FERC Directs Co-Location Reforms in PJM

The Federal Energy Regulatory Commission (FERC or the Commission) directed PJM Interconnection, LLC (PJM) on December 18, 2025 to reform its rules governing generation interconnection and transmission service for generators co-located with load. The Commission’s Order on Show Cause Proceeding (Order) found that PJM’s Open Access Transmission Tariff (Tariff) lacks sufficient rates, terms, and conditions of service that apply to such generators.

The Order directs significant changes to generation interconnection procedures and available transmission services, including the creation of three new transmission services. Although the Order applies only to PJM, electric utilities should expect the Commission to apply this direction to other transmission providers.

1. BACKGROUND

The Order follows a show cause proceeding established by the Commission in February 2025 directing PJM to either explain why its Tariff and related operating agreements remained just and reasonable “without provisions addressing with sufficient clarity or consistency the rates, terms, and conditions of service that apply to co-location arrangements” or what Tariff changes would be necessary to remedy such concerns. The Commission’s concerns underlying the show cause proceeding were in part precipitated by a prior attempt by a PJM market participant to co-locate generation with large data center load and a related complaint that was separately submitted by another PJM entity.

Although co-location is not a new concept, the scale and operational complexity of today’s large data center campuses are presenting new wrinkles to familiar regulatory concerns related to jurisdiction, cost allocation, reliability, and more. As data center co-location arrangements become increasingly common in PJM, the Commission felt the region’s existing rules do not sufficiently or clearly address those concerns. Specific concerns raised by the Commission included that the PJM Tariff (1) did not specify what transmission service a co-location arrangement must take, (2) lacked a process to ensure that co-location arrangements pay for benefits received from the transmission system, such as ancillary and black start services, and (3) lacked rules necessary for PJM to assess the effect of co-location arrangements on reliability and resource adequacy.

The Commission further noted that co-location arrangements have unique resource adequacy and reliability effects because these “co-located loads”[1] can be connected to the grid much quicker than normal load growth. The Order found PJM’s Tariff to be unjust and unreasonable because it did not address these concerns.

Specifically, the Commission found:

• Tariff gaps prevent interconnection customers serving co-located loads from knowing the applicable terms and conditions for their co-location arrangements.
• PJM must require interconnection customers who will be using their generating facilities to serve co-located load to specify an “eligible customer”[2] who will be responsible for taking transmission service on behalf of the co-located load. The eligible customer designation determines PJM’s transmission cost allocation approach, through which each eligible customer is billed for the charges associated with the transmission and ancillary services used to serve its load.
• PJM’s Tariff lacks transmission services that reflect that an eligible customer taking service for a co-located load might be willing and able to limit energy withdrawals. Such eligible customers should not be required to take Network Integration Transmission Service (NITS) nor pay for network upgrades required to take NITS.
• PJM’s Tariff does not address a co-located load’s use of ancillary, regulation, and black start services. Because these loads are synchronized with the transmission system, they use and benefit from some ancillary services. So, cost-causation principles require that they pay for that use and benefit. Co-located loads that are not drawing energy are still unlikely to have a perfect load factor and thus at least require regulation service.
• PJM’s Tariff does not fully account for loads with behind-the-meter generation (BTMG) in resource adequacy planning. BTMG rules were developed for small loads and not on the scale of large data centers. But co-located loads that are very large, like data centers, do not carry reserves. Existing BTMG rules do not limit the amount of qualifying load that a network customer may net. So, large loads configured in a BTMG arrangement with significant generation will raise cost-shifting, reliability, and resource adequacy concerns as compared to smaller loads with smaller netting.

2. KEY FINDINGS

The Commission concluded broadly that the show cause proceeding demonstrated a lack of consistency or clarity regarding the conditions of service that apply to interconnection customers serving co-located load. The Commission remarked that these gaps create the risk of commercial and operational uncertainty, which transmission owners and customers have been attempting to address through a patchwork-style approach to co-locating generation and large load. The Commission directed PJM to revise its tariff to address some of these gaps, as described below.

Interconnection Procedures

PJM must revise its generation interconnection procedures to require an interconnection customer who will use its generator to serve co-located load to specify an eligible customer who will take transmission service on behalf of the co-located load. Following these changes, the eligible customer will be responsible for executing a transmission service agreement, which will ensure that charges for transmission and ancillary services are appropriately assigned. If an interconnection customer wants to serve co-located load without identifying an eligible customer, it must terminate interconnection to PJM’s transmission system and serve the co-located load fully islanded from PJM’s transmission system.

