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3 Things to Know About President Trump’s Bulk-Power System Order

What might happen if China or Russia attacked the nation’s electricity grid? The answer to that question is at the heart of an executive order issued by President Trump on May 1.

Foreign adversaries are increasingly looking for ways to exploit weaknesses in the country’s bulk-power system (“BPS”) – the large interconnected electrical system that supports the nation’s critical energy and defense infrastructure.

The president has declared that these threats constitute a national emergency, and he’s seeking to ban the use of BPS equipment supplied by certain countries deemed to be bad actors. Specifically, the executive order prohibits the “acquisition, importation, transfer, or installation” of any BPS equipment that is “designed, developed, manufactured, or supplied, by persons owned by, controlled by, or subject to the jurisdiction or direction of a foreign adversary.”

The presidential directive is likely to have sweeping implications for power industry constituents, from energy project developers and operators, to investors in energy projects. But it has also created uncertainty as various parties assess their obligations and the potential impact to their bottom line. Written in broad strokes, without providing details on the types of equipment or vendors that will be banned or otherwise targeted, the executive order has raised many unanswered questions.

“The executive order was extraordinarily broad,” said V&E partner Peter Marshall, who advises private equity funds and other financial sponsors on renewable energy transactions. “That’s a challenge. How can you agree to buy a facility or a company if you have no idea what the impact will be on the asset or on the business?”

The Department of Energy, which has been charged with issuing regulations implementing the executive order, has a deadline of September 28, 2020, to do so. In the meantime, Marshall and V&E partner David Johnson, who leads V&E’s Government Contracts/Export Controls and Economic Sanctions practice, have shared three things you need to know in order to prepare for what’s ahead.

The executive order is likely to stick regardless of who will be in the White House in 2021

The significant threats posed by China, Russia, North Korea, Iran, Cuba, and Venezuela – the current list of foreign adversaries identified by the Department of Energy pursuant to the executive order – are well documented.

A 2019 report by the Office of the Director of National Intelligence warns that foreign adversaries have the ability to launch cyber-attacks causing disruptive effects on critical infrastructure – such as the disruption of a natural gas pipeline or electric infrastructure – potentially lasting for days or even weeks.

Given widespread recognition of such threats, the likelihood that there will be regulations banning the use of BPS equipment from foreign adversaries is high regardless of the shifting political landscape.

“This is real and there will be serious impact,” Johnson said. “You shouldn’t expect there will be an abatement even if there is a change in the White House.”

Doing a M&A deal in the power space? Think long and hard about the bulk-power system order

Complying with the executive order could significantly erode energy project returns.

As a result, it’s important for investors to work with attorneys who are highly experienced in M&A, project development, and national security matters. Experienced lawyers can identify potential problems related to complying with the executive order and advise on allocating risks in M&A contracts.

Marshall and Johnson know this first-hand. The V&E lawyers recently represented a financial investor looking to acquire a solar facility under development. On the eve of the signing, President Trump issued the executive order.

As is often the case, key equipment to be used in the facility was sourced from Southeast Asia, with a number of underlying components coming from China. With guidance from Johnson, the client negotiated and obtained additional protections from the seller that addressed the potential impact of the executive order on the project’s completion and potential returns.

“If you’re an investor in solar or other energy projects, you need to be sure that you have competent counsel who can advise you on the ongoing updates related to the promulgation of the regulations,” Marshall said.

Now is the time to get a handle on your supply chain

For those who currently have BPS equipment in their systems that is at high risk of being prohibited, the road ahead is murky. The executive order directs the Secretary of Energy, to “develop 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.”

Rather than waiting for regulations to be issued, now is a good time to scrutinize your supply chain in anticipation of having to remove and replace equipment.

There are some important lessons to learn from an interim regulation recently released by the Federal Acquisition Regulatory Council that has put serious pressure on government contractors.

The rule, which was prompted by the John S. McCain National Defense Authorization Act for Fiscal Year 2019, prohibits federal agencies from doing business with companies that use equipment produced by Huawei Technologies Co., ZTE Corp., and other Chinese companies deemed security risks. Contractors were given only about one month to purge all “covered equipment and services” from their systems in order to remain eligible for federal contracts.

The takeaway for facility owners with BPS equipment: “Do you just sit there and watch the computer screen waiting to react until something pops out later this year?” Johnson said. “Or do you proactively get your house in order and get a handle on your supply chain now?”

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.