Can One Person Company Increase OPC Investments

Investment incentives in the regulation of energy infrastructure

In this article, relevant international experience of investment regulation is evaluated. These regulations try - more or less comprehensively - to come to a more integrative approach of incentive regulation against the background of relevant investment needs. The concrete approaches, including the new British system RIIO (Revenue using Incentives to deliver Innovation and Outputs), are quite different and their suitability depends on the level of development of an incentive regulation and the emphasis on efficiency or effectiveness aspects.


The aim of investment regulation is to counter uncertainties on the part of investors so that they can realize economically sensible investment levels. Investments can be cautious if their scope is not adequately taken into account by the revenue target and / or the financial resources from new investments only flow back with a delay within an ongoing regulatory period, so that the expected return on equity is influenced

Rate-of-return adders are frequently used internationally. They set direct incentives by directly increasing the permissible revenues through various instruments. Adders are mainly used in the context of cost regulation, e.g. in the USA, but they are also conceivable in the case of incentive regulation. Through Adders, specific financial improvements are made in investments. The main design features are:

  • an increased return on equity for new investments,
  • the full reimbursement of approval costs, if these are proportionate,
  • Tax reductions,
  • increased depreciation options.

In the USA, the responsible regulator decides on the application of these instruments by examining them on a case-by-case basis. Current cases can be outlined via the practice of the Federal Energy Regulatory Commission. The network operators Otter Tail Power Co. and Great River Energy were reimbursed in full for the costs of systems under construction upon application. The Baltimore Gas & Electric Company and the Public Service Electric and Gas Company received a rate-of-return-adder of 150 basis points, i.e. 1.5 percentage points higher than the otherwise permissible return on equity. There are comparable elements in Europe, e.g. in the French gas network regulation. Similar instruments are used in Italy, where individual assessments were also carried out. The surcharges initially amounted to 125 basis points and have now been increased to 300 basis points for certain systemically important investments

Increasing the return on equity increases the incentive to invest in the networks. Adders are basically conceivable within the framework of an incentive regulation, in particular by increasing the permitted return on equity and thus the applicable total return on capital for selected projects. However, it remains unclear whether the selected higher return on equity is the right one. High surcharges can be due to industrial policy goals, they may also be explained by a high competitive risk of individual projects. Adders implicitly set incentives for the preferential use of capital, which in principle resemble the effect described by the Averch-Johnson effect.3 This is based on the fact that investments receive a return that is better than the market rate. In principle, there should be an economic justification for this.

Investment budgets

The regulator can also approve investment projects ex-ante and temporarily treat their costs separately from the incentive regulation. In Germany, investment budgets are used for this purpose in order to reimburse the cost of capital (CAPEX) for network expansions and integrations more quickly. Linking applications for investment budgets if the investment costs concerned are not covered by other instruments of the expansion factor. The regulator checks extensively whether the investments made are necessary and efficient. The examination consists of (i) a technical description of the project including timing, (ii) proof of the (technical) necessity, (iii) technical calculations that prove the necessity, (iv) an economic evaluation of the project (including OPEX) , (v) Analysis of possible alternatives and description of the interaction with known investment projects and (vi) a detailed description of the preferred alternative.

The approved cost of capital will be included in the capital base for the next regulatory period and will then be checked again. The transmission system operators use the cautious E3 benchmarking model5, which does not question the network topology. Since the distribution networks can be better compared, the efficiency is assessed differently. The regulators in Germany assess on the basis of two cost bases and two statistical methods, whereby the best result is used. This approach is also cautious, but it does not make the assumption that the network topology itself is accepted. It therefore harbors greater uncertainties regarding the economic attractiveness of an investment.

