Federal regulators are considering requiring AT&T (T) to pay up to $500 million to cover unpaid telecommunications fees on its popular prepaid calling cards.

AT&T claims 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 added advertisements heard when someone placed a call using the prepaid cards. The ads, AT&T argues, make the cards an "information service."

Under Federal Communications Commission (search) rules, companies that offer "information services" don't have to pay the fees.

The cards are sold at large discount retail outlets, convenience stores and gas stations, and the ads are placed by the stores that sell the cards.

The FCC has been investigating and its staff is close to recommending that the five-member commission order AT&T to pay the fees, according to FCC officials. FCC Chairman Michael Powell (search) has indicated his support.

"It would be a break from precedent for the bureau to conclude that a calling card that is primarily used to place long-distance calls is exempt from rules" that require long-distance companies to pay the federally-mandated fees, FCC spokesman Mark Wigfield said Friday.

AT&T will await the commission's ruling before deciding how to proceed, spokeswoman Teri Rucker said.

The FCC knew about plans to place ads on the prepaid cards since 1994 and regulators never questioned the idea until recently, said Robert Quinn, AT&T's vice president for federal government affairs.

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 if commissioners approve the recommendation, AT&T said.

Of the $500 million in unpaid fees, $160 million was to the "universal service" fund that benefits rural areas, schools and libraries. 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.