Building in Arizona’s Data Center Boom: How Federal Executive Orders, State Regulation, and National-Security Policy Are Reshaping the Rules for Developers

By Ryan J. Regula

Developers and practitioners evaluating data center projects in Arizona face a regulatory environment shifting on three fronts simultaneously. Federal executive orders are opening new land, streamlining permitting, and channeling financial incentives toward qualifying projects — but they are not preempting the state and local rules that most directly affect project economics. A carve-out in the December 2025 Artificial Intelligence (AI) Framework Executive Order preserves Arizona’s authority over data center infrastructure, meaning the Arizona Corporation Commission’s (ACC) rate-classification docket, municipal zoning restrictions, water-use ordinances, and pending grid cost-allocation legislation remain the binding constraints on project feasibility. Understanding where federal tailwinds end and state and local headwinds begin is essential for any developer sizing risk or selecting sites in the state.

Five interlocking executive orders are accelerating data center development nationally, but none overrides Arizona’s authority over siting energy, or infrastructure.

Since May 2025, the current administration has issued five executive orders that directly affect data center development. These orders are not isolated actions; they form an interlocking framework in which permitting reform, energy policy, AI governance, and national-security strategy reinforce one another.

Executive Order (E.O.) 14318, signed on July 23, 2025, is the most important federal action for data center siting in Arizona. It creates a category of “Qualifying Projects,” which are data center projects with at least $500 million in capital expenditure, incremental electric load above 100 megawatts, or a national-security nexus, and grants them access to an accelerated federal pathway with three key components.

First, the Secretary of Commerce is directed to provide financial support such as loans, grants, tax incentives, and energy offtake agreements. Second, agencies must identify the National Environmental Policy Act categorical exclusions to streamline environmental review, potentially cutting project timelines by 12 to 18 months. Third, and most consequentially for Arizona, the order opens federal lands managed by Interior, Energy, and Defense to data center development.

Arizona is roughly 39 percent federally owned, including Bureau of Land Management (BLM) parcels, military installations such as Fort Huachuca, and Department of Energy (DOE) affiliated sites. Before E.O. 14318, these lands were essentially unavailable for commercial data center development. Now they are on the table, significantly expanding the universe of available sites.

Notably, E.O. 14318 revoked the Biden-era E.O. 14141 (January 2025), which had conditioned federal-land leases on clean-energy and prevailing-wage requirements. The current framework is deliberately more permissive on energy source and labor standards.

The May 2025 executive order on advanced nuclear reactor technologies designates AI data centers at DOE sites as “critical defense facilities,” unlocking defense-priority procurement and funding pathways. It directs the Secretary of Energy to authorize privately funded advanced nuclear reactors, including small modular reactors, on DOE-controlled sites, targeting reactor operation within 30 months.

Arizona is uniquely positioned here. The state hosts the nation’s largest nuclear plant, and its three major utilities have jointly applied for a DOE grant to pursue an early small modular reactor (SMR) site permit, with siting studies planned for 2026. Senator Ruben Gallego co-introduced the bipartisan Accelerating Reliable Capacity (ARC) Act in February 2026, establishing a federal risk-reduction program for first-of-a-kind commercial reactors.

This federal enthusiasm, however, exists in tension with state-level caution. Governor Katie Hobbs vetoed H.B. 2774 in April 2025, which would have exempted data center-co-located SMRs from environmental compatibility review and local zoning in counties under 500,000 residents. Her veto message called the bill premature, noting it “puts the cart before the horse by providing broad exemptions for a technology that has yet to be commercially operationalized anywhere in this nation.” The federal government is signaling “go”; the state is signaling “not so fast, my friend.”

The December 11, 2025, executive order titled “Ensuring a National Policy Framework for Artificial Intelligence” is the most consequential federal action for allocating regulatory authority over data center development between the federal government and Arizona.

