President Joe Biden announced a new slew of authorizations set on reshaping the energy industry under the Cold War-era Defense Production Act (DPA). Announced on March 31, the first measure seeks to increase America’s own supply of critical materials needed to produce batteries. The second measure, announced on June 6, 2021, aims to bolster the American manufacturing of five critical clean energy technologies:
- Solar panel parts like photovoltaic modules and module components; Building insulation;
- Heat pumps, which heat and cool buildings super efficiently;
- Equipment for making and using clean, electricity-generated fuels, including electrolyzers, fuel cells and related platinum group metals; and
- Critical power grid infrastructure like transformers.
What does this mean for the energy industry energy? Only time will tell. But in order to anticipate how the Biden administration will use the DPA to affect policy change over the next year, a better understanding of the DPA’s mechanics is in order.
What Is the DPA and How Is It Used to Impact Energy Policy?
Congress first enacted the DPA in 1950 during the Korean War. See 50 U.S.C. Sections 4501 et. seq. The law was intended to arm the president with various authorities to regulate private industry to facilitate national defense. “National defense,” however, is no longer limited to encompass traditional military conflicts. The DPA’s encroachment upon domestic energy regulation began with Congress’s passage of the Stafford Act, extending presidential powers to direct “emergency preparedness activities.” See Robert T. Stafford, Disaster Relief and Emergency Assistance Act, P.L. 93-288.
According to the DPA’s most recent declaration of policy, “in order to ensure national defense preparedness, it is necessary and appropriate to assure the availability of domestic energy supplies for national defense needs.” Specifically, the Act allows the federal government to “provide necessary direction, coordination, and guidance, and shall provide necessary assistance, as authorized in this subchapter so that a comprehensive emergency preparedness system exists for all hazards.”
An “emergency preparedness system” encompasses every imaginable activity that could occur before, during and after a hazard, including “measures to be undertaken in preparation for anticipated hazards (including … the procurement and stockpiling of necessary materials and supplies.”) Since energy is part of that supply, this is how Cold War-era national defense legislation morphed into a tool to regulate the domestic energy market.
This is not the first time a president has invoked the DPA in an attempt to affect energy policy. For example, Title 1 prioritization and allocation authorities were delegated to the Department of Energy (DOE) in 2001 to ensure that emergency supplies of natural gas continued to flow to California utilities to help avoid threatened blackouts. See U.S. Congress, Senate Committee on Banking, Housing and Urban Affairs, California Energy Crisis and Use of the Defense Production Act, 107th Long., 1st sets., Feb. 9, 2001, S.Hrg. 107-215 (Washington GPO, 2001).
Biden’s DPA invocation comes on the heels a 2022 DOE report defining strategies the federal government can follow to support a clean energy transition. See Department of Energy, America’s Strategy to Secure the Supply Chain for a Robust Clean Energy Transition, Department of Energy Response to Executive Order 14017, “America’s Supply Chains,” (Feb. 24, 2022). The report recommended that Congress consider directly appropriating funding to DOE to implement such change, and the Department of Defense has made similar recommendations. The kind of appropriations recommended come from Title III funding under the DPA.
How Exactly Does the DPA Work?
The DPA has two primary functions: to guarantee public access to goods already being produced in the private sector (i.e., priority and allocation) and to ensure there is an adequate supply of critical items for public use going forward. See Congressional Research Service, The Defense Production Act of 1950, History, Authorities and Considerations for Congress (March 2, 2020), available at //fas.org/sgp/crs/natsec/R43767.pdf (last visited June 30, 2022). In practice, the president delegates the DPA’s powers to executive agencies to achieve the president’s stated goals. See, e.g., 50 U.S.C. Section 4558(c). These goals can be achieved in a variety of forms, including:
Title 1 authority to prioritize contracts. Title 1 bestows priority and allocation authority upon the chosen government agency. The most common example of this authority is the Department of Commerce’s delegated authority to prioritize materials, services and facilities, which is effected under the Defense Priorities and Allocations System. See 15 C.F.R. Section 700.11. The basic contours of the DPA’s prioritization rules are as follows:
- A prioritized contract under the DPA is known as a “rated order.” With limited exceptions, a contractor must accept and fill a rated order, and may itself place rated orders to suppliers of materials needed to fill the order.
