So you want to form a telco… - tips to become a competitive local exchange carrier - Industry Trend or Event

Communications News, April, 1997 by Paul F. Kirvan

One of the most important aspects of the Telecommunications Act of 1996 is that it permits competition in local exchange service. If you look closely at the law and its ramifications, you can see that entry into local service isn't limited to traditional telco-like organizations.

Companies like yours can also become telephone companies, if you can make the case from both business and legal perspectives. You can apply for status as a competitive local exchange carrier, or CLEC. This differentiates you from an incumbent local exchange carrier, or ILEC. These are generally dominant LECs, e.g., Nynex, US West, and GTE.

What we're suggesting is not totally new. Non-telephone companies have created telephone service organizations in the past. And the ability to resell long distance service has become a popular source of revenue for many organizations across the country.

However, full-fledged CLECs--those that provide dial tone and other traditional local services--are much newer. Companies like Teleport and MFS Communications are among the leading CLECs in the industry.

Is your company a candidate to become a CLEC? Let's look at some of the considerations.

BENEFITS

[check] As a CLEC, your new organization will obtain local access service at presumably "wholesale" rates from an established EC. Assuming your new "telco" resells those services to the parent company, savings of 5% to 20% are possible. However this depends on what rates you are able to negotiate from the primary LEC(s) you use. To do this you will have to negotiate rates with the carrier(s) and obtain suitable approvals from state regulators.

[check] Your investment as a resale CLEC is nominal, since in most case the physical connections from the LEC to your site are already in place. Any new service connections (or disconnects) will be done by the LEC from whom you obtain service, your own installation team, or a third-party firm.

[check] You are not limited to reselling dial tone to your company. You can resell to virtually anyone. This will generate revenues for your new company.

[check] You can also resell long distance service, thereby offering a comprehensive package of services for your own company as well as any others you support.

LIMITATIONS

[check] Legal fees to set up a telephone company can be in the tens of thousands of dollars. Your biggest startup expense will probably be legal fees.

[check] Rates you obtain from established LECs in your area may not be low enough to provide a suitable return on investment.

[check] Established LECs that are concerned about additional competition could stonewall your plans in the courts.

[check] You may not be able to obtain the necessary state and (if required) federal approvals to launch your firm.

[check] Existing telecom department staff may not have the skills to run a full-fledged telephone company.

[check] If over time you decide to become to a facilities-based LEC, you will probably be faced with a major investment in a central office-class switch, costing in the tens of millions of dollars.

Suppose you decide to take the step and form a CLEC. Obtain the services of a suitably experienced law firm. Also obtain the services of consulting organizations that have appropriate experience.

STEPS TO TAKE

[check] Build a business plan. Don't do anything until you've formulated a business plan. Work with both a qualified communications lawyer and telecomm consulting firm. Determine if you want to remain a reseller, or if you plan to evolve into a facilities-based carrier.

[check] Determine services the new company will provide, as well as the intended customer base(s). If you intend to provide local service, the regulator may require you to provide certain local services that your company does not currently use, such as certain emergency services, services for the elderly or physically impaired, or even public telephone service.

[check] Petition the state public service commission for an application to get a license/ certificate to provide telephone services.

[check] Negotiate rates with established LECs. This is not as easy as might be implied. After all, the LEC is in effect helping to establish a new competitor.

[check] If you plan to offer interstate long distance, negotiate rates with established LD carriers.

[check] Review FCC regulations to ensure compliance.

[check] Hire and train a suitable staff to be ready when the business is launched.

[check] Establish appropriate corporate organization and tax structure.

[check] Identify telco reporting requirements for both state and federal agencies. Determine which level of reporting you can handle.

[check] Formally petition the state public service commission for license or certificate to provide service.

[check] If you plan to offer interstate long distance service, petition the FCC for the appropriate license or certification.

[check] Establish corporate launch dates, commence marketing when you are approved to offer service (assuming you plan to resell outside your organization), have your technical support team in place, have a carrier coordination team in place (minimizes finger-pointing among carriers), and get started.