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AT&T Faces $500 Million Phone Card Payment

January 7, 2005
The Federal Communications Commission is expected to take action soon that would require AT&T to pay about $500 million in fees on its highly profitable prepaid calling cards, according to The Wall Street Journal. The company is the naiton's second-largest issuer of the popular cards.

At issue are payments to the Universal Service Fund, which subsidizes telephone and Internet service to schools, libraries and rural areas and to the local telephone companies that originate and complete calls made with the cards. Other issuers of prepaid cards, including Sprint, have paid the fees without complaint for years and say AT&T's failure to pay is both illegal and unfair.

AT&T began withholding the fees in 1999, after it added a brief advertisement to the announcement callers hear when they place a call using the cards. The ad made the calling card an "information service" instead of a "telecommunications service," thereby rendering it exempt from the fees, AT&T argued.

AT&T has won a bigger share of the $3.5 billion annual market for calling cards by cutting its rates, something it achieved partly by stiffing the local phone companies and the Universal Service Fund. Now AT&T argues that it would be a disservice to its customers to make it pay the fees.

The FCC was close to ordering AT&T to make the payments last summer but backed off when AT&T launched a public relations blitz which exploited armed forces members serving in Iraq. Forcing it to pay the fees everyone else pays would hurt morale among the troops, AT&T argued.

last July, AT&T added an announcement to the message callers hear when using the cards, claiming the FCC was planning to raise prepaid card rates by 20 percent and including a toll-free number users could call to complain. The number went to the White House switchboard, which said it received one million calls in a few weeks' time.

AT&T argues that the advertisment "enhanced" its calling-card service and that the FCC has been aware of the practice for years. The company lost $7.1 billion in the third quarter.

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