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