AT&T Corp. (T) Monday objected to rival WorldCom Inc.'s (search) blueprint for emerging from bankruptcy protection and said it plans to seek damages for losses related to connecting high-cost calls.

The biggest U.S. long-distance carrier accused No. 2 carrier WorldCom of fraudulently diverting U.S. calls to Canada to avoid hefty connection fees, adding millions of dollars to AT&T's expenses and luring away lucrative clients.

"AT&T does not know how much damage it has suffered as a result of debtors' (WorldCom's) scheme, but believes that the injury is at least many millions of dollars," AT&T told the New York bankruptcy court overseeing WorldCom's reorganization.

A WorldCom representative had no immediate comment. AT&T said it would sue for unspecified damages.

WorldCom filed for bankruptcy protection last year after being rocked by an $11 billion accounting scandal as well as amassing huge debts and seeing customer demand plummet.

The company, which is trying to win approval to shed much of its $41 billion in debt, is being probed by the U.S. Attorney in New York on allegations by rivals that the company avoided paying higher access fees.

A source close to WorldCom said the company received a subpoena related to allegations it avoided paying connection fees to AT&T and other rivals, SBC Communications Inc. (SBC) and Verizon Communications (VZ).

The U.S. Bankruptcy Court for the Southern District of New York is slated to hold a hearing next month on whether to approve WorldCom's blueprint to emerge from bankruptcy. The company hopes to emerge this fall.

AT&T shares soared $1.79, or 8.8 percent, to $22.20 on the New York Stock Exchange Monday.

North of the Border

Local and long-distance telephone competitors like AT&T have tried to derail WorldCom's plan to emerge from bankruptcy and lobbied government agencies to force the carrier to liquidate and cut off lucrative government contracts.

"I don't see (the new allegations) getting in the way of emerging from bankruptcy," telecommunications analyst Jeff Kagan said. "But it could make it stickier for them to win and retain politically sensitive contracts with the government."

AT&T argued that beginning in July 2001 WorldCom routed U.S. domestic calls that incurred higher access fees, including those by government agencies, through Canada and onto AT&T's network, shifting the costs and violating a 1993 agreement.

"It was a part of the scheme that debtors used this improper transfer of costs to artificially reduce its expenses and increase those of AT&T so as to afford debtors an unfair and groundless competitive advantage over AT&T," AT&T's filing said.

AT&T said an internal probe found that 30 percent of its traffic from Canada actually originated in the United States and 88 percent of that traffic was for high-cost rural areas.

AT&T noted that after losing business from Wells Fargo & Co. (WFC) in July 2002 to WorldCom, the carrier noticed that traffic it routed from Canada included "a substantial volume of Wells Fargo traffic which had originated in the United States."

AT&T also said domestic calls from U.S. government agencies like the State Department were routed through Canada and so were some in-region toll calls, like from one part of a state to another, as long-distance calls, which carry lower rates, in violation of state laws.

AT&T said that between 1995 and 1997 and in 2001, attempts were made to dump calls on its networks by MCI, the long-distance unit WorldCom acquired in 1998 for $40 billion.

Long-distance and local telephone carriers want WorldCom broken up and sold off instead of allowing the company to wipe the slate clean, arguing that the company would have an unfair competitive advantage.

They have also sought to bar WorldCom from handling government contracts which amount to hundreds of millions of dollars each year. WorldCom has agreed to pay $750 million to settle securities fraud charges.

The General Services Administration (search), which handles government contracts, has been examining WorldCom's role as a service provider to government agencies and is expected to make a determination in the coming weeks.

Sen. Susan Collins (search), head of the Senate Government Affairs Committee which is probing WorldCom's federal contracts, said the latest revelations were "extremely disturbing."

"If these allegations are true, it would undermine MCI WorldCom's claims that the fraud was limited to just a few 'bad apples,' and that the company has been thoroughly reformed," she said in a statement.