Electric Lightwave, Inc.

views updated

Electric Lightwave, Inc.

4400 N.E. 77th Avenue
Vancouver, Washington 98662
U.S.A.
Telephone: (360) 816-3000
Fax: (360) 816-0998
Web site: http://www.eli.net

Public Subsidiary
Incorporated: 1990
Employees: 1,182
Sales: $187 million (1999)
Stock Exchanges: NASDAQ
Ticker Symbol: ELIX
NAIC: 513310 Wired Telecommunications Carriers

Since it was established in 1990, Electric Lightwave, Inc. has focused on providing alternative telecommunications access and services. It began as a competitive access provider (CAP), linking its business customers to their long-distance services. It later gained regulatory approval in certain western states to become a competitive local exchange carrier (CLEC). Since 1998 the company has been an integrated communications provider (ICP), offering high-volume business clients a full complement of telecommunications services.

Offering Alternative Access to Business Clients: 1990–93

Electric Lightwave was incorporated on July 18, 1990, as a Delaware company by Citizens Utilities Co., which was head-quartered in Stamford, Connecticut. The company’s plan was to become a profitable alternative telecommunications provider for medium-sized metropolitan areas. It would provide companies with private access to their long-distance services over its own fiber-optic network, thus bypassing the local exchange networks. This took place before deregulation made such alter-natives commonplace.

Before Citizens Utilities decided to invest in the idea, the two entrepreneurs who devised the business plan for the company—John Warta and Earl Kamsky—presented it to Portland [Oregon] General Electric (PGE), which declined to participate. Once Citizens Utilities became a major investor, Electric Lightwave was incorporated, with Warta as president and CEO and Kamsky as vice-president. The company began hiring its first employees in September 1990 and began construction of its first Metropolitan Area Network (MAN) in Portland, Oregon the next month. Citizens Utilities had net income of $93.7 million on revenue of $356 million in fiscal 1990 and provided the financing for Electric Lightwave’s fiber-optic construction as well as any legal battles that might arise involving state regulatory agencies and local telephone utilities.

Electric Lightwave began providing service in Portland on January 1, 1991. In the second quarter of 1991 it began construction on its second MAN in Seattle, which became operative in December 1991, following approval from the Washington Utilities and Transportation Commission (WUTC). At that time local dial tone service in Seattle was provided by U.S. West Inc. and GTE Northwest Inc. Electric Lightwave provided commercial customers with fiber-optic connections to their long-distance carriers. Since its service bypassed local dial tone providers, the telephone utilities were concerned that it would eventually open up competition for local dial tone service.

In early 1992 Electric Lightwave sought authority in Washington and Oregon to offer point-to-point service to its commercial customers. The company was targeting high-volume communications customers such as software companies and travel reservation services as well as hospitals and financial institutions. Such a service would only allow a customer’s different locations to communicate with each other. Calls outside the system would still require going through the local telephone utility, through a process known as switching.

At this point, Electric Lightwave was not seeking to provide switched services. Both U.S. West and GTE Northwest were opposed to Electric Lightwave’s plans, but in March 1992 Electric Lightwave gained an important regulatory victory when Oregon’s Public Utility Commission granted the company authority to provide dedicated inter-exchange services. It marked the first time commercial telephone customers in Oregon would have a source other than their local telephone utility to provide such services. Under the ruling, Electric Lightwave was able only to provide point-to-point or point-to-multipoint services, and only locations served by different exchanges could be linked in the dedicated line service. At this point the Oregon PUC could not grant authority for dedicated service within an exchange area, because of Oregon statutes.

In early 1993 Electric Lightwave began a $120 million expansion to extend its private fiber-optic networks to nine cities over three years. The company’s strategy was to find mid-sized cities with companies that needed the services it provided. By the end of 1993 it planned to operate in Phoenix, Sacramento, and Salt Lake City, in addition to Portland and Seattle. San Diego was targeted for 1994, but no other cities had been decided on yet. Subsequently, Las Vegas was added to the list.

