(September 2002)

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 the carrier from whom you currently purchase your telecom trunks from such as T-1s, T-3s and local loops. Some of the U.S. ILECs are Southwestern Bell, BellSouth, Verizon.

The Telecommunications Act of 1996 enabled new telephone companies called Competitive Local Exchange Carriers (CLECs) to be formed in order to compete with the ILECs and change the face of local service. Many companies with huge telecom costs have become Competitive Local Exchange Carriers (CLECs) to cut costs and declare their independence from retail pricing and from the incumbent LECs (ILECs) 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 Prepaid Companies, Debit Card Companies, ISPs, Telemarketing Firms/Call Centers and Utilities "TAKE THE PLUNGE"and file to become a CLEC? Here are a few reasons:

• State by State mandated 15 to 30 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 (UNEs) unavailable at retail levels

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

There are basically two types of CLECs: switchless reseller or facilities-based provider.

Becoming a CLEC can be very beneficial to an IXC. It allows the switchless reseller CLEC, under it’s 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 can be obtained by a facilities-based CLEC. In a facilities-based environment, the CLEC also has the opportunity to receive all of its inbound trunks to the Tandem Access Switch, at no cost from the ILEC and/or CLEC. This can translate to a savings of 15 to 24 percent across the board, under a negotiated agreement or by the use of switching facilities. 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 facilities-based CLEC, the company can now participate in reciprocal compensation with the carriers and further reduce its 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 that want to remain competitive must take a serious look at becoming a CLEC/IXC.


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.


As a Non-Facilities-Based CLEC, you are registered 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 9 Steps to Ensure CLEC Success:

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

2. Define legal issues: choose counsel, review legal factors.

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

4. Define the operational process: network model, resource requirements

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

6. Detailed network design: detailed architecture, personnel requirements

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

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

9. 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

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


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 firm 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 turnkey or end to end solution. Key word searches such as ISP-CLEC or ISP/CLEC can be helpful.


Make a determination whether to become a "switchless reseller" CLEC or a "facilities-based" CLEC. Which is best for your overall business plan in order to maximize existing internal network infrastructure and also cost savings?

What type of existing equipment is in place? How many remote POPs are there. How many LATAs do they currently cover? How many markets are they in and what type of market concentration is there?


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 cannot afford to remain merely an ISP and not an ISP/CLEC. For those with much greater costs, facilities-based certification is more in order.


Plan your strategy session with the team of experts (principals, 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 ILECs, whether resale or facility based certification is warranted, and to gather all of the necessary information required to start the certification process.


Draft your CLEC application.


Draft your tariff. There are no typical costs in drafting a tariff. Many companies include tariff costs 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.


Begin negotiations for your interconnections agreement (or resale agreement – approx. $2,500). This cost is usually assessed if the MFN (Most Favored Nation), or section 252i of the Telecommunications Act of 1996, is used. The FCC also allows utilization of the "pick and choose" methodology – 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 today’s marketplace.


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. Upon your sign off on the documents, they need to be filed with the Public Utility Commission. 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. Also many states, specific minimum financial requirements, and may require a hearing to finalize certification.

Typically speaking most state certifications can be achieved in approximately ninety (90) days. Federal certifications can be achieved in approximately forty-five (45) days.

Obviously, this is only the beginning of the process. A facilities-based CLEC will now need to undertake a second phase of due diligence and planning to properly implement its network. But, hopefully, the above information will assist you in making the right business decision for your company, and set you on the path to increased profitability.

Joseph Isaacs is president of ISG- Telecom Consultants. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it. .