SB 338 and the Regulation of Texas Data Centers

Estimated Time to Read: 12 minutes

Senate Bill 338 (SB 338), filed by Texas State Sen. Charles Perry (R-Lubbock) and supported by a bipartisan group of Senators for the 90th Legislative Session, would place a broad new set of state rules on Texas data centers. It reaches facilities of at least 100,000 square feet through four statutes at once: the Utilities Code, the Water Code, the Tax Code, and the economic development provisions of the Government and Local Government Codes.

The bill does two very different things. It tightens the strings attached to taxpayer-funded incentives for data centers, and it gives state regulators new power to decide how data centers cool their buildings, where they sit on their land, and whether they can connect to the grid at all. Texas Policy Research (TPR) has long argued that Texas should welcome data center growth by building the energy and water supply it requires, without subsidizing the industry or singling it out for special restrictions. Measured against that standard, SB 338 gets part of the problem right and much of it wrong.

Water and Grid Access

The core of SB 338 is a new Section 39.920 of the Utilities Code. It applies to large load customers covered by the interconnection standards that Senate Bill 6 (SB 6), passed in the 89th Legislative Session (2025), created in Section 37.0561, generally sites drawing more than 75 megawatts, whose facilities house servers in at least 100,000 square feet. Under a new Section 39.362, those customers would have to register their facilities with the Public Utility Commission (PUC) as large loads.

Before connecting to the ERCOT grid, a registered data center would have to cool its facilities, including any co-located generation, with one of four approved approaches. These are a closed-cycle recirculating system, a dry cooling system, a saline water system using desalinated seawater, brackish water, or produced water from oil and gas operations, or a system the PUC finds uses less water than a closed-cycle system would. The data center would also file an estimate of its annual cooling water needs and the sources it expects to draw from.

Once connected, the facility would report its actual cooling water use and sources every year. The PUC would design those forms with the Texas Water Development Board (TWDB) and pass the filings along to it annually.

The enforcement mechanism is the grid connection itself. The PUC would be required to prohibit electric cooperatives, municipally owned utilities, and transmission and distribution utilities from connecting a data center that lacks an approved cooling system or the required filings. Those utilities would be required to disconnect a data center that later switches to an unapproved system or misses an annual report.

The bill also authorizes, but does not require, the PUC to limit noise and light from data centers and to set minimum distances between their buildings and property lines. The PUC could enforce those standards the same way, by denying interconnection or ordering disconnection.

Environmental Permits as an Enforcement Tool

SB 338 also enlists the Texas Commission on Environmental Quality (TCEQ). Most large construction sites in Texas discharge stormwater under a general permit issued through Section 26.040 of the Water Code. A new Section 26.054 would require a data center seeking coverage under that permit to state in its notice of intent that it complies, or will comply, with the PUC's large-load and data center rules.

TCEQ would have no discretion once it finds a problem. After a hearing, the agency would be required to deny or suspend the data center's authority to discharge if the facility does not or will not meet the PUC's standards. A new Section 5.517 would also require TCEQ to issue an emergency order halting construction on the same finding, which could be triggered by a complaint.

The result is that a stormwater permit, designed to keep sediment and pollutants out of Texas waterways, becomes a backstop for enforcing utility commission rules on cooling systems and siting. A dispute over a data center's cooling design could stop construction before the facility ever asks to connect to the grid.

New Strings on Taxpayer-Funded Incentives

The second half of SB 338 deals with the incentives Texas governments offer data centers. Under a new Section 312.204(a-1) of the Tax Code, a city could not abate more than 50 percent of the otherwise abatable value of data center property in any year. Because county abatements under Chapter 381 and abatements by other taxing units are governed by the same Chapter 312 provisions, the cap would follow those agreements as well.

A new Section 312.2042 would require every data center abatement to carry a set of conditions. The owner or lessee would have to use an approved cooling system and file the same water estimates and annual reports required under the Utilities Code. It would also have to own or lease the data center for the full term and pay to remediate any environmental harm from building, running, abandoning, or demolishing it. It would have to comply with any PUC noise, light, and setback standards.

The owner would also have to grant the city a permanent, recorded interest in the land that bars any future data center on the property from using a non-approved cooling system. That restriction would run with the land and bind later owners. If the company breaks any term, the city could terminate the agreement and would be required to recover all forgone tax revenue plus interest.

The same conditions would apply to city loans and grants under Chapter 380 of the Local Government Code, although the 50 percent cap would not. County loans and grants under Chapter 381 are not addressed.

At the state level, SB 338 amends the Jobs, Energy, Technology and Innovation (JETI) Act, the school district tax limitation program in Subchapter T, Chapter 403 of the Government Code. JETI agreements for data centers would carry the same cooling, water, ownership, remediation, and deed-restriction terms. The governor or school district could terminate an agreement for a violation of any data center term after notice and a 180-day cure period, with recapture of all lost tax revenue plus interest.

