Benchmarking in the new ‘AnreizregulierungsVO’

Benchmarking workshop in

Braunschweig

Dr Anton Burger

Senior Consultant

14 October 2016

Agenda

• topic

• benchmarks in German regulation

• changes through ARegV?

• what is new?

• criteria

• what should benchmarking look like?

• indicative assessment

• good or bad?

14 October 2016 2

What is a benchmark?

a) set independently of the company, usually by using peers

b) can and should be outperformed

Topic

ARegV contains several benchmarks

14 October 2016 3

EOt = KAdnb,t + (KAvnb,0 + (1 – Vt) x KAb,0) + B0/T) x (VPIt/VPI0 – PFt) + Qt + (VKt – VK0) + St

Distribution factor –

individual efficiency

targets (Xind)

Productivity – technical

progress (Xgen)

Costs of equity

Quality

‘Erweiterungsfaktor’

was a benchmark

New: efficiency bonus

Agenda

• topic

• benchmarks in German regulation

• changes through ARegV?

• what is new?

• criteria

• what should benchmarking look like?

• indicative assessment

• good or bad?

14 October 2016 4

‘ARegV-Novelle’

What’s new?

• efficiency bonus if ‘super-efficient’ (§12a)

• no mandatory parameters (§13 Abs. 4 deleted)

• ‘comment’ on data quality with respect to gas and electricity TSO benchmarking

(§22)

• constant returns to scale (Anlage 3, §12)

• transparency and publication of data (§31)

• there will be a report on benchmarking methods in 2023 (§33)

14 October 2016 5

Other relevant news

• new, but not due to ‘ARegV-Novelle’

• in RP3, there will be the first non-administrative setting of the general

productivity factor Xgen

• things that were discussed, but did not make it into the ‘ARegV-Novelle’

• ‘best of 4’ rule for efficiency results remains

• inefficiencies are still being spread over five years and not over three

• no change of 60% lower limit

14 October 2016 6

Efficiency bonus

‘Super-efficiencies’

• efficient beyond normal DEA value

• arithmetic mean of results for both cost definitions (§13 Abs. 2 and §12 Abs. 4a)

• maximum of 5%, spread over five years

14 October 2016 7

Ou

tpu

t

Cost

Efficiency: by how much can you reduce costs

without reducing output?

Super-efficiency: are you above or below an efficiency

frontier that is formed by all companies but you?

Ou

tpu

t

Degree of super-efficiency

Efficiency frontierEfficiency frontier

Degree of inefficiency

100% efficient

Cost

A A

B B

No mandatory parameters anymore

• mandatory factors were

• connections

• area

• line length

• max load

• effect on benchmarking

• discriminatory power of benchmarking will increase a chance that there will

be lower efficiencies on average

• more flexibility for consultant doing the Benchmarking

• new outputs possible (‘energiewende’?)

• risk of a model that has been reduced too far

14 October 2016 8

Other changes

• gas and electricity TSOs

• if not enough data: reference network analysis

• transparency/consultation process

• parameter AND data published?

• benchmarking would be transparent!

14 October 2016 9

‘insbesondere … dass der Bundesnetzagentur vergleichbare Daten von einer

hinreichenden Anzahl an Netzbetreibern in anderen Mitgliedstaaten der Europäischen

Union …nicht vorliegen’

‘die im Effizienzvergleich verwendeten Aufwandsparameter sowie die nach §13 im

Effizienzvergleich verwendeten Vergleichsparameter’

Calculating the Xgen

• productivity change (TFP) and input price change (IP)

• according to ARegV, this has to:

• be state of the art

• use data from network operators from the whole of Germany for at least four

years

• possibly be conducted separately for electricity and gas

• two possibilities now

• data from cost benchmarking (Malmquist index)

• data for the German energy sector

• BNetzA method tried and failed in 2006

• Törnquist indices

14 October 2016 10

Agenda

• topic

• benchmarks in German regulation

• changes through ARegV?

• what is new?

• criteria

• what should benchmarking look like?

• indicative assessment

• good or bad?

14 October 2016 11

Basic idea of incentive regulation

Why benchmarking?

14 October 2016 12

• why have benchmarking?

• stick in addition to carrot?

• incentive to still save costs at end of

regulatory period

• control for non-controllable factors and

changes

• incentive to save costs because of decoupling of

revenues and costs

• Xind expected catch-up is given to customers

• Xgen expected technical progress is given to

customers

Revenues decoupled from costs

Real costs

year 1 year 2 year 3 year 4 year 5 year 6 ...

Possibility of ‘over-recovery

of profits’

Incentives through benchmarking

• if benchmarking is working, companies

still save costs at the end of the

regulatory period, because they know

the benchmarking will uncover all

inefficiencies anyway

• if benchmarking is just seen as a

‘lottery’, companies will try to get away

with higher costs and there is no

additional incentive to save costs

Robust

Also important

Benchmarking/regulation should be robust and fair

14 October 2016 13

No strong variation of results

if you vary:

• sample

• time period

• model specification

Data quality

Correct application of methods

Enough datapoints

Fair

correct modelling of

economic reality

Correct economic model (over time)

Open consultation

Transparency

Agenda

• topic

• benchmarks in German regulation

• changes through ARegV?

• what is new?

• criteria

• what should benchmarking look like?

• indicative assessment

• good or bad?

14 October 2016 14

Indicative assessment of Benchmarking under the new

‘AnreizregulierungsVO’

So, is this now good or bad?

14 October 2016 15

Kostenbenchmark, Xind Super-efficiency bonus Messung Sekotorealer

Produktivität, Xgen

Incentive • BM increases incentive to cut

costs

• speed of how quickly efficient

costs are enforced is about

distribution and not necessarily

incentives

• additional incentive

• but also additional incentive for

gaming

• only distributional effect

Robust • data and method ok, yet there were issues

• transparency increases robustness

• ÜNB and FNB MNA

• data only for whole energy

sector

• volatile because of events such

as nuclear phase-out, oil price

swings, ‘energiewende’

‘Fair’ • economic model may change

over time (‘energiewende’)

• no fixed parameters may

increase flexibility

• incentive for good performance

principle of market economy

• but more incentive for gaming

• values derived from data of

whole energy sector used for

networks

Financial

effect

• +/- 1% efficiency result means 1% bonus or penalty on

influenceable costs (KAvnb,0 +KAb,0)*1%

• +/- 1% Xgen means 5 times 1%

penalty (5.1%) on

influenceable costs

Contact:

Dr Anton Burger

+49 (0) 30 7675 99101

anton.burger@oxera.com

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