16 G. Brunekreeft, K. Keller Utilities Policy 9 2000 15–29
set a monopolistic input price and secure marginal-cost pricing at the complementary stage; in other words, it
will attempt to secure an as-if competitive outcome at the complementary stage if it can compensate via the
input price here, the access charge. Under certain conditions the input monopolist will be indifferent
between vertical integration into the complementary stage or vertical separation. In contrast, if the input
price is regulated sufficiently strongly, the input monopolist will have an incentive to attempt to lever
the market power of the input stage to the complemen- tary stage in order to make monopoly profits at the
complementary stage. In order to do so, it will have to foreclose and thereby exclude competitors from the
complementary stage.
The German option for nTPA contrasts sharply with the other EU member states. Effectively all others opted
for Regulated Third Party Access rTPA which implies a sector-specific regulator setting and controlling an
access regime. This allows an interesting comparison of different systems. Throughout, the United Kingdom will
be used as a comparator country.
2
The structure of the ESI in the UK is roughly comparable with the ESI in
Germany and regulation of the ESI in the UK provides a perfect counterexample of the situation in Germany.
The primary aim of this contribution is to analyse the newly liberalized ESI in Germany. The secondary aim
is to indicate empirically that network costs make up a relatively higher share of the electricity bill in Germany
than in the UK, which in turn implies that the relative share
of the
competitive components
especially generation is lower in Germany than in the UK. The
paper is organized as follows. Section 2 will describe the legal environment of the ESI in Germany, with special
attention to the so-called Association Agreement II VV II,
3
which arranges the network conditions. Section 3 characterizes the sector as a whole. In Section 4, price
developments are examined in detail, with the ultimate purpose of indicating the ratio of network access costs
as compared to the final electricity price. Section 5 offers some conclusions.
2. Institutional arrangements
It was a cumbersome way to the final consensus and the implementation of the new Energy Act
4
on 29 April 1998. Three aspects of the Energy Act are noticeable:
extensive discussion of the theory see Knieps and Brunekreeft 2000, Chap. 2.
2
Where appropriate due to, for example, data-availability, the comparison is restricted to England and Wales.
3
In German: Verba¨ndevereinbarung.
4
EnWG Energiewirtschaftsgesetz.
O First, there are no constraints on the vertical structure of the sector.
O Second, access to the networks has been arranged by Negotiated-TPA; this implies that both the structure
and the level of the access charges are to be determ-
ined by the industry. O Third, all end-users have been declared eligible.
In many countries the ESI had been a monopoly in the strict sense; the German equivalent to this was an
enforced cartelization in the form of territorial demar- cation via the so-called demarcation contracts. The
main contribution of the Energy Act has been the abol- ishment of §103 of the antitrust law Gesetz gegen
Wettbewerbsbeschra¨nkungen GWB, which exempted the ESI from the general prohibition of cartels. The
demarcation contracts are now deemed illegal, and a pre- viously artificially stabilized situation may turn out to
be highly unstable. In principle, maximum competitive conditions are provided. Market-entry is completely free.
New generation capacity is allowed by licensing rather than tendering. Since demarcation contracts are now
prohibited, new entrants do actually have a market. Right-of-use of public ground may no longer be granted
exclusively; otherwise the Energy Act would contradict the EU-directive regarding the building of a direct line.
All consumers are eligible and thus, retail-competition is possible for even the smallest end-users.
The Energy Act places no constraints on the vertical industry structure. Vertical separation has been discussed
but turned out not to be feasible; vertical separation would require expropriation of the networks, which
would contradict the constitution. Rather than prescrib- ing vertical separation, the degree of vertical integration
appears to increase through take-overs, mergers and internal growth. The Energy Act does not prescribe the
trading mechanism. Even if spot markets are currently arising e.g. in Leipzig and Frankfurt, the main trading
mechanism relies on bilateral contracting.
2.1. Negotiated TPA and the essential-facilities doctrine
Network access is dealt with in clause 6 of the Energy Act, which explicitly prescribes non-discriminatory
nTPA, in accordance with clause 17 of the EU-Directive. The conditions including pricing of access are
explicitly left to negotiations within the industry.
