Powering Progress Episode 8 – Markets Under Pressure

Aubrey Bishai [00:00:09]

Welcome back to Powering Progress, a podcast series exploring the infrastructure, energy, and market dynamics shaping the next generation of data centers and AI development. I’m your host, Aubrey Bishai, Chief Innovation Officer at Vinson & Elkins.

As AI adoption accelerates and data center development expands across the country, the conversation around infrastructure increasingly comes back to one central issue: power.

But access to power is not simply an engineering or development challenge. It’s also deeply tied to the regulatory frameworks that govern wholesale electricity markets, transmission systems, energy trading, reliability requirements, and market operations.

The scale and speed of projected data center growth are creating new pressures across the energy ecosystem, raising important questions about how existing regulatory structures will adapt to rapidly evolving demand.

Today, I’m joined by partner C.J. Polito to discuss the federal regulatory landscape surrounding energy markets and what it means for companies developing, financing, and operating AI-driven infrastructure.

We’ll explore how regulators are thinking about reliability, market design, power transactions, interconnection challenges, and wholesale energy markets as demand from data centers continues to grow.

We’ll also discuss how developers, investors, and infrastructure companies should think about regulatory risk, compliance, and long-term market dynamics as the convergence of AI, energy, and infrastructure continues to reshape the industry.

C.J., thank you so much for joining us.

C.J. Polito [00:02:17]

Great to be here, Aubrey. Thanks for having me.

Aubrey Bishai [00:02:19]

So to start broadly, how is the rapid growth of AI and data centers beginning to affect the way regulators think about wholesale electricity markets and grid reliability?

C.J. Polito [00:02:32]

So really what we’re seeing is a fundamental shift in how regulators are thinking about these issues. For many years, regulators planned the system around slow load growth, just predictable demands that are developing in particular geographic areas. And now we have a situation where there’s very large loads developing very quickly and often concentrating in specific geographic areas.

So the Federal Energy Regulatory Commission, or FERC — that’s the agency that regulates the wholesale power markets — that agency’s responded by making data center interconnection its top priority. FERC is poised to take action this month, June 2026, on an advance notice of proposed rulemaking proceeding related to large load interconnection to the grid that was directed by the U.S. Secretary of Energy. And NERC, which is the North American Electric Reliability Corporation that handles electric reliability in the United States, has also indicated that it’s going to impose a new reliability standard by the end of this year to address large loads to the grid.

At the regional and state level, there has also been active regulatory proceedings ongoing. Regional grid operators are looking at and have proposed various rule changes to accommodate large loads into their markets. State regulators and utilities have also been implementing a series of large load tariffs to incorporate data center customers and make sure they pay their fair share.

So overall, this is a very active, urgent situation that’s reshaping how the regulators are looking at issues such as resource adequacy and cost allocation as it relates to data center development.

Aubrey Bishai [00:04:10]

Are existing wholesale market structures designed to handle the scale and speed of projected AI-driven demand growth? Or do you expect regulators and market operators to rethink aspects of the market design?

C.J. Polito [00:04:27]

So the short answer is that regulators and market operators have been active in rethinking aspects of market design. As I mentioned, these markets were largely designed for a different era, with gradual load growth, longer-term planning cycles, and a clear separation between supply and demand.

One of the clearest pressure points that we see here is interconnection, and that’s both on the generation and interconnection side. The system was already struggling with generation queues — long lines to get generation interconnected — and now you’re layering in fast, large moving load requests, often paired with generation. So the current frameworks aren’t really designed to evaluate in an integrated way these both the generation and load interconnection at the same time.

Another area I think to watch is capacity markets, as generation gets built to serve new data centers. The market operators — the regional transmission organizations, independent system operators — are proposing capacity market rule changes as a result of what’s happening with load growth in their regions.

I don’t think we’re going to be headed towards a wholesale redesign of these markets overnight. We are seeing, and we will continue to see, targeted reforms, particularly around interconnection, load participation, and transmission planning, because the current constructs aren’t fully aligned with the pace and scale of what’s coming. So I think in sum, regulators and market operators are and will continue to rethink aspects of market design. In many cases, they’ve already implemented some large changes. The question is whether they can move fast enough and whether the solutions will be legally durable.

