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What’s Next for the Executive Order on Bulk-Power System Equipment?

May 21, 2020

This LawFlash provides an overview of the recent executive order limiting the US use of bulk-power system equipment produced by “foreign adversaries,” initial guidance on key questions, and issues that will remain unresolved until regulations are implemented.

President Donald Trump issued Executive Order 13920, “Securing the United States Bulk-Power System” (the Order) on May 1. As the US Department of Energy explained in summarizing the Order, “America’s bulk-power system (BPS) is the backbone of the U.S. electric grid, supporting the critical infrastructure that assures our national defense, essential emergency services, economic vitality, and modern way of life. Adversaries continue to develop ways to compromise the BPS, including undermining the supply chain of required critical components.” The Order is a first step toward addressing the risks that adversaries could exploit within the complex, and often worldwide, electric supply chain.

Although not completely unexpected—a similar order on telecommunications equipment was issued almost exactly a year earlier (Executive Order 13873)—the new Order immediately called into question how various electric utilities can plan construction and maintenance work, given the nature of the bulk power equipment’s long supply chains, much of which is currently reliant on foreign equipment and components.

In the intervening three weeks, the US Department of Energy (DOE), the agency responsible for implementing the Order and developing the implementing regulations, has issued some initial guidance on what the US government has in mind. Although final decisions will not be revealed until the regulations are published months from now, the Order and subsequent DOE statements provide a basis for tentative answers to certain key questions electric utilities and utility suppliers likely have. This LawFlash provides an overview of the Order, initial impressions on key questions presented by the Order, and a list of major issues that will likely remain unresolved until the rulemaking.

Overview of the Executive Order

As described in further detail below, the Order imposes certain restrictions on transactions involving “bulk-power system equipment” provided by entities controlled by foreign adversaries where the transaction would create an undue risk and directs DOE to develop implementing regulations over the coming months. Although DOE has not yet issued implementing regulations, the prohibitions provided in the Order are currently effective. As a result, utilities and equipment suppliers should be aware of the implications for their existing and planned operations.

Relying on the broad authority granted by the International Emergency Economic Powers Act (50 USC §§1701–1707) and the National Emergencies Act (50 USC §§ 1601–1651), the Order documents the president’s finding that foreign adversaries are using their supply of equipment for the bulk-power system to create and exploit vulnerabilities and that such threats are a risk to national security.

The Order prohibits acquiring, importing, transferring, or installing bulk-power system equipment through any transaction “initiated” after May 1, 2020 “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)” and where DOE, in coordination with other federal departments and agencies, determines 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
  • the transaction:
  • 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.

The Order directs DOE to issue implementing rules and regulations within 150 days (i.e., by September 28, 2020) and notes that such rules and regulations may:

  • determine that particular countries or persons are foreign adversaries;
  • identify persons owned by, controlled by, or subject to the jurisdiction or direction of foreign adversaries;
  • identify particular equipment or countries with respect to which transactions involving bulk-power system electric equipment warrant particular scrutiny;
  • establish procedures to license otherwise prohibited transactions; and
  • identify a mechanism and relevant factors for the negotiation of agreements to mitigate concerns raised in connection with the Order.

Because the Order is issued pursuant to the International Emergency Economic Powers Act, violations are subject to civil penalties of more than $300,000 (which would be adjusted for inflation) or twice the amount of the transaction that created the violation, whichever is greater.

In addition, the Order directs DOE, in coordination with other federal departments and agencies, to identify existing bulk-power system equipment that is in use and would have met the criteria for prohibited transactions had the transaction been initiated after May 1, 2020 and to develop “recommendations” for how utilities can identify and then isolate, monitor, or replace such items “as soon as practicable.”

Finally, the Order establishes a “Task Force on Federal Energy Infrastructure Procurement Policies Related to National Security.” The Task Force – chaired by the Secretary of Energy and comprising the Secretaries of Defense, the Interior, Commerce, Homeland Security, and the Directors of National Intelligence and the Office of Management and Budget, among others –will work to address the national security concerns presented by energy procurements. In so doing, the Task Force will:

  • issue recommendations for incorporating national security concerns into federal energy infrastructure procurement policies and procedures;
  • evaluate criteria for addressing national security issues in energy security and cybersecurity policies;
  • consult with the Electricity Subsector Coordinating Council and the Oil and Natural Gas Subsector Coordinating Council on the Task Force’s recommendations;
  • provide an annual report describing the Task Force’s progress in and recommendations for enhancing national security through energy procurement recommendations and coordination efforts;
  • engage with distribution system groups to address these same procurement risks although distribution systems are outside the scope of the Order.

The Federal Acquisition Regulatory Council will, upon receiving the Task Force recommendations, consider changes to federal government procurement regulations.

Key Questions and Preliminary Answers

What can parties do if they expect a future transaction could involve prohibited equipment?

