The U.S. Department of Energy's recent order prohibits certain utilities from acquiring specified electric equipment with a China nexus that directly serves critical defense facilities, but companies should carefully examine their bulk power system supply chains to ensure they are not exposed, say Mario Mancuso, Sanjay Mullick and Jeremy Iloulian in this article for Law360.
On Dec. 17, the U.S. Department of Energy issued an order that, as of Jan. 16, 2021, prohibits utilities from acquiring, importing, transferring or installing specified bulk power system, or BPS, electric equipment with a China nexus that directly serves critical defense facilities. Utilities subject to the prohibition order should expect to be notified by the DOE soon.
Though the prohibition order targets particular utilities, it could cause broader ripple effects on the BPS supply chain, warranting parties to examine their exposure to China. Additionally, while the current focus is on China, the DOE indicated similar rules could soon be forthcoming with respect to additional countries, including Cuba, Iran, North Korea, Russia and Venezuela, and more expansive proposed rules could be issued shortly.
The View From Washington
The prohibition order reflects the U.S. government's concerns regarding China's national strategy of military-civil fusion — i.e., using civil technology development for military development purposes. According to FAQs the DOE published along with the prohibition order, China "is equipped and actively planning to undermine" the U.S. bulk power system.
The prohibition order is part of a flurry of actions the Trump administration has recently taken toward China. Others have included the U.S. Department of Commerce adding individuals and entities to its entity list to cut off their access to U.S. export-controlled technology; the U.S. State Department sanctioning Chinese officials, preventing them from entering the U.S.; and the White House issuing an executive order preventing U.S. persons from investing in companies linked to the Chinese military.
Together these restrictions open multiple fronts in the U.S.-China strategic competition.
Key Features of the Prohibition Order
The prohibition order represents the first set of restrictions to be implemented pursuant to the executive order the White House issued on May 1 concerning securing the U.S. bulk power system. The executive order laid out a timeline for the DOE to develop restrictions on U.S. persons, or those in the U.S., engaging as of that date in certain transactions of bulk-power system electric equipment with a nexus to a "foreign adversary" that poses "an unacceptable risk to the national security of the United States."
Narrower than the executive order, the prohibition order identifies a specific subset of entities to whom the prohibitions apply, known as responsible utilities. Responsible utilities are electric utilities that own or operate defense critical electric infrastructure that in turn actively serves a critical defense facility, as those terms are defined in the Federal Power Act.
The prohibition order states that the DOE will notify the responsible utilities subject to the prohibitions.
Types of Transactions
Following the terminology in the executive order, the transactions that responsible utilities are prohibited from engaging in include the acquisition, importation, transfer or installation of certain BPS electric equipment listed in an attachment to the prohibition order — including associated digital components, software and firmware — meeting certain technical specifications that will be used by the responsible utility to serve the critical defense facility.
Responsible utilities will need to certify to the DOE that they did not engage in any prohibited transactions, and that they have an internal monitoring process in place to track compliance, while also working with the DOE for load shedding and system restoration contingency planning.
The prohibition order applies to transactions involving BPS electric equipment that has been manufactured or supplied by entities owned by, controlled by or subject to the jurisdiction or direction of China. For purposes of the order, the BPS electric equipment does not need to be designed, developed, manufactured or supplied by entities physically present in China, but could be made in a third country.
Conceivably, BPS items being manufactured by a Chinese state-owned company in a third country, or by companies that may have branches physically present in China, could be subject to the prohibitions. Though there is no specific list of entities provided by the DOE, the U.S. Departments of Defense and Commerce have recently identified a number of companies determined to have ties to the Chinese government.
Though the prohibition order specifies that only transactions from the effective date of Jan. 16, 2021, onward are prohibited, it is possible that could still cover a contract signed prior to that date that has not been entirely fulfilled.
Potential examples could include situations in which the BPS electric equipment at issue would be imported after the effective date, or in which BPS electric equipment that has already been installed needed a software update after the effective date. Clarification from the DOE may be needed to make a determination.
What Comes Next
The FAQs indicate more actions could be forthcoming, as there are additional foreign adversaries identified in a related July 8 DOE request for information, including Cuba, Iran, North Korea, Russia and Venezuela.
Additionally, a DOE webpage associated with the executive order, the request for information and the prohibition order indicates it anticipates "issuing a notice of proposed rulemaking later this year," which could have broader impact. The recent cyber incidents in the U.S. that some have attributed to Russia potentially could accelerate such actions.
The new restrictions only directly target a limited set of utility entities within the BPS, but could still have ripple effects throughout the supply chain. Such utilities and their suppliers would be well served to examine their BPS supply chain and consider its risk exposure to China and Chinese companies.
Though the prohibition order has a more narrow scope, the DOE has indicated that further prohibition orders could be issued for additional countries. The department has noted that proposed rules for the executive order are expected by the end of this year, which could impose more expansive restrictions.
Mario Mancuso and Sanjay Mullick are partners, and Jeremy Iloulian is an associate, at Kirkland & Ellis LLP.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
 https://www.defense.gov/Newsroom/Releases/Release/Article/2434513/dod-releases-list-of-additional-companies-in-accordance-with-section-1237-of-fy/; https://www.commerce.gov/news/press-releases/2020/12/commerce-department-will-publish-first-military-end-user-list-naming.