PROSPECTIVE ENTRANTS into local exchange telephony advocate that the prices for unbundled network elements be set equal to the total element long-run incremental cost (TELRIC) or that the prices for services be set at their total service long-run incremental cost (TSLRIC) per unit. To be sure, TSLRIC or TELRIC pricing is simple to understand. It would be a mistake, however, to equate simplicity with accuracy. Although employing a simple pricing mechanism may result in some savings in administration, those possible cost savings are trivial compared with the short-term and long-term market distortions that would be certain to result from taking the easy way out. TSLRIC or TELRIC pricing is overly simplistic because it is simply the wrong pricing policy.

The problem with TSLRIC or TELRIC pricing generally is that it does not equal economic costs. Thus, such pricing creates economic inefficiencies. The problems with TSLRIC or TELRIC pricing outlined below stem from that basic defect. Those defects are evidently not obvious, for a number of distinguished economists have overlooked them.

To avoid redundancy, and because the economic analysis is the same in either case, we subsume our critique of TELRIC pricing within that of TSLRIC pricing. There is an important difference between TSLRIC and TELRIC that should be noted, however. The FCC introduced the term TELRIC pricing in August 1996 in its First Report and Order to emphasize the costs of providing unbundled network elements.