# Publication of a Report on the Effect of Imports of Transformers and Transformer Components on the National Security: An Investigation Conducted Under Section 232 of the Trade Expansion Act of 1962, as Amended > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2021-24958 ## Record - **Collection:** Federal Register - **Document type:** Notice - **Published:** November 18, 2021 - **Citation:** 86 FR 64606 ## Text DEPARTMENT OF COMMERCE Bureau of Industry and Security RIN 0694-XC085 Publication of a Report on the Effect of Imports of Transformers and Transformer Components on the National Security: An Investigation Conducted Under Section 232 of the Trade Expansion Act of 1962, as Amended AGENCY: Bureau of Industry and Security, Commerce. ACTION: Publication of a report. SUMMARY: The Bureau of Industry and Security (BIS) in this notice is publishing a report that summarizes the findings of an investigation conducted by the U.S. Department of Commerce (the “Department”) pursuant to Section 232 of the Trade Expansion Act of 1962, as amended (“Section 232”), into the effect of imports of transformers and transformer components on the national security of the United States. This report was completed on October 15, 2020 and posted on the BIS website in July 2021. BIS has not published the appendices to the report in this notification of report findings, but they are available online at the BIS website, along with the rest of the report ( see the ADDRESSES section). DATES: The report was completed on October 15, 2020. The report was posted on the BIS website in July 2021. ADDRESSES: The full report, including the appendices to the report, are available online at https://www.bis.doc.gov/index.php/documents/section-232-investigations/2790-redacted-goes-report-20210723-ab-redacted/file. FOR FURTHER INFORMATION CONTACT: Kevin Coyne, Industrial Studies Division, Bureau of Industry and Security, U.S. Department of Commerce (202) 482-4952, ESproducts232@bis.doc.gov. For more information about the Section 232 program, including the regulations and the text of previous investigations, please see www.bis.doc.gov/232. SUPPLEMENTARY INFORMATION: The Effect of Imports of Transformers and Transformer Components on the National Security U.S. Department of Commerce, Bureau of Industry and Security, Office of Technology Evaluation Final Report October 15, 2020 Table of Contents I. Executive Summary II. Legal Framework III. Investigation Process IV. Description of Products Subject to the Investigation V. Importance of Products to Critical Infrastructure and National Security VI. United States' and Global Markets for GOES, Transformers and Transformer Components VII. U.S. Production Capabilities, Industry Health and Competitiveness, and the Impact of Imports on National Security for Transformer Component Manufactures VIII. U.S. Production Capabilities, Industry Health and Competitiveness, and the Impact of Imports on National Security for Transformers IX. Competitiveness and Labor Issues X. Findings and Recommendations Appendices Appendix A: Section 232 Investigation Notification Letters to U.S. Department of Defense, U.S. Department of Energy, and Office of the U.S. Trade Representative Appendix B: Table of Acronyms Appendix C: Federal Register Notice (85 FR 29926) Appendix D: Summary of Public Comments Appendix E: Department of Commerce Survey Instrument Appendix F: Tariffs and Trade Agreements Appendix G: Summary of Previous U.S. Government Studies I. Executive Summary On May 4, 2020, U.S. Secretary of Commerce Wilbur Ross announced he would initiate an investigation into whether laminations for stacked cores for incorporation into transformers, stacked and wound cores for incorporation into transformers, electrical transformers, and transformer regulators are being imported into the United States in such quantities or under such circumstances as to threaten to impair the national security. Secretary Ross officially initiated this investigation on May 11, 2020, in response to inquiries and requests from multiple Members of Congress, a grain-oriented steel manufacturer, and producers of power and distribution transformers. On May 19, 2020, the Department of Commerce (Department) published a Federal Register Notice ( See Appendix C— Federal Register, 85 FR 29926) announcing the initiation of the investigation and inviting interested parties to submit written comments, opinions, data, information, or advice relevant to the investigation. The Department received 79 public comments and 30 rebuttal comments from a wide range of interested parties, including industry participants, representatives of state and local governments, foreign governments, and trade associations. A summary of the public comments received is included in Appendix D. In addition, the Department surveyed ( See Appendix E) 87 U.S. companies identified as participating in production or distribution of electrical steel, laminations and stacked and wound cores for transformers, power and distribution transformers, and voltage regulators. Survey responses provided the Department with detailed industry information that is otherwise not publicly available and was necessary to conduct a thorough analysis for this investigation. The Department consulted with the Department of Defense (including the Office of Industrial Policy and Defense Logistics Agency) regarding methodological and policy questions that arose during the investigation. Given the vital role that these products play in the energy sector and the critical infrastructure of the country, the Department also consulted with the Departments of Energy (Office of Electricity) and Homeland Security. In addition, the Department consulted with the Office of the United States Trade Representative, given the trade implications of any actions taken with regard to imports of these products. The products subject to this investigation are essential inputs to the manufacture and functioning of transformers, as well as the finished transformers themselves. In particular, this investigation focuses on transformers and transformer components (i.e., laminations and cores) for which the crucial input is grain-oriented electrical steel (GOES) . Transformers are critical assets used to step-up and step-down power voltages throughout the electrical grid. As such, they are fundamental to the efficient transmission and distribution of electricity across the bulk-power system of the United States. The U.S. electricity grid supplies residential, commercial, and industrial customers, as well as the power required to support military and defense installations, including bases, arsenals, and laboratories. A simplified schematic of the role of transformers in the electrical grid is presented below. EN18NO21.000 In addition to transmission and distribution, transformers are used widely in major industrial sectors such as mining, manufacturing, and chemical processing. Large commercial users of transformers include hospitals, hotels, office buildings, and airports. Sophisticated military equipment, such as fighter jets and naval vessels, relies on transformers of various types and capacities to provide the correct voltage within subsystems. Due to its importance for certain defense applications, the Defense Logistics Agency has included GOES among its requests for inclusion in the National Defense Stockpile. Large Power Transformers (LPTs) are among the most critical elements of the United States Bulk-Power System (BPS), which was the subject of an emergency declaration issued by President Trump on May 1, 2020. Executive Order 13920 (E.O. 13920 or Bulk Power Executive Order), titled “Securing the United States Bulk-Power System,” noted that as the backbone of our Nation's energy infrastructure, the BPS is fundamental to national security, emergency services, critical infrastructure, and the economy. 1 The President determined that the unrestricted foreign supply of electrical equipment constitutes an unusual and extraordinary threat to the national security, foreign policy, and economy of the United States. The President also determined that the evolving threats facing our critical infrastructure have highlighted supply chain risks and the need to ensure the availability of secure components from American companies and other trusted sources. 2 1 https://www.whitehouse.gov/presidential-actions/executive-order-securing-united-states-bulk-power-system/. 2 https://www.energy.gov/articles/president-trump-signs-executive-order-securing-united-states-bulk-power-system. The global transformer industry is dominated by large multinational companies that offer a wide product range and benefit from economies of scale. In addition to these large global players, in the United States there are also a number of smaller domestic companies that manufacture transformers of various power-handling capacities. Many manufacturers have established production facilities in locations that allow them to take advantage of lower labor costs and environmental standards. Mexico, in particular, has become a significant player in transformer manufacturing. A. GOES Grain-oriented electrical steel (GOES) is a critical material essential to the performance of transformers and accounts for a significant portion of the cost of transformer production (about 25 percent based on responses to the Department survey). AK Steel, Inc., a subsidiary of Cleveland Cliffs Inc., is the sole U.S. domestic producer of GOES, which it manufactures at facilities in Zanesville, Ohio, and Butler, Pennsylvania. While still a leader in the domestic market, AK Steel's electrical steel operations are not profitable, in part due to years of pressure from lower cost imports. 3 The CEO of Cleveland Cliffs, Inc., has stated that it may shut down the two unprofitable plants at which GOES is manufactured. If AK Steel's GOES operations were to close, the United States would lack the ability to produce transformers of any power handling capacity without relying on foreign sources for the key material that is essential to their operation and efficiency. 3 AK Steel Public Comments. The threat to national security posed by imports of GOES (among other steel products) was addressed by a Section 232 investigation conducted in 2017, which resulted in the 2018 imposition of 25 percent tariffs on imports of steel products from most countries. As a result, imports of GOES in 2019 were dramatically lower than in 2018 (down 56 percent). [TEXT REDACTED] [TEXT REDACTED]. 4 Moreover, many transformer companies, in public comments or survey responses, indicated concern over AK Steel's capabilities and capacity to supply a full range of GOES products, especially the higher grades that are increasingly in demand due to current DOE energy standards for distribution transformers as well as general market trends toward energy efficiency. 4 Department of Commerce, Section 232 Investigation into Impact of Steel Imports on National Security, 2018. 1. Transformer Components (Laminations and Cores) This investigation sought to evaluate the status of domestic production and the impact of imports for key subcomponents of transformers, namely laminations for stacked cores for incorporation into transformers, stacked cores for incorporation into transformers, and wound cores for incorporation into transformers. Arguably the most important part of a transformer is its core, which is made up of thin layers of laminations, usually made of GOES. Cores may have varying designs and specifications, but their function is generally to facilitate the magnetic field necessary for the induction of voltages between the two windings ( i.e., in order to “step-up” or “step-down” the power voltage). The layered composition helps reduce the core's energy losses. Transformer lamination and core producers make up the primary customer base for GOES suppliers such as AK Steel. However, over the past few years, there has been a marked decline in the domestic manufacturing of laminations and cores (both in-house by transformer companies and by independent producers), and a movement of production offshore (especially to Canada and Mexico). The United States has become highly dependent on foreign sources for these critical transformer components. A corollary to the movement of lamination and core manufacturing out of the United States is the decline of the domestic market for AK Steel's GOES. Although not the only factor, the tariffs imposed on imports of electrical steel under Section 232 have raised material costs for lamination and core manufacturers, affecting their ability to compete, because electrical steel accounts for a large percentage of the cost of these items [TEXT REDACTED]. In 2019, laminations with a total value of $40.2 million were sourced by surveyed companies. Of this $40.2 million, less than 12 percent came from domestic suppliers. This implies an import penetration level of 88% for laminations. In the years immediately prior, there was a dramatic increase in imports of these products—from $18 million in 2017 to $33 million in 2019—which displaced U.S. production. Over 95 percent of these imports came from Canada (68 percent) and Mexico (29 percent). A similar situation exists with regard to stacked and wound cores. Based on survey data, imports account for about 75 percent of wound core purchases by surveyed transformer companies in 2019. With regard to stacked cores, imports accounted for 54 percent of purchases by respondents. [TEXT REDACTED]. However, this firm reported that it shut down core production in February 2020 due to its inability to compete with imports. [TEXT REDACTED]. With the exit of the leading domestic non-captive supplier, future imports of stacked cores will also likely exceed 80 percent of purchases, with China serving as a major source. Imports of transformer cores (stacked and wound) rose from $22 million in 2015 to $167 million in 2019—a 650 percent increase—again with Canada (52 percent) and Mexico (45 percent) accounting for more than 95 percent of the total. Since domestic demand for laminations and cores has not increased in parallel with the increase in imports, the surge in imports represents displaced domestic production. Moreover, neither Mexico nor Canada has indigenous production capability for GOES. While Japan is the leading source of GOES for these countries, they also import some of this material from China and Russia. B. Transformers This investigation evaluated the status of the domestic transformer industry in several categories: Liquid-filled distribution transformers and small power transformers, medium power transformers, LPT, dry-type transformers, and voltage regulators. Distribution transformers (both liquid-dielectric as well as dry-type), and small and medium power transformers are used extensively in the U.S. electrical grid—millions are installed and operating. This investigation found that domestic industrial production and capabilities in these sectors is generally adequate. In the liquid-dielectric categories, imports account for less than a quarter of apparent consumption, and companies in this sector are largely financially sound and competitive in the market, based on responses to the BIS industry survey. While import penetration is currently relatively low, survey participants indicated competitiveness challenges, especially from Mexico and China. Survey respondents also mentioned workforce issues, such as difficulty finding and attracting qualified labor, as a concern. Imports play a major role in the dry-type transformer sector, and leading U.S.