The Capacitor value is dependant on the CURRENT you are intending to draw - which will also impact on the current rating of the Zener D2 and VDR1. 470nF is good for about 25/30mA. I find formulas in this case don't hold up too good... simply take your Capacitor and put it across your AC Supply in series with an AC Ammeter. That'll give you a reasonable idea of absolute maxium current. Next step is to build your circuit, and then load the Zener until the input voltage at the Kathode starts to colapse below the holding value. That then tells you how far you can sensibly go with your selected Capacitor.

Without the Zener Diode (D2) and D1 combination, off-Load, the Voltage at the Anode of D3 will quickly reach AC Supply potential (eg 240v) and the poor little 78L05 (which has a 30v max input or thereabouts) and everything else on the board would be history. The Zener clamps the off-load voltage to a safe level. D1 stops the Zener from popping. This design had to be reasonably failsafe, so there is secondary protection in the form of VDR1 should the Zener fail. If Capacitor C2 failed, the combined current through D1, D2 and VDR1 would quickly blow the fuse.

At least that's the theory, nobody's died yet as far as I know (I've been told to refrain from killing off clients as apparantly it impacts on repeat business).