Brien J. Sheahan is the former Chairman and CEO of the Illinois Commerce Commission. He served on the Board of Directors for the National Association of Regulatory Commissioners and the U.S. Department of Energy Nuclear Energy Advisory Committee.
Prudence is a regulatory concept used to evaluate whether utility decisions are reasonable and necessary to provide safe, reliable and cost-effective service to customers. While this analysis is typically associated with the mundane procurement of poles and wires, geopolitical tensions and national security concerns can create additional risks and uncertainties for the supply and maintenance of critical infrastructure.
Under these circumstances what degree of reasonable foresight or mitigation is required, and by whom, to prudently manage vulnerable utility supply chains?
Although utilities weathered Covid-related disruptions, they are susceptible to supply chain shock that would result from military conflict in East Asia at a time when the grid is becoming increasingly digitalized and reliant on foreign-made electronics. This increased risk is leading major U.S. companies to relocate manufacturing capacity out of China that in the past has used trade as a weapon, including against Australia and Lithuania. It recently suggested imposing controls on exports to the U.S. of solar panels and exotic materials used in the manufacturing of motors for electric vehicles.
Assessments of the likelihood of armed conflict with China vary. Senior generals, diplomats and members of Congress who have warned about Chinese intentions include General Mike Minihan, head of the U.S. Air Mobility Command; Admirals Philip Davidson and Harry B. Harris Jr, former heads of the U.S. Indo-Pacific command; and U.S. Secretary of State Antony Blinken. Rep. Michael McCaul, R-Texas, chairman of the House Foreign Affairs Committee, has said the odds of conflict with China over Taiwan "are very high." But Chairman of the U.S. Joint Chiefs of Staff General Mark Milley has said war with China is “not inevitable.”
The vulnerability of supply chains for critical infrastructure is acute and self-inflicted. The U.S. and allies have allowed themselves to become captive to Chinese cartels that control production of electronic components, high-powered magnets, printed circuit boards, computers, drones, rare earth metals, wind turbines, solar cells, cellular phones and lithium batteries at a time when the integration of renewables and electric vehicles at scale will require ever more sophisticated technologies to manufacture and manage.
In fact, nearly every element of the technology-based digital smart grid is dependent on Chinese-made components with murky provenance. Michèle Flournoy, a former undersecretary of Defense for Policy, told Bloomberg the “the presence of Chinese-made components throughout defense supply chains create unacceptable dependencies — if not vulnerabilities. Most prime contractors can’t even tell you how much Chinese content is in their systems, ranging from semiconductors to displays to nuts and bolts.”
If this is true of the defense industry it is certainly true of the utility industry. Building and strengthening business relationships with friendly nations and partners to ensure supply chain security and resilience during times of conflict or geopolitical tensions is crucial, and can only be achieved by diversifying the sources of supplies and establishing partnerships with reliable and trusted suppliers around the world.
Essential high-tech equipment for the integration of distributed energy resources and grid modernization are not our only exposure to Chinese and foreign suppliers. Commoditized photovoltaic module production is concentrated in a few countries and can pose supply chain risks for the solar industry. This has become increasingly apparent in recent years, as global demand for PV modules has surged, leading to supply chain bottlenecks and rising prices for raw materials and components. To address these challenges, we should diversify the PV supply chain to reduce our dependence on a few key producers.
Transformers are also almost exclusively manufactured overseas and can take many months or even years to build. As we have seen with recent attacks on substations in California, North Carolina and Oregon, a small number of individuals can destroy sensitive, hard to replace equipment with impunity. At scale, a coordinated attack on the power system could take weeks, or longer, to repair, leaving millions in the dark. The possible economic toll and loss of life is difficult to comprehend. Increased investment in domestic transformer manufacturing capacity is critical.
The Inflation Reduction Act and CHIPS Act include provisions that may reduce our dependence on foreign supply chains for microchips and other advanced electronics. State regulators can do more to encourage utilities to support local and domestic manufacturers of everything from safety gear and personal protective equipment to power distribution systems and components for utility management systems. Solutions may include a national strategy, or framework, for supply chain resilience that provides guidance and best practices for utilities and other critical infrastructure providers. This could include standards for supply chain risk management and guidelines for developing contingency plans and response strategies in the event of supply chain disruptions.
The macroeconomic cost of reduced, or reallocated, foreign investment and the impact on ratepayers of securing utility supply chains would be modest compared to the economic toll of an event that disrupts essential services to a large city for days or weeks — not to mention months. Managing the financial impact on ratepayers will require that the president and Congress recognize that these challenges are no longer the sole responsibility of utility ratepayers but are matters of national security. State and federal policymakers, utilities and other stakeholders must develop and implement effective strategies for securing supply chains while minimizing the financial impact on ratepayers.
Regulators, and the governors and legislatures that appoint them, will be held accountable for failure to safeguard critical infrastructure. Policymakers have the authority to reduce and eliminate our dependence on vulnerable supply chains that will reduce the risk of disruptions and ensure a steady supply of critical goods and services during times of conflict or geopolitical instability.
Regulatory review of prudence is usually backward-looking, but state and federal policymakers have a responsibility to proactively ensure the safety, reliability and resilience of utility services that are — quite literally — the foundation of modern civilization. Today, we need to scrutinize supply chains for critical infrastructure with urgency and a new perspective. Good judgment requires the fortification and diversification of supply chains for communications and utility infrastructure.