By March 1993 Electric Lightwave had laid about 60 miles of fiber-optic cable in the Sacramento area. It was noted that the city had a growing high-tech community. Electric Lightwave would be the third company offering fiber-optic cable access to businesses in Sacramento; the other two were Pacific Bell and Phoenix FiberLink, both of which opposed Electric Light-wave’s entry into the market. In Salt Lake City the company planned to build a 35-mile fiber-optic loop, and construction on a 140-mile fiber-optic loop in Phoenix was to begin during the first quarter of 1993.

For 1991 and 1992 the company had about 30 employees and grew to about 60 employees in early 1993. The planned expansion was expected to add 100 to 150 more employees by the end of 1993. Meanwhile, parent company Citizens Utilities—Electric Lightwave’s source of financing—continued to grow, reporting revenue of $600 million and net income of $115 million in fiscal 1992. For 1992 Electric Lightwave had revenue of about $2 million.

Warta left Electric Lightwave in 1993 to start up another fiber-optic and microwave communications company called PacWest Network. A noncompete agreement prevented him from operating in the same cities as Electric Lightwave. He was succeeded as president and CEO at Electric Lightwave by Al Rymarz. Within the year Earl Kamsky and the other minority shareholders who helped found the company also had departed.

Competing for Local Telephone Service: 1994–96

By early 1994 Electric Lightwave had asked regulators in Washington for authority to compete with local telephone utilities and provide local phone service to businesses. Back in April 1993 Washington regulators had granted Electric Lightwave and Teleport Communications Group authority to offer private line and data services within local exchange services.

In March 1994 Electric Lightwave, which was not a regulated utility, received permission from the California Public Utilities Commission to sell its high-speed fiber-optic data transmission services to Sacramento businesses. Existing providers Pacific Bell and Phoenix FiberLink complained that the corporate market that Electric Lightwave was going after was their most lucrative business and that it supported their less lucrative consumer telephone services. Electric Lightwave planned to undercut existing prices by about ten percent. It would provide business customers with an alternative local telecommunications link to their long-distance carriers. At the time Electric Lightwave entered the Sacramento market, Pacific Bell had a 300-mile local fiber-optic network in place and was planning to spend $94 million to build an all-digital fiber-optic network in Sacramento. The other competitor, Phoenix FiberLink, had entered the Sacramento market in 1992 and had laid about 60 miles of fiber-optic cable. Sacramento was the fifth city in which Electric Lightwave would compete, after Portland, Seattle, Salt Lake City, and Phoenix.

In Phoenix, U.S. West had a monopoly on local telephone service. In 1994 Electric Lightwave and Phoenix FiberLink both began offering competitive access to business customers located in downtown Phoenix. Both built six-mile fiber-optic loops in the downtown area to give business customers an alternative link to their long-distance carriers.

In March 1994 Electric Lightwave became the first company west of the Mississippi River to be authorized to provide competitive local exchange (dial tone) service to its customers. It won such authorization in the state of Washington. Statutory changes in Oregon and Utah already allowed competitive access providers (CAP) to offer such service. In November 1994 it also became the first company to provide competitive, facilities-based telecommunications services in the state of Washington. During the year the company opened full-service offices in Sacramento and in Salt Lake City, Utah. Additional offices were opened in Phoenix in 1995; Boise, Idaho, in May 1997; and Spokane, Washington, in November 1998.

In mid-1994 the company announced plans to expand into another 24 cities—all of them mid-sized cities in the Rocky Mountain states and the Far West—as well as to start offering conventional local telephone service in competition with local monopolies such as U.S. West and GTE. The company had about 110 employees but would have to greatly expand its workforce if it began offering local dial tone service. Also in 1994 Electric Lightwave opened videoconferencing facilities in Portland and Seattle that could connect with any similar system in 146 U.S. cities and 21 other countries.

Company Perspectives:

Electric Lightwave continues to grow as technology and legislation alter the future of the telecommunications industry. The company’s business strategy focuses on broadening its MAN (metropolitan area network) cities and cluster markets by offering a full range of telecommunications services to medium and large businesses. Electric Lightwave will also continue to assert itself on the West Coast with the completion of the largest SONET ring in the Western United States—a ring that interconnects seven western states. As it continues its expansion to extend services across the country, Electric Lightwave intends to have a market presence in every metropolitan area east of the Rockies.

