How Delays of “Rip and Replace” Jeopardize All Telecom in U.S.
Episode ID S1E06
April 7, 2022
The federal government promised to reimburse U.S. communication companies to “rip and replace” Chinese-made equipment from their networks. But Congress has yet to provide adequate funding, creating an environment of unusually high risk and uncertainty for rural operators. In this episode, CoBank’s Jeff Johnston speaks with Carri Bennett, a communications policy expert with the Rural Wireless Association and partner at Womble Bond Dickinson, and John Nettles, president of Pine Belt Wireless.
Jeff Johnston: Hello there, and welcome to the All Day Digital podcast, where we talk to industry executives and thought leaders to get their perspective on a wide range of factors shaping the communications industry. This podcast is brought to you by CoBank’s Knowledge Exchange group, and I am your host Jeff Johnston.
On today’s episode we get to hear from two great guests. Carri Bennet is a communications policy expert with the Rural Wireless Association, and a partner with Womble Bond Dickinson. John Nettles is the president of Pine Belt Wireless. They share their thoughts on the secure and trusted communications network reimbursement program, which is causing headaches for rural operators -- and it’s becoming a national security threat to all U.S. telecom operators.
By way of background, three years ago the federal government passed a law that required U.S. communication operators to remove from their networks all non-compliant equipment. This was to address national security concerns about untrusted equipment. Congress appropriated $1.9 billion to cover the expected initial costs of the program, but it turns out that was well short of the actual funding needed.
At Pine Belt Wireless, John is now dealing with all sorts of uncertainty. And it’s wreaking havoc on his ability to serve his customers with their critical communication needs, manage his network, and comply with the law.
So, without any further a due, pitter patter, let’s hear what Carri and John have to say.
Carri and John, welcome to the podcast. It’s great to have you here today.
John Nettles: Thank you.
Carri Bennet: Great to be here, Jeff. Thanks.
Jeff: Carri, I’d like to start with you. Maybe you could give us a high-level overview of what this secure and trusted communications network act is, and why do we have it?
Carri: Well, it’s actually a much broader act than people think. It’s to be able to take care of technology that gets into the communications networks, which later the government decides is not secure, should not be part of the network. It could be video equipment, it can be communications equipment or technologies. It’s an overreaching, overly inclusive piece of legislation to handle these kinds of problems that could cause risk to the networks.
In particular and where we’ve been focused is on two companies, Huawei and ZTE, who have been named by the Federal Communications Commission as covered entities. The program that the FCC has put into place that everyone is focused on is their reimbursement program to remove Huawei and ZTE equipment and services from the communications networks in the U.S. because they were determined to be unsecure and possibly even could be weaponized to harm interests in the U.S.
Jeff: So, the amount of money, the appropriations is a nice segue into the area I wanted to focus on with you two today. Maybe, John, I’ll direct this question to you, and then Carri obviously jump in and add any additional thoughts, please. As I understand it, there was $1.9 billion that was appropriated by Congress to pay for the “rip and replace” of this non-compliant equipment, but then after estimates and submissions were submitted to the FFC by all of the impacted operators, the number I think was closer to $5.6 billion dollars. So, quite a large chasm between those two numbers. John, I guess, for you, any thoughts on why you think we have this wide gap? That’s pretty significant.
John: It is pretty big gap, pretty big jump. There’s several reasons that contributed to the difference. One was just the factor of the amount of time between the original estimates and when the final estimates were submitted. I think it was almost two years ago that we were initially asked to submit and just asked to submit a relatively short order, what we thought it was going to cost us. There were a number of factors that I don’t think were considered, at least I can say that we didn’t consider, the amount of work that was going to have to go into repairs or retrofitting of the towers to accommodate the additional loads. Plus, you’ve got just increasing in cost that comes with time, you got the supply chain issues that impact that cost factor.
Carri: A couple of other contributing factors: we have workforce issues, as you know, we don’t have enough workforce to do all of this. The cost of the workers has gone up quite a bit just because of demand. The other thing is when the folks that were asked to put in the estimate, the jurisdiction that the FCC had to get companies to come forward and do this was under their universal service regime, and their ability to regulate eligible telecommunications carriers. Those were the only ones that were required to put in the estimates. Others can voluntarily do it.
