In short
The Arizona Corporation Commission is reshaping how the state’s electric utilities charge and serve AI data centers. The main large load tariff from Arizona Public Service, called Extra High Load Factor, already carries demand charges around $13 to $19 per kilowatt per month. In its 2025 rate case, APS is asking to raise the XHLF class revenue by 47.03 percent. APS public notice At the same time, the Commission has opened a broad inquiry into AI data center rate classifications and held a first workshop in April 2026 where utilities agreed that the party causing new costs should pay them. Proposed state law, HB 2756, would require quarterly interconnection reports, a cost of service study for new extra high load factor customers, and Commission preapproval of all extra high load factor customer contracts. HB 2756 (2026), HB 2756 (2026), ACC workshop highlights The rules are still moving. The final rate case decision is not expected until late 2026, and the inquiry docket has no formal orders yet. For developers and their counsel, the legal framework is in motion right now.
Who regulates electricity in Arizona and what does that mean for AI data centers
Arizona splits electricity oversight among several bodies. The Arizona Corporation Commission sets rates and service standards for investor owned utilities. That covers Arizona Public Service and Tucson Electric Power. It does not cover Salt River Project, which is governed by its own elected board and serves roughly 7,000 MW of large load across 59 customers. ACC, Arizona State Law Journal, ACC workshop, SRP It also does not cover municipal utilities or tribal utility authorities. The Arizona Energy Promise Taskforce noted this fragmented oversight as a challenge.
In practice, an AI data center connecting to APS or TEP falls under the ACC’s ratemaking jurisdiction. The ACC can approve, modify, or reject utility tariffs and must review contracts that deviate from approved rates. The Commission does not directly negotiate the financial terms between a developer and a utility, but any special rate or energy supply agreement that differs from the standard tariff needs ACC approval. ACC approves energy supply agreement For an AI data center developer, the first question is which utility serves the site. If it is APS or TEP, the ACC’s rules and rate cases are the central regulatory risk.
What is the existing APS rate for extra high load factor customers
APS offers a rate schedule called Extra High Load Factor, or XHLF. It is designed for very large users with steady, continuous power consumption. An AI data center that runs its servers around the clock at near peak load fits that profile.
Eligibility
To qualify for XHLF, a customer must have a monthly maximum demand of at least 5,000 kilowatts (5 MW) and a load factor of 92 percent or higher for at least nine of the prior twelve months. APS XHLF tariff Load factor is a measure of how steady the customer’s usage is. It is the ratio of the average kilowatt consumption over a period to the highest single demand reading in that same period. An AI data center that pulls 50 MW nearly all day every day has a very high load factor, close to 100 percent. A factory that runs only one shift has a much lower one.
If a customer also wants the Economic Development and Sustainability features built into the tariff, it must show a demand of at least 15,000 kW (15 MW) and a 50 percent carbon free energy target. APS XHLF tariff
Current charges
The XHLF bill has three main parts. A fixed daily service charge, a demand charge per kilowatt of the month’s highest demand, and an energy charge per kilowatt hour actually used. The rates vary by the voltage at which the customer takes service. Transmission voltage customers (the largest) have the lowest per kilowatt demand charge but a higher fixed daily charge. Here are the numbers effective March 8, 2024.
| Voltage level | Basic service charge per day | Demand charge per kW | Energy charge per kWh |
|---|---|---|---|
| Secondary | $5.682 | $18.750 | $0.04210 |
| Primary | $8.833 | $17.290 | $0.04210 |
| Transmission | $43.130 | $13.274 | $0.04210 |
A 100 MW AI data center served at transmission voltage with a 95 percent load factor would see a demand charge of roughly $1.3 million per month (100,000 kW × $13.274) plus about $43 per day for the service charge and the energy charge on top of that. Even a small shift in these per unit charges translates into millions of dollars a year.
How is the 2025 APS rate case changing the cost for AI data centers
On June 13, 2025, APS filed a general rate case asking for a net revenue increase of $579.52 million, about a 13.99 percent overall increase. APS public notice The increase is not spread evenly. The largest proposed jump hits the XHLF class. APS proposes a 47.03 percent revenue increase for XHLF customers, compared to a 16.44 percent increase for residential customers. APS public notice
Why the steep increase for XHLF
APS argues that its current market based pricing feature in the XHLF tariff no longer recovers the true cost of generation for these customers. The utility wants to remove the market proxy index for generation fuel and purchased power adjustment charges and instead charge them based on actual cost. APS testimony APS also says that the enormous new demand from AI data centers is driving the need for new generation and transmission, and that the cost should be borne by the class that causes it.
