July 12, 2020

Volume X, Number 194

July 10, 2020

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Securing the U.S. Bulk Power System: An Assessment of Executive Order 13920

On May 1, 2020, President Trump issued Executive Order 13920 (“Executive Order”), which prohibited certain transactions involving bulk-power system electric equipment manufactured or supplied by persons owned by, controlled by, or subject to the jurisdiction of a foreign adversary that poses an undue risk of catastrophic effects on the security or resiliency of U.S. critical infrastructure or the national security of the U.S.  The Executive Order poses several potential problems for electric industry participants, particularly renewable generation owners, developers and investors, which will likely cause uncertainty in equipment procurement decisions.  The Executive Order and its potential issues are discussed below.

In the Executive Order, President Trump stated that the bulk-power system is a target of foreign adversaries seeking to commit malicious acts against the U.S., including malicious cyberattacks. President Trump therefore declared a national emergency with respect to the threat of foreign adversaries supplying the U.S. with bulk-power system equipment that such foreign adversaries can use to create or exploit security vulnerabilities. To address these concerns, the Executive Order prohibits:

  • “any acquisition, importation, transfer, or installation of any bulk-power system electric equipment (transaction)” supplied by a foreign country or a national thereof,

  • where the transaction was initiated after the date of the Executive Order, and

  • where the Secretary of Energy (“Secretary”), in coordination with other federal agencies, 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 of a foreign adversary, and

    • the transaction poses an undue risk of, among other things, sabotage to or catastrophic effects on the security or resiliency of U.S. critical infrastructure or the national security of the U.S.[1]

The Executive Order also provides that the Secretary, in consultation with the heads of certain other federal agencies, may establish and publish criteria for recognizing particular equipment and vendors in the bulk-power system electric equipment market as pre-qualified for future transactions, and may apply those criteria to establish and publish a list of pre-qualified equipment and vendors.[2] Additionally, the Executive Order directs the Secretary, in consultation with heads of certain other federal agencies, to publish rules or regulations within 150 days that implement the Executive Order.[3] Such rules and regulations may (i) identify which countries are foreign adversaries, (ii) identify equipment that warrants “particular scrutiny”, (iii) establish procedures to license transactions otherwise prohibited by the Executive Order, and (iv) identify a mechanism and relevant factors for the negotiation of agreements to mitigate security/vulnerability concerns.[4] The Executive Order also requires the Secretary to, among other things, develop recommendations on ways to identify, isolate, monitor or replace problematic equipment as soon as practicable.[5]

Several features of the Executive Order are potentially problematic, particularly for renewable generation owners, developers and investors.  First, the Executive Order is broad in its application, and on its face appears to cover most types of generation equipment. For example, the term “bulk-power system electric equipment” includes, among other things, bulk-power system substations, power generating stations, large generators, certain transformers, generation turbines, large generators and backup generators.  Thus, most solar and wind generation equipment obtained from “foreign adversaries” arguably fall within the scope of the Executive Order, and battery storage equipment potentially falls within the scope of the Executive Order.  Given that the Executive Order contains no guidance on who might be an acceptable vendor, which countries are “foreign adversaries”, or what types of equipment procurement transactions are permissible under the Executive Order, the Executive Order introduces a risk that equipment that has already been installed, procured or is pending procurement is prohibited.

Second, the Executive Order states that it applies to transactions that were initiated after May 1, 2020.[6] However, the Executive Order then provides that the prohibitions set forth therein apply “notwithstanding any contract entered into or any license or permit granted prior to” May 1, 2020, and that the Secretary may promulgate rules that require replacing problematic equipment.[7] Thus, the Executive Order arguably applies retroactively, in that it could subject prior equipment procurement transactions to potential nullification, or installed/operational equipment to replacement.  This aspect of the Executive Order, if left intact, could potentially have material consequences for entities that regularly procure equipment from foreign countries, such as China. For example, entities currently engaged in negotiations with foreign equipment suppliers may choose to cease or delay such negotiations, given the potential risk that the equipment will later be deemed prohibited by the Secretary. Such a decision could cause significant delays (or outright abandonment) of projects currently under development. Additionally, if a party is currently operating a fleet of renewable generation equipment later found to be prohibited by the Secretary, that equipment is potentially subject to replacement.

Thus, given the breadth of the Executive Order, utilities, renewable project developers and investors, among other entities, are now at risk that their current and future procurements from China (or any other “foreign adversary”) of solar and wind generating equipment, transmission equipment and battery storage equipment may be subject to the Executive Order. Further, given the inherent uncertainty regarding the scope and applicability of the Executive Order, future purchasers of bulk-power system  equipment may determine it is necessary to obtain a determination from the Secretary that the procurement transaction/equipment is not prohibited. However, the Executive Order provides no guidance on how equipment purchasers would go about obtaining such a determination from the Secretary.

There is considerable merit to securing the U.S. bulk-power system, but the Executive Order is arguably not the least-restrictive means of doing so, particularly for certain industry segments.  For example, although the Executive Order is not resource-specific, one likely result of the Executive Order is that renewable generation owners, developers and investors across the entire industry (which procure a significant portion of their bulk-power system equipment from foreign countries) will be hampered in making procurement and development decisions in light of the Executive Order.  Such entities may be hesitant to engage in, or continue, negotiating bulk-power equipment transactions until further clarity is available.  Moreover, delays or suspensions of equipment procurement negotiations/transactions can have further downstream effects, causing project delays or even preventing project completion.  Additionally, the Executive Order, when coupled with other federal policies (some of which we have discussed here), may cause a shift in the wholesale generation fuel mix profile, by making natural gas- and coal-fired plants more competitive with renewable generation resources.

Until further guidance and clarity is issued by the President and/or the Secretary, electricity market participants should expect to grapple with uncertainty in their equipment procurement decisions for the near-term.

FOOTNOTES

[1] Exec. Order No. 13920, at § 1(a), 85 Fed. Reg. 26595 (May 1, 2020).

[2] Id. at § 1(d).

[3] Id. at § 2(b).

[4] Id.

[5] Id. at § 2(d)(ii).

[6] Id. at § 1(a).

[7] Id. at §§ 1(c) & 2(d)(iii).

Copyright © 2020, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume X, Number 133

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