Defending Energy Infrastructure: the Defense Production Act of 1950

Defending Energy Infrastructure: the Defense Production Act of 1950[1]

By: Sarah C. Thompson

On May 29, 2018, one day before a National Security Council meeting on the subject of energy resiliency, a draft White House memorandum was published which outlines plans for the utilization of the Defense Production Act of 1950 (“DPA”), in concert with the Federal Power Act (“FPA”)[2], as a means of reversing what the White House describes as the rapid depletion of our nation’s critical energy infrastructure.[3] This memorandum suggests that the Department of Energy may be able use its powers under the aforementioned Acts to stem the ongoing tide of “premature retirements” occurring among domestic coal and nuclear plants.[4]

So what is the DPA?

Based on the War Powers Acts of WWII and initially authorized during the Korean War, the DPA authorizes the President to control and direct certain aspects of domestic industry in the interest of national defense. Facing a series of post-war labor strikes resulting from widespread industrial and economic turmoil and in the face of growing Cold War tensions, the Truman administration enacted the DPA on September 8, 1950.[5]  By design, the DPA is a temporary law requiring periodic reauthorization. The most recent reauthorization occurred on December 1, 2005, and will expire on September 30, 2019.[6] The provisional nature of this law enabled the evolution of its terms, with amendments modifying and updating the Act’s authorities continuously.

In its original form the DPA granted to the President a number of authorities, such as the authority to demand that manufacturers give priority to defense production, to requisition materials and property, to expand government and private defense production capacity, to ration consumer goods, to fix wage and price ceilings, to force settlement of some labor disputes, to control consumer credit and regulate real estate construction credit and loans, to provide certain antitrust protections to industry, and to establish a voluntary reserve of private sector executives who would be available for emergency federal employment.[7] Currently, only a portion of these original authorities granted by the Act remain.

Today, under the DPA, the President may act to ensure that the U.S. possesses the military resources necessary to respond to an attack, and further enables the President to enhance and support domestic preparedness, including taking measures to ensure a prompt and thorough response to and recovery from natural hazards, terrorist attacks, and other national emergencies.[8] Subchapter II (formerly Title III) of the DPA deals with expansion of national defense “productive capacity and supply.” The various sections therein generally authorize the President to provide or guarantee loans to industry in order to expedite deliveries or expand discovery and production of , purchase industrial items or technologies for installation in government or private industrial facilities, and to encourage development of synthetic fuels.[9] It is apparently this authority, along with powers derived from the FPA that the memorandum proposes may be utilized to save ailing coal and nuclear facilities. Under section 202 of the FPA, the Secretary of Energy may “require by order temporary connections of facilities, and generation, delivery, interchange, or transmission of electricity as the Secretary determines will best meet the emergency and serve the public interest.”[10] However, this power may only be used “during the continuance of a war” or “when an emergency exists by reason of a sudden increase in the demand for electric energy, or a shortage of electric energy, or of facilities for the generation or transmission of electric energy.”[11]

This begs the question: Are we facing an emergency situation? The United States has not declared war since 1941, but that does not necessarily mean that exerting economic influence in the interest of national defense cannot still be accomplished through the use of its war powers. The constitutionality of the DPA was called into question not long after its enactment by Excel Packing Company when the company was found liable for damages under the Act, for selling meat in excess of maximum prices fixed by the regulation.

The United States appealed a judgment from the United States District Court for the District of Kansas dismissing its action against the meat packing company. On appeal, the Tenth Circuit Court of Appeals found in favor of the United States, holding that “the right of Congress to exercise its war power does not end with the cease fire order. Neither is Congress limited in its right to invoke such powers only upon a formal declaration of war or from the firing of the first gun.”[12] In Excel, the power of Congress to legislate for the national defense and security in time of war or during a national emergency was not challenged. Id. (emphasis added). The Tenth circuit cited to language of the DPA and explained,

“the policy of the United States [is] to oppose acts of aggression and to promote peace” and in doing so the United States “is determined to develop and maintain whatever military and economic strength is found to be necessary to carry out this purpose” which “task requires diversion of certain materials and facilities from civilian use to military and related purposes” and that it is intended “to provide the President with authority to accomplish these adjustments in the operation of the economy.” There can, therefore, be little question that the Act was primarily passed to promote the national defense.”