-based producers also have overseas production facilities. Countries with low cost labor—including China, Indonesia, and Mexico—are major sources of imported dry-type transformers. Despite relatively strong domestic production capabilities, an in-depth analysis of suppliers found a heavy dependence on foreign sources among domestic manufacturers in all transformer categories for critical components including laminations and cores and the GOES from which they are made, as described above. This investigation found shortcomings with regard to domestic production of LPTs that are critical elements of the United States BPS. Because they serve the greatest number of customers, the failure or destruction of just a single unit can have a large impact on U.S. economic, public health, and security interests. Moreover, long procurement lead times and limited availability of spare LPT and parts have serious implications for the resiliency of critical infrastructure. Domestic production capability falls far short of demand for the LPT segment of the industry, with imports accounting for over 80 percent of consumption. This lack of domestic production capability and the accompanying extreme dependence on imports has persisted for at least a decade, creating a critical infrastructure vulnerability, which has been raised in previous Department of Energy assessments. 5 5 “Large Power Transformers in U.S. Electric Grid”, Department of Energy, Office of Electricity and Energy Reliability, June 2012 https://www.energy.gov/sites/prod/files/Large%20Power%20Transformer%20Study%20-%20June%202012_0.pdf . Only six companies currently manufacture LPTs in the United States; [TEXT REDACTED]. The largest domestic producer is Korean-owned Hyundai, which has publicly noted that its Alabama facility will be utilized “in maneuvering U.S. imposed anti-dumping tariff [sic] and its protectionist policies.” 6 6 http://hhiamerica.com/about/sub04.htm. [TEXT REDACTED]. 7 Compounding the issue, domestic LPT producers are highly dependent on foreign sources for GOES, laminations, and cores. 7 [TEXT REDACTED]. C. Findings [TEXT REDACTED]. While still a leader in the domestic market, the market has eroded due to the migration of production of transformer components (and finished transformers) out of the United States. If this manufacturer were to shut down GOES production, the United States would be completely dependent on foreign sources for material critical to the manufacture of transformers. There is insufficient or no domestic production capability for certain grades and qualities of GOES that are increasingly in demand to meet efficiency standards for distribution transformers as well as general market trends toward more efficient transformers using higher grades of GOES. The United States lacks sufficient capacity to produce transformer cores and laminations, which are the key components in transformers. Transformer manufacturers in the United States rely on foreign sources (especially Canada and Mexico) for these critical components to meet over 75 percent of (non-captive) demand. The United States is also highly dependent on foreign-sourced transformers, most significantly for the LPTs that form the backbone of the BPS. Based on the overwhelming dependence of domestic transformer manufacturers on foreign sources, the Secretary finds that transformer laminations, stacked cores and wound cores are being imported into the United States in such quantities and under such circumstances as to threaten to impair the national security. In addition, LPTs are being imported into the United States in such quantities and under such circumstances as to threaten to impair national security. This dependence on imports leaves the United States with insufficient production capability for LPTs to meet the needs of the critical energy infrastructure of the United States. II. Legal Framework A. Section 232 Requirements Section 232 of the Trade Expansion Act of 1962, as amended, provides the Secretary with the authority to conduct investigations to determine the effect on the national security of the United States of imports of any article. It authorizes the Secretary to conduct an investigation if requested by the head of any department or agency, upon application of an interested party, or upon his own motion. See 19 U.S.C. 1862(b)(1)(A). Section 232 directs the Secretary to submit to the President a report with recommendations for “action or inaction under this section” and requires the Secretary to advise the President if any article “is being imported into the United States in such quantities or under such circumstances as to threaten to impair the national security.” See 19 U.S.C. 1862(b)(3)(A). Section 232(d) directs the Secretary and the President to consider, in light of the requirements of national security and without excluding other relevant factors, the domestic production needed for projected national defense requirements and the capacity of the United States to meet national security requirements. See 19 U.S.C. 1862(d). Section 232(d) also directs the Secretary and the President to “recognize the close relation of the economic welfare of the Nation to our national security, and . . . take into consideration the impact of foreign competition on the economic welfare of individual domestic industries” by examining whether any substantial unemployment, decrease in revenues of government, loss of skills or investment, or other serious effects resulting from the displacement of any domestic products by excessive imports, or other factors, results in a “weakening of our internal economy” that may impair the national security. 8 See 19 U.S.C. 1862(d). 8 An investigation under Section 232 looks at whether imports threaten to impair the national security, rather than looking at unfair trade practices as in an antidumping investigation. Once an investigation has been initiated, Section 232 mandates that the Secretary provide notice to the Secretary of Defense that such an investigation has commenced. Section 232 also requires the Secretary to do the following: (1) “Consult with the Secretary of Defense regarding the methodological and policy questions raised in [the] investigation;” (2) “Seek information and advice from, and consult with, appropriate officers of the United States;” and (3) “If it is appropriate and after reasonable notice, hold public hearings or otherwise afford interested parties an opportunity to present information and advice relevant to such investigation.” 9 See 19 U.S.C. 1862(b)(2)(A)(i)-(iii). 9 Department regulations (i) set forth additional authority and specific procedures for such input from interested parties, see 15 CFR 705.7 and 705.8, and (ii) provide that the Secretary may vary or dispense with those procedures “in emergency situations, or when in the judgment of the Department, national security interests require it.” Id., § 705.9. As detailed in the report, all of the requirements set forth above have been satisfied. In conducting the investigation, Section 232 permits the Secretary to request that the Secretary of Defense provide an assessment of the defense requirements of the article that is the subject of the investigation. See 19 U.S.C. 1862(b)(2)(B). Upon completion of a Section 232 investigation, the Secretary is required to submit a report to the President no later than 270 days after the date on which the investigation was initiated. See 19 U.S.C. 1862(b)(3)(A). The report must: (1) Set forth “the findings of such investigation with respect to the effect of the importation of such article in such quantities or under such circumstances upon the national security;” (2) Set forth, “based on such findings, the recommendations of the Secretary for action or inaction under this section;” and (3) “If the Secretary finds that such article is being imported into the United States in such quantities or under such circumstances as to threaten to impair the national security . . . so advise the President.” See 19 U.S.C. 1862(b)(3)(A). All unclassified and non-proprietary portions of the report submitted by the Secretary to the President must be published. See 19 U.S.C. 1862(b)(3)(B). Within 90 days after receiving a report in which the Secretary finds that an article is being imported into the United States in such quantities or under such circumstances as to threaten to impair the national security, the President shall: (1) “Determine whether the President concurs with the finding of the Secretary;” and (2) “If the President concurs, determine the nature and duration of the action that, in the judgment of the President, must be taken to adjust the imports of the article and its derivatives so that such imports will not threaten to impair the national security” See 19 U.S.C. 1862(c)(1)(A). B. Discussion While Section 232 does not specifically define “national security,” both Section 232 and the implementing regulations at 15 CFR part 705 contain non-exclusive lists of factors that the Secretary must consider in evaluating the effect of imports on the national security. Congress, in Section 232, explicitly determined that “national security” includes, but is not limited to, “national defense” requirements. See 19 U.S.C. 1862(d). The Department has determined that “national defense” includes both the defense of the United States directly and the U.S. “ability to project U.S. military capabilities globally.” 10 The Department also concluded that “[i]n addition to the satisfaction of national defense requirements, the term `national security' can be interpreted more broadly to include the general security and welfare of certain industries, beyond those necessary to satisfy national defense requirements, which are critical to the minimum operations of the economy and government.” 11 The Department deemed these certain industries as “critical industries.” 12 This report applies these interpretations of the terms “national defense” and “national security,” in defining “critical industries.” In doing so, this report considers 16 critical infrastructure sectors identified in Presidential Policy Directive 21. 13 Section 232 directs the Secretary to determine whether imports of any article are being made “in such quantities” or “under such circumstances” that those imports “threaten to impair the national security.” See 19 U.S.C. 1862(b)(3)(A). Accordingly, either the quantities or the circumstances, standing alone, may be sufficient to support an affirmative finding. 10 Department of Commerce, Bureau of Export Administration; The Effect of Imports of Iron Ore and Semi-Finished Steel on the National Security; Oct. 2001 (“2001 Report”). 11 Id. 12 Id. 13 Presidential Policy Directive 21, Critical Infrastructure Security and Resilience (Feb. 12, 2013) (“PPD-21”). The statute does not prescribe a threshold or a standard for when “such quantities” of imports are sufficient to threaten to impair the national security, nor does it define the “circumstances” that might qualify. Likewise, the statute does not require a finding that the quantities or circumstances are impairing the national security. Instead, the threshold question under Section 232 is whether those quantities or circumstances “threaten to impair the national security.” See 19 U.S.C. 1862(b)(3)(A). This demonstrates that Section 232 may be used to prevent a threatened impairment to the national security from occurring before the national security is actually impaired. Section 232(d) contains a list of factors for the Secretary to consider in determining if imports “threaten to impair the national security” 14 of the United States, and this list is mirrored in the implementing regulations. See 19 U.S.C. 1862(d) and 15 CFR 705.4. While the list provided by Congress in Section 232 provides mandatory factors for the Secretary to consider, it is not exhaustive. 15 Congress' illustrative list is focused on the ability of the United States to maintain the domestic capacity to provide the articles in question as needed to maintain the national security of the United States. 16 Congress split the list of factors into two equal parts using two separate sentences. The first sentence focuses directly on “national defense” requirements, thus making clear that “national defense” is a subset of the broader term “national security.” The second sentence focuses on the broader economy and expressly directs that the Secretary and the President “shall recognize the close relation of the economic welfare of the Nation to our national security.” 17 See 19 U.S.C. 1862(d). 14 19 U.S.C. 1862(b)(3)(A). 15 See 19 U.S.C. 1862(d) (“the Secretary and the President shall, in light of the requirements of national security and without excluding other relevant factors . . .” and “serious effects resulting from the displacement of any domestic products by excessive imports shall be considered, without excluding other factors . . .”). 16 This reading is supported by Congressional findings in other statutes. See, e.g., 15 U.S.C. 271(a)(1) (“The future well-being of the United States economy depends on a strong manufacturing base . . .”) and 50 U.S.C. 4502(a) (“Congress finds that—(1) the security of the United States is dependent on the ability of the domestic industrial base to supply materials and services . . . (2)(C) to provide for the protection and restoration of domestic critical infrastructure operations under emergency conditions . . . (3) . . . the national defense preparedness effort of the United States government requires—(C) the development of domestic productive capacity to meet—(ii) unique technological requirements . . . (7) much of the industrial capacity that is relied upon by the United States Government for military production and other national defense purposes is deeply and directly influenced by—(A) the overall competitiveness of the industrial economy of the United States; and (B) the ability of industries in the United States, in general, to produce internationally competitive products and operate profitably while maintaining adequate research and development to preserve competitiveness with respect to military and civilian production; and (8) the inability of industries in the United States, especially smaller subcontractors and suppliers, to provide vital parts and components and other materials would impair the ability to sustain the Armed Forces of the United States in combat for longer than a short period.”). 