5
The industry has worked out the so-called Association
Agreement VV, which sets out the frame for network- access conditions. After a false start with the first version
5
Clause 62 EnWG, 1998 states that regulation of the structure of access charges and other conditions can be introduced by minis-
terial decree. Furthermore, clause 64 prescribes information-disclos- ure with respect to the access charges to some extent.
17 G. Brunekreeft, K. Keller Utilities Policy 9 2000 15–29
of the Association Agreement VV I, in December 1999 the industry agreed on a significantly improved version
with VV II. Involved in these negotiations are the associations of the ESI VDEW, the cogenerators
VIK and industrial users BDI. The antitrust control of the sector is left to the federal antitrust agency. To
strengthen the position of the antitrust agency, the 6th reform of the competition law GWB, in force from 1
January 1999, has included an essential-facilities doc- trine with clause 1944 GWB. It states that it is an abuse
of a dominant position to refuse access to the networks or other facilities, which are deemed essential for
competition without practical justification, if it is not possible or not reasonable to duplicate the facility. The
essential-facilities doctrine appears to be the main instru- ment to handle the network operators’ market power.
The most important application of the essential-facilities doctrine was the decision of 30 August 1999 against
BEWAG Berlin, after it had refused access to its com- petitor RWE.
Even if the Energy Act does not contain sector-spe- cific regulation of the access charges, the competition
law includes a provision of abuse of a dominant position. Clause 1942 [GWB, 6th version] prohibits excessive
pricing in case of a dominant position. Excessive pricing is defined as prices being higher than prices under “as-
if competition”. Common practice for identification of excessive pricing is international comparison. Even if
identification of excessive pricing may be difficult in practice, the network operators are certainly not free to
charge whatever they like.
A peculiar problem arises with full competition on the retail level; that is, competition for even the small-
est end-users, which is possible since all consumers are eligible. Because the time-of-use meters, which are
required for retail competition, are still too expensive for small end-users, demand-profiling is the alterna-
tive. Although VV II clause 4.1 suggests agreement that demand profiles shall be used, there is still no
agreement for a precise method. Distributors tend to impede access to their network e.g. by requiring to
install a time-of-use meter because they disagree with the demand-profile proposed by the competitors.
Recently, the federal antitrust agency investigated a case against the distributor in Munich Stadtwerke
Mu¨nchen on precisely this issue. Even if the distribu- tors’ argument seems sensible, they may run into trou-
ble with respect to the non-discrimination provision in the competition law. The antitrust agency signalled
that refusal of access was indeed discriminatory, because installing these time-of-use meters was not
required for the Stadtwerke’s own retail department, only for competitors. The firms recently came to an
agreement in which access is allowed. 2.2. Consequences for other acts
The new Energy Act and the subsequent liberalization practically forced modifications in other acts which are
quite insightful. A first development concerns the end- user tariffs for small users so-called Tarifkunden. Tariff
ceilings have to be authorized by the ministry of eco- nomics at state level.
6
It is rather suspect whether this “regulation” of end-user prices is actually binding. For
various reasons, doubts have been expressed about the effectiveness of the regulation. Since competition at the
generation and retail level appears to develop quite well and end-user prices for small users decrease more rap-
idly than expected, state ministries seem to consider further authorization of end-users prices as superfluous.
In December 1999, the state of Baden-Wu¨rttemberg was the first to propose omitting authorization of the end-
user prices.
7
This development is difficult to assess. If the regulation has indeed been intransparent and
unspecified, then abolishing the decree creates trans- parency and a reduction of regulatory uncertainty. On
the other hand, since the access charges are largely unregulated, regulation of end-user tariffs is the only
control against excessive pricing. But then again, if a control of excessive pricing is desired, disaggregated
regulation of the access charges would be superior to globally capping end-user prices. It is easier and more
transparent to restrict regulatory attention to the monop- olistic bottleneck i.e. the networks rather than to the
entire sector. If the stages generation and retail do indeed exhibit competition, it is principally unnecessary to regu-
late them.
8
From this perspective, it may be desirable to drop the control of the end-user prices. In case the end-
user prices are perceived as being too high, the govern- ment should consider introducing disaggregated regu-
lation of the access charges.