Given that the United States has been embroiled in “Extended Military Campaigns”[13] off and on for the better part of a century, it is not beyond the realm of possibility that a court would find the measures proposed in the memorandum to be justified and properly exercised under the war powers and authorities granted by the Act. Judging by various industry responses to the memorandum thus far, these measures could face some tough legal challenges.[14]

What exactly does the memorandum propose?

The rapid rate at which coal and nuclear energy generating facilities are being retired could be creating a shortage of energy generation diversity sufficient to justify action under the DPA/FPA. The memorandum suggests that too many “fuel-secure plants” have closed prematurely and many more have recently announced retirement. The term “fuel secure” refers to facilities which maintain their power source on site, such as coal and nuclear facilities, as opposed to those utilizing natural gas, which must be piped-in.[15] The memorandum acknowledges that currently the lost megawatts of coal/nuclear power are being replaced by new generation from natural gas and renewable energy sources, but warns that this transition comes at the expense of fuel security and resilience.[16]

What has the industry response been?

Administrations on both sides of the aisle have relied on DPA authorities to direct energy production (During January 2001, both Presidents William J. Clinton and George W. Bush invoked DPA powers, in conjunction with those granted in the Natural Gas Policy Act of 1978 (P.L. 95-621, 92 Stat. 3350), to ensure that emergency supplies of electrical power and natural gas continued flowing to California utilities, deflecting threatened electrical blackouts.[17]). However, its proposed use to safeguard, and some critics would say interfere with, the domestic energy market has sparked quite a bit of controversy.

An unlikely alliance of environmental groups and oil and gas industry interest groups have spoken out in opposition to the proposed measures.[18] Todd Snitchler of the American Petroleum Institute has called for less government intervention in energy markets and expressed concern that the proposed use of the DPA/FPA to support “high-cost generation” (referring to coal and nuclear) could result in consumers paying more for their electricity.[19] Amy Farrell, vice President of the American Wind Energy Association stated, “[o]rderly power plant retirements do not constitute an emergency for our electric grid”.[20] PJM[21], the east coast grid operator which serves 65 million customers, published an analysis of recently announced planned deactivations of certain nuclear plants and determined that there was no immediate threat to system reliability. “There is no need for any such drastic action,” said a PJM spokesperson referring to the memorandum’s proposals.[22]

How likely is implementation of the proposals in this memorandum?

The memorandum directs the DOE to protect the ailing coal and nuclear industries from further decline by requiring power market operators “to purchase or arrange the purchase of electric energy or electric generation capacity from a designated list of Subject Generation Facilities (SFGs) sufficient to forestall any further actions towards retirement, decommissioning, or deactivation…”[23] The proposed use of the DPA is unique in this instance because the memorandum seems to say that at any moment an emergency could arise, and this risk is itself sufficient to invoke the DPA.[24] The memorandum warns that “[t]he vulnerability of U.S. critical infrastructure to cyber, physical, and electromagnetic attacks means that adversaries could disrupt military command and control, banking and financial operations, the electrical grid, and means of communication.”[25] It remains yet to be seen whether the looming threat of attack to critical infrastructure[26] would be considered an “emergency” sufficient to justify use of the authorities granted by the DPA and FPA.[27]

Further, the draft DOE directive lacks many details addressing how it would actually be implemented. For instance, the memorandum provides that systems operators would be instructed to purchase energy from a specified list of “Subject Generation Facilities.” However, statements made by Federal Energy Regulatory Commission Chairman Kevin McIntyre and DOE Undersecretary Mark Menezes suggest that details on who these “subject generation facilities” are, or how they will be chosen, are not only unclear, but do not yet exist.[28] The lack of specificity about how the DOE would actually implement this plan, as well as the fact that the memorandum was a draft subject to modification, makes it difficult to assess the feasibility of utilizing the DPA to assist the struggling coal and nuclear industries.