With investment budgets, the financial resources flow back to the investor earlier, since otherwise the investment costs would not be recognized until the next regulatory period.6 In this way, the regulator sets investment incentives. In Germany attempts are being made to only support expansion and restructuring investments, which is not easy to implement in the delimitation of replacement investments. Investment budgets also give the regulator a better insight into the cost structures. However, depending on the detailed inspection, they can involve considerable bureaucratic effort. In Germany, investment budgets are also limited in time and their incentive effect is overlaid by the efficiency assessment of the benchmarking, in which the new investments in the following regulatory periods are also included (i.e. new and old investments are assessed together) .7

Financial micro-incentives

Rate-of-return adders and investment budgets are based on verified costs or planned costs. The network operators generally have an incentive to inflate the indicated costs. In Germany, this information advantage is countered by benchmarking. At the same time, such a comparison process, which is intended to depict the market result, harbors a regulatory risk because the result is unknown to the individual network operator. A relevant uncertainty arises above all if ex post cost-effective decisions of network planning that have already been made are questioned. Alternative instruments for reducing information asymmetry, such as sliding scales or menu regulation, have therefore been developed in the regulatory economy.

A sliding scale works as follows, for example: The regulator estimates the expected costs and sets a band around this target value, identified by the columns "Profit cap" and "Loss limit". The cap describes the maximum profit a network operator can achieve by undercutting costs. The loss limit describes the maximum loss he can suffer if target costs are exceeded.8 In addition, the degree of distribution of the advantages / disadvantages of cost over- and under-undercuts between the company and the consumer is described using allocation factors. If the actual costs are below the expected value, the company only has to partially reduce its revenue expectations, i.e. it has an advantage in being below costs. At the same time, by lowering costs, part of the efficiency gain is passed on to the end user. If, in the opposite case, the value is above the expected value, the company can adjust some of its revenue expectations upwards. In this respect, a share of the risk is assumed by the end user. All values ​​outside the defined maximum profits / losses lead to a complete passing on to the end user, i.e. no further changes for the company side. In principle, other configurations are also conceivable outside of the areas defined by the cap and loss limit.

Table 1 with the sliding scale for system services in Great Britain clearly shows that a bonus-malus system is defined here by cost targets set ex ante. The last column denotes the network operator's realized gains or losses (NGET) that lie within the framework drawn by the cap and loss limit. The development shows that - if the cost targets were not reached - the targets were often adjusted downwards (comparison of the columns “realized costs” and “target value”). However, the expansion of renewable energies in recent years has led to an upward adjustment again

Table 1
Sliding-scale incentive mechanism for National Grid Electricity Transmission (NGET)
yearTarget valueDistribution factorsProfit capLoss limitRealized costsRealized profit / loss
 (Million pounds)Bottom (%)Above (%)  (Million pounds)(Million pounds)
2006/7No agreement made495-
2009/10571,43 - 601,432515151544115

Source: For illustration see Ofgem, Consultation ef: 14/09 National Grid Electricity Transmission and National Grid Gas System Operator Incentives from April 1, 2009, London, February 2009, p. 12, /WhlMkts/EffSystemOps/SystOpIncent/Documents1/Final%20proposals%20consultation%20document.pdf.

An economically demanding further development is the menu regulation, which combines several sliding scales. They are linked in such a way that a risk-neutral company is best positioned if it chooses the scale that has the expected costs as its cost target. This can be explained using a table that applies to distribution network operators in Great Britain (see Table 2). The tableau is based on expert assessments and cost models that evaluate the company's planned costs. The first line describes the relationship between the planned costs of the network operator and the assessment of the regulator. This information is used to define an incentive scheme which, in addition to an allocation factor in the event of undercutting (efficiency incentive), contains a bonus-malus term as an additional financial incentive, as well as an upper limit for the permitted (approved) costs. The characteristics of these elements depend on which sliding scale - i.e. which column - is selected. This choice is made based on the final specification of the planned costs and their ratio in comparison to the assessment of the regulator. Finally, the numbers in the matrix represent the net gains and losses on investments and reflect the penalties and rewards for budget over and under budget. A negative / positive number actually means that a lower / higher return on capital than normally allowed is approved via the menu.

Table 2
Menu regulation for distribution networks in Great Britain
Cost estimation (VNB / PB experts)100105110115120125130135140
Efficiency incentive40%38%35%33%30%28%25%23%20%
Extra income2,52,11,61,10,6-0,1-0,8-1,6-2,4
Allowed expenses105106,25107,5108,75110111,25112,5113,75115
Realized expenses         

Source: Illustration based on Ofgem: Electricity Distribution Price Control Review; Policy Paper, Ref. 159/08, London 2008, Table 1, Appendix 9, p. 110.

