Trump Administration Issues Order to Restrain International Sourcing for U.S. Bulk-Power System; Initiates Related Section 232 Import Investigation

International Trade & Compliance Alert | May.06.2020

On May 1, 2020, the President issued Executive Order 13920, “Securing the United States Bulk-Power System (“E.O. 13920”),” to authorize restrictions on “bulk-power system electric equipment” if there is a connection to a “foreign adversary” that poses an “unacceptable risk to the national security of the United States,” or other risks to the U.S. economy or safety.

Depending on how the Trump Administration implements the order, it could impose impediments to international sourcing of equipment by U.S. utilities and non-utility project developers, including developers of renewable energy projects. These restraints could mirror restrictions that the Committee on Foreign Investment in the United States (“CFIUS”) has recently established on sourcing of equipment for certain power production projects, especially equipment from China, in the context of CFIUS screening of foreign investment.

As a separate but related matter, on May 4, 2020, the Trump Administration commenced a “Section 232” investigation of whether imports of “laminations for stacked cores for incorporation into transformers, stacked and wound cores for incorporation into transformers, electrical transformers, and transformer regulators” threaten U.S. security. As with other Trump Administration Section 232 investigations, this action could result in duties or quantitative restraints on imports of covered products.

The Order: Prohibitions on Certain “Transactions”

E.O. 13920 requires the Department of Energy to issue regulations by September 28, 2020, to implement the prohibition of the “acquisition, importation, transfer, or installation of any bulk-power system electric equipment (‘Transaction’)” by any person, or with respect to any property subject to U.S. jurisdiction, that is “designed, developed, manufactured, or supplied, by persons owned by, controlled by, or subject to the jurisdiction or direction of a foreign adversary” if the Secretary of Energy determines that the Transaction poses certain undue or unacceptable risks. The order applies to Transactions initiated after May 1, 2020, which could include activities related to contracts entered into prior to such date.

E.O. 13920 is similar in many ways to E.O. 13873 of May 15, 2019, which prohibits certain transactions involving any information and communications technology or service produced or supplied by “foreign adversaries” or owned by, controlled by or subject to the jurisdiction or direction of a foreign adversary, where the transactions pose certain risks. As described in our prior client alert, the Department of Commerce issued a proposed rule in December 2019 to implement E.O. 13873.

Bulk Power Systems

E.O. 13920 defines “bulk-power system” 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.” In contrast to the North American Electric Reliability Corporation (“NERC”) definition of the “bulkelectricsystem,” which generally applies to transmission systems operated at 100 kV (100,000 volts) or higher, and which is used to determine whether facilities are subject to NERC’s reliability standards, this definition (which is the definition used in Section 215 of the Federal Power Act, but from which NERC departed in its reliability standard jurisdictional provisions) includes transmission lines rated at 69,000 volts (69 kV) or more. “Bulk-power system” does not include facilities used in the local distribution of electric energy.

E.O. 13920 defines “bulk-power system electric equipment” as:

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.

Notwithstanding the definition of “bulk-power system” and the list of “bulk-power system electric equipment,” E.O. 13920 does not provide sufficient guidance to make a determination as to whether specific facilities or equipment are “needed to maintain transmission system reliability” or are “necessary for operating an interconnected electric energy transmission system.” Section 2 of the order authorizes the Secretary of Energy to adopt appropriate rules and regulations as may be necessary to implement the order; it may be necessary to await the issuance of these rules and regulations before it is possible to determine whether a facility or equipment is “bulk-power system equipment.”

Separate from E.O. 13920, pursuant to CFIUS’s newly effective regulations that implement the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), CFIUS has jurisdiction over certain investments in companies that are involved with specified types of critical infrastructure, including those that own or operate systems for the generation, transmission, distribution or storage of electric energy comprising the “bulk-power system.” CFIUS uses the Federal Power Act’s definition of bulk-power system.

