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On May 1, 2020, President Trump issued an Executive Order that prohibits the acquisition or installation in the United States of certain electrical equipment originating in countries designated as “foreign adversaries.” The Executive Order is broadly worded and could result in major disruption to the electric power generation and transmission industries. However, the impact of the Order will largely be determined by the implementing regulations to be developed by the Secretary of Energy.
Requirements of the Order
The basis of the Executive Order is the President’s determination that “the unrestricted acquisition or use in the United States of bulk-power system electric equipment designed, developed, manufactured, or supplied by persons owned by, controlled by, or subject to the jurisdiction or direction of foreign adversaries augments the ability of foreign adversaries to create and exploit vulnerabilities in bulk-power system electric equipment, with potentially catastrophic effects.”
The Order defines “bulk-power system electric equipment,” as follows:
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 preceding list and that have broader application of use beyond the bulk-power system are outside the scope of this order.
Effective May 2, 2020, Companies are prohibited from entering into “any acquisition, importation, transfer, or installation of any bulk-power system electric equipment (transaction),” where the Secretary of Energy (Secretary) has determined the transaction (i) “involves . . . 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 (ii)
- “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.”
How broadly the Order is applied will ultimately be a function of how the Secretary chooses to interpret the risks posed by particular equipment. The Order vests in the Secretary the power “to take such actions, including directing the timing and manner of the cessation of pending and future transactions that are prohibited and adopting appropriate rules and regulations.” It directs the Secretary to take several specific actions:
1. Within 150 days, the Secretary must publish rules and regulations that:
- “identify particular countries or persons [that] are foreign adversaries . . for the purposes of this order”;
- “identify particular equipment or countries [that] warrant particular scrutiny;” and
- “identify a mechanism and relevant factors for the negotiation of agreements to mitigate [the] concerns raised [in the Order]” which “may serve as a precondition to the approval by the Secretary of a transaction or of a class of transactions that would otherwise be prohibited pursuant to this order.”The Secretary will consult with the Secretary of Defense, the Secretary of Homeland Security, the Director of National Intelligence, and, as appropriate, the heads of other agencies to establish the rules or regulations.
2. The Secretary “may establish and publish criteria for recognizing particular equipment and particular vendors . . . as pre-qualified for future transactions; and may apply these criteria to establish and publish a list of pre-qualified equipment and vendors.”
3. “As soon as practicable,” the Secretary shall “identify [such] bulk-power system electric equipment” and “ 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.” The Secretary shall do so “in consultation with the Secretary of Defense, the Secretary of the Interior, the Secretary of Homeland Security, the Director of National Intelligence, the Board of Directors of the Tennessee Valley Authority, and the heads of such other agencies as the Secretary considers appropriate.”
Responding to the Order:
Although the Order was only issued on May 1, its prohibitions became effective May 2, meaning that Companies in affected electric and transmission industries need to take immediate steps to determine how it may affect their activities. For example, affected Companies should determine what pending transactions, planned future purchases, or routine purchase orders involve equipment that may be deemed “bulk-power system electric equipment” as defined in the Order. Potential supply chain disruptions could lead to potential breaches of power purchase or other commercial agreements that depend on timely completion of construction or maintenance activities. Companies may also wish to evaluate equipment maintenance practices to determine whether the operational life of existing equipment can be extended to hedge against the possibility that replacement parts or equipment may become difficult to source.
Given that the Order delegates so much authority to the Secretary of Energy, Companies should consider leveraging their relationships with legislators and high-level staffers within the Department of Energy and/or the other agencies that the Secretary is directed to consult with, such as the Department of the Interior, the Homeland Security and the Tennessee Valley Authority, to seek to influence their recommendations and determinations. The best option to minimize any burden resulting from the Order may be to ensure that the equipment you require is determined not to pose the kind of threats that the Order is concerned with, or at least is designated as pre-qualified so that the likelihood of delays in acquiring that equipment is minimized.
If you believe your business may be affected by the Order, we encourage you to reach out to the authors or your contact at Locke Lord to discuss your situation more specifically.