- A “rated order” takes priority over “any other contract order,” and applies to all types of orders, with the exception of employment contracts.
- A contractor must perform a rated order for the same price it would charge for comparable nonrated orders.
A contractor may reject an order in certain circumstances, most notably “if the order is for an item not supplied or for a service not performed” or “if the person placing the order is unwilling or unable to meet regularly established terms of sale or payment.”
Title III authority to fund supply demand. Title III authorities enable the federal government to ensure that the nation is able to produce materials necessary for the national defense. Using Title III, the president may provide financial incentives such as loan guarantees and loan incentives to develop or expand domestic resources. Purchase commitments, subsidy payments and equipment installation for government and privately owned industrial facilities can also be achieved with appropriations from the Defense Production Act Fund. This can only be triggered if the president declares a “domestic industrial base shortfall” that threatens the national defense.
Title VII authority to block foreign corporate mergers. Among the most important of the general authorizations afforded under Title VII is the on Foreign Investment in the United States (CFIUS) regulation, which operates pursuant to Section 721 of the DPA. Under this section, the president can block proposed or pending foreign investment transactions if they threaten to impair the national security; the foreign investor is controlled by a foreign government; or the transaction could affect homeland security or would result in control of any critical infrastructure that could impair the national security. See 50 U.S.C. Section 4565; 31 C.F.R. chap. VIII; Jackson, James K. and Cimino-Isaacs, Cathleen D., CFIUS Reform Under FIRRMA, CRS In Focus IF10952.
Will President Biden’s Use of the DPA Impact the Energy Industry?
Biden’s use of the DPA has yielded criticism from proponents and opponents alike. While environmental activists have sharply criticized the president over his administration’s continuing failure to pass major climate legislation through an evenly divided Senate, they applaud this move as a step in the right direction. However, players in the renewable energy space most impacted by the DPA authorizations claim that the Title III funding appropriated is far too little to yield actual results.
On the other hand, Biden’s critics believe that believe that involving federal subsidy programs for these specific energy technologies will do too little to achieve the goal of reducing demand for fossil fuels and promoting clean energy production—particularly when there is a lack of consumer demand for the targeted technologies. See, e.g., Bennett, Brent, Ph.D., Biden’s Use of the Defense Production Act is Useless and Illogical, Texas Public Policy Foundation (June 22, 2022), available online at https://www.texaspolicy.com/bidens-use-of-the-defense-production-act-is-useless-and-illogical/ (last visited June 28, 2022).
There are also those who wish to see the president invoke DPA authorizations in the wake of soaring gas prices caused by the Russian-Ukrainan conflict. According to CNN Business, JP Morgan CEO Jamie Dimon urged a domestic fortification of energy security of the United States and Europe by taking such measures as allowing for environmentally responsible increase in natural gas production, building additional liquefied natural gas facilities in Europe, investing in new technology for hydrogen and carbon capture resources and (4) streamlining permitting for renewable alternatives like wind and solar.
While the efficacy of Biden’s DPA invocation remains to be seen, one thing is certain: The DPA hands the DOE new tools and authorities to drive federal procurement, establish project labor agreements, community benefit agreements and master supply agreements, develop loan programs, create partnerships and establish other programs that address the emergency need for clean energy. If used correctly, these are powerful tools to effect the change Biden seeks.
Leslie Ritchie Robnett is special counsel at Duane Morris, where she practices in the trial practice group and on the energy industry team. Robnett concentrates in regulatory litigation with a focus on energy policy.
Reprinted with permission from The Legal Intelligencer, © ALM Media Properties LLC. All rights reserved.