Analysis. Late last month we argued that the binding constraint on the AI buildout was turning out to be permission rather than power, and among the things we told readers to watch were whether the wave of state-level proposals converted into actual restrictions, and what Caterpillar said when it reported on August 4.
Both answered within twenty-four hours of each other, and they answered in opposite directions.
On August 3, Governor Greg Abbott directed the Public Utility Commission of Texas and ERCOT to conduct a comprehensive verification and audit of every data center advancing through the grid operator’s interconnection process — an audit that must be completed before any of those projects moves forward. On August 4, Caterpillar reported the first $20 billion quarter in its history, driven by data center demand, and raised its full-year outlook.
Texas is not New York. It is the largest data center buildout market in the country, and the state that has spent a decade advertising itself as the place where you do not wait in line.
What Abbott Actually Ordered
The mechanism matters, because this is not an executive order and not a construction moratorium. It is a directive to the regulators who control access to the grid — which, for a facility that needs hundreds of megawatts, amounts to the same thing.
Abbott’s language leaves little ambiguity about the posture: “Any project that fails to comply with the requirements set forth by the PUCT and ERCOT, and by state law, must be denied connection to the Texas grid. Simply put, Texans must come first.”
Projects in the queue must now disclose the public financial assistance they have received, their on-site generation capability versus their dependence on the grid, their water consumption and cooling technology, their community impact mitigation, and their ownership and controlling interests. That last item is the one least discussed and arguably the most consequential — a queue position held by an entity nobody can identify is exactly the kind of speculative placeholder an audit is designed to flush out.
The scale of what is being audited is genuinely difficult to hold in your head. ERCOT is processing roughly 474 gigawatts of pending large-load interconnection requests, approximately 90% of it data centers — more than five times the system’s record peak demand. ERCOT moved the same day, as the Texas Tribune reported, pausing its Batch Zero review. Per a Holland & Knight client alert, the grid operator announced on August 3 that it would not meet an August 7 deadline tied to the Batch Zero interconnection study process, and would seek a good-cause exception from the PUC on that schedule.
That 474 GW figure should be read with care. Nobody believes 474 gigawatts is getting built: an interconnection queue is a register of requests, not of projects, and it counts speculative filings and duplicate positions alongside real ones. Establishing which fraction is real is, in part, what the audit is for.
Someone Put a Number On It
This is where the Texas story diverges usefully from New York’s. In New York, the cost of the pause was a matter of inference. Here, BloombergNEF has published an estimate — work credited to Derrick Flakoll, Nathalie Limandibhratha and Mark Daly, and reported by POWER on August 5.
Their finding: the audit could delay roughly 49.8 GW of data center load, at a cumulative cost of $8 billion to $15 billion by the first quarter of 2027. The range turns on compute mix — around $8 billion at a 60% AI-compute assumption, up to $15 billion at 100%. The mechanism is a three-month slip, pushing capacity additions from the Q3 2026–Q1 2027 window into Q2 2027.
Three months. That is the shape of this: not cancellation, but a delay expensive enough to be worth billions, applied to a slice of the queue roughly ten times smaller than the queue itself.
Then the Cities Started
The state-level pause would be a story on its own. What makes this stretch different is that Texas municipalities moved within days of each other, independently, on a different lever — land use rather than grid access.
On August 11, Fort Worth’s city council voted unanimously to initiate a moratorium on new data center development, and 10–1 both to adopt application rules complying with Abbott’s directive and to create a Data Center & Infrastructure Committee to draft recommendations. Per the Fort Worth Report, the moratorium would run 90 days — extendable to 180 under state law — and take effect February 16, 2027, exempting projects with zoning applications already submitted or approved, facilities in the city’s extraterritorial jurisdiction, and those on Fort Worth municipal water outside city limits.
The tone was notably not hostile. Council Member Elizabeth Beck, addressing the industry directly: “We are here to work with you on this. We aren’t your enemy in this fight.”
