Depreciation
Depreciation is the allocation of the cost of a physical asset, such as network equipment, as an expense over its useful life.
What is Depreciation?
Straight-line depreciation charges equal amounts each year. The annuity (or compound interest) method used in some regulatory cost models instead calculates a charge that, combined with a return on capital, gives a constant or smoothly changing annual cost; with constant cash flows it produces lower depreciation early and higher later. Regulators choose depreciation methods carefully because they affect the timing of cost recovery in charge controls.