Trump Orders Ban on Power Equipment Transactions Linked to "Foreign Adversaries"

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On May 1, 2020, President Trump signed an Executive Order on “Securing the United States Bulk-Power System,” reflecting the administration’s larger concern over national security risks from foreign participation in key U.S. industries (such as telecommunications, as our colleagues have analyzed).

The Executive Order casts a vague but potentially broad shadow over equipment transactions in much of the bulk electric generation and transmission industry. The Executive Order could even reach many entities and much infrastructure beyond the usual regulatory reach of the Federal Energy Regulatory Commission (FERC) and the North American Electric Reliability Corporation (NERC).

Details will emerge with agency implementation, but we offer some practical steps that affected entities can take now to protect themselves.

Summary of the Executive Order

The Executive Order declares a national emergency due to foreign adversaries “creating and exploiting vulnerabilities” in the U.S. bulk-power system. On that basis, the Executive Order prohibits transactions initiated after May 1, 2020, regarding bulk-power system electric equipment (BPS equipment) with a nexus to any “foreign adversary” if the transaction would pose an undue risk to U.S. national security, grid security and resiliency, or the economy.

Below we explain the key elements of the prohibition (including the multiple agency actions required before it applies), followed by the Executive Order’s implications for affected entities.

Key Elements

Who Does the Executive Order Affect?

The Executive Order could affect anyone engaged in a “transaction”—meaning acquisition, importation, transfer, or installation—dealing with BPS equipment subject to U.S. jurisdiction.1 Some entities may be surprised to find their transactions affected, for a couple of reasons:

  • The Executive Order covers equipment with voltages as low as 69 kV, sweeping in subtransmission facilities, and probably entire entities, that fall below the usual 100-kV threshold for FERC and NERC regulation.2
  • NERC typically only regulates entities active in operating, maintaining, or planning the grid.3 But the Executive Order focuses on equipment and transactions, not entity functions and related actions,4 conceivably affecting any entity from an importer of equipment or components to an installation contractor to a creditor who acquires equipment through bankruptcy or foreclosure (let alone tries to sell it after).

With respect to equipment types, the prohibition can apply to “items used in” virtually the entire range of facilities and equipment in bulk-power generation and transmission.5

What Nexus to a "Foreign Adversary" Could Lead to a Prohibited Transaction?

First, the Secretary of Energy (Secretary) and cooperating agencies must identify specific foreign adversaries, which may be governments or persons, based on their pattern or serious instances of “conduct significantly adverse” to U.S. interests.6 (Obvious candidates include China and Chinese companies previously identified by the Trump Administration as security concerns, but the Executive Order does not name any entities.)

Then, to prohibit a transaction, the Secretary must further find that it “involves” BPS equipment designed, developed, manufactured, or supplied by persons owned by, controlled by, or subject to the jurisdiction of a foreign adversary.7

What Risks to the United States Could Lead to a Prohibited Transaction?

In addition to a foreign adversary nexus, to prohibit a transaction the Secretary must find that it poses an undue risk of BPS “sabotage,” “subversion,” or “catastrophic effects” on the U.S. economy or critical infrastructure, or impacts on U.S. national or personal security.8 (None of these terms are defined.)

What Exceptions Apply?

The prohibition only applies to transactions “initiated” after May 1, 2020.9 However, the Executive Order does not say what constitutes “initiation.” For example, is equipment importation “initiated” by contract execution? Departure from the country of origin? Arrival in the United States? Clearance of customs? Passage of title?

Perhaps more importantly, the Executive Order states that the prohibition applies notwithstanding any contract, license, or permit finalized before the Executive Order.10 In other words, BPS equipment installed before May 1, 2020, might need to be modified or removed if it otherwise falls within the parameters of the Executive Order.

The Executive Order also provides for design or negotiation of mitigation measures, special pre-conditions to allow transactions;11 pre-qualification of particular equipment and vendors;12 and rules for licensing of otherwise prohibited transactions.13 In short, potential exceptions abound, but lack detail.

Implications

The Executive Order will have broad ramifications for those entities seeking to acquire, import, transfer, or install BPS equipment that is sourced from a foreign supplier. Yet clarity will only come through implementation.

The agencies must publish regulations within 150 days (i.e., September 28, 2020).14 But the Secretary could act at any time with respect to specific transactions. Below are some immediate steps potentially affected entities should consider.

Monitor Agency Pronouncements About Specific Entities and Equipment

Entities considering the acquisition of BPS equipment from a foreign-controlled company (or with any of the other foreign nexus elements described above) should monitor pronouncements from the Secretary under the Executive Order to determine if they are in danger of entering into a prohibited transaction.

Keep an Eye on Rulemaking and Guidance Through September

The rules and procedures published by September 28, 2020, will need to be carefully reviewed as they will presumably shed much more light on the scope and likely impacts of the Executive Order. In the meantime, interested entities should review and consider commenting on draft rules to protect their interests.

As indicated above, the Secretary may act before final regulations are published. Such actions may include recommendations on ways to “identify, isolate, monitor, or replace” BPS equipment that may be at risk.15 Whether those recommendations will impact currently installed equipment and require the modification or removal of that equipment remains to be seen.

Entities considering the acquisition of BPS equipment—and those currently operating BPS equipment—need to remain vigilant of further actions by the Secretary under the Executive Order.

Subject to NERC? Watch for Regulatory Differences or Even Conflict

Entities should consider the interplay between the Executive Order (and the anticipated rules and regulations) and those NERC reliability standards (e.g., CIP-013) that seek to protect the supply chain of NERC Registered Entities. As we recently analyzed, FERC agreed to an extension to October 1, 2020, for the implementation effectiveness of these standards.

Entities will need to compare the scope and implementation of the Executive Order to the directives of NERC’s supply chain reliability standards to assess the timing of implementation and to seek regulatory guidance on inconsistent or conflicting directives.

Contracts Should Allocate the Risks Arising Under the Executive Order

Finally, from a contract drafting perspective, it appears that the Executive Order is primarily aimed at BPS equipment contracts executed after May 1, 2020.

Parties considering executing contracts for BPS equipment transactions from a foreign-sourced supplier (or from any supplier, given the broad nexus elements) should be mindful that the Executive Order could significantly disrupt contractual performance, and that potential disruption is a known risk that should be allocated through appropriate contract language (e.g., a force majeure clause) excusing the buying if the transaction becomes prohibited under the Executive Order.

Even if the Secretary has not determined that a particular country is a foreign adversary, purchases of BPS equipment from a manufacturer, designer, or supplier located in or controlled by that country should include appropriate language to allocate the risk of a later “foreign adversary” designation that might block the transaction. This will require careful due diligence of suppliers and contractors and thoughtful contract drafting in order to protect acquiring entities.

We will continue to track these developments and would be happy to discuss questions or concerns with any potentially affected entity.

FOOTNOTES

1  Executive Order § 1(a)
2  Compare Executive Order § 4(a) with "Bulk Electric System" as defined in NERC's Glossary of Terms
3  See types of regulated functional entities, NERC Registry Criteria at 5-7
4  Executive Order § (1)(a)
5  Executive Order § 4(b)
6  Executive Order §§ 2(b), 4(d)
7  Executive Order § 1(a)(i)
8  Executive Order § 1(a)(ii)
9  Executive Order § 1(a)
10 Executive Order § 1(c)
11 Executive Order § 1(b)
12 Executive Order § 1(d)
13 Executive Order § 2(b)
14 Executive Order § 2(b)
15 Executive Order § 2(d)(ii)

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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