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 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.