President Trump Issues Executive Order on Bulk-Power System Transactions

On Friday, May 1, 2020, President Trump issued an executive order (“EO”) declaring a national emergency with respect to threats to the bulk-power system posed by the unrestricted foreign supply of bulk-power system electric equipment (“BPE”) and invoking the International Emergency Economic Powers Act (“IEEPA”) to address the threat to national security. The EO prohibits certain transactions for the acquisition, importation, transfer, or installation of BPE initiated after May 1, 2020 that involve property in which a foreign country or national has an interest (including contracts for the supply of BPE). The prohibition is limited to transactions that the Secretary of the Department of Energy (“DOE”) determines to both: (i) involve BPE designed, developed, manufactured, or supplied by persons owned by, controlled by, or subject to the jurisdiction or direction of a foreign adversary; and (ii) pose an undue risk of sabotage to or subversion of the bulk-power system, or catastrophic effects on critical infrastructure or the economy, or otherwise pose an unacceptable risk to national security or U.S. persons.

Because the EO was issued pursuant to the President’s powers under the IEEPA, the prohibitions on affected BPE are limited to transactions involving property in which a foreign country or national has an interest. Consequently, transfers of BPE between U.S. entities having no foreign interest (in either the parties or the BPE) should not be directly impacted by the EO. Foreign acquisitions of U.S. businesses with BPE and no foreign interest would also be outside of the EO, but may be more likely to encounter mitigation requirements relating to BPE during review by the Committee on Foreign Investment in the United States (“CFIUS”).

BPE is defined to include certain items used in bulk-power system substations, control rooms, or generating facilities. “Bulk-power system” is defined by the EO as facilities and control systems necessary for operating an interconnected transmission network, including transmission lines rated at 69 kV or more and electric energy from generation facilities needed to maintain transmission reliability, but explicitly excludes facilities for local distribution of electricity. It is possible DOE may consider smaller generating equipment, such as wind turbines and photovoltaic equipment, to be BPE when deployed at utility scale, although such equipment is not generally known to provide transmission reliability. Smaller scale deployments of renewable technologies, such as residential and commercial solar, appear to fall outside of the EO. On the other hand, standalone energy storage facilities may fall within the scope of BPE.

On its face, the EO is expansive and many aspects of its implementation are currently unclear. In particular, there is significant ambiguity regarding whether the EO may impact certain transactions initiated prior to May 1, 2020, notwithstanding statements in the EO to the contrary. Some of these questions may be resolved by the rules and regulations DOE is directed to publish within 150 days. These rules could:

• identify the countries or persons that are foreign adversaries for the purposes of the EO (although China is likely to be on the list);
• identify persons owned by, controlled by, or subject to the jurisdiction or direction of foreign adversaries for the purposes of the EO;
• identify particular equipment or countries that warrant particular scrutiny under the provisions of the EO;
• establish procedures to license transactions that would otherwise be prohibited under the EO;
• identify a mechanism and relevant factors for negotiating agreements to mitigate the identified security concerns as a precondition to approval of a transaction or class of transactions that would otherwise be prohibited; and
• establish criteria for recognizing particular equipment and vendors as pre-qualified for future transactions, which could be used to publish a list of pre-qualified equipment and vendors.

Until the implementing rules are issued, energy project transactions will need to be proactively assessed to determine whether they potentially involve affected BPE and a foreign ownership interest that could trigger the prohibitions outlined in the EO, and to consider appropriate steps to address or avoid the risk of later DOE action. Because the EO appears to require a transaction-specific analysis of security concerns, it is possible that the DOE will establish a notice and review process for transactions potentially falling within the scope of the EO. We also anticipate that foreign investments and acquisitions of U.S. infrastructure with prohibited BPE could encounter mitigation requirements initiated by DOE as part of CFIUS clearance, even before DOE publishes final rules implementing the EO.

Existing BPE may also be impacted by the order. DOE is tasked with identifying existing BPE posing significant vulnerabilities for the bulk-power system or threats to national security, and developing recommendations on ways to identify, isolate, monitor, or replace such items as soon as practicable, taking into consideration overall risk to the bulk-power system.

Finally, the EO establishes a Task Force on Federal Energy Infrastructure Procurement Policies Related to National Security (“Task Force”) that will submit annual reports to the President. The Task Force is charged with coordinating federal government procurement of energy infrastructure and sharing risk information and risk management practices to inform procurement. The Task Force is also charged with engaging with distribution system industry groups to address attacks on the bulk-power system that originate through the distribution system.

We are working quickly to understand the impact of the EO on our clients, and we are available to assist you with managing the uncertainties that the EO has created for future transactions as well as those currently underway. Over the coming weeks, we will learn more details about the EO’s true scope and whether it is as disruptive as it first appears. And in the meantime, be well, stay healthy and safe, and together we will all figure out whether this EO is yet another item to adopt into our “new normal.”