By Jennifer Hiller
PHOENIX -- A new style of architecture is rising in the sprawling suburbs of the Sonoran Desert: windowless data centers that hum 24 hours a day and guzzle as much electricity as a midsize city.
As Microsoft and other tech giants expand their footprints in one of the nation's largest data-center markets, a high-stakes battle is unfolding over how to pay for the massive power-grid upgrades needed to drive the AI revolution.
Arizona Public Service, the state's largest utility, sits at the center of the firestorm. APS is proposing a 45% electricity-rate increase for "extra-large energy users," primarily data centers, and a roughly 14.5% increase for residential customers.
Nearly everyone is unhappy.
Consumer advocates warn the plan would shift the financial risks of the AI build-out to households already struggling with high summer electricity bills and temperatures that often hit triple digits. If the AI boom fizzles or the energy consumption of data centers wanes, they worry residents could be left paying off the infrastructure upgrades years from now.
Microsoft, which operates three big data centers in Phoenix's West Valley, says it is paying its own way for needed upgrades to the grid -- but contends the utility has a flawed approach to paying for new generation.
APS says its plan would ensure "growth pays for growth."
"We're making sure that they are paying their fair share," said Ted Geisler, chief executive of APS and parent company Pinnacle West Capital. "These data centers require entire power plants to be built just for them or entire transmission lines. That's why we've got to modernize the rate tariffs."
The debate is part of a national tug of war. Similar fights over how to pay for the grid build-out have erupted in Texas, North Carolina and other markets, where residential power customers face large increase proposals.
The stakes are high. Electricity prices are rising faster than inflation and have become a bipartisan political issue. Residential customers across the U.S. saw their electricity rates climb 32% on average between 2020 and 2025. In Arizona, the jump was 26%.
The U.S. is rushing to build infrastructure to stay ahead of China in the AI race, but consumer backlash is snowballing. Beyond their voracious appetite for electricity, data centers face criticism for their massive land and water use.
U.S. electricity demand had been stagnant for decades before accelerating during the artificial-intelligence mania. Commercial power use is likely to surpass residential use next year for the first time, according to the Energy Information Administration.
At the urging of President Trump, big tech companies have promised to cover the costs to power data centers. Microsoft is asking Arizona regulators to allow it and other large electricity users to build their own power plants instead of relying on utility-owned generation that other customers wind up paying for.
"Since we first began operations in Arizona in 2021, Microsoft has been committed to paying our own way to ensure our data centers don't increase electricity prices," said Jeff Riles, the company's senior director of energy markets.
APS said it is working on a way for large customers to develop their own power generation, but it can't compromise reliability or affordability for others.
Fairly allocating infrastructure costs among groups of customers is complex. Utilities have been making investments not only to support data centers but also to upgrade the grid to withstand more extreme weather and replace aging infrastructure, changes that benefit all customers.
There are more than 120 cases across the country of utilities wrestling with how to charge giant customers, according to utility filings aggregated by AI startup Halcyon.
Rate setting is overseen by state regulators during yearlong legal processes like the one unfolding in Phoenix, where customers and advocacy groups can petition to participate. Arizona's five elected utility commissioners will likely set the APS rate rise later this year. They last approved an increase in 2024, when the utility had requested a 13.6% bump for most customers and got 8%.
Geisler, the APS chief, said higher rates are needed to cover what already has been spent for upgrades and repairs to the grid. Rising inflation, higher interest rates and supply-chain volatility have driven up project costs. Prices for some transformers have jumped 90% in recent years, Geisler added.
Until two years ago, APS connected new customers to the grid as they signed up for service. Now, it is preparing to add customers requesting more than 4,000 megawatts of service -- and an additional 19,000 megawatts of requests are waiting in a queue, more than twice the system's peak demand.
That scramble has Arizonans worried.
Jane Andersen, Arizona state leader for Mormon Women for Ethical Government, said she is concerned residents and small businesses will end up subsidizing the power needs of data centers.
She called APS's proposed 14.5% rate increase for households "out of line" with national averages. Low-income families and seniors on fixed incomes already struggle to afford their bills and air conditioning is a must, she said.
"It's a lifesaving measure," Andersen said.
Arizona Attorney General Kris Mayes, a Democrat and former utility commissioner, wants to see data centers carry a heavier share of the burden. Even a 45% rate increase won't fully cover the costs to plug them in, she said, while arguing residential customers should see about a 3% hike.
Phoenix Mayor Kate Gallego, who formerly worked in economic development at the Salt River Project, a federal utility in the Phoenix area, said she sees parallels to an earlier boom.
"In 2008 with the real-estate downturn, Arizona was hit very hard because we were so strongly linked to residential real estate," she said.
The Phoenix area is a major data-center market, home to semiconductor manufacturing and copper mining, a key commodity for the power industry. Not every proposed data center will be built, but having Arizona's grid too heavily weighted toward one sector would be irresponsible, Gallego said.
"We are making an enormous bet on one sector," she said.
Write to Jennifer Hiller at jennifer.hiller@wsj.com
(END) Dow Jones Newswires
June 04, 2026 11:50 ET (15:50 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
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