The matrix shows, for example, that a company with an expected value of costs that corresponds exactly to the regulator's assessment (or is 5% higher), i.e. a ratio of 100 (105), is best if it does the first ( second) column selects. So in this case it gets an addition of 4.5 (2.6). If the expected costs were given higher, i.e. if a column further to the right was selected, the situation would be worse for the same realized costs (comparison within the line of the realized costs). Falling short of the expected costs is additionally rewarded.10 From a game-theoretical point of view, a company has the incentive to reveal its true expected costs. This is a dominant strategy for a risk-neutral company, i.e. it is clearly the best choice. An evaluation of the sliding scales chosen by the distribution network operators within the menu regulation shows that companies often tend to estimate higher planned costs than the regulator, but that these cost targets are usually undercut because they do not consider all possible cost-cutting potentials. In principle, such a result does not contradict the theoretical background, because cost reduction possibilities only become fully apparent during implementation or the companies are risk averse.

The advantage of both approaches is an attractive return if the set cost targets are undercut. They also contain clear assessment goals and thus avoid ex-post uncertainties. With menu regulation, the network operator endogenously weighs up the risk in the selected revenue cap regulation by choosing a specific sliding scale that is either more cost-oriented (i.e. choosing a column further to the right) or revenue-oriented (i.e. choosing a column further to the left). A basic problem with the design of the menu, however, is that an initial estimate of the expected costs must be obtained when dimensioning the panel. This may not be easy and restricts the scope to financially comprehensive and sufficiently comparable investment projects. The dimensions of the tableau determine the specific financial incentives. The question arises as to how suitable incentives can be set when starting menu regulation without an external assessment of the target cost level. Suitable cost levels could be determined e.g. through tenders. However, tenders cannot be used if their results are not implemented. At best, they should be seen as an alternative instrument for awarding investment projects.


Investment incentives can also be set through negotiations if attractive conditions are individually agreed with the investor. Such incentives can be certain adders, bonus-malus schemes or other advantageous conditions. Negotiations are attractive when the cost verifiability is poor or the regulatory costs are very high, e.g. due to significant differences between the individual network operators. In the USA and Canada, negotiations are a regulatory instrument that is not infrequently used. The consumer side is represented by consumer councils. In US regulation, the role of the Office of Public Counsel (OPC) is particularly noteworthy.11 The OPC is a consumer representative that is consulted as an advocate for consumers in tariff hearings or in individual decisions by the regulator. In Florida, the OPC has resulted in significant price reductions over the past 25 years. The results came about in individual negotiations with the network operator and were forwarded to the regulator for review and approval. In the UK, too, the new regulatory regime will involve greater stakeholder participation. The main aim is to treat the interests of network operators and stakeholders more individually. 12

The importance of investment planning

Investment planning is a procedure in which the necessity and economic advantages of individual expansion options of the networks are comprehensively examined. Such tests are called regulatory tests. Investment planning can indirectly be seen as an incentive instrument to the extent that it increases the investor's investment security within a regulated framework; they belong to the broader framework for setting investment incentives and are upstream of it.

Regulatory tests are used in Australia, New Zealand, and the United States. They represent an extended cost-benefit analysis of the alternatives for network expansion planning, which is intended to help find the economically best alternative, whereby security of supply is explicitly taken into account. In Australia, this takes place in two steps, in which a distinction is made between tests from the point of view of security of supply and economic tests. An analysis of the regulatory test in Australia13 shows, with regard to the integration of these two elements, that the security of supply is mainly given by the fulfillment of technical specifications, while the economic part contains a large number of criteria, such as the cost and benefit categories that are used when determining the Present values14 of different alternatives can be used as an essential decision-making criterion.15 If investments have passed the regulatory test, they can be approved, whereby the alternative of non-expansion is also assessed. In the economic analysis, dynamic effects (especially changes in competition) can generally be taken into account, but this is still not common practice today. 16

Regulatory tests represent an evaluation tool that provides guidance on the efficiency of investments, as alternatives to network expansion planning that are not recognized as meaningful are eliminated. Thus, they have a selection effect, whereby the concrete cost efficiency is still little discussed. The further examination can then focus solely on cost efficiency, e.g. through the use of suitable benchmarking models such as E3-Grid.All in all, such a procedure provides the network companies with increased investment security, since the network expansion planning can be regarded as accepted and set after the test has been carried out. Regulatory tests are obviously limited to economically significant investments.

