Held a short lunchtime session at our Benchmarking Workshop in Braunschweig

1. Benchmarking in the new
‘AnreizregulierungsVO’
Benchmarking workshop in
Braunschweig
Dr Anton Burger
Senior Consultant
14 October 2016

2. 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

3. 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

4. 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

5. ‘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

6. 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

7. 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
Output
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?
Output
Degree of super-efficiency
Efficiency frontierEfficiency frontier
Degree of inefficiency
100% efficient
Cost
A A
B B

8. 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

9. 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’

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. Contact:
Dr Anton Burger
+49 (0) 30 7675 99101
anton.burger@oxera.com
www.oxera.com
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