FCC Bans Use of USF Funds for Covered Equipment and Services From Designated Companies - Huawei and ZTE Targeted First

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In its recent Report and Order (Order), the Federal Communication Commission (FCC) adopted a rule prohibiting the use of Universal Service Fund (USF) funds by USF recipients that are eligible telecommunications carriers (ETCs) to purchase or obtain covered equipment or services produced or provided by a covered company that poses a national security threat to the integrity of communications networks or the communications supply chain (Covered Companies).

  • The first two companies initially designated under the Order, effective January 3, 2020, are Huawei Technologies Company and ZTE Corporation.

As a consequence of this action, upon final determination, USF recipients may no longer use USF funds to maintain, improve, modify, or otherwise support equipment or services, including upgrades to existing equipment and services in any way, purchased from Covered Companies.

The FCC also issued a Further Notice of Proposed Rulemaking (FNPRM) with the Order seeking comment on proposals to:

  1. Require, as a condition on the receipt of any future USF support, that ETCs not use or agree to use, within a designated period of time, communications equipment or services from Covered Companies;
  2. Require ETCs receiving USF support to remove and replace covered equipment and services from their network operations; and
  3. Establish a reimbursement program to offset reasonable transition costs.

Comments regarding the FNPRM have been filed; reply comments are due March 3, 2020.

Huawei and ZTE Designated as Covered Companies

The Order initially designates Huawei and ZTE as Covered Companies for purposes of the rule and establishes a process for designating additional covered companies in the future. In the cases of both companies, the FCC found that their ties to the Chinese government and military apparatus—together with Chinese laws obligating them to cooperate with any request by the Chinese government to use or access their systems—pose a threat to the security of communications networks and the communications supply chain and necessitate taking this step.

Designation Process Going Forward

Under the new rule, the FCC may determine that a company poses a national security threat either in response to a petition from an outside party or through an independent determination of the Public Safety and Homeland Security Bureau (PSHSB). The rule also prescribes a procedure by which PSHSB, with input from the public and the designated company, will then determine whether the entity poses a national security threat and, if it reaches such a conclusion, make a final designation.

The Order also gives PSHSB the ability to reverse its designation upon a finding that an entity is no longer a threat to the integrity of communications networks or the communications supply chain, requiring PSHSB to issue an order announcing its decision along with the basis for its reversal.

Enforcement

The Order directs the Wireline Competition Bureau, in coordination with USAC, to revise the relevant information collection for each of the four USF programs to require a certification attesting to compliance with the new rule. It also directs USAC to implement audit procedures to implement the rule change for each USF program.

Further Notice of Proposed Rulemaking

In the accompanying FNPRM, the FCC invited public comment on proposals to:

  • Require, as a condition on the receipt of any USF support, that ETCs not use or agree to use, within a designated period of time, communications equipment or services from Covered Companies;
  • Require ETCs receiving USF support to remove and replace covered equipment and services from their network operations; and
  • Establish a reimbursement program to offset reasonable transition costs.

The FNPRM proposes to make the requirement for ETCs to remove covered equipment and services contingent on the availability of a funded reimbursement program. It does not propose to subject other USF recipients (e.g., rural healthcare providers, schools, and libraries) to remove and replace requirements, but seeks comment on that approach.

Of particular note, the FNPRM also seeks comment on (1) the Commission's power to expand the prohibition on use of equipment or services from Covered Companies from just USF recipients to include all companies subject to the FCC's jurisdiction, (2) whether any expanded remove-and-replace order should cover all equipment and services from Huawei and ZTE, and (3) whether non-USF participants should be allowed to voluntarily participate in a reimbursement program.

Finally, the FNPRM seeks comment on how to fund removal and replacement requirements, and how to determine reasonable replacement costs and the types of restrictions it should place on such expenses. The FCC proposes to seek funding from Congress and requests input on the appropriate level of such a funding request. In the alternative, the FCC seeks comment on using USF funding to provide support for replacing equipment and services. 

These proposals could have significant impact on all communications carriers, not just USF recipients. Companies participating in the USF programs, as well as any company that utilizes Huawei and ZTE equipment and services, should monitor the FCC’s rulemaking process and consider submitting comments in response to the FNPRM.

Reply Comments must be filed no later than March 3, 2020.

Information Collection

In a separate Information Collection Order accompanying the Order and FNPRM, the FCC directed the Wireline Competition Bureau (WCB) and Office of Economics and Analytics (OEA), in coordination with USAC, to determine the extent to which potentially prohibited equipment exists in current networks and the costs associated with removing such equipment and replacing it with equivalent equipment.

The collection will focus on whether ETCs own and use Huawei or ZTE equipment or services, the nature of such equipment or services, the cost to purchase or install such equipment and services, and the associated cost with removing and replacing them. The information collection is mandatory for all ETCs and voluntary for other USF recipients or entities with pending ETC applications.

  • The Commission has directed the WCB and OEA to "proceed expeditiously" with the collection.

These actions are part of a broader government-wide effort to ban equipment that purportedly undermines national security. In December 2019, the U.S. House of Representatives passed bi-partisan legislation that prohibits the government from using funds to help carriers buy Huawei's telecommunications equipment. 

This follows a presidential executive order issued in May 2019 banning American companies from using any telecommunications equipment deemed to be a "national security risk." The debate on how to best secure the nation’s communications networks will continue through much of 2020.

DWT is closely monitoring, and actively participating in, these proceedings. 

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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