FCC Takes Step Forward to Establishment of Rip and Replace Program
The Federal Communications Commission (FCC" or the Commission") took a significant step forward this month in concretizing its program for extirpating equipment from the country's communications networks that poses a threat to national security. The Commission's Order in large part implements the objectives of the Secure and Trusted Networks Act of 2019 (the Secure Networks Act") and fills in some of the blanks left by the statute. There are a few notable quirks, however.
Background on the Rip and Replace" Program
In general, the Secure Networks Act and the FCC's rules are intended to remove from America's communications networks equipment that has been determined to constitute a threat to the security of communications. The Secure Networks Act prohibits the use of Universal Service Fund (USF") support to purchase covered" communications equipment or services. It also directs the FCC to establish a reimbursement program for costs incurred by Eligible Telecommunications Carriers (ETCs") - carriers determined to be eligible to receive USF support - to remove and replace covered equipment and services. The determinations regarding the equipment covered by this ban are made by a group of federal security agencies including the FBI, the Department of Defense, and the National Intelligence Director. These initial determinations, to no one's surprise, included Chinese manufacturers Huawei, ZTE, and a handful of other Chinese companies. The roster of suspect (covered") equipment can change over time as new threats are detected. The federal government is already removing this equipment from its own networks, but there is still a large amount of equipment being used in privately owned telecom networks. The problem affects smaller carriers disproportionally since smaller carriers were enticed by the low prices and attractive financing offered by the Chinese companies.
The FCC had initiated its own process, but the program moved forward at a tortured pace, especially since (i) there was no specific statutory mandate for such a program and (ii) the FCC's proposal was targeted only at ETCs that had received USF funds to build out and operate their networks. This tack would have left plenty of large and small networks without funding assistance for the expensive replacement program. The Commission did take specific steps within its authority to rescind and block the authorization of suspect Chinese companies that had been granted or were seeking the right to offer communications services in the U.S. themselves. The Secure Networks Act was enacted by Congress in the spring of 2020 to provide the authority the FCC needed and set the general rules for implementing the program.
The Congressional/FCC Rip and Replace" program as now formulated requires ETCs that have received USF support to remove covered equipment from their networks and allows, but does not require, non-ETCs to remove and replace this equipment from their networks. In both cases, the carriers are to be reimbursed out of funds appropriated by Congress for this purpose. Initially, Congress thought that about $900 million would be adequate for his purpose, but as the record developed, the number has crept closer to $2 billion. The program is limited to smaller" carriers; those with fewer than 2 million subscribers. This threshold also had crept up during the process, which was originally targeted at much smaller carriers. This explains the much higher tab. As of this writing, Congress has not appropriated any money for this program, but fingers are crossed that in the flurry of lame-duck legislating, this loose end will get tied.
The program will require eligible entities to submit an application to the FCC setting forth their plan for getting rid of the covered equipment, destroying it, and replacing it with safe equipment. The FCC will review the application and determine how much money will be allotted to each carrier for this purpose, giving carriers the comfort of knowing they will be reimbursed, even though the funds will not be paid until the work of ripping, destroying, and replacing goes forward. The FCC will create a catalog designating equipment that will be eligible for replacement in order to simplify the process. This should streamline the application filing and review process, but experience counsels that the process may become bogged down in the details, as may be inevitable when conscientious administrators are giving away up to $2 billion of public money.
Funding the Rip and Replace" Program
Because the FCC does not know how much funding Congress will appropriate, it cannot be sure that there will be enough money to go around. To cover this scenario, the FCC has established several priority categories. In the first category are ETCs, with sub-prioritizations first for core network expenses and then non-core radio access network expenses. Next come non-ETCs that provided cost information that the Commission used in developing its overall cost estimates, again with core expenses prioritized over non-core. All other applicants are relegated to the final priority group. It is important to note that only providers with 2 million or fewer customers are eligible for reimbursement under the FCC's program. This tiered allocation scheme is somewhat controversial since Congress consciously did not prioritize ETCs in its reimbursement plan even though the FCC had proposed such a plan prior to Congressional action. The theory appears to be that ETCs are more dependent on subsidies than other carriers, but some argued that they are less dependent than non-ETCs since ETC equipment had been subsidized in the first place. This prioritization scheme may be a non-issue if the full $2 billion is appropriated, but it will make a big difference if there is less funding to go around.
The rules permit those seeking reimbursement to upgrade their equipment from older generation equipment to equipment that is 4G-compatible and capable of being upgraded to 5G. This measure sensibly permits applicants to installer newer generation equipment rather than installing older equipment that would soon have to be replaced at additional cost.
The Commission will permit applicants to be reimbursed for removing and destroying covered equipment even if they don't replace it.
The program is now at last on the verge of taking off. It awaits only the appropriation of funds to make the magic happen.