17 Accord 50 U.S.C. 4502(a). In addition to “national defense” requirements, two of the factors listed in the second sentence of Section 232(d) are particularly relevant in this investigation. Both are directed at how “such quantities” of imports threaten to impair national security. See 19 U.S.C. 1862(b)(3)(A). In administering Section 232 to “[determine] whether such weakening of our internal economy may impair the national security,” the Secretary and the President are required to “take into consideration the impact of foreign competition on the economic welfare of individual domestic industries,” as well as to and analyze whether there exist “serious effects resulting from the displacement of any domestic products by excessive imports.” See 19 U.S.C. 1862(d). In certain key product categories, imports of transformers and transformer components accounted for over 80 percent of U.S. consumption in 2019. In the case of transformer cores and laminations, imports have substantially displaced domestic production of these items. Because these products are the primary market for GOES, the displacement of domestic production by imports also threatens threaten the financial viability of the only remaining domestic producer of GOES. Two other factors included in the statute that are also particularly relevant to this investigation are “loss of skills” and “loss of investment.” See 19 U.S.C. 1862(d). As imports of GOES have increased, losses of U.S. GOES production capacity have caused a decline in the skilled workforce needed for the GOES manufacturing process. Additionally, as a result of their impact on the revenues of U.S. producers, these imports have mitigated investment in U.S. GOES production facilities, precluding future sustainable development of domestic GOES production. Similarly, these imports also create a disincentive for needed investment in U.S. GOES production facilities; without this investment, future production of domestic GOES is not sustainable. These factors are illustrative of a “weakening of the internal economy [that] may impair the national security” as defined in Section 232. III. Investigation Process A. Initiation of Investigation On May 4, 2020, the Secretary of Commerce announced that he would initiate an investigation into whether laminations for stacked cores for incorporation into transformers, stacked and wound cores for incorporation into transformers, electrical transformers, and transformer regulators are being imported into the United States in such quantities or under such circumstances as to threaten to impair the national security. 18 Laminations and cores made of GOES are critical transformer components, and transformers are a key element for distribution of all types of energy—including solar, nuclear, wind, coal, and natural gas—across the country. The decision to launch an investigation under Section 232 of the Trade Expansion Act of 1962, as amended (19 U.S.C. 1862), followed inquiries and requests from multiple Members of Congress, a GOES manufacturer, and producers of power and distribution transformers. 18 Department of Commerce Press Release, May 4, 2020. On May 11, 2020, the Department officially initiated the investigation. Pursuant to Section 232(b)(1)(b), the Department notified Secretary of Defense Mark T. Esper of the investigation and requested Department of Defense participation as it relates to methodology, policy questions, and national defense requirements for these products. Additionally, given that the products subject to this investigation are used extensively in the electrical grid and critical infrastructure of the United States, the Department also notified Secretary of Energy Dan R. Brouillette and Acting Secretary of Homeland Security Chad F. Wolf. Finally, the Secretary notified United States Trade Representative Robert E. Lighthizer, noting that Department staff will consult with counterparts in the Office of the United States Trade Representative regarding methodological and policy questions that arise during the investigation. (See Appendix A). On May 19, 2020, the Department published a Federal Register Notice ( See Appendix C— Federal Register , 85 FR 29926) announcing the initiation of the investigation to determine the effect of imports of Laminations for Stacked Cores for Incorporation into Transformers, Stacked Cores for Incorporation into Transformers, Wound Cores for Incorporation into Transformers, Electrical Transformers, and Transformer Regulators on the national security. The notice also announced the opening of the public comment period. B. Public Comments In the Federal Register Notice announcing the investigation, the Department invited interested parties to submit written comments, opinions, data, information, and advice relevant to the criteria listed in Section 705.4 of the National Security Industrial Base Regulations (15 CFR 705.4) as it affects the requirements of national security, including the following: (a) Quantity of the articles subject to the investigation and other circumstances related to the importation of such articles; (b) Domestic production capacity needed for these articles to meet projected national defense requirements; (c) The capacity of domestic industries to meet projected national defense requirements; (d) Existing and anticipated availability of human resources, products, raw materials, production equipment, facilities, and other supplies and services essential to the national defense; (e) Growth requirements of domestic industries needed to meet national defense requirements and the supplies and services, including the investment, exploration, and development, necessary to assure such growth; (f) The impact of foreign competition on the economic welfare of any domestic industry essential to our national security; (g) The displacement of any domestic products causing substantial unemployment, decrease in the revenues of government, loss of investment or specialized skills, and productive capacity, or other serious effects; (h) Relevant factors that are causing or will cause a weakening of our national economy; and (i) Any other relevant factors, including the use and importance of the Products in critical infrastructure sectors identified in Presidential Policy Directive 21 (Feb. 12, 2013) (for a listing of those sectors see https://www.dhs.gov/cisa/critical-infrastructure-sectors ). At the request of several parties, and in light of the global pandemic, the initial public comment period, as well as the rebuttal period, were extended ten additional days. The department provided an additional 24 days to submit public comments, with an additional time period provided for the submission of rebuttals to such comments as well. The final deadline for the submission of rebuttals to the public comments July 24, 2020. The Department received 82 written comments concerning this investigation, 79 of which were responsive on Regulations.gov for public review. Parties that submitted comments included members of industry, representatives of state and local governments, foreign governments, and other concerned groups. All 79 comments were available for response during the rebuttal period. Thirty-four rebuttal comments from industry participants and other stakeholders were received and 30 were responsive and were posted on Regulations.gov for public review. All of the appropriate comments and rebuttals were reviewed and factored into the investigative process. These responsive public comments received are summarized in Appendix D, along with a link to the Regulations.gov docket (BIS-2020-0015), where comments can be viewed in full. C. Information Gathering and Data Collection Activities Because this investigation commenced during a pandemic during which, many public and private sector organizations were shut down or operating under limited conditions, the Department decided not to hold a public hearing for this investigation. In lieu of a public hearing, the Department issued mandatory surveys ( See Appendix E) to 87 companies or divisions of companies identified as participating in the production or distribution of electrical steel, laminations and stacked and wound cores for transformers, and power and distribution transformers. Survey responses were received from most of the major participants in the domestic transformer supply chain. The surveys collected both qualitative and quantitative information. These mandatory surveys were conducted pursuant to Section 705 of the Defense Production Act (DPA) of 1950, as amended (50 U.S.C. 4555), and collected data on imports, exports, production, capacity utilization, employment, operating status, global competition, and financial information. The resulting aggregate data provided the Department with detailed industry information that is otherwise not publicly available, which was necessary to conduct a thorough analysis for this investigation. Information furnished in the survey responses is deemed confidential and will not be published or disclosed except in accordance with Section 705 of the DPA. 19 19 Section 705 of the DPA prohibits the publication or disclosure of this information unless the President determines that withholding such information is contrary to the interest of the national defense. Unless or until such a determination is made, information will not be shared with any non-government entity in other than aggregate form. D. Interagency Consultation The Department consulted with the Department of Defense (including the Office of Industrial Policy and Defense Logistics Agency) regarding methodological and policy questions that arose during the investigation. Given the vital role that these products play in the energy sector and the critical infrastructure of the country, the Department also consulted with the Departments of Energy (Office of Electricity) and Homeland Security. In addition, the Department consulted with the Office of the United States Trade Representative, given the trade implications of any actions with regard to imports of these products. The Department also consulted with other U.S. government agencies with expertise and information regarding the domestic and global transformer and GOES industries, including the Department's International Trade Administration and the U.S. International Trade Commission. E. Product Scope of the Investigation The scope of this investigation includes laminations for incorporation into stacked cores, stacked cores for incorporation into transformers, wound cores for incorporation into transformers, electrical transformers, and transformer regulators. While GOES is not the direct subject of this investigation, because it is the primary material used in laminations, stacked cores, and wound cores, it is included in the scope of products addressed in this report. Products were examined in accordance with the Harmonized Tariff Schedule of the United States (HTS) up to the ten-digit level. The products and their associated HTS code are provided in Figure 1 below. Figure III-1—Product Scope of the Investigation 10 digit HTS Product description 7226.19.1000 Non-Oriented Electrical Steel (NOES) (300-600mm). 7226.19.9000 Non-Oriented Electrical Steel (NOES) (<300mm). 7225.11.0000 Grain-Oriented Electrical Steel (GOES) (>600mm width). 7226.11.1000 Grain-Oriented Electrical Steel (GOES) (300-600mm). 7226.11.9030 Grain-Oriented Electrical Steel (GOES) (<300mm; <.25mm thick). 7226.11.9060 Grain-Oriented Electrical Steel (GOES) (<300mm; >.25mm thick). 8504.90.9634 (Post 2016), 8504.90.9534 (2015) Transformer Laminations (Stacked). 8504.90.9638 (Post 2016), 8504.90.9538 (2015) Transformer Cores (Stacked). 8504.90.9642 (Post 2016), 8504.90.9542 (2015) Transformer Cores (Wound). 8504.21.0020 Liquid-Dielectric Transformer Under 50KVA. 8504.21.0040 Liquid-Dielectric Transformer 50-100KVA. 8504.21.0060 Liquid-Dielectric Transformer 100-500KVA. 8504.21.0080 Liquid-Dielectric Transformer 500-650KVA. 8504.22.0040 Liquid-Dielectric Transformer 650-2,500KVA. 8504.22.0080 Liquid-Dielectric Transformer 2,500-10,000KVA. 8504.23.0041 Liquid-Dielectric Transformer 10,000-60,000KVA. 8504.23.0045 Liquid-Dielectric Transformer 60,000KVA-100,000KVA. 8504.23.0080 Liquid-Dielectric Transformer Over 100,000KVA. 8504.32.0000 Dry-Type/Other Transformer 1-16KVA. 8504.33.0020 Dry-Type/Other Transformer 16-50KVA. 8504.33.0040 Dry-Type/Other Transformer 50-500KVA. 8504.34.0000 Dry-Type/Other Transformer Over 500KVA. 9032.89.4000 Voltage Regulators. Source: United States International Trade Commission and U.S. Department of Commerce, Bureau of Industry and Security. IV. Description of the Products Subject to the Investigation The products subject to this investigation are those that are critical to the manufacture and functioning of transformers, as well as the transformers themselves. In particular, this investigation focuses on transformers and transformer components for which the crucial input is GOES . Transformers are passive devices that change (or transform) the voltage or electrical current level using a magnetic circuit. They are used to either increase (step-up) or decrease (step-down) voltage to ensure the correct voltage for a specific electricity use application. Transformers are available with a wide range of power-handling capabilities, typically measured in kilo-volt-amperes (kVA), from less than one kVA, to more than 100,000 kVA (which can also be expressed as 100 mega-volt-amperes where 1 MVA = 1,000 kVA). LPTs can be several stories tall and weigh hundreds of tons, while transformers for consumer products may be small enough to fit in your hand. No matter the size, the basic purpose of any transformer is to transform electrical power from one voltage to another. There are many ways in which transformers can be categorized. Common industry terminology may classify by specific type (autotransformer, instrument transformer), current type (direct or alternating), function (step-up, step-down), core type (shell-form or core-form), or type of installation (pole-mounted, pad-mounted, underground). The size of a transformer can be measured by the input voltage (in kilovolts), the output voltage (in kilovolts), or the load capacity (measured by kilovolt amperes). This report will generally classify transformers based on their power load handling capacity (in kVA) as well as their type of dielectric insulation (liquid or dry). These categorizations were chosen because they correspond with the way in which the U.S. Census Bureau collects information on imports of these items. Transformers of most power-handling capacities are subject to this investigation. The exception is very small transformers (under 1 kVA), such as those typically used in conjunction