Where SB 338 Moves in the Right Direction

The Texas Liberty Compact calls for ending corporate welfare, because government should not pick winners and losers with taxpayer dollars. TPR has applied that principle to data centers just as it has to film production, semiconductor manufacturing, and sports franchises, including in its coverage of Senate Finance's reexamination of data center tax breaks. We also recently published a legislative spotlight on bipartisan efforts to end those tax breaks as well.

On that score, the incentive half of SB 338 is a step forward. Capping abatements limits how much of the tax burden local governments can shift from one company onto every other property owner. Mandatory clawbacks with interest mean that a company that breaks its deal repays what other taxpayers covered in the meantime. Requiring recipients to pay for environmental cleanup keeps those costs off the public as well.

Still, a 50 percent cap leaves half of each break in place. It manages the problem instead of solving it. If an incentive is wrong in principle, the answer is to stop offering it, for data centers and every other industry, rather than to attach a longer list of conditions that local officials and state agencies must then monitor and enforce.

Where SB 338 Goes Wrong

TPR's view of data center growth starts from a simple premise: Texas does not have a demand problem; it has an infrastructure challenge. Rising demand for electricity and water is a sign that Texas is winning the competition for the next economy. As TPR has consistently argued, the answer to that demand is more supply, not rationing.

The regulatory half of SB 338 takes the opposite approach. It treats demand as something to manage by controlling how one industry builds. Cooling design, an engineering and business decision for the owner, would become a condition of grid access set by a state agency. A data center that changes its cooling system or files a late report would not face a fine. Its utility would be required to cut off its power.

TPR's position has been consistent: no subsidies, no special favors, and no special punishment. Texas has many large water and power users, including refineries, petrochemical plants, manufacturers, and agriculture. SB 338 applies its cooling mandate, its water reporting, and its disconnection penalty to data centers alone. If water planning requires better information about large users, that case should be made for all of them under one neutral rule.

The siting provisions raise a property rights concern on both sides of the fence. Neighbors facing real, measurable harm from noise, light, or drainage deserve real remedies, and nuisance law and clear standards of general application provide them. A setback rule written by the PUC for a single land use, enforced by cutting off power, is something different. It is statewide zoning for one industry, administered by a utility regulator.

Texans have raised legitimate questions about water, and TPR has examined them at length. The way to answer those questions is to expand supply through desalination, brackish groundwater, produced water reuse, and the storage and conveyance a growing state needs. Mandating particular technologies for one industry rations existing supply rather than expanding it.

What the Bill Leaves Out

For most Texans, the most practical question about data centers is who pays for the infrastructure they require. Large loads drive new transmission lines, substations, and interconnection upgrades. If those costs are spread across every ratepayer, households and small businesses end up underwriting private investment decisions.

TPR has argued for cost causation over cost socialization: whoever creates an infrastructure cost should pay it, and that rule should apply the same way to every large user, whatever the industry. SB 6 took a partial step last session by requiring large loads to contribute to the cost of their own interconnection. The broader question of how new transmission is paid for remains open, and SB 338 does not touch it. It regulates how data centers cool their buildings while leaving untouched the issue most likely to show up on Texans' electric bills.

Drafting Issues Worth Fixing

Several provisions of the filed text deserve attention, whatever lawmakers decide on the policy. The most significant is in the JETI amendment to Section 403.605(a). Standard JETI agreements set a project's taxable value at 50 percent of market value. SB 338 would set a data center's taxable value at "not more than 50 percent" of market value.

Read literally, that language caps the share of value that is taxed, not the size of the break. It would permit a data center's taxable value to fall below 50 percent, allowing a deeper limitation than other JETI projects receive. That appears to be the reverse of the author's intent, and the phrasing should be corrected if the goal is to limit data center incentives.

The bill also defines "data center" three slightly different ways. The Tax Code version covers facilities "constructed or adapted" to house servers, while the Utilities Code and Water Code versions cover facilities "specifically constructed or refurbished" for that purpose. One definition, used throughout, would avoid disputes over which facilities are covered by which provisions.

Finally, the deed restriction in Section 312.2042 binds "the owner" even when a lessee is the party that signed the abatement. Lawmakers should clarify how that requirement works when the company receiving the incentive does not own the land.

The Bottom Line

If enacted, SB 338 would take effect September 1, 2027. Its provisions would apply only going forward: to incentive agreements, loans, and grants made after that date, to stormwater permit applications filed after it, and to data centers that connect to the ERCOT grid after it.

The bill gets the incentive problem half right and the growth question wrong. Its limits on abatements and its clawback requirements recognize that taxpayer-funded deals for data centers burden everyone else, though the better course is to end those deals altogether. Its cooling mandates, siting rules, and disconnection penalties single out one industry for treatment no other large user faces, and they leave the real cost question unaddressed.

Texas should stop subsidizing data centers, stop singling them out, and do the harder work of building the power and water supply a growing state needs.

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