Davis Wright Tremaine LLP

In a Second Report & Order (Second R&O)—published in the Federal Register January 13, 2021, with an effective date of March 15, 2022—the Federal Communications Commission (FCC) unanimously adopted rules that implement the Secure and Trusted Communications Networks Act of 2019 (Secure Networks Act). Those rules require Eligible Telecommunications Carriers (ETCs) to remove and replace covered equipment and services, which are to be included on the covered list required by Section 2 of the Secure Networks Act, from their network and operations environments.

The Second R&O also establishes a Reimbursement Program that will provide funds to smaller providers of advanced communications services for removal and replacement of covered equipment, and establishes reporting requirements to monitor the presence of such equipment and services in communications networks. Through the Consolidated Appropriations Act of 2021 (effective December 27, 2020), Congress provided $1.9 billion to fund the replacement of covered equipment and services, and the FCC is now in the process of formulating the means by which applications for reimbursement will be considered.

All of this comes on the heels of the FCC's late 2020 denials to reconsider designations of Huawei Technologies Company and ZTE Corporation as "covered entities" by the Public Safety and Homeland Security Bureau (which we discussed here). With Huawei and ZTE's designations as threats to national security affirmed, ETCs may no longer use funds from the FCC's Universal Service Fund (USF) to purchase, obtain, maintain, improve, modify or otherwise support any equipment or services produced or provided by either telecom company—and any ETCs receiving USF support must remove-and-replace such equipment and services.

Remove-and-Replace Requirement

Under the Second R&O, ETCs receiving USF support are required to remove all existing covered equipment or services in their networks as a condition of receiving reimbursement funds. Likewise, non-ETC carriers that qualify and elect to voluntarily participate in the Reimbursement Program also will be required to remove all covered equipment and services as a condition to receiving reimbursement funds.

For ETCs receiving USF funds, the FCC explicitly states that this obligation extends beyond just those jurisdictions in which a company operates as an ETC and irrespective of whether it participates in the Reimbursement Program. Failure to comply can result in FCC enforcement action and forfeiture of future USF funding.

Covered Equipment and Services

The Second R&O lays out the FCC's plans, pursuant to the Secure Networks Act, to create a list of communications equipment and services subject to remove-and-replace requirements (Covered List). The FCC interprets "communications equipment and services" to include all equipment or services used in fixed and mobile broadband networks, provided they incorporate or use "electronic components."

The Second R&O reiterates the Act's requirement that, to be "covered," such equipment must meet two criteria:

  • First, the communications equipment or services must, based exclusively on determinations made by Congress, certain government agencies, or interagency bodies, "pose[ ] an unacceptable risk to the national security of the United States or the security and safety of United States persons[.]"
  • Second, the equipment or services must be capable of:
    • (a) Routing or redirecting user data traffic or permitting visibility into any user data or packets that such equipment or service transmits or otherwise handles;
    • (b) Causing the network of a provider of advanced communications service to be disrupted remotely; or
    • (c) Otherwise posing an unacceptable risk to the national security of the United States or the security and safety of United States persons.
    The FCC makes clear that "capable" includes "equipment or service that can possibly perform these functions, even if the subject equipment or service is not ordinarily used to perform [those] functions ..."

The R&O announces that the FCC will publish the Covered List on its website by March 12, 2021. The list will be publically available and serve as a reference to indicate equipment and services subject to rip-and-replace, the ban on federal subsidies, and reporting requirements adopted in the Second R&O. The FCC will publish, update or modify the Covered List without providing notice or opportunity to comment—however, the Bureau will issue a Public Notice each time the Covered List is updated.

The FCC anticipates that some determinations will list specific communications equipment or services that pose an unacceptable risk to national security and others will list general categories or classes of equipment that pose such a risk. Anticipating that there will be uncertainty regarding interpretation of some of the listings, the FCC has stated that parties may seek a declaratory ruling regarding whether specific equipment and services are "covered."

However, the FCC stated emphatically that it lacks discretion to modify a determination. To the extent that parties take issue with a determination, the FCC directs them to petition the source of the determination (e.g., executive branch interagency bodies, the Department of Commerce, National Security Agencies).

