The ratchet effect in a two lag setting and the mitigating influence of yardstick competition

In order to increase efficiency in the provision of power distribution networks, the German regulator Bundesnetzagentur plans to implement revenue cap regulation together with yardstick competition. Revenue cap regulation could bear the ratchet effect: cost minimization need not to be optimal for the operator who anticipates that his revenue cap will become adjusted according to his cost performance. The regulator could extract all the rent by lowering an operator's revenue cap to the level of costs he revealed to be possible for him to reach. The ratchet effect could be mitigated by yardstick competition at which the level of revenues that is allowed to one operator is tied to the performance of others that are comparable to him. One will only be allowed to accumulate revenues that recover the least cost level that has been adopted within the group of comparable decision makers. In a setting of two sequential regulatory lags, this paper examines the occurence of the ratchet effect and the mitigating influence that yardstick competition has on it.ratchet effect, yardstick competition, regulation

The ratchet effect in a two lag setting and the mitigating influence of yardstick competition

In order to increase efficiency in the provision of power distribution networks, the German regulator Bundesnetzagentur plans to implement revenue cap regulation together with yardstick competition. Revenue cap regulation could bear the ratchet effect: cost minimization need not to be optimal for the operator who anticipates that his revenue cap will become adjusted according to his cost performance. The regulator could extract all the rent by lowering an operator’s revenue cap to the level of costs he revealed to be possible for him to reach. The ratchet effect could be mitigated by yardstick competition at which the level of revenues that is allowed to one operator is tied to the performance of others that are comparable to him. One will only be allowed to accumulate revenues that recover the least cost level that has been adopted within the group of comparable decision makers. In a setting of two sequential regulatory lags, this paper examines the occurence of the ratchet effect and the mitigating influence that yardstick competition has on it.ratchet effect, yardstick competition, regulation

Regulatory observer: international and Australian regulatory developments and decisions

Provides information and updates about international (focusing on the OECD) and Australian regulatory developments and decisions. Summary In this issue: European Commission funding for transport infrastructure International regulatory round-up Australian regulatory round-up. &nbsp

Fusionskontrolle in dynamischen Netzsektoren am Beispiel des Breitbandkabelsektors: zugleich ein kritischer Beitrag zur Kartellrechtsdogmatik des Bundeskartellamts nach Iesy/Ish und TC/Ish und sektorspezifischen Regulierungskonsistenz seitens der Bundesnetzagentur

The working report looks at the actual situation of the German broadband cable market in the context of merger control and sector specific regulation. A crucial problem in dealing with the cable market whether in antitrust cases or in the regulatory context is the precise assessment of the economic conditions, especially the arguable question if the network has still characteristics of a natural monopoly still a common argument in network industries. The report therefore uses the basic concept of the disaggregated identification of network-specific market power. The unique structure of the German broadband cable industry with its horizontal and vertical separation of the distribution network shows a highly contestable market with elements of competitive franchise bidding. On the other hand the cable market is suffering from that separation due to problems of inefficiency, especially in times of dynamic changes in communications with powerful intermodal competitors like Deutsche Telekom AG (DTAG) with an innovative IPTV infrastructure. To this date these market characteristics have been ignored. --Bottleneck,broadband cable,consumer surplus approach,contestable markets,disaggregated approach,efficiency analysis,essential facility,franchise bidding,market definition,market dominance,market power,merger control,network effects,open field approach,regulation,remedies and conditions,telecommunication networks,total welfare standard

Microeconomic Consequences of Exemptions from Value Added Taxation – The Case of Deutsche Post

The exemption for Value Added Taxation (VAT) can be used to pursue distributive objectives. Goods like food, housing, medicine, or infrastructure services (water, telecommunication, postal) are very often partially or totally exempted from VAT. The exemption of infrastructure services had been frequently combined with market entry restrictions. Both instruments should assure the fulfilling of the universal service obligation (USO). VAT-exemption leads to two problems, at least: (i) the expectable financial gain, which can be achieved by the exempted firm, is unpredictable, and (ii) the welfare consequences depend on the prevailing type of market structure (competition, monopoly with or without price discrimination, or dominant firm). The VAT-exemption for German postal services can be seen as an outstanding case study to show the typical consequences. Because of empirical references for intensive use of price discrimination by Deutsche Post AG and strong arguments of Deutsche Post AG as a dominant firm welfare could be increased by abolishing VAT-exemption without abandoning USO.

Grid Integration Costs of Fluctuating Renewable Energy Sources

The grid integration of intermittent Renewable Energy Sources (RES) causes costs for grid operators due to forecast uncertainty and the resulting production schedule mismatches. These so-called profile service costs are marginal cost components and can be understood as an insurance fee against RES production schedule uncertainty that the system operator incurs due to the obligation to always provide sufficient control reserve capacity for power imbalance mitigation. This paper studies the situation for the German power system and the existing German RES support schemes. The profile service costs incurred by German Transmission System Operators (TSOs) are quantified and means for cost reduction are discussed. In general, profile service costs are dependent on the RES prediction error and the specific workings of the power markets via which the prediction error is balanced. This paper shows both how the prediction error can be reduced in daily operation as well as how profile service costs can be reduced via optimization against power markets and/or active curtailment of RES generation.Comment: Accepted for SUSTECH 2014, Portland, Oregon, USA, July 201

Representation of the German transmission grid for Renewable Energy Sources impact analysis

The increasing impact of fossil energy generation on the Earth ecological balance is pointing to the need of a transition in power generation technology towards the more clean and sustainable Renewable Energy Sources (RES). This transition is leading to new paradigms and technologies useful for the effective energy transmission and distribution, which take into account the RES stochastic power output. In this scenario, the availability of up to date and reliable datasets regarding topological and operative parameters of power systems in presence of RES are needed, for both proposing and testing new solutions. In this spirit, I present here a dataset regarding the German 380 KV grid which contains fully DC Power Flow operative states of the grid in the presence of various amounts of RES share, ranging from realistic up to 60\%, which can be used as reference dataset for both steady state and dynamical analysis.Comment: The dataset to which this paper refers can be found in: Mureddu, M. (2016). Representation of the German transmission grid for Renewable Energy Sources impact analysis.figshare. http://doi.org/10.6084/m9.figshare.4233782.v

On the Allocative Efficiency of Ownership Unbundling

We analyze vertical structures where a regulated network operator serves n network users, and the network users compete in quantities for customers. We distinguish two cases: (i) none of the network users are related to the network operator (ownership unbundling), (ii) one of the network users is partially integrated with the operator and the others are disintegrated (legal unbundling). We seek to understand when ownership unbundling leads to lower customer prices, and formalize necessary conditions. In general, legal unbundling implies a less effective regulation, but it reduces the degree of market distortion caused by the difference between marginal costs and average costs (= regulated prices of network usage). We find that the necessary condition is not satisfied for realistic values of the relevant parameters, i.e. legal unbundling leads to lower costumer prices than ownership unbundling in most relevant markets. --Unbundling,vertical integration,Cournot competition