Sprint Corp. (NYSE: S) is helping cable companies push VOIP service into some of the smallest markets in America, but rural incumbent telcos haven't exactly laid out the welcome mat.

Sprint is offering to connect the VOIP services of small cable companies with the public switched telephone network (PSTN) so that cable customer calls can terminate anywhere. For instance, Time Warner Cable Inc. (NYSE: TWC) uses Sprint to connect voice users in half of the MSO's 27-state footprint. Sprint believes Time Warner, which has also relied on MCI for local VOIP connections, will soon expand that relationship to cover its entire footprint.

But Sprint needs to interconnect with local incumbent telcos to hook up its cable friends with the PSTN. Some rural incumbent telcos, not eager to help another competitor into the market, have refused to do so. They argue that Sprint isn't entitled to such an interconnect because it isn't a "common carrier" as described by the Telecom Act of 1996. (See Study Says Cable VOIP Quality Beats PSTN .)

Rural telcos in Illinois and Texas contended, ultimately unsuccessfully, that Sprint isn't a common carrier because it doesn't act like one. Sprint, they said, doesn't directly touch the consumer and doesn't report the rates and contract terms of its arrangements with the cable operators. Other ILECs, such as several in South Carolina, have argued that Sprint's service is IP-based and thus doesn't fit the legal description of a "common carriage" service. Rich Morris, VP of state regulatory affairs for Sprint, says the arguments of the incumbent telcos are but a thin veil over their desire to keep cable rivals out of their markets. And so far regulators have, for the most part, agreed with Sprint. (See NARUC Tunes Up Termination.)

Indeed, Sprint has already won common carrier status from regulators in seven states: Pennsylvania, Texas, New York, Ohio, Indiana, Illinois, and Iowa. It also has applications pending in South Dakota and Wisconsin.

Iowa Telecommunications Services Inc. (NYSE: IWA) was one of the first local phone companies to refuse interconnection with Sprint and its cable partner in that state, Mediacom Communications Corp. Iowa Telecom tried several legal arguments, including the assertion that it should be required to interconnect with Mediacom, not Sprint. Eventually, in November, the Iowa Utilities Board (IUB) ordered Iowa Telecom to interconnect with Sprint or face the possibility of heavy fines.

Iowa Telecom has, for the most part, accepted the IUB's decision, and is playing down its attempts to fight Sprint's market entry. Iowa Telecom spokesman Dan Eness notes that the company has interconnected with numerous CLECs, although its Sprint agreement is its only one where a cable company is involved.(See Cable Crowd Seeks VOIP Peers.)

"This was mainly a disagreement about compensation for the interconnection," Eness says. "We've got dozens of interconnection agreements, and in this one there was just more dispute than usual."

But Sprint's Morris sees it a little differently. "I wouldn't portray it as them trying to interconnect with us at any time," he says. "I'd portray it as them trying to avoid interconnecting with us by any means possible under any guise that they could."

"Our actions have been consistent with federal and state law as clarified by the IUB," retorts Iowa Telecom's Eness. "We are going to abide by the IUB order." But Iowa Telecom's attorneys are actually asking the IUB to reverse its ruling that any violation of the interconnect agreement could result in civil penalties.

Sprint says its VOIP backbone service -- and cooperation from the ILECs -- is the only viable way that small cable companies can offer competitive voice service. "If you are trying to build a wireline network independent of other carriers in rural America, the economics are just not there to do it," Sprint's Morris says.

Sprint still faces serious barriers to entry in other states. South Carolina regulators recently ruled that Sprint isn't quite the same as a common carrier under the '96 Act because it is offering an IP, not a wireline, service to cable companies. Sprint and its potential cable partner in the state, Time Warner Cable, have each filed petitions with the Federal Communications Commission (FCC) , asking the agency to intervene. (See Time Warner VOIP Growth Slows.)

At the same time, the state utilities board in Nebraska has required the ILECs in half the state to cooperate with Sprint, while allowing them to decline interconnections in the other half, Sprint's Morris says.

Incumbents in other states have avoided interconnecting with Sprint by showing regulators that the entry of a competitive service wouldn't help consumers. For instance, regulators have granted interconnection waivers to three small ILECs in Ohio, one of which is a "mutual" or customer-owned telco.

Although the regulatory situation is evolving on both the federal and state levels, Morris believes that regulators are steadily seeing things Sprint's way. Sprint says it wants to offer its interconnect service to cable companies in 40 states by 2008.Sprint says it is currently providing interconnection services for 11 cable companies, including such major MSOs as Time Warner. (See Cable Industry Counts 3 Million IP Phone Subscribers.)

— Mark Sullivan, Reporter, Light Reading