Pros and Cons of CLEC registration
By Joseph Isaacs

Until recently, the physical connection to the business (the "local loop") has been the sole responsibility of the incumbent local exchange carrier (ILEC). An ILEC is whom you currently purchase your telecom trunks from such as T-1ís, T-3ís and local loops. Some of the US ILECís are Southwestern Bell, BellSouth, Verizon, etc. However, the telecommunications Act of 1996 enabled new telephone companies called Competitive Local Exchange Carriers (CLECís) to be formed in order to compete with the ILECís and change the face of local service. Many companies with huge telecom costs have become Competitive Local Exchange Carrierís (CLECís) to cut costs and declare their independence from retail pricing and from the incumbent LECs (ILECís) they must otherwise rely on for access. They're cashing in on the benefits of reciprocal compensation and taking advantage of wholesale carrier pricing to resell services and reduce their own line costs. It's a strategy for success that can pay big rewards.

Why should ISPís, "TAKE THE PLUNGE" and file to become a CLEC? Here are a few of the reasons:

 

State by State mandated 15 to 24 percent below-tariff wholesale rates on circuits and services for switchless reseller CLECs;

Greater discounts of up to 45 percent below-tariff wholesale rates on circuits and services for facility-based CLECs;

Lower long distance costs as an interstate/intrastate/international IXC (Inter-exchange Carrier)

Reciprocal Compensation (fees paid between carriers for traffic on their networks)

Availability of carrier class services (UNE's) unavailable at retail levels;

Ability to be a "Peer" to the ILEC instead of just a customer.

Your telecommunications costs are way out of control and account for the single largest company expense.

There are basically two types of CLECís. The first is a switchless reseller and the second is a facility based provider.

Becoming a CLEC/IXC is very beneficial because it allows the Switchless Reseller CLEC, under itís Resale Agreement (Agreement to purchase services at wholesale prices with a predetermined discount structure) to obtain discounts on the lines purchased by the CLEC. Much greater discounts would be obtained as a facility based CLEC/IXC or by entering into a term and volume agreement with the long distance carrier at lower prices than available as merely a retail customer. In a facility based environment, the CLEC also has the opportunity to receive all of their inbound trunks, to the Tandem Access Switch, at no cost from the ILEC and/or CLEC. A savings of 15 to 24 percent across the board under a negotiated agreement or by the use of switching facilities. This puts the client in a much more competitive position within its markets. The savings on local loop and long distance charges will translate into higher profits and/or lower price, both of which are key ingredients for a growing and competitive organization.

Furthermore, as a facility based CLEC, the client can now participate in reciprocal compensation with the carriers and further reduce their line costs. Reciprocal compensation is the term used to describe the fees that interconnecting local carriers pay to terminate traffic on each other's network.

Looking at the CLEC arena from the bigger perspective, the direction of the telecom industry suggests that any firms who want to remain competitive must take a serious look at becoming an CLEC/IXC. Becoming a CLEC will be a critical step in positioning itself competitively.

Why Become A CLEC?
Because the opportunity is truly vast, analysts are predicting that incumbent local exchange carriers (ILECs) will lose up to 25% of the local exchange market. Providing competitive local phone service was a $1 billion business in 1996. By 2006, that is expected to grow to $30 billion Ė


The best news is, ISPís are superbly positioned to move into the competitive local exchange business.

-You have advantages in local, long distance, and data services

-Access to existing ILEC network at discounts

-No existing baggage

-In 1996 there were 50 CLECs. -By 2006, there will be at least 500.


Become a Non-Facilities-Based CLEC


Register as a CLEC, but resell ILEC services obtained at wholesale rates rather than provide services on owned equipment


PROS of becoming a non-facilities-based CLEC:

-Lower entry cost -- Avoid equipment expenditure and many operations costs

-Less complex -- Avoid the 6-9 months wait to complete an interconnect agreement with the ILEC

-Potential xDSL entry strategy data only service option


CONS of becoming a non-facilities-based CLEC:

-Difficult to add value to core services

-Differentiation depends on envelope functions: sales & marketing, customer service, etc.