Incentives for Merchant Investors

In principle, investments can also be made by merchant investors, i.e. by private investors who benefit from price arbitrage and whose tariffs are not regulated. Such private investors can be integrated into the network planning. The organization at PJM in the USA shows, for example, how a combination of regulation and merchant investments can be designed. PJM operates an independent system operator (ISO) model that gives the ISO far-reaching decision-making powers. A three-step process is used here: 17

  • In the first stage, data on the bottleneck costs are collected. If the costs, measured using the product of the price differences between two market areas and the amount estimated for price compensation, are higher than the network expansion costs, then the network expansion is economically attractive.
  • Potential merchant investors can then submit offers for expansion within a year.
  • If no attractive offer can be found during this time, the network will be expanded by the network operator himself.

This scheme increases investment security and creates an investment incentive over and above the price difference. In addition, due to the external effects on electricity transport in the transmission networks connected to the merchant lines, integration is also attractive from a network point of view. The Murraylink case from Australia shows the advantages of such a pre-integration of private investors. Murraylink is an unregulated 220 MW direct current cable approximately 180 km long that connects Victoria and South Australia. During the construction phase of Murraylink, a regulated interconnector was approved at the same time, which undermined the business model by significantly reducing the possibility of making profits via arbitrage through the expansion of capacity. As a result, Murraylink applied for a conversion from unregulated to regulated status, which was also approved by the Australian regulator. Such a conversion is to be advocated if the initial planning of a merchant line was economically convincing, which should not have been the case with Murraylink.18 Even the regulated interconnector would not have been advocated in an economic assessment, if in addition to the pensions of the consumers that the producers would have used.

This case and others from Europe19 make it clear that the economic attractiveness of merchant investments is based on the constancy of sufficient price differences between individual market areas. Merchant Lines are therefore subject to the risk of developing alternative connecting lines, which means that the required return on capital for risk compensation is increased. At the same time, Merchant Lines will not endeavor to build connection capacities that lead to full price equalization, because this also makes the business model unrealizable. It can therefore be attractive to involve an independent system operator (or the transmission system operator) in the planning.

Efficiency versus effectiveness of the instruments

In practice it is important whether the efficiency or effectiveness of an instrument is emphasized. With regard to the demand for efficiency, the introduction of micro-incentives is attractive, 20 if suitable target values ​​can be determined ex ante and the effort required for this is reasonable. Sliding scales can be well specified for individual cost items, such as the system service costs, but also for individual informative processes such as the forecast of market development. If the economic backgrounds of investment projects are sufficiently comparable and the dimensions of the projects are sufficiently large, a menu regulation can be used. The design of a menu is complex and requires a good understanding of costs. Menus can be used primarily for larger investment projects in which the target costs can be estimated sufficiently well, i.e. processes that are based on comparable processes across different network operators. A menu regulation is, however, incompatible with a benchmarking, since target values ​​are set in two ways, the incentives of which are superimposed.

It is difficult to assess the efficiency of the rate-of-return adders that are to be assessed as effective ad hoc. In principle, their efficiency depends on the rigor of the regulator's previous cost review. In addition, there is the question of the adequate height of the adder. Adders therefore harbor the risk of control errors from an efficiency point of view. Granting investment budgets also says little about their efficiency. However, they can be combined with additional incentives for the efficient implementation of the investment project, e.g. with sliding scales. In addition, the focus is clearly on improving the return flow and not on an immediate increase in the return on capital. From an efficiency point of view, benchmarking helps in addition to an investment budget, but this can be associated with an assessment uncertainty for the regulated company and thus reduce the effectiveness of the instrument.

