May 6, 2020

Securing the U.S. Power Grid: President and Commerce Department Sound the Alarm

Holland & Knight Alert
Ronald A. Oleynik | Andrew K. McAllister | J. Michael Cavanaugh | Stephen J. Humes | Mark C. Kalpin | Taite R. McDonald | Beth A. Viola | Dariya V. Golubkova

Highlights

  • Executive Order 13920 declares foreign adversaries' acquisition and use of bulk-power systems in the United States to be an unusual and extraordinary threat to the country's national security, foreign policy and economy.
  • To address the threat posed, President Donald Trump has empowered the Secretary of Energy to mitigate, prohibit or unwind certain transactions initiated after May 1, 2020.
  • Although no foreign adversaries are identified by name, it is expected that the Russian Federation and the People's Republic of China will be so designated in the implementing regulations, which are due by Sept. 28, 2020.
  • In a separate but seemingly coordinated effort, the U.S. Department of Commerce commenced a Section 232 investigation into imports of certain parts used in electrical transformer equipment.

President Donald Trump signed Executive Order 139201 on May 1, 2020, declaring a national emergency in order to secure the nation's bulk-power system. The president's order explains that such systems are threatened by foreign adversaries who are increasing their efforts to exploit and create new vulnerabilities therein. The threat is described as unusual and extraordinary due to its potential to cut off electricity supply to critical infrastructure, systems of national defense and emergency services. To counter the threat posed, President Trump issued two broad mandates: 1) transactions resulting in the acquisition, transfer, import or installation onto the U.S. power grid of bulk-power system electric equipment — designed, developed, manufactured or simply supplied by a foreign adversary — are prohibited, and 2) already in-service qualifying equipment must be identified, isolated, monitored or replaced as soon as practicable. The president's order:

  • has immediate effect
  • delegates broad authority to the Secretary of Energy (Secretary) to mitigate, prohibit or unwind qualifying transactions2
  • orders the Secretary, in consultation with other relevant agencies, to promulgate implementing rules by Sept. 28, 2020
  • establishes a Task Force charged with creating, updating and coordinating the federal government's energy procurement policies and proposing amendments to the Federal Acquisition Regulation (FAR), which the FAR Council may offer for public notice and comment within 180 days of receipt3

Subsequently, on May 4, 2020, the U.S. Department of Commerce (Commerce) announced a new Section 232 national security investigation into imports of certain parts used in electrical transformer equipment. Commerce explains that domestic production thereof is necessary to ensure preparedness for "large power disruptions."4

Prohibited Transactions Under EO 13920

A prohibited transaction must satisfy five elements: 1) it involves a person subject to U.S. jurisdiction, 2) attempting to acquire, transfer, install or import some "bulk-power system electric equipment," 3) in which a foreign person has any kind of interest, and 4) which the Secretary, in consultation with other relevant agencies, determined was designed, developed, manufactured or supplied by a "foreign adversary," and 5) the acquisition, transfer, installation or importation of which poses one of three risks: sabotage or subversion of a U.S. bulk-power system, a catastrophic effect on U.S. critical infrastructure or economy, or some other harm to U.S. national security.

Key terms referenced above are defined as follows:

  • Bulk-power system includes 1) facilities and control systems necessary for operating an interconnected electric energy transmission network (or any portion thereof), and 2) electric energy from generation facilities needed to maintain transmission reliability (inclusive of transmission lines rated at 69,000 volts (69 kV) or more, but not facilities distributing electric energy locally).5
  • Bulk-power system electric equipment includes 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.
  • A foreign adversary includes any foreign government or non-government person that 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 to the security and safety of U.S. persons.

National security, however, is not defined and likely to remain as such. The EO 13920-implementing regime, instead, is likely to read the term broadly, similar to the practice of the Committee on Foreign Investment in the United States (CFIUS).

Predicting Foreign Adversary Designees

Although it is hard to predict which countries may be designated as foreign adversaries for purposes of EO 13920, Russia and China are likely to be designated as such.

On Russia's contention — the order specifically references "malicious cyber activities" conducted against U.S. bulk-power systems, likely alluding to the late 2018 efforts of the hacking group Xenotime (largely believed to be indirectly supported by the Russian government) to scan networks of U.S. electric utilities for potential security gaps. Russia's efforts to target the U.S. energy infrastructure segment were even the subject of a joint alert, issued by the FBI and the Department of Homeland Security, in 2018.

On China's contention — the Trump Administration has consistently identified that country as a threat to U.S. national security in other contexts, e.g., to impose broad-ranging tariffs on Chinese-origin goods under Section 301 and to designate prominent Chinese companies, such as Huawei, to Commerce' Entity List.6

Furthermore, in 2019, the Director of National Intelligence identified both countries as actively attempting to undermine U.S. critical infrastructure,7 and recent reports indicate a consensus among senior intelligence officials that both Russia and China "have secured hidden footholds in the electric system and could use that access to cause blackouts at some future date."8

