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Charles Babcock
Charles Babcock
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Data Centers Don't Need To Be Regulated Utilities

The New York Times misses the big picture with its take on data centers as "wildcat" utilities that need government oversight. There is no data center monopoly in northern N.J.

The New York Times has renewed its series on the data center industry, zeroing in on the concentration of data centers in northern New Jersey and questioning whether data center operators should be regulated as de facto brokers of electrical power.

There's a limited amount of power available at any one data center in northern N.J., and James Glanz's May 13 story, "The Cloud Factories: Landlords Double as Energy Brokers," argues that data center operators should be governed by the public utility commissions that govern the generation and distribution of electricity.

The tone of Glanz's previous articles has been critical, coming across as if he has seen what's going on in the industry and thought through the implications, while others have not. Nothing wrong with being critical, and the data center industry is a burgeoning business that deserves greater scrutiny. But the reason only John Glanz has reached some of these conclusions may be due to the fuzzy logic involved.

Northern New Jersey, like northern Virginia, Miami and California's Silicon Valley, has a concentration of wholesale data center space, built to be rented to customers who install their own equipment and gain access to good network connections.

[ Want to learn more about electricity consumption by the data center industry? See Data Centers May Not Gobble Earth, After All. ]

"When the centers opened in the 1990s ... the tenants paid for space to plug in servers with a proviso that electricity would be available. As computing power has soared, so has the need for power, turning that relationship on its head: electrical capacity is often the central element of lease agreements, and space is secondary," Glanz wrote. To buttress his point, he quotes a senior VP of a commercial real estate firm as saying the language of data center deals refer to real estate, but "these are power deals, essentially."

The ability to virtualize applications and concentrate more of them on a single server has led to the consumption of more power for each square foot of data center space occupied. That's a trend we're all acquainted with. But the writer doesn't stop there.

"A result, an examination shows, is that the industry has evolved from purveyor of space to an energy broker -- making tremendous profits by reselling access to electrical power, and in some cases, raising questions of whether the industry has become a kind of wildcat power utility," Glanz wrote.

Let me note that the term "wildcat," as in wildcat oil drillers, refers to those who go into territory not known to contain oil and try to find it by drilling. Hence, it has come to connote a risky business. How the term applies to data centers as utilities I would leave to John Glanz to explain. He says they are anything but a risky business.

Glanz suggests regulators need to step in and direct the power distribution in an equitable manner. When a for-profit company does so, it gets away with charging "double" for the power consumed by tenants because customers want guaranteed access to more power than their steady-state usage. That's because their needs ramp up, even though much of the time they're not using the amount they have contracted for.

This is typical over-provisioning by the enterprise data center managers; it looks bad until the business really needs more capacity, with a large volume of customer business at risk, and then having standby capacity appears brilliant. The cost of paying for double the amount of electricity typically used must be weighed against the cost of losing business, if you don't have the power available when needed. Enterprise data center managers have been making such calculations for a long time.

"Interviews with regulators in several states revealed widespread lack of understanding about the amount of electricity used by data centers or how they profit by selling access to power," Glanz wrote.

This is where the second part of the confusion sets in. Glanz is rather offhandedly claiming regulators fail to see the data centers in their proper light as electricity brokers. But what if they are not?

To be a broker of electrical power in the same sense that a regulated utility is, the broker needs to either generate the power being distributed, as many public utilities do, or be a distributor with long-term relationships with say, hydroelectric power generators in Ontario, Canada. With a source of supply, a regulated utility is then guaranteed all the business in its defined region; it's a monopoly. At the same time, it must serve all customers who come to it, using a set rate schedule approved by the public utilities commission.

When a new data center is built in northern New Jersey, such as the NYSE Euronext data center in Mahwah, N.J., it often opens with some of its space unoccupied to allow for further growth. It likewise has power supply outlets that are unused because there are not yet enough customers to fill the space. But as business picks up, the data center's ability to serve more and more customers has a limit. The space fills, the circuits get loaded up, the chillers work at capacity and eventually additional customers must be turned away.

A "wildcat power broker" in this position, if I understand what Glanz means, might use the scarcity of power as a means to increase prices at will, or worse, help generate the shortage in the first place. The northern N.J. data centers are not power brokers, in that sense. They are subject to the limits of what their supplier and the grid can deliver to them. Their control is over a set of resources that defines a data center -- the network connections, the secure space, the cooling system -- with electricity as one element of that offering.

If they charge double for power, it's possible that's because they have signed contracts to deliver twice the amount the customer typically uses and must bear the expense of keeping that supply available, even if the customer isn't using it 85% of the time. Failing to do so could lead to financial penalties written into a customer's service level agreement. While there may be some calculated risks undertaken by the data center owner in allocating power, the reckless reselling of power would surely lead to a day of reckoning.

In addition to having to supply direct power, the data center operator must also have an uninterruptible power supply installed, in case of grid delivery failure. The backup must kick in the instant the grid fails. Otherwise data will be lost in running applications and data integrity will be compromised as systems try to come back online. In some cases, that's a bank of 12-volt batteries siphoning off a trickle charge from the incoming power supply. Today it's usually a more sophisticated mechanism that attempts to minimize the power lost, such as Vantage's insulated gate bipolar transistor unit. In this case, it's good to be bipolar; it cuts resistance to the electricity supply's flow and reduces power loss.

In addition, for space to be suitable as a data center, it must have emergency backup generators capable of replacing all the power that's normally imported. Perhaps Glanz knows how to amortize the expense of insulated gate uninterruptible power supplies and backup systems, but I suspect most public utility commissions do not. (But the N.J. utility commissioners know quite well the value of backup systems in the wake of a storm, such as Hurricane Sandy.)

A wholesale data center is not a wildcat power broker with the goal of profiteering from a stranglehold on the power supply. It's a combination of services in a location where such a set is in high demand, such as outside New York in close proximity to the trading exchanges. A public utility, seeing potential business at risk, can contract for more power, add substations, upgrade its grid. The wholesale data center cannot. Power is brokered to it, but it cannot become a power broker with the ability to, at will, expand or contract the supply.

"The sale and resale of power is subject to a welter of regulations and price controls ... But the capacity pricing by data centers ... appears not to have registered with utility regulators," Glanz concludes. In this case, the absence of regulation is a good thing.

There is no data center monopoly in northern N.J. On the contrary, it is one of the most competitive regions for building data center space in the world. Let the data center operators run their business as they see fit. They're the ones who know it best. And let's hope the regulators who read The New York Times keep their common sense and don't take Glanz's recommendations too much to heart.

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