Aubrey Bishai [00:05:55]

We’ve talked a lot on this podcast about how we’re seeing increasing interest in behind-the-meter generation, co-located power solutions, and hybrid energy strategies. How are regulators approaching those structures today?

C.J. Polito [00:06:13]

So this is another very dynamic area right now, and also one of the least settled from a regulatory perspective. This past December, FERC directed PJM, which is the Mid-Atlantic grid operator, to establish new rules to facilitate AI-driven data centers and other large loads co-located with generation facilities.

FERC had found that PJM’s existing rules were not just and reasonable, because they lacked clarity and consistency in terms of the rules of the road for generators that wish to co-locate load and for transmission customers that want to take transmission service on behalf of those co-located loads. And FERC also ruled that PJM’s existing behind-the-meter generation rules were no longer just and reasonable. And so PJM and its stakeholders are currently working through rule changes in these areas to address that order from FERC.

One of the other grid operators in the central United States, the Southwest Power Pool, has been active with regard to establishing new study processes for data centers and associated generation. And earlier this year, FERC approved Southwest Power Pool’s high-impact large load initiative, which establishes new protocols to accelerate the interconnection of large loads and associated generation resources.

We’re also seeing a move towards more hybrid models — combinations of grid supply, on-site generation, and storage — and regulators are working through how those configurations should participate in the wholesale markets without creating unintended distortions. It’s a scenario where the structure and the details really matter, and where the regulatory expectations are evolving quickly.

Aubrey Bishai [00:07:36]

And how important are compliance programs and regulatory preparedness becoming for infrastructure investors and developers entering these markets?

C.J. Polito [00:07:48]

So regulatory preparedness and compliance are absolutely central to anyone investing in or developing these projects. As I mentioned, the regulatory landscape is complex and changing in real time. So being ready to implement new changes in the rules, and also compliance with existing rules, takes on heightened importance.

We’ve seen increasing regulatory scrutiny, including enforcement activity around interconnection and deliverability of generation. Regulators, including FERC, are actively monitoring how data centers participate in the markets, as well as how generators that serve those data centers operate under existing market rules and existing commitments, such as capacity market commitments. And there’s also the broader issue of evolving market rules, which can be traps for the unwary.

In terms of compliance, compliance programs are vitally important for investors in these projects. FERC has said that compliance is a central goal of its enforcement efforts, and FERC policy encourages companies that are subject to FERC regulation and oversight to develop strong compliance programs that minimize the potential for violations. FERC gives significant weight to compliance programs when determining whether to assess a civil penalty or other remedy for a violation.

Aubrey Bishai [00:08:57]

So C.J., looking ahead, do you think the rise of AI infrastructure could ultimately reshape how energy markets themselves are designed and operated in the United States?

C.J. Polito [00:09:09]

Yes, I do. I think this new paradigm is really changing how the markets are designed and operated. The challenge for regulators is really making sure that the large loads — data centers — interconnect in a way that’s predictable, fair, and transparent to existing customers. And those are the issues that are currently being worked through across the country.

I think one of the biggest shifts is the role of load and the role of demand. Large data centers increasingly act as participants in the wholesale electric markets, so they can provide flexibility in the form of demand response, respond to price signals, and potentially offer other reliability services. And on the planning side, there’s going to be increasing pressure to move from a more reactive to a more proactive form of transmission development.

Looking ahead, I think that the convergence of co-located generation, battery storage, demand flexibility, and the sheer scale of AI-driven load growth is likely to produce energy market structures that look really different than what we have today. AI has the potential to accelerate a broader transition to a more dynamic, flexible, and integrated grid, and the market structures will evolve to support that. It will take some time, but it will likely happen through a series of incremental changes that are happening right now across the country.

Aubrey Bishai [00:10:27]

Thank you, C.J. These are incredible insights in a very complex space. Thanks for joining us.

C.J. Polito [00:10:34]

Thanks for having me, Aubrey. Really appreciate it.

Aubrey Bishai [00:10:36]

And thank you all for listening to Powering Progress. For more conversations and insights on the infrastructure powering the AI economy, visit us at velaw.com.