizona can only reflect historic costs – in this case, those incurred through the end of 2024.

Going forward, data centers and other businesses with high levels of steady energy use can help reduce the need for rate increases. This is because our rates recover fixed system costs through usage-based charges. Unless high-usage customers require the addition of significant fixed infrastructure, their consumption can help pay for the system everyone else is already using.

That’s why the first phase of Project Blue is such a good deal for TEP’s customers. It’s also why we’re committed to making sure the same is true for any future phases of the project, which would require an increase in fixed costs – specifically, new generating resources.

Skeptics speculate or simply assume that data centers will be allowed to saddle TEP’s future customers with the long-term costs of new resources developed to serve their significant new energy needs. But both TEP and the ACC are focused on ensuring that large energy users pay their fair share of new system costs.

TEP is obliged to try to meet the energy needs of new customers in our region without compromising reliability or affordability for other local residents or businesses. That’s why we insist on serving hyperscale data centers through energy supply agreements with binding terms that protect both our customers and our own financial stability.

New agreements to serve a future phase of Project Blue or other new hyperscale data centers in our region will need to account for the long-term cost of new generating resources and other facilities developed to serve their needs. They also will ensure that such users pay their fair share of those costs, either up front or over time, and that others aren’t left to pay the remaining “stranded” cost of that infrastructure if the project is not developed or does not operate as expected.

TEP is committed to protecting customers from bearing additional costs associated with powering new, large-scale data centers. We understand concerns about higher electric bills, particularly at a time when affordability is so critical. The reality, though, is that data centers can support greater long-term affordability in Arizona if our utilities and regulators continue working together to ensure that they cover their fair share of system costs.