The stage is set for a David vs. Goliath showdown next week, when a group of Iowa rural telcos and their conference-calling partners meet with the Federal Communications Commission in an effort to force major incumbents including AT&T, Qwest and Sprint to continue paying the high termination fees that fund their conference calling business.

The parent company of one of the calling services, FreeConference, said today that a grassroots campaign of complaints by consumers has prompted Qwest and Sprint to stop blocking calls to its service, which it claims the two large carriers have been doing. AT&T earlier stopped blocking the calls but has also contacted the FCC to challenge the free calling scheme.

At issue is whether a group of rural Iowa telcos can collect large termination fees from the long-distance companies for calls it then uses VoIP technology and voice gateways to route to a low-cost conferencing service, an international calling service or an adult sex line. AT&T, Qwest and Sprint say they are looking at termination fee bills in the millions of dollars for calls that aren’t truly terminating on local phone lines in Iowa, while the rural telcos say they are just following the rules as they currently exist, and that the long-distance companies are making their money off the toll calls that consumers make to reach the other services.

The rural companies pay what FreeConference calls “a small marketing fee” to the conferencing services, which also receive revenue directly from customers who buy its premium services. The additional traffic enables the rural companies to substantially boost their revenues through the larger termination fees.

Consumers who use the services say they are trying to avoid hefty conferencing charges imposed by incumbents. In recent months, in addition to filing complaints and lawsuits and refusing to pay the termination charges, AT&T, Qwest and Sprint had started blocking the calls to the conference calling lines.

That prompted a countersuit from a group of Iowa telcos, as well as the grassroots campaign and next week’s meeting at the FCC.

In an April 7 letter to FCC Chairman Kevin Martin, James Cicconi, AT&T’s chief lobbyist and senior executive vice president, called the “free calling” a “scam” and warned that it is likely to proliferate if the FCC doesn’t act.

Cicconi said the “traffic pumping” schemes “make a mockery of the universal service system given that these very same LECs are receiving federal universal service subsidiaries even as they earn staggering returns from their scams.”

While about a dozen rural telcos are engaged in this practice today, Cicconi said, “many more, apparently drawn by the lure of illicit windfalls, plan to exist the NECA pool in July.”

The National Exchange Carrier Association pool was set up to establish average access rates for a large group of small rural carriers. After exiting the pool, a rural carrier files its own tariffs and can claim higher rates based on the low call volume of rural communities. Once those rates are established, a rural telco able to drive up the volume of calls to numbers terminating on its local exchanges will receive substantial termination revenue from the long-distance companies.

The Iowa telcos have been able to increase their traffic volumes by installing voice gateways at the central offices that can then route the calls to free-conference calling services, international calling services or pornographic chat lines.

AT&T and Qwest have both filed suit against the rural telcos in the U.S. District Court in Iowa. The telcos have filed a countersuit in U.S. District Court in New York.