It was the end of last year, and the U.S. Telecom Association appeared to be coming to pieces.

The Washington trade association of the local phone industry had just lost one of its largest members — Qwest Communications, one of the association’s four remaining Baby Bell companies. Its largest non-Bell member, Altell, was on its way out the door.

And the association’s three remaining Bell companies — BellSouth, Verizon Communications and SBC Communications — were thinking about following them out the door.

But after an aggressive lobbying campaign by USTA President Walter McCormick, insiders insist the trade group has reversed course.

Altell ditched its plans to leave the association, and the remaining Bell companies decided to reconnect. In addition to kicking in their $2 million in annual dues, each Bell company has pledged to fund a multimillion-dollar television advertising campaign designed to rebuild the local phone industry’s image.

“After reviewing [USTA] at the end of last year, we concluded that we were going to revitalize the trade association,” said former Rep. Tom Tauke (R-Iowa), an executive at Verizon and one of three Bell company representatives on USTA’s board. “We have made the commitment to make the USTA the premier trade association in the industry.”

Added SBC’s Jim Smith, another USTA board member: “We figured out over the last year that we are going to get more accomplished if we work together.”

The effort to bounce back comes as the industry’s largest players face continued static on Wall Street and Capitol Hill. Stock prices of the Baby Bells have tumbled while the companies’ top priority — relief from regulations in the high-speed Internet marketplace — was smothered on Capitol Hill.

“Over the course of the last two years, the industry has taken some pretty big blows,” McCormick said.

To be sure, some tension persists about the disproportionate dues that the Bells pay to the association each year — especially as the Bells have been forced to cut back on expenses at their own Washington offices.

“They are all making great money over there and we aren’t getting a bang,” said a lobbyist for one Bell company who did not want to be identified. “We are not terribly pleased at the services that we have received.”

“It’s only natural when our own organizations are being asked to tighten our belts that we ask our trade association to do the same,” said the disgruntled Bell executive. “The big companies are saying: ‘We are paying millions of dollars to these guys and there are questions about their effectiveness.’”

Still, under McCormick’s direction, the industry’s trade group appears to have finally come to grips with persistent tension between the Bell companies and the other 1,200 small- and mid-sized companies that dominate the association’s 45-member board of directors.

“It’s been a difficult marriage as long as the Bell companies have been around,” said one longtime industry lobbyist. “It’s tough to please the small company guys and the Bell companies. The Bells don’t feel like they are getting their money’s worth.”

Under agreements reached earlier this year during marathon sessions by the USTA board, the association’s small, medium and large members have agreed to work together toward stripping regulations on the industry and strengthening a federal fund to keep local phone rates affordable in rural areas.

“The board of directors defined a very clear agenda for the future that is straightforward and bold,” said McCormick, who is nearing the end of his second year at the helm of the trade association.

USTA also agreed to increase the size of its political action committee and boost its lobbying expenditures.

The association spent $2.2 million on lobbying last year, up slightly from $2 million in 2001 and $1.7 million in 2000, according to PoliticalMoneyLine.com.

Meanwhile, USTA’s PAC has swelled to an all-time high, distributing $170,000 to Members of Congress in the previous election cycle. About two-thirds of the contributions went to Republicans.

However, the association continues to give out far less money than the cable industry’s lobby — and spends less on lobbying than both the National Cable and Telecommunications Association and the Cellular Telecommunications and Internet Association.

One Bell lobbyist said colleagues at other Bells have discussed the idea of “spinning off” from USTA and creating a more agile and aggressive alliance, while ditching hundreds of the association’s small and medium-sized firms.

Such a lobbying entity would be based on Voices for Choices, the front group set up by AT&T and the long-distance industry.

A USTA spokesman called the talk of disbanding the trade association “ridiculous” and lobbyists at other Bell companies — at least publicly — say they have had no such discussions.

“I’ve never heard one word about anyone dropping out,” said Bill McCloskey, a spokesman for BellSouth.

BellSouth executive Margaret Greene is serving a one-year term as chairwoman of USTA’s board of directors.

McCloskey said USTA’s diverse membership helps the Bells because it represents small and medium carriers in addition to the industry’s four giants. “To not be involved in USTA would be a lobbying minus,” he said.

Tauke added, “The three large companies are more committed than they have ever been.”

In another change, USTA has agreed to respond directly to attacks from Voices for Choices.

In the past two years, SBC has spent millions of dollars responding to an aggressive anti-Bell advertising campaign funded by the long distance industry’s alliance.

Going forward, “there is unified agreement that we are going to have USTA do it in the future,” said SBC’s Smith. As a result, “it will be all the [local] companies responding” to Voices for Choices.

USTA has already begun its first advertising effort, a multimillion-dollar campaign to boost the image of beleaguered industry.

The ads, which are running in Washington and selected Congressional districts around the country through the end of the summer, come after years in which the industry was pummeled by state regulators and a savvy and aggressive advertising effort by its adversaries in the long-distance industry.

“We feel like we have been mischaracterized by our competitors,” said Tom Amontree, a spokesman for USTA. “We felt it was important to go out and tell our story.”