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# The FCC Never Had the Power to Build USAC, a Court Says
- URL: https://www.freemarketsreport.com/the-fcc-never-had-the-power-to-build-usac-a-court-says/
- Published: 2026-10-17T19:03:51.000Z
- Updated: 2026-10-17T19:03:51.000Z
- Description: On Oct 15, 2026 the Fifth Circuit held the FCC never had specific authority to create USAC and vacated the 38.1% contribution factor. The mechanism, the bear case and one stock idea.
- Author: Michael A. Gayed, CFA

**A federal appeals court just told the FCC that the company it has used for almost 30 years to collect and spend $9 billion a year never had a legal right to exist. I think the court is right on the law, I think the fix belongs with Congress, and I do not think the fund goes away.**

## Key Highlights

- **The ruling:** On October 15, 2026 a three-judge Fifth Circuit panel held in Consumers' Research v. FCC, No. 25-60535, that the FCC lacked specific congressional authorization to create the Universal Service Administrative Company (USAC) and so violated the Government Corporation Control Act.[1](#fn-1)
- **What was vacated:** The court vacated the fourth quarter 2025 contribution factor of 38.1% and sent the matter back to the FCC.[2](#fn-2)
- **The size:** The fund draws about $9 billion a year, and the vast majority of telecom companies pass the cost on to customers.[3](#fn-3)
- **The clock:** The FCC says the order would not take effect for two months at the earliest, and it is considering all options.[3](#fn-3)
- **The idea:** Verizon (VZ) closed Friday at $44.79, 13.3% below its 52-week high of $51.68, on 8.5 times consensus 2027 earnings of $5.25 a share.[4](#fn-4)

Start with the number most people never see. The federal Universal Service contribution factor for the fourth quarter of 2026 is proposed at 42.0%, up from 17.9% ten years earlier.[5](#fn-5) It is a percentage applied to carriers' revenues. Carriers put it on your bill as a fee.

Now picture who decides that number. Not Congress. A private nonprofit called USAC proposes it, and the FCC signs off. A court just said that setup was never legal.

## The surface story

Judge Edith Brown Clement wrote for the panel. The line that matters: "Because Congress never specifically authorized the FCC to establish USAC, we hold that the agency violated the Government Corporation Control Act".[3](#fn-3)

The facts of the case are plain. The FCC created USAC in 1997 as an independent nonprofit to administer the Universal Service Fund. Petitioners, including a telecom reseller and several consumers, challenged the fourth quarter 2025 contribution factor. After USAC submitted its projections, the FCC issued a public notice adopting USAC's data, with a minor adjustment, and set the factor at 38.1%.[2](#fn-2)

The panel concluded that the FCC created USAC to act as an instrumentality for administering the fund, and that neither the general statutory provisions the FCC cited nor later acts of Congress amounted to the specific authorization the Government Corporation Control Act demands.[2](#fn-2)

![Timeline of the Universal Service Fund challenge from the 1997 creation of USAC to the October 15, 2026 Fifth Circuit ruling](https://storage.ghost.io/c/be/1b/be1bb8f3-f534-4eb9-b00d-09ff49598e5f/content/images/size/w1000/2026/10/chart1_timeline-6.png)

Source: Justia summary of Consumers' Research v. FCC, No. 25-60535[2](#fn-2); Reuters via U.S. News, Oct. 15, 2026[3](#fn-3).

That is the surface. The surface is incomplete.

## The quiet second document

The headline says a $9 billion fund was "invalidated." It was not. The court vacated one quarter's contribution factor and remanded. The advisory from CommLaw Group is careful on this point: the decision does not invalidate the federal universal service statute or eliminate carriers' statutory contribution obligations, the 42.0% factor for the fourth quarter of 2026 was not directly adjudicated, and the court did not order refunds or set up a recovery process.[1](#fn-1) Providers should not treat the ruling as permission to suspend contributions or stop collecting the surcharge from customers.

