Not Fully Funding Rip and Replace Could Mean Some Smaller Carriers Going Out of Business

Eighteen wireless carriers and stakeholders are urging Congress to fully fund the Secure and Trusted Communications Networks Reimbursement Program amid ongoing concerns about the FCC’s final estimate that lawmakers will need to appropriate an additional $3.08 billion to pay the costs of replacing the unsecure equipment (see 2207150067). Industry experts told us the outlook on whether Congress will act on the Spectrum Innovation Act (HR-7624) or other proposals to provide additional funding is unclear, but the risk for industry and negative implications for closing the digital divide are real.

Carriers with insecure equipment face cuts of more than 60% of “the funding needed to complete otherwise approved projects,” absent the additional appropriation, the carriers said in a Thursday letter to Senate Majority Leader Chuck Schumer, D-N.Y., House Speaker Nancy Pelosi, D-Calif., and their GOP counterparts. FCC Chairwoman Jessica Rosenworcel told lawmakers earlier this month the commission would need to pro-rate all of its reimbursement allocations to about 39.5% of the requested amounts due to the existing funding shortfall. ATN International, Nokia, CellularOne, Pine Cellular, Choice, NTUA Wireless, Pine Belt Wireless, Commnet, PTSI, Copper Valley Telecom, Telsasoft, Ericsson, Union Wireless, Inland Cellular, United Wireless, James Valley Telecommunications, Viaero Wireless, Nemont and Viya signed the letter.

“Unfortunately, many carriers simply will not be able to fully and completely remove, replace, and destroy untrusted equipment and services under these circumstances,” the carriers said: “Failure to provide additional resources risks putting the success of the STCN Reimbursement Program, as well as the security of the United States, in jeopardy.”

The “letter signatories are exactly correct -- for the STCN Reimbursement Program to be a success, sufficient resources must be made available,” Competitive Carriers Association President Steve Berry said Friday. “This is not only a national security issue” but “an important consumer issue as well.” Failure “to make up for the funding shortfall threatens the availability of advanced communications to residents and visitors in large parts of the country, especially in rural areas -- an outcome that no one wants to see,” he said.

Hill Priorities

A House Commerce Committee-cleared revision to HR-7624’s allocations of proceeds from a proposed 3.1-3.45 GHz auction that would give priority to the Treasury Department using the money for relocating band incumbents and $16 billion in federal deficit reduction “won’t really affect the amount of money we can” then use for the rip and replace shortfall, House Communications Subcommittee Chairman Mike Doyle, D-Pa., said in an interview. HR-7624 would allocate up to $10 billion of the sales money to fund next-generation 911 tech upgrades and up to $3.4 billion for rip and replace money once Treasury pays out the prioritized money (see 2207130066).

House Commerce needed to add the deficit reduction language to HR-7624 “to make it budget neutral, since that’s a mechanism to do that,” Doyle said: “That wasn’t a sticking point” for committee Democrats. House Communications ranking member Bob Latta, R-Ohio, noted committee leaders are hoping the Congressional Budget Office will be able to quickly produce a score for HR-7624 to smooth the way to its passage.

Senate Communications Subcommittee Chairman Ben Ray Lujan, D-N.M., and ranking member John Thune, R-S.D., separately cited a need for the subpanel to delve into how to structure 3.1-3.45 GHz auction proceeds as part of a likely hearing the week of Aug. 1 (see 2207180067). Lujan noted misgivings about HR-7624’s proposal to renew the FCC’s spectrum auction authority for 18 months. A longer renewal period would allow any auctions to “generate more revenue, which would allow us to make more investments” in rip and replace, NG-911 and other telecom priorities, he said.

Thune voiced a preference for using some of the 3.1-3.45 GHz proceeds for rip and replace since “we’re coming up short on” the reimbursements. It’s hard to tell if the proposed sale would be able to generate enough proceeds to pay for all proposed uses of the money since Democrats “keep coming up with more ways” to use it, Thune said: “I would rather we take a deep dive look at that” during the upcoming Communications hearing before agreeing to back HR-7624.

