Should Data Centers Be Regulated as Utilities? Industry Experts Weigh In

power-smallorange

Power infrastructure in a data center (Photo by Tim Dorr via Flickr)

Last week the New York Times suggested that the data center industry has become a “wildcat power utility” by reselling power to customers at a profit and ripe for regulation. So we reached out to experts who were familiar with both data centers and utilities and asked: Is the data center industry a candidate for regulation as a utility?

Their answer: Although power is a key component of their offerings, data centers differ from utilities in very significant ways. Another key point is that data center clients are typically sophisticated companies that are paying premium prices, and unlikely candidates for exploitation by service providers - a key historical concern of utility regulation.

But these experts also noted that some industry practices open the door to greater scrutiny, and data center operators need to be more transparent about their practices to address concerns.

Times: Power A Central Component of Leases

In its story last week, The New York Times took a critical look at power provisioning in data centers. “Electrical capacity is often the central element of lease agreements, and space is secondary,” the Times wrote. “A result, an examination shows, is that the industry has evolved from a purveyor of space to an energy broker — making tremendous profits by reselling access to electrical power, and in some cases raising questions of whether the industry has become a kind of wildcat power utility.”

The paper added that "the capacity pricing by data centers .... appears not to have registered with utility regulators."

Regulating data centers as utilities "doesn't seem plausible to me," said Coy Stine, Director of Data Center Services at Bluestone Energy, which works with utilities on energy efficiency incentives. "Data centers provide the service of a highly conditioned and very reliable power source. Customers can't get that by plugging their services into the utility power plug in the wall. Comparing a data center to a utility is similar to saying a car manufacturer is a provider of sheet metal. The automobile has metal as a component, but there's much more to it. The data center provider is playinhg the same role."

"I think data centers are a whole different animal," said Jon Koomey, a research fellow at Stanford University who has done several landmark studies on data center energy use. "It's not only the cost of a kilowatt of power. They're charging for equipment and infrastructure like backup generators. These data centers aren't like individual households. The key difference is that these (customers) are people who know what they're doing."

Sophisticated Customers

Both Koomey and Stine said they have heard of concerns being raised about the role of data centers in energy purchasing. But they say that equating data center providers to residential or office landlords is a flawed comparison, as they offer different services and have different types of customers.

"I think it stems from the old model of tenants being exploited by their landlords," said Koomey. "The people that are renting data center space are typically pretty sophisticated folks who are paying a lot of money for these services. This idea that they're taking advantage of these clients doesn't make sense."

"Data center customers have teams of people to negotiate their SLAs (service level agreements) very carefully," said Stine. "The cost for the data center operator to buy switchgear and UPS gear and generators is factored into the cost to the customer. I think the customers understand this, but the general public does not. Most of the audience of the New York Times doesn't understand what happens in the data center."

Testing Boundaries

But some industry providers are testing boundaries in how they sell power, according to Mark Bramfitt, who led data center initiatives for California utility PG&E for many years and now consults on utilities and IT.

"I think it's pretty well known that colocation data center operators are often crossing regulatory lines with regard to the 'resale' of electric service, but it's been a no-harm-no-foul matter because tenants have not made an issue of it," said Bramfitt. "Tenants signed lease agreements that base their rents on available power capacity or even measured usage, after all.

"The real risk for tenants is if a colo operator oversells available power capacity," said Bramfitt. "I know of at least one case where an operator is scrambling to find additional capacity, either from the serving utility, from energy efficiency, or from on-site generation, because they have promised through lease agreements to provide more power than they currently have."

Need for More Transparency

Bramfitt, who says he "talked pretty extensively with the Times" about data center energy issues, said service providers will need to be more open about their practices, as energy will be central to data centers' value proposition for some time to come.

"In the future, if tenants ask for things like a higher proportion of renewable power, colo operators will find themselves spending far more time managing power procurement and delivery than they do now," said Bramfitt. "While that won't move them into the role of a utility, I believe they will have to be far more sophisticated and transparent in how they manage electric supply issues."

Stine agrees. "It's fair to ask the question (about electricity sales and regulation)," he says. "The data center industry needs to respond and let the public know that it's not that simple. You can't compare data center space to apartment rentals in lower Manhattan. It behooves the largest players in the data center industry to peel back some of the mystery in data centers and let people know what goes on inside these buildings."