Updated from 12:16 p.m. EDT


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took its case for cheap local access to both Wall Street and Main Street Wednesday, saying the rollback of recent FCC regulations on Bell network charges would help lower its 2004 revenue and force it to stop taking new business in seven states.

Late Wednesday, the phone giant said the government's decision not to appeal the FCC's defeat, along with creeping cost pressure, will result in total revenue of $29.5 billion to $30.5 billion in 2004. Analysts surveyed by Thomson First Call had been forecasting revenue of $31.34 billion.

"Recent escalation in competitive pricing pressure is expected to negatively impact AT&T's business division in the near-term," the company said. "As a result, the company now expects a sequential increase in the year-over-year rate of revenue decline for AT&T Business in the second quarter of 2004, and a full-year revenue decline exceeding the company's previous forecast."

AT&T also reaffirmed its commitment to an aggressive rollout schedule for its voice over Internet protocol service, a campaign that it said would raise near-term costs. Taken together, the issues will result in consolidated operating income of between $1 billion and $1.4 billion in 2004, excluding charges.

Earlier, the company delivered on its threat to turn the FCC defeat into an

ugly political issue, AT&T saying it will no longer seek new residential customers in seven states. Earlier this week, telco upstart



informed regulators that it will stop taking new customers for its local phone service in eight states.

The moves come after the Bush administration and the Supreme Court, earlier this month,

declined to consider an appeal of federal rules governing phone service pricing. Those decisions were seen as a win for the four Bells -- local phone giants


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-- and a major setback for outfits like AT&T and



Both camps are squared off over wholesale pricing rules. For eight years, the Federal Communications Commission has been attempting to increase local phone competition by creating unbundled network elements platform, or UNE-P, rules. This forced the Bells to rent their local lines to rivals at steep discounts.

The Bells successfully fought the effort, gaining the Bush administration's support in large part by promising not to raise its wholesale prices until after the presidential election, say industry observers. Verizon denies the promise was a political gesture. The company says it froze prices so it could negotiate new wholesale agreements with competitors.

But AT&T said Wednesday that "the reversal of local competition policy by the administration will permit the Bell companies to raise wholesale rates as early as November." In light of that, the company says there is no profitable incentive to marketing for new customers in Ohio, Missouri, Washington, Tennessee, Louisiana, Arkansas and New Hampshire.

AT&T says it will continue to serve its customers in those states. A company representative declined to say how many customers that entails.

"This makes sense," says Jefferies & Co. analyst Rick Klugman. "The economics of providing UNE-P service is changing." Plus, "they have a regulatory agenda," adds Klugman, referring to the pressure AT&T and the other Bell challengers can apply to sway the ruling process.

FCC Chairman Michael Powell has said the agency is drafting a new set of pricing rules, but he offered no time frame for when the guidelines would be ready.

Meanwhile, says an AT&T rep, "we are operating in a vacuum, and we have to make business decisions now." The company says it is reviewing its options in other states beyond the seven mentioned Wednesday.

Similarly, Z-Tel says it won't take new residential customers in Arkansas, Idaho, Iowa, Maine, Montana, Nebraska, New Mexico and West Virginia because of unfavorable pricing rules, according to a trade press story published Tuesday in

Telecommunications Reports


Industry observers say that even though the Bells have vowed not to seek any price increases, presumably to prevent consumer unrest during the election season, competitors such as AT&T could continue to turn up the political heat.

Industry watchers fear that AT&T and MCI could announce plans to shut down more consumer sales in some states, raise prices in other areas, and possibly lay off workers, as they place the blame on the Bush administration.

But few foresee any major disruptions. "They will probably make a lot of noise," says Klugman. But they aren't likely to get out of the consumer phone business. "It's still a huge cash generator for them."