The order pulls in two directions. It directs the White House to prepare a legislative recommendation for a “uniform federal AI policy framework” preempting conflicting state AI laws, backs that directive with a DOJ AI Litigation Task Force, and conditions Broadband Equity, Access, and Deployment (BEAD) program funding eligibility on whether states maintain what the administration calls “onerous” AI laws.

At the same time, the order carves out data center infrastructure. The legislative recommendation “shall not propose preempting otherwise lawful State AI laws relating to … AI compute and data center infrastructure, other than generally applicable permitting reforms.” This carve-out is the reason Arizona’s zoning rules, rate-classification proceedings, water-use ordinances, and other data center regulations remain legally intact.

Two additional orders round out the federal framework. E.O. 14319 (July 23, 2025) mandates that federally procured large language models adhere to “Unbiased AI Principles.” Office of Management and Budget’s December 2025 implementing guidance (M-26-04) requires compliance terms in LLM contracts — standards that may flow down to Arizona data centers serving federal clients.

The E.O. on promoting the export of the American AI technology stack (July 23, 2025) creates the American AI Exports Program and requires compliance with U.S. export controls and outbound investment regulations. These requirements will affect Arizona-based facilities handling sensitive AI workloads or involving foreign investment.

Arizona’s infrastructure rules are shielded from federal preemption today, but congressional action, constitutional challenges, and Federal Communications Commission (FCC) rulemaking could narrow that protection.

The December 2025 carve-out provides significant near-term protection for Arizona’s regulatory authority, but it is neither absolute nor permanent. Understanding both its scope and its limitations is essential for any practitioner advising on Arizona data center projects.

The carve-out preserves Arizona’s core regulatory tools (i.e., zoning, siting, energy procurement, rate structures, water use, and noise mitigation), all of which fall within the “AI compute and data center infrastructure” category excluded from proposed preemption. For Arizona-focused projects, this means the primary friction points such as local zoning in Phoenix, Chandler, and Mesa; the ACC’s rate-classification docket; H.B. 2756’s grid cost-allocation requirements; and Tucson’s water-use ordinances, are all shielded under the current framework.

The carve-out also shields Arizona from the DOJ AI Litigation Task Force, whose mandate targets state laws on AI model behavior including algorithmic transparency, bias auditing, and disclosure mandates like Colorado’s AI Act but not infrastructure regulation. Likewise, Arizona’s BEAD broadband funding eligibility should not be jeopardized, because data center regulations fall outside the scope of “onerous AI laws” that trigger funding conditions.

Bipartisan political support for preserving state authority over physical infrastructure suggests the carve-out is durable and likely to survive into eventual federal legislation. The implication for developers is clear: do not assume federal preemption will clear the regulatory path. State and local engagement is essential.

Despite the carve-out’s breadth, at least four residual risks warrant attention.

First, the carve-out contains a sub-exception for “generally applicable permitting reforms.” If Congress enacts broad permitting streamlining legislation, which is actively under discussion, it could override specific Arizona requirements that conflict with a federal standard.

Second, the carve-out is a policy directive, not a statute. Congress can enact broader preemption, and a future administration can revoke the order entirely.

Third, private litigants can challenge Arizona’s regulations on constitutional grounds — Dormant Commerce Clause, Equal Protection — regardless of the carve-out. If Phoenix’s zoning restrictions or the ACC’s rate structures were found to burden interstate commerce unduly, the carve-out would not save them.

The executive order on promoting the export of the American AI technology stack (July 23, 2025) creates the American AI Exports Program and requires compliance with U.S. export controls and outbound investment regulations. These requirements will affect Arizona-based facilities handling sensitive AI workloads or involving foreign investment.

State-level decisions on rate classification, grid cost allocation, and SMR policy will directly set the cost structure for new projects.

At the state level, Arizona’s regulatory environment reflects a deliberate balancing act between encouraging data center investment and protecting ratepayers, local communities, and natural resources.