Thin margins

-Dependent on difference between wholesale and end user pricing

-Balance of power lies with ILEC


Follow These Nine Steps to Ensure CLEC Success:

Define the business: business case, market strategy, and service definition

Define legal issues: choose counsel, review legal factors

Define regulatory issues: choose counsel and review state, federal, Bellcore requirements, negotiate interconnect agreements

Define the operational process: network model, resource requirements

Prepare the business plan: market characterization, strategy, risk assessment, financials

Detailed network design: detailed architecture, personnel requirements

Procurement: acquire access, switching & transport facilities, operations support systems, and human resource acquisition

Installation: site selection, site readiness, equipment installation and provisioning

Operations and Integration: sales and marketing, operations support systems


With proper consultants you can attain CLEC status quicker than you think.

Although CLEC status has been achieved in as little as three months, in general you should anticipate a 6 to 9 month process depending upon the individual states that you intend to establish service. Some states require only that you satisfy the requirements of the Telecom Act of 1996 and may have no other filing requirements. You should consider seeking experienced and knowledgeable legal counsel to help expedite this process and ensure proper filings are done on a state-by-state basis.

Section 214(e) of the Telecom Act requires that you register as an "eligible telecommunications carrier" entitling you to "universal service" support. If you do not choose to register your serving area will be limited. Also, several states have additional requirements for providing service. You must request a copy of these requirements from each state's PUC where you plan to provide service.

The regulatory filing process can be very time consuming and expensive, particularly if you are establishing a multi-state operation. An experienced consulting firm will help:

-Speed you through the filing process

-Assist in post-certification filing

-File annual updates about your company and its operations

-Respond to requests for miscellaneous information

-Protect your right to privacy when filing confidential information

Becoming a Competitive Local Exchange Carrier (CLEC) is not as difficult as one would expect. Although there are a myriad of state and federal regulations to adhere to, ISG-Telecom takes the hassle and burden out of becoming a CLEC or an IXC. This article has a follow-up to Part One.

Part 2:  The steps to take

The following steps are designed to give the a firm who wishes to plunge into the telecom business an idea of the processes and procedures necessary to become a CLEC.

PHASE I:

Step I:
Hire a good telecom regulatory consulting firm. There are two different approaches to the regulatory processes. The first is to find merely a telecommunications attorney who will help with the certification process. The second, and more recommended avenue would be to hire a telecom consulting form that has regulatory attorneys on staff. This methodology will not only get you through the certification process but also help the new entity negotiate agreements, set up the ILEC accounts, engineer equipment contingencies, obtain operating codes, etc. Internet searches can yield many good consultants but few have the ability to handle a client project on a turn key or end to end solution. Key word searches such as ISP-CLEC or ISP/CLEC can be helpful.

Step II:
Make a determination whether becoming a "switchless reseller" CLEC or a "facility-based" CLEC is best for your overall business plan in order to maximize existing internal network infrastructure and also cost savings. The major determining factors here are the following:

1)                  How much are the ISPís current trunking needs

2)                  What type of technical staff does the ISP currently have

3)                  How solvent is the ISP Ė do they have large positive cash flows

4)                  What types of services are to be offered to the general public after CLEC licensing is obtained

5)                  What types of credit lines are currently in place

6)                  What type of existing  is in place. How many remote POPís are there. How many LATAís do they currently cover. How many markets are they in and what type of market concentration is there.

Step III:
Analyze the current telecom costs. Take a close look at both local loop and long distance. Inbound and outbound analysis inclusive of 1+ dialing, 800 service and number of trunks as well as their size. Comparative examples do not exist. Any ISP with telecom costs in excess of 20K monthly can not afford to remain merely an ISP and not an ISP/CLEC. For those with much greater costs  - facility based certification is more in order.

Step IV:
Plan your strategy session with the team of experts (principles, regulatory and project management personnel). This will help determine the pricing and service elements that will be set into your tariff. The strategy session is used to determine things like pricing elements, interconnection ILECís, whether resale or facility based certification is warranted, and to gather all of the necessary information required to start the certification process. For a list of data required to start a CLEC certification go to: http://www.isg-telecom.com/checklist.htm

Step V:
D
raft your CLEC application. The following information will be required for certification and can be found at: http://www.isg-telecom.com/checklist.htm.

