Ready, Set, Go! The Nuts and Bolts of Reimbursement Under the FCC's Rip and Replace Program

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On September 27, 2021, the Federal Communications Commission's (FCC) Wireline Competition Bureau (WCB) announced that the Filing Window for the rip-and-replace Reimbursement Program (Filing Window), created pursuant to the Secure and Trusted Communications Networks Act of 2019 (Secure Networks Act), will open on October 29, 2021, and close on January 14, 2022.

As we recently discussed (here) and will discuss further below, the opening of the Filing Window triggers a variety of actions that "providers of advanced communications services" (ACS Providers) who choose to participate in the Reimbursement Program must complete within prescribed timelines. Besides submission of the Reimbursement Program application, chief among the requirements is completion of all removal, replacement, and destruction ("rip-and-replace") work, to eliminate identified Huawei Technologies Company (Huawei) and ZTE Corporation (ZTE) equipment and services from ACS Providers' communications networks.

Closely related requirements include timely filing of Reimbursement Claim Requests and reports addressing the completion of rip-and-replace work. Some of the deadlines are common to all ACS Providers, but each ACS Provider must track its individual deadlines for other requirements.

Background

The Secure Networks Act contains two significant funding-related provisions designed to achieve the Act's goals of purging equipment and services deemed to pose an unacceptable national security risk in subsidized U.S. communications networks and discouraging use of such equipment and services elsewhere.

The first provision (which we addressed in part here 1) prohibits recipients of FCC subsidy funds from utilizing those funds to purchase, rent, lease, otherwise obtain, or maintain, communications equipment or services designated on the FCC's Covered List. This forward-looking prohibition lessens the possibility that risky Huawei and ZTE equipment (and other equipment the FCC later adds to the Covered List designations) can be retained, updated, or added to U.S. networks.

The second provision, subject to appropriations including those made in the Consolidated Appropriations Act of 2021 (CAA), addresses the issue of risky equipment already present in U.S. networks by providing ACS Providers an opportunity to be reimbursed for the cost of removing and replacing existing Huawei and ZTE equipment from their networks.

While participation in the Reimbursement Program is elective, failure to remove and destroy Huawei and ZTE equipment will render communications providers ineligible for future FCC subsidy funds. Receiving funding approval under the Reimbursement Program renders completion of rip-and-replace work mandatory.

Reimbursement Program Filing Requirements and Timelines

Request for Funding Allocation

The rip-and-replace Reimbursement Program requires eligible ACS Providers (including schools, libraries, healthcare entities, and consortia of each that provide advanced communications services) to project future expenses eligible for reimbursement in an FCC Form 5600: Application Request for Funding Allocation (Application Request) submitted to the WCB during the Filing Window, October 29, 2021, through January 14, 2022. After the close of the Filing Window, the WCB will allocate money based on projections of total eligible claims and inform each of the approved ACS Providers (Reimbursement Program Recipients, or Recipients) of the amount of its allocation.

The overall dollar amount of approved claims and each applicant's prioritization status will influence whether the applicant receives all or only part of its requested reimbursement. Upon approval of allocations, Recipients will not immediately receive the allocated funds; they first will have to incur rip-and-replace costs.

Reimbursement Claims

Recipients can submit their first FCC Form 5640: Reimbursement Claim Request (Reimbursement Claim Request) against that allocation immediately after its approval if they have already incurred reimbursable costs, have invoices documenting those costs, and want or need funds to cover the invoiced expenses. While they might choose to file promptly, Recipients are not obliged to submit a Reimbursement Claim Request immediately upon incurring reimbursable costs.

Recipients might instead choose to delay their submissions so long as they comply with two reimbursement filing deadlines: a one-year deadline, calculated from the date of the allocation approval, for submission of the first Reimbursement Claim Request; and a final Claim Deadline (Claim Deadline) (discussed further below), which occurs 120 days after completion of rip-and-replace work. The penalty for failure to file at least one Reimbursement Claim Request within one year of receiving the allocation approval is loss of the approved allocation and all eligibility for reimbursement.

