Utilities Face Tougher Rate-Setting Over Data Centers

The policy push is colliding with a sector that has traditionally been prized for steady, regulated earnings. But the economics of the current build-out are changing. Data centre demand is forcing utilities to expand faster, often before new customers are fully connected or paying. That raises the risk that existing ratepayers are left underwriting infrastructure for large industrial users, while shareholders capture returns set under older assumptions about demand growth, interest rates and capital costs.

That tension helps explain the recent weakness in utility stocks. The Utilities Select Sector SPDR Fund, XLU, was last down at $39.51, below both its 50-day moving average of $42.98 and its 200-day moving average of $43.84. Its RSI reading of 17.6 points to heavily oversold conditions, while the MACD remains negative, suggesting investors are marking down the sector on fears that regulatory scrutiny could cap earnings just as financing costs stay elevated.

Individual names have also come under pressure. NextEra Energy fell to $76.08, below its 50-day average of $83.95 and its 200-day average of $86.40, while Duke Energy slipped to $113.35, under both its 50-day and 200-day averages. Those moves reflect a market that is starting to price in tighter allowed returns, slower rate recovery or greater political resistance to rate increases. By contrast, some utilities may still benefit if regulators allow them to expand rate base faster and pass through costs tied to reliability and grid reinforcement.

For investors, the key question is no longer whether utilities will spend more, but who will pay for it. A benign outcome would be a regulatory framework that lets utilities recover investment and earn reasonable returns on new infrastructure tied to data-centre growth. A more hostile outcome would force utilities to absorb more of the capital burden, compressing return on equity and pressuring valuations across the sector.

The broader story is that electricity is becoming a strategic bottleneck in the AI build-out. That gives utilities more volume growth than they have had in years, but it also invites closer political oversight of profits. As borrowing costs remain high and demand from large load customers accelerates, the next round of rate cases is likely to determine whether utilities emerge as reliable compounders or as a utility sector under sustained margin pressure.