A day later, five Dallas council members — Chad West, Paul Ridley, Zarin Gracey, Gay Donnell Willis and Laura Cadena — filed a memo requesting a hearing within 30 days toward amending the city’s development code, either by modifying its communications exchange facility provisions or by creating a distinct “data center” land use category. West’s framing of the problem: “Currently, data centers are allowed by-right in many non-residential areas with little oversight.”
No Dallas vote has happened. This is a request for a hearing about authorising a hearing — the earliest possible stage. It belongs in this story as a leading indicator, not as an accomplished restriction.
And Yet Caterpillar Just Printed a Record
Here is the part that should discipline anyone getting too comfortable with the constraint thesis, including us.
On August 4, Caterpillar reported second-quarter revenue of $20.5 billion, up 24% year over year and the first time the company has cleared $20 billion in a quarter. Adjusted profit came in at $8.17 per share against roughly $6.20 expected. Power generation retail sales grew 72%. The Power & Energy segment reached $8.2 billion. Backlog hit a record $72 billion. Management raised full-year sales growth guidance to the mid-to-high teens.
The company also restarted a discontinued engine line — 1.5 GW of a 10-MW medium-speed gas reciprocating platform, with shipments beginning in Q4 — specifically to serve this demand. CEO Joseph Creed’s assessment of customer behaviour, as reported: “no one is slowing down at the moment.”
So the analyst call we wrote about on July 30 — Baird’s downgrade of Caterpillar citing the New York moratorium — looks, on the quarter, wrong.
Except that it does not, and the distinction is worth being precise about. Baird explicitly forecast strong orders, backlog and earnings momentum through the second half of 2026 and explicitly declined to call an AI bust. Its thesis was about 2027 and 2028. A record Q2 2026 is entirely consistent with that thesis; it is what Baird said would happen. The quarter neither confirms nor refutes the argument. It simply arrives too early to be evidence either way.
That is an uncomfortable position for a reader who wants a verdict, and it is the honest one.
What This Means for Construction
Backlog and permission have decoupled, and only one of them is on the earnings call. Caterpillar’s $72 billion backlog reflects orders placed under the old regime. The audits, moratoria and land use rewrites now underway affect projects that have not broken ground. Those two facts can coexist for several quarters before they meet, which means the current quarter’s numbers carry very little information about the pipeline’s actual health. For contractors, the useful signal is not the equipment maker’s revenue — it is queue position and zoning status on specific jobs.
The exemption structure is where the real value sits. Fort Worth exempts projects with zoning applications already submitted. Abbott’s audit applies to projects in the queue. In every one of these regimes, being early is worth more than being good. Expect a rush to establish position — filings made to preserve optionality rather than to build — and expect regulators to notice, because flushing out exactly that behaviour is a stated purpose of the audit.
Water and community impact are now underwriting criteria. Both the Texas audit and the Fort Worth committee ask about water consumption, cooling technology and community mitigation. These have moved from ESG-report material to conditions of connection. Firms that can document them rigorously will clear faster, which is a slower-burning version of the same argument we made about reality capture becoming a permitting asset.
The grid is the constraint, and capital already knows it. The same week Texas paused 474 gigawatts of interconnection requests, a grid-inspection AI company closed a $20 million Series A on the argument that utilities must improve reliability while absorbing AI-driven load growth. That is not a coincidence, and we cover it separately.
What to Watch
The PUCT’s response to ERCOT’s good-cause exception request is the near-term signal on how long this takes — a fast resolution keeps BNEF’s three-month estimate intact, while a slow one makes it optimistic.
Watch whether Dallas actually schedules its hearing within the 30 days requested, and whether Fort Worth’s moratorium survives to its February 16, 2027 effective date in its current form. Six months is a long time in local politics, and the exemptions are wide enough that the practical bite may end up well below the headline.
And watch Caterpillar’s Q3, not for the revenue line but for order composition. Backlog built before August tells you about the past. What we need to know is what gets ordered after it.