Governor Hobbs has sent two distinct signals. E.O. 2025-13 (September 2025) directed the Arizona State Land Department to streamline energy infrastructure development on state trust lands — facilitating the buildout data centers require. Her veto of H.B. 2774, however, drew a clear line against preempting local authority over unproven nuclear technology. The governor appears to be saying she is not anti-data center; she is anti-preemption of local authority over technologies not yet commercially deployed.

At least six new SMR bills have advanced out of committee in the 2026 session, but any version preempting county zoning authority is widely expected to face another veto. H.B. 2756 would require the public utilities commission to ensure data center grid-connection costs are not shifted to other retail customers.

On the incentive side, Arizona has extended its data center tax breaks to equipment certified before December 31, 2033. This is a meaningful competitive advantage against Texas, Virginia, and Georgia.

The ACC’s data center docket is the single most consequential state-level proceeding for project economics. In April 2025, Chairman Kevin Thompson opened Docket No. E-00000A-25-0069, asking whether data centers should bear the full costs of new generation and grid infrastructure or socialize them across ratepayers. His opening statement that data centers should “shoulder the costs of building new electricity generation and infrastructure that solely benefits a particular business” signals a cost-causation approach.

The ACC has simultaneously endorsed Integrated Resource Plans from local utilities projecting thousands of megawatts of new capacity from solar, wind, battery storage, and natural gas. For anyone developing or financing an Arizona data center project, this docket will directly set power costs, and active participation through intervention or public comment should be considered.

A fragmented municipal zoning landscape demands early site-level due diligence and carries Proposition 207 litigation exposure on both sides.

At the local level, Arizona municipalities have adopted a patchwork of regulatory responses to data center growth, driven by community concerns over land use, power consumption, water availability, and the limited employment density of data center operations.

Phoenix’s December 2024 zoning regulations steer future data centers away from employment centers, reserving prime parcels for higher-employment uses. Chandler’s zoning amendment permits data centers only in specific planning area designations, with mandatory noise studies. Mesa grandfathered existing projects but now requires waivers for new facilities. Tucson has used water-use ordinances as a de facto tool to limit data center construction where water scarcity is acute.

These actions carry legal risks under Arizona’s Proposition 207, the Private Property Rights Protection Act, which requires government compensation when regulations diminish property value. Municipalities that downzone or restrict development face liability, creating exposure on both sides. Developers should conduct local zoning due diligence early, engage city councils before committing to a site, and factor Proposition 207 risk into any jurisdiction that has recently tightened its rules.

Arizona lacks data center foreign-investment restrictions today, but its defense and semiconductor footprint makes state-level action likely.

Arizona has not enacted foreign-investment restrictions specific to data centers, but the national trend is accelerating. Illinois and Indiana have proposed or enacted legislation restricting construction by entities tied to foreign adversaries, and Florida has proposed barring foreign-controlled data centers entirely.

Given Arizona’s defense and semiconductor footprint — and the federal classification of certain AI data centers as “critical defense facilities”— similar legislation could emerge here. Even without it, federal Committee on Foreign Investment in the United States (CFIUS) review and export-control compliance under the AI export executive order will affect any project involving foreign investment, foreign-origin technology, or cross-border data flows.

Federal incentives will not override state and local friction; therefore, proactive engagement at every regulatory level is the critical risk-mitigation strategy.

Federal policy is creating real incentives to build in Arizona, but it is not clearing the regulatory path. The carve-out means project feasibility will be determined by the ACC, the legislature, and municipal zoning boards — not by federal preemption. Developers who assume otherwise will miscalculate timelines, costs, and risk.

Four priorities follow:

The practitioners who engage proactively at all three levels — federal, state, and local — while the framework is still taking shape will likely be best positioned to secure sites, manage risk, and influence the rules governing this market.

*** Any opinions expressed are the author’s and not necessarily those of the firm or his colleagues.