Ban on Use of Federal Subsidies for Equipment on Covered List

The Second R&O implements provisions of the Secure Networks Act that prohibit funding from federal subsidies for advanced communications services from being used to purchase, rent, lease or otherwise obtain any covered communications equipment or service, or maintain any covered equipment or service previously purchased, rented, leased or otherwise obtained. The FCC has interpreted the Secure Networks Act to apply to all universal service programs, but not other federal subsidy programs to the extent those programs may tangentially or indirectly involve expenditures related to the provision of advanced communications service.

The FCC acknowledges that there will be two processes to designate equipment or services as prohibited from federal funding—one for the designation of an entity as posing a national security threat to the integrity of communications networks or the communications supply chain, and another for the designation of specific equipment and services through the Covered List process.

Certain equipment or services may be subject to either or both of the designation processes. The prohibition further applies to any FCC-administered funding program made available to subsidize capital expenditures for the provision of advanced communications service, including any future USF programs (unlike the existing prohibition, which is limited to USF support). However, similar to the existing prohibition, the new prohibition does not grandfather existing contracts.

Secured and Trusted Networks Reimbursement Program

By March 12, 2021, the FCC must establish a Reimbursement Program to indemnify providers of advanced communication services for reasonable costs incurred to permanently remove, replace, and dispose of covered communications equipment and services from their networks. In the Consolidated Appropriations Act of 2021, Congress raised the threshold for participation in the Reimbursement Program to providers with 10 million or fewer customers (previously 2 million). This would include both ETCs and non-ETCs.

The FCC will establish, and publish on its website, a Replacement List that will identify categories of suggested replacements of real and virtual hardware and software equipment and services to guide providers in removing covered communications equipment from their networks. However, the FCC stated that—to avoid appearances of favoritism toward certain equipment or manufactures—the list will not identify specific suggested replacements.

The FCC's Wireline Competition Bureau will establish a 30-day filing window for eligible providers to submit initial estimates of the costs to be reasonably incurred for the removal, replacement, and disposal of covered communications equipment or services to participate in the reimbursement program. Applicants will be required to provide an initial reimbursement cost estimate at the time of application, with supporting materials substantiating the costs and timeline for removal, replacement, and disposal.

Each applicant will be required to certify under penalty of perjury that it:

  • (1) Believes in good faith that it will reasonably incur all of the estimated costs that it claims as eligible for reimbursement;
  • (2) Will use all money received from the Reimbursement Program only for expenses it believes are eligible for reimbursement;
  • (3) Will comply with all policies and procedures relating to allocations, draw downs, payments, obligations, and expenditures of money from the Reimbursement Program;
  • (4) Will maintain for 10 years detailed records, including receipts, of all costs eligible for reimbursement actually incurred; and
  • (5) Will file all required documentation for its expenses.

The FCC will act on applications within 90 days after the date of submission. If aggregate demand exceeds available funding, the FCC will prioritize funding requests from ETCs subject to a remove and replace requirement and replacement of core network expenses before funding the requests of non-ETCs and non-core network expenses. Program recipients will have one year from the initial disbursement to complete the permanent removal, replacement, and disposal of covered communications equipment or services.

Reporting Requirements

Finally, the FCC will issue a new data collection requirement that will apply to all providers of advanced communications services. The FCC will require that providers of advanced communications services report annually on covered communications equipment or services in their networks.

For equipment or services on the Covered List acquired on or after August 14, 2018, network providers will have to report:

  • (1) The type of covered communications equipment or service purchased, rented or leased;
  • (2) The location of the equipment or service;
  • (3) The date the equipment or service was procured;
  • (4) Removal or replacement plans for the equipment or service, including cost to replace;
  • (5) The amount paid for the equipment or service;
  • (6) The supplier for the equipment or service; and
  • (7) A detailed justification for obtaining such covered equipment and service.

The FCC plans to issue a public list of providers that have reported covered equipment or services in their network—however, sensitive information such as location of the equipment and services, removal or replacement plans that include sensitive information, the specific type of equipment or service, and any other provider specific information will be presumptively confidential.

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