Another modification has been forced into the so- called
decree for
concession fees
Konzessionsabgabenverordnung KAV
of 1992.
Communities have the right to grant concession for the use of public ground, for which they can charge a con-
cession fee. The level of these fees has been laid down in the decree for concession fees. Among other things,
the level of the fee, which is charged per kWh, differs for
small users
Tarifkunden and
large users
Sondervertragskunden; the latter pay considerably less.
9
This type of differentiation appears to be in
6
This regulation is based on the the Federal Electricity Tariff Decree Bundestarifordnung fu¨r Elektrizita¨t BTOElt, 1990.
7
This still has to be approved by federal parliament.
8
It is beyond the scope of this paper to discuss this issue in depth. The interested reader may be referred to Knieps and Brunekreeft
2000, Crew 1999, Brunekreeft 1997 and Laffont and Tirole 1996 and the literature quoted therein.
9
See Section 4 for further details.
18 G. Brunekreeft, K. Keller Utilities Policy 9 2000 15–29
accordance with the theory on price discrimination; demand of large users may be expected to be more elas-
tic, because they may substitute away from electricity or in the long run decide against a specific site due to high
concession fees. After liberalization, new retail-entrants bundled small end-users so that they could qualify as a
large user and consequently by-pass the high concession fee. This is a textbook example of arbitrage destroying
price discrimination. The associated losses for the com- munities were politically sensitive, so that a modification
of the decree followed. Basically, arbitrage is now pro- hibited; the basis for charging the fee now is the voltage-
level at which the end-user is connected to the network. If a retailer supplies an end-user with a voltage level
below 1 kV, the end-user still qualifies as a small user despite the intermediate retailer. One may question
whether the decree for concession fees is not outdated overall; the concession fee is actually a communal tax
on electricity and perhaps it might be superior to treat it as such explicitly.
2.3. Network access: the Association Agreement II By virtue of nTPA, it has been left to the industry to
work out an agreement of the network-access conditions. On 22 May 1998, the Association Agreement I VV I
was presented to the public. On 13 December 1999, this version was replaced by the Association Agreement II
VV II.
The first association agreement has been criticized as being anti-competitive and not suited for a competitive
market. Since VV I is no longer in force, it suffices to be brief.
10
The main point of criticism was that it was based upon a contract-path principle rather than postage
stamps. The capacity-based price per contract intro- duced a bias in favour of long-term contracts with con-
stant flows. This substantially hindered the development of a spot market; a spot market lives on many different
short-term transactions. Furthermore, part of the pricing was distance related. For a contract, a fictional contract
path was calculated for which a km-price was charged. This created an advantage for nearby power plants which
tend to be the network-owners’ own plants. The dis- tance-related price has been criticized as discriminatory,
because in an interconnected network distance-related pricing of electricity transmission lacks economic justi-
fication. Nevertheless, it was authorized by the federal antitrust agency with the argument that it was not
empirically relevant. Overall, the VV I has been assessed as being intransparent due to the contract-path
principle, cumbersome and as leaving undue potential for discriminatory behaviour for the system operators
10
The interested reader may be referred to Perner and Riechmann 1998, Brattle Group 1998, or Bergman et al. 1999, pp. 152–155.
especially with regard to ancillary services and reserve capacity. It should be noted that the latter are the incum-
bent generators. The Association Agreement II has repaired these
shortcomings. With the VV II the structure of the access- charge regime in Germany adjusted quite strongly to
what appears to become the standard in the EU.
11
Mind, however, that this concerns the structure of the charges,
not the level. Several aspects are of interest. The basis for the charges is a postage stamp also
called entry–exit system, i.e. they are not distance- related. Every end-user pays an annual connection
charge based on his maximum load kW. Generators do transitionally not contribute; their connection charge
has been set at zero. The costs of energy losses and ancillary services are included in the connection charge
and not charged separately. Only the costs of special requirements for reserve capacity are charged separately.
Different network levels voltage levels are assigned different postage stamps. The end-user pays a connection
charge at the level of his point of connection, which includes the sum
12
of the connection charges of all sub- sequent higher network levels; in other words, the
charges of higher network levels cascade to the lower levels. In effect, the distribution networks pay the con-
nection charges for the transmission network and pass this on to their own connection charges. In contrast, in
the UK, the suppliersretailers and the generators pay the transmission costs, not the distribution networks. The
connection charges are allowed to differ for different regional networks.
