§ 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 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 § 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 § 51.511.

   (1) A state commission may set a rate outside the proxy ranges or above
   the proxy ceilings described in § 51.513 only if that commission has
   given full and fair effect to the economic cost based pricing
   methodology described in this section and § 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.

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