What we saw is as a result of this that if you want money under the secured networks act, you have to come forward and put it in an application. More companies came forward and put in those applications. There were quite a few more than initially put in originally. Those are all the things that have contributed to that. In addition, we could talk a little bit about the cost catalog that the FCC had put together. The cost catalog has a range in it of low-cost and high-cost.
The FCC decided that it would take the average of those two costs and set that as a default mechanism so that if you just come in and pick that when you’re in the safe harbor area, or you don’t have to provide additional support for what was selected. When you take the average of the high and the low, you may see some increased costs there.
John: I can say that definitely happened. In our case, we deferred to the average because as the rules of the process were laid out, we didn’t have to submit a whole lot of additional justification for that there because it’s a one-time submission.
Jeff: Okay, that makes a lot of sense. So we’ve got this gap. As I understand it, it’s not as if Congress has approved the $5.6 billion. We’re not there yet, are we, Carri?
Carri: The Secure and Trusted Networks Act was a piece of legislation that authorized this process, and then later, Congress had to come in behind it and appropriate the money to pay for it. They only appropriated $1.9 billion, but they told the FCC, “If you get close to $1 billion, let us know and we can relook at it. We can always appropriate more money.” And remember what I said in the beginning, this is a broader piece of legislation for future problems that might arise with other equipment vendors and technologies that they might have to get paid for to take out of networks or to fix later.
They’d always have to appropriate more money if something new was found to be amiss in the communications networks that needed to be ripped out and replaced. It’s a piece of legislation or the act itself is ongoing and continuing, not just for Huawei and ZTE. Right now, the $1.9 billion is only for Huawei and ZTE. We don’t have enough to even take care of Huawei and ZTE. The FCC can go back to Congress and say, “Look, we need more money.” The FCC has actually done that once they realized that there was a difference between the 1.9 and the 5.6 and they told Congress, “There’s a gap.” Congress has been asking the FCC lots of questions about the gap. The FCC in turn has been going back to all the applicants who submitted the costs and are asking them lots of questions about what they submitted. On June 15th, that’s the statutory deadline that the FCC has to come back and tell each of the applicants how much money they’re actually going to be eligible for.
For example, if an applicant asks for $100 million, the FCC can come back to them and say, “Look, we’ve looked at this very thoroughly, we think you’re eligible for $95 million, not $100 million.” They’ll do that to all of the different applicants and then they’ll have a final number that everyone’s eligible for. If that amount is still over $1.9 billion, then it’s up to Congress to appropriate more money to fund the difference.
But, in the meanwhile, the way the program works, the applicants will all get a pro rata of share of the $1.9 billion. They’ll get a percentage of that $1.9 billion. Right now, that percentage, if it stays at $5.6 billion, and there’s a disconnect, because there’s only $1.9 billion, each of the applicants will only get funded a third of what they requested, about 33%.
Jeff: Wow. Geez. John, if I were to put myself in your shoes, I would think operators like yourself that need to comply and I’m sure want to comply with the act in a tough spot. There’s a lot of uncertainty here. You’ve got to get a lot of work done. I think there’s probably a good bit of risk to communication services and markets where the wireless operator or the impacted operator is the only option for people in those markets. It really feels like it puts you in a tough spot. Am I thinking about that the right way?
John: You hit it right on the head. The way the act reads once we’re given our final appropriation or our final allocation, then we’re expected to take our first draw within one year of that, and then we’re expected to complete the work within one year of taking our first draw. You can argue that you’ve got essentially 24 months to do the work, but if you’ve only got enough money to do a third of the work, then it’s not like I’m going to be able to keep two-thirds of my-- I’ve got a ZTE network, two-thirds of those ZTE network up and running, and put a new third network of another vendor in place, it just doesn’t work that way. I’m faced with some pretty hard choices at that point, do I turn down two-thirds of my network.
That’s a step backwards in time in terms of what you were referring to earlier about people need the coverage, they need the broadband services that were provided, whether it’s wireless or wireline. If the system works out such that the networks get smaller instead of getting bigger, that’s 100% counter to the broader policy objectives of better broadband to everybody everywhere.
