Issues in the Application of Annuities

Issues in the Application of Annuities

  • Information Paper
  • Project Information

The QCA released the Issues in the Application of Annuities information paper on 4 February 2014.

This paper illustrates various examples of the use of annuities in economic regulation. Both the annuity approach and the RAB building blocks approach can be defined to achieve the NPV=0 principle, but the resulting annual prices may be different.

The paper debunks many misconceptions associated with annuities, including the proposition that the use of annuities would lead to lower prices. 

The paper also illustrates that the application of rolling annual annuities may result in under-recovery of sunk asset cost, and introduces an alternative known as the aggregated rolling annuity.

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The paper examines the two common approaches for recovering the sunk cost of regulated assets – the regulated asset base (RAB) building blocks approach and the annuity approach – and how they can be defined to achieve the financial capital maintenance principle (also known as NPV=0 principle).

The paper considers a number of issues associated with the application of annuities, including:

  • the use of capital annuities to recover the cost of existing assets or to fund new assets
  • the application of renewals annuities, misconceptions associated with annuities
  • potential short-comings associated with rolling annual annuities.
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