The ACC evidentiary hearing on the rate case began May 18, 2026, and is expected to last just over a month. A final Commission decision is not expected until late 2026. Arizona Corporation Commission Developers with projects that would take service under XHLF in 2027 or 2028 are watching this docket closely. The final approved rates could be lower than the requested 47 percent, but the direction of travel is clearly upward.
Formula rate mechanism
APS also proposes a Formula Rate Mechanism, or FRM, that would allow annual rate updates based on a Commission approved formula using the prior 12 months of cost and revenue data. The formula could adjust rates each year for up to five years without a new full rate case. APS public notice The ACC had already adopted a policy statement in December 2024 permitting formula rates. Decision No. 79647 The mechanism would limit residential adjustments to between 0.85 and 1.15 times the annual average, but the XHLF class is not singled out with a cap in the public notice. A formula rate reduces the frequency of contested rate cases, and it also means that a developer’s power cost could change annually based on utility expense trends, outside a full rate review.
What is the ACC’s open inquiry into AI data center rates
On April 2, 2025, the ACC opened Docket E-00000A-25-0069, an inquiry into the existing rate classifications for AI data centers and other issues tied to large load growth. ACC, ACC eDocket This is a broad, forward looking docket. It can lead to new tariff designs, new customer classes, or revised interconnection rules, but it has not yet produced a formal order.
The April 2026 workshop
The ACC held its first Large Load Users Development Workshop on April 16, 2026. Participants included APS, SRP, TEP, the Data Center Coalition, the Goldwater Institute, and independent power producers. ACC Large Load Workshop highlights The group agreed on a core principle. The party that causes the cost should bear it. They discussed developing statewide standard service mechanisms and a hybrid model that combines a universal large load tariff with individual energy supply agreements. ACC workshop highlights
Commissioner Kevin Thompson said he wanted to host another workshop that would further explore Integrated Resource Planning modifications and reforms, revisions to the RFP process, water considerations, and developing hook-up fees similar to what is currently implemented in water cases. SRP That second workshop has not yet been scheduled.
Practical note. The first workshop showed where the Commission and stakeholders are heading. Cost causers will pay. Developers should model a future in which the standard tariff may include a separate large load class with a cost-of-service based rate that includes the full cost of new generation and transmission built to serve that load.
What does House Bill 2756 propose for large load customers
HB 2756, introduced in the 2026 legislative session, would impose new requirements on electric utilities and the ACC specifically for extra high load factor customers, a term the bill does not define by a single demand number but which would capture large AI data centers. HB 2756 (2026)
Quarterly interconnection reporting
Investor owned utilities like APS would have to file quarterly reports with the ACC detailing the number of interconnection requests and completed interconnections for extra high load factor customers. § 40-207(A) Public power entities serving more than one million connections (primarily SRP) would have to file similar reports with their own governing body. § 30-301(A) For the first time, this would make the volume and pace of data center queue activity transparent across the state’s largest utilities.
Cost-of-service study and preapproved contracts
The bill directs investor owned utilities to file a cost-of-service study within 180 days after the effective date of this act, showing the cost allocation of serving new extra high load factor customers. HB 2756 § 4 It also instructs the ACC to adopt rules that would establish minimum billing requirements, prescribe contract forms, and mandate that all contracts with extra high load factor customers be submitted for ACC review and approval at least 30 days before execution. § 40-207(D) The approval standard is whether the contract serves the best interest of other ratepayer classes and does not shift costs to them.
Rate design workshop and IRP integration
Within 90 days after the effective date, the ACC must hold at least one workshop to determine whether utility revenues and costs from extra high load factor customers are resulting in increased or decreased residential bills and whether any rules or policies should be adopted to establish a new customer class for extra high load factor customers or a specific rate design or cost allocation for extra high load factor customers. HB 2756 § 3 Also, utilities conducting Integrated Resource Planning would be required to include extra high load factor customers in their load growth projections. § 40-207(C)
As of late April 2026, HB 2756 had passed the House on February 23, 2026 and passed the Senate in amended form on April 16, 2026, and was in final legislative processing. HB 2756 (2026) Whether it is signed, stalls, or is further amended, its provisions reflect the direction the legislature and the ACC are pushing. Even if the bill does not become law, the ACC’s own inquiry docket could produce a similar framework through rulemaking.
