Client Alerts

Executive Order Restricts Acquisition of Bulk Power System Equipment from Foreign Adversaries

By William DeGrandis & Nicholas J. Guidi

On May 1, 2020, President Donald J. Trump issued an Executive Order on Securing the United States Bulk-Power System (“Executive Order”).

The Executive Order directs the Secretary of Energy to restrict the acquisition and use of electric equipment designed, developed, manufactured, or supplied by foreign adversaries and any entities controlled by or subject to the jurisdiction of such foreign adversaries in connection with the Bulk-Power System (“BPS”). Recognizing that the BPS may be a target of malicious actors and that any successful attack could significantly impair the country’s economy, safety, and defense, the Executive Order seeks to curtail the ability of such actors to “create and exploit vulnerabilities in bulk-power system electric equipment” to potentially catastrophic effect. Given this broadly protective goal, the Executive Order has wide-ranging implications for the electric power industry, including electric utilities, generator and transmission project developers and owners, as well as vendors and others doing business with these industry participants. Many details will need to be worked out, but this will be an important initiative for industry participants to monitor and likely become actively involved with, as the processes described below are established and the tenets of the Executive Order are implemented.

I. Executive Order

The Executive Order declares a national emergency with respect to the country’s BPS, in light of the threat presented by the unrestricted foreign supply of BPS equipment. To address this concern, the Executive Order prohibits: “any acquisition, importation, transfer or installation of any bulk-power system electric equipment,” where the transaction “involves any property in which any foreign country or a national thereof has any interest (including through an interest in a contract for the provision of the equipment);” was initiated after May 1, 2020; and the Secretary of Energy (“Secretary”), in coordination with other agency heads, has determined that:

1. “the transaction involves bulk-power system electric equipment designed, developed, manufactured, or supplied, by persons owned by, controlled by, or subject to the jurisdiction or direction of a foreign adversary;” and

2. the transaction:

3. “poses an undue risk of sabotage to or subversion of the design, integrity, manufacturing, production, distribution, installation, operation, or maintenance of the bulk-power system in the United States;”

4. “poses an undue risk of catastrophic effects on the security or resiliency of United States critical infrastructure or the economy of the United States;” or

5. “otherwise poses an unacceptable risk to the national security of the United States or the security and safety of United States persons.”

This prohibition applies “notwithstanding any contract entered into or any license or permit granted prior to” the Executive Order’s issuance date.

For purposes of the Executive Order, the definition of the BPS largely reflects the definition in section 215 of the Federal Power Act: “(i) facilities and control systems necessary for operating an interconnected electric energy transmission network (or any portion thereof); and (ii) electric energy from generation facilities needed to maintain transmission reliability.”

The Executive Order specifically includes transmission lines of 69 kV or more and excludes local distribution facilities.

More significantly, the Executive Order provides some specifics as to its desired coverage, by including a lengthy definition of “bulk-power system electric equipment” to include “items used in bulk-power system substations, control rooms, or power generating stations, including reactors, capacitors, substation transformers, current coupling capacitors, large generators, backup generators, substation voltage regulators, shunt capacitor equipment, automatic circuit reclosers, instrument transformers, coupling capacity voltage transformers, protective relaying, metering equipment, high voltage circuit breakers, generation turbines, industrial control systems, distributed control systems, and safety instrumented systems.”

Items not included in the foregoing list and whose use extends beyond the BPS are outside the scope of the Executive Order.

A key provision of the Executive Order includes its applicability to a “foreign adversary,” which is defined as “any foreign government or foreign non-government person engaged in a long‑term pattern or serious instances of conduct significantly adverse to the national security of the United States or its allies or the security and safety of United States persons.”

The Executive Order authorizes the Secretary, in consultation with other agency heads, to design mitigation measures that may serve as preconditions to a transaction’s approval and to establish and publish pre-qualifying criteria and a list of acceptable equipment or vendors. The Executive Order also authorizes the Secretary to adopt rules and regulations that, inter alia, identify particular countries or persons as foreign adversaries, identify particular equipment or countries that warrant particular scrutiny, establish procedures to license otherwise prohibited transactions, and establish mitigating mechanisms and factors for use in negotiations. Such rules and regulations must be issued within 150 days, i.e., by September 28, 2020.

