Regulatory Discrimination Against Miners Is Shortsighted
On July 18, 2016, the Public Utility Department (PUD) of Chelan County in Washington State, which has seen a large increase in Bitcoin mining, passed a “new electric rate for customers with high density loads (HDL) such as server farms or similar technology operations…as a means to mitigate operational and financial costs associated with serving these energy intensive loads.” The new higher rate, effective January 1, 2017, follows a moratorium on adding new HDL customers and comes after 18 months of public comment and then a non-public vote by the members of the PUD.
Because this new rate increase impacts virtual currency mining operations, miners were included in the discussions of the proposal. The PUD says that “it is trying to strike a delicate balance between power production, delivery and customer costs.” Consistent with that goal, “Bitcoin miners advocated for a solution in which they would pay a slightly lower rate of 3.99 cents per kilowatt hour in exchange for bearing the brunt of upfront costs of setting up electricity.” However, there is no indication as to whether the PUD actually considered this proposal, as reports suggest that no “entrepreneurs or opponents of the idea attended the meeting during which the final vote was held.” When asked about the HDL community’s presence during the vote, “Commissioner Garry Arseneault commented that the absence of HDL customers in the boardroom the day of the vote was proof that these customers ‘are not in conflict’ with the new rate.” However based upon the positions advocated by HDL customers, including virtual currency miners, during the public comment period and after the rate increase was approved, this conclusion could not be further from the truth. Daniel Conover, founder and chief operating officer of Bitcoin mining company Hash the Planet, one such HDL customer, is uncertain of the company’s future in Washington following the hike: “with the rate increase, we couldn’t survive.” Hash the Planet’s chief executive officer Sean Cooper voiced similar concerns: “That’s very heavy weighing on me…I have three kids, I can’t afford to go bankrupt.” Further, the primary incentive for most HDL customers has now been taken away:
It’s possible to mine bitcoins almost anywhere in the country — at least, on a small scale. But running a hosting facility for other bitcoin miners, as Hash the Planet does, is a different matter. “For a hosting facility you need the ultra-low rates because you have the overhead”…rent, costs of hardware and maintenance. And of course, power costs.
Hash the Planet is now considering moving its operations abroad. Iceland and Greenland have approached the company to try to persuade it to build mining operations in their countries which offer “similar power rates, along with tax breaks and incentives… [p]lus, the usually low temperatures there hold down the costs of cooling high-powered computers.” Without incentives to stay in Washington or even elsewhere in the US, virtual currency mining companies may not be left with much choice in relocating their operations: “I’m pouring money into the community, hand over fist… [w]e’re productive members of the community out here.”
Malachi Salcido, a longtime local businessman in Chelan County and owner of bitcoin mining company Salcido Connection, believes that the rate increase is based, at least in part, on the PUD’s lack of familiarity with Bitcoin:
The PUD overreacted with its moratorium on new power requests, perhaps based on fear of the unknown — and, despite Japan’s thinking of recognizing bitcoin as a legal currency, it remains a bit mysterious to most people. “There are some bad actors in the bitcoin world. We don’t smear the technology.” Salcido believes there has to be a middle ground. There needs to be affordable power for everyone — and there needs to be economic growth.
Salcido also explained why the county should be fostering, rather than harming, virtual currency mining operations:
At a Feb. 3 public hearing in Wenatchee, Salcido gave a presentation arguing that high-density power users like bitcoin miners could help regional economic growth. How? Bitcoin miners are just one example of intellectual capital that he believes the region needs to attract.
‘You need people with brains and innovative juices flowing, young entrepreneurs who are going to figure out the next big thing,’ he said. ‘We can become one of the successful emerging technology hubs of the United States. It’s already happening. It just doesn’t look quite like you think it would. It’s a little messy. It’s emerging technology.’