Allocations expire after the Claim Deadline, so any remaining unclaimed funds as of that deadline will also be lost. When planning submission of its first Reimbursement Claim Request, each Recipient must keep in mind that once it receives its first disbursement of allocated funds, it has exactly one year from the date of receipt of that payment (the Rip-and-Replace Term or RRD Term) to complete the removal, replacement, and disposal of all Huawei and ZTE equipment and services throughout its network.

Rip-and-Replace Term Extension

If after commencement of rip-and-replace work the FCC determines that the supply of replacement equipment and services is inadequate to meet Recipients' program needs, and if the Commission provides detailed justification to Congress regarding this determination, it may grant a general six-month extension to the Rip-and-Replace Term for all Recipients. The FCC may also grant individual six-month extensions on a case-by-case basis if the WCB determines that a Recipient requesting an extension was not at fault in its inability to meet its one-year Rip-and-Replace Term.

Reporting Requirements

Between approval of a funding allocation and the close of its one-year Rip-and-Replace Term, each Recipient is subject to interim reporting requirements.

Each Recipient must submit a first Status Update on its rip-and-replace progress within 90 days of receiving its allocation approval; additional Status Updates are due at least every 90 days thereafter. The Status Updates, which must address not only progress made but also challenges encountered and issues with availability of replacement equipment, are intended to help the WCB proactively assess whether a general extension might be necessary. Each Recipient must also submit Spending Reports twice yearly, between February 1 and February 10, and then between August 1 and August 10, starting after the Recipient receives its first disbursement.

Within ten days of the close of the Recipient's one-year Rip-and-Replace Term (plus extension(s), if granted), the Recipient must submit a Final Certification that all Huawei and ZTE equipment and services have been removed and disposed of. The final Reimbursement Claim Request is due by the Claim Deadline, that is, within 120 days after the close of the Recipient's Rip-and-Replace Term, and a final Spending Report is due no later than 60 days following the expiration of the Recipient's Claim Deadline. At any point during the process, a Recipient is subject to audit and field investigations to confirm completion of rip-and-replace work in compliance with the Secure Networks Act and to prevent waste, fraud, and abuse.

Preparing an Application Request for Funding Allocation

Keeping these general requirements in mind, ACS Providers that wish to participate in the Reimbursement Program must take great care in planning their rip-and-replace work and preparing their Application Request.

Filing Window

All ACS Providers have only one window—October 29, 2021, through January 14, 2022—in which to apply for funding for removal and replacement of Huawei and ZTE equipment and services.

Consolidated Application Requests

Affiliated2 ACS Providers can submit individual Application Requests or a consolidated request at the holding company level. The FCC prefers the latter as it will make processing more efficient.

Where affiliates do not submit a consolidated request, the FCC will nevertheless review the related applications together to confirm eligibility because the maximum number of customers allowable for eligibility (10 million) is the sum of customers across all affiliated entities.

Mistakes in Application Requests

Some errors made in the application can be corrected after submission. For instance, the Secure Networks Act allows a single Cure Period for material deficiencies in an application: An applicant will have 15 days (the Cure Period), starting on the date on which the WCB individually notifies the applicant of the material deficiency, to submit a cured application.
Failure to remedy the deficiency within the Cure Period renders the applicant ineligible.

In contrast, some errors cannot be corrected after submission: Critically, cost calculation errors that underestimate the total funding needed for rip-and replace work cannot be revised upward after submission of an application. Outside of the Cure Period, the WCB may request eligible applicants to provide additional information to assist in its evaluation of an application, but the WCB's information request will not create an opportunity for the applicant to request additional funding.

Amendments and Modifications

While there will only be one Filing Window and little opportunity to amend applications, the WCB will allow some modifications to the Application Request after it allocates funds. For example, a Recipient may notify the Reimbursement Program Fund Administrator of its intent to amend and will then be able to submit changes, such as providing itemized vendor quotes where the initial application relied on the Cost Catalog (see below) for a cost estimate.