The second thing the headline hides is the ground. This is a statutory ruling, not a constitutional one. In June 2025 the Supreme Court upheld the broader universal service framework against a nondelegation challenge, overturning an earlier Fifth Circuit decision that had called the funding mechanism a "misbegotten tax".[3](#fn-3) The Supreme Court left other statutory and constitutional questions open.[2](#fn-2) This panel walked through the door that was left open.

I like that. A court that loses on the big constitutional theory and then wins on a narrow statute is doing what courts are supposed to do: asking whether the agency can point to the law that authorizes the thing it built. The FCC built USAC in 1997\. It had nearly 30 years to ask Congress for a clear sentence. It never got one.

## Who wins and who loses

Start with who does not lose today. Nobody's subsidy stops this month. The FCC says the order would not take effect for at least two months.[3](#fn-3) The FCC or other parties may seek rehearing in the Fifth Circuit before seeking Supreme Court review[1](#fn-1), and a stay could keep operations running during that time.[6](#fn-6)

The first winners are the petitioners and anyone who wants Congress, not a nonprofit, to own a tax-like charge. The second are carriers and customers who have watched the factor climb from 17.9% to 42.0% without a vote. The charge is a percentage of carrier revenues that most carriers pass straight through to customers.

The losers are narrower than the alarm suggests, but they are real. The program backs services for rural and low-income households, schools, libraries, rural health care and tribal lands. In 2024 it benefited 7.5 million low-income households, gave telecom companies $4.2 billion to deliver high-speed internet in hard-to-serve rural areas, and provided $7 billion over three years to 118,000 schools and libraries serving 54 million students.[3](#fn-3) If the structure is not fixed, applications, planning and disbursements all carry risk.[6](#fn-6)

Those $4.2 billion recipients are incumbents. I will come back to that.

## The numbers

Four numbers frame this. The first is 38.1%, the vacated factor for the fourth quarter of 2025\. The second is 42.0%, the proposed factor for the fourth quarter of 2026, which the court did not decide. The third is 17.9%, the factor a decade earlier. The fourth is about $9 billion, the annual size, though one outlet puts it nearer $8.5 billion, and the reason for the gap is unclear.[5](#fn-5)

![Bar chart of the universal service contribution factor: 17.9 percent a decade earlier, 38.1 percent for Q4 2025, and 42.0 percent proposed for Q4 2026](https://storage.ghost.io/c/be/1b/be1bb8f3-f534-4eb9-b00d-09ff49598e5f/content/images/size/w1000/2026/10/chart2_factor.png)

Source: Hoodline, Oct. 16, 2026[5](#fn-5); Justia summary of Consumers' Research v. FCC, No. 25-60535[2](#fn-2).

The factor more than doubled in a decade. I cannot tell you how much of that is more spending and how much is a shrinking revenue base, because the sources I read do not split it. I would want that split before anyone calls the number reasonable or unreasonable.

## The free-market read

Let me give the other side its best argument first, because it is a good one.

The Universal Service Fund pays for things markets under-supply. A rural line is expensive to build and cheap to charge for. A school in a poor district cannot buy broadband on a price list. A subsidy is how a country with 50 states and very different densities decides to connect them. If you think connected schools and clinics are worth buying, a pooled fund is a reasonable tool, and the court did not say otherwise.

I take that seriously. I still think the structure is the problem.

A charge of 42.0% of revenue, set quarterly, collected on most customers' bills, and spent by a private nonprofit the agency created without clear permission is a tax in everything but name. The Fifth Circuit used the words "misbegotten tax" about the mechanism in an earlier round, and the Supreme Court disagreed on the constitutional question.[3](#fn-3) Fine. Here is what survives that loss: a tax should have an owner. Someone elected should have to say "42%, and here is why" and stand for it.

Prices are information. A surcharge buried in a fee line tells the customer nothing about what the program costs or what it buys. If Congress writes USAC's role into law, or moves the function into an agency, or funds the program through appropriations, voters can see the number. I would rather argue about a visible number than live with a hidden one.

