FERC Directs PJM to Issue New Rules for Co-Location of Power Plants and Data Centers

I. Introduction: FERC’s New Approach to Data Center Co‑Location

On December 18, 2025, the Federal Energy Regulatory Commission (FERC) issued an order (the “Order”) to address issues associated with large loads seeking to co-locate with generating facilities located in the region administered by PJM Interconnection LLC, the US’s largest grid operator.[1]

Among other findings, the Order concluded that PJM’s tariff and other applicable governing documents (collectively, the “Tariff”) are “unjust and unreasonable” due to a lack of clarity and consistency in the “rates, terms, and conditions of service” for co-location arrangements. The Order further directs PJM to establish three new transmission services for applicable customers, clarify interconnection procedures for co-located projects, and revise its Behind-the-Meter Generation (BTMG) rules.

Although the Order applies narrowly to PJM, it signals FERC’s willingness to facilitate service for large loads co-located with generating facilities, such as AI-driven data centers, and may serve as a guide for other US grid operators.

II. Regulatory Background: Why FERC Intervened

The Order follows a show cause order issued on February 20, 2025 (the “Show Cause Order”), in which FERC directed PJM to demonstrate that the Tariff “remains just and reasonable and not unduly discriminatory or preferential” despite its lack of clear and consistent provisions addressing “the rates, terms, and conditions of service that apply to co-location arrangements.”[2][3]

As FERC noted in the Order, such co-location arrangements are “becoming increasingly common in PJM,” and the existing regulatory policies, which were not designed for co-location arrangements involving large data centers, may not be “a good fit.”[4]

The Show Cause Order was issued in response to co-location disputes among PJM customers as well as a November 2024 technical conference on large load co-location, following which then-Chairman Mark Christie emphasized that “FERC needs to act and act soon to address these issues.”[5]

As such, the Order is part of a broader effort to clarify interconnection and transmission rules for large co-located loads in response to the growth of the data center industry.

III. Key Legal and Regulatory Findings in FERC’s Co‑Location Order

a. FERC Finds PJM Tariff “Unjust and Unreasonable” for Co‑Located Loads

In the Order, FERC concluded that the PJM Tariff is “unjust and unreasonable,” as it does not address “with sufficient clarity or consistency the rates, terms, and conditions of service” that apply to co-location arrangements.[6] The absence of such provisions has resulted in “uncertainty” and “disparate treatment in PJM,” as “transmission owners have taken different approaches to performing the necessary steps” to connect co-location arrangements.[7] FERC further noted that the Tariff does not provide appropriate transmission services for co-located loads that are “willing and able to limit energy withdrawals” under the certain conditions.

For these reasons, FERC directed PJM to establish rules for co-location arrangements, clarify related interconnection procedures, and submit filings implementing such changes.

b. FERC Requires PJM to Establish New Transmission Services for Co‑Located Loads

As an initial matter, FERC will require PJM to establish three new transmission services for co-location arrangements, as outlined below.

i. Interim, Non-Firm Transmission Service

Under this service option, co-located loads served by an eligible customer may begin limited withdrawals under an “interim, non-firm transmission service.” This option is intended to serve as a bridge while any network upgrades necessary to provide Network Integration Transmission Services (NITS) are complete.[8] Eligible customers would be required to pay the NITS rate for the new service as well as charges for ancillary services and black start service.[9]

ii. Firm Contract Demand Transmission Service

Through this service option, an eligible customer will have the right to request transmission service up to a specified megawatt “contract demand.” Customers may only withdraw the quantity of energy specified, as they will not be “permitted to withdraw energy … beyond the contract demand level.”[10] Although such customers will be charged for “transmission, ancillary service and capacity” based on contract demand, charges for “regulation and black start services” will be based on a “gross demand basis.”[11] Importantly, if a customer withdraws energy in excess of the contract demand, it will be assessed a penalty rate, as determined by PJM.

iii. Non-Firm Contract Demand Transmission Service

Through this option, FERC seeks to provide an option for co-located loads that do not “plan to withdraw energy from the transmission system on a regular basis.”[12] Eligible customers may reserve transmission service “for terms ranging from one hour to one month.”[13] Customers will be charged for “transmission and ancillary services on an as-reserved contract demand basis” and regulation and black start services on a “gross demand basis.”[14] Further, customers will be assessed a penalty for energy withdrawals in excess of the “transmission service reservation.”[15]

FERC directed PJM to make compliance filings implementing the new transmission services by February 16, 2026. To make determinations on the specific rates, terms, and conditions for the new service options, FERC will establish a paper hearing for interested parties, as specified in the Order.[16]

c. FERC Orders PJM to Clarify Interconnection Procedures for Co‑Location

The Order further requires PJM to clarify its interconnection procedures to ensure that “it is clear to both new and existing interconnection customers how to interconnect in a co-location arrangement.”[17]