The Order directs DOE to establish procedures for licensing transactions that would otherwise be prohibited. As part of this, the Order suggests DOE can develop security measures that entities can agree to implement to mitigate the risks of such equipment when seeking a waiver for an otherwise prohibited transaction. However, the Order provides no guidance around the process for requesting a waiver of the purchase prohibition, including the timing and protective measures that could be considered to offset the risks.

Will utilities be required to remove from service equipment already in use prior to the Order?

That appears unlikely. Although the Order addresses the risk of existing bulk-power system equipment that is in use and would have met the criteria for prohibited transactions, it does not mandate or direct the removal of such equipment, but directs DOE to develop “recommendations” for how utilities can identify and then isolate, monitor, or replace such items to address the risks they present. Indeed, DOE’s recent guidance indicates that any immediate actions by utilities would be premature because prohibited equipment has yet to be identified.

What is the scope of the equipment covered?

The definition of “bulk-power system” under the Order includes facilities down to 69 kV, lower than the traditional 100 kV bright line used within the electric utility industry. According to DOE, 69 kV is typically the lowest voltage considered “transmission” within the United States. And not all bulk-power system “equipment” is covered. DOE has explained that the Order identifies specific types of equipment, which are “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.” According to DOE, “items not included in the list and that have broader application of use beyond the bulk-power system are outside the scope of the order.”

Does the Order apply to renewable generation? What about energy storage?

Yes, at least large transmission-connected renewable generation and energy storage projects will be covered. In an interview with Politico, DOE explained that projects connected to the transmission system are “within the purview of this executive order” but not smaller distribution-connected or behind-the-meter resources.

Energy storage is unique in that it is sometimes regarded as both generation and transmission, may be highly automated (such as large batteries), and oftentimes provides ancillary services required for grid reliability, such as frequency regulation and spinning reserve.

What should electric utilities and vendors do in the absence of identified equipment?

Because the final scope of the covered equipment and suppliers remain unclear, affected entities should prepare to adjust operations, purchases, and plans to the extent possible when the more precise prohibitions are announced. This could include:

  • Reviewing any forthcoming purchases of equipment that could be subject to the Order and identifying an alternative source in the event it is needed.
  • Confirming that thorough documentation is available regarding the source of procurements of equipment likely to be subject to the Order. Under the International Emergency Economic Powers Act the federal government has broad authority to demand the production of records necessary to demonstrate compliance with the Order.

How does the Order differ from last year’s telecommunications-focused executive order?

Although EO 13873 “Executive Order on Securing the Information and Communications Technology and Services Supply Chain” (the Telecom Order) and the recent Order on bulk-power system equipment both direct the implementing agencies to develop procedures to authorize otherwise prohibited transactions and allow the implementing agency to exclude certain vendors from the prohibitions in those orders, there are also significant differences that could suggest implementation will differ in material ways.

First, the Order specifically calls for the development and publication of criteria for identifying equipment and vendors that are prequalified and lists of equipment and vendors deemed prequalified. The Department of Commerce’s proposed regulations for the Telecom Order presumes that all decisions will be case-by-case, but acknowledges that it is possible that classes of transactions could be preauthorized.

Second, the Telecom Order does not directly address a need for recommendations on problematic equipment already in service. This reflects the national security policy driving the new Order—a recognition that although certain new transactions will be banned, past transactions have already created a risk that will need to be addressed.

Third, the Bulk-Power System EO establishes a task force that will shape federal procurement changes by developing recommendations on energy infrastructure procurement policies and procedures for agencies “to ensure that national security considerations are fully integrated” and submit such recommendations to the Federal Acquisition Regulatory Council. The Order directs the Council to consider revising the Federal Acquisition Regulations to implement the recommendations.

Open Questions

The Order is but the first step in what is likely to be a lengthy process during which DOE, in coordination with various other federal agencies, will define the parameters of the prohibition on bulk-power system equipment provided by foreign adversaries and the processes governing implementation of the prohibition. At this early stage, the following issues are readily apparent concerns that the rulemaking process will need to resolve:

  • Who are the “foreign adversaries” and what does it mean for a supplier to be controlled by or subject to the jurisdiction of such an adversary?
  • When is a transaction considered “initiated” by the May 1, 2020 effective date?
  • What criteria will be utilized to define undue and unacceptable risks to the bulk-power system in the United States?
  • How will the waiver process work?
  • How can vendors be pre-certified and when can they begin the pre-certification process?
  • Is equipment that only uses certain components from vendors controlled by “foreign adversaries” covered?
  • Will the prohibitions apply to US subsidiaries of foreign companies?
  • Will the prohibitions apply to American-owned businesses using parts supplied from overseas?

The importance of these questions and the need for guidance in the industry as projects are planned in dependence on complex supply chains makes the coming regulations exceptionally important. In the meantime electric utilities, contractors, and vendors to the electric industry can consider the above steps to prepare the flexibility needed to adopt to limitations on existing supply chains while ensuring they have the documentation necessary to demonstrate compliance.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Washington, DC
J. Daniel Skees
Kenneth J. Nunnenkamp
Giovanna M. Cinelli
Roland Backhaus

Los Angeles
Neeraj Arora