with power cables for consumer electronics including laptops and cell phones, as these generally do not use electrical steel cores. The most ubiquitous use of transformers is in the electrical grid, where they are used by electric utilities and power producers for the transmission and distribution of electricity from power generation plants to residential, commercial, and industrial customers. In addition to the electrical grid, large industrial users such as mines and major manufacturing, and chemical plants, as well as large commercial users including hospitals, hotels, office buildings, and airports may connect directly to the transmission grid and utilize their own transformers to take advantage of lower marginal costs. Transformers are crucial equipment used throughout the electrical grid. Power leaves the generator and enters a transmission substation located at the power plant. This transmission substation uses LPTs to “step-up” the generator's voltage to extremely high voltages (155 kV to 765 kV volts) for efficient transmission over long distances (up to 300 miles). For the electricity to be used by commercial, industrial, or residential users, it must be “stepped-down” by transformers to distribution voltages (less than 10 kV; a standard line voltage is 7.2 kV at a substation). From there, the electricity is distributed locally via overhead or sunk power lines before it is further stepped-down by smaller transformers (such as pole mounted units) to the 240 volts that is standard household electrical service. Additionally, as noted above, some large commercial and industrial users may connect directly at substation transmission levels. The diagram below presents a simplified depiction of the use of transformers in the electrical grid. BILLING CODE 3510-33-P EN18NO21.001 A. Types of Transformers LPTs generally have power-handling capacities above 100,000 kVA (100 MVA) and are used to step-up the voltage up to extremely high levels at power generation sites for efficient transmission over long distances. They are used again at substations to step-down the voltage for more local distribution. LPT are also used by manufacturing sectors that require high voltages in their production processes, such as steel mills. EN18NO21.002 Small and medium power transformers, which generally have power handling capacities from 5,000 kVA to 100,000 kVA, are also used extensively throughout the electrical grid. They are available in a wide range of voltage ratings and power handling capacities, to meet the specific needs of consumers. For example, they are used at substations and at industrial facilities. Distribution transformers (up to 5,000 kVA) are used to further step-down the voltage at substations to deliver electricity to customers. Distribution transformers provide the final voltage transformation in the electrical grid. While they are energized for 24 hours a day, their load fluctuates throughout the day with changing energy demands. Also located along the electric grid are banks of voltage regulators, which are used to compensate for voltage fluctuation during power distribution. Voltage regulators play an important role in light of the increasing use of distributed energy resources such as solar and wind, which are intermittent. Transformers can be classified by the material used in core-insulation ( e.g., “Liquid-dielectric” or “Dry-Type”). Cooling is important because transformers generate heat and pose potential fire or explosion hazards. Liquid-dielectric transformers consist of the transformer core placed in a metal sealed container filled with mineral oil, which serves as a coolant and insulator. Dry-type transformers have a metal housing for insulation but are cooled by air convection or fans, or may be encased in resin. Oil-filled liquid transformers are generally more efficient than dry-type, which are more limited in their power-handling capacity and size. However, oil-filled transformers require more maintenance, and because the liquid may be flammable or toxic, dry-type may be more preferable in public spaces. EN18NO21.003 Dry-type transformers are commonly used in light industrial and commercial applications; some are used indoors or underground. They are often used in cases in which liquid-dielectric transformers present unacceptable environmental, explosion, or fire hazards. Specialized transformers perform specific functions in the electric grid. For example, instrument transformers step-down currents and voltages for accurate and reliable measurement by secondary equipment such as meters, protection relays, and other devices. Another specialized type of transformer is the autotransformer, which is used in power transmission systems to interconnect systems operating at different voltage; this type of transformer can also be used as a voltage regulators. Transformers have been in use for over 100 years (Westinghouse built the first reliable commercial transformer in 1886) and are becoming more complex as they evolve to become part of the growing interconnected “smart grid.” 20 The smart grid is an automated network with a two-way flow of energy and information that is capable of monitoring and controlling energy metrics between the power plant and the end user, as well as at the many points in between. To function as part of the smart grid, transformers must be able to communicate in real time, be capable of extensive customer interaction, feature remote digital monitoring, and have the ability to self-diagnose and repair malfunctions. 20 https://global.abb/group/en/about/history/heritage-brands/westinghouse. B. Transformer Construction Regardless of their size or application, all transformers work through electromagnetic induction, a process in which a coil of wire magnetically induces a voltage into another coil of wire in close proximity to it. The basic structure of a transformer is two coils of copper wire: The “primary winding” and the “secondary winding.” The primary winding takes the power into the transformer, and the secondary winding delivers the power from the transformer. The difference in voltage between the primary and secondary windings is achieved by differences in the number of coil turns in each winding. 21 21 https://circuitdigest.com/tutorial/transformer-basics. The two windings are not in direct contact with one another, but rather are each wound around a closed magnetic circuit that forms the core of the transformer. The core is not solid, but is made up of thin layers, or laminations, usually made of GOES. This layered composition helps reduce energy losses (eddy flow and hysteresis) within the core. Core laminations are the main material input in an electrical transformer and can account for up to 50 percent of a transformer's cost. 22 22 https://www.worldofsteel.com/Types%20of%20CRGO.html. EN18NO21.004 Electrical transformers are typically produced with either stacked or wound cores. Stacked cores are most often used in larger distribution and power transformers, while wound cores are used in small and medium distribution transformers that step-down the voltage from the transmission line and provide power. In either case, GOES is the most common material used. When used in stacked cores, GOES is sheared or stamped into individual laminations, which are then stacked together to form the core. Stacked laminations often resemble letters of the alphabet, including C, E, L, U, and I shapes. Commonly used core shapes include E-I, E-E, L, and U-I. When used in wound cores, a continuous length of GOES is wound around a mandrel multiple times to form the core. Copper windings (electricity conductors) are wrapped around both stacked and wound cores. Transformers can be produced in “single-phase” or “three-phase” models. A single-phase transformer has one primary and one secondary set of windings, while a three-phase transformer has three primary and secondary windings around three core limbs. Most commercial electric power applications use three-phase transformers, while lower voltage and distribution level transmissions use single-phase transformers. There are two typical configurations for the core and windings of a transformer: Core-form and shell-form . In core-form, the windings are in a cylindrical shape around the legs of the core. In shell-form, the windings are wrapped around the center of the core. Core-form transformers are the most widely used because they are generally simpler in design and less expensive than shell-form transformers. Shell form transformers typically use more electrical steel and are more resistant to short circuit offering an advantage for extra high voltage applications. For this reason, they are often used in industrial applications, such as steel mills, where short circuits are common. C. Electrical Steel 23 23 This section draws from USITC's report, Grain-Oriented Electrical Steel From the People's Republic of China, the Czech Republic, Germany, Japan, the Republic of Korea, Poland, and the Russian Federation: Initiation of Antidumping Duty Investigations, 78 FR 65283 (October 31, 2013). As noted in the above description of transformer construction, the key material used in the core of most transformers is GOES; this application accounts for the majority of GOES consumption. The magnetic properties of electrical steel are integral to the primary function of transformers, i.e., converting voltage from one level to another. Electrical steel is a flat-rolled silicon alloy. The benefits of adding silicon to steel include increased electrical resistivity, high permeability, and low hysteresis loss. There are two types of electrical steel: GOES, also known as Cold-Rolled Grain Oriented Steel (abbreviated CRGO), and non-grain-oriented electrical steel (NOES), also known as Cold-Rolled Non-Grain Oriented Steel (abbreviated CRNGO). GOES is the most energy efficient type of electrical steel used to transport and transform mechanical energy to electrical energy. Its primary application is in transformers where energy or core loss is critical (particularly large and medium-sized electrical power and distribution transformers. In contrast, NOES is more commonly used in electric motors and generators, as well as in some smaller transformers. GOES is milled to yield exceptionally good magnetic properties. It can be sold in sheets or strips in fully processed form (annealed by the manufacturer) or semi-processed (requiring further heat treatment by purchaser). GOES, which typically contains approximately 3.2 percent by weight of silicon, is manufactured using specialized rolling and annealing (heat treatment) processes, which produces grain structures uniformly oriented in the rolling (lengthwise) direction of the steel sheet. Compared with NOES, this uniformly oriented grain structure permits the GOES steel sheets to conduct a magnetic field with a higher degree of efficiency in the direction of rolling. 1. Types of GOES GOES is produced in compliance with specifications issued by standards organizations and various proprietary specifications. For example, conventional GOES is available in standard gauges (thicknesses), ranging from 0.007 inch (0.18 mm) through 0.0138 inch (0.35 mm), and high-permeability GOES is found in two standard thicknesses (0.23 mm and 0.27mm). Conventional products in the standard thicknesses are often referred to as U.S. or American Iron and Steel Institute grades M2 through M6. Thinner gauge GOES is often preferred because thinner laminations yield lower core losses in transformers, despite the added cost for both the steel and the manufacturing of the transformer core. Within each type of GOES, magnetic characteristics may vary, with producers manufacturing the same product with differing average core losses. In addition to differences in thickness, GOES is produced with varying levels of magnetic permeability, distinguished by the size and orientation precision of the grains within the steel. Conventional GOES has smaller but less precisely oriented grains, while high-permeability GOES has more precisely oriented but larger grains. High-permeability products allow a transformer to operate at a higher level of flux (flow) density than conventional products, thus permitting a transformer to be smaller and have lower energy operating losses. EN18NO21.005 High permeability GOES is also produced as a domain-refined (surface-treated) type that has even lower core loss at high flux density. Domain refinement occurs by using laser scribing, mechanical scribing or electrolytic etching to scribe thin lines onto the surface of the steel, which subdivides larger-oriented grains into smaller ones to produce “domain-refined GOES” (DR-GOES). GOES that undergoes laser scribing does not retain its enhanced magnetic characteristics when it is annealed (heat treated) to relieve internal stresses. As a result, laser-scribed GOES (or “non-heat-proof GOES”) is not suitable for producing wound-core transformers, which require superior core-loss properties but must undergo heat treatment to relieve internal stresses (which increase core losses) accumulated from the manufacturing process. By contrast, domain-refined GOES produced by mechanical scribing or electrolytic etching (“heat-proof” or “permanent” DR-GOES”) retains its enhanced magnetic characteristics, even though stress-relief treatment. There is no known production of mechanically scribed or electrolytically-etched heat-proof GOES in the United States. 2. Amorphous Metal Amorphous metal transformer cores are an alternative to traditional cores made from GOES. Amorphous metal, called metglas, is an alloy of iron that includes boron, silicon, and phosphorous in the form of thin foil. Produced using rapid solidification of molten alloy (at a rate of about one million degrees Celsius per second), it differs from GOES in that it has a random rather than a crystalline structure. While more expensive than GOES on a per kilogram basis and more labor intensive to form into cores, the material has the potential to reduce costs in the long run for utilities over the life of the transformer. Compared to cores made from GOES, core losses from eddy currents can be 70-80 percent lower in transformers with amorphous metal cores, reducing their operating costs and improving their energy efficiency. Amorphous metal is most often used in industrial and distribution transformers with power handling capacities in the 50 to 1000 kVA range. D. Transformer Construction The typical transformer manufacturing process consists of the following steps: 1. Engineering and design: Design is complex, balancing the costs of raw materials (copper, steel, and cooling oil), electrical losses, manufacturing labor hours, plant capability constraints, and shipping constraints. 2. Core building: The core is the most critical component of a transformer, and it requires both a highly trained and skilled workforce and a supply of GOES. 3. Windings production and assembly of the core and windings: Windings are predominantly copper and have an insulating material. 