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Grid Order

Executive Order Establishes New Challenges for Utilities

May 12, 2020
Executive order injects major new risks into the sale and procurement of bulk power equipment.

On May 1, 2020, the Trump administration ratcheted up cybersecurity protection for the nation's power grid by empowering the secretary of energy to prohibit the sale of certain foreign-made equipment for use in the U.S. bulk power system. The executive order is of particular concern to firms in the transmission and distribution (T&D) equipment supply chain because it creates unanticipated risks and may disrupt pricing and procurement of equipment already in the pipeline. In a worst-case scenario, U.S. electric utilities and generation owners may eventually be required to remove or isolate noncomplying equipment that have already been installed.

On the other hand, the executive order may create commercial opportunities for power system equipment manufacturers in the United States and other friendly countries who have recently struggled against competition from China.

The executive order specifically targets the control equipment used in control centers, as well as reactors, capacitors, turbine controls, protective relays, voltage regulators, transformers, automatic circuit reclosers, and safety instrumentation systems (among other items) used throughout the bulk power system.

Specifically, the order allows the secretary of energy to prohibit the "acquisition, importation, transfer, or installation" of bulk power equipment that is "designed, developed, manufactured, or supplied" by any person who is "subject to the jurisdiction of a foreign adversary." Though not named in the order, it is generally understood that China and Russia are principal targets of the order. The secretary may prohibit the use or trading of the equipment if it is found to "pose an undue risk of sabotage or subversion" of the U.S. bulk power system.

By Sept. 28, 2020, the secretary of energy will issue regulations to identify the adversary nations against whom the prohibitions apply. The regulations may also identify the specific manufacturers subject to an adversary's control, and specific equipment and transactions that are outlawed. These regulations are to be issued in consolation or collaboration with OMB, Defense, Homeland Security, and Intelligence.

The language of the order indicates that the forthcoming rules could prohibit the use of equipment from U.S. companies with manufacturing facilities in China, or equipment that uses chips or related components manufactured and designed in China or by Chinese companies.

The point at which the new prohibitions will apply to pending transactions may not be known until those rules are issued. The executive order authorizes the secretary of energy to determine when pending transactions that violate the yet-to-be-issued rules will be stopped. Theoretically, the rules could cover any equipment installed after May 1, 2020. This would be a harsh exercise of the secretary's power but it is possible.

In the light of these risks, buyers and sellers of at-risk equipment should carefully review the procurement and contract documents associated with the transactions. Vendors should determine the place of manufacture of equipment and critical components where they have scoped or priced projects based on that equipment. Contractual provisions should be carefully reviewed to ensure that the parties understand who bears the risk if more expensive equipment need to be substituted for the equipment originally specified or if there are delays in performance because the anticipated equipment cannot be used.

Contractual provisions allowing vendors to recover additional costs caused by a change of law can be of particular importance in this context. The specific language of those provisions should be carefully reviewed with these risks in mind. However, these provisions are likely to apply only to projects that have already been scoped, priced, or are in performance before the new executive order was issued on May 1, 2020. Going forward, it may be argued that the change in law has already occurred. Going forward, procurement documents should specifically discuss the risks of prohibited transactions under this new set of rules.

A more hopeful note, the executive order allows for regulations that whitelist particular vendors and equipment and establish licensing processes for otherwise prohibited transactions.

The executive order also empowers the secretary of energy to identify installed bulk power equipment that possess a cybersecurity risk and develop recommendations on how to "identify, isolate, monitor, or replace" such equipment. How these powers will be implemented are yet to be determined. There will also be new rules related to federal government procurement of related electrical equipment that may include both bulk power and distribution level.

The order does not outline how or if a utility or others will be compensated for isolating or replacing "compromised" components but in past cases, telecommunications companies have been successful in obtaining billions of dollars in federal compensation for the removal of equipment deemed to pose a security risk to critical U.S. infrastructure.

The new executive order injects major new risks into the sale and procurement of bulk power equipment that may be subject to the forthcoming rules and regulations. Unfortunately, there is no likely mechanism for obtaining rulings or exemptions from the new regulations until they are issued. Both buyers and vendors, as well as contractors scoping and pricing bulk power projects, should proceed with great care and include provisions in their contracts expressly dealing with the risks posed by these forthcoming regulations. The terms on which existing bulk power equipment may need to be scrapped or isolated in the future are unknown but will be of great concern to generators and transmission or bulk power system operators and should be monitored closely. Warranty provisions in contracts should be carefully considered in the light of these potentialities.

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