Senate Intelligence Committee Vice Chairman Marco Rubio, R-Fla., is seeking to fully fund rip and replace via the Chips+ U.S. semiconductor manufacturing incentives and pro-U.S. competitiveness package, filed as an amendment to shell bill HR-4346, that’s set for a Senate vote this week (see 2207200063). Rubio said Friday he’s filed an amendment to the package that would increase the amount of funding for the reimbursement program from the original $1.9 billion included in the FY 2021 appropriations and COVID-19 aid omnibus law (see 2203140061) to the $4.98 billion figure the FCC said would fully cover applicants’ requests. “America needs to make things again,” but “we need to do it in a way that benefits our country and our workers,” Rubio said. “Unless we add meaningful safeguards in this package, we should call this for what it is: the China Investment Bill.”

The House voted 220-207 Wednesday to pass the FY 2023 omnibus appropriations package that includes funding for the FCC, FTC and Agriculture Department rural broadband programs (HR-8294) but didn't include any additional rip and replace funding in that legislation. The measure proposes giving the FCC $390 million and the FTC $490 million (see 2206270061).

'Heap of Trouble'

If the FCC pays only 39.5% of reimbursement costs, “that number results in many rural, small carriers turning off the lights and handing in their licenses,” said Telecommunications Industry Association Senior Director-Government Affairs Colin Andrews. “That’s just the reality we’re looking at.” Since the FCC determined the Huawei and ZTE equipment is a security risk “you can’t update it, you can’t replace it,” he said: “You’re one natural disaster or lightning strike away from having a network go down and not being able to replace the equipment.” Having a “firm, vetted” number from the FCC could help on the Hill, Andrews said. He predicted the House will pass HR-7624. Though that approach isn’t TIA’s preference, it “will at least mitigate the damage and fully fund the program," he said.

“It’s the smaller carriers, and those serving the most rural areas, that may be worst hit by the shortfall,” said TechFreedom General Counsel Jim Dunstan. “A lot of the equipment that is subject to rip and replace is relatively new, which means it was installed as either extending deployment into more rural areas in recent years, or upgrading older systems,” he said: “If that equipment is lost and its replacement equipment only partially funded, how does that impact further extensions into rural areas?”

NTIA’s $42.5 billion broadband, equity, access and deployment program money “may ultimately not come close to closing the digital divide,” Dunstan said. “Add to that unfunded rip and replace costs, and we're in a heap of trouble.”

“Given rising concerns about the resilience of the broadband infrastructure supply chain, it is critical to fund fully the identified rip and replace costs so that providers can procure and install secure equipment and keep offering essential services to their communities,” said NTCA Executive Vice President Mike Romano. NTCA is “encouraged” by House Commerce's effort to fully fund the program via HR-7624 and “we are hopeful that their colleagues in Congress will follow suit by passing legislation to avoid potential disruptions in service, increases in rates, or other negative impacts for rural consumers,” Romano said.

Keeping a 'Promise'

“The safe bet is always that Congress does nothing, but here there is a lot of support for rural phone companies and for building a real wall to defend against security breaches coming from China,” said New Street’s Blair Levin. “It has a better chance than a lot of other legislative initiatives.” The level of risk some smaller carriers could fail depends on the financial position of individual companies, he said: “Some may exit, but I suspect exits will have more to do with cannibalization from fixed wireless or competition from electric co-ops than the cost of replacing equipment.”

“When you make a promise like the one the FCC/Congress made, it’s like a bill on the table that must be paid,” emailed John Strand of Strand Consult: “It's hard to see how the FCC can run away from the bill when” Rosenworcel “used a phrase like ‘reasonable and supported’ about the money that's missing.”

“Companies bought equipment from Huawei with offers that were too good to be true,” Strand said: “The information about the dangers of Huawei had been in the public domain since at least” 2012. “Many companies, large and small, avoided Huawei, and other Chinese vendors, knowing that there was [a] security risk,” he said. “Shareholders should bear that risk, not taxpayers.”

Getting more funding for rip and replace is a “tough sell for Congress given all of the funding already allocated towards broadband deployment, especially with the fact that the carriers gave the wrong estimates to the FCC initially,” said Digital Progress Institute President Joel Thayer. “Without more funding, it will be near impossible for these smaller carriers to comply with the FCC's … mandate,” he said: “This is an incredibly important issue to get right, and it's clearly in the U.S.'s interest to get Huawei and ZTE equipment out of our networks. Frankly, they need the funding and Congress should be receptive to their requests because the broader goal should always be to keep China out of our communications networks.”