Analysis and Takeaways

Executive Order 13920 defines key terms broadly and leaves a great deal to the Secretary's discretion.9 First and foremost, the Secretary may designate foreign adversaries. The definition provided, however, provides no evaluative factors to understand what constitutes a long-term pattern or serious instance of conduct adverse to the security of the United States or its allies, and sets no temporal limit on past bad acts. Second, the Secretary can designate classes of prohibited transactions as well as identify equipment and countries warranting further scrutiny. Such efforts have resulted in outright bans, such as the one presently preventing Huawei and other Chinese telecommunications companies from providing various products and services to federal government end users. Relatedly, the Secretary can create a list of "pre-qualified" vendors that are deemed safe to work with. To prepare, manufactures, users and sellers of bulk-power system electric equipment can begin isolating potentially qualifying companies and/or developing criteria to propose to the Secretary that would guide its identification of such vendors. Lastly, the Secretary can establish 1) licensing procedures to allow import of otherwise prohibited equipment, and 2) a mechanism and evaluative factors to negotiate mitigation agreements. The Secretary may review the structure and requirements of existing licensing regimes (e.g., Commerce's for the export of certain controlled goods) and the CFIUS approach to mitigation agreements, as it promulgates its own implementing regulations.

The president's order also leaves several questions unanswered. Specifically, although it designates May 1, 2020, as the effective date and explains that the Secretary can mitigate, terminate or unwind prohibited transactions initiated thereafter, it also states that the terms of the order apply "notwithstanding any contract entered into or any license or permit granted prior to the date of th[e] order." The EO, as such, appears to carve out situations where its terms apply to transactions originally undertaken prior to May 1, 2020. In the same vein, the order does not contain a backstop to deem a connection to a foreign adversary as too remote. As written, qualifying equipment is prohibited for life (notwithstanding how far down the supply chain it was acquired) or its life outside of a foreign adversary's control. Therefore, a company located in any country that sells qualifying equipment that it sourced from a foreign adversary to the U.S. will be subject to the EO's terms. Companies are encouraged to update their due diligence procedures for identifying and monitoring component-part supply chains; conduct risk assessment analyses before transacting for qualifying equipment with Russian and Chinese companies, as well as countries subject to significant sanctions or national security measures (e.g., arms embargo countries under 22 C.F.R. § 126.1); and, if applicable, begin identifying supply sources outside of such countries.

Lastly, although EO 13920's breadth makes it hard to predict how its terms will be implemented, a reference model may exist. Specifically, in late 2019, Commerce proposed a rule implementing the terms of an executive order similarly seeking to protect critical U.S. infrastructure from foreign adversaries. The two orders are similar in tone and construction. (For more information, see Holland & Knight's previous alert, "Proposed ICTS Supply Chain Review Regime Raises Procedural Concerns," Dec. 26, 2019.)

For companies that may be directly impacted by EO 13920, this is an opportunity to engage the U.S. Department of Energy to help shape the regulations that will provide further detail as to how the prohibitions will be administered.

Section 232 Investigation

Just three days after President Trump signed EO 13920, Commerce initiated a new Section 232 investigation into items utilized by the U.S. energy infrastructure segment, specifically laminations for stacked cores and stacked and wound cores that are incorporated into electrical transformers, electrical transformers and transformer regulators. A formal notice of initiation thereof will be published imminently, at which time Commerce will have 270 days to deliver its report to the president.10 Although public hearings are not a mandatory part of the investigatory process, an opportunity for public comment will be available pursuant to the terms established in the upcoming formal initiation notice.

Holland & Knight Can Help

For advice on how either EO 13920 or Commerce's newly commenced investigation may impact your operations or any ongoing/contemplated transactions, please contact the authors or another member of Holland & Knight's International Trade Group or Energy Team. Our team will be monitoring the situation and will publish updates as soon as they become available.


Notes

1 Executive Order No. 13920, Securing the United States Bulk-Power System, 85 Fed. Reg. 26595 (May 1, 2020) (invoking the U.S. Constitution, the International Emergency Economic Powers Act and the National Emergencies Act as sources of authority to declare the national emergency).

2 3 U.S.C. § 301.

3 The Task Force shall consist of: the Secretaries of Commerce, Defense, Interior and Homeland Security, the Directors of National Intelligence and the Office of Management and Budget, and any other agency head designated by the Task Force Chair, in consultation with the Secretaries of Defense and Interior.

4 U.S. Department of Commerce, Press Release, U.S. Secretary of Commerce Wilbur Ross to Initiate Section 232 Investigation into Imports of Laminations and Wound Cores for Incorporation into Transformers, Electrical Transformers, and Transformer Regulators (May 4, 2020).

5 Interestingly, although Executive Order (EO) 13920 borrows heavily from Section 215 of the Federal Power Act — providing the Federal Energy Regulatory Commission (FERC) with oversight over electric reliability matters affecting the bulk-power system — the FERC Chairman is not among the agency heads singled out by EO 13920 to implement its terms.

6 See Holland & Knight's previous alert, "The Drama Around Huawei: Can U.S. Companies Do Business with the Chinese Chipmaker?", July 16, 2019.

7 Worldwide Threat Assessment Report, Director of National Intelligence's Statement for the Record of the Senate Select Committee on Intelligence (Jan. 29, 2019) (explaining that "Russia has the ability to execute cyber attacks in the United States that generate localized, temporary disruptive effects on critical infrastructure").

8 Timothy Puko and Rebecca Smith, U.S. Moves to Address 'Extraordinary Threat' From Some Foreign Electric Gear, The Wall Street Journal (May 1, 2020).

9 EO 13920 does have a consultation requirement. For purposes of this alert, all references to the Secretary's discretion encompass the agencies with which it is required to consult.

10 19 U.S.C. § 1862(b)(3).


Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.

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