Dave Sharkey joined Electric Lightwave as president and CEO in August 1994, replacing Al Rymarz. Known as a marketing specialist, Sharkey was previously an executive with Mobile Media, Inc., a radio common carrier provider, and worked in technical operations and sales and marketing at New Jersey Bell Telephone and AT&T. In 1997 he became chief operating officer of Electric Lightwave.

In November 1994 Electric Lightwave requested permission from the Oregon PUC to compete against U.S. West and GTE Northwest Inc. for local dial tone service in Portland and other nearby communities. Electric Lightwave was the first company to ask to compete with the monopoly utilities. Legislation permitting such competition was passed in Oregon in 1993. It was up to the PUC to determine if such competition was in the public interest. The PUC also had to work out the technical and policy issues that were involved.

In August 1995 Electric Lightwave won approval from the Utah Public Service Commission to provide telephone service to customers throughout the state. Up to this time U.S. West had a monopoly on telephone service in Utah. Electric Lightwave would have to negotiate interconnection contracts with U.S. West regarding how they would use each other’s lines. Electric Lightwave planned to offer service to business customers only, not residential service. By March 1996, however, U.S. West had failed to negotiate an interconnection agreement with Electric Lightwave. When Electric Lightwave appealed to the Utah PSC to force U.S. West into an agreement, the two companies succeeded in reaching an agreement following two weeks of in-tense negotiations. A year later, though, Electric Lightwave accused U.S. West of dragging its feet and failing to follow interconnection orders. In mid-1997 it sued U.S. West, charging it with failure to comply with the federal antitrust provisions in the Telecommunications Act of 1996 and for providing insufficient interconnection services. The lawsuit alleged that U.S. West’s actions had resulted in disconnects, busy signals, blocked calls, and other problems—all of which contributed to an image of unreliability for the alternative provider.

Meanwhile, in California Electric Lightwave had built more than 100 miles of fiber-optic cable in the Sacramento area. As of January 1, 1996, it would be able to offer local telephone service to business customers in competition with Pacific Bell, which already had built a much larger fiber-optic system in the state capital. In May it purchased a telephone system at Mather Field from the U.S. Air Force and was installing more fiber-optic cable in the Sacramento area. The company also had established an office for data services in Los Angeles and was planning to establish a similar office in San Francisco in 1998. During the year it also signed an interconnect agreement with Pacific Bell.

In 1996 Electric Lightwave signed the largest and most comprehensive strategic alliance in the United States with Arizona’s Salt River Project (SRP), which gave Electric Lightwave access to SRP’s vast fiber-optic network in the Phoenix metropolitan area. For 1996 the company reported revenue of $31.3 million and a net loss of $29.4 million.

Going Public and Subsequent Growth: 1997–2000

Electric Lightwave went public with an initial public offering (IPO) in November 1997. The company sold eight million shares and raised $128 million, which would be used to finance expansion plans for the build-out of its existing market clusters and interconnection of its longhaul routes. Following the IPO Citizens Utilities owned more than 80 percent of the company and controlled some 97 percent of the combined voting power of its common stock. Citizens Utilities reported revenue of $1.4 billion for its fiscal year ending September 30, 1997. For 1997 Electric Lightwave reported revenue of $61 million and a net loss of $33.9 million.

In June 1998 Electric Lightwave signed a $122 million contract with Qwest Communications to purchase bandwidth on Qwest’s national fiber optic network. Qwest owned a 9,000-mile-long fiber-optic route and planned to double it in 1999, providing access to 130 cities that accounted for 80 percent of all voice and data traffic in the United States. The agreement enabled Electric Lightwave to bring its services to major metropolitan areas throughout the country by the end of 1998.

