Incentive regulation in Germany prescribes a revenue cap for distribution and transmission network operators in the gas and electricity sector. One of the revenue cap’s determinants is an RPI-X component, the “general sectoral productivity factor” (Xgen). The ordinance setting out incentive regulation “Anreizregulierungsverordnung” (ARegV) prescribes that the regulator Bundesnetzagentur (BNetzA) must determine the Xgen using methods that “conform to scientific standards” as of the third regulatory period (i.e. as of 2018 for gas networks and as of 2019 for electricity networks).

Following consultation periods, BNetzA set the Xgen at 0.49% for gas networks in February 2018 and at 0.90% for electricity networks in November 2018. BNetzA determined these Xgen figures by estimating:

• Changes in the productivity of network operators;
• Changes in input prices of network operators; and
• Changes in the CPI.

BNetzA based its estimate of productivity changes on two candidate figures for each sector, one based on the Törnquist index, the other based on the Malmquist index. For each sector, BNetzA used the lower of the two candidate figures as a basis for its final decision. For gas networks, the final decision was based on the Törnquist index. For electricity networks, it was based on the Malmquist index.

Law firm Flick Gocke Schaumburg (FGS) commissioned NERA Managing Director Tomas Haug, Associate Director Dominik Hübler, and Consultant Dr. Adjmal Sirak to assess BNetzA’s determination of the Xgen on behalf of a group of German electricity and gas network operators. The central task of the assignment was to check whether BNetzA’s determinations conform with scientific standards, as required per the ARegV ordinance.

The NERA team reviewed BNetzA’s methodological approach and replicated the calculations of the Törnquist index for gas networks and of the Malmquist index for electricity networks. For both sectors, the NERA team identified methodological flaws in BNetzA’s approach to calculating the Törnquist and Malmquist indices. The team also identified issues that call into question the reliability of the input data to BNetzA’s calculations. BNetzA did not attempt to quantify the uncertainty in its estimates (e.g., through calculation of confidence intervals or tests of statistical significance).

The NERA team concluded that neither the determination for gas networks based on the Törnquist index nor the determination for electricity networks based on the Malmquist index conform with scientific standards.

Several hundred gas network operators appealed BNetzA’s decision on the Xgen at the regional higher court of Düsseldorf (OLG Düsseldorf), and a NERA report was submitted as supporting evidence. The court appointed an academic expert to review BNetzA’s decision on gas. The expert identified several issues with BNetzA’s determination of the Xgen and found that BNetzA had not conclusively shown that its determination conforms with scientific standards, thereby confirming NERA’s conclusion. OLG Düsseldorf overturned BNetzA’s determination of the Xgen for the gas sector in July 2019. BNetzA has appealed this decision at the Federal Court of Justice (BGH). BGH’s decision is still pending.

Meanwhile, several hundred network operators have also appealed BNetzA’s decision on the Xgen for electricity at OLG Düsseldorf, and a NERA report was submitted as supporting evidence. We understand OLG Düsseldorf will postpone its decision on electricity until BGH has reached a decision on gas.