TR Daily Small, Large Carriers Split on Impact of Chinese Equipment Ban
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Monday, November 19, 2018

Small, Large Carriers Split on Impact of Chinese Equipment Ban

A Department of Defense authorization act that restricted federal agencies from buying information technology products from certain Chinese companies deemed to pose a national security threat does not apply to universal service subsidies, small carriers and their trade associations have told the FCC.

Groups representing larger carriers, on the other hand, have taken the opposite view: that the 2019 National Defense Authorization Act (NDAA) requires the Commission to prohibit the use of Universal Service Fund dollars to buy telecom equipment from Huawei Technologies Co., ZTE Corp., or other “covered” entities.

Those conflicting views were presented to the FCC’s Wireline Competition Bureau in an ongoing proceeding (WC 18-89) in which the Commission proposed barring the use of USF funds to buy components from companies that are thought to be used by the Chinese government to conduct cyber espionage against the U.S.

In response to a notice of proposed rulemaking issued by the FCC in April, smaller carriers noted that a ban on the use of USF funds for Chinese equipment, which is generally less expensive, would strain their finances (TR Daily, June 4).

They offered similar views in comments posted today in response to an additional request from the Commission for input on how the provisions of the 2019 NDAA, which was adopted after the FCC had issued its NPRM, should affect the Commission’s proposed USF restrictions (TR Daily, Oct. 29).

Several trade associations representing smaller carriers suggested that the NDAA’s prohibition on federal agencies’ purchases of Chinese equipment did not apply to USF. “The plain text of the 2019 NDAA does not apply to USF support, and the FCC therefore should not interpret the 2019 NDAA as a directive to place additional restrictions or limitations on USF support,” the Competitive Carriers Association (CCA) said.

Section 889(b)(1) of the NDAA “applies only to the use of funds ‘to procure or obtain, extend or renew a contract to procure or obtain, or enter into a contract (or extend or renew a contract) to procure or obtain’ certain ‘equipment, services, or systems,’” CCA observed.

“A natural reading of this language indicates that Congress was focused on agencies’ procurement processes, and accordingly prohibited executive agencies from using funds in their own procurement. When distributing USF support, however, the FCC is not procuring anything for itself, but rather providing support for third parties to provide vital communications services,” it said.

NTCA offered similar views. “Section 889 of the 2019 NDAA is intended to apply only to the federal government procurement process, including companies that support the departments of Defense and Energy via federal contracts,” it said. “However, the universal service program is not related to either department, the federal government procurement process, or national defense activities specifically.”

Other commenters said section 889(b)(1) applied only to loans or grants and that the USF program was neither. “USF support is a subsidy program. As such, it does not fall within the ambit of section 889(b)(1)’s prohibition on loan and grant funds,” ITTA said.

That argument was buttressed by noting that the subsequent section of the NDAA specifically mentions “subsidies” and calls on the FCC and other agencies to find ways to help communications companies remove Chinese equipment from their networks.

“Section 889(b)(1) notes that the head of an executive agency ‘may not obligate or expend loan or grant funds’ on covered equipment,” WTA told the Commission. “However, section 889(b)(2) subsequently refers to the ‘heads of executive agencies administering loan, grant, or subsidy programs, including the heads of the Federal Communications Commission.’”

“In WTA’s opinion, Congress has distinguished grants from subsidies in the statute. The inclusion of the term ‘subsidies’ in (b)(2) but not (b)(1) is conspicuous, and it could be argued that as a result, Congress did not intend to include USF under the ban,” WTA said.

The Wireless Internet Service Providers Association focused on the second provision of that section of the NDAA and said the act’s only directive for the FCC was to find ways to help smaller providers transition away from the targeted Chinese equipment.

“The omission of the term ‘subsidy programs’ from section 889(b)(1) of the 2019 NDAA, and its inclusion in section 889(b)(2), which also includes specific reference to the Commission, strongly indicate that only the latter section is applicable to the USF program,” the association said.