Jeff: And when I think about, just thinking back what we went through with COVID and how it exposed those living in rural America who didn’t have access to reliable broadband. It just exposed their ability to learn, exposed their ability to work. It almost feels like almost, I don’t know if COVID part two is the right way to think about it. Look, if people can’t get access to the internet or to broadband networks because companies like yourself are stuck in this holding pattern, it really puts your customers and those living in rural America in a brutal spot potentially, no?
John: Yes, it does. In fact, we’ve already experienced that in the surging demand from the pandemic when it kicked off in 2020. I had a significant amount of demand for our services that I was unable to meet because the ZTE network that I have is pretty much overtaxed. I don’t have any support from ZTE. I was unable to buy any additional components to increase the capacity on the network. There were, I don’t know, 600 or 700 customers in about a 90-day window that needed to be able to remotely access either work or school, that had come to me to ask for that, and I couldn’t deliver it to them. Honestly, I don’t know how they got it because I guess they either continued to rely on dial-up or one of the dial-in WiFi hotspots that people threw up in different places. It had a real-world effect on people.
Jeff: I think you alluded to this. I think ZTE has left the market from a support standpoint. If I’ve got it correct, I think Huawei is going to exit the market sometime this year. How in the world you run a network with your network suppliers no longer available from a software perspective, from a parts perspective. How is that even possible?
John: We’re living on borrowed time. That’s literally the truth. One particular component of the network was called the IMS IP multimedia subsystem. It’s the system that makes voice over LT work. I was unable to complete that in my initial installation because of ZTE’s departure. As we approach sunset with the 3G networks, I’m very anxious to get this replacement started so that my network doesn’t become obsoleted because of the technology transition.
Jeff: Everyone’s got limited resources and smaller operators can feel that pain maybe more so than larger operators. I would think too that this could also impact how quickly and maybe mention this around a roundabout way, but how quickly you could deploy 5G so that other customers or your customers could enjoy higher data speed connections.
John: True. Until I get the foundation replaced, we can’t make that next step.
Carri: To be clear, the funding isn’t available for 5G services, it can be 5G ready, but not a 5G service. As we keep marching on one of the things Congress should probably look at as well is with all of this funding, why not just add a tiny bit more in there and make it 5G, too. It’s not a big jump for them to get to 5G on these 4G networks. They’re already doing a lot of new stuff and it’s a rip out and replace. Conceivably as Congress looks at doing this funding, one of the things Congress could look at as well is just going ahead and making it 4G and 5G. Just the thought that if anyone from Congress is listening. [chuckles]
Jeff: That certainly would make things run a lot smoother and make it a little bit easier for John and his counterparts in other markets. They’ve had to jump through hoops to deal with this and then if they’ve got to then have a parallel track of what we’re going to replace our 4G network, but then we’ve got to think about building 5G on top of it, that seems cumbersome, too.
Carri: The other thing I was going to add is, while John’s customers and his rural markets are going to suffer, so will the customers of Verizon and others who have to use those networks to roam for their own customers. It’s not just hurting a small group of customers in rural Alabama, it’s hurting anyone that’s with big carrier customer traveling through rural Alabama that is reliant on that network as well. It’s as much more far reaching. If John has to turn down or Pine Belt has to turn down coverage, there’s no coverage, then there’s no 911 support services either.
John: Last time I looked for every customer of mine that was on my network, there were 10 visitors in my network. That ratio is a little bit dated. It was a couple years ago before last time I pulled that stat. My network serves 10 visitors to one home customer.
Jeff: Carri, this is really our only option through Congress. It’s not like the FCC can take money out of, I don’t know, a spectrum auction or something like that to help this situation out. This really has to go through Congress.
Carri: Right. With a spectrum auction, Congress could actually earmark funds from a spectrum auction for something like this from a future spectrum auction. That’s the way sometimes Congress funds things, but the FCC doesn’t have any way to fund this. It’s totally dependent on Congress to fund it and it has no power to come up with the funding to do anything like this just outside of its bailiwick, so to speak. There are lots of ways Congress could look at funding that get well. I should say appropriating money to do this, and there’s some legislation that’s moving forward. The America COMPETES Act and a bunch of other bills associated with that for competing against China. Given that this is Huawei and ZTE, and the U.S. is trying to compete against China in this market and other markets, that it makes sense to try to throw in some money to be appropriated through that legislation, or some emergency legislation can appropriate the money.