The Executive Order also directs the Secretary to, as soon as practicable, identify BPS electric equipment that would implicate the concerns articulated in the Executive Order and to “develop recommendations on ways to identify, isolate, monitor, or replace such items as soon as practicable, taking into consideration overall risk to the bulk-power system.”

Finally, the Executive Order creates a Task Force on Federal Energy Infrastructure Procurement Policies Related to National Security (“Task Force”), comprised of certain agency heads. The Task Force will, among other things, develop a recommended set of energy infrastructure procurement policies for agencies to effectuate the Executive Order’s mandates. Additionally, the Task Force will engage with distribution system industry groups to consider the extent to which attacks on the BPS can originate through the distribution system.

II. Implications

As written, the Executive Order could directly affect the supply chain for electrical equipment used in the country’s BPS. The Executive Order employs broad terms to indicate the equipment and countries subject to its prohibitions, but declines to define either category with specificity at this time. The rules and regulations issued by the Department of Energy will help to fill in certain gaps, but these will not be issued until September 28, 2020. Additionally, while the Secretary will promulgate guidance regarding bulk-power system electric equipment that satisfies the Executive Order’s prohibition criteria as soon as practicable, that will surely take some time as well. In the meantime, the Executive Order leaves many questions answered, especially in light of its immediate effectiveness.

Given the expansive definitions of “bulk-power system” and “bulk-power system electric equipment,” the Executive Order can have a significant scope. The extent of that reach, however, remains unclear. Specifically, the Executive Order applies to “facilities and control systems necessary for operating” the transmission system, which includes transmission lines of 69 kV and above.

“Bulk-power system” also broadly includes “generation facilities needed to maintain transmission reliability,” but fails to specify which types of generation facilities are necessary for reliability purposes.

[8]

Baseload facilities would intuitively fit that description, but it is unclear whether this definition applies to intermittent resources as well. The definition of “bulk-power system electric equipment” includes “items used in . . . power generating stations” and lists, among other things, “large generators,” “backup generators,” and “generation turbines” as affected equipment.

[9]

Some combination of these terms could arguably encompass wind, solar, and storage resources. Beyond local distribution facilities, which the Executive Order expressly excludes, questions as to the types of equipment covered by the Executive Order will not likely be clarified until the Department of Energy identifies such facilities as required by the Executive Order.

Until the Department of Energy issues implementing guidance, the “foreign adversaries” contemplated by the Executive Order are not defined. The Executive Order broadly defines “foreign adversary” as “any foreign government or foreign non-government person engaged in a long‑term pattern or serious instances of conduct significantly adverse to the national security of the United States or its allies or the security and safety of United States persons.”

The Executive Order does not point to any list of “foreign adversaries” currently in existence or incorporate by reference any lists maintained by federal agencies. While the list of foreign adversaries is not specified at this point, the Secretary of Energy could utilize, or build upon, a list of eligible countries utilized by other federal agencies. For instance, the Office of the United States Trade Representative maintains a list of “Eligible Countries” for purposes of the USDA Rural Development Electric Program.

[11]

Companies in that program have been able to utilize equipment/supplies only from countries on the list, and may not do so from non-listed countries. Companies who have been subject to those requirements may consider suggesting to the Secretary of Energy as part of the Department of Energy’s rulemaking process that a similar list should be used for determining the list of “foreign adversaries.”

Many commenters assume that the list of “foreign adversaries” will ultimately include China, given the Trump administration’s recent statements and actions concerning China.

For this reason, until the Secretary issues further guidance, project developers should be wary of entering into any transaction involving Chinese nationals or equipment, especially given the Executive Order’s current effect. To the extent wind and solar resources fall within the Executive Order’s ambit, developers of these resources will be significantly affected if the Secretary’s foreign adversary list includes China, which produces a large percentage of the wind and solar generation equipment used in the United States.

Absent additional clarification from the Secretary, the Executive Order’s effective date also remains unclear. First, the Executive Order prohibits “any acquisition, importation, transfer or installation” that meets certain criteria and is “initiated after the date of this order (May 1, 2020).”

