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: Today, federal electricity regulators may propose rules that could accelerate data center connections to the grid while limiting costs passed on to other customers.

• More on that below.

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.

• This includes Arizona, Texas and Ohio in recent weeks.

"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, said Ben Townsend, head of infrastructure and sustainability at Google.

Behind the scenes: At the data center this week, the temperature was nearing the day's high of 107 degrees.

• Workers avoid preventative maintenance on outside equipment during the summer months to avoid heat exposure, a company spokesperson said.
• The campus spans 185 acres — roughly equal to 140 football fields — and is still partly under construction. It first came online last year.

The bottom line: Thompson said Arizona residents are most concerned that data centers could make their power not only more expensive, but unreliable when they need it most.

• "They want to make sure their air conditioning is still running when it's 120 degrees outside," Thompson said. "But they want it to be affordable as well."

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All eyes (in our world!) are on FERC, which will unveil a new policy this morning to speed connection of data centers to transmission systems.

Why it matters: Regulators face pressure to enable the AI boom, but without straining grids and sticking consumers with the bill.

What's next: FERC's meeting will take up Energy Secretary Chris Wright's request for new rules, but the specifics remain tightly guarded.

Catch up quick: Last fall, Wright floated ideas for considering these big demand sources along with new power generation, as well as assigning grid upgrade costs to these "large loads."

• It included ideas like prioritizing projects that agree to curtail power use during demand spikes.

Between the lines: FERC watchers have been reading tea leaves in Chairwoman Laura Swett's comments, and wondering how aggressively FERC will act.

• TD Cowen analysts expect FERC to encourage flexibility and locating data centers next to new generation by "offering streamlined (60-day) study timelines."
• They also predict carrots for hyperscalers to pay grid interconnection costs, the firm said in a note.

Yes, but: Analysts with advisory firm Capital Alpha Partners argue that FERC is wary of creating legal jeopardy by infringing on state jurisdiction.

• In a note, they predict FERC could downshift to offering "best practices" that give state regulators leeway to "choose solutions that work for them."

The bottom line: "It could potentially be the most significant FERC action in decades," former FERC chairman Neil Chatterjee tells Bloomberg.

Here's what caught our eye about yesterday's news that the Interior Department and power giant Invenergy agreed that Invenergy will give up undeveloped offshore wind leases and instead invest the money in Trump-friendly projects.

The intrigue: This $765 million partial refund to Invenergy — the latest in a string of such agreements aimed at boosting U.S. fossil fuels — comes with a twist.

• Invenergy will steer some of the money to geothermal projects, though natural gas got first billing in Interior's announcement.
• It cites Invenergy's plans to build gas-fired plants in Indiana, Wisconsin, Iowa, Kansas and Missouri — part of the company's wider gas project pipeline.

My thought bubble: It signals Trump 2.0's dislike of wind, but reaffirms that geothermal is the renewable source that the administration likes.

Catch up quick: Invenergy snagged a 5,000-acre lease in the Interior Department's geothermal auction for tracts in New Mexico this week, the company tells me.

• It now has 45 parcels from Interior's Bureau of Land Management, totaling 144,000 acres across five states, it said.

What we're watching: How much of the $765 million will go toward Invenergy's gas projects vs. geothermal projects it's eyeing.

• The company did not provide comment on the split.

The bottom line: New offshore wind plans faced tough economics even before the Trump administration's moves against the sector.

• But Invenergy isn't ruling out future investments if the seascape improves.

The U.S. wind sector was growing more slowly than solar even before the second Trump administration began imposing a suite of new onshore and offshore restrictions.

• Headwinds in recent years included interest rates, lack of transmission where it's needed, supply chain hurdles, and competition from solar and gas.

Yes, but: Trump 2.0 has aggressively targeted the sector, with steps like the Pentagon allegedly sitting on once-routine reviews needed for FAA sign-offs.

The end isn't nigh (Oliver Burkeman Substack)

Amy says: Ohhhh an article that combines AI, climate change and human psychology. Click! But seriously, this is worth a read.

• Also, I love putting a name to something I have felt: "Temporal chauvinism."

What Happens to an Economy When It's Too Hot to Work? (Bloomberg)

Amy says: This reminds me of the episode in the 2023 Apple TV miniseries "Extrapolations" where India has flipped its working hours so people sleep during the day and work at night.

• That show is based on real climate science extrapolated into the future, so if you're reading this newsletter, you should watch that show!

The Teachers Getting $50,000 Bonuses Thanks to a Massive Meta Data Center (The Wall Street Journal)

Amy says: Stories like this help provide some specificity to the broad "economic benefits" data centers say they bring to communities, though I would love to hear from one of these teachers and see how they feel about the big payday.

"We run out of reserves in about four weeks. ... There are reserves all over the world, and we would really run out, and there'll be a time when you wouldn't be able to get it, and you want to see bedlam?"

Quick take: The comment is an admission that dwindling oil stockpiles factored into the White House calculus in the deal that falls short of U.S. aims for the war.