Keeping things in context.

Should the measures proposed in the May 29 draft memorandum be implemented, the oil and natural gas industries would inevitably feel the impacts. One commentator expressed concerns that a push to help one sector of energy production would inevitably cut in on the success of its competitor producers, and in this instance could introduce uncertainty and challenges into the oil and gas industry not previously present.[29] Additionally, the proposed assistance to the coal and nuclear industry comes on the heels of newly imposed steel tariffs, a measure that has already been speculated to negatively impact the oil and gas industry,[30] and follows ongoing discussions on modifying the North American Free Trade Agreement, which could also have an impact upon oil and gas exports.[31]

Until an official directive is released by the White House, it is impossible to assess the legality and feasibility of the proposed use of the DPA and FPA to bolster struggling nuclear and coal facilities. However, it is safe to say that the memorandum presents a novel approach to ensuring domestic energy resilience, and should an official directive be released, this discussion will certainly be revisited, and more thoroughly. At the very least, the memorandum’s release is a reminder that a free energy market is still subject to expansive federal oversight—especially where national security is concerned.

 

[1] 50 U.S.C.A. § 4501 (Formerly cited as 50 App. USCA § 2061).

[2] Under FPA section 202(c) during the continuance of a war in which the United States is engaged or when an emergency exists by reason of a sudden increase in the demand for electric energy, or a shortage of electric energy, or of facilities for the generation or transmission of electric energy, or of the fuel or water for generating facilities, or other causes, the Secretary of Energy may require by order temporary connections of facilities, and generation, delivery, interchange, or transmission of electricity as the Secretary determines will best meet the emergency and serve the public interest.  16 U.S.C. § 824a(c).

[3]Taken from a statement by Whitehouse spokeswoman Sarah Huckabee Sanders following the memorandum’s release. https://www.nbcnews.com/news/us-news/trump-energy-plan-would-prop-failing-coal-nuclear-plants-n879406.

[4] See “Addendum, Draft-5/29/18”, p. 1, https://www.documentcloud.org/documents/4491203-Grid-Memo.html.

[5] P.L. 81-774, 64 Stat. 798.

[6] 50 U.S.C.A. § 4564

[7] Brown & Else, Congressional Research Service report: The Defense Production Act of 1950: History, Authorities, and Reauthorization (July 28, 2014), available at www.crs.gov

[8] Defense Production Act, “Declaration of Policy”, 50 U.S.C.A. § 4502.

[9] Else, Congressional Research Service report: The Defense Production Act: Purpose and Scope (May 14, 2009), available at www.crs.gov.

[10] 16 U.S.C. § 824a(c).

[11] 16 U.S.C. § 824a(c).

[12] United States v. Excel Packing Co., 210 F.2d 596, 598 (10th Cir. 1954).

[13] The US Doesn’t Declare War Anymore, 9/18/2014, Times.com http://time.com/3399479/war-powers-bush-obama/

[14] Energy analysist Katie Bays stated in an interview with Reuters online that “While we believe DOE has broad privileges to identify threats to national security, we are skeptical that (the order) entitles DOE to direct power market operators (…) to pay generators more based upon that threat… Litigation would begin almost immediately.” https://www.reuters.com/article/us-usa-electricity/trump-throws-ailing-u-s-coal-nuke-plants-a-lifeline-triggers-backlash-idUSKCN1IX51Q.

[15] “Gas-fired power generators are more vulnerable to cyber attacks than coal plants and nukes because gas must be delivered from remote fields via pipelines, according a draft report by the department. Coal and nuclear plants, on the other hand, keep fuel stored on site, eliminating a potential weak point that could be targeted by malicious hackers.” https://www.bloomberg.com/news/articles/2018-06-01/trump-s-coal-nuke-push-pegged-to-security-threats-to-gas-pipes.