Step VI:
D
raft your tariff. There are no typical costs in drafting a tariff. Many company's such as ISG-Telecom's (www.isg-telecom.com) tariff costs are  included in the certification process. All tariffs must contain service descriptions, terms and conditions and prices. The prices are determined by the company wishing certification but in most cases the terms and conditions are dictated by the Public Utility Commission in which certification is being applied for. Drafting a tariff can be complicated when attempted by someone who has never done it before which is why a good telecom regulatory consulting firm is recommended.

Step VII:
B
egin negotiations for your interconnections agreement (or resale agreement) (Approx. $2,500) This cost is usually if the MFN (Most favored Nation) or section 252i of the Telecommunications Act of 1996 is used. The FCC also allows utilization of the ďpick and chooseĒ methodology Ė meaning terms from many agreements already approved can be combined to formulate a new agreement. The negotiation process has been streamlined over the past few years . In most cases a new carrier can opt-in to an existing agreement to eliminate total negotiation. A complete negotiation of a new interconnection agreement can involve hundreds of hours and costs up to $50,000. per agreement. This methodology is usually not necessary in todayís marketplace.

Step VIII:
All documents are approved by client and sent to the appropriate Public Service Commission. Typical costs to draft the application and tariff and file with the Utility Commission are $9,500.00. Using a professional telecom regulatory consulting firm can usually have documents prepared in ten days or less, ready for client approval and signature. After the client signs off on the documents they need to be filed with the Public Utility Commission. A single point of contact will be necessary in the event the Commission staff has questions, concerns or requires changes. The rules constantly change and staying abreast of such changes is not a talk that an individual ISP owner will want to undertake alone. Approval timeframes take between 1 day and 6 months depending on the state. Sometimes the PUC will reject all of the documents if not prepared properly and sometimes they will merely request additional information. A good consulting firm will act as the single point of contact and should see the process from start to certification and not just draft documents for the client to undertake filing of. Also many states, depending on the type of certification required have specific minimum financial requirements. Many states require a hearing to finalize certification. This is another reason a competent telecom regulatory consulting firm is required.

Step IX:
Repeat steps V through VIII if client wishes to sell long distance services as an IXC

PHASE II: (For facility based projects)

Step X:
C
ontact our Strategic Partners and begin organizing equipment layout and quotes.  Engineers will do an analysis of existing infrastructure and make determinations as to whether equipment upgrades are necessary. There are many different types of equipment available to become a facility based CLEC. Some of the vendors include Cisco, Nortel, Siemens, Lucent, Convergent and many more smaller soft switch manufacturers. This process of selecting a vendor can be tedious and long if one is not knowledgeable of the options . Costs can range from 50,000 to upwards of millions depending on the service offering .

Step XI:
Equipment is ordered. Typically it takes 3 months to have equipment delivered and installed with another 30-60 days for testing and final turn-up. Installation costs vary dramatically depending on where the equipment is being installed.

Step XII:
Follow-up with the PUC/PSC/FCC on certification process. The follow-up time varies depending on the agency and the state in which certification is being applied for. Your telecom regulatory consulting firm will typically do  on a regular basis with staff in order to assure prompt replies and expeditious certification.

 
PHASE III:

Step XII:
S
tarts setting up the back office procedures (Billing, customer service, operator services, DA & 911) Set-up accounts with the ILECís you wish to purchase or interconnect with. (Approx. $4-5,000). This cost is affiliated with sifting through, completing and doing follow up with the ILEC on a massive amount of paperwork necessary to implement account status as a certificated carrier.

What billing systems and software are in use?  Can this be outsourced?  What is the $5,000 for? 

Step XIII:
Certification is received

Step XIV:
Equipment is delivered, installed and turned-up for Beta testing

Step XV:
Back office functions are put in beta to co-ordinate with switch

Step XVI:
Hire and train your sales, operations, marketing, & product marketing teams

Typically speaking most state certifications can be achieved in approximately ninety (90) days. Federal certifications can be achieved in approximately forty-five (45) days. For a complete listing of all state certification time tables go to http://www.isg-telecom.com/puc.htm

ABOUT THE AUTHOR:

Joseph Isaacs is President of ISG-Telecom Consultants, a consulting firm specializing in state and federal certifications, tariffs,  resale and interconnection agreements, collocation issues/ applications and obtaining operating codes for both CLEC's & IXC's.
http://www.isg-telecom.com
isaacs@isg-telecom.com
Phone:727-738-5553

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