Trump’s Grid Order Baffles Utilities Over What They Can Buy

By Gerson Freitas Jr., Kartikay Mehrotra and Stephen Cunningham | June 25, 2020

U.S. utilities are scrutinizing their suppliers of transformers and other power-grid equipment for ties to China as they await details on President Donald Trump’s order to crack down on imports from overseas adversaries.

Electric companies are trying to preemptively identify any components and manufacturers that could ultimately be barred once the U.S. Energy Department determines how to enforce Trump’s May 1 order to secure the nation’s grids, according to lawyers and consultants working with utilities. In some cases, lenders are requiring cyber-security audits to head off any scrutiny.

The uncertainty over the order, which doesn’t specify what equipment or nations it will cover, threatens to delay the push by utilities to modernize power grids and slash emissions by retiring aging coal plants and expanding renewable power. In the long term, the directive could also mean higher costs if companies are forced to find new suppliers and reshape supply chains.

“It seems unavoidable that companies will have to pause to take stock of their procurements,” said Keith Bradley, a partner at Squire Patton Boggs who is advising companies on how to respond to the order. “That alone is going to cause some amount of disruption and delay.

Large U.S. utilities including Duke Energy Corp., NextEra Energy Inc. and Dominion Energy Inc. either declined to comment or said it’s too early to say how the order may impact projects. A spokesman for the Edison Electric Institute, an industry trade group, said power companies are “being cautious” and working closely with the Energy Department. And three lawyers and consultants working with companies said the directive is prompting them to review supply chains.

In a recent blog post, Energy Secretary Dan Brouillette wrote that the nation’s power grids are overly dependent on foreign equipment, leaving them vulnerable to cyber-attacks. “This state of affairs imperils our national and economic security,” Brouillette wrote. “The first step must involve identifying vulnerabilities to those threats.”

Trump’s order comes as U.S.-China relations are already strained over the coronavirus and an ongoing trade war. The president, who has long pushed for ways to revive domestic manufacturing, recently ramped up his rhetoric against Beijing, threatening a “complete decoupling” of the U.S.’s economic relationship to China.

The president’s directive restricts utilities from buying power-grid equipment that has a nexus with any foreign adversary and poses an undue risk to national security. The order, however, doesn’t cite specific nations, manufacturers or components. The Energy Department has until Sept. 28 to provide clarification.

Nonetheless, the effort seems directed at China, according to Keith Martin, a lawyer with the law firm Norton Rose Fulbright, who specializes in tax law and project finance.

“Companies that were on the verge of signing equipment supply agreements with Chinese suppliers have been thinking carefully about whether to move forward,” Martin wrote in an essay for a newsletter published by his firm. “It is too early to tell how much, but some level of pullback in the short term from Chinese equipment seems inevitable.”

It won’t be easy untangling China from the supply chain for U.S. power grids. The country supplies about 90% of the U.S.’s $59 billion of electrical equipment purchased overseas, according to BloombergNEF. The utility sector spent more than $67 billion on equipment in 2017, according to the U.S. Census Bureau.

“If you decompose all the various aspects of the grid system, you will eventually come across some aspect or component that has some ties to China,” said Tobias Whitney of Fortress Information Security, a cyber-security company whose clients include Southern Co. and American Electric Power Co.

As companies await details of how the order will be enforced, they’re rushing to assess their exposure and have changed procurement processes to include questions about ties to foreign adversaries, Whitney said.

Nation-state hackers have already demonstrated they’re capable of breaching power supplies. Russian hackers have repeatedly cracked into Ukraine’s power system, and government hackers for the U.S. and Russia are believed to have infiltrated each others’ power networks.

Utilities in Favor

Utilities are in favor of the executive order, according to Scott Aaronson, a vice president for security and preparedness at Edison Electric Institute. While one of its goals is to encourage domestic manufacturing, the spirit of the order isn’t to completely block international suppliers, Aaronson said.

Southern Co.’s Chief Executive Officer Tom Fanning, who sits on a committee of federal lawmakers, experts and business leaders developing strategies to defend against cyber-attacks, said in an interview that the order is a “very effective way” to secure the supply chain for critical infrastructure.

During the 1960s, the U.S. dominated the power-grid equipment market. But manufacturers moved abroad when expansion of U.S. systems slowed. That’s forced American utilities to purchase equipment from overseas. Two of the biggest suppliers are European giants Siemens AG of and ABB Ltd.

Even some European suppliers use components and materials from China to build power systems, said Ophir Gaathon, chief executive officer and co-founder of Dust Identity Inc., which uses diamond dust to monitor component authenticity.

Seized Transformer

Jim Cai, the U.S. representative for Chinese transformer manufacturer, Jiangsu Huapeng Transformer Co., said he fears Trump is trying to push his company out of the market.

Since the executive order, at least one American utility has canceled an award for a new transformer from Jiangsu, which has served the U.S. market for about 15 years, Cai said. He declined to name the utility. Last month, the Wall Street Journal reported that federal officials seized a Jiangsu transformer at the Port of Houston last summer and sent it to the Sandia National Laboratories in Albuquerque, N.M.

Mike McKenna, a former senior Trump administration official who said he helped draft the executive order, said diversifying the chain that supplies equipment to electric utilities is part of a “generational struggle” to slash reliance on China for everything from crucial drugs to telecommunications equipment.

“In some circumstances — and the power system is certainly going to be one of them — it may be a challenge,” McKenna said in an email. “But it is going to happen, and it needs to happen.”

–With assistance from Oliver Sachgau, Mark Chediak, Brian Eckhouse and Jennifer A. Dlouhy.

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