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Key Takeaways

• FERC has ordered PJM to overhaul its tariff framework for co-located generation and large loads, finding existing rules unjust and unreasonable and directing the creation of clear, standardized transmission service requirements.

• New firm and non-firm transmission service options are intended to give data center developers and IPPs faster energization, greater flexibility, and better alignment between transmission costs and actual grid dependence.

• The Order tightens cost responsibility and reliability requirements—curbing large-load transmission cost avoidance and making early service selection, engineering design, and cost modeling critical to project structuring.

On December 18, 2025, the Federal Energy Regulatory Commission (“FERC” or the “Commission”) issued a landmark  on co-location of generation and large loads in the regional market administered by PJM Interconnection, L.L.C. (“PJM”), which serves over 67 million Americans in 13 states and D.C.[1] FERC’s goals, as expressed by Commissioner David Rosner, writing in concurrence, are “meet[ing] surging demand while upholding two fundamental values that underpin the electric industry in our country: first, that all customers have a right to receive electric service on a timely basis, and second, that electric service should be reliable and affordable for all customers.” To these ends, FERC unanimously held that the existing PJM Open Access Transmission Tariff (the “Tariff”) “is unjust and unreasonable because it does not contain provisions addressing with sufficient clarity or consistency the rates, terms, and conditions of service for Interconnection Customers serving Co-Located Load and Eligible Customers taking transmission service on behalf of Co-Located Load.” Thus, FERC directed PJM to revise the Tariff “to establish transparent rules to facilitate service [for] AI-driven data centers and other large loads co-located with generating facilities.”

FERC’s action has immediate and important consequences for developers of AI, cloud computing, and cryptocurrency data centers and advanced manufacturing facilities, as well as for independent power producers (“IPPs”) seeking to serve such loads. The reforms promise to enhance optionality, speed, and clarity, and, in recognition of concerns regarding rising retail prices and grid stability, also impose reliability safeguards and cost responsibility that will shape deal structures going forward. And while the Order only directly affects PJM, as the nation’s largest organized power market, FERC’s action here may foreshadow similar changes in other markets.

Background and Jurisdictional Concerns

FERC’s action resulted from a “show cause” proceeding, opened in February 2025, regarding concerns that PJM’s existing Tariff lacks clarity on rates, terms, and conditions for generation and large load co-location arrangements.[2] In the show cause proceeding, PJM and the PJM transmission owners had to either defend existing provisions for co-location of load or propose changes to make the Tariff just and reasonable and not unduly discriminatory or preferential. Ultimately, FERC concluded that the Tariff is unjust and unreasonable because it does not provide consistent, transparent rules for Interconnection Customers (generators) serving co-located load or for Eligible Customers (transmission customers) taking transmission service on behalf of those loads.

FERC declined to “comprehensively address jurisdictional matters regarding the interconnection of retail loads” served through co-location arrangements on the interstate transmission system, but held that FERC “has jurisdiction to oversee the interconnection of generating facilities, including . . . generators that are used to serve Co-Located Load, to the interstate transmission system, as well as jurisdiction over the provision of transmission service in interstate commerce used by an Eligible Customer to serve Co-Located Load.” It also declined to address the details of the Secretary of Energy’s recent proposal to FERC of an Advanced Notice of Proposed Rulemaking on large load interconnection to the transmission system in general,[3] which we discussed here. But it affirmed that states retain “exclusive authority” over the specific terms of retail sales and retail rate design, generator siting, the generation mix, and transmission in intrastate commerce. Thus, large load developers and IPPs will still need to navigate state franchise laws and retail supply rules when developing projects.

New Paths for Co-Location of Large Loads

At the heart of the Order is recognition that business-as-usual approaches to load growth are struggling under the weight of surging demand. PJM’s existing Tariff did not specify how much transmission service a co-located load must take or how to handle arrangements where loads can limit withdrawals from the grid. That lack of clarity left developers facing disparate treatment by different transmission owners.

