Incentive Regulation: Evidence From German Electricity Networks

Abstract

We propose a difference-in-differences (DiD) approach to estimate the impact of incentives on cost reduction. We show theoretically, and estimate empirically, that German electricity distribution system operators (DSOs) incur higher costs when subject to a lowerpowered regulation mechanism. The difference is particularly significant (about 7%) for firms in the upper quartile of the efficiency distribution, a pattern which is consistent with the pooling of types under the threat of ratcheting.JEL Class K23, L51, L94, L98, D24, D82 for valuable comments and suggestions. The usual disclaimer applies.

Hayekian complexity and the role of regulation in electricity markets

“…Since the monitoring costs are always positive, regulated firms always find ways to adapt and use interdependencies within the electricity system. Incentives provided by the regulator become less attractive to distribution companies towards the end of the implementation period, especially for capital expenses, creating issues such as the ratchet effect and x-inefficiency (Hellwig, Schober, & Cabral, 2018). More importantly, utilities and regulators cannot evade the knowledge problem that arises from an increasingly complex distribution market.…”

“…It signals to the utilities that they do not have to improve their efficiency, as there is no clear way of measuring productivity increases apart from relative comparisons. See Hellwig et al (2018) for an empirical analysis of the ratchet effect in the German electricity markets. 4 'Aggregator' is a relatively new concept for electricity markets, even though it has been used in finance for a long time.…”

Unbundling, Regulation and Pricing: Evidence from Electricity Distribution

“…8 A price set too high would result in a revenue above the revenue cap that 6 A detailed description of the regulation of grid charges in Germany's electricity distribution sector is provided by the Federal Network Regulation Agency: www.bundesnetzagentur.de/EN/Areas/Energy/Companies/ GeneralInformationOnEnergyRegulation/IncentiveRegulation/IncentiveRegulation_node.html, accessed on September 27, 2018. Also, detailed information can be found in Hellwig et al (2018).…”

“…Some utilities unbundled even later because they passed the threshold of 100,000 connected customers, either through organic growth or following a merger, and some even unbundled voluntarily. 11 see Hellwig et al (2018). Year 2000 2004 2005 2006 2007 2008 2011 2013 no LU LU of DSOs 2 1 12 5 19 1 3 3 77 The data on grid charges are composed of a fixed component and a variable part that depends on the usage level.…”

Unbundling, Regulation, and Pricing: Evidence from Electricity Distribution

“…A detailed description of the regulation of grid charges in Germany's electricity distribution sector is provided by the Federal Network Regulation Agency: www.bundesnetzagentur.de/EN/Areas/Energy/Companies/ GeneralInformationOnEnergyRegulation/IncentiveRegulation/IncentiveRegulation_node.html, accessed on September 27, 2018. Also, detailed information can be found inHellwig et al (2018).7 For the setting of the revenue cap, the regulatory agency examines a DSO's costs for operating the grid, as well as other costs that are not under the immediate control of the DSO (e.g. legal obligations, concession fees, business taxes, upstream transmission charges, investments related to network operations, extra costs of underground cabling, or collective agreements about nonwage and social benefits).8 Before a new grid charge enters into force, it has to be reported to the regulatory authority.…”