By Avi Salzman

Utility stocks have been on a tear for the past year, rising 17% as they benefit from surging power demand from artificial-intelligence data centers. Now the industry is facing a tricky balancing act -- how to provide affordable service to its regular customers while also meeting the needs of technology companies.

Utilities like the data-center deals for the boost they give to earnings. Regulators and politicians, however, are worried that rising demand from Big Tech will cause electricity prices to spike for regular customers, like small businesses and homeowners. Research groups like Wood Mackenzie say that consumers are likely to foot much of the bill to expand the electricity grid to power data centers.

Already this year, utilities have asked regulators for a record $29 billion in rate increases, according to the nonprofit Powerlines. Consumer bills are poised to jump, after already rising more than 20% between 2021 and 2024. A political backlash against data centers has been growing.

A few utilities, however, have found a sweet spot -- they're making money from data centers while pushing much of the cost of new generation and transmission onto the tech companies rather than their normal customers. Two of the standouts in that area are Ohio-based American Electric Power and Louisiana's Entergy, both of which reported better-than-expected earnings on Wednesday and saw their stocks rise. The companies have inked major deals with tech companies to set up data centers in their service areas.

Entergy, at a recent $90, is planning to power one of the largest data-center campuses in the world for Meta Platforms in Louisiana, building three massive natural-gas power plants. Meta agreed to pay to reserve natural-gas equipment, fund transmission costs, and make minimum monthly payments to cover generation costs for 15 years, regulatory documents show. Entergy also has a deal with Amazon.com for a major data center campus in Mississippi.

On Wednesday, it lifted its annual industrial sales growth rate, which includes data centers, to 13% for the next four years -- a big growth rate for a company in a supposedly sleepy sector. "They've certainly been one of the data-center darlings out there, and a name we continue to like," said David Grumhaus, chief investment officer at investment firm Duff & Phelps.

AEP is in a similar position. It operates in 11 states, including Ohio and Texas, and has seen booming demand from tech companies hoping to operate data centers in its service territory, enough to double total electricity load in central Ohio by 2030.

To accommodate those customers -- without piling costs onto existing electricity users -- AEP convinced the Ohio public utilities commission to sign off on a special rate structure. Data-center operators would need to pay for at least 85% of the energy they're expected to use, even if they don't use it in a given month. That would help fund the transmission lines and other infrastructure that AEP needs to build.

AEP's special rate "provides clarity to go to the negotiating table with these data centers" and "mitigate concerns of who's paying," said Morningstar analyst Andrew Bischof. Other utilities are now working on similar arrangements.

For now, though, AEP, at a recent $113, is the one that is benefiting from the flood of data-center deals that are on the way. The company boosted its expected five-year capital spending budget last year by about 25%, and said on Wednesday that it expects to add another 30% on top of that. It is on track to get paid handsomely for all these investments, with analysts expecting earnings to grow 28% by 2028.

That should pay off for shareholders too.

Write to Avi Salzman at avi.salzman@barrons.com

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August 01, 2025 21:31 ET (01:31 GMT)

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