4. Drying operations: Excess moisture must be removed from the core and windings because moisture can degrade the dielectric strength of the insulation. 5. Tank production: A tank must be completed before the winding and core assembly finish the drying phase so that the core and windings do not reabsorb moisture. 6. Final assembly: The final assembly must be done in a clean environment; even a tiny amount of dust or moisture can deteriorate the performance of a transformer. 7. Testing: Testing is performed to ensure the accuracy of voltage ratios, verify power ratings, and determine electrical impedances. V. Importance for Critical Infrastructure and National Security A. Critical Energy Infrastructure The Cybersecurity and Infrastructure Security Agency (CISA) has identified 16 critical infrastructure sectors whose assets, systems, and networks, whether physical or virtual, are considered so vital to the United States that their incapacitation or destruction would have a debilitating effect on security, national economic security, national public health or safety, or any combination thereof. 24 One of these 16 sectors is the Energy Sector. CISA has determined that the U.S. energy infrastructure fuels the economy of the 21st century. Without a stable energy supply, health and welfare are threatened, and the U.S. economy cannot function. In fact, CISA notes that, among the sixteen sectors, the Energy Sector is uniquely critical because it provides an “enabling function” across all critical infrastructure sectors. The energy infrastructure is divided into three interrelated segments: Electricity, oil, and natural gas. Items subject to this investigation form the backbone of the electricity segment. 24 https://www.cisa.gov/critical-infrastructure-sectors. The U.S. electricity segment contains more than 9,700 power plants with 1,200 gigawatts capacity, sourced by coal, petroleum, natural gas, nuclear, hydroelectric, and renewable energy sources such as wind and solar. 25 The number of power plants has increased significantly in recent years, due primarily to the expansion of solar and wind power generation. The electricity generated by the plants is processed along hundreds of thousands of miles of high voltage transmission lines and millions of miles of local distribution lines through transformers subject to this investigation. In addition to plant-generated power, there is an evolution of sorts where distributed energy resources are allowing energy resources such as solar, wind, and energy storage, to be owned and operated at the customer level. However, the vast majority of electric power is in plant-generated and delivered via traditional means to consumers. 25 EIA, Electric Power Annual, Table 4.1. In its Energy-Sector Specific Plan, CISA notes that the failure of U.S. power infrastructure, and specifically LPTs, could present a vulnerability to the electric grid. CISA further expresses concern that the United States heavily depends on overseas manufacturers to meet its demand for LPTs and that the supply and procurement of LPTs can be challenging because it can take more than 12 months to replace an LPT due to its long and complex procurement process and the uniqueness in construction for the specific voltages and currents at the intended substation. 26 26 https://www.cisa.gov/sites/default/files/publications/nipp-ssp-energy-2015-508.pdf. While the electrical grid, especially at the BPS level, 27 has operated at a high-level of reliability, there is a growing concern that the ever-expanding list of threats, which could be physical and/or cyber-related in nature, further increases the grid's vulnerability and the need for enhanced security. In addition to their long manufacturing and acquisition lead time, LPTs pose unique vulnerabilities because of transformer's susceptibility to the serious and evolving threats and hazards. Single or multiple failures of LPTs are becoming a significantly greater concern to grid reliability. 27 The North American Electric Reliability Corporation defines the bulk-power system to consist of all generation components and transmission system elements generally operating at 100 KV or higher. See: https://www.nerc.com/pa/Stand/Project%20201017%20Proposed%20Definition%20of%20Bulk%20Electri/bes_phase2_reference_document_20140124_llh.pdf. As a result of these concerns, several efforts by the federal government and electric utility industry have been initiated and are underway. For example, the North American Electric Reliability Corporation (NERC) issued the NERC-CIP-14 Standard in 2015, requiring transmission asset owners to apply risk assessments to identify and protect transmission stations and substations, as well as their associated primary control centers. Instability, uncontrolled separation, or cascading failure within an interconnected transmission system could result if these assets were rendered inoperable or damaged as a result of a physical attack. In addition, the Fixing America's Surface Transportation Act [Pub. L. No. 114-94 (FAST Act)], signed into law in December 2015, requiring the DOE to establish a plan for a Strategic Transformer Reserve that could be tapped in the event of a major disruption to the electric grid. 28 DOE's responsive recommendation is that a voluntary industry-based approach would be more feasible and effective than a national, Government-owned stockpile of transformers. The DOE report, however, noted the lack of domestic capacity to produce LPT and the extreme dependence on foreign suppliers, especially for high-voltage transmission (>345 kV). 29 28 https://www.congress.gov/114/plaws/publ94/PLAW-114publ94.pdf. 29 DOE Transformer Reserve Study, 2017. President Trump signed Executive Order 13920 (E.O. 13920), titled “Securing the United States Bulk-Power System,” on May 1, 2020. 30 The President determined that the unrestricted foreign supply of BPS electric equipment constitutes an unusual and extraordinary threat to the national security, foreign policy, and economy of the United States. 30 https://www.federalregister.gov/documents/2020/05/04/2020-09695/securing-the-united-states-bulk-power-system. In this Executive Order, the President declared that threats to the BPS by foreign adversaries constitute a national emergency. He also found that as it serves as the backbone of our Nation's energy infrastructure, the BPS is fundamental to national security, emergency services, critical infrastructure, and the economy. Transformers subject to E.O. 13920 include substation transformers, substation voltage regulators, and instrument transformers, which are key elements of the BPS. The E.O. notes that the BPS is a target of those seeking to commit malicious acts against the United States and its people, including malicious cyber activities, because a successful attack on the U.S. BPS would present significant risks to the economy and human health and safety and would render the United States less capable of acting in defense of itself and its allies. While BPS electric equipment supplied by potential adversaries raises immediate concerns, the Secretary of Energy has also noted that evolving threats facing our critical infrastructure have only served to highlight the supply chain risks and the need to ensure the availability of secure components from American companies and other trusted sources. 31 DOE is currently undertaking a rulemaking effort, in consultation with other agencies, to implement the authorities delegated to the Secretary of Energy in E.O. 13920. E.O. 13920 authorizes the Secretary of Energy to (1) prohibit any acquisition, importation, transfer, or installation of BPS electric equipment by any person or with respect to any property to which a foreign adversary or an associated national thereof has any interest, that poses an undue risk to the BPS, the security or resiliency of U.S. critical infrastructure or the economy, or U.S. national security; (2) establish and publicize criteria for recognizing particular equipment and vendors in the BPS electric equipment market as “pre-qualified” for future transactions and to apply these criteria to establish and publish a list of pre-qualified equipment and vendors; (3) in consultation with heads of other agencies, to identify existing BPS electric equipment in which a foreign adversary or associated national thereof has an interest that poses an undue risk to the BPS, the security or resiliency of U.S. critical infrastructure or the U.S. economy, or U.S. national security, and develop recommendations to identify, isolate, monitor, or replace this equipment as appropriate; and (4) establish a Task Force on Federal Energy Infrastructure Procurement Policies Related to National Security, which will focus on the coordination of Federal Government procurement of energy infrastructure, the sharing of risk information and risk management practices, and the development of recommendations for implementation to the Federal Acquisition Regulatory Council (FAR Council). DOE and the Department will coordinate efforts to ensure consistency of rules and supporting program activities. 31 https://www.energy.gov/articles/president-trump-signs-executive-order-securing-united-states-bulk-power-system. 1. Role of Transformer Manufacturers in Critical Infrastructure As part of its survey of industry conducted for this investigation, the Department requested survey recipients to provide information on which of the 16 critical infrastructure sectors their products support. Respondents indicated support for all 16 sectors, with the Energy Sector (not surprisingly) indicated most frequently. As mentioned above, the Energy Sector is unique among the 16 sectors because it provides an “enabling function” across all critical infrastructure sectors, and survey responses validated this fact. Other critical infrastructure sectors that received numerous mentions by survey respondents were critical manufacturing, commercial facilities, Government facilities, information technology, chemical sector, defense industrial base, and food and agriculture (see Figure V-1). EN18NO21.006 By product, all categories were again cited as providing support to critical technology sectors (see Figure V-2). Most frequently mentioned were dry-type transformers 16-500 kVA, followed by liquid-dielectric transformers 60-100 MVA, and liquid-dielectric transformers under 650 kVA. EN18NO21.007 B. National Security/Defense Requirements In today's technology-dependent environment, energy requirements are inseparable from the Department of Defense's (DOD) mission requirements, whether discussing weapons platforms or the installations and systems that support those capabilities around the globe. As such, energy resilience, which enables the capabilities of weapons platforms, facilities, and equipment, is a critical investment that must be part of the DOD's research, acquisition, operations, and sustainment conversations. 32 32 Department of Defense Annual Energy Management and Resilience Report (AEMRR) for Fiscal Year 2018, https://www.acq.osd.mil/eie/Downloads/IE/FY%202018%20AEMR.pdf. DOD is the largest single energy-consuming entity in the United States, both within the Federal Government and as compared to any single private-sector entity. DOD operational and installation energy consumption represents approximately 80 percent of total Federal energy consumption, more than sixteen times the total energy consumption of the next closest Federal agency (the United States Postal Service). 33 In FY 2018, DOD spent approximately $3.49 billion on installation energy, of which $2.5 billion was for electricity used to power, heat, and cool buildings. 33 Id, p. 32. The U.S. electrical grid, primarily under the ownership and control of private organizations, supplies the power required to support DOD installations, including military bases, arsenals, and laboratories. This supply is a key part of the “Defense Critical Electric Infrastructure,” which is defined as any electrical infrastructure in the 48 contiguous States or the District of Columbia that serves a facility designated by the Secretary of Energy as critical to the defense of the United States and vulnerable to a disruption of the supply of electric energy provided to such a facility by an external provider, but that is not owned or operated by the owner or operator of such facility. 34 In 1998, with the issuance of Defense Reform Initiative #49, the military services were directed to privatize their utility systems. The Department of Defense's Defense Logistics Agency Energy acts as the procurement agency for contracting with utilities for this purpose. 35 34 https://www.federalregister.gov/documents/2018/10/29/2018-23459/critical-electric-infrastructure-information-new-administrative-procedures. 35 https://archive.defense.gov/dodreform/drids/drid49.html. The Department of Defense operates 500 installations worldwide, with nearly 300,000 buildings covering 1.9 billion square feet. Energy needed to power these fixed installations accounts for nearly 30 percent of DoD's total energy use, and the installations rely extensively on transformers of various power handling capacities to distribute electricity at the appropriate voltage level. 