How do local governments affect AI data center siting in Arizona
Local rules are not the focus of this article, but they intersect with grid matters because a project needs both a site and a power hookup. Several Arizona cities have tightened land use rules over the past two years. In December 2024, Phoenix adopted zoning regulations that steer future AI data centers away from employment centers. Chandler limits AI data centers to specific planning area designations and requires noise studies. Mesa grandfathered existing projects but requires waivers for new ones. Tucson has used water-use ordinances as a practical barrier. Tax alert A developer must clear both local land use and the ACC ratemaking process.
What tax relief is available for AI data centers in Arizona
Arizona offers a sales and use tax relief program for certified computer data centers under A.R.S. § 41-1519. It is separate from the grid rules but is often part of the project financial model.
A facility whose owner or operator applies to the Arizona Commerce Authority can receive tax relief on the purchase, installation, and repair of eligible computer data center equipment. Eligible equipment includes all power transformation, generation, and distribution gear (transformers, UPS, switchgear, conduit, cabling, batteries, testing equipment) and all cooling and environmental control equipment (mechanical systems, refrigerant piping, cooling towers, adiabatic and free cooling systems, air handlers, fans, ducting, filters). A.R.S. § 41-1519(D)(8)(a) and (b)
The investment threshold depends on the county population. A facility in a county of 800,000 or fewer people must make a new investment of at least $25 million, including land, buildings, improvements, modular data centers, and computer data center equipment, within five years of certification. In a county above 800,000 people, the threshold is $50 million. A.R.S. § 41-1519(E)(1)(b) A qualified colocation tenant, an entity that contracts for at least 500 kilowatts per month for two or more years, can also benefit. A.R.S. § 41-1519(12), A.R.S. § 41-1519(A) The authority shall not certify any new computer data center that submits an application after December 31, 2033, and once certified, the certification remains in effect. A.R.S. § 41-1519(C), (K), ACA Computer Data Center Program
What do real Arizona projects show about the grid landscape
Three examples show the pressures in practice.
Tract Buckeye Technology Park
In August 2024, Tract acquired 2,069 acres in Buckeye for a master planned AI data center park. At full build out, the project would host up to 40 individual AI data centers across 20 million square feet, requiring up to 1.8 gigawatts of power. Tract The Buckeye City Council approved a development agreement with infrastructure commitments and a reimbursement deal. That scale, 1.8 GW, shows why APS estimates its large customer peak demand could reach roughly 13.1 GW in 2026 and why the utility has a speculative queue of about 19,000 MW. ACC, APS, APS and APS
Project Blue (TEP and Beale Infrastructure)
Project Blue, on 290 acres in Pima County, is an AI data center campus developed by Beale Infrastructure. The ACC approved a 10-year energy supply agreement between TEP and Beale on December 3, 2025, by a 4 to 1 vote. AZ Luminaria The contract includes minimum monthly billing, a multiyear notice for termination with a payment, and a gradual load ramp to 286 MW by 2028. It does not include a requirement for the AI data center to curtail load during an energy emergency. TEP stated it has the ability to curtail but did not make it a contract term. AZ Luminaria The project overcame local opposition, a water denial from Tucson, and protests that continued even after construction began in April 2026. AZ Luminaria
APS AI data center demand and the generation gap
APS’s own AI data center strategy director said the utility is turning away potential AI data center customers because it lacks the energy and transmission infrastructure to serve them. azfamily.com Meanwhile, APS proposed a new 2,000 MW natural gas plant partially available to large load customers under a subscription model, as an alternative to the regulated XHLF tariff. EEI, NewsData The generation supply behind the rates matters as much as the rate design.
What are the near term practical steps for a developer or counsel
The legal ground is shifting, so deals should be structured to account for several open turns.
- Monitor the APS rate case. The 47 percent proposed increase is a ceiling, but any final increase will change the project pro forma. The decision is due late 2026, meaning a project entering service in 2027 faces a different cost structure than one that locked in earlier.
- Negotiate with the end of the year in mind. If the ACC adopts a new large load customer class or a formula rate mechanism, future rate adjustments could be automatic. Contract provisions that pass through rate changes should be drafted with that in mind.
