STOCKTON — As a 12-year-old, John La Rue scavenged wires and parts from a local junkyard to build a crude telephone network connecting his neighborhood buddies through relay switches attached to an abandoned doghouse.
It didn't take long for the telephone police to catch on.
"One afternoon, when I came home from school, there was this man who appeared to me to be about 25 feet tall standing on the front porch," said La Rue, now 54. "He told me that I needed to cease and desist from operating my illegal telephone utility."
Four decades later, the law is on his side. The company he founded, Pac-West Telecomm Inc., is challenging big phone companies with the encouragement of state and federal regulations.
Pac-West's primary business is to route calls by Internet users in California to their service providers, like EarthLink Inc., in a way that makes the calls local, not long-distance. SBC Communications Inc. and Verizon Communications Inc. carry the traffic on their networks to three Pac-West switching centers in California, a strategy that saves Internet providers and their customers a bundle in toll charges.
It's an arrangement made possible by the federal Telecommunications Act of 1996, which was designed to spur competition in local phone service after a century of monopoly.
Since Congress passed the act, dozens of companies like Pac-West have found niches in California, giving customers an array of new services and saving them hundreds of millions of dollars.
Now the law's future is in doubt. A series of court decisions have thrown out key rules written in Washington to carry out the act, and politicians are considering revamping it. Baby Bells are demanding significant increases in state-regulated rates that they are allowed to charge rivals to use Bell lines and gear to deliver service to homes and small businesses.
And new technologies are threatening to upend the phone industry's intricate and intertwined financial structure: voice over Internet protocol, or VOIP, for example, uses data lines to bypass not only the traditional phone network but also state and federal regulations and taxes.
The court rulings and the pressure on regulators have put the "critical mission" of promoting local phone competition in jeopardy, Federal Communications Commissioner Kevin J. Martin recently told Bell rivals.
"Policymakers in Washington are not debating the benefits of the services that you all are providing," he told members of a trade group meeting of Bell rivals in Anaheim. "They are too frequently debating how much of the rules should be eliminated."
At Pac-West, executives say the rules have too often been ignored.
Although 20% of the dial-up Internet traffic in California travels through Pac-West switches, the company last year lost $15.2 million on revenue of $134.6 million, after a profit of $2 million on revenue of $164.1 million in 2002. The reduced revenue and nearly all the loss were caused by Verizon and SBC withholding payments that Pac-West said were due under contracts for connecting Bell lines with Pac-West switches. A federal court ordered the FCC two years ago to resolve the pay dispute, but the agency hasn't acted.
La Rue -- who sold most of the company in 1998 but is a director on Pac-West's board -- worries that Martin may be right.
"It would be a huge disservice to the citizens of the country to have competition squashed," La Rue said.
Early Distaste for Bells
His antipathy toward the Bells goes back to when he was a boy. His father, Knox, owned a Stockton radio station and telephone answering service and disliked Pacific Telephone, then a division of AT&T. When the federal government broke up the company known as Ma Bell in 1984, local service was split into seven regional Baby Bells -- including Pacific Bell, which would later be acquired by SBC.
La Rue became interested in phones at age 8, when a family friend gave him an old telephone and challenged him to figure out how it worked. Four years later, La Rue was spending a good part of his summer vacation building his Backyard Telephone & Telegraph Co., the name he gave to the straggly network he put together.
"I used to ride my bicycle over to the phone company's yard at about 6 o'clock on Saturday mornings to beat the dumpster man, and I'd just scrounge parts," La Rue said. "Plus, my father liked collecting stuff, not to be called junk, and occasionally there would be a couple of phone things that I couldn't find at surplus yards."
It was the ultimate party-line system: Make one call, and everyone could join in the conversation.
But a phone company worker on a nearby pole spotted the network and told his supervisor.
That person was most likely the man who was waiting for him on the porch, La Rue said. Later that night, several local Bell executives showed up, and La Rue's father left his son in charge to talk with them.