36 36 DOD AEMMR. As noted above, DOD relies primarily on commercial power to support its installations. Commercial power supplies can be threatened by a variety of events, ranging from natural hazards and physical attacks on infrastructure (including transformers), to cyber-attacks on networks and Supervisory Control and Data Acquisition (SCADA) systems. Disruption of power could affect critical DOD missions involving power projection, defense of the homeland, or operations conducted at installations in the United States directly supporting warfighting missions overseas. DOD's efforts to improve the energy resilience of its installations mainly focuses on backup power generation to compensate when the commercial grid experiences a disruption. However, emergency power generation assets are ineffective if the surrounding distribution system is unable to convey power between the generation asset and final point of use. Therefore, DOD may also pursue upgrading distribution system equipment, including transformers and power lines, as a standalone solution if backup generation is already adequate or as an integrated solution when new backup power generation assets are implemented. In addition to their vital role in the electricity grid to supply power to military installations, transformers also play an essential role in supporting military operations. Sophisticated military equipment, such as missiles, fighter jets, and naval vessels, rely on transformers of various types and capacities to provide the correct voltage within subsystems. Additional military applications include tactical displays and field operations equipment such as mobile power supplies and reconnaissance equipment. In addition to reliability and durability, military transformers must meet defense specifications (Mil Spec) and often must be designed and manufactured to withstand extreme environmental conditions, such as high humidity, salt spray, sand, high altitude, shock, and vibration. Military transformers may be specially encapsulated to withstand these types of harsh conditions. [TEXT REDACTED]. Due to its importance for certain defense applications, the Defense Logistics Agency (DLA) has included GOES among its requests for inclusion in the National Defense Stockpile. In their Fiscal Year 2019 Report to Congress on Stockpile Requirements, DLA Strategic Materials identified a potential shortfall for GOES of approximately [TEXT REDACTED]. Per the Strategic and Critical Materials Stock Piling Act (50 U.S.C. 98 et seq. Sec 14 (b)), shortfalls are estimated under national emergency planning assumptions consisting of “a military conflict scenario consistent with the scenario used by the Secretary of Defense in budgeting and defense planning purposes.” In other words, shortfall amounts are calculated based on surge requirements for the military engaging in conflict, taking into consideration weapons and munitions lost and expended during the conflict in an environment of reduced foreign availability of supplies of strategic and critical materials. If United States' sole domestic source of GOES were to cease production, DLA's estimated shortfalls would be larger. DLA Strategic Materials recommended a [TEXT REDACTED]. The stockpile recommendation is lower than the estimated requirement due to competing stockpile needs and budget constraints. In the industry survey conducted as part of this investigation, the Department queried participants as to whether their products were provided, directly or indirectly, for U.S. defense systems, installations, or known defense end-uses. The majority of survey respondents were unable to provide specific information in this regard because most defense-related sales are indirect; instead, respondents noted that their products (especially liquid-dielectric transformers) are used to provide power in the national grid that supplies power to military bases. Most of those that responded to the question with specifics reported that only a small percentage of sales, about 1-3 percent, involved defense-related uses. Moreover, in most cases, this was just an estimate, as survey respondents typically did not have insight into the ultimate end use of their products. However, some survey respondents were able to provide precise information on defense and military uses for their products. These respondents supported every branch of the military, as well as the Department of Energy/National Labs, the DLA, the State Department, NASA, the Department of Defense's Missile Defense Agency, and the U.S. Intelligence Community. EN18NO21.008 Based on survey responses, dry-type transformers (particularly of higher power handling capacities) are suitable for inside installations and thus play an important role in direct defense applications such as onboard radars, missiles, ships, and aircraft. EN18NO21.009 No respondent attributed sales of voltage regulators, non-oriented electrical steel, liquid-dielectric transformer 60,000-100,000 kVA, or liquid-dielectric transformer over 100,000 kVA to direct defense industrial base support. [TEXT REDACTED]. [TEXT REDACTED]. 37 [TEXT REDACTED]. 37 https://new.abb.com/news/detail/64657/abb-completes-divestment-of-power-grids-to-hitachi. VI. United States' and Global Markets for GOES, Transformers and Transformer Components A. GOES Market The market for GOES is dominated by transformers, particularly LPTs, which can weigh over 400 tons, and GOES constitutes a significant portion of this weight. Although large transformers by sheer size incorporate more GOES by weight, the market for them is small in terms of units. In contrast, smaller transformers, such as distribution transformers, utilize less GOES by weight, but they are sold in much greater volumes and so also provide a significant market for GOES. A recent report by a market research firm estimated that the global market for GOES will reach $20.8 billion by 2025, with a compounded annual growth rate (CAGR) of 5.8 percent. The average annual growth rate in the United States is estimated to be 4.6 percent over the next five years (adjusted downward from 5.7 percent due to the impacts of COVID-19); the market in China will grow at 9.5 percent. 38 38 https://www.reportlinker.com/p05798466/Global-Electrical-Steel-Industry.html?utm_source=GNW. AK Steel is the sole remaining U.S. supplier of GOES. Another domestic producer, Allegheny Technologies, Inc. (ATI) stopped production of GOES in 2016. However, industry reports indicate that Big River Steel (Osceola, AR), a manufacturer of non-grain oriented steel, intends to produce high quality GOES in the future, including high permeability grades (such as Hi-B). 39 39 https://bigriversteel.com/products/electrical/. Outside of the United States, there are 13 manufacturers of GOES, as listed in Figure VI-1. EN18NO21.010 [TEXT REDACTED]. 41 40 http://www.corpin.cz/en/arcelorgosteel.html. 41 [TEXT REDACTED] A limited number of these global suppliers, such as those from Japan and South Korea, are capable of producing the high permeability GOES that the market is demanding in response to current DOE standards. China is the world's largest producer of GOES but much of its production is consumed internally, and Chinese firms have not dominated export markets. [TEXT REDACTED] EN18NO21.011 For GOES <600 Mm in width, the total trade in 2019 was $437.6 million, much smaller than GOES ≥600 Mm in width, and the major players were mainly Europen countries. EN18NO21.012 B. Transformer Laminations and Cores Most of the major global transformer companies produce laminations and cores for internal consumption, although manufacture of these items does not necessarily occur in the same facility in which they are consumed. However, there are also companies that manufacture these products for transformer producers. Lamination and core manufacturers tend to be small companies that produce specialized products, and there is little information available on them as a distinct industry sector. Based on data available from GTAA, the biggest players in the world export market for the category including transformer parts (laminations and cores but also products not subject to this investigation) 42 is China, including Hong Kong. In 2019, of the total $11.3 billion of trade of transformer parts, China exported $2.8 billion and Hong Kong exported $2.3 billion; together, China and Hong Kong accounted for 44.9 percent of the total trade. Germany was second, with exports of $924.4 million. Although Canada and Mexico are the main sources for U.S. imports of transformer cores and laminations, neither country is significant actors in global exports: Mexico ranked 8th with $283.5 million and Canada ranked 12th with $184.0 million. 42 Note: At the 6 digit HTS level for which global trade data are available, this category (8504.90) includes parts and components unrelated to transformers ( e.g., parts of static converters and inductors). There is no way to determine how much of this trade is transformer laminations and cores. Therefore, this information should be considered indicative of general trading patterns only. EN18NO21.013 The leading destination for China's exports of transformer parts was the United States with $282.4 million total imports in 2019, followed by India with $256.9 million. The leading destination for Hong Kong's exports of transformer parts during the same year was also the United States with $152.6 million, followed by Germany with $77.9 million. C. Global and U.S. Transformers Market [TEXT REDACTED]. Typical customers are companies in electricity generation, transmission, and distribution industries. End-use customers also include energy-intensive industries such as mining, chemical manufacturing, and steel and pulp/paper mills, as well as large commercial facilities. The global transformer industry has undergone numerous mergers, acquisitions, consolidations over the past several decades, resulting in fewer, larger players that offer a wider product range and are able to benefit from economies of scale. During the consolidation process, many manufacturers moved their production offshore ( e.g., Mexico, India, Colombia), taking advantage of lower labor costs, lower labor and environmental standards, and access to local markets with rapidly increasing demands for electricity. 43 Mexico, in particular, has become a significant player in transformer manufacturing; among the global transformer manufacturers with production facilities in Mexico [TEXT REDACTED]. 43 Large Power Transformers and the U.S. Electric Grid, DOE, 2014. In addition to these large global players, in the United States there are a number of smaller companies that manufacture transformers of various power-handling capacities. These include [TEXT REDACTED]. In its most recent market assessment, Global Market Insights estimated the global transformer market to reach $80 billion by 2024, assuming a CAGR of 6.5 percent. Key markets for transformers are those with rising electricity demands and investments in power distribution infrastructure—namely, the Asia/Pacific region, Africa, and the Middle East. The greatest market potential is in emerging markets such as these; 15 percent of the world's population does not yet have access to electricity. 44 44 Draws from http://www.firstresearch.com/industry-research/Transformer-Manufacturing.html (Dun & Bradstreet). In contrast, the U.S. market is mature, and demand for transformers is largely based on upgrades and replacements of aging infrastructure, including efforts to install smart grids to increase energy efficiency. The average transformer in the United States is 38 years old, with 70 percent of U.S. transformers older than 25 years. 45 New transformers are also needed to distribute electricity from the growing number of renewable energy generation plants. With over 9,000 power plants, 1.2 terawatts of power generating capacity, and 360,000 miles of high voltage transmission lines, the United States remains one of the largest markets for transformers. 45 DOE LPT Study, 2014 update. Trade data available through GTA show the major players by country in export markets for transformers of various power handling capacities. While only available at broad (6 digit HTS) product categories, these data are useful to show the relative global export market sizes and which countries dominate exports in each broad segment. Among all transformer categories, the product with the greatest value of world exports is the liquid-dielectric transformers with a handling capacity of more than 10,000 kVA (HTS 8504.23). This category includes large power transformers, as well as medium sized power transformers and larger distribution transformers. It accounted for nearly 45 percent of total world trade in transformers, based on average annual value of global exports over the 2014-2019 period. In this category, China is the top exporter with an average annual export value of $893.9 million, followed by South Korea with $635.9 million, and Germany with $371.8 million. For liquid-dielectric transformers with smaller power handling capacities (distribution transformers, HTS 8504.21 and 8504.22), as well as mid-sized dry-type transformers (HTS 8504.32 and 8504.33), Mexico is a major exporter. Virtually all of Mexico's transformer exports are destined for the United States. EN18NO21.014 EN18NO21.015 D. United States Transformers Market In the United States, there are about 250 establishments involved in transformer manufacturing (including units of companies with multiple locations), with a combined annual revenue of about $5 billion according to Global Market Insights. The National Electrical Equipment Manufacturers Association (NEMA) is the major sector-specific trade association that represents companies in this industry. NEMA states that there are over two dozen companies and over 15,000 employees involved in transformer manufacturing in the United States. 46 46 NEMA Public Comments. Transformer manufacturing is most highly concentrated in Mississippi, Wisconsin, Virginia, North Carolina, and California. The industry is highly regulated by local, state, and federal agencies for environmental protection reasons, as well as to ensure workplace safety. DOE sets energy efficiency standards for distribution transformers, with the standards last increased to achieve stricter efficiency in 2016. 47 47 https://www.researchandmarkets.com/reports/4376152/transformer-manufacturing. The industry is made up of large companies, such as GE (headquartered in the United States but with most transformer manufacturing facilities abroad) and ABB (now called Hitachi ABB Power Grids), which offer a variety of transformer products to utilities and industrial customers. In addition, there are numerous small companies that manufacture specialty transformers and niche products to industrial and consumer products customers. However, the 50 largest companies account for 90 percent of industry revenue. 48 48 https://www.researchandmarkets.com/reports/4376152/transformer-manufacturing. According to the Census Bureau, in 2018 (the most recent year for which data are available), the U.S. power, distribution, and specialty transformer manufacturing industry employed 19,227 people, operated in 285 locations, and totaled $6.15 billion in revenue. The Census Bureau classifies data using the North American Industry Classification System (NAICS) codes. Because the NAICS code representing power, distribution, and specialty transformer manufacturing is broader and more inclusive than the scope of this investigation, the data below should be interpreted to represent industry trends. EN18NO21.016 EN18NO21.017 BILLING CODE 3510-33-C Imports account for about 35 percent of the U.S. market for transformers (of all power handling capacities combined); primary sources of imports are Mexico, Canada, South Korea, and China. About 10 percent of U.S. production is exported, mainly to Mexico and Canada. With regard to specific subsectors of the transformer industry, there are few companies worldwide that manufacture LPTs; in the United States, as previously discussed, there are six manufacturers but their capability is limited. Distribution transformers are produced by a greater number of companies, including U.S. manufacturers. DOE has gathered extensive information about the distribution transformer market as a result of the energy conservation standards that the Energy Efficiency and Renewable Energy (EERE) Office is required to set under the Energy Conservation and Policy Act of 1975, as amended. DOE determined that there is significant domestic manufacturing of these products, finding that 75 percent of the employees who work for manufacturers that provide medium-voltage dry-type transformers are located domestically. 