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The results reflect reasonable expectations. For example, users with concentrated utilization of either intra-LATA or inter-LATA CPCS report higher cost savings that the entire population of respondents, as would be expected for each target group's decision to deploy relatively more CPCS in either area.

The manner in which the cost savings data was reported in the survey does not allow the percentage values to be converted into absolute dollar amounts. Collecting the actual costs of existing or potential CPCS, considering the variety of transmission media, route distances and telecommunications applications that might be involved in individual systems, would have been extremely difficult. Consequently, it would be inappropriate to attempt to relate the results displayed above to the concepts of "economic" and "uneconomic bypass." Users who have realized or who anticipate relatively low cost savings, or no savings at all, nevertheless must be engaging in rational economic decisions concerning the utilization of a CPCS. To a large measure, these users' decisions must be driven by factors involving the quality or availability of alternative services from common carriers, and such factors also influence decisions of users who do report significant cost savings.

However, important conclusions about the cost-related economics of CPCS can be drawn from the results. First, more users have either realized or anticipate higher cost savings from LATA systems than from inter-LATA systems. As noted above, LATA systems are more likely to compare to services offered by a single common carrier, usually the local exchange company, while inter-LATA CPCS are more comparable to services provided both by local and intercity carriers. As with the distribution of respondents who reported either that LATA services

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were replaced by CPCS or that, in fact, CPCS offered unique, non-replacing facilities compared to LATA carriers, it appears that CPCS utilization frequently depends on pricing and service conditions that are within the control of local companies. Conversely, CPCS utilization is related less to the prices, services or cost savings associated with common carrier offerings that span

inter-LATA or interstate boundaries.

Second, the cost savings margins reported by the ICA members are not substantially larger and may be smaller than the percentage rate increases which have been applied in recent years to the common carrier private line services, which are most comparable to point-to-point CPCS. Recent increases in intrastate or short-haul interstate-rated private line circuits may cause increases in a user's expenditures for common carrier services which exceed the cost savings ranges reported above. Thus, the cost savings expectations of users may reflect a degree of price and cost stability in the technologies and equipment used for CPCS, while they perceive common carrier offerings to continue to escalate in price (and, as well, perceive inferior quality or reliability).

The cost factors identified by the survey results may illustrate the boundaries of economic policies toward CPCS. Policies that seek to limit economically inefficient deployment of CPCS should ensure that common carriers have incentives to achieve both cost-based rates and a level of costs that reflects increased efficiency in the provision of their services. Such incentives may be emerging today as common carriers face the possibility of users deploying CPCS. A narrow margin of error for departures from cost is

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shown by the cost savings which users already realize or anticipate. In other words, given the cost savings differentials reported by the survey respondents,

even slight departures from cost-based common carrier rates

price of these services to potential CPCS users deployment of CPCS.

increasing the

could cause increases in the

The results reported at the opposite extremes of these cost savings ranges also may be instructive. Cost savings in the higher ranges reported by the survey respondents may indicate that a policy which attempted to limft CPCS by means of surcharges, taxes or other new fees could require large and increasing levies to achieve its goal. The other end of the range where cost savings are either low or do not exist - suggests that an effort to mask the economics of deploying CPCS in this manner could also fail when use of such systems is driven by perceived limits in the quality or availability of common carrier services.

Mr. WYDEN. Mr. Kraemer.

TESTIMONY OF JOSEPH S. KRAEMER, PARTNER, MANAGEMENT CONSULTING DIVISION, TOUCHE-ROSS & CO.

Mr. KRAEMER. Good afternoon, Mr. Chairman and members of the task force. I am Joe Kraemer. I am a partner in the Management Consulting Division of Touche-Ross. In the last 18 months we have conducted studies of the nature, extent and implication of bypass in 25 States. My purpose today is to share the results of those studies and answer specific questions that were put to me by the staff.

In order to determine the extent of bypass, we interviewed approximately 2,000 of the largest users of telecommunications in the United States. Of these, 5 percent were public agencies such as States, cities, counties and school districts, and 59 percent were large business customers.

For purpose of the studies which I directed, bypass was defined as the origination and/or termination of voice or data traffic without use of the telephone company local loops. I think that is an important definition because we would exclude from our definition things like the use of private lines, that is we exclude telephone facilities, that is, we do not count those as bypass. It is only when they roll off the network that for us they are defined as bypass.

We did not classify as bypass any systems which are not normally provided by local telephone companies. Consequently, we did not classify as bypass the following: Receiver only video systems used to receive television programming from satellites by cable television; local area networks such as those interconnecting word processors in a single building; or buildings on contiguous property or mobile radios connecting base stations with vehicles.

While difficult to generalize because our study results vary by State, the following represents major findings from the bypass studies. One bypass is a current reality. Our study shows that 1 in 4 of the largest customers divert some traffic from the local loops of the telephone company. Amounts of traffic diverted is usually 10 to 20 percent of total traffic originating from a facility with access to a bypass system; that is an average.

The amount of traffic diverted in the future will probably increase. Almost every user who currently bypasses will continue to do so. I don't think we have had one indicate they intended to discontinue bypassing. Most users which currently bypass intended to expand their use of bypass, and the large users which do not currently bypass have plans to do so within the next 3 years.

Third, bypass is accelerating. More than half of the bypass systems in the United States have been built since 1980 and it is true that we have had microwave, private systems since the late 1950's, but approximately half of the bypass systems that we have seen or identified have occurred in the last 4 years. I think I would say that is a significant finding.

Fourth, large customers clearly indicate that the decision to bypass is motivated by the customers' need to reduce cost. Customers which plan to bypass expect to save 10 to 20 percent of the equivalent telephone company services.