XLU Trails SPY by 500 Basis Points as 30% Data Center Rate Hikes Reshape Utility Earnings Math
Portland General Electric and Entergy both announced roughly 30% rate increases for data center customers to fund grid upgrades, while Duke Energy projects 10x AI power demand growth over the next decade. Whether regulators approve these cost-plus models will determine if XLU can close its gap with SPY or faces further
RKey facts
- Portland General Electric announced 30 percent data center rate increase, effective soon
- Entergy CEO: data centers responsible for close to 10 percent of industrial customer growth
- Duke Energy CEO projects 10x AI power demand growth over next decade
- XLU trails SPY by 500 basis points as utilities struggle for valuation clarity
What's happening
The buildout of AI infrastructure is creating an unusual friction in the utility sector. Rather than a simple boon from rising electricity demand, power companies are facing pressure to fund massive grid upgrades and are passing those costs directly to data center operators. Portland General Electric and Entergy both signaled in the past 48 hours that they are hiking rates sharply for their data center customer base to finance the buildout, a move that underscores the scale and urgency of the capacity problem.
CEOs at Portland General and Entergy stated that data center rate increases of around 30% are necessary to fund grid infrastructure. The rationale is straightforward: data centers demand fast, reliable power and require dedicated infrastructure investment. However, the rate hikes create a squeeze on two fronts. First, they raise the cost basis for hyperscalers and AI chipmakers locating new facilities. Second, they risk alienating residential and commercial customers who see their own rates climbing without the benefit of the grid capacity investment.
XLU, the utilities sector ETFExchange-Traded Fund - a basket of securities trading like a single stock., has lagged SPY by 500 basis points this quarter, suggesting that investors are skeptical about whether utilities can grow earnings and valuations while managing rate pressure. The disconnect is stark: Duke Energy projects 10x AI power demand growth, Pinnacle West says data centers will fund grid upgrades, yet the sector underperforms.
The key debate centers on sustainability. If utilities can enforce cost-plus rate models and pass through capex to data centers without regulatory pushback, the narrative flips bullish. But if regional utility commissions resist, or if data center operators route around expensive grids by building captive power, utilities face margin compression. The next flashpoint is regulatory approval of these proposed rate hikes in state proceedings.
What to watch next
- 01Portland General and Entergy rate case decisions: next 2-3 months
- 02Q2 2026 utility capex guidanceCompany-issued forecasts of future financial performance. and AI power demand updates: July earnings
- 03Data center capex announcements and alternative power plans: ongoing
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