49 49 DOE, EERE, Technical Support Document (TSD), Ch. 12, Manufacturer Impact Analysis, filed in Docket No. ERE-2010-BT-STD-0048 (Apr. 2013), at 12-48. The Edison Electric Institute (EEI), which represents investor-owned electric companies that provide power to about 220 million Americans, estimates that its members have procured about four million transformers, at a total cost of more than $20 billion, over the last five years. The vast majority of these were distribution transformers. EEI estimates that investments in the grid will continue at similar levels in the coming years. EEI members also reported that transformers were sourced both domestically and internationally, with a majority of the reported distribution transformer purchases sourced domestically. 50 50 EEI et al. Public Comments. VII. U.S. Production Capabilities, Industry Health and Competitiveness, and the Impact of Imports on National Security for Transformer Component Manufacturers A. Introduction This chapter evaluates the state of U.S. production capabilities, industry health and competitiveness, and the impact of imports on national security for GOES, transformer lamination, and transformer core manufacturers. In particular, it presents data on U.S. GOES production, as well as production of key transformer components primarily composed of GOES: Transformer laminations, stacked cores, and wound cores. B. Grain-Oriented Electrical Steel GOES is a highly specialized, technically challenging product that requires dedicated equipment, advanced manufacturing process know-how, and well-trained, experienced employees. This product is absolutely critical to the performance of transformers, as it is the key material used in transformer cores, which constitutes the primary market for GOES. AK Steel is the only domestic producer of GOES. 51 The company, then known as Armco Steel, invented and introduced GOES products to the market in 1926. 52 Another manufacturer, Allegheny Ludlum, a subsidiary of Allegheny Technologies, Inc. (ATI), ceased manufacturing of GOES in 2016, with a loss of 350 jobs. [TEXT REDACTED] 53 51 Paul J. Bough, “ATI to Permanently Close Midland, Bagdad Metal Plants,” Pittsburgh Business Times, October 25, 2016, https://www.bizjournals.com/pittsburgh/news/2016/10/25/ati-to-permanently-close-midland-bagdad-metals.html. Another U.S. company, Big River Inc. (Osceola, Arkansas) has indicated an intention to enter the GOES market. The company currently produces a wide variety of non-grain oriented steels for motor laminations. It has invested in plant equipment and infrastructure to expand production to include high permeability grain-oriented electrical steels. It also has expressed interest in utilizing the facility at which Orb Steel formerly manufactured grain oriented electrical steel in the United Kingdom (owned by Tata of India, which is attempting to sell the plant). However, the company's production capacity and product range is unknown at this time so cannot be counted as domestic production capability. 52 https://www.aksteel.com/our-products/electrical-steel/grain-oriented-electrical-steels. 53 [TEXT REDACTED]. AK Steel melts, rolls, and finishes electrical steel at its Butler Works facility in Butler, Pennsylvania (which employs about 1,300 employees; this plant also processes other rolled steel products including Non-Grain Oriented Electrical Steel) and finishes electrical steel at its Zanesville Works plant in Zanesville, Ohio (which employs about 100 employees). However, electrical steel represents only a small percentage of AK Steel's business, accounting for [TEXT REDACTED] of revenues (the automotive industry is AK Steel's primary customer). AK Steel was acquired by Cleveland Cliffs Inc., the nation's largest producer of iron ore pellets, in March 2020. 54 54 http://www.clevelandcliffs.com/English/news-center/news-releases/news-releases-details/2020/Cleveland-Cliffs-Completes-Acquisition-of-AK-Steel/default.aspx. While still a leader in the domestic market, AK Steel's electrical steel operations are in poor financial condition, in part due to years of pressure from lower-cost foreign imports. In his testimony before the Congressional Steel Caucus in March 2020, Lourenco Goncalves, the President & CEO of Cleveland Cliffs, warned that the company would be forced to close the Butler and Zanesville facilities, both of which are unprofitable, unless the U.S. Government were to take action to limit imports of GOES in the form of transformer laminations and cores. 55 If AK Steel's GOES operations were to close, the United States would lack the ability to produce transformers of any power handling capacity without relying on foreign sources for the key material that is essential to their operation and efficiency. 55 http://www.butlereagle.com/article/20200306/NEWS12/200309971. The charts below present the current status of AK Steel specific to several important industry measures. [TEXT REDACTED] [TEXT REDACTED]. 56 [TEXT REDACTED] 57 [TEXT REDACTED] [TEXT REDACTED] [TEXT REDACTED]. 58 [TEXT REDACTED] [TEXT REDACTED] 56 [TEXT REDACTED]. 57 [TEXT REDACTED]. 58 [TEXT REDACTED]. [TEXT REDACTED]. 59 60 [TEXT REDACTED] 61 [TEXT REDACTED]. 62 [TEXT REDACTED]. 59 U.S. Department of Commerce, Bureau of Industry and Security, Section 232 Investigation on Impact on National Security of Imports of Steel, 2017. 60 [TEXT REDACTED]. 61 Ibid. 62 Ibid. [TEXT REDACTED]. As a result of its inadequate investment, AK Steel says it will not be able to innovate in order to keep pace with the latest production technology or be able to meet increasingly stringent DOE efficiency standards. AK Steel states (and transformer companies validate) that the company can make high-permeability GOES products that have very low losses and are highly efficient. However, if the DOE increases its efficiency standards to require more high-permeability GOES, AK Steel would likely need to invest in more capacity to meet U.S. demand. Under current market conditions and pricing, AK Steel claims it cannot justify investments to achieve such additional capacity. 63 63 AK Steel Public Comments. [TEXT REDACTED] [TEXT REDACTED] 1. U.S. GOES Production, Consumption and Import Penetration [TEXT REDACTED]. [TEXT REDACTED] The United States imported about 27,000 metric tons of GOES in 2019, for which Japan and Korea were the main sources. Imports of GOES in 2019 were dramatically lower than in 2018 (down 56 percent), a result of 25 percent tariffs imposed on imported GOES from most locations (Steel 232 tariffs). However, the steel tariffs did not achieve the intended result of increased production and consumption of domestic GOES. BILLING CODE 3510-33-P EN18NO21.018 EN18NO21.019 EN18NO21.020 Thus, based on production and trade data for GOES (presented in Table VII-11), imports accounted for less than 20 percent of domestic consumption (on a tonnage basis) in 2019. This is down from a high of 37 percent in 2017, prior to imposition of the steel tariffs. On a value basis, penetration is even lower, at 13 percent. These simple calculations do not present an accurate picture of the dependence of the domestic transformer industry on imported GOES, however, as will be discussed in the section analyzing suppliers to U.S. transformer manufacturers provided in the BIS industry survey. 2. Analysis of BIS Survey Supplier Data: GOES The Department's industry survey provided additional data and insight on domestic consumption of GOES. Thirty-nine survey respondents reported that they directly sourced GOES and provided details on their suppliers and purchases. The aggregated amount of GOES that they procured on an annual basis was relatively stable between 2015 and 2019, [TEXT REDACTED]. This figure is roughly consistent with estimates for domestic GOES demand. Moreover, the total amount supplied by AK Steel as reported by survey respondents is consistent with that company's GOES production data. This data indicates that the Department's survey accurately captured most of the market. The survey respondents reported obtaining GOES from a wide variety of global suppliers. Purchases were made from suppliers in Japan, China, Mexico, Germany, Russia, Canada, France, Brazil, Poland, and South Korea, as well as the United States. In addition to the steel mills that produce GOES sheets in coils, some respondents included in their responses information on purchases from suppliers that provide GOES in slightly more processed forms. These suppliers typically start their production with electrical steel sourced from a steel mill producing electrical steel and perform additional processing such as cutting, slitting, stamping, and/or coating. In this regard, the line between GOES and transformer laminations is seemingly quite indistinct, as other survey recipients recorded purchases from these same suppliers under the “laminations” category. [TEXT REDACTED] Four GOES suppliers accounted for 93 percent of purchases by the survey population in 2019. [TEXT REDACTED]. The remainder of the market shifted considerably among other players, with the most significant development the exit of ATI (Allegheny Ludlum) from the market in 2016. [TEXT REDACTED]. [TEXT REDACTED] [TEXT REDACTED]. [TEXT REDACTED]. [TEXT REDACTED]. [TEXT REDACTED]. 3. Sufficient Quantity and Quality of Domestic GOES A number of transformer companies have indicated, through their public comments, through the Section 232 steel tariff exclusion process, and through survey responses, that the sole domestic source of GOES (AK Steel) lacks the capacity to meet the domestic demand for the full range of GOES products. U.S. consumption of GOES is estimated at approximately 220,000 metric tons per year, [TEXT REDACTED]. 64 However, AK Steel's stated capacity does not take into consideration the production of variable grades of GOES. For example, much of the company's production is of conventional grades of GOES (M class); its production capacity for higher grades is limited. 64 Core Coalition Public Comments. In its public comments, the Core Coalition noted that although AK Steel is widely recognized in the industry as a supplier of high-quality GOES. However, it is a high-cost supplier compared to foreign sources, which the Core Coalition attributes to the company's lack of capital investment and its continued use of obsolete production equipment and processes. AK Steel notes that the Department's antidumping investigations have found that foreign GOES manufacturers sell at unfair prices (dumping) or are subsidized by their governments. The European Union has found AK Steel practices dumping. In addition, AK Steel does not manufacture or offer an intermediate grade of GOES, called MOH, which is widely available from suppliers in South Korea, Japan, and China. While AK offers a higher grade GOES that can be used instead of MOH, it is more expensive and is not optimal for use in certain standard-issue transformers where GOES price weighs more heavily than energy efficiency in sourcing decisions. Another concern expressed by domestic transformer manufacturers is the maximum width of AK's Steel's product. The company does not produce steel wide enough (>932mm) to form the laminations and cores of larger transformers. According to the technical specifications on AK Steel's website, the maximum width of its domain-refined products (TRAN-COR) is 920mm. 65 While two pieces of steel can be patched together, this process leads to increased production costs and loss of efficiencies in the core. 66 65 https://www.aksteel.eu/files/downloads/TRAN-COR_H_%20Grain_Oriented_Electrical_Steel.pdf. 66 Public comments of Domestic Transformer Producers. Many transformer companies submitting public comments during the investigation indicated that AK Steel's lack of capital investment over many years has affected the company's ability to supply the highest grades of steel grades that steel transformer manufacturers prefer to use in the cores of distribution transformers subject to DOE energy standards. In addition, in general, utility companies are increasingly seeking to install transformers with high efficiency/lower losses (that tend to require higher grades of GOES) that reduce costs and are environmentally friendly. For example, European and Asian manufacturers offer a high permeability GOES called HI-B (originally developed by Nippon Steel of Japan but licensed the technology to other companies). 67 67 Public comments of Domestic Transformer Producers. A summarized list of concerns with AK Steel's capabilities and capacity expressed through the public comments process is provided in the table below. EN18NO21.021 EN18NO21.022 [TEXT REDACTED]. 68 68 Joe Paladino Technical Advisor, DOE Office of Electricity, in written comments to BIS submitted on 9/21/202. A number of transformer manufacturers indicated that the sole domestic source of GOES does not offer the full range of efficient GOES, with the result that the manufacturers must seek foreign suppliers. For example, transformer manufacturers indicated that they are unable to obtain permanent, heat resistant domain-refined grain oriented steel (PDR GOES) from the sole domestic manufacturer. 69 DOE energy efficiency standards for distribution transformers that came into effect in 2016 have reduced demand for lower-permeability, conventional grades of GOES, and increased the demand for high grades, such as PDR-GOES. PDR-GOES is capable of being annealed after core production while retaining its domain-refined properties, which is important for use in wound cores often used in distribution transformers. 70 Nippon Steel of Japan is recognized as the primary source of this product. 69 For example, in its public comments, Central Moloney, a domestic manufacturer of distribution transformers, expressed concern over the quality of AK Steel's GOES. They said that the company's manufacturing equipment and processes are antiquated, and it lacks the capability to produce electrical steel that it prefers to use to meet DOE efficiency standards for distribution transformers—namely Permanent Domain-Refined GOES (PDR). In addition, tariff exclusion requests from Sumitomo, ABB, Eaton/Cooper, and SPX cited lack of domestic capabilities. 70 https://Agmetalminer.com/tag/grain-oriented-electrical-steel/. [TEXT REDACTED]. However, while there is some degree of interchangeability among different grades of GOES in transformer core construction, doing so could result in higher core losses/decreased efficiencies and/or require a larger size transformer. As a result, using non-permanent DR-GOES in lieu of PDR-GOES could affect the competitive position of the transformer manufacturer when bidding for contracts. 