US appeals court invalidates federal $9 billion telecom subsidy fund

By David Shepardson

WASHINGTON, Oct 15 (Reuters) - A U.S. federal appeals court said on Thursday the Federal Communications Commission exceeded its authority in setting up a telecoms subsidy program in the late 1990s used to widen access to communications for millions of Americans.

The FCC collects funds from telecom carriers through a private company for the so-called "Universal Service Fund" that subsidizes basic communications services for consumers in rural and low-income areas.

However, the FCC lacked legal authority in 1997 to establish the company, the Universal Service Administrative Co, to collect the funds and set contribution rates, said Judge Edith Brown Clement.

"Because Congress never specifically authorized the FCC to establish USAC, we hold that the agency violated the Government Corporation Control Act," she wrote for a three-judge panel of the U.S. Court of Appeals for the Fifth Circuit.

The FCC was considering all options available to it, a spokesperson said in response to Thursday's decision.

"While the court takes issue today with an FCC decision made almost 30 years ago, the court’s order would not go into effect until two months from now, at the earliest," the spokesperson added in a statement.

The fund draws about $9 billion a year, with the vast majority of telecoms companies passing on the cost to customers.

In addition to low-income and rural areas, the fund has been used to widen services to Native American tribal lands, as well as enabling schools, libraries and rural health care facilities to obtain essential communications services.

In June 2025, the U.S. Supreme Court endorsed the way the FCC funds the multi-billion dollar program.

The ruling overturned an earlier Fifth Circuit decision that the FCC's funding mechanism employing mandatory contributions from telecoms companies had effectively levied a "misbegotten tax" on consumers.

U.S. telecom providers get billions of dollars in payments from the Universal Service Fund and millions of consumers rely on such government-subsidized services for internet access or phone service.

In 2024, the FCC program benefited 7.5 million low-income households and gave telecom companies $4.2 billion to provide high-speed internet service in hard-to-serve rural areas.

It also gave 118,000 schools and libraries $7 billion over a three-year period for internet service for 54 million students.

The FCC, overseen by Congress, was set up as an independent federal agency in 1934.