These post-allocation amendments will not result in recalculation of the allocated funds: If actual rip-and-replace costs are greater than initially projected, the Recipient will only receive reimbursements up to the allocated amount. Because ACS Providers cannot amend their total request amount after filing, ACS Providers should account for reasonably foreseeable cost increases and provide supporting documentation when submitting the Application Request.

Tools to Assist in Preparation of the Application Request

In addition to providing an educational webinar, responding to Frequently Asked Questions (FAQs), and setting up a Fund Administrator Help Desk to respond to individual inquiries about the Reimbursement Program and application process, the WCB created two documents to help ACS Providers prepare their applications: a Cost Catalog and a Replacement List.

  • The Cost Catalog is a non-exhaustive list of rip-and-replace expenses that are likely reimbursable and includes estimated cost ranges for many of the listed items and services. Line items and averages of the estimated costs from the Catalog will be incorporated into the online application form.

Prepared with industry input, the Cost Catalog details equipment such as access-layer site cabinets, middle-mile microwave antennas, and core server hardware. It also addresses associated services such as site surveys, installation crews, helicopter rental, legal fees for zoning and permitting, FCC filing fees, and disposal costs.

The Cost Catalog previews additional items for which estimating cost ranges was not feasible and for which affected ACS Providers therefore will need to create their own cost estimates, ranging from fairly basic items like wiring to situation-specific expenses such as fuel surcharges applicable to shipping equipment to Hawaii. The FCC corrected a few mistakes in the Cost Catalog in its separate Best Practices for Equipment Disposal, released on September 30, 2021.

  • The Replacement List, in contrast to the Cost Catalog, is a short summary of types of equipment that ACS Providers might need to remove from their networks, useful as a starting point to guide the planning process.

Filling Out the Form 5600

Completing the Application Request requires careful attention to the form's line-by-line instructions, the Cost Catalog, the WCB's August 3, 2021, guidelines, and the FCC's Third Report and Order (Third R&O) (effective October 22, 2021), plus preparation of significant quantities of supporting documents. Selected notable requirements include the following:

  • ACS Providers must submit detailed information on the equipment subject to removal and replacement, including the location of every piece of covered equipment and service, the exact equipment or service that is being removed, the replacement equipment or service (including the replacement's country of origin), and costs related to the removal, replacement, and disposal process.
  • If the applicant will upgrade technology as part of the rip-and-replace process, the applicant must identify whether the upgrade exceeds comparable replacement technology. The WCB will review upgrades using a "costs reasonably incurred" standard, supplemented by analysis of whether the cost, equipment, or service is "reasonably necessary" to meet rip-and-replace program requirements. This means the applicant may be responsible for the difference in cost between a comparable replacement and a chosen upgrade.

The Reimbursement Procedures, the Third R&O, and the FAQs describe some upgrades that are or are not considered "costs reasonably incurred."

  • For example, replacing older mobile wireless networks with 4G LTE equipment, or 5G-ready service, is allowed, but the applicant will be responsible for any optional equipment.
  • According to the Third R&O, replacing customers' Huawei and ZTE cell phones with new phones from different manufacturers could be a reimbursable upgrade. However, replacing customers' older, non-Huawei and non-ZTE cell phones will not be a reimbursable upgrade because the FCC has deemed those replacements "not reasonably necessary" under the rip-and-replace program. The FCC expects carriers to treat customer phone upgrades as they would respond in other instances where network upgrades render certain existing customer premises equipment unusable.
  • If estimated costs are not based on the Cost Catalog, the applicant must submit documentation supporting the costs, certify that the estimates are made in good faith, and justify why the estimate is not based on the Cost Catalog. This process allows, for instance, ACS Providers with equipment in remote areas or subject to significant, foreseeable weather events (like Alaskan winters) to provide estimates that could not be adequately previewed in the Cost Catalog.
  • Costs associated with breaking prepaid service contracts, managed service contracts, and long-term service contracts (e.g., early termination fees) may be reimbursable if the contracts were entered into prior to June 30, 2020, and the termination is reasonably necessary to accomplish rip-and-replace work. ACS Providers requesting reimbursements for early termination fees will need to include copies of the contracts with their submissions.