The important thing is from RWA’s members, and John being one of them, is we’ve got about 25% of our members who are impacted by this. It came about because the FCC decided to do a reverse auction to spend $300 million in the Mobility Fund Phase I Auction to deploy 3G and 4G services in rural America. It was a race to the bottom. The Chinese came in through Huawei and ZTE, and heavily subsidized those companies to be able to cut the price of the other companies out of the market.
That’s what you get when you have a reverse auction. You’re always going to have a race to the bottom with subsidized equipment from China that turns out later we find out to have problems and be unsecure and harmful to our networks.
Jeff: That’s I think a really important point to make. If I were to take a step back, it feels like to me what John and your impacted members and everyone who’s impacted need right now is certainty. They need to know how much money they’re going to get, and when they’re going to get, how it’s going to be deployed so that they can go about and do the things that they need to do to be in compliance with the act, at the same time not disrupting service to their customers. Is that I think an important takeaway here?
John: Yes, absolutely. My access is not even just how much money we get. It’s like, “Hey, how and when are we going to get them, the amount that we actually to do the job to complete the job?”
Carri: I compare it to crossing a stream. You can’t get halfway into the stream and then have no way to get to the other side. Then you can’t go back once you’re halfway there. It doesn’t work that way. You can’t be stuck in the middle of the stream with no path forward. Congress has to give that certainty by saying, “Yes, we’re going to appropriate the money, and this is how much money we’re going to appropriate.” They can say, “trust us,” but I think everyone feel much better when the president actually signs the legislation that appropriates the money.
Jeff: Any other closing thoughts, or things that we didn’t cover to either John or Carri that you think is important that we touch on?
John: I’ll just going to try to reiterate, this is an actual security issue. With everything that’s going on in the world, the fact that it is a national security issue should make it an even more urgent matter in terms of getting it appropriate so that we can proceed with it because it’s been in the public eye for four years now. It started in April 2018 when the FCC issued its first NPRM, and it’s dragged out from that point.
Carri: I would say it’s not just an issue that impacts from a security standpoint, that impacts the companies that built Huawei and ZTE networks. All of these networks, the Huawei and ZTE networks that were built here in the U.S., are all interconnected with all of the other communications networks in the U.S. and even beyond. That’s what’s really important; so what happens on a ZTE network or a Huawei network in the U.S., those networks being interconnected with other networks. If there is something that’s unsecure or something that’s able to be weaponized through these networks impacts more than just the networks, impacts things that are attached to the networks.
When you start thinking about devices that are attached to the network, and how the networks are interconnected, all these networks are interconnected with one another, it should be raising a lot of red flags for Congress. It’s not like Congress didn’t see this coming. I think initially when we discussed this with Congress, we threw out numbers of anywhere from $2 billion to $3 billion, and they settled on $1.9 to start. They made it very clear that was to start. Here we are, we’ve started, we’re in the middle of the stream, help us out, get us to the other side.
Jeff: Absolutely. Well, I hope for the sake of all the impacted operators, and for the sake of national security, Congress does the right thing and appropriates the necessary funds so that we can get this thing resolved. I’m going to leave it there. Carri and John, super insightful thoughts here, and certainly appreciate your time. Thanks for being with us.
John: Thank you, Jeff.
Carri: Thank you.
Jeff: A special thanks goes out to Carri and John for taking time out of their busy schedules to chat about this very important topic. After talking to John, I can’t imagine how difficult and stressful it must be for he and others like him to be stuck in this holding pattern. They’re waiting for Congress to appropriate more money so they can move forward with their respective of rip and replace programs, while at the same time, they are losing support for the equipment that is still running their networks. I think the important message here is that impacted operators, many of which are small and have limited resources, desperately need certainty and they need it fast. Certainty on how much more money will be appropriated and when it will be made available so they can ensure that their customers continue to have access to critical communication networks. Hey, thanks for joining us today. Watch out for the next episode of the All Day Digital podcast.