Price Cap Financial Model

Some versions of price cap regulation do not focus on identifying an externally-identified X-factor, but base the price control on the revenues necessary to cover the operating costs and provide an appropriate return on investments during the control period. The net present value of the firm incorporates the investments required to meet service quality and expansion targets, as well as projected efficiencies (which can be related to an X-factor). The results of the cash flow model are used to determine the price control.