WASHINGTON -- Phone and Internet consumers could be cheated out of next-generation services and hit with higher rates as telephone companies scramble to make their lines wiretap-friendly for the FBI by the end of the month.

Under a 1994 law, the Federal Communications Commission requires carriers--including wireless services--to bring their voice-surveillance capabilities up to scratch with FBI rules. The clock is ticking for the telcos, which have until June 30 to upgrade their switches to give the FBI access to extract dialed numbers and conversations.

Despite the half billion dollars Congress set aside to offset costs, many telecom companies say obeying the Communications Assistance for Law Enforcement Act--CALEA--is still an expensive endeavor, one that might harm consumer confidence and cause rate hikes.

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"To the extent that the federal government doesn't pay for the upgrades, it will probably come down on consumers," says Mark Uncapher, vice president and counsel of the Internet Commerce and Communications Division of Information Technology Association of America, a telecommunications industry association.

Money isn't the only concern. Consumer advocacy and privacy groups fear abuse with surveillanceof digital communications, which lack some of the safeguards of older analog methods. Both those privacy concerns and the money matters are likely to affect many consumers in ways they do not yet realize.

Small phone companies say upgrade costs are affecting their business. In fact, many won't meet the June 30 deadline because wrangling with switch vendors and buying and installing software is a drawn-out process.

Wheat State Telephone, a Kansas-based phone and Internet service provider, has about 2500 local subscribers who may have to wait another two years before enjoying video over the network, according to general manager Archie Macias.

"We were looking at getting into video, providing movies, cable, and entertainment content," Macias says. But CALEA costs have set them back "one or two years," he says.

Updating Wheat State's switches cost about $50,000 per switch. Macias says it's especially frustrating because the FBI has never ordered an interception of the company's phone lines.

"We had to upgrade and expend this money for a function that probably won't be used," Macias says. "When we normally spend money for switch upgrades, we look at revenue streams it might generate, like optional calling features. This doesn't provide us any of that." The cost of these CALEA-mandated upgrades may eventually fall to consumers, he adds.

Consumers may be the biggest losers in the CALEA crossfire, agrees Rick Stevens, assistant general manager at Central Montana Communications.

"Ultimately, the end users will pay for it if we can't recover the costs," Stevens says. "I can't say it's been exorbitant, but it has certainly been expensive."

Independent telco Central Oklahoma Telephone is also juggling its budget to appease the FBI. Like Wheat State in Kansas, it must delay upgrades for other scheduled services, says Steve Guest, manager.

Central Oaklahoma Telephone has spent about $70,000 per switch so far, which is roughly a third of the original installation cost, Guest says. He called the costs a "setback" but does not think consumers will see a rate increase.

One company hopes to profit from the carriers' crunch time. VeriSign, a Web security company, last week launched NetDiscovery, a subscription-fee service marketed to telephone companies. VeriSign's service takes over CALEA-mandated upgrades and maintenance. The company says it can perform the functions "a fraction of the cost" a carrier would pay to upgrade and maintain the equipment themselves.

"To buy the equipment themselves, hire the staff and maintain the capability on a continuing basis...is really significant, up to $500,000 per switch," says Tony Rutkowski of Verisign's NetDiscovery strategy team.

NetDiscovery may be the solution for straggling providers still sweating the approaching June 30 deadline. Rutkowski says it could save operating costs that would otherwise fall to consumers. The company says some telcos have expressed interest but did not reveal any contracts.

Carriers aren't the only ones antsy about CALEA. Since Congress passed the law in 1994, the fight between privacy advocates and FCC rule makers on easy-access digit extraction and wiretapping has been a bitter one.

The transition from analog to digital phone carriers threatened the agency's ability to keep tabs on phones in the event of a court-ordered criminal investigation. Congress helped the FBI by passing CALEA, requiring telecom companies to keep their wiretap-friendly technology current so the FBI could phone-tap on command. Congress left it to the FCC to write the specifics. The FBI has subsequently received more latitude in its surveillance operations.

After complaints from privacy groups and cost concerns from telecom companies, a federal appeals court rejected the FCC's original proposal. The revised rules released in April fully address the concerns, says Rodney Small, an FCC engineer.

But David Sobel, general counsel at the Electronic Privacy Information Center, is doubtful. He says privacy groups are especially concerned about the FCC's standard for dialed-digit extraction, a method of remotely identifying calls dialed from a given number.

The problem was simpler in the analog world, Sobel explains. Law enforcement authorities often issue "pen register orders," which involve retrieving only dialed numbers, not conversations. Analog devices could only extract phone numbers but couldn't keep track of anything dialed after the call was connected.

In a digital environment, however, all dialed information travels in packets, which include not only the phone number but anything dialed during the call. The challenge is protecting sensitive information like bank account and Social Security numbers when they are tightly bound to the packet. Privacy advocates fear the system is ripe for abuse, Sobel says.

"Our position was that so long as no technical way to protect that content exists, that capability should not be given to law enforcement," Sobel says.

Small counters Sobel's complaint, citing a clause in the FCC's new rules that says "the carrier must have the ability to turn on and off the dialed digit extraction capability."

Sobel admits the on-off switch is an important start. But EPIC is still concerned about accountability--whether the switch will be used appropriately. EPIC "will certainly continue to monitor the activities of law enforcement," Sobel says.

Sobel says EPIC has no immediate plans to challenge the most recent FCC order implementing CALEA, but that if industry groups decided to do so, EPIC would support them.