71 71 See, e.g., SPX Exclusion Request. This apparent deficiency in U.S. production capabilities for GOES with superior magnetic qualities helps explain continued imports of GOES (especially from Japan) despite the additional cost due imposition of tariffs. In fact, the Department has granted some requests for exclusion from the 25 percent tariffs on imported steel due to lack of domestic capability of the particular product grade. Additionally, some imports of GOES from South Korea and Brazil continue to be economical because the Section 232 remedy resulted in a quota, rather than tariffs for steel from those countries. While just a rough estimate, the average unit value by country (based on value imports divided by unit imports) is broadly illustrative of the varying grades of GOES from different suppliers. Other than the United Kingdom, which is not a major source of GOES imports, GOES imported from Japan has an average unit value significantly higher than from other sources. This suggests that Japan is the source of the highest grades GOES imported into the United States. EN18NO21.023 BILLING CODE 3510-33-C C. Laminations and Cores Transformer lamination and core producers make up the primary customer base for GOES suppliers. There are very few companies in the United States that manufacture only transformer laminations and cores; some major transformer companies produce laminations and cores for in-house use in their transformers. Manufacture of these critical transformer components requires expensive, specialized equipment which can only produce laminations within a specific size range. This limits the ability of independent companies to offer laminations in the varied sizes required across transformer product categories. Over the past few years, there has been a marked decline in domestic manufacturing of laminations and cores (by both transformer companies and independent producers), and a movement of production offshore (especially to Canada and Mexico). A corollary to the movement of lamination and core manufacture out of the United States is the loss of a potential domestic market for AK Steel's GOES. Because electrical steel accounts for such a large percentage of the cost of transformer laminations and cores (averaging about 60 percent for the surveyed companies), the 25 percent import tariff raised material costs and decreased transformer manufacturers' ability to compete. The CEO of one of the remaining domestic producers of these items, Orchid Monroe LLC (Wisconsin), stated that imported laminations and cores often cost less than the price at which its company can procure domestic electrical steel, without any processing or manufacturing costs included. 72 72 Public Comments from Gordon Bibby, Orchid Monroe LLC. Global transformer companies with multiple facilities have adapted to changes in raw material prices by shifting their lamination and/or core production or sourcing offshore in order to continue to utilize foreign-origin GOES without the price premium for domestically produced GOES. Smaller companies that specialize in these products either moved their operations offshore or ceased production. The trend toward moving lamination production offshore occurred prior to the Section 232 steel tariffs, but the situation worsened after their imposition. The expansion of core-making capacity in Canada and Mexico began in the mid-2010s, at which time the United States had initiated antidumping investigations on GOES from many foreign sources. In the antidumping investigations conducted by the Department, many foreign suppliers of GOES were found to be selling at less than fair value, or in the case of China, with the benefit of government subsidies. However, the International Trade Commission did not find material injury to U.S. industry was not found, no duties were imposed. 73 Despite this, partly to avoid potential duties, transformer and transformer component manufacturers began to shift production offshore where they are able to use foreign origin GOES without the risk of increasing costs due to the imposition of duties. 73 See Grain-Oriented Electrical Steel from Germany, Japan, and Poland, Inv. Nos. 731-TA-1233, 1234, and 1236, USITC Pub. 4491 (Sep. 2014), at 2. Another factor in the movement of core and lamination toward offshore outsourcing was the new DOE energy efficiency standards for distribution transformers that were implemented in 2016. To meet these standards, transformer companies had to redesign their products, including the choice of electrical steel and core construction. [TEXT REDACTED]. 74 [TEXT REDACTED]. 75 74 [TEXT REDACTED]. 75 [TEXT REDACTED]. As a result, there are very few remaining domestic producers of laminations and cores. The Department's survey included responses from 10 small businesses in the United States that reported production of laminations, stacked core, and/or wound cores using GOES. The table below presents the state of transformer lamination and core manufacturing in the United States by these non-captive producers. [TEXT REDACTED] [TEXT REDACTED]. Moreover, analysis of these companies' financial reports reveals additional weaknesses. Respondents were assigned a comprehensive financial risk score by the Department, which incorporated yearly scores and trends in financial health. Based on this scorecard, respondents were categorized as low/neutral risk, moderate/elevated risk, or high/severe risk. 76 76 For how BIS assessed financial health, see note [45], infra. [TEXT REDACTED] All of the companies noted in their survey responses that they face serious negative impacts from foreign competition. Three of the 10 have shut down their domestic operations in recent years [TEXT REDACTED]. A fifth company has reduced its capacity in an attempt to return to profitability. The five companies remaining have had to increasingly rely on niche markets, including aerospace and defense, to counter the loss of demand from other customers (which have either shifted sourcing or are themselves impacted by foreign competition). Among the domestic laminations and core manufacturers that have been negatively affected is [TEXT REDACTED]. [TEXT REDACTED]. [TEXT REDACTED]. As mentioned above, in addition to these specialized manufacturers, several transformer companies produce laminations and/or cores in the United States for their own internal consumption. [TEXT REDACTED]. These captive producers, too, have changed production and sources for laminations and cores, either completely or partially outsourcing. [TEXT REDACTED]. [TEXT REDACTED]. The new company (80 percent owned by Hitachi and 20 percent by ABB) is called Hitachi ABB Power Grids. 77 Although Hitachi's long-term plans for the facility are unknown, the sale may impact domestic production of laminations and cores. 77 http://www.hitachi.com/New/cnews/month/2020/07/f_200701.pdf. 1. Lamination Suppliers The lack of domestic production capability is validated by the lamination and core supplier data provided by survey recipients. Twenty-two survey participants reported sourcing stacked laminations for use in transformer cores. They sourced laminations from suppliers in a variety of countries, including the United States, South Korea, Mexico, Canada, Turkey, Italy, and India. In 2019, laminations with a total value of $40.2 million were sourced by surveyed companies. 78 Of this $40.2 million, less than 12 percent came from domestic suppliers, while 88 percent were from foreign sources. [TEXT REDACTED]. 78 This figure exceeds the value of imports of laminations (HTS 8504.90.9634) according U.S. Census trade statistics, which was $33 million in 2019; purchases in an annual period and export shipments in an annual period do not necessarily match. [TEXT REDACTED] [TEXT REDACTED]. 79 [TEXT REDACTED]. In addition to these two companies, survey respondents reported several other suppliers from Mexico along with minor suppliers located in South Korea, Italy, Turkey, India, and China. 79 https://magneticsmag.com/jfe-gains-foothold-in-na-with-acquisition-of-cogent-power-from-tata-steel/. It is clear from respondents' replies to the supplier question that there is an ambiguity between what is considered GOES and what is considered a lamination; data from the survey show that 60 percent of the value of laminations is accounted for by the cost of GOES. Among the suppliers listed, as noted earlier, there is overlap between the two categories. [TEXT REDACTED]. 2. Stacked Core Suppliers Outside of captive production by several transformer manufacturers, 16 transformer companies participating in the Department's survey procured a total of $114.7 million worth of stacked cores in 2019. Their suppliers were located in Canada, Mexico, Italy, and China, as well as the United States. Of the $114.7 million total, [TEXT REDACTED]. The other leading core suppliers were [TEXT REDACTED]. As with the lamination sector, this would mean that foreign fabricated cores could account for over 80 percent of the future market. [TEXT REDACTED] As noted above, Cogent Power was recently purchased by JFE Shoji. This Japanese steel trading company also acquired an unspecified interest in another leading source of stacked cores, [TEXT REDACTED]. [TEXT REDACTED], several Chinese companies were minor suppliers of stacked cores. 3. Wound Core Suppliers Twenty-nine respondents to the Department's survey indicated that they procured wound cores for use in manufacturing transformers during the 2015-2019 period. The total value of the wound cores that these companies purchased increased markedly in the last three years of the time period, from $132 million in 2017 to $410 million in 2019. The increase may be because wound cores are often used in distribution transformers that are subject to the DOE energy efficiency standards. PDR-GOES, which is not produced in the United States, is desirable for use in wound cores because it is capable of withstanding the annealing process. By far the leading source of wound cores for the survey sample was [TEXT REDACTED]. [TEXT REDACTED] mentioned that make up the other 25 percent of consumption are domestic companies that have shut down their U.S. facilities since 2019. 4. U.S. Imports of Laminations and Cores U.S. import statistics affirm the Department's survey data with regard to the dominant role that foreign sources play in the United States domestic transformer market. The dramatic increase in imports of these products, particularly from Canada has resulted in the displacement of U.S. production of transformer components. BILLING CODE 3510-33-P EN18NO21.024 EN18NO21.025 U.S. imports of transformer laminations rose from $18 million in 2017 to $33 million in 2019, with most of the increase due to imports from Canada. For stacked and wound transformer cores, imports rose from $22 million in 2015 to $167 million in 2019—a 650 percent increase—with Canada and Mexico accounting for more than 95 percent of the total imported. Data for the first six months of 2020 indicate that the trend toward increased imports is continuing. As domestic demand for laminations and cores has not increased, this surge in imports represents displaced domestic production. The United States-Mexico-Canada Agreement (USMCA) establishes a country of origin (COO) rule for transformers and transformer components, including laminations and cores. These rules of origin, which will come into force in five years (2025), will consider transformer laminations and cores as derived from the country in which the electrical steel from which they are made was produced, based on the high percentage of these products' value that is accounted for by the electrical steel. As Canada and Mexico have no electrical steel production, those cores will not be considered products of either Mexico or Canada when full implementation of USMCA is achieved. 80 However, even when this new requirement for preferential treatment comes into effect, it will likely not discourage the production of these items in Canada or Mexico (using foreign GOES) for export to the United States, because that the general, most-favored-nation U.S. tariff rate on imports of these items is zero. 80 https://ustr.gov/sites/default/files/files/agreements/FTA/USMCA/Text/04-Rules-of-Origin.pdf. 5. Consumption of GOES Contained in Transformer Cores Due to the movement offshore of lamination and core production, U.S. imports of these products must also be considered as part of U.S. GOES consumption that is not captured in the trade statistics for GOES. In 2019, the United States imported an estimated 68,000 metric tons of GOES in the form of transformer laminations and cores. 81 81 Trade data for cores are not collected by weight, but rather by units. Estimate of the weight of lamination and core imports is based on the estimates provided by the Core Coalition in its public comments. [TEXT REDACTED]. Based on these figures, the import penetration for GOES was approximately 44 percent in 2019. (Note: this number could include double counting from U.S. exports of GOES that is then imported into the United States in the form of cores, but this is likely minimal because Canada was not a major destination for U.S. GOES exports or a major source of Canadian imports). A public comment by the Core Coalition estimates that total U.S. core imports, in kilograms, will be much higher in 2020 than in 2019 (due primarily to an anticipated increase in imports of wound cores; trade data from the first half of 2020 validates this). Based on the Coalition's estimate of 2020 core imports of 96,000 metric tons, and assuming steady U.S. GOES production and export and import levels, import penetration is estimated to reach over 50 percent this year. 6. Dominance of Suppliers for Laminations and Cores As discussed, Canada and Mexico are by far the leading suppliers of components for U.S. transformer manufacturers. [TEXT REDACTED]. [TEXT REDACTED]. Until 2019, Cogent was owned by Tata of India, which also owned Orb Steel, which may explain why Orb was a major supplier to Cogent. Now that Cogent is owned by JFE Shoji, it is likely that JFE Steel will emerge as one of its major suppliers. [TEXT REDACTED]. 7. Consumption of GOES Imported in Finished Transformers Despite the grim results that the inclusion of the GOES-derivative products discussed above presents, the complete picture with regard to the true dependency of the U.S. electricity grid on foreign sources for GOES, laminations, and cores remains incomplete until the impact of finished transformers is included. Given that transformers have a high percentage value of GOES, domestic GOES production (and transformer production) is adversely impacted by imports of complete transformers. The vast majority of imported transform [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2021-24958. Public record. Not legal advice.