Salcido believes that the rate increase is discriminatory because it specifically targets HDL customers for rate increases. While he is hopeful that Chelan County pursues an alternative to the rate increase to fulfill its goal of a balanced and fair approach to electricity charging, if it does not, “he fears he will be forced to liquidate the two Chelan County data centers his company has invested millions of dollars into, and enter into a legal battle with the utility over their actions, which he sees as discriminatory.”
A discrimination suit based on the rate increase is an uphill battle and not likely to succeed. Since the right to fairly priced electricity is not a fundamental constitutional right and because HDL users are not part of a classification that have been subject to governmental discrimination historically, such as race, gender, national origin, etc., the PUD’s decision will be allowed to stand unless a court finds that there was no “rational basis” for it. Rational basis review means that a court will uphold a law “if it is rationally related to a legitimate government interest.” Essentially, a court identifies the purpose of the subject law and then considers whether it serves a legitimate government purpose. Most courts considering laws that state governmental agencies have claimed are necessary for fiscal responsibility, which Chelan County claims is the purpose of this rate increase, have concluded that the laws are rationally related to a legitimate government interest.
A suit based on the Commerce Clause, however, may be a legal recourse available for HDL companies affected by the rate increase. The Commerce Clause allows Congress the power “to regulate commerce with foreign nations, and among the several states, and with the Indian tribes,” which was later held by courts to include “the channels of commerce, the instrumentalities of commerce, and action that substantially affects interstate commerce.” The rate increase directly and adversely affects virtual currency mining companies, who, while located in Chelan County, are mining transactions occurring globally or at least outside of Washington. Therefore, their actions arguably substantially affect interstate commerce and may only be regulated by Congress as opposed to a state entity such as a local county agency.
While it remains uncertain whether the rate increase will pass legal muster, by focusing solely on short-term financial consequences rather than long-term growth and innovation, the PUD is shortchanging Washington’s citizens by driving new technology businesses away from the state:
The PUD and the bitcoin advocates all say they want what’s best for Chelan County. The problem is, what the PUD believes is best for protecting existing residents — the rate increase for high-density power users — just might drive away the bitcoin miners. And if Salcido is right, it could also drive away the region’s shot at technology-driven economic growth.
For a state that has been a thriving location for virtual currency mining, the rate increase will likely have a chilling effect on innovation. Rather than create an environment that welcomes technological advancement, Chelan County is working against efficiency and growth. Shortsighted regulations such as this rate increase will only serve to disincentivize companies from staying in Washington. HDL companies, including virtual currency mining companies, are already looking for other states in which to build and develop these businesses, such as Iowa, which has become the new hub for many HDL companies.
In contrast to the PUD’s rate increase that sends the message that Chelan County does not want HDL companies, Iowa has attracted HDL companies with millions of dollars in tax incentives and other benefits. For example, as the result of over $50 million in incentives, HDL centers built by Google and Facebook have created 300 and 150 new jobs, respectively, in Iowa. Most recently, Microsoft announced its plan to build Project Osmium its largest ever data center, in Iowa after receiving a $37 million incentive package. Regardless of whether Microsoft’s data center employs a substantial number of Iowans, it will undoubtedly contribute to the community by building infrastructure, stimulating economic growth, and providing substantial tax revenue:
As an incentive for the development, West Des Moines plans to help pay for the infrastructure Project Osmium needs. Adding roads, water mains and sewer lines can prime an area for new construction, making it easier to attract homebuilders and commercial real estate developers, city officials say.
West Des Moines officials say the real benefit of such data center projects is the development that can spring up around them as a result of building new roads, and sewer and other infrastructure.
The developers envision expensive homes tucked into the wooded bluffs overlooking the river. Farther south, there could be more neighborhoods, office parks and commercial developments.
Iowa’s approach to creating an environment to attract HDL companies to the state stands in stark contrast with the PUD’s decision to raise electricity rates for HDL consumers. Rather than taking an anti-HDL business stance, the PUD should take a hard look at what Iowa is doing. The PUD and other governmental agencies in Washington and other states should be mindful of balancing their short-term financial goals with the need to attract and maintain innovative businesses.