In July 1998 Electric Lightwave announced that it was evolving from a competitive access provider (CAP) and a competitive local exchange carrier (CLEC) to become an integrated communications provider (ICP). It planned to offer a complete communications package to its customers, including local and long-distance services, national data networks, and videoconferencing, among other services. It also offered direct access to the Internet and Web hosting services. The company had about 2,500 miles of fiber routes, metropolitan area networks in six Western cities, and data-only networks in other cities.

Key Dates:

1990:: Electric Lightwave is incorporated to provide alter-native telecommunications services.
1991:: Electric Lightwave begins providing service to business customers in Portland, Oregon and Seattle, Washington.
1993:: Targets Phoenix, Sacramento, and Salt Lake City for its next metropolitan area networks (MAN).
1994:: Becomes the first company west of the Mississippi River to be authorized to provide competitive local exchange (dial tone) service to its customers.
1997:: Becomes a public company with an initial public offering (IPO) on the NASDAQ exchange.
1998:: Agrees to purchase bandwidth on Qwest Communications’ 9,000-mile-long fiber-optic route for $122 million.
2000:: Completes its western SONET network of more than 3,200 miles at a cost of $131 million.

In 1998 Electric Lightwave opened a sales office in Las Vegas. By 1999 it planned to finish a switching facility that would allow it to offer local and long-distance calling plans to area businesses. Additional fiber routes were under construction to connect Las Vegas with Los Angeles, Salt Lake City, Boise, and Portland. The company also announced plans in August 1998 to build a SONET (synchronous optical network) ring that would connect fiber networks operating in 83 West Coast cities. The project would expand the Internet backbone and relieve congestion on the Internet. In 1999 Electric Lightwave began offering data and Internet access services in 14 major metropolitan areas across the United States.

In April 1999 Electric Lightwave and Touch America agreed to give each other access to portions of their fiber networks. Both companies operated in the northwest and were in the process of expanding their networks. Under the agreement Electric Lightwave would gain greater access to markets in Minnesota, Montana, North Dakota, and Wyoming. Touch America had a 10,000-mile network and was planning to add another 2,000 miles.

Electric Lightwave made a similar deal with IXC Communications Inc. of Austin, Texas. Electric Lightwave gained access to fiber links that IXC was building between Salt Lake City and Denver and between Denver and Dallas. During 1999 Electric Lightwave became involved in another dispute with U.S. West involving reciprocal compensation for Internet-related traffic. Complaints filed against U.S. West in Arizona, Utah, Oregon, and Idaho were all resolved in Electric Lightwave’s favor by early 2000.

During 1999 Electric Lightwave closed its Voice Solution division, which marketed prepaid phone services and videoconferencing services. In other cost-cutting measures, the company closed six eastern retail sales offices and consolidated them in Dallas. Later in the year the company rolled out a radio and print advertising campaign targeting business customers. In October the company named Rudy J. Graf as vice-president and CEO. Graf was also president and COO of parent company Citizens Utilities. Sharkey remained president and COO and retained day-to-day control of Electric Lightwave. Parent company Citizens Utilities was in the process of divesting its gas, electric, and water and wastewater treatment businesses. The parent company planned to focus exclusively on telecommunications ventures. For 1999 Electric Lightwave reported record revenue of $187 million as well as its largest net loss, $133.5 million.

Electric Lightwave completed its western SONET network of more than 3,200 miles in mid-2000, at a cost of $131 million. By enabling the company to replace leased capacity lines with its own fiber, the new longhaul fiber-optic network would help Electric Lightwave reduce its operating costs. It also would improve the speed and reliability experienced by customers. With the completion of the SONET, Electric Lightwave had more than 6,300 route miles of fiber-optic cable, including its metropolitan area networks (MAN).

Although Electric Lightwave’s goal was to become profitable, for the first six months of 2000 it reported a net loss of $70.1 million on revenue of $117.4 million, compared with revenue of $84.3 million and a net loss of $68.2 million for the first six months of 1999. In its second quarter report, the company told investors that it was running out of money for operating leases, working capital, capital expenditures, and debt service. Although Electric Lightwave only had $46 million left of its $400 million credit line, it noted that its parent company Citizens Utilities would continue to finance its cash requirements until other financing was in place.