Here is where I part ways with my own side. Pro-market is not pro-incumbent. A carrier that took part of $4.2 billion to build rural networks does not get a pass because its checks were legal when they were written. If the administrator is invalid, the recipients' business models rest on a structure that a court just called unauthorized. The honest free-market answer is the one that costs the people who benefit: fix the authorization, publish the cost, and let projects compete for the money on price.

So my verdict is this. The ruling is right on the statute. The remedy should be a law, not a workaround. And the first test of anyone's principles will be whether they want the fix if it means a visible number.

## The bear case

The bear case against my read has four parts.

First, it may change nothing. The court vacated one quarter's factor. The FCC can seek rehearing, defend USAC on remand, or ask Congress for a sentence of authority. A stay could hold everything in place for months.

Second, Congress may simply ratify USAC. That would be the cheapest repair, and it would leave the 42.0% factor untouched. I would call that a loss for transparency and a win for the status quo.

Third, the ruling could hurt the people it claims to protect. If disbursements slow, rural carriers and schools pay for a legal argument they did not make. The CommLaw Group advisory warns that other factors calculated through the same process could face similar challenges, and that providers should keep collecting and paying.[1](#fn-1)

Fourth, Supreme Court review is possible but, in the advisory's words, "neither automatic nor assured." The advisory sees no direct circuit conflict on the specific Government Corporation Control Act question.[1](#fn-1)

All fair. None of them says the court was wrong. They say the fix is slow.

## The Idea: VZ (Verizon)

This is not advice. Treat it as a way to ask who is exposed to a policy change, not as a recommendation. I am going to be careful here, because the link between a Fifth Circuit ruling on an administrator and a $186 billion company is thin, and I will not oversell it.

**What it is.** Verizon Communications is a large U.S. wireless and broadband carrier with a market value of about $186 billion at Friday's close.[7](#fn-7)

**Why the ruling matters.** The contribution factor is a charge on carrier revenues that most carriers pass on to customers. A lower, more visible, or more politically accountable charge helps the customer's bill and the carrier's pricing power at the margin. A large carrier also has the scale to absorb whatever transition rules come next. That is a modest second-order tailwind, and I do not have a Verizon-specific figure for how much of its bill-level fees this is, so I will not invent one.

**The data.** VZ closed Friday at $44.79, within a 52-week range of $38.39 to $51.68, a trailing P/E of 11.66 and 2026 and 2027 consensus earnings of $5.00 and $5.25 a share.[4](#fn-4) That is 8.9 times 2026 and 8.5 times 2027, by my arithmetic, and 13.3% below the 52-week high.

**What the market may be missing.** I think the market prices large carriers as a single regulated-utility trade and gives no credit for a tail that a visible, legislated, smaller charge helps the customer more than the carrier hurts. This is a small piece of the story, not the story.

**An honest comparison.** Verizon is the cheapest of the three on 2027 earnings. AT&T trades at 9.1 times and T-Mobile at 11.4 times, by my arithmetic from the same quotes and estimates.[8](#fn-8) T-Mobile sits 31.0% below its 52-week high and AT&T 20.4% below. If your question is the biggest drawdown, T-Mobile wins. I picked Verizon on valuation and scale.

![Bar chart showing Verizon 13.3 percent, AT&T 20.4 percent and T-Mobile 31.0 percent below their 52-week highs at the October 16, 2026 close](https://storage.ghost.io/c/be/1b/be1bb8f3-f534-4eb9-b00d-09ff49598e5f/content/images/size/w1000/2026/10/chart3_carriers.png)

Source: Perplexity Finance quotes and consensus estimates for VZ, T and TMUS, Oct. 16-17, 2026[9](#fn-9). Percent below 52-week high and forward multiples are my calculations.

