What ACS Providers Need to Know About the FCC's Rip, Replace, and Reimbursement Program

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On August 3, 2021, the Wireline Competition Bureau (WCB) of the Federal Communications Commission (FCC) adopted final procedures (Reimbursement Procedures) for the Reimbursement Program created pursuant to the Secure and Trusted Communications Networks Act of 2019 (Secure Networks Act), as amended by the Consolidated Appropriations Act of 2021 (CAA).

These procedures address the reimbursement feature of the Secure Networks Act's "rip-and-replace" mandate, which requires communications providers that receive FCC subsidy funds to remove identified Huawei Technologies Company (Huawei) and ZTE Corporation (ZTE) equipment and services from their communications networks. The Reimbursement Procedures are closely tied to the FCC's Third Report and Order (Third R&O), published in the Federal Register on August 23, 2021, effective October 22, 2021, which, among other things, expands the group of network providers eligible for reimbursements and revises the reimbursement prioritization scheme.

With these publications, one key step remains to be finalized under the Secure Networks Act: Setting the opening date for the Reimbursement Program application filing window. When that date—currently targeted for October 29, 2021—is formally announced, the countdown will begin for completion of application submissions and completion of all rip-and-replace work.

Background

The Secure Networks Act was enacted on March 12, 2020, with the aim of purging equipment and services that pose national security risks emerging from subsidized U.S. communications networks. To accomplish this goal, the Act included a prohibition on use of FCC subsidy funds to purchase, rent, lease, otherwise obtain, or maintain communications equipment or services enumerated in a Covered List 1 developed by the FCC. The Act also created a Reimbursement Program to assist eligible providers of "advanced communications services" (ACS providers) in recovering the costs of removing, replacing, and destroying ("rip-and-replace") items on the Covered List.

In two Designation Orders effective on June 30, 2020 (which we discussed here), the FCC's Public Safety and Homeland Security Bureau confirmed that equipment and services from Huawei and ZTE—including all parents, affiliates and subsidiaries—posed unacceptable risks to U.S. national security and, therefore, included those entities on the Covered List. The FCC's 2020 Supply Chain Second Report and Order (Second R&O) (which we discussed here) enacted rules relating to creation and maintenance of the Covered List, the rip-and-replace mandate, and the Reimbursement Program, including a funding prioritization scheme in the event appropriated funds are insufficient to meet program costs.

The 2021 CAA revised aspects of the Secure Networks Act and appropriated $1.9 Billion USD to fund the Reimbursement Program. As a consequence, the FCC had to reconcile its Second R&O with the CAA, leading to adoption of the Third R&O.

The CAA refined and expanded who could be an eligible ACS provider and provided that covered equipment and services eligible for appropriated funding under the Reimbursement Program are limited to all Huawei and ZTE equipment and services acquired before the date of the Designation Orders of June 30, 2020 (instead of the previously specified cutoff date of August 14, 2018).2 The CAA also created a new reimbursement prioritization schedule.

Eligible Providers

Under the CAA and the Third R&O, ACS providers eligible for the Reimbursement Program include any person who:

(a)  provides "high-speed, switched, broadband telecommunications capability that enables users to originate and receive high-quality voice, data, graphics, and video telecommunications using any technology with connection speeds of at least 200 kbps in either direction" (also referred to using the terms "advanced communications service" or "advanced telecommunications capability");

(b)  to United States customers; and

(c)  has 10 million or fewer customers.

Prior to the CAA and Third R&O, eligibility was capped at two million or fewer customers.

The CAA and Third R&O further clarify that ACS providers under the Secure Networks Act include accredited public or private non-commercial educational institutions or consortia thereof that are already licensees in the FCC's Educational Broadband Service (EBS) and provide their own facilities-based educational broadband services of at least 200 kbps in one direction to end users. The changes also clarify that ACS providers include healthcare providers and libraries or consortia thereof that provide advanced communications services of at least 200 kbps in one direction to end users.

The CAA and Third R&O did not change the underlying communications service parameters or how customer quantities are counted across affiliated ACS providers to determine eligibility. Further, the expansion of eligibility under the Reimbursement Program did not effect an amendment of the term "provider of advanced communication services" for any other section of the FCC's rules.

In the Third R&O, the FCC projected that the CAA's expansion of eligible participants "will encompass the vast majority of [broadband] providers," but broadband providers interested in the Reimbursement Program must perform their own eligibility analyses. This includes reviewing first, whether they meet the definition above of a "provider of advanced communication service;" second, confirming their customers are United States customers; and third, confirming those customers meet the customer limit.

