SB 887 Would Curb CEQA Exemptions for Data Centers and Expedite Litigation for Qualifying Projects

What Happened

As throughout the country, California lawmakers are increasingly focused on the rapid growth of data centers and their corresponding potential impacts and demands on the state’s electrical grid, water resources, and infrastructure. California has the third-highest number of data centers in the United States. However, there is also growing legislative momentum to ensure that data center projects are subject to review under existing regulatory frameworks such as the California Environmental Quality Act (CEQA).

Senate Bill 887 (SB 887), introduced by Senator Steve Padilla, would largely foreclose the use of categorical exemptions under CEQA for data center projects, while also providing a pathway for an expedited litigation timeline for projects that meet certain environmental standards. The bill recently passed the California Senate with a vote of 29-9 and is currently under consideration in the Assembly. SB 887 is part of a broader legislative effort by Senator Padilla to manage the impacts of data center development; Senator Padilla also introduced SB 886, which would impose a new electrical tariff framework applicable to certain data center operations.

If enacted, SB 887 would require all projects that fall within a broad definition of a “data center” to undergo CEQA review. At the same time, the bill offers qualifying projects access to California’s Environmental Leadership Development Program (ELDP), which provides, among other things, expedited judicial review of CEQA challenges. The bill thus combines a regulatory mandate with a potential incentive for projects willing and able to meet stringent environmental and labor standards.

SB 887’s Broad Definition of “Data Center”

As of the most recent amendments at the end of June, SB 887 very broadly defines a data center as any “facility, or part of a facility, that houses computing infrastructure, including graphics and central processing units, servers, storage devices, networking equipment, and associated power and cooling systems, for the primary purpose of processing, storing, or distributing electronic data.” However, the current draft of the bill excludes several categories of facilities, including:

• Publicly funded research facilities;
• Public safety facilities;
• National security facilities;
• Publicly owned facilities; and
• Certain utility facilities, including assets of facilities-based telecommunications providers.

Despite these exclusions, the broad definition of “data centers” could capture facilities beyond what many stakeholders would traditionally consider a data center. This raises questions regarding the extent to which the bill applies to certain businesses with large internal computing facilities. Many modern commercial enterprises maintain server infrastructure to process, store, and distribute internal electronic data. Those facilities could arguably fall within the statutory language, even if data processing is not the broader business’s primary purpose. For example, facilities associated with the financial industry or other private-sector operations that rely on substantial in-house computing resources could be included within the definition of a “data center” and therefore prevented from utilizing a categorical exemption.

SB 887 Eliminates CEQA Exemptions for Data Centers

Under existing law, the extent to which a data center project requiring discretionary approvals may qualify for a CEQA exemption would depend on the scope of the project as a whole and whether it fits into established categories of projects that – subject to various exceptions – have been deemed not to have a significant impact on the environment. SB 887 clarifies that data centers must undergo some form of CEQA review and cannot qualify for any such categorical exemptions.

Whether this change will have widespread practical consequences remains unclear. Given their significant scope and potential environmental impacts, it seems unlikely that categorical exemptions are being widely used – if at all – for many large data center developments. Accordingly, SB 887 may prove more significant as a policy statement regarding the state’s oversight of data centers than as a dramatic expansion of environmental review obligations.

Qualifying Data Center Projects May Qualify for CEQA Streamlining

A second component of SB 887 is that qualifying data center projects could be certified under the Environmental Leadership Development Program for expedited judicial review. This streamlined process is designed to resolve CEQA litigation within approximately 270 days. By contrast, ordinary CEQA challenges can last several years.

To even qualify for expedited judicial review, a proposed data center project must first satisfy an extensive list of environmental, labor, and community-benefit requirements. Among other things, a qualifying project must:

• Pay the full cost of electrical interconnection to avoid cost-shifting to other ratepayers;
• Avoid increasing fossil fuel consumption within California;
• Include zero-carbon energy storage capable of providing at least four hours of capacity at 100 percent of forecasted peak demand;
• Use onsite zero-carbon energy storage to provide demand-response services to the grid;
• Enter into an enforceable commitment with the service entity or utility to fully pay for all electrical grid investments to serve the data center;
• Reimburse the full cost of electrical grid investments, including new generating capacity, if the data center ceases operations;
• Utilize recycled water, water-efficient technologies, or waterless cooling systems;
• Achieve 100 percent zero-carbon electricity on an hourly basis within five years of commencing operations, with 75 percent of that energy coming from newly developed resources;
• Enter into a community benefits program with a community-based organization; and
• Require both a project labor agreement and prevailing wages.

Are the ELDP Criteria Realistic?

The environmental and labor standards required for ELDP certification are ambitious, and it remains uncertain how many projects could realistically satisfy them.

For example, the requirement that qualifying facilities ultimately rely on 100 percent zero-carbon electricity may present a significant challenge. According to the International Energy Agency, fossil-fuel generation continues to provide a substantial share of electricity used by data centers nationwide. An estimated 55% of the energy used by U.S. data centers currently comes from coal and natural gas. Transitioning an individual facility to hourly matching using entirely zero-carbon resources, while also meeting reliability requirements and maintaining continuous operations, could require significant investment in generation and storage infrastructure.

The bill’s project labor agreement and prevailing wage requirements may represent a less significant hurdle than the bill’s energy and infrastructure obligations.

Nonetheless, several of the ELDP requirements go beyond existing industry practice. Therefore, data center developers would face a choice at the outset—without complete information as to the likelihood of CEQA litigation—between accepting a conventional litigation timeline or incurring substantial additional costs just to qualify for expedited judicial review.

Why SB 887 Matters

SB 887 reflects California’s increasingly active regulation of data center development. The bill would essentially impose mandatory CEQA review on most developments that fall within its broad definition of a data center, while simultaneously offering accelerated litigation procedures to projects that meet its rigorous environmental and labor standards. However, even if the bill is enacted, it is unclear if many data center projects could choose to meet the requirements to qualify for ELDP certification. Regardless, California policymakers are increasingly viewing these projects as major industrial consumers of electricity, water, and other public resources. The regulatory complexity is likely to increase as new procedural requirements and incentives are introduced.

Manatt continues to monitor SB 887 and other legislative and regulatory developments affecting data centers. For more information on SB 887 or other data center matters, please contact the authors, C.J. Laffer and Jimmy Yuen, or any of your Manatt contacts for further guidance.