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May 2026 · Part three in a series on FERC data center interconnection policy
FERC Commissioner Travis Kavulla's proposal to create a segregated interconnection queue for data centers — one that trades speed for full cost absorption — is not just a regulatory concept. It is a repricing event for every corporate power purchase agreement currently under negotiation with a hyperscale offtaker. If adopted, the framework would shift hundreds of millions of dollars in network upgrade costs from generation developers and socialized tariff pools directly onto the balance sheets of the companies demanding the power. The downstream effects on PPA structure, collateral mechanics, and development timelines will be significant.[1]
The Kavulla Framework: Fast-Track for a Fee
The core tradeoff is straightforward in principle and enormously complex in execution. Kavulla envisions a distinct interconnection pathway where data center loads — routinely 300 MW to 1 GW at a single point of delivery — would bypass the congested standard queue that FERC's Order 2023 cluster study process was designed to manage. In exchange, the requesting load would bear the full, direct cost of whatever transmission network upgrades are required to serve it.[1]
This is an implicit concession that Order 2023's "first-ready, first-served" model, established under Docket RM22-14-000, is already buckling. The cluster study process was built to handle speculative generation interconnection requests — not single-customer load additions that dwarf the peak demand of mid-sized cities. Kavulla's proposal effectively quarantines those requests before they distort study timelines for every other project in the queue.
The policy logic is clear: if a single customer drives $400 million in network upgrades, that customer — not the ratepayer base of a three-state RTO footprint — should fund those upgrades. The commercial question is who actually writes the check, and when.
PPA Mechanics Under Pressure: LOCs, Milestones, and the Offtaker's Balance Sheet
Today's typical corporate PPA for a renewables-plus-storage project serving a data center places the interconnection cost risk primarily on the generation developer. The developer secures the Interconnection Service Agreement (ISA), funds or finances the assigned network upgrades, and recovers those costs through the contract energy price over a 10- to 15-year term. The corporate offtaker's primary financial exposure is the contracted price of energy and whatever termination liability the PPA specifies.
Under a Kavulla-style regime, that architecture inverts. If the hyperscaler's load request — not the generator's interconnection request — triggers the network upgrade obligation, the offtaker becomes the primary obligor on transmission capital expenditure. In practice, this means several things for deals currently in term sheets or late-stage negotiation:
Letters of credit will increase materially. Developers will require hyperscalers to post LOCs or parent guarantees covering not just PPA termination value, but the offtaker's pro-rata share of network upgrade costs that the developer may be contractually committed to fund on an interim basis. For a 500 MW data center campus requiring $200–$400 million in upgrades, the collateral package could double.
Milestone schedules will bifurcate. PPAs will need to decouple generation development milestones from transmission upgrade milestones, because the cost and timeline risk profiles are now borne by different parties. Commercial operation date definitions — and the liquidated damages tied to them — will require new conditionality around transmission readiness that the offtaker controls.
"Change in law" clauses become the most contested term in the agreement. Every hyperscaler negotiating a PPA today will insist on regulatory change-of-law protections that allow contract repricing or termination if FERC retroactively applies new cost allocation rules to pending interconnection requests. Developers, in turn, will resist open-ended repricing triggers that undermine project finance bankability.
The Queue Premium Is Already Priced In
The market is not waiting for FERC to formalize Kavulla's proposal. The NextEra–Dominion mega-deal reported on May 20 illustrates how aggressively capital is chasing generation assets with executed ISAs and established grid access.[8] These assets command steep valuation premiums precisely because they allow buyers to sidestep the standard RTO cluster study process — the same process Kavulla's framework implicitly declares inadequate for hyperscale loads.
Simultaneously, PJM is accelerating its own backstop reliability auction while pressuring states — Virginia's SCC and Maryland's PSC chief among them — to draft tariff riders that isolate data center-driven transmission costs from residential and commercial ratepayers.[9] The convergence of federal and regional action on the "hyperscaler pays" model suggests this is not a single commissioner's thought exercise. It is the direction of travel.
Generation assets with executed ISAs are now the scarcest commodity in the data center supply chain. The interconnection agreement, not the turbine or the panel, is the binding constraint — and the primary driver of M&A multiples.
What to Watch Next
Three developments will determine how quickly these structural shifts move from policy discussion to contract language. First, watch for a formal Notice of Proposed Rulemaking or technical conference notice from FERC that would give Kavulla's framework procedural footing — any action under a new docket number signals institutional momentum beyond a single commissioner's remarks. Second, monitor PJM's stakeholder process on the backstop auction design; the cost allocation methodology PJM adopts will establish the template that other RTOs follow. Third, track how the Talen Energy/Amazon Susquehanna co-location proceeding (Docket ER24-2125) resolves, as that ruling will define whether behind-the-meter arrangements become more or less attractive relative to a "pay-to-play" front-of-the-meter queue.
As I noted in my May 8 analysis, cost allocation was always the next battleground after queue reform. Kavulla has now proposed the first actionable federal framework to fight on it. The deal teams negotiating hyperscale PPAs this quarter need to structure for a world where that framework — or something very close to it — becomes the rule.
References
- "Kavulla Outlines Thoughts on Data Center Interconnection Amid BPA Rumors," RTO Insider, 20 May 2026. Link
- "NextEra-Dominion mega-deal throws spotlight on US power M&A rush," Recharge News, 20 May 2026. Link
- "PJM accelerates backstop auction amid uncertainty over data center cost allocation," Utility Dive, 20 May 2026. Link
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