The financial capital maintenance (or NPV=0) principle refers to the requirement that the present value of expected regulated returns for an asset over its economic life should be equal to the initial asset value or purchase cost. This principle forms the basis for the building blocks model of regulation as applied by the QCA.
A smoothed revenue or price path is typically obtained by regulators adjusting the building blocks annual revenue requirement.
This project analyses the approach that we have applied for ensuring the NPV=0 principle is met, and methods of price smoothing that have been applied by us.
The paper shows how different depreciation profiles can impact prices and discusses the issue of the optimal pattern of prices over time.