Micro-incentives, investment budgets and rate-of-return-adders are instruments that do not answer whether an investment is necessary. If this question is not left to the market, the state can assume a decision-making process as a further step. Such a consideration makes sense for economically significant investments, i.e. especially in the context of transmission networks. Regulatory tests can be an important tool for regulators in the case of extensive investments, as they provide basic information about economic advantages.

Benchmarking and Government Risk

The network operator not only ensures that the capital employed pays appropriate interest, but also that the investment is secure. In addition to cost control, this can also be seen from the efficiency comparison. Benchmarking has two fundamentally important evaluation elements:

  • the determination of the relative efficiency compared to other network operators and
  • the interaction of the investment with the entire assessment framework in benchmarking, from which the question arises as to how an investment changes the efficiency assessment.

At the same time, benchmarking offers the opportunity to exploit efficiency potential and increase profits. It sets efficiency incentives for unavoidable investments, but causes reluctance to invest, the assessment of which by the regulator is associated with uncertainties from the company's point of view. However, this can adversely affect the timing of an investment if economically sensible investments are postponed. In Germany, such uncertainty is countered by the E3 model, which does not call structures into question. However, the connection between the promotion of new and old capital cannot necessarily be clearly anticipated in benchmarking. In the transmission network area, negative incentives could be mitigated in advance by benchmarking only on the operating costs (OPEX). Then it is required that a cost control of the cost of capital (CAPEX) is sufficiently strict, especially with regard to the declaration of costs as OPEX or CAPEX, and that this control includes the investment budget. 21

Extension or replacement - useful differentiations?

Incentives for network expansion can also be designed on the condition that the current regulatory framework already offers financial leeway for replacement investments. This can imply that expansion investments are recorded separately from replacement investments. In regulatory practice, this can be problematic if a differentiation against the background of the asymmetrical information is too time-consuming or if it fundamentally fails because it is difficult to differentiate. In the context of investment budgets, it could therefore be advantageous to support all new CAPEX in an undifferentiated manner. This brings the financial return forward for all CAPEX and increases the financial attractiveness of an investment.

New approaches in the RIIO model?

In Great Britain, the RIIO model aims at a future-oriented reorientation of regulation and is to be seen as a comprehensive regulatory policy update of the current incentive-oriented system. Against the background of the decarbonisation of the British economy, this involves questions of investment incentives.22 The new policy approach contains a wealth of detailed proposals on how the current revenue cap regulation should be further developed. To better classify them, it should be emphasized that the previous system is essentially characterized by previously separate cost-oriented CAPEX and comparison-oriented OPEX incentives (“block building approach”) 23. Furthermore, there is already an application of sliding scales for individual incentives for individual cost items and a menu regulation for new investments at the distribution network level. Tenders are used for offshore wind projects and their grid integration. Thus, the new system is already based on a comparatively differentiated regulation.

A noticeable feature of the analysis of the manual on the introduction of the RIIO model is an extension of the regulatory period from five to eight years. This basically creates an incentive for less short-term investment behavior. Halfway through this longer regulatory period, a review is to take place in which necessary adjustments to the regulatory framework can be made to correct the regulator's misjudgments or unanticipated volume or cost effects. This ensures that uncertainties from regulatory action are reduced and network operators build trust. In addition, six output categories are defined:

  • Customer satisfaction,
  • Reliability and availability,
  • Security,
  • Connection conditions,
  • Environmental impacts and
  • social obligations,

the exact operationalization of which is still pending in the approval process. The idea of ​​the approach is to include the consequences of investments (or innovations) more extensively, especially by considering the results in the following regulatory period as a secondary output.

The RIIO allows the revenue approval to be adjusted more flexibly within the regulatory periods via uncertainty mechanisms and volume mechanisms. Different configurations are provided here. They are intended to significantly reduce the regulatory risk. In terms of investment costs, the mechanisms that make it possible to adjust the revenue cap are particularly relevant if customer satisfaction or another primary output has been achieved or exceeded (or costs are incurred that were not taken into account in the regulatory review, provided they are efficient ), or when new services are offered. An additional special investment incentive is that investments that are in the regulated capital base are not subject to any additional risk. Furthermore, quality regulation is to be expanded. The RIIO manual thus shows additional options for reacting individually to changes in the network, the services provided and thus the costs.