However, termination fees for breaking any current contracts with any third party for maintenance or operation of Huawei and ZTE equipment are not reimbursable because those are considered costs associated with maintaining Huawei and ZTE networks, and using Universal Service Funds to pay those contract expenses has been prohibited since June 30, 2020.

  • ACS Providers may seek reimbursement for Huawei and ZTE equipment acquired before June 30, 2020, that was never deployed. They may also seek reimbursement for equipment and services that they have proactively removed and destroyed dating back to April 17, 2018, as a result of the Secure Networks Act's prohibitions.
  • ACS Providers will need to address whether rip-and-replace work will involve major service disruptions to subscribers. The FCC's FAQs indicate that if a Recipient sets up temporary or interim facilities to mitigate service disruptions, related costs may be reimbursable.

WCB Review Period

The WCB's Application Request review period will start on the first business day after the close of the Filing Window. At the start of the review period, the Reimbursement Program Fund Administrator will conduct a preliminary review to assess the total reimbursement funds requested and to determine whether applicants are actually eligible and their submissions acceptable.

The WCB will issue a public notice listing the eligible and materially deficient applications, then proceed to process the eligible applications and any cured applications returned during the 15-day Cure Period. Allocation announcements will likely occur early in the second quarter of 2022.

Additional Considerations

Ownership Changes

Recipients will be required to notify the WCB of any ownership changes, including bankruptcy, occurring after approval of the funding allocation. WCB pre-approval of transactions involving a Recipient's change in ownership is not required.

However, ownership changes may affect both eligibility to participate and disbursement of the remaining allocated funds, so Recipients may need to work closely with the Reimbursement Program Fund Administrator to resolve questions raised by a pending or concluded ownership change.

Effect of Delinquent Debts to Federal or State Governments

Any ACS Provider with delinquent debts to federal or state entities must keep in mind that the U.S. Department of the Treasury's Offset Program (TOP) will apply to Reimbursement Program disbursements. The WCB encourages prospective applicants to resolve federal and state debt obligations before participating; otherwise, all or part of approved disbursement payments may be offset to satisfy such debt.

Applicants ineligible under the Department of the Treasury's Do Not Pay system are ineligible for Reimbursement Program funding allocations; if Do Not Pay ineligibility arises after allocation approval, reimbursement payments will be withheld. While the FCC cannot waive either of those restrictions, the FCC will waive its own "red light rule" and allow ACS Providers that are delinquent on debt owed to the FCC to participate in the Reimbursement Program and receive funding.

Public Availability of Required Filings

Significant portions of the Application Requests and other required filings described above will be made public. Applicants must take care to indicate any information that they consider confidential or otherwise exempt from publication under the Freedom of Information Act (FOIA). The Reimbursement Procedures and the Third R&O discuss in detail what must be published and what can be treated as exempt.

* * *

As discussed above and in our prior advisories, any broadband provider who would like to participate in the Reimbursement Program or believes it is subject to rip-and-replace mandates as a recipient of FCC subsidy funds should study the eligibility and implementation requirements carefully. The FCC's many publications relating to implementation of the Secure Networks Act address details too numerous to include in our summaries.

FOOTNOTES

1  Regulatory activities following the Further Notice of Proposed Rulemaking discussed in our February 20, 2020, advisory, plus amendments to the Secure Networks Act in the 2021 CAA, modified the scope of persons subject to mandates and eligible for reimbursement under the Secure Networks Act. Please review our subsequent advisories (here, here, and here) and the underlying FCC publications and contact us with any questions.
2  For purposes of the Secure Networks Act, an affiliate is "a person that (directly or indirectly) owns or controls, is owned or controlled by, or is under common ownership or control with, another person," with ownership constituting "an equity interest (or the equivalent thereof) of more than 10 percent." 47 U.S.C. § 153(2).

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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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