Arizona emerges as test case for AI's energy and water crunch (axios.com)

PHOENIX — This desert region has become a bellwether for the nation's data center growth as the tech sector grapples with rising temperatures and scarce resources. Why it matters: Arizona is an extreme microcosm of the challenges the AI boom is running into across the country , as tech companies race to build data centers demanding massive amounts of power and testing local water supplies. "What took our utilities 100+ years to build, we need to double that within the next four to five years to keep up with demand," said Kevin Thompson, who serves on the Arizona Corporation Commission, a powerful utility regulator whose members are elected statewide. Speaking at an Axios event Tuesday in Phoenix, Thompson continued: "How do you do that and not put the cost onto the existing customers?" Driving the news: On Thursday, federal electricity regulators may propose rules that could accelerate data center connections to the grid while limiting costs passed on to other customers. The public meeting of the Federal Energy Regulatory Commission — which oversees much of the nation's electric grid — is being closely watched because connecting new projects to the grid can take years. Financial services firm TD Cowen said in a research note Wednesday that it expects FERC could encourage more of the costs associated with connecting large data centers to be paid directly by the developers rather than spread across other customers. State of play : As regulators debate who should bear the costs of AI-driven infrastructure growth, states leading the data center boom are also beginning to reassess how much development they want to encourage. Arizona just paused certain data center tax incentives for three years. Republican Texas Gov. Greg Abbott recently called for new regulations that would eliminate certain data center tax incentives. Ohio Gov. Mike DeWine, also a Republican, unexpectedly paused state sales tax breaks for data centers last month. "This three-year process gives us a little breathing room," Maren Mahoney, director of the resiliency office for Arizona Gov. Katie Hobbs (D), said at the Axios event. She said the pause could help the state determine whether it should offer incentives for certain types of data centers or technologies that put less strain on the desert environment. Case in point: Google's first data center in Arizona — 30 miles east of downtown Phoenix — uses air-cooled technologies instead of the more water-intensive evaporative method due to the water scarcity issues facing the American southwest, a Google executive said. What they're saying: "We've made a lot of investments in Arizona," said Ben Townsend, head of infrastructure and sustainability at Google. "There are other folks out there that are electing to build data centers [there] that are using evaporative cooling. That was something that didn't align with our values, and so we elected to not do so." Yes, but : Thompson said Google's original proposal called for evaporative coolin