Discussion Papers

Oliver Franz, Daniel Schäffner, Bastian Trage

Grundformen der Entgeltregulierung: Vor- und Nachteile von Price-Cap, Revenue-Cap und hybriden Ansätzen
Nr. 267 / August 2005


In the context of the implementation of the European Union Directives for the internal market of electricity (2003/54/EC) and gas (2003/55/EC) the introduction of an incentive regulation is prepared for these two markets in Germany. The intention of the tariff regulation for the use of electricity and gas networks is an effective, fair and discrimination-free network access and thus the regulation of transport and supply of energy.

First a general theoretical description and analysis of incentive regulation mechanisms with their particular elements is given in this article. This is done on the basis of an analysis of a company with only one product which helps to point up the fundamental framework of an incentive-orientated tariff regulation. Secondly, price caps, revenue caps and hybrid concepts, seen as basic forms of tariff regulation, are analysed and their advantages and disadvantages are discussed. With the help of the the  hybrid concepts already mentioned, it is attempted to adjust the effects of changing quantities which can be seen using price caps or revenue caps and to thus generate additional advantages. The individual design of the single elements directly affects the incentives for efficient behaviour. Different combinations of the mentioned elements lead to stronger or weaker incentives for the regulated utilities. During the entire arrangement it has particularly to be considered that only network tariffs are to be regulated.

In the further description of an incentive-orientated regulation for companies with more than one product, it is on the one hand analysed which products and services are offered by network operators as a monopolicstic player. On the other hand it needs to be resolved whether (successfully unbundled) network operators, which have no control of the energy price, have the possibility of extending their turnover since this is mainly dependent on the decision of the customers. The described incentive-orientated regulation concepts consist of different procedures and functioning methods which equally lead to different behaviours of the enterprises and therefore to different results. Each concept has its advantages and disadvantages, which can partly only be seen in the interplay of characteristics and structures of the regulated market. Concerning welfare theory a price cap regulation is to be preferred to a revenue cap regulation because of its allocative characteristics. According to legal guidelines a price cap as well as a revenue cap regulation method should be connected with the demand for quality goals, as soon as the availability of data makes this possible, since reductions in quality usually bring about cost reductions and thus profit maximisations.

When deciding for one specific method relevance and significance of theoretical and practical aspects of the regulation are to be weighed against each other. At this point of the analysis only a regulation by means of an average revenue cap appear as a procedure with substantial weak points.

In the fourth chapter the arrangement of an incentive-orientated regulation regime for energy networks is represented in more detail regarding the two areas of electricity and gas. Due to systematic reasons an approach designed along the same lines and thus well-rounded is to be aimed at for both areas. At this point an all-embracing analysis can be carried out for the choice of an appropriate index, the length of the regulation period as well as the consideration of quality provisions. Only the addition of a glide path mechanism can be of advantage already in the introduction phase for the incentive regulation of both energy markets.

Based on the previous appraisal the introduction of a price cap regulation for the gas market is regarded as the overall most practicable solution. This applies especially on the condition that the quantity demanded is more or less exogenously given and can be hardly influenced by network operators. For the gas market the regulation of the network tariffs can be executed on the level of local distribution net operators by means of a price cap. Concerning the transmission lines price caps as well as revenue caps are possible to apply. [Full text available in German only]

Diskussion Paper is available for download.

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