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Inefficient But Indispensable – How to Regulate Network Operators Which Cannot (Timely) Improve their Efficiency?

Thilo Richter

Price regulation of energy network system operators envisages to compensate a lack of competition and to achieve that (natural) monopolists offer their services at the lowest price possible. Modern regulation systems introduce efficiency benchmarking systems to identify the cost of an efficient network system operation. Only these costs are accepted to be passed on to customers. The cost base of energy network operators derives to a large extent from long term infrastructure investments which cannot be revised. Thus, these operators can find themselves in an inefficiency crisis – unable to improve their efficiency to the level demanded by the regulator. This article discusses how regulatory systems/regulators should respond to this critical situation, namely, whether they should risk the operator stumbling into financial difficulties or waive the principle that customers should not pay for inefficiency by allowing higher tariffs. In this context, the article describes the approach under German energy regulation law.

Dr. Thilo Richter, Lawyer at Freshfields Bruckhaus Deringer LLP, Cologne.


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