Foreign Adversaries

E.O. 13920 defines “foreign adversary” 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.” This definition is identical to the definition of foreign adversary in E.O. 13873, except that E.O. 13873 does not reference U.S. allies. E.O. 13920 does not identify any foreign adversaries, but it clearly targets China and likely Russia. The Commerce Department’s proposed regulation to implement E.O. 13873 does not identify any foreign adversaries, and it is unknown whether the Energy Department’s regulations will do so with respect to the new prohibitions under E.O. 13920.

Risk Determination

To prohibit a Transaction, the Secretary of Energy must determine that it:

  • poses an undue risk of sabotage to or subversion of the design, integrity, manufacturing, production, distribution, installation, operation, or maintenance of the U.S. bulk-power system;
  • poses an undue risk of catastrophic effects on the security or resiliency of U.S. critical infrastructure or the U.S. economy; or
  • otherwise poses an unacceptable risk to U.S. national security or the security and safety of United States persons.

These risks identified in E.O. 13920 are almost identical to those identified in E.O. 13873.

Remedies Short of Transaction Prohibition

E.O. 13920 authorizes the Secretary of Energy to design or negotiate measures to mitigate identified risk and provides that the Secretary may approve a Transaction or class of Transactions subject to mitigating conditions that would have otherwise been prohibited. The Secretary is also authorized to establish criteria for pre-qualifying equipment and vendors in the bulk-power system electric equipment market and may create a list of pre-qualified equipment and vendors. Energy Department regulations to be issued may establish procedures to license transactions that would otherwise be prohibited by E.O. 13920.

Applicability to Power Generation and Transmission Projects

The restrictions to be imposed pursuant to E.O.13920 can affect renewable, as well as conventional, power generation and transmission projects being developed by utilities and non-utility developers. Virtually all conventional and renewable generation projects, as well as transmission projects, include one or more of the items listed in the definition of “bulk-power system electric equipment” in the order. In contrast to the NERC definition, which establishes clear standards for determining if generation facilities connected to the transmission system are included, E.O. 13920 does not include similar criteria. As a result, for example, it may be the case that any generation equipment that interconnects at a voltage of 69 kV or higher is “bulk-power system electrical equipment” subject to the order.

Establishment of a Task Force

E.O. 13920 establishes a “Task Force on Federal Energy Infrastructure Procurement Policies Related to National Security,” to be chaired by the Secretary or Energy or his designee. Other members shall include the following heads of agencies or their designees: Secretaries of Defense, Interior, Commerce and Homeland Security, Director of National Intelligence, and Director of the Office of Management and Budget, plus any others designated by the Secretary of Energy. The Task Force is required to develop a “recommended consistent set of energy infrastructure procurement policies and procedures for agencies . . . to ensure that national security considerations are fully integrated across the Federal Government, and submit such recommendations to the Federal Acquisition Regulatory Council (FAR Council).” E.O. 13920 also provides that the Task Force shall engage with distribution system industry groups. The Task Force must submit a report to the President by May 1, 2021 and annual reports thereafter. After receiving the Task Force’s recommended set of procurement policies and procedures, the FAR Council must consider proposing an amendment to applicable provisions in the Federal Acquisition Regulation to implement such recommendations.

Trade Investigation under Section 232 of the Trade Expansion Act

Separately, but apparently related to E.O. 13920, on May 4, 2020, the Commerce Department announced that it was initiating an investigation under section 232 of the authority of the Trade Expansion Act of 1962 to examine the national security implications of imports of “laminations for stacked cores for incorporation into transformers, stacked and wound cores for incorporation into transformers, electrical transformers, and transformer regulators.” By January 29, 2021, the Secretary of Commerce is to submit a report to the President, detailing whether the importation of such equipment threatens to impair national security. The President can then take action to “adjust the imports” or take other non-trade related actions as deemed necessary.

The full impact of this section 232 investigation will not be known for some time. It could, however, result in a dramatic reduction in the importation of Chinese laminations and wound cores for incorporation into U.S. power production projects and facilities.

Conclusion

These developments place in jeopardy sourcing of bulk-power system equipment from China and likely Russia. We will issue updates to this client alert as developments warrant or additional information becomes available.