Summary:
Citing concerns with the potential for foreign adversaries to exploit vulnerabilities in the U.S. bulk-power system1 that supports the country’s national defense, as well as vital emergency services, critical infrastructure, economy, and way of life, President Trump declared a national emergency related to this threat to the U.S. bulk-power system and issued an executive order that may have a dramatic effect on the equipment authorized for use to support the U.S. infrastructure.
The Executive Order on Securing the United States Bulk-Power System (EO) issued on May 1, 2020, was issued under the International Emergency Economic Powers Act (50 U.S.C. 1701 et seq.) and other authorities and seeks to balance the Trump administration’s commitment to an “open investment climate” in bulk-power system electrical equipment, with a “critical national security threat.” Accordingly, the EO prohibits, from the date of the order, “any acquisition, importation, transfer, or installation of bulk-power system electric equipment by any person or with respect to any property subject to the jurisdiction of the United States,” where the transaction involves any property in which a foreign person has an interest (including an interest through a contract) and where the Secretary of Energy (Secretary), in consultation with other agencies, has determined that the transaction presents certain national security risks. Specifically, the transaction will be prohibited where the Secretary has determined that it involves “bulk-power system electric equipment designed, developed, manufactured, or supplied by persons owned by, controlled by, or subject to the direction of a foreign adversary,”2 and where the transaction poses an undue or unacceptable risk to the bulk-power system, the critical infrastructure system, the economy, or the national security of the United States.
The EO highlights an increasingly sensitive area of U.S. national security and follows at the heels of the recently implemented authority of the Committee on Foreign Investment in the United States (CFIUS) to review foreign investment in U.S. critical infrastructure related to, among other things, the bulk-power grid. Effective February 13, 2020, the authority of CFIUS to review inbound foreign investment was broadened to include review of certain investments in U.S. businesses that own or operate any system for the generation, transmission, distribution, or storage of electric energy comprising the bulk-power system, or any electric resource connected to the bulk-power system, including facilities and systems that serve the U.S. military. The EO adds an additional layer in the securement of the bulk-power system by addressing threats arising from foreign equipment used or installed at such facilities.
The EO delegates broad powers to the Secretary to effectuate the EO, including the authority to make determinations under the EO, to direct the timing and manner of the cessation of prohibited transactions, and to adopt rules and regulations necessary to implement the EO within 150 days of the order. These regulations may, among other things, determine who is “owned by, controlled by, or subject to the jurisdiction of foreign adversaries” and who are “foreign adversaries” as well as determine what equipment or countries merit heightened scrutiny. The EO requires the heads of all agencies, including the board of directors of the Tennessee Valley Authority, to take all appropriate measures to implement the EO.
The EO’s prohibitions, however, apply broadly, notably “notwithstanding any contract entered into or any license or permit granted prior to the date of this order.” Nonetheless, the EO also contemplates that the Secretary may establish procedures to license transactions otherwise prohibited under the EO and to design or negotiate mitigation measures for particular transactions. The EO also contemplates that the Secretary may establish criteria necessary for vendors to be recognized as prequalified and to publish a list of prequalified vendors and equipment.
At present, the specifics regarding the scope of equipment, persons, and countries that will be subjected to, among other things, the EO’s prohibitions, heightened scrutiny, or prequalification are not known. However, the EO demands that “as soon as practicable,” the Secretary, in consultation with the Secretaries of Defense, Interior and Homeland Security, together with the Director of National Intelligence and the board of directors of the Tennessee Valley Authority, identify the bulk-power system electric equipment that poses national security risks identified under the EO and develop recommendations on ways to “identify, isolate, monitor, or replace these items as soon as practicable in view of the risk to the bulk-power system.”
Finally, the EO establishes a Task Force on Federal Energy Infrastructure Procurement Policies Related to National Security, which will coordinate within the federal government and work to protect the United States from risks to its infrastructure. This Task Force will have broad membership from various agencies of the federal government, and will work to develop a recommended set of energy infrastructure procurement policies, procedures, and other related mechanisms for agencies to follow in a coordinated fashion.
Takeaways:
Much remains to be clarified relative to this EO, such as the nature and extent of the regulations and policies that will be promulgated to effect its mandates. Nevertheless, once implemented, this EO stands to have an obvious, immediate, and wide-ranging impact to companies that presently operate in or supply products and services to support the bulk-power system of the United States – including purchases by the U.S. federal government. In anticipation of the EO’s implementation, any company operating in or supporting the bulk-power industry should immediately scrutinize its entire supply chain to understand how the products it sells, uses, or installs were “designed, developed, manufactured, or supplied.” The EO does not identify the “foreign adversaries,” but it seems likely that the controls will be primarily targeted at China and Russia, including state-owned suppliers. The EO defines “bulk-power system electronic equipment” to include:
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.
Therefore, companies located in any country that source this type of equipment from China or Russia – assuming these countries will be among the “foreign adversaries” – for sale to U.S. persons may be affected by the EO. The supply chain evaluation should focus on the equipment identified above. As part of this evaluation, to the extent the equipment described above is sourced from China or Russia, such companies should consider how they might propose to isolate, monitor, or replace these items if necessary. Companies affected by this EO should make immediate plans to engage with the Secretary and Task Force on these issues and should be in contact with industry groups and trade associations regarding the EO.
Companies should anticipate that violations stemming from implemented regulations may invoke broad penalties and liability, including false claims liability. Accordingly, companies should consider best practices for managing the risks that may result from this EO, such as by requiring certifications and indemnifications from suppliers at all levels in the supply chain to ensure that companies have a reasonable basis to support any statements provided to regulators regarding the EO. The wide range of impacts to the supply chain may also include contractual issues arising under long-term supply contracts for products and services, as the application of the EO to existing contracts is unclear.
While there are more questions than answers at this point, companies monitoring this situation may look to the U.S. government’s approach to telecommunications equipment supplied by certain Chinese suppliers for guidance in how this might play out. The legal authorities and background are different, but the overall context – protecting critical infrastructure from a perceived foreign threat unseen by industry – is the same. Multinationals potentially affected by this EO should also assume that the U.S. government will encourage close allies like the U.K. and other NATO members to take similar measures.
Reed Smith LLP will be monitoring this situation and will provide updated client alerts as new information becomes available. As always, we are available to help our clients navigate any concerns that they may have concerning this executive order.
- The executive order defines “bulk-power system” for the purpose of the executive order, as “(i) facilities and control systems necessary for operating an interconnected electric energy transmission network (or any portion thereof); and (ii) electric energy from generation facilities needed to maintain transmission reliability. For the purpose of this order, this definition includes transmission lines rated at 69,000 volts (69 kV) or more, but does not include facilities used in the local distribution of electric energy.”
- Foreign adversary is defined in the EO as “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.”
Client Alert 2020-289