- Watch the HB 2756 process. If the bill passes, cost-of-service studies and mandatory contract preapproval become gating items. Even if it stalls, the ACC inquiry may reach the same place through rulemaking.
- Know your utility regulator. An APS or TEP project falls under ACC jurisdiction. An SRP project does not. The regulatory path is fundamentally different. The same developer with sites in both territories needs two separate strategies.
- Include local siting and tax relief in the timeline. Tax relief certification, local zoning, and water rights each add their own lead time and political risk. Project Blue illustrates how local delays can slow a project even after a power agreement is signed.
Key takeaways
- The ACC is the gatekeeper for APS and TEP rates, and its current inquiry docket (E-00000A-25-0069) is the main regulatory vehicle for reshaping AI data center cost allocation in Arizona.
- APS’s Extra High Load Factor tariff is the standard rate for large steady load AI data centers. Its demand charges, passed through the 2025 rate case, could rise by nearly half.
- The proposed 47.03 percent XHLF increase in the APS rate case is the largest among all customer classes, driven by the removal of market based pricing and the cost of new generation for AI data centers.
- The ACC’s April 2026 workshop established the cost causer pays principle as a consensus baseline. A second workshop is planned.
- HB 2756 would add quarterly interconnection reporting, a cost-of-service study, and mandatory ACC preapproval of large load contracts, all measures that embed cost causation into law.
- SRP is not regulated by the ACC, so developers in its territory face a separate board process.
- The Tract Buckeye and Project Blue examples show both the scale of the demand and the local political friction that can affect a project.
- Tax relief through A.R.S. § 41-1519 remains available for equipment certified by December 31, 2033, subject to investment thresholds.
- The legal regime is fluid. Negotiate flexibility into power contracts and watch the ACC rate case and any enacted version of HB 2756.
Frequently asked questions
Q:What does the ACC regulate for AI data centers?
A:The ACC sets the rates and service standards for investor owned utilities (APS, TEP). It does not regulate SRP or municipal utilities. ACC
Q:What is the Extra High Load Factor tariff and who qualifies?
A:It is the APS rate schedule for very large, steady loads. To qualify, a customer must have at least 5,000 kW of demand and a 92 percent load factor for nine of the prior twelve months. APS XHLF tariff
Q:How much does APS want to raise rates for AI data centers?
A:In its 2025 rate case, APS proposes a 47.03 percent increase in total revenue from the XHLF class. APS public notice The exact per-kW and per-kWh figures will depend on the final approved rate design.
Q:What did the ACC’s April 2026 workshop decide?
A:The workshop did not issue binding orders, but participants agreed that the party causing new costs should pay them. They discussed standard large load tariffs and a hybrid model that blends a universal tariff with individual energy supply agreements. ACC
Q:What would HB 2756 do if it passes?
A:It would require quarterly interconnection reporting, a cost-of-service study for new extra high load factor customers, and ACC preapproval of all contracts with such customers at least 30 days before execution. It would also require a workshop on rate impacts within 90 days. HB 2756 (2026)
Q:When will the APS rate case be decided?
A:The evidentiary hearing began May 18, 2026. A final Commission decision is expected toward the end of 2026. APS
Q:Does the ACC regulate SRP?
A:No. SRP is governed by its own elected board and its rates are set through a separate public pricing process. ACC
Q:What tax relief can an AI data center get in Arizona?
A:Certified computer data centers can get relief from sales and use tax on equipment if they meet a $25 million or $50 million new investment threshold (depending on county population) within five years, with new certifications available for applications submitted through 2033. A.R.S. § 41-1519, Tax alert
Q:Are there local government hurdles beyond the ACC?
A:Yes. Phoenix, Chandler, Mesa, and Tucson each have zoning or water restrictions that affect AI data center siting. Law firm analysis
Q:What is the current queue for AI data center load in Arizona?
A:APS estimates its large customer peak demand at about 13.1 GW and has a speculative queue of roughly 19,000 MW. TEP shows 286 MW contracted and an 8 to 10 GW speculative queue. ACC
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Junde Liu, JD, LL.M. (Taxation) candidate at UF Law. Originally published on Compute Law Blog. This article is general information and does not constitute legal advice. Reading it does not create an attorney client relationship. The reader should not act on the basis of any content here without first consulting a licensed attorney in the relevant state. Last reviewed for accuracy May 23, 2026.