Update on the Executive Order prohibiting import and installation of bulk power system equipment sourced from a foreign adversary: DOE FAQs
Energy AlertThe energy industry is facing considerable uncertainty about the scope and expected implementation of the Executive Order1 issued by the Office of the President on May 1, 2020 barring the importation or use of “bulk-power system equipment” in transactions involving a “foreign adversary” and risks to national security. This unease is understandable: on its face, while the Order could have a material impact on the use of equipment in transmission and generation facilities sourced from foreign suppliers, the exact details won’t be known until the Department of Energy (DOE) makes several key determinations. The DOE has since issued some Frequently Asked Questions2 that shed some light on what the Order means for those developing energy infrastructure projects in the US.
Although no specific country is named in the order – target jurisdictions have yet to be specified – it seems likely that China is one of the intended jurisdictions that may be named at a later date. Project developers and owners, engineering, procurement and construction (EPC) contractors and service companies are now in the difficult position of assessing the risk of sourcing foreign equipment which the Order may potentially bar from being imported or integrated into their projects post-purchase. We expect that compliance with the Order will also be an issue in the context of procuring project financing.
DOE comments on legal effect of Order
The Order limits the acquisition, importation, transfer or installation of bulk power system (BPS) equipment where the transaction involves property in which a foreign citizen or country has an interest. It was issued pursuant to the International Emergency Economic Powers Act, the National Emergencies Act and its general delegation power. Transactions initiated after the date of the Order are prohibited in cases where the Secretary of Energy, in consultation with other agencies,3 has determined that such a transaction (1) involves qualifying equipment as described in the Order which is designed, developed, manufactured or supplied by persons owned, controlled by or subject to the jurisdiction of a foreign adversary and (2) poses an undue risk of sabotage or catastrophic effects of on the security or resiliency of critical infrastructure or otherwise poses an unacceptable risk to national security. The Secretary of Energy is tasked with enacting detailed regulations implementing the Order within 150 days or by September 28, 2020.4
The Order imposes no legal responsibilities on companies at this time, pending the necessary determinations by the DOE. The DOE’s comments in the FAQs are consistent with this, stating that currently “no equipment is prohibited.”5 The DOE further indicates that before the use of any specific equipment or vendor is barred, the DOE would have to determine that there is “a nexus between a foreign adversary and an undue risk to the BPS, critical infrastructure, the economy, the security and safety of Americans, or national security.”
National security threats by foreign adversaries
So who will qualify as a “foreign adversary” for purposes of the Order? The prohibitions in the Order apply to equipment whether it is designed, developed, manufactured or supplied by a person which is owned by, controlled by or subject to the jurisdiction of such a foreign adversary. Thus, both government entities and entities subject to the jurisdiction of such governments are impacted, including private companies from designated jurisdictions or private companies simply operating in a jurisdiction deemed to be a foreign adversary.
The definition of “foreign adversary” also includes a requirement that such person be “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.” The White House cites the risk to the bulk power system which is a target for “malicious acts against the United States and its people,” including cyberattacks. It describes the foreign supply of bulk power systems as “an unusual and extraordinary” threat to national security and declares a national emergency based on such threat as the basis for issuing the order. Although no country is named in the Order, the President’s National Infrastructure Advisory Council issued a report in December, 2019 in which it identified each of China, Russia and Iran as posing a threat to critical US infrastructure, including to the US energy infrastructure.6 The 2019 Worldwide Threat Assessment cites similar concerns.7 A number of key suppliers of components and equipment for both transmission and generation systems are based in China. It remains to be seen if and to what extent “foreign adversary” nations will align with other countries currently subject to US sanctions or export controls.
The Order is also likely a continuation of more aggressive positions taken by the US in trade relations with China notwithstanding the phase 1 trade deal completed in January 2020. Other recent examples of such posture include tightening export control restrictions on certain items to Huawei8 and military end users9 in China. This Order is additionally promulgated on top of the already existing Section 301 import tariffs on several goods of Chinese origin, which may range up to 25 percent of the Customs value.10 The energy industry has already felt the impact of the ongoing trade issues based on the tariffs imposed on the import of lithium ion batteries used for energy storage which are manufactured in China.11 On May 15, 2019, citing similar national security concerns, the White House also issued an Executive Order placing limits on the acquisition, importation, transfer, installation, dealing in or use of information and communication technologies and services in which a foreign adversary has an interest.12 Regulations have been proposed under the 2019 Order by the Department of Commerce, but no foreign adversary has yet been identified.
