TELECOM ELECTRIC is the working title of the latest venture to announce its intention to challenge the British Telecom/Mercury Communications duopoly. A subsidiary of National Grid, and headed by two of the industry's most experienced heavyweights, it has enough of the right ingredients to give BT something to think about.

Gordon Owen, former group managing director of Cable and Wireless, and David Dey, former managing director of business communications at BT, are putting their team in place at National Grid House in south London. With careful planning, the new company could begin operating a phone service within two years.

Its two main rivals are British Rail Telecommunications (BRT) and American phone company, Sprint International. Assuming they all receive licences from the Department of Trade and Industry, these three could end up jostling for position as the third leading force in telephone service provision. According to Mr Owen, who led Mercury through its early days, there is plenty of room for new entrants to take market share: 'There is still a lot of work to be done on BT. They haven't relinquished their monopoly in any shape or form. Economists define a monopoly as 75 per cent. BT still has 90-something per cent.'

If they win the go-ahead, these new players would use new fibre optic cable technology, which they say they could deploy quickly. BRT already has the cable in place throughout a large part of Britain and would only have to install telephone exchanges and software to begin providing public services. Sprint has rights to install cable along the British Waterways canals, and Telecom Electric could use the electricity pylons and under-the-street ducts to carry cable.

They have the advantage over British Telecom that they can design their entire network from the beginning using the latest transmission technology. Known as synchronous digital hierarchy or SDH, it provides better quality and higher speed lines. It also has a number of automatic fault-clearing capabilities. This should reduce the maintenance costs, as well as cut down on engineering time spent sorting out problems.

Andrew Burroughs, vice president of marketing at Sprint International, estimates the cost of installing fibre at between Pounds 100m and Pounds 500m, depending on the extent of the network - 'we do believe there is a market for a company that offers fibre connections between key cities here,' he says.

It is likely that all three could seek to tie up with some of the smaller companies now looking at providing local phone services. Cambridge-based Ionica, and US company Millicom are both licenced to provide local phone connections via radio instead of cable. They will build regional , rather than national networks, and will need to get trunk connections from one of the larger players.

Ionica is already negotiating with Mercury on this basis. However, once there are other alternatives to Mercury, they are likely to choose the one which offers them the best deal. Similarly, cable television companies are looking for favourable deals on long distance telephony. They are signing up customers for phone services, which are carried on the same wires as the TV programmes. This market has been slow to develop since Windsor Television offered the first phone services on a Slough trading estate in the late 1980s.

But now Cable London, which has a network installed in parts of Camden, Harringey and Enfield, claims to have 8,000 telephone subscribers only two years after it began laying cable. And Cambridge Cable is confident of gaining telephone subscribers following the launch of its service this month.

However, all competitor phone companies still have to face a number of hurdles. The most critical is something known as an 'inter-connection charge.' This has to be paid to BT on each call made - it covers BT's costs for delivering calls to subscribers with a BT phone.

According to Terry Rhodes, director of competition policy at Mercury, the inter-connect charge is the highest cost for any new entrant. Mercury expects that it could be asked to pay BT around Pounds 200m this year, which is approximately equal to its staffing costs.

The issue which has been raised by Mercury for many years, but has not been resolved, is how much it costs BT to provide that local connection. BT claims its local loop costs are high, but there have been many questions raised about its accounting procedures.

Terry Rhodes is currently in discussions with BT and the regulator Oftel to get this charge reduced. If he succeeds, the new players will benefit - 'you can't open services unless you sort this out,' he said.

The other hurdle is investment. Mercury claims to have spent Pounds 1.5bn on building its network, which is still not complete. It is now looking for an equity partner in order to share the investment burden.

According to Gordon Owen, new competitors have a significant advantage over Mercury. He points out that they are permitted by Oftel to lease capacity from BT or Mercury and resell it. This means that they could offer voice telephone services which operate over lines actually owned by BT or Mercury.

It would allow them to get started with a lower cost-base. They could begin generating income relatively quickly and transfer customer traffic on to their own network as they build it. Mercury was not permitted to do this and had to build the network from scratch.

National Network, a small, privately-owned company which has also applied for a telecoms licence, is already reselling capacity. It uses the Post Office network of private leased lines. However, it is finding the going tougher than expected. Although it offers savings on BT prices, it is offering deals to large customers.

BRT, Sprint and Telecom Electric are more likely to compete on service levels and on marketing skills. They can be expected to introduce telephone services that neither BT nor Mercury offer - these could include higher capacity leased lines, or they could use new software capabilities in telephone exchanges for advanced call-diverting facilities.