New Executive Order Will Prohibit Certain Acquisitions of Foreign-Made Bulk-Power Systems Equipment

What Specific Activities Does the EO Prohibit?

The EO prohibits any acquisition, importation, transfer or installation of any BPS electric equipment (transaction) by any person, or with respect to any property, subject to the jurisdiction of the United States, where

1. the transaction involves property in which any foreign country or a national thereof has any interest (including through an interest in a contract for the provision of the equipment)
2. the transaction was initiated after May 1, 2020; and
3. the Secretary, in coordination with other departments and agencies, has determined that

a. the transaction involves BPS electric equipment designed, developed, manufactured or supplied by persons owned by, controlled by or subject to the jurisdiction or direction of a “foreign adversary”; and

b. the transaction

i. poses an undue risk of sabotage to or subversion of the design, integrity, manufacturing, production, distribution, installation, operation or maintenance of the BPS in the United States,

ii. poses an undue risk of catastrophic effects on the security or resiliency of United States critical infrastructure or the economy of the United States, or

iii. otherwise poses an unacceptable risk to the national security of the United States or the security and safety of United States persons.

What Was the President’s Legal Authority for Imposing the Prohibition?

The President invoked the Constitution, the International Emergency Economic Powers Act and the National Emergencies Act. The President declared a national emergency based on his determination that “foreign adversaries are increasingly creating and exploiting vulnerabilities in the United States bulk-power system” and “seeking to commit malicious acts against the United States and its people, including malicious cyber activities” and that “the unrestricted foreign supply of bulk-power system electric equipment constitutes an unusual and extraordinary threat to the national security, foreign policy, and economy of the United States.”

What Countries are “Foreign Adversaries”?

The EO does not identify any foreign adversaries. Implementing regulations may determine that particular countries or persons are “foreign adversaries” and identify persons owned by, controlled by or subject to the jurisdiction or direction of “foreign adversaries.” The regulations may also identify particular countries that “warrant particular scrutiny.”

What Equipment Is Affected?

The EO covers “bulk-power system electric equipment.” The term “bulk-power system electric equipment” means items used in BPS 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.

Implementing regulations may identify particular equipment that “warrant[s] particular scrutiny.”

Are the Restrictions in the EO Immediately Applicable?

No. The EO directs the Secretary to issue implementing regulations by September 28, 2020. However, the EO applies to any transaction initiated on or after May 1, 2020, which implies that the regulations could be retroactive to May 1, 2020. The prohibitions apply “notwithstanding any contract entered into or license or permit granted prior to the date of this order.”

Are All Transactions that Meet the Criteria Specified in the EO Prohibited?

Not necessarily. The Secretary may establish procedures to license otherwise prohibited transactions and may provide a mechanism to negotiate agreements to mitigate concerns.

Does the EO Apply Only to Specific Transactions or to Broad Categories of Transactions?

The EO refers to threats posed by “individual acquisitions and when acquisitions are considered as a class.” The prohibition could apply to all transactions involving designated countries or persons or to individual transactions.

The Secretary may also establish criteria to “prequalify” particular equipment and vendors. Certain transactions involving prequalified equipment and vendors, however, may still be prohibited or regulated.

How Does the EO Deal With BPS Equipment That Has Already Been Installed?

The EO directs the Secretary, in consultation with the other agencies and the board of directors of the Tennessee Valley Authority, to identify national security risks related to previously installed BPS equipment provided by foreign adversaries. The Secretary shall develop recommendations to isolate, monitor and potentially replace such equipment.

Establishment of Task Force to Develop Energy Infrastructure Procurement Policies

The EO requires the establishment of the Task Force on Federal Energy Infrastructure Procurement Policies Related to National Security (the Task Force), which will recommend federal energy infrastructure procurement policies and procedures to ensure that national security considerations are “fully integrated across the Federal Government.” The Task Force must submit recommendations to the Federal Acquisition Regulatory (FAR) Council, and within 180 days of receiving the recommendation, the FAR Council must consider proposing for public comment an amendment to the Federal Acquisition Regulations to implement the recommendations. The Task Force must consult with the Electricity Subsector Coordinating Council and the Oil and Natural Gas Subsector Coordinating Council. The Task Force will submit annual reports to the President and will terminate as soon as it has accomplished its objectives and completed all required reports under the EO.

What’s Next?

The BPS EO is similar to an EO issued in May 2019 in connection with information and communications technology (ICTS EO).¹ The U.S. Department of Commerce (Commerce) issued draft implementing regulations in connection with the ICTS EO in November 2019, but they left many key issues for further consideration (e.g., countries that would be treated as foreign adversaries). It is not clear when Commerce will issue final regulations to implement the ICTS EO.² If the Department of Energy were to follow a similar approach in connection with the BPS EO, then the proposed regulations that should be issued in September 2020 might not provide significant clarity, and the implementing process could take more than a year.

 

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¹ Executive Order on Security the Information and Communications Technology and Services Supply Chain (May 15, 2019).
² See Securing the Information and Communications Technology and Services Supply Chain, 84 Fed. Reg. 65316 (Dep’t of Commerce Nov. 27, 2019) (proposed rule).