[16] See “Addendum, Draft-5/29/18”, p. 1, https://www.documentcloud.org/documents/4491203-Grid-Memo.html

[17] Unattributed, “Bush Administration Extends Emergency Orders Requiring Electricity and Natural Gas Shippers to Continue Supplying California Utilities,” Foster Electric Report 209, January 31, 2001, p. 6. The use of these authorities was criticized by some as improper. Bart Jansen, “Gramm Raps Cold War Law,” San Antonio ExpressNews, February 10, 2001, p. 19A.

[18] “The White House billed the effort as a way to shore up national energy security, but the announcement triggered swift backlash from an unusual alliance of drillers, renewable energy producers and environmentalists who called it an unfair attempt to prop up non-competitive industries.” https://www.reuters.com/article/us-usa-electricity/trump-throws-ailing-u-s-coal-nuke-plants-a-lifeline-triggers-backlash-idUSKCN1IX51Q.

[19] https://www.cnbc.com/2018/04/15/api-opposes-trump-administration-bailout-of-firstenergy.html; https://www.nytimes.com/aponline/2018/06/01/us/politics/ap-us-trump-coal-plants.html.

[20] Farrell called the draft plan “a misapplication of emergency powers” and said, “There’s certainly no credible justification to force American taxpayers to bailout uneconomic power plants.” https://www.nytimes.com/aponline/2018/06/01/us/politics/ap-us-trump-coal-plants.html.

[21]In 1997 the Federal Energy Regulatory Commission (FERC) approved PJM as the nation’s first fully functioning independent system operator (ISO). ISOs operate, but do not own, transmission systems in order to provide open access to the grid for non-utility users. http://www.pjm.com/about-pjm/who-we-are/pjm-history.aspx.

[22] https://www.reuters.com/article/us-usa-electricity/trump-throws-ailing-u-s-coal-nuke-plants-a-lifeline-triggers-backlash-idUSKCN1IX51Q

[23] See “Addendum, Draft-5/29/18”, p. 3, https://www.documentcloud.org/documents/4491203-Grid-Memo.html

[24] Previous uses of the FPA include responses to massive blackouts caused by incidents like hurricanes Rita and Katrina, https://www.energy.gov/oe/services/electricity-policy-coordination-and-implementation/other-regulatory-efforts/does-use.

[25] See “Addendum, Draft-5/29/18”, p. 7, https://www.documentcloud.org/documents/4491203-Grid-Memo.html, citing National Security Strategy of the United States of America, at 12 (Dec. 20 17), available at https://www.whitehouse.gov/wp-content/uploads/20 17112/NSS-Final-12-18-20 17-0905-2.pdf.

[26] The term “critical infrastructure” means any systems and assets, whether physical or cyber-based, so vital to the United States that the degradation or destruction of such systems and assets would have a debilitating impact on national security, including, but not limited to, national economic security and national public health or safety. 50 U.S.C.A. § 4552

[27] The DPA does not provide a statutory definition of what would constitute an “emergency”, however the holding in Excel suggests that neither a declaration of war, nor recognition of any national emergency is necessary, where the Act is used to promote national defense.

[28] Statement of Samantha Gross, a fellow in foreign policy focused on international energy and climate at the Brookings Institution, https://www.rtoinsider.com/ferc-doe-trump-rick-perry-kevin-mcintyre-coal-nuclear-93744/.

[29] https://www.usnews.com/national-issues/energy-environment/articles/2018-06-07/trump-backing-coal-and-nuclear-shuns-natural-gas

[30] For a more thorough discussion of this, see: Trump’s Steel Tariff Threatens His Goal Of Oil And Natural Gas Dominance, https://www.forbes.com/sites/judeclemente/2018/03/04/trumps-steel-tariff-is-bad-for-his-oil-and-natural-gas-dominance/#190380c82550.

[31] https://www.bloomberg.com/news/articles/2018-06-11/mexico-turns-attention-to-japan-as-nafta-trade-talks-at-risk; https://www.politico.com/story/2018/06/10/kudlow-trump-nafta-trudeau-041630.