DOE notes in the FAQs regarding the Order that certain vendors could be pre-qualified, which would allow energy companies to proceed with transactions with confidence. It also notes that even for prohibited transactions, it may be possible to proceed if mitigation measures such as testing relevant components, allowing inspections or other measures to address vulnerabilities in the bulk power system are taken.13 These matters are to be addressed in the regulations expected in September of 2020.
Equipment to which the Executive Order will apply
The Order is focused on transactions involving the “bulk-power system electric equipment” and its use in “bulk-power systems” throughout the United States. A bulk power system is defined as the facilities and control systems associated with interconnected electric transmission networks as well as the energy from generation facilities which is necessary to maintain the reliability of such networks. Local distribution via a transmission line of less than 69 kV is expressly excluded. The concept of bulk power system electric equipment is defined broadly as “items used in” substations, control rooms and 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.14
A range of equipment is described, including many that could otherwise be imported under Harmonized Tariff Schedule of the United States (HTSUS) Chapters 84 (ie, machinery and mechanical appliances) or 85 (ie, electrical machinery, equipment and parts thereof). The list above captures key components used in both transmission systems and generation facilities. The definitions are not limited to transmission facilities as there are express references to both the electricity to be transmitted across such systems and to power generation stations generally in defining the relevant equipment. When asked what type of generation, if any, is covered by the Order in the FAQs, the DOE noted the Order defines relevant equipment to include “power generating facilities owned or operated by public- and private-sector entities.” However, local distribution systems below 69 kV are not subject to the Order, which presumably also excludes onsite and distributed generation projects interconnected to such local systems. Also, the Order does not distinguish among different types of generation, so both renewable and non-renewable projects could be impacted.
The Order contemplates that the Secretary can establish certain categories of equipment and vendors which are pre-approved. The DOE notes in the FAQs that it will clarify the process of pre-qualifying vendors in the regulations.
Expected process for review of transactions
The Order requires the Secretary of Energy to establish regulations implementing the Order within 150 days or by September 28, 2020. We would expect the DOE to seek comments from industry and interested parties in the next couple of months to give it time to review and implement by this deadline. The Secretary is authorized to direct the “timing and manner of the cessation of pending and future transactions prohibited” by the Order.15 DOE is further tasked with developing methods to “identify, isolate, monitor, or replace such items” as needed to protect national security.16 The Order contemplates that, through the regulations, the DOE will:
- identify particular equipment or countries with respect to which transactions involving bulk-power system electric equipment warrant particular scrutiny under the provisions of this order
- establish procedures to license transactions otherwise prohibited pursuant to this order and
- identify a mechanism and relevant factors for the negotiation of agreements to mitigate concerns raised.17
Based on the terms of the Order and the DOE’s comments, we would expect the DOE to establish criteria for pre-approved transactions or vendors which do not require review. We would also expect the DOE to further clarify the type of equipment which is included or excluded from the Order which may vary based on the intended use of the equipment. The DOE will likely establish criteria for transactions which require “particular scrutiny” as described in the Order based on the perceived risk to energy infrastructure within a bulk power system. Such transactions may be subject to a process for review by the DOE pursuant to which the DOE can evaluate such perceived risks and potentially permit the transaction to proceed subject to various mitigation measures.
The Order provides that it applies to transactions “initiated” after May 1. However, the Order also states that it applies notwithstanding any contractual obligation or import license or permit granted prior to the issuance of the Order. Further, in its summary, the DOE described the Order as calling for “identifying any now-prohibited BPS equipment already in use, allowing the government to develop strategies and to work with asset owners to identify, isolate, monitor, and replace this equipment as appropriate.”18
Thus, the expected impact on existing transactions and systems, even as to installed equipment, remains unclear at this time. The regulations could require the review of existing equipment already in use and limit or complicate a party’s ability to purchase maintenance services or spare parts for equipment already installed and operating.
