Sec. 51.505  Forward-looking economic cost.

    (a) In general. The forward-looking economic cost of an element 
equals the sum of:
    (1) The total element long-run incremental cost of the element, as 
described in paragraph (b); and
    (2) A reasonable allocation of forward-looking common costs, as 
described in paragraph (c).
    (b) Total element long-run incremental cost. The total element long-
run incremental cost of an element is the forward-looking cost over the 
long run of the total quantity of the facilities and functions that are 
directly attributable to, or reasonably identifiable as incremental to, 
such element, calculated taking as a given the incumbent LEC's provision 
of other elements.
    (1) Efficient network configuration. The total element long-run 
incremental cost of an element should be measured based on the use of 
the most efficient telecommunications technology currently available and 
the lowest cost network configuration, given the existing location of 
the incumbent LEC's wire centers.
    (2) Forward-looking cost of capital. The forward-looking cost of 
capital shall be used in calculating the total element

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long-run incremental cost of an element.
    (3) Depreciation rates. The depreciation rates used in calculating 
forward-looking economic costs of elements shall be economic 
depreciation rates.
    (c) Reasonable allocation of forward-looking common costs--(1) 
Forward-looking common costs. Forward-looking common costs are economic 
costs efficiently incurred in providing a group of elements or services 
(which may include all elements or services provided by the incumbent 
LEC) that cannot be attributed directly to individual elements or 
services.
    (2) Reasonable allocation. (i) The sum of a reasonable allocation of 
forward-looking common costs and the total element long-run incremental 
cost of an element shall not exceed the stand-alone costs associated 
with the element. In this context, stand-alone costs are the total 
forward-looking costs, including corporate costs, that would be incurred 
to produce a given element if that element were provided by an efficient 
firm that produced nothing but the given element.
    (ii) The sum of the allocation of forward-looking common costs for 
all elements and services shall equal the total forward-looking common 
costs, exclusive of retail costs, attributable to operating the 
incumbent LEC's total network, so as to provide all the elements and 
services offered.
    (d) Factors that may not be considered. The following factors shall 
not be considered in a calculation of the forward-looking economic cost 
of an element:
    (1) Embedded costs. Embedded costs are the costs that the incumbent 
LEC incurred in the past and that are recorded in the incumbent LEC's 
books of accounts;
    (2) Retail costs. Retail costs include the costs of marketing, 
billing, collection, and other costs associated with offering retail 
telecommunications services to subscribers who are not 
telecommunications carriers, described in Sec. 51.609;
    (3) Opportunity costs. Opportunity costs include the revenues that 
the incumbent LEC would have received for the sale of telecommunications 
services, in the absence of competition from telecommunications carriers 
that purchase elements; and
    (4) Revenues to subsidize other services. Revenues to subsidize 
other services include revenues associated with elements or 
telecommunications service offerings other than the element for which a 
rate is being established.
    (e) Cost study requirements. An incumbent LEC must prove to the 
state commission that the rates for each element it offers do not exceed 
the forward-looking economic cost per unit of providing the element, 
using a cost study that complies with the methodology set forth in this 
section and Sec. 51.511.
    (1) A state commission may set a rate outside the proxy ranges or 
above the proxy ceilings described in Sec. 51.513 only if that 
commission has given full and fair effect to the economic cost based 
pricing methodology described in this section and Sec. 51.511 in a state 
proceeding that meets the requirements of paragraph (e)(2) of this 
section.
    (2) Any state proceeding conducted pursuant to this section shall 
provide notice and an opportunity for comment to affected parties and 
shall result in the creation of a written factual record that is 
sufficient for purposes of review. The record of any state proceeding in 
which a state commission considers a cost study for purposes of 
establishing rates under this section shall include any such cost study.