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Incentive Regulation: Evidence From German Electricity Networks

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  • Michael Hellwig
  • Dominik Schober
  • Luis Cabral

Abstract

We propose a difference-in-differences (DiD) approach to estimate the impact of incentives on cost reduction. We show theoretically, and estimate empirically, that German electricity distribution system operators (DSOs) pile up more costs in the year used to determine future prices when subject to a lower-powered regulation mechanism. The difference is particularly significant (about 10% of total cost) for firms in the upper quartile of the efficiency distribution, a pattern which is consistent with the pooling of types under the threat of ratcheting. In light of heterogeneous network reinforcement across DSOs due to local wind and solar power expansion, cost inflation will particularly hit already hard-struck DSOs’ customers.
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Suggested Citation

  • Michael Hellwig & Dominik Schober & Luis Cabral, 2018. "Incentive Regulation: Evidence From German Electricity Networks," Working Papers 18-03, New York University, Leonard N. Stern School of Business, Department of Economics.
  • Handle: RePEc:ste:nystbu:18-03
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    References listed on IDEAS

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    Cited by:

    1. Heim, Sven & Krieger, Bastian & Liebensteiner, Mario, 2018. "Unbundling, regulation and pricing: Evidence from electricity distribution," ZEW Discussion Papers 18-050, ZEW - Leibniz Centre for European Economic Research.

    More about this item

    JEL classification:

    • K23 - Law and Economics - - Regulation and Business Law - - - Regulated Industries and Administrative Law
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • L98 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Government Policy
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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