With respect to new interconnection customers, PJM must clarify how a new customer may:

• make use of “provisional interconnection capacity”;
• accelerate the interconnection process if the request has no network upgrade costs and does not require further studies;
• request interconnection service below its nameplate capacity; and
• request surplus interconnection service to serve a co-located load.[18]

The Order requires PJM to clarify its policies for existing generators seeking to modify their interconnection service to serve a co-located load. Specifically, PJM must provide guidance on the necessary studies to determine the upgrades needed to “maintain transmission system reliability” following the requested change in interconnection service. Importantly, under this policy, the interconnection customer must pay the full cost of any such modifications or network upgrades and cannot withdraw its capacity from the system until such upgrades are in place.

To implement these changes, PJM must submit compliance filings by January 20 and February 16, 2026, as specified in the Order.[19]

d. FERC Revises PJM Behind-the-Meter Generation Rules for Large Loads

FERC also found that PJM’s BTMG rules are no longer “just and reasonable” with respect to large loads. Under existing policies, load serving entities may reduce their costs by “netting output from BTMG in the calculation of their peak demand” for the purposes of reducing their transmission charges.[20] In this way, BTMG may allow certain entities to offload transmission costs to non-BTMG entities, resulting in cost shifting contradictory to FERC’s “cost causation principle.”[21]

To address this issue, FERC directed PJM to establish a new megawatt “materiality threshold,” limiting the amount of load that a particular location may net by using BTMG.[22] In addition to establishing a three-year “transition period” for customers using existing BTMG rules, the Order “grandfathers” customers who have entered contracts for the “specific purpose of effectuating a BTMG arrangement.”[23]

e. Federal and State Jurisdiction Over Co‑Located Data Centers and Generation

Through the Order, FERC also clarified the “careful balance that the [Federal Power Act] strikes between federal and state regulation.”[24] It determined that states retain exclusive authority over the specific terms of retail sales, siting decisions, and intrastate transmission decisions. FERC, on the other hand, has authority over interconnection of generating facilities, including generators that intend to serve a co-located load, as well as interstate transmission rates. Notably, FERC declined to comprehensively outline the contours of state and federal jurisdiction, concluding that “the boundaries of federal and state jurisdiction are not hermetically sealed.”[25]

IV. What FERC’s Co‑Location Order Means for Data Centers and Energy Markets

While the Order directly applies only to PJM, it provides much-needed guidance on largescale co-location arrangements and provides a template for other FERC-regulated markets. In this way, the Order will provide added regulatory certainty to customers.

The Order outlines several policy principles:

i. Transmission Services. FERC’s proposed transmission services will provide greater clarity for co-located arrangements, as well as regulators. Further, by partially tying cost allocation with grid use, the services may lower costs for co-located arrangements.

ii. Behind‑the‑Meter Generation. FERC clarifies that BTMG netting is not just and reasonable with respect to large co-located loads, as it can result in improper cost shifting. Consequently, although BTMG may remain available below a certain threshold, data centers will likely be unable to use BTMG netting to reduce costs.

iii. Costs of Regulation and Black Start Service. Although FERC will assess certain charges based on withdrawals from the grid, cost recovery for regulation and black start services will be based on “gross demand.”

[1] PJM Interconnection, L.L.C., 193 FERC ¶ 61,217 (2025), available at https://www.ferc.gov/media/e-1-el25-49-000-0.

[2] Id. at p. 1.

[3] In relevant part, the Show Cause Order defined “co-location arrangements” as referring to both the “co-located load and the associated generator.” It further defines a “co-located load” as “a configuration [that] refers to end-use customer load that is physically connected to the facilities of an existing or planned Customer Facility on the Interconnection Customer’s side of the Point of Interconnection to the PJM Transmission System.”

[4] Id. at p. 47.

[5] Federal Energy Regulatory Commission, FERC Orders Action on Co‑Location Issues Related to Data Centers Running AI, News Release (Feb. 20, 2025), available at https://www.ferc.gov/news-events/news/ferc-orders-action-co-location-issues-related-data-centers-running-ai.

[6] Id. at p. 159

[7] Id. at p. 333.

[8] Id. at p. 160.

[9] Id.

[10] Id. at p. 200.

[11] Id. at p. 209.

[12] Id. at p. 214.

[13] Id. at p. 215.

[14] Id. at p. 216.

[15] Id. at p. 217.

[16] Id. at p. 219.

[17] Id. at p. 161.

[18] Id.

[19] Id. at p. 228.

[20] Id. at p. 7.

[21] Id. at p. 7.

[22] Id. at p. 221.

[23] Id. at p. 224.

[24] Id. at p. 165.

[25] Id. at p. 174.

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