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Small number, large effect: the productivity factor for gas networks in Germany

Oxera submits a report on the gas sector in Germany to the regulator as part of a regulatory review.

The German Federal Network Agency (Bundesnetzagentur) has produced a preliminary determination of the productivity factor X for gas networks in Germany. The aim of the productivity factor is to ensure that regulated networks are compensated for their efficiently incurred costs.
Under the German incentive regulation for gas networks, the allowed level of operators’ revenue is determined by a productivity factor, the so-called general X factor (or Xgen). Together with the retail price index (RPI), this factor is intended to mimic competition, and the initial revenue level is escalated annually by RPI – X. The RPI – X term ensures that gains from technological progress and changing input prices are passed on to final network customers via lower prices for network services.
Germany’s utility association, BDEW (Bundesverband der Energie- und Wasserwirtschaft), asked Oxera—including our Associates, Professor Subal C. Kumbhakar and Professor Emmanuel Thanassoulis—to assess the regulator’s methodology in determining the X factor. Following our advice, the regulator’s preliminary decision has adopted part of its previous methodology. A final decision was reached in January.
The report (Executive Summary in German, detailed slides in English) has been submitted to the German regulator and can be downloaded by selecting the ‘download’ button.