Strategies to address risks arising from Executive Order
The DOE has indicated that project owners need not take any “immediate steps” in response to the Order and indeed that such action would be “premature” and potentially “unnecessary.”19 Although, as noted above, no equipment is currently prohibited, we suggest that project owners and developers, EPC contractors and service companies who supply, use, or expect to use equipment which arguably falls within the definition of “bulk-power systems electric equipment” set forth above consider the potential impact of the Order and the expected regulations. This primarily extends to parties which own, are developing, or provide equipment or services to transmission systems or generation projects based on the equipment designated in the Order.
Impacted parties should consider completing a detailed review of equipment sourcing and request information from equipment suppliers and EPC contractors as to the vendor, country of origin and location of manufacture of each component or sub-component to be included. For new projects and contracts, parties should consider alternative suppliers, plan to collect detailed information as to sourcing and consider express terms as to the selection of components, potential change orders and the treatment of the Order and related regulations as a potential force majeure or change in law. Contractors and service providers should be asked to stand-behind sourcing information via appropriate representations and warranties. An express agreement as to how the sourcing issue will be treated will allow parties more certainty as to the potential cost or delay resulting from the Order.
It will also be critical for impacted parties to do a thorough analysis of their existing contractual obligations, remedies and potential penalties for noncompliance. Both buyers and sellers of equipment can potentially invoke force majeure if the importation or use of specific equipment is prohibited by federal law. Force majeure provisions should be analyzed given that parties may be entitled to relief for noncompliance with contractual obligations as the result of a party’s inability to source a specific component or piece of equipment due to the need to comply with applicable law. Project owners and lenders should proactively assess interrelated contractual obligations for all project documentation to ensure the proper “flow through” of force majeure protections, both in terms of coverage and relief periods. Any mismatch of force majeure coverage may likely place a project in jeopardy given that many counterparty agreements will contain limitations of liability or maximum liability caps. Change in law provisions should also be assessed to ensure that a changing regulatory framework has been accounted for and provides contractual adjustments which will need to be invoked.
In the event project developers and lenders identify gaps in the project documentation, it will be important to proactively design work-around contingency plans to address the need to finalize construction of projects in development or maintain the efficient and safe operation of projects in service. Given that contractors and service providers will likely avail themselves of force majeure provisions contained in their respective project documentation, it will be important for project owners to assess the availability and pricing of substitute components and equipment which may be impacted by the Order.
Having an immediate response to a force majeure protection claim made by a contractor or service provider that a covered item is no longer available to be imported or integrated into a facility in order to comply with the law will, depending on the actual wording of the provision in question, provide an owner a means of shortening the force majeure coverage period. Most force majeure provisions provide for the claiming party to continue to utilize reasonable efforts to overcome the force majeure event and continue fulfilling its contractual obligations. In the event a project owner is able to demonstrate that a substitute part is available from an alternate source, the party claiming an inability to perform is then put on notice of a remedy to the claimed effect and the burden of performance is shifted back to the claiming party. This will greatly shorten any forced outage of a facility due to the inability to source parts covered by the Order. However, In many cases, contractors and suppliers may be entitled to some type of price and scheduling relief if required to source components from new sources. According to the DOE, it also may be possible to undertake certain mitigation efforts, such as testing or inspections, to qualify equipment that would otherwise be prohibited.
In addition, an active compliance program overseeing vendors and sources of equipment and parts purchased or to be purchased will also be important for project owners to maintain in order to avoid unintended violations of the Order. Offtakers and lenders are already raising questions regarding compliance and seeking additional assurances such as specific representations and warranties.
Parties can expect additional certainty once the DOE establishes the regulations needed to fully define the equipment and actions which will be prohibited pursuant to the Order. Until then, the industry will have to do its best to consider ways to avoid or mitigate the potential impact of the Order on the development of energy infrastructure projects in the US.
Learn more about the implications of this Executive Order by contacting any of the authors.
