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FERC, CFTC, and State Energy Law Developments

The secretary of the US Department of Energy (DOE) issued an order on December 17 prohibiting electric utilities from installing equipment or components provided by Chinese companies in electric facilities serving designated “Critical Defense Facilities.” Relying on authority from Executive Order 13920 on Securing the United States Bulk-Power System, the order identified threats to the electric supply chain from China and concluded that prohibiting Chinese equipment in these sensitive facilities is necessary to respond to the Chinese government’s plans to undermine the bulk-power system.

The Prohibition

Electric utilities that own or operate “Defense Critical Electric Infrastructure”—the electric utilities actively serving Critical Defense Facilities designated by the DOE—are designated as “Responsible Utilities” and are the only electric utilities subject to this order. 

Beginning on January 16, 2021, Responsible Utilities may not engage in “Prohibited Transactions,” which are transactions meeting the following criteria:

  1. Acquiring, importing, transferring, or installing equipment that falls within one of the categories of “Regulated Equipment” (defined below).
  2. Transactions wherein the Regulated Equipment was “manufactured or supplied by persons owned by, controlled by, or subject to the jurisdiction or direction of” China, including the software, firmware, and digital components that control the operation of Regulated Equipment, even if the larger equipment itself would not be prohibited.
  3. Transactions wherein the Regulated Equipment is used in the Defense Critical Electric Infrastructure serving a Critical Defense Facility at 69,000 volts (kV) or higher anywhere from the point of interconnection with the Critical Defense Facility through the first “upstream” transmission system.

“Regulated Equipment” is defined in an attachment to the order as the following:

  1. Power transformers with a low-side voltage rating of 69 kV or higher and associated control and protection systems like load tap changer, cooling system, and sudden pressure relay.
  2. Generator step-up (GSU) transformers with a high-side voltage rating of 69 kV or higher and associated control and protection systems like load tap changer, cooling system, and sudden pressure relay.
  3. Circuit breakers operating at 69 kV or higher.
  4. Reactive power equipment (reactors and capacitors) of 69 kV or higher.
  5. Associated software and firmware installed in any equipment or used in the operation of items listed in 1 through 4.

Protection for Critical Defense Facility Loads

In addition to the prohibition on certain transactions, the order requires that Responsible Utilities prioritize electric service to the Critical Defense Facility loads in their load shedding programs and system restoration plans. In practice, this will mean that electric utilities will maintain service to Critical Defense Facilities as long as possible in a system emergency, dropping other loads before discontinuing service to Critical Defense Facilities. It also means that Responsible Utilities will need to work to restore service to Critical Defense Facilities early following any system-wide outages.

Compliance

How do you know if you are an affected utility? The DOE will notify Responsible Utilities that will need to put in place compliance controls necessary to meet the January 16, 2021 deadline.

Those utilities will then need to take the following steps:

  1. Certify within a month (i.e., no later than February 15, 2021) that they have designated the relevant Critical Defense Facilities as priority load in their load shedding and restoration plans.
  2. Certify no later than March 17, 2021, and once every three years thereafter that they have (a) not conducted a prohibited transaction, and (b) put in place a system of internal controls to ensure compliance with the prohibition order.

Any instances of noncompliance are subject to financial penalties of $250,000 per violation (adjusted for inflation) or twice the value of the transaction that formed the basis of the violation.

Given the lengthy, worldwide supply chains that serve the electric industry in the United States as well as the component level on which the prohibition will apply, it could be very difficult to identify whether a given piece of equipment is subject to the prohibition. Frequently, a piece of electronic equipment, such as a protection system, within a substation is made up of a series of components from a variety of suppliers around the world. The utility often will have little visibility beyond the immediate vendor supplying the equipment. Stringent controls will be needed to ensure compliance for the affected electric facilities.

Electric utilities that fall within the scope of the order should consider leveraging all available tools to achieve compliance with this new directive, including independent supply chain controls and verifications, contractual provisions, and regulatory protections.