However, the Executive Order later provides that its prohibitions apply “notwithstanding any contract entered into or any license or permit granted prior to the date of this order.”

[14]

Given these somewhat contradictory terms, industry participants would be wise to assume that any transaction involving affected equipment will implicate the Executive Order unless the equipment has actually changed hands or completed installation before May 1, 2020, at least until the Secretary issues further guidance. Additionally, the Executive Order instructs the Secretary to “develop recommendations on ways to identify, isolate, monitor, or replace” affected equipment, which suggests application to equipment already in use.

[15]

The Department of Energy’s response confirms this application, noting that the Executive Order authorizes the Secretary to “[i]dentify any now-prohibited equipment already in use, allowing the government to develop strategies and work with asset owners to identify, isolate, monitor, and replace this equipment as appropriate.”

[16]

This serves to further expand the Executive Order’s effect beyond new equipment and transactions, but the Department of Energy appears to anticipate a collaborative process with existing equipment owners, as opposed to the categorical prohibition applied to future transactions.

With respect to its practical application, the Executive Order as written provides significant leeway. In order to prohibit a transaction, the Secretary must find that that it involves (1) “undue risk of sabotage to or subversion” of the bulk-power system, (2) “undue risk of catastrophic effects on the security or resiliency” of the United States’ critical infrastructure or economy, or (3) “unacceptable risk to the national security of the United States or the security and safety of United States persons.”

The boundaries of these criteria are largely undefined and vest significant discretion in the Secretary. Until the Secretary issues specific guidance as to the equipment or nations subject to the Executive Order, the industry is left without a clear signal as to which transactions to avoid. Complicating matters further, enforcement of the Executive Order is not clearly established by its provisions, as it broadly authorizes the Secretary to direct the timing and manner of cessation of pending and future transactions. The Secretary may establish pre-approval criteria and mitigation mechanisms, but the Executive Order does not specify how the Department of Energy will conduct its approval process or whether it will initiate its own investigations into such transactions. Given the Executive Order’s mandate, such procedures will not likely be delineated until the Department of Energy issues its implementing rules and regulations on or before September 28, 2020.

Finally, while the Executive Order does not discuss any consequences of noncompliance with its provisions, it was partly authorized under the International Emergency Economic Power Act (“IEEPA”). Violations of orders under the IEEPA are subject to both civil penalties of $250,000 or more, depending on the transaction’s value, and criminal penalties of up to $1 million and 20 years in prison.

III. Conclusion

The broad and undefined reach of the Executive Order leaves significant uncertainty for industry participants. However, affected industry participants should consider providing comments to the Secretary of Energy during the Department of Energy’s consideration of its rules and regulations, either individually or through their trade associations. In the meantime, participants would be well served to approach transactions involving foreign nationals and equipment carefully, especially if such transactions involve nations with whom the United States has adverse relationships. No matter how the Executive Order is ultimately implemented, it promises to have wide-ranging and costly consequences to the supply chain of electric equipment in the United States.

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 Executive Order on Securing the United States Bulk-Power System (May 1, 2020),

https://www.whitehouse.gov/presidential-actions/executive-order-securing-united-states-bulk-power-system/

 (Executive Order).

   Id.

  Id.

  Id.

  Id.

Id.

Id.

Id.

Id.

Id.

See “Eligible Countries,” U.S. Department of Agriculture (Mar. 18, 2020),

https://www.rd.usda.gov/files/UEP_Engineering_EligibleCountries.pdf

.

See, e.g., Joel A. Hugenberger, et al., “President Trump’s Executive Order on U.S. Bulk Power System Electric Equipment: Questions and Analysis,” National Law Review (May 4, 2020),

https://www.natlawreview.com/article/president-trump-s-executive-order-us-bulk-power-system-electric-equipment-questions

.

Executive Order.

  Id.

  Id.

President Trump Signs Executive Order Securing the United State Bulk-Power System, Department of Energy (May 1, 2020),

https://www.energy.gov/articles/president-trump-signs-executive-order-securing-united-states-bulk-power-system

.

  Executive Order.

 50 U.S.C. § 1705.