The introduction of cost-based elements in investment regulation leads to additional investment incentives. When choosing an instrument to promote investment, it should be noted that in practice there can easily be a conflict of objectives between efficiency and investment security. This shows that there is no silver bullet and that instruments must be chosen according to political goals and the level of development of regulation.

Rate-of-return adders are very effective. However, they require strict cost controls for the instrument to be acceptable from an efficiency point of view. The effectiveness results from the fact that Adders guarantee a higher return on capital and compensate for regulatory risks. However, the economic appropriateness of the higher interest rate often remains unclear. Investment budgets can also result in a higher return on capital. However, they can also be used solely to avoid delays in the return flow of financial resources and also to be provided with additional efficiency incentives. This also includes subsequent benchmarking. Investment budgets are attractive for projects of considerable economic importance, especially for transmission networks.

In principle, it is not easy to resolve when evaluating the instruments, the demand of the network operators for the most secure return on the capital employed, which promotes investment, and the demand for efficiency, which has led to the extensive use of benchmarking methods in regulatory practice. Additional benchmarking increases efficiency, but can lead to uncertainty among investors, especially when benchmarking total costs. It seems worth considering restricting such a comparison with the transmission system operators to the OPEX alone, if sufficient control of the OPEX-CAPEX allocation is possible in order to limit opportunistic behavior by the network operators.24

Micro-incentives reduce regulatory uncertainties from benchmarking, as this at least cannot be coupled with menu regulation and may also overlay the effect of sliding scales. Even with sliding scales, it is more effective to use capital bases that are not subject to further benchmarking. Here, however, the question arises as to the appropriate dimensioning, which requires sufficient knowledge of the (efficient) costs to be expected on the part of the regulator. Over time, a menu regulation in particular should improve the regulator's knowledge, provided that the efficient network costs are not too volatile. However, this form of regulation is not easy to implement and depends on the path of regulatory development. Strategic incentives that may result from separate OPEX and CAPEX regulation must be observed in principle and countermeasures may have to be taken accordingly. In addition, it should be considered how replacement and expansion investments can be funded as uniformly as possible, as these cannot be easily differentiated in practice.

The current development in Great Britain shows that some general changes to the regulatory framework are conceivable, which in principle can have a stimulating effect on investments. This includes, above all, the extension of the regulatory periods, which can be introduced in the event of advanced incentive regulation, and the more comprehensive adjustment and review of the selected revenue cap within a period. This counteracts a possible time delay in the return flow of financial resources to an investor. Furthermore, the stakeholders should be more closely involved and the investment projects should be assessed in a more differentiated manner, which in Great Britain still has to be filled out in detail.25

This article represents the personal view of the author and not a professional assessment from the point of view of the Federal Office.