“Accordingly, the Commission has a mandate to use USF funding to subsidize the acquisition of new telecommunications equipment by entities that have previously procured this type of equipment from vendors that now fall into the prohibited category created under the 2019 NDAA,” it said.

The Rural Wireless Broadband Coalition asserted that the adoption of the NDAA, and the potential conflicts it created with the FCC’s original NPRM, required the Commission to issue a further notice of proposed rulemaking to gain more clarity. The congressional direction provided by the NDAA further undermined the Commission’s original proposition that it had authority to address telecom supply chain risks, the coalition said.

“The Commission’s legal authority to protect America’s communication networks from national security threats was very much in doubt before Congress enacted section 889 of the 2019 NDAA,” it said. “We submit that the [Communications] Act does not authorize the Commission to adopt its proposed rule. Consequently, the Commission must turn to section 889 of the 2019 NDAA for its authority to proceed. But to do so, the Commission must substantially amend its proposed rule to conform with section 889.”

Trade associations representing larger carriers and equipment makers took the opposite view. “Congress included section 889 in the 2019 NDAA to protect U.S. networks by restricting federal support for equipment deemed to pose a national security threat. Reading the statute to exclude the USF program would significantly undermine that purpose,” the Telecommunications Industry Association said.

“First, the Commission is an ‘executive agency’ within the context of section 889 because it is an ‘independent establishment.’ Next, the Commission’s subsidy programs including the Universal Service Fund qualify as ‘grants’ subject to the procurement ban in section 889(b)(1),” TIA said.

“While the statute does not explicitly define what constitutes a ‘grant,’ the USF program has been repeatedly referred to as a ‘subsidy.’ The plain meaning of the word ‘subsidy’ indicates that the term is synonymous with ‘grant’ for purposes of paragraph (b)(1),” it added.

USTelecom said Congress would not have included the second provision requiring the FCC to help small providers replace Chinese equipment if it intended to exclude universal service funds from the ban.

“It would be a frustrating read of the statute for the Commission to find that only this subsection, which specifically enumerates the Commission as one of the ‘executive agencies,’ is applicable without also finding that all of the section’s references to ‘executive agencies’ apply to the Commission. Instead, this subsection should be read to confirm that Congress intended to include it within its scope of ‘executive agencies,’ also at issue in subsection (b)(1),” USTelecom said.

“Similarly, while USTelecom does not reach any conclusion about whether the USF program is a ‘grant’ or ‘subsidy’ program, it is clear from Congress including the Commission in the list of executive agencies that also provide funding for telecom programs that it considers the Commission’s USF program to be a ‘grant’ or ‘subsidy’ within the meaning of the statute,” it added.

“Congress would not have included the Commission in such a list if it did not intend to include the Commission’s USF program within the scope of its directive -- it would have no meaning if it did not apply in the USF context,” USTelecom argued.

Similarly, NCTA said a “plain reading of section 889 does suggest that it would restrict awarding Universal Service Fund support to purchase equipment and services from providers of ‘covered telecommunications equipment or services.’”

“Congress made clear that section 889 was intended to apply to all federal agencies. Indeed, an earlier version of the provision reported by the Senate Armed Services Committee applied only to the Department of Defense, but that was revised to apply more broadly across the entire federal government prior to final passage,” NCTA said.

Huawei, one of the companies that will be affected by any bans on the purchase of its equipment, reiterated that the NDAA provisions and the FCC’s rulemaking were based on a false premise. “Despite the lack of any specific evidence that Huawei poses any threat to U.S. national security, and despite the strong circumstantial evidence demonstrating that no such threat exists . . . Congress chose to name Huawei in section 889 of the 2019 NDAA as one of a small number of companies from which federal executive agencies and their contractors are prohibited from procuring certain types of equipment,” it said.

But the enactment of the NDAA also means that the Commission had no authority under the Communications Act to consider banning the use of USF funds to buy Huawei gear, the company said. “If anything, the enactment of section 889 confirms that the Commission’s original proposed rule was both outside the scope of its legal authority and irrationally broad,” it said. —Tom Leithauser, [email protected]

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