In the Order, FERC directed PJM to revise the Tariff to offer four transmission service options—including three new services—for Eligible Customers with co-located load:

1. Network Integration Transmission Service (“NITS”): Full network load designation, billed on a gross demand basis.
2. Interim, Non-Firm Transmission Service: For customers seeking NITS but that can take interruptible service until required network upgrades are complete.
3. Firm Contract Demand Transmission Service: A fixed reservation up to the load’s expected grid withdrawals, where PJM would plan for and procure capacity only for the reserved amount. The load may not exceed that amount without penalty.
4. Non-Firm Contract Demand Transmission Service: An as-available service with curtailment priority below firm customers, reservable for short periods when system capacity is available.

For developers, these service options will enable alignment between Tariff obligations and actual grid dependency. For example, a co-located data center served mostly by on-site generation could contract for less firm transmission service or use non-firm arrangements, potentially avoiding expensive network upgrades and long development and construction delays.

Specific to the new transmission services, FERC established a “paper hearing” to determine the just and reasonable rates, terms, and conditions that will apply to those services. PJM’s initial filing on these services is due February 16, 2026.

Key Takeaways for Data Center Developers

FERC’s Order is likely to result in several key benefits for developers of data centers in PJM, including:

• Faster Energization: Under the current PJM rules, a large data center taking full NITS likely would have to wait for completion of all necessary network upgrades required to reliably serve the new load. The new interim, non-firm service will allow faster grid access on an interruptible basis, enabling the load and new generation to interconnect to the grid until upgrades are complete. Non-firm arrangements also offer faster paths where firm capacity is constrained.
• Cost Alignment: Contract demand services mean not having to pay for full NITS capacity when actual grid usage is lower. For developers pursuing large on-site generation, this can lower annual transmission charges and avoid socializing the full integration costs of massive load additions across PJM customers.
• Flexibility and Reduced Design Risk: Several of the new services depend on limiting grid withdrawals through special protection schemes or operational controls. Developers must invest in reliable design, metering, and coordination protocols to qualify, but there are many potential options for them to do so.
• Increased Planning Certainty: Selecting a designated service level upfront gives PJM and transmission owners more visibility for transmission and capacity planning, which may reduce disputes over whether and how much a new project is likely to stress the transmission system.

Key Takeaways for Independent Power Producers

• New Commercial Models: Under the new regime, IPPs can directly serve large industrial or data center loads “behind the meter” without forcing the load to take full NITS, as long as doing so is consistent with applicable state law. The interconnection must still follow PJM rules, and the associated load must procure one of the new transmission services if tied to the grid.
• Interconnection Process Clarity: FERC directs PJM to spell out how generators can request service below nameplate capacity to reflect on-site load, use provisional interconnection to start serving load sooner, and tap surplus interconnection service at existing points of interconnection. These enhancements may benefit IPPs pairing generation and load, allowing them to match requested service levels to actual injections and reduce required network upgrades.
• Cost Responsibility for Existing Generators: For existing generators, FERC directs PJM to require completion of and payment for any upgrades necessary to maintain reliability before capacity can be de-listed to serve co-located load. Those costs will be borne by that generator, not other PJM customers.
• Opportunity to Bypass Queue Delays: For new generation paired with large load, options like surplus interconnection or accelerated studies may help projects avoid long delays in PJM’s general interconnection queue. This could make co-location the faster route to monetize new generation.

Reforms to Behind the Meter Generation Rules

FERC also took aim at the long-standing Behind the Meter Generation (“BTMG” ) provisions in PJM’s Tariff. The current rules, dating back to 2004, allowed network customers to net BTMG output against peak demand for transmission billing purposes. FERC found these provisions are no longer just and reasonable for large loads like data centers, which can avoid most transmission costs even while relying on the grid for back-up power supply and ancillary services. Accordingly, FERC required PJM to propose a materiality threshold for netting eligibility, maintain current rules for smaller customers under that threshold, and implement a three-year transition period (with grandfathering) for existing contracts. This change eliminates a potential path for large co-located load to replicate BTMG-style cost avoidance without contributing to system investment. For IPPs, the message is clear: arrangements that look like oversized BTMG will face new limits unless they meet the new co-location service constructs.