[1] Executive Order On Securing the United States Bulk-Power Systems (May 1, 2020). See https://www.whitehouse.gov/presidential-actions/executive-order-securing-united-states-bulk-power-system/.
[2] Frequently Asked Questions – Executive Order on Securing the Bulk Power System (May 2020). See https://www.energy.gov/sites/prod/files/2020/05/f74/DOE%20BPS%20EO%20FAQ.pdf.
[3] The Secretary of Energy is to consult 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.”
[4] Department of Energy, Office of Electricity, Securing the United States Bulk-Power System Executive Order https://www.energy.gov/oe/bulkpowersystemexecutiveorder.
[5] Frequently Asked Questions – Executive Order on Securing the Bulk Power System (May 2020) in Answers to Questions 5 and 6. See https://www.energy.gov/sites/prod/files/2020/05/f74/DOE%20BPS%20EO%20FAQ.pdf.
[6] Transforming the U.S. Cyber Threat Partnership (December 2019) published by the President’s National Infrastructure Advisory Council at page 5. See https://www.cisa.gov/sites/default/files/publications/NIAC-Transforming-US-Cyber-Threat-PartnershipReport-FINAL-508.pdf. The Council cited “the cyber-attack on a nuclear plant in India in September 2019, a March 2019 denial-of-service attack on wind and solar generating facilities in the United States, the breach of a US nuclear power plant’s network in 2017, the 2017 NotPetya attack that affected systems in multiple sectors throughout the world, and the 2015 and 2016 cyber attacks on Ukraine’s electric grid.”
[7] Office of the Director of National Intelligence, Statement for the Record: Worldwide Threat Assessment of the US Intelligence Community (January 29, 2019), https://www.dni.gov/files/ODNI/documents/2019-ATA-SFR---SSCI.pdf.
[8] For more information, see DLA Piper’s client alert at https://www.dlapiper.com/en/us/insights/publications/2020/05/commerce-department-targets-huawei-with-additional-export-control-restrictions/.
[9] For more information, see DLA Piper’s client alert at https://www.dlapiper.com/en/us/insights/publications/2020/05/bis-announces-three-new-rules-that-place-significant-restrictions-on-exports-to-china/.
[10] For more information, see DLA Piper’s latest client alert at https://www.dlapiper.com/en/us/insights/publications/2020/05/us-takes-action-to-abate-tariffs-and-duties-in-wake-of-covid-19/
[11] A 15 percent tariff was imposed in 2019. This was reduced to 7.5 percent in January 2020 as part of Phase 1 of the trade deal between the United States and China. See 85 Fed. Reg. 3741 (Jan. 22, 2020).
[12] Executive Order on Securing the Information and Communication Technology and Services Supply Chain (May 15, 2019). See https://www.whitehouse.gov/presidential-actions/executive-order-securing-information-communications-technology-services-supply-chain/.
[13] Frequently Asked Questions – Executive Order on Securing the Bulk Power System (May 2020) in Answers to Questions 5 and 6. See https://www.energy.gov/sites/prod/files/2020/05/f74/DOE%20BPS%20EO%20FAQ.pdf.
[14] Section 4(b) of Executive Order On Securing the United States Bulk-Power Systems (May 1, 2020). See https://www.whitehouse.gov/presidential-actions/executive-order-securing-united-states-bulk-power-system/. The Order goes on to state that “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.”
[15] Id. at Section 2.
[16] Section 2(d)(ii) of Executive Order On Securing the United States Bulk-Power Systems (May 1, 2020). See https://www.whitehouse.gov/presidential-actions/executive-order-securing-united-states-bulk-power-system/. The Order goes on to state that “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.”
[17] Id. at Section 2(b).
[18] See DOE summary of the Order posted on its website at https://www.energy.gov/oe/bulkpowersystemexecutiveorder.
[19] Frequently Asked Questions – Executive Order on Securing the Bulk Power System (May 2020) in Answer to Question 5. See https://www.energy.gov/sites/prod/files/2020/05/f74/DOE%20BPS%20EO%20FAQ.pdf.