New Transmission Service Options

PJM must, within 60 days of the Order, revise its Tariff to require an eligible customer taking transmission service on behalf of a co-located load to take one of three transmission services or to otherwise island from PJM

1. NITS, or a new interim, non-firm transmission service while network upgrades necessary for NITS are pending;
2. a new firm contract demand transmission service; or
3. a new non-firm contract demand transmission service.

The new interim, non-firm transmission service is a direct response to concerns from stakeholders over the delays large new loads experience when seeking service through the traditional front-of-the-meter load interconnection process. The new interim service will provide a temporary, transitional service option to allow co-located load to withdraw electricity from the PJM transmission system earlier than may be otherwise achievable if those loads could only be designated as network load. This optional, interruptible service lasts until the network upgrades required by NITS are complete and the co-located load can be designated as a network load. Service will be available to the level that PJM concludes it can be provided reliably. Service will be charged at the NITS rate, including for ancillary and black start services, but will not be charged for generation capacity. This service cannot be combined with the contract demand services.

In contrast, firm and non-firm contract demand will be permanent alternatives to existing transmission services that will not require the co-located load to become network load. PJM’s Tariff requires eligible customers taking NITS on behalf of co-located loads to take NITS on a gross demand basis (as opposed to a net basis, which could shift costs to other transmission customers). The Commission recognized that these eligible customers might be willing and able to limit energy withdrawals, and thus it would be inconsistent with cost-causation principles to require them to take NITS on a gross demand basis, in addition to requiring inefficient and costly transmission system buildout. Accordingly, such customers should be permitted to take alternative transmission services, and the Commission thus ordered PJM to offer these two new contract demand services.

The Contract demand services are permanent alternatives to existing transmission services and do not require the co-located load to become network load. Contract demand services require that the co-located load is willing and able to prevent or limit energy withdrawals and be separately metered from the associated generator. Eligible customers who will not withdraw any energy must take the non-firm contract demand service at 0 MW. An eligible customer may use a combination of firm and non-firm contract demand service. The Commission is establishing a paper hearing to determine the appropriate rates, terms, and conditions for the new transmission services.

In addition to directing the reforms outlined above, the Commission is establishing a paper hearing process to determine the appropriate rates, terms, and conditions for the new proposed transmission services, with PJM’s initial briefing due by February 16, 2026. Interested parties will have the opportunity to respond through the second quarter of next year.

BTMG Rules

The Order concluded that PJM’s existing BTMG rules are no longer just and reasonable and directed PJM to revise those rules within 60 days. The Commission’s concern stems from BTMG not being fully accounted for in resource adequacy planning, thereby creating reliability and resource adequacy risks for PJM, which is obligated to serve transmission customers using BTMG. Part of the mandated revisions will incorporate a transition process for customers, including a three-year transition period and the ability to grandfather certain entities with existing BTMG contracts. Notably, the Commission did not direct PJM to change its rules for non-retail BTMG, which is already capped in PJM for each year at a maximum of 3,000 MW.

Jurisdiction

The Commission responded to stakeholder concerns over the scope of its authority by reaffirming its well-established jurisdiction over generator interconnections to FERC-jurisdictional facilities. At the same time, the Commission reaffirmed that states maintain exclusive authority over specific terms of retail sales and retail rate design, generator siting, resource mix, and intrastate transmission.

Other Reforms

• PJM must implement reforms requiring an eligible customer taking transmission service on behalf of a co-located load to be assessed for regulation service and black start service on a gross demand basis, even if they have zero net energy withdrawals.
• Interconnection customers seeking to serve co-located loads must follow the study process necessary to effectuate a co-location arrangement, pay for all required network upgrades, and wait to commence service until all required network upgrades, special protection schemes, and metering are in service.
• PJM is required to consider interconnect requests below the full generating capability of the facility using existing accelerated procedures where no cost allocation or studies are required and for provisional or surplus service.

3. NEXT STEPS AND IMPLICATIONS

The reforms directed in the Order are the culmination of lengthy deliberations and a stakeholder process that received attention from all corners of the energy industry. While FERC’s directive is tailored to the rules and requirements within the PJM region, the Order is expected to more broadly provide a framework for addressing some of the core issues related to co-location and other large-load interconnection issues, as similar configurations proliferate across the country.

Even so, Commission-directed reforms are unlikely to resolve the full range of commercial and risk-allocation concerns that routinely arise in the co-location context among generators, large-load customers, utilities, and third-party developers. Those limitations are likely to be amplified outside independent system operator/regional transmission organization markets and in states where (as FERC Commissioner Judy Chang noted in her concurrence) retail loads must be served by the local electric utility.

In that respect, while the Order provides much-needed directional guidance from the Commission, ongoing questions will remain as other regions seek solutions to these co-location and large-load interconnection issues within materially different market structures and regulatory regimes.