updated 2/23/2005 7:05:47 PM ET 2005-02-24T00:05:47

Federal regulators ruled Wednesday that AT&T skirted the law by failing to pay fees on its popular prepaid calling cards, a decision that could cost the long-distance company about $500 million.

AT&T, in a statement, called the ruling “unfair and legally flawed” and said it would fight the decision in court.

The long-distance company contended the cards should not be subjected to the fees, which go to local phone companies to cover their cost for connecting calls on their lines and to a federal fund that subsidizes phone and Internet service in rural areas and for schools and libraries.

AT&T used to pay the fees, but in 1999 it added advertisements heard when someone placed a call using the prepaid cards. The ads, AT&T argued, made the cards an “information service,” which are exempt from fees.

The Federal Communications Commission disagreed, ruling the ads are incidental to the underlying telecommunications service offered to the cardholder.

“Companies cannot engage in misdirection or word games to avoid their universal service obligations,” FCC Chairman Michael Powell said.

AT&T has reported that $160 million in unpaid fees were for the “universal service” fund that benefits rural areas, schools and libraries. The FCC said the company must file new statements with the government related to universal service contributions.

The $160 million could subsidize phone service for 6 million low-income Americans for three months, Powell said.

The remaining $340 million are unpaid access fees to local phone companies. To recoup those costs, local companies would have to file suit or work out agreements with AT&T.

The price of the prepaid cards, which are popular with low-income consumers, senior citizens and military personnel because of their low per-minute cost, could climb by 20 percent, AT&T has said.

SBC Communications Inc. announced last month it was acquiring AT&T, its former parent company, in a $16 billion deal to create one of the world’s largest telecom companies. An AT&T official said it was unclear if SBC would assume responsibility for the fees because AT&T hopes the courts will overturn the decision.

AT&T has said the FCC knew about the plans to place ads on prepaid cards since 1994 and regulators never questioned the idea until recently.

“In order to reach its desired outcome, the FCC has reversed years of precedent and re-regulated enhanced prepaid calling card services,” AT&T said Wednesday.

But Powell said other companies were offering discounted or free calling cards to military personnel while still paying universal service fees.

Nothing in the order requires increases in the prices paid by consumers for prepaid calling cards, and calling card calls made to or from military personnel overseas are not subject to access fees between phone companies, the FCC noted.

The FCC added that it would study further the issue of how calling cards are regulated. The agency must address the issues quickly to erase any ambiguity in the rules, said Commissioner Jonathan Adelstein, a Democrat.

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