**Risks and what proves it wrong.** The thesis is wrong if the Fifth Circuit rehears and reverses, if Congress ratifies USAC and leaves the factor near 42.0%, or if the charge is replaced by something carriers must absorb instead of pass on. It is also wrong if a carrier turns out to depend on USF payments in a way I did not check. I did not, because I did not find a fetched source for Verizon's USF receipts. This is a modest, second-order idea. I would rather give you a modest honest one than a loud wrong one.

## What to watch next

Three things will tell you whether this matters.

First, the mandate. The FCC says the order would not take effect for at least two months. Watch for a rehearing petition or a stay request inside that window.

Second, the next contribution factor. The fourth quarter 2026 number was not decided, so the FCC's first quarterly notice after the ruling will show how it plans to calculate the charge without relying on USAC's projections, or whether it keeps relying on them.

Third, Congress. A bill that names USAC and its duties would settle the question and cost a vote. A bill that moves the job into an agency would change the politics of the number. For related reading on how courts have been asking agencies to point to their authority, see [Two Circuits Just Disagreed About What a Swap Is](https://www.freemarketsreport.com/two-circuits-just-disagreed-about-what-a-swap-is/) and [The FCC Just Erased a Cap Congress Wrote Into Law](https://www.freemarketsreport.com/the-fcc-just-erased-a-cap-congress-wrote-into-law/).

An agency needs a sentence of law behind what it builds. The FCC went 29 years without one, and a court noticed.

## Sources

1. [CommLaw Group advisory, Oct. 16, 2026](https://commlawgroup.com/2026/fifth-circuit-vacates-federal-usf-contribution-factor/?ref=freemarketsreport.com) (commlawgroup.com)
2. [Justia summary of Consumers' Research v. FCC, No. 25-60535](https://us5thcircuitcourtofappealsopinions.justia.com/category/communications-law/?ref=freemarketsreport.com) (us5thcircuitcourtofappealsopinions.justia.com)
3. [Reuters via U.S. News, Oct. 15, 2026](https://money.usnews.com/investing/news/articles/2026-10-15/us-appeals-court-invalidates-federal-9-billion-telecom-subsidy-fund?ref=freemarketsreport.com) (money.usnews.com)
4. [Perplexity Finance quotes and consensus estimates for VZ, VZ quote and consensus estimates, Oct. 16-17, 2026](https://www.perplexity.ai/finance/VZ?ref=freemarketsreport.com) (perplexity.ai)
5. [Hoodline, Oct. 16, 2026](https://hoodline.com/2026/10/appeals-court-strikes-down-9-billion-telecom-fund-that-wires-rural-america/?ref=freemarketsreport.com) (hoodline.com)
6. [Washington Tribune, Oct. 16, 2026](https://www.washingtontribune.com/news/fifth-circuit-telecom-subsidy-fund/?ref=freemarketsreport.com) (washingtontribune.com)
7. [Perplexity Finance quotes and consensus estimates for VZ, VZ quote, Oct. 16, 2026](https://www.perplexity.ai/finance/VZ?ref=freemarketsreport.com) (perplexity.ai)
8. [Perplexity Finance quotes and consensus estimates for VZ, VZ, T and TMUS quotes and estimates, Oct. 16-17, 2026](https://www.perplexity.ai/finance/VZ?ref=freemarketsreport.com) (perplexity.ai)
9. [Perplexity Finance quotes and consensus estimates for VZ, T and TMUS, Oct. 16-17, 2026](https://www.perplexity.ai/finance/VZ?ref=freemarketsreport.com) (perplexity.ai)

## Related analysis

- [Two Circuits Just Disagreed About What a Swap Is](https://www.freemarketsreport.com/two-circuits-just-disagreed-about-what-a-swap-is/)
- [The FCC Just Erased a Cap Congress Wrote Into Law](https://www.freemarketsreport.com/the-fcc-just-erased-a-cap-congress-wrote-into-law/)
- [The FCC Just Freed a Gigahertz and Rewrote Its Own Environmental Footprint](https://www.freemarketsreport.com/the-fcc-just-freed-a-gigahertz-and-rewrote-its-own-environmental-footprint/)

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