ACS providers under the Secure Networks Act are measured against the same standard as ACS providers subject to FCC Form 477 "Local Telephone and Broadband Reporting" filing requirements,3 so many prospective applicants can quickly answer the first prong by confirming they completed the most recent Form 477 filing. Additional Reimbursement Program eligibility review tools include confirming current status as an Eligible Telecommunications Carrier (ETC) under the Universal Service Support (USF) program or status as an EBS licensee. Intermediate providers and fixed or mobile broadband providers that directly service end-users but are not part of those named programs are nevertheless likely eligible if they meet the connection speed, customer location, and customer limits.4

If eligible, participation in the Reimbursement Program is not mandatory. But once an ACS provider applies to the Reimbursement Program and the WCB approves funding, they must follow through and remove all Huawei and ZTE equipment. ACS providers who currently participate in the USF program but do not want to remove Huawei or ZTE equipment will be ineligible for additional USF funding.

Prioritization Schedule

The Second R&O had envisioned prioritizing certain ETC requests for core network expenses over non-ETCs and non-core network expenses in the event reimbursement funding fell short of needs. Under the CAA and Third R&O, core networks and ETC status have no special weight. Instead, ACS providers with two million or fewer customers will have first priority, followed by eligible providers that are qualifying educational institutions, healthcare providers, and libraries, followed by any remaining eligible ACS providers.

Eligible providers in the second category (educational, healthcare, libraries) will be prioritized under the first category if they have two-million or fewer customers. The revised schedule also eliminates the FCC's earlier proposal to prioritize certain subgroups within any larger priority groups.

Applications for Reimbursement

The Reimbursement Procedures include changes to and finalize the:

Included among those are clarifications regarding the extent to which technology upgrades are reimbursable: Whether a specific replacement or upgrade is reimbursable will be reviewed against a standard of "costs reasonably incurred," taking into account whether the equipment or service is "reasonably necessary" for completion of rip-and-replace work. The FCC has determined as a general matter, for instance, that replacing microwave backhaul with fiber backhaul is not reimbursable because that substitution is not "necessary" to removal and replacement of covered equipment and services.5

Several elements of the FCC Form 5600 are notable, such as the level of detail it requests for equipment being removed and the replacement equipment, as well as the Form's pointed reminder that anything being removed cannot be replaced with new Huawei or ZTE equipment or services.

Filing and Review of the Reimbursement Application

Whether a provider is eligible, its prioritization category, and the maximum reimbursement funds it can receive will be determined for all ACS providers through the same process and in the same timeline. Providers who believe they are eligible must prepare and submit the FCC Form 5600 through an online portal within the filing window, which will likely be a 60-day period (expanded from earlier projections of a 30-day window) opening on or sometime after October 29, 2021.

After the close of the filing window, the WCB will review all applications in conjunction with each other to ensure allocated funds are distributed in accordance with the prioritization categories and to determine allocation amounts for each ACS provider. The WCB will have at least 90 and up to 135 days to complete its review and determinations.

After the filing window closes, ACS providers will each have only one opportunity to cure a materially deficient application and only a limited ability to amend or supplement an application, with no chance to request increased funding levels. In light of those restrictions, ACS providers should review each form and all of the associated guidelines carefully and as soon as possible. Providers should begin compiling the necessary information now so that they will be ready to submit complete applications through the online portal before the close of the filing window.

After each ACS provider receives its allocation determination, incurs its first rip-and-replace program costs, and receives its first funding disbursement against a reimbursement claim, it will have one calendar year to complete the removal, replacement, and disposal of all covered equipment and services from its network.

In our next rip-and-replace advisory, we will address the Reimbursement Program filing requirements, particularly the Form 5600, and accompanying timelines. We will also review the Cost Catalog and costs eligible for reimbursement with additional detail, along with procedural notes discussed in the Third R&O and the Reimbursement Procedures.

FOOTNOTES

1  The FCC's Covered List (first published in March 2021, published yearly in the month of March thereafter) broadly describes categories of equipment and services from five companies: Huawei Technologies Company, ZTE Corporation, Hytera Communications Corporation, Hangzhou Hikvision Digital Technology Company, and Dahua Technology Company.
2  Covered equipment and services from the other three companies on the Covered List are not eligible for replacement funding under the current Reimbursement Program and are not subject to the rip-and-replace mandate at the present time. Future rip-and-replace requirements will depend on express designations of covered entities plus future funding appropriations. FCC 21-86 at ¶ 45 (July 14, 2021).
3  See 47 C.F.R. § 1.7001.
4  Parties that merely purchase advanced telecommunications services rather than serve as a facilities-based network provider are not eligible.
5  However, ACS providers may receive reimbursement for an amount equivalent to the comparable replacement cost for microwave backhaul, then choose to install upgraded fiber backhaul, self-funding the difference between the comparable replacement cost and the upgrade cost. FCC 21-86 at ¶¶ 90-91 (July 14, 2021).

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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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