Reliability and Planning Information Requirements

Recognizing that load growth is accelerating faster than PJM’s ability to complete upgrades, to address reliability concerns associated with co-location arrangements, FERC also required PJM to file an informational report, by January 19, 2026, addressing such concerns, including its Critical Issue Fast Path stakeholder process designed to expedite new generation in PJM. This report must address “the status of the expedited interconnection process to enable shovel-ready generation projects to serve PJM more quickly, modifications to PJM’s reliability backstop mechanism to improve PJM’s ability to respond to acute resource adequacy shortfalls, and the development of enhanced load forecasting and demand flexibility measures to assist PJM in determining the amount of new capacity that is needed to maintain system reliability.” Developers and IPPs should review this report closely and monitor related developments because it could shape the generation and transmission environment for years to come, especially if PJM adopts policies that favor combined load-generation projects or demand-side flexibility to meet near-term needs.

Implications for Project Structuring

The Order’s combination of new transmission services, interconnection rules, and capped cost avoidance through BTMG has several practical implications that data center developers and IPPs should keep in mind going forward:

• Service Selection Matters: For paired projects, the decision between firm, non-firm, and interim service will affect not only cost and timelines but also contractual commitments to curtail or isolate load.
• Engineering Matters: Special protection schemes must be robust and redundant, and designs must ensure isolation thresholds are met without hurting system stability.
• State Engagement Matters: FERC’s framework respects state retail authority, so developers and IPPs must continue to make sure that they comply with state law and obtain any required retail supply authorizations.
• Cost Modeling Matters: Transmission and ancillary service charges resulting from the service option selected and gross demand billing for certain charges will affect long-term costs. Developers should adjust financial models accordingly.
• Queue Strategy Matters: IPPs seeking to develop generation may benefit from pursuing co-location arrangements to access accelerated interconnection where possible, which could enable avoidance of long waits in PJM’s interconnection queue.

Next Steps

The Order directs PJM to submit several compliance filings to implement its reforms. These include, but are not limited to:

• First, “within 60 days of the [Order], a compliance filing to revise its Tariff to set forth specific terms and conditions that an Interconnection Customer in PJM seeking to serve Co-Located Load must follow in order to effectuate a Co-Location Arrangement.”
• Second, “within 30 days of the [Order], a compliance filing to revise its Tariff to make clear how Interconnection Customers can make use of provisional interconnection service, the ability to request interconnection service below nameplate capacity, the potential to accelerate the interconnection process under certain circumstances, and surplus interconnection service to interconnect new generating facilities seeking to serve Co-Located Load.
• Third, within 60 days of the Order, PJM must “modify its Tariff to require that the Eligible Customer taking transmission service on behalf of the Co-Located Load takes one of three transmission services: (1) NITS; (2) the new Firm Contract Demand transmission service; or (3) the new Non-Firm Contract Demand transmission service, and also  to “create [the] new interim, non-firm transmission service.” As noted, PJM’s initial brief in the paper hearing on rates for the new transmission services is due February 16, 2026. Responses are due March 18, 2026, and any replies are due April 17, 2026.
• Fourth, within 60 days of the Order, PJM must “propose a new MW threshold for the amount of load at a particular electrical location that Network Customers may net by using BTMG, which “threshold should reduce the reliability and resource adequacy risks . . . that large loads may pose to PJM, while also allowing for Network Customers to reduce their transmission charges in a transparent, not unduly discriminatory fashion.”

Stakeholders will have opportunities to comment on PJM’s filings and should take these opportunities to make sure that PJM and FERC will hear and have the chance to address their concerns. More generally, data center developers should begin evaluating how the new slate of service options may fit into their site selection and power procurement strategies, and IPPs should assess existing and planned generation development plans for co-location potential, considering applicable state regulatory frameworks and the new cost responsibility rules.

While the Order does not fully resolve the region’s load growth challenges or replace the need for broader queue reform, it gives PJM and market participants new tools to structure large load and generation arrangements more efficiently, with clearer rules on who pays for what and when projects can come online. For developers and IPPs seeking to capitalize on co-location, the opportunity is real, provided they can navigate the technical, regulatory, and contractual demands of this new terrain.

The �鶹ֱ�� energy regulatory team will continue to track developments in this area and welcomes questions on these issues.

The authors thank Trey Wolf for his valuable contributions to and support in the preparation of this article.