United States: COVID-19: Trump’s executive order bans “adversary” supplied equipment on the nation’s transmission system

In brief

On 1 May 2020, President Donald Trump issued an Executive Order on Securing the United States Bulk-Power System (the “Order”) that delegates to the Energy Secretary authority to prohibit use of certain foreign-supplied equipment in the nation’s electric grid to prevent the risk of disruption. The Order prohibits the acquisition, transfer, or installation of bulk-power system electric equipment by a U.S. person where the Energy Secretary determines (1) the equipment was developed, manufactured, or supplied by a “foreign adversary” and (2) the transaction poses an “unacceptable risk” to U.S. national security. By 28 September 2020, the Energy Secretary must issue regulations to implement these broad authorities, including designating “foreign adversaries” and entities controlled by such adversaries, identifying particular equipment or transactions meriting scrutiny, and establishing procedures for licensing otherwise prohibited transactions.


Contents

The President’s order is based on the International Emergency Economic Powers Act of 1977, which grants the President regulatory authority upon the declaration of a national emergency. While prior presidents have used this power sparingly to sustain a temporarily lapsed legislative framework (e.g., export controls) and to impose limited measures such as extending sanctions in specific cases, President Trump has resorted to these emergency powers to authorize broad control over the regulation of imports in the name of national security. The Order closely tracks a 2019 order granting the Commerce Secretary the power to regulate use of information and communications technology and services associated with a foreign adversary. This parallel ICT/S supply chain order has raised broad concerns in industry, and the implementing regulations for that order are expected by be promulgated in the coming months.
 
This alert provides a brief overview of the Order and highlights key questions and implications for developers and manufacturers.

Overview of Order
  • What is covered by the Order? The Order prohibits the acquisition, importation, transfer, or installation of any electric equipment in the nation’s bulk-power system (BPS) that the Department of Energy (DOE) determines is designed, developed, manufactured, or supplied by a “foreign adversary” and poses an unacceptable national security risk.
  • Who is a “foreign adversary”? A “foreign adversary” is 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.
  • How will the Order be implemented? The Order gives DOE broad authority to establish rules and regulations necessary to implement and enforce the Order, including directing the timing and manner of the cessation of pending and future transactions prohibited by the Order. DOE has the authority to stop purchases and installations of prohibited equipment and even to require replacement of banned equipment.
  • When do we need to comply with the Order? The Order applies to any “transaction” initiated after 1 May 2020, and transaction includes installation. In other words, equipment installed in the BPS system from inventory that is later banned may need to be replaced. And, if that was not clear from the definition of transaction, the Order also states that it applies “notwithstanding any contract entered into or any license or permit granted prior to the date of this order,” which seemingly gives the Order a retroactive effect.

Questions and Implications
 
The Order could have far-reaching implications for both the U.S. power industry and for non-U.S. manufacturers who supply components to the U.S. electric grid.

  • What facilities are covered? The term “bulk-power system” includes (1) facilities and control systems necessary for operating an interconnected electric energy transmission network (or any portion thereof) and (2) electric generation facilities needed to maintain transmission reliability. As a result, if an electric generation facility supplies ancillary services to the grid, equipment used in the generation facility would fall within the scope of the Order.
    • "Bulk-power system” includes transmission lines rated at 69 kV or more, but does not include “facilities used in the local distribution of electric energy.” Thus, while renewable energy facilities interconnected on the distribution side of a utility presumably would be outside the scope of the Order, the question remains whether the language is broad enough to include utility-scale solar and wind facilities.
  • What equipment is covered? The definition of BPS electric equipment subject to the Order is broad and includes almost all of the equipment that could affect the operation of a transmission system. Yet, it is unclear whether the term encompasses equipment for solar and wind projects. BPS electric equipment includes “generation turbines,” but the definition does not distinguish between combustion turbines and wind turbines. As noted above, the term “bulk-power system” may be broad enough to include utility-scale solar and wind facilities; if that is the case, then equipment used in those facilities would likewise be covered by the Order.
  • Incorporating equipment from inventory. The Order applies not only to the acquisition or purchase of banned equipment, but also to the installation of such equipment. Thus, developers may be prohibited from installing BPS electric equipment from their own inventory, even though the equipment may have been purchased well before the Order was issued. Accordingly, developers should be cautious about incorporating equipment from inventory that includes control systems designed or manufactured in potential adversary countries.
  • Large equipment could be “contaminated” by smaller components. As written, the Order applies to the components in larger pieces of equipment. Given the global nature of supply chains for electric power equipment, countries not historically viewed as U.S. adversaries—e.g., Japan—likely source their components from other nations, like China, that could be considered “foreign adversaries.” Therefore, a larger piece of equipment otherwise excluded from the prohibition could be contaminated by a smaller component incorporated upstream.
  • Replacing equipment in operating projects. The Order instructs DOE to “develop recommendations on ways to identify, isolate, monitor, or replace” targeted equipment, meaning fully developed and operational projects that have incorporated targeted equipment may be forced to replace such equipment. Because older equipment may lack the security features of newer equipment, older parts are more susceptible to “malicious attacks” by foreign adversaries and therefore will likely be targeted by the Order.
  • Supply chains will come under scrutiny. Given the risk of contamination discussed above, purchasers of new equipment will likely request detailed information from suppliers about the supply chain for the new equipment. As such, non-U.S. manufacturers must ensure they have visibility regarding the origin of their components.  
  • Equipment “designed” by a foreign adversary. The Order applies broadly to any equipment that is designed by a foreign adversary. At its extreme, a component manufactured in a friendly country based on designs from an adversary could contaminate a larger piece of equipment—regardless of whether the relevant parties are aware of the design origins.
  • Prohibition could apply to tax equity transactions. In addition to the acquisition or installation of covered equipment, the Order specifically bans the “transfer” of such equipment. On its face, a tax equity transaction in which an investor receives equity in the underlying project could constitute a “transfer” to which the Order would apply.
  • Pre-qualified vendors. The Order authorizes DOE to establish criteria for recognizing particular vendors and equipment as “pre-qualified” (and thus outside the scope of the prohibition). We expect that much of the detailed work on generating this list will occur gradually over the next five months in conjunction with establishing the broader rules and regulations governing the Order. As such, we do not anticipate receiving clarity on this list in the near term.

The extent of the prohibition will depend largely on the rules established by DOE. To stay ahead of the curve, industry stakeholders should engage with DOE to expedite the process of identifying pre-qualified equipment. In addition, developers should conduct a thorough review of their existing inventory to identify equipment potentially subject to the Order. For new projects set to obtain equipment from problematic non-U.S. manufacturers, developers should explore alternative supply options to the extent changes in suppliers can be made. Finally, industry participants should continue monitoring communications from DOE regarding the scope, operation, and timing of the Order.

 


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