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AT&T, Sprint Seek FCC Ruling on Contract Dispute

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WASHINGTON (Dow Jones) AT&T and Sprint Nextel are locked in a dispute over agreements governing the traffic flows of phone calls on each other's telecommunications networks which could be potentially worth tens of millions of dollars to the victor.

Sprint Nextel has accused AT&T of violating one of the conditions imposed on it when it bought BellSouth Corp. in 2006.

Besides the potential financial windfall to Sprint Nextel, the case is significant because it is the first time that AT&T has been accused of violating the conditions it was forced to agree to in December 2006 by the Federal Communications Commission in order to win clearance for its takeover of BellSouth.

Sprint Nextel's interpretation of one of those conditions is that it can take any contract it, or one of its subsidiaries, had with AT&T or one of its operating units, and adopt it in any of the 22 states AT&T operates in.

The contracts, known as interconnection agreements, dictate how much one phone company pays another to carry its traffic.

While neither side will give specifics of either the terms of individual agreements or how much money is exchanged in all the contracts the two companies have, several people familiar with the situation said all the agreements combined could be worth tens of millions of dollars.

Sprint Nextel is trying to take an agreement that one of its subsidiaries had with BellSouth Corp. throughout the nine south eastern states it operated in, and export it to all 22 states where AT&T has a presence.

AT&T disagrees, saying that the merger condition was only intended to allow rival companies to cut down on the costs of negotiating new contracts in areas where business conditions are broadly similar.

After regulators in three states agreed at least in part with Sprint Nextel, AT&T turned to the Federal Communications Commission and asked it to issue a ruling to decide the matter.

In its filing to the FCC, AT&T pointed to the fact that the merger condition imposed on it states that companies are not allowed to export aspects of the interconnection agreements involving pricing.

In this the two companies are in agreement.

But Sprint Nextel says that the contract it had with BellSouth states that no money should change hands as the two companies had broadly similar flows of phone calls moving back and forth.

This part of the contract, known as 'bill and keep' in legal jargon, isn't a pricing issue said Sprint Nextel, and therefore AT&T must accept that contract anywhere in its operating territory.

"When BellSouth signed this contract with Sprint, they agreed to forgo setting a price or a rate for exchanging traffic with us and instead adopt this provision - that's what "bill and keep" means," said John Taylor, a spokesman for Sprint Nextel.

The question of whether this aspect of the interconnection agreements constitute pricing is at the heart of the issue. If the FCC deems it is a pricing issue then Sprint Nextel wouldn't be able to insist on the same contract terms throughout AT&T's operating territory.

"Bill and keep is clearly pricing, it sets the price and the price is zero," said an AT&T spokesman. "It is a perfectly acceptable mechanism when the balance of traffic is equal."

The problem, the spokesman said, is that in most parts of the country, the balance of traffic is not similar, and Sprint Nextel is disingenuously trying to use the condition to save money, rather than simply cut negotiating costs.

Sprint Nextel is not alone in its interpretation of the merger commitments. Other companies including Comcast, Cox Communications and MetroPCS Communications have weighed in on its side.

"I would guess the FCC would probably try to give the states guidance without saying you can't do bill and keep," said David Kaut, an analyst with Stifel Nicolaus.

An FCC spokesman declined to comment for this article saying he couldn't speak about a pending commission matter.

State regulators in Kentucky, Kansas and Ohio have all agreed with Sprint Nextel and ordered AT&T to allow the BellSouth contracts to be used in all agreements between the two companies in their states.

A fourth state, Mississippi, has ruled in favor of AT&T on the issue.

There are cases before all the other 17 state commissions that comprise AT&T's territory.

AT&T is hoping the FCC exerts jurisdictional authority and clarifies what it meant by the merger condition. This could take several months, as the commission is not obliged to act on such regulatory petitions within a specified period.

From AT&T's perspective, the longer it takes the better. The conditions will expire in June 2010, at which point it could seek to renegotiate new interconnection agreements without the current limitations.

"AT&T is trying to run out the clock until these merger conditions expire in June 2010," said Sprint's Taylor.

According to Stifel Nicolaus' Kaut, the ultimate outcome is unlikely to be a clear cut victory for either side.

"At the end of the day I would think you would see a mixed outcome with some states deciding bill and keep can be used, and others saying it can't be," he said.

-By Corey Boles, Dow Jones Newswires; 202-862-6637; corey.boles@dowjones.com

(END) Dow Jones Newswires

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