  • 1 For an introductory overview, reference is made in particular to the article by G. Guthrie: Regulating Infrastructure: The Impact on Risk and Investment, in: Journal of Economic Literature, Vol. 44, pp. 925-972. It should be noted here that the analysis presented there primarily relates to the cost-reducing effect of investments. This is also present (dynamically) in the energy industry, but there is also the decisive fact that investments also increase the regulated cost base.
  • 2 See the annual reports of the Commission de Régulation d'Energie.
  • 3 This is also the view of G. Brunekeeft, R. Meyer: Regulation and Regulatory Risk in the Face of Large Transmission Investments, Bremer Energy Working Papers, No. 5, pp. 7 f., February 2011. The Averch-Johnson Effect (AJ Effect) describes the tendency of the regulated company to invest more in a rate-of-return regulation than would be economically sensible. The classic paper on the A-J effect is H. Averch, L. L. Johnson: Behavior of a firm under regulatory constraints, in: American Economic Review, vol. 52 (1962), pp. 1052-1069.
  • 4 Basically comparable instruments, albeit with a different designation, also existed in other European countries.
  • 5 For details,
  • 6 When this takes place depends directly on the timing of the financial return via the investment budget. This can result in a time delay. This is countered when the investment budget is initially based on planned costs. For an analysis of the timing of investments see G. Brunekreeft, J. Borrmann: The Effect of Monopoly Regulation on the Timing of Investment, Bremer Energy Working Papers, No. 1, February 2010.
  • 7 This is fundamentally appropriate, since otherwise a new efficiency assessment of networks would not make much sense.
  • 8 If a so-called dead band is also specified for the target value, then all costs in the relevant interval are recognized here (without further breakdown).
  • 9 Bonus-malus systems can, in addition to stipulating certain services, also relate to the scheduling of network expansion - as is the case with the NorNed interconnector between the Netherlands and Norway, for example. See.also DTe: Decision on the application by TenneT for permission to finance the NorNed cable in accordance with section 31 (6) of the Electricity Act of 1998, December 2004.
  • 10 This can be seen from the fact that the return on capital generally increases with lower costs.
  • 11 See S. Littlechild: Stipulations, the consumer advocate and utility regulation in Florida, Electricity Policy Research Group Working Paper, No. EPRG 06/15, Cambridge, February 2006.
  • 12 The advantage of negotiations is that if an agreement is reached, both sides must derive sufficient advantages from the result. In this respect, the use of negotiations is ultimately about a skillful balancing of the negotiating power, which is essentially determined by what the expected result would be if the negotiation were unsuccessful and what pressure the two sides or the regulator can exert on one another. The latter determines the distribution of the benefits from a project. In addition to the control function, the regulator also has an arbitration function. See S. Littlechild, N. Cornwal: Potential scope for user participation in the GB energy regulatory framework, with particular reference to the next Transmission Price Control Review, Report for Ofgem, 2009.
  • 13 See Australian Energy Market Commission: National Transmission Planning Arrangements, Final Report to MCE, June 30, 2008.
  • 14 See the description on or for use in the Netherlands .pdf.
  • 15 The New Zealand approach of more interlinked assessment is more inclusive than the Australian one. The attempt is made to combine the reliability test and the market benefit test more comprehensively. A minimum technical standard is required for power transmission in every power supply unit. The benefits and costs of options that go beyond these are assessed economically. The economic evaluation takes place against the background of a scenario analysis in which individual scenarios are provided with the probability of occurrence so that the expected benefits can be calculated. Different care standards are included in the assessment.
  • 16 Cf. M. De Nooij: Social cost benefit analysis if interconnector investment: A critical appraisal, Bremer Energy Working Papers, No. 2, 2010.
  • 17 See PJM: Summary of PJM’s Regional Transmission Expansion Plan (RTEP), 2010; and PJM: Manual 14B: PJM Region Transmission Planning Process, 2008.
  • 18 Cf. S. Littlechild: Regulated and Merchant Interconnectors in Australia: SNI and Murraylink Revisited, Cambridge Working Papers in Economics, CWPE 0410, 2004.
  • 19 Comparable experiences with the Murraylink case are also available in Europe. The NorNed cable was planned by the Swedish company Statkraft and the Dutch partner company NEA. The two companies assumed that the merchant line would be exempt from regulation. After the conclusion of the contract, however, it turned out that the regulatory authorities wanted to issue third-part access under strict conditions. This threatened the pensions from the project and it was taken over by the transmission system operators TenneT and Statnett SF.
  • 20 See P. L. Joskow: Incentive Regulation in Theory and Practice: Electricity Distribution and Transmission Networks, MIT Center for Energy and Environmental Policy Research, Cambridge 2006.
  • 21 In addition, investment incentives that encourage early investment could be considered.
  • 22 The manual developed by Ofgem for this purpose should be understood less as a specific, differentiated regulatory regime than as a detailed description of future options, which still needs to be specified further. See
  • 23 However, this should be abandoned and switched to TOTEX benchmarking.
  • 24 Such a benchmarking should be non-mechanistic so that the expected results have a considerable range and possibly also are not very robust.
  • 25 An "individualized" approach can be implemented in Great Britain, as the number of network operators is significantly lower than, for example, in Germany and Switzerland. However, this does not fundamentally speak against individualization in countries with a high number of network operators, as long as a case study can be typified sufficiently easily. At the same time, it must be taken into account that a system with many levers can easily become confusing. In this respect, a sensible selection of new elements must be made.