German efficiency gone wrong: Unintended incentives arising from the gas TSOs’ benchmarking

Abstract

The German regulatory framework for gas transmission system operators features a regular efficiency benchmarking that aims to identify inefficient cost components and reduces the allowed revenues accordingly. Using a broad range of data envelopment analysis simulations based on the regulator's data and methodology, this paper identifies problems and potential side effects arising from the efficiency benchmarking. We find that the benchmarking results are highly sensitive to the selection of relevant cost drivers and hence may not reflect true efficiency for all network operators. In its current form, the benchmarking creates incentives to game the system and to favour physical network expansion over optimising network usage, which is undesirable given the uncertain demand outlook for gas networks. In addition, companies can face disincentives to forego specific types of expansion projects, which increases misallocation risks. As a remedy, we suggest to account for misspecification risks and reduce the scope for gaming behaviour when defining and selecting cost driver variables. In addition, network usage should be reflected in benchmarking specifications and regulator-approved network expansions that reduce the efficiency score due to properties of the underlying statistical method could be exempted from the benchmarking procedure.