Buying clean electricity, financing new generation, and paying for the transmission and capacity required to serve a large new load are three different transactions. A headline power purchase agreement usually covers only the first. The data center grid upgrade costs fall into a separate legal and commercial track, one that FERC’s June 18, 2026 show cause orders have pushed to the center of the interconnection debate.
Why Data Center Grid Upgrade Costs Are Not Covered by the Power Deal
A utility or grid operator that receives a request to connect a data center campus must answer two separate questions. The first is whether the request can be connected to the local network, and the second is what network reinforcement will be required to serve it at scale. The power purchase agreement that often accompanies the announcement answers neither question. It is a contract for energy and environmental attributes, not a plan for transmission or distribution investment.
Recent large data-centre power arrangements illustrate the gap. A developer may sign an agreement whose headline capacity is measured in gigawatts, but that figure can combine existing generation already on the system, new generation that requires its own interconnection, and contractual structures rather than newly built physical assets. Treating the headline number as a measure of grid upgrade need conflates accounting arrangements with the physical network changes that determine whether a load can actually be served.
What the June 2026 FERC Orders Actually Require
On June 18, 2026, FERC issued show cause orders to PJM, MISO, SPP, CAISO, ISO-NE and NYISO and their transmission owners. The orders direct each grid operator to justify how its existing tariff provides for the interconnection of large and co-located loads, or to propose tariff revisions. Those orders do not reach ERCOT, nor regions where utilities have not ceded operational control of their transmission systems to a Commission-jurisdictional operator.
The most consequential structural point is what the orders do not do. They do not impose a single national tariff or interconnection rule. FERC said it was not looking for a one-size-fits-all approach, citing differences in market design, transmission service models and progress on large-load reforms among the six RTOs and ISOs. The orders instead direct each grid operator to justify or revise its own tariff, leaving the detailed cost responsibility to each market’s compliance filing.
Each grid operator and transmission owner has 60 days from the order to justify its current tariff or file changes, a deadline of August 17, 2026. A separate 30-day requirement calls for an informational report on generation adequacy for existing and new large loads by July 20, 2026. The rulemaking docket that FERC opened after the Department of Energy directed it to begin a large-load interconnection rulemaking on October 23, 2025 remains open, alongside the show cause process.
How Network Upgrade Costs Are Allocated in Practice
Applying for interconnection does not by itself define who pays for the network reinforcement that follows. The generator-side connection is generally built and funded by the project that requested it, with the costs of dedicated facilities assigned to that customer. The broader question is the network upgrades required elsewhere on the system to maintain reliability once the new load or generation is added. Those costs are typically allocated through the applicable tariff, not through a single national rule.
For large loads, cost recovery may run through tariffed service charges, special contracts negotiated between the customer and the utility or grid operator, or direct construction and contribution in aid of construction. Which of those channels is available, and which applies, depends on the jurisdiction, the service territory, the size and location of the load, and whether the transmission provider has a large-load interconnection process in place. A load in one region may be handled very differently from an identical load in the next.
Cost recovery agreements are not simply direct assignment of every network upgrade. They are instruments that secure payment obligations and mitigate stranded-cost risk if the expected load does not materialise. Among the reform areas FERC identified is cost transparency and cost-shifting protection. The Commission directed that a pro forma cost recovery agreement be used among the grid operator, the relevant transmission owner and the eligible customer taking transmission service on behalf of the large load, with the stated purpose of mitigating cost-shifting risk.
The Real Disagreement: Load Pays or Ratepayers Share
The case for assigning upgrade costs to the large load rests on cost causation. If a single data center triggers reinforcement that would not otherwise be needed, charging that load protects existing customers from bearing costs they did not cause. It also aligns siting decisions with the true network cost of a location. If the load later fails to materialise, the party that triggered the investment bears the stranded asset risk.
The opposite case points to wider system benefits. New transmission and capacity can relieve congestion, improve reliability, and support broader electrification even after the original large load leaves. Socialising upgrade costs can accelerate deployment and avoid a first-mover penalty that discourages otherwise valuable load from connecting. But socialisation can also encourage inefficient siting and shift risk onto customers who receive no direct benefit from the new load.
Grid-enhancing technologies sit between these positions. Dynamic line ratings and advanced power flow control can raise the transfer capability of existing lines, reducing the upgrade that would otherwise be needed for a particular load. Cost allocation can also be weighted to reflect both causation and wider system benefit. This middle ground is not simply direct assignment versus socialisation, but a range of calibrated options that different regions are pursuing at different speeds.
Behind-the-meter generation has emerged as a way to reduce the load a data center imposes on the network, but it does not remove the need for a grid connection entirely. On-site assets can lower the community upgrade burden, yet the remaining service requirement still has to be priced through the tariff or a negotiated agreement. That is why the behind-the-meter generation question is separate from the network upgrade question.
What Happens Next
The immediate next step is the compliance filing window. Each RTO and ISO either justifies its existing tariff or files proposed changes, and the Commission then examines those filings before deciding whether further action is needed. The parallel rulemaking launched after the Department of Energy’s October 2025 direction remains open, which means the show cause process and the broader rulemaking are proceeding on parallel tracks. The compliance filings are where regional variation in cost responsibility shows up, because each operator’s proposal reflects its own load profile, generation mix and cost-allocation practice.
The practical consequence for anyone planning a data center is that the grid upgrade question cannot be answered from the power purchase agreement alone. The answer sits in the applicable tariff, the negotiated agreement, and the compliance filings that each regional operator will put forward. Reading those tariffs matters more than following the headline capacity announcements.
References
- McGuireWoods — “FERC Issues Section 206 Show Cause Orders Directing All Six RTOs/ISOs to Justify or Reform Large-Load Integration Rules” — primary record of the June 18, 2026 orders, the six RTOs/ISOs, the reform categories, and the deadlines.
- Baker Botts — “FERC Issues ‘Pivotal’ Show Cause Orders to Grid Operators to Integrate Large Energy Users” — details on regional flexibility, the pro forma cost recovery agreement, and the Department of Energy’s October 2025 rulemaking direction.
