In this regulatory filing on behalf of the German energy association BDEW, a NERA team led by NERA Director Tomas Haug reviews the economics behind the regulator’s proposal to cut the allowed rate of return on equity investments in new electricity and gas networks from a current value of 9.05% to 6.91%.

According to the ordinances governing rate setting in Germany the regulator is required to have regard to i) international rate benchmarks, ii) conditions on national and international capital markets, and iii) observable and quantifiable risks. The NERA team finds that the regulator’s proposals fall short on all three dimensions:

• Placing the allowed rate of return in the bottom three in Europe and around 1.5 percentage points below the average in comparable low risk Western European countries;

• Ignoring recent evidence from the German National Bank, the academic literature and other regulators on appropriate responses to current abnormal financial conditions (discussed in an earlier NERA paper);

• Contradicting the regulator’s earlier findings in a telecommunications rate case concluded earlier this year.   

The regulator is expected to publish the final determination in October. During previous rate cases the regulator has shown a willingness to incorporate consultation feedback and to increase rates between draft and final stage while an unchanged result is likely to leave investors and utilities considering litigation.

NERA regularly advises utilities, investors and regulators on cost of capital issues as well as providing economic support during regulatory litigation cases.

The NERA report (in German) is available on the BDEW webpage.