The cascading principle prescribes that the lower net- work pays a connection charge to the higher network.
The basis for this charge is the maximum load at the point of connection of the lower network to the higher
network. This principle is known as the net-principle; the lower network pays for the actual use of the higher
network rather than for the mere option to use the higher network which is the gross-principle. This implies that
if relatively much decentralized power is fed into the lower network, the maximum load at the point of con-
nection between the lower and the higher network will be relatively low. Consequently, the lower network’s
contribution to cost-recovery of the higher network will be relatively small. The VV II states that the correspond-
ing avoided costs of the lower network are paid to the decentralized generator normally CHP.
An empirically relevant variable is the so-called coincidence factor
. The average costs of a network are determined by dividing the annual costs of the network
11
The VV II shows remarkable similarity to, for example, the so- called tariff code in the Netherlands; the latter was designed by the
Dutch ESI, but had to be and has been authorized by the electricity regulator DTe.
12
Slightly corrected for network coincidence factors.
19 G. Brunekreeft, K. Keller Utilities Policy 9 2000 15–29
by the network’s maximum load. The user’s connection charge is based on the user’s maximum load which need
not coincide with the network’s highest load. The coinci- dence factor takes account of this divergence; it is a stat-
istically derived estimation of the probability that the user’s highest load coincides with the network’s highest
load. Multiplying the coincidence factor with the user’s highest load approximates the expected value of the
user’s share in the network’s highest load. The coinci- dence factor is a function of the load duration in hours
per year, which in turn is calculated as the annual con- sumption in kWh divided by the user’s maximum load
in kW. In effect, the coincidence factor is a function of but not equivalent to the load factor which is load
duration divided through 8760 h. Unfortunately, the VV II is not specific on the precise calculation of the coinci-
dence factors; it is left to the network operators to work out a relation. The structure of the function proposed in
the VV II is as follows:
g
1
5a
1
1 b
1
T
∗
·T
i
, if T
i
,T
∗
g
2
5a
2
1 b
2
8760 ·T
i
, if T
i
.T
∗
. T
is a critical number of hours after which the para- meters of the function change; T
is to be determined by the network operator. T
i
is the actual load duration of user i. It can be seen now that the coincidence factor g
1
g
2
depends on a fixed number a
1
a
2
both .0 and is linearly increasing in the load duration with b
1
b
2
both .0. This specification implies that the access charge con-
sists of two different two-part tariffs expressed in indi- vidual load DMkW and individual demand PfkWh,
where application depends on the load duration. This is how the network operators present their access charges.
Let F represent the network’s connection charge per kW per year and P
i
a user’s maximum load. The individual annual connection expenditure, E
i
, then is: E
i
5F·P
i
·gT
i
which after using the expression for g
1
T
i
, becomes: E
i
5a
1
·F·P
u
1
S
b
1
·F T
∗
·P
i
·T
i
D
. And for g
2
similarly. It can be seen that in this expression the individual access charge depends on the
individual maximum load P
i
and energy use P
i
T
i
. There happened to be one aspect in the VV II which
triggered severe criticism: the so-called T-component. The idea was that the German transmission network
would be divided into two different zones: a north-zone and a south-zone. If transactions passed the border
between these zones, a price of 0.25 PfkWh would be charged. Since there is neither an obvious economic nor
technical reason for this charge, it was deemed anti-com- petitive. In the recent merger-cases see Section 3, abol-
ishment of the T-component within Germany has been one of the provisions for approval of the merger. In con-
trast, there still is a cross-border T-component of 0.125 PfkWh.
Section 4 will in examine the level of the access charges as they have been presented recently by the net-
work operators. With respect to the structure, four points can be stated as an overall assessment:
O The Association Agreement II is based on postage stamps rather than on the contract-path principle as
was the VV I. Since distance-related pricing was abolished, the access charge structure is largely
non-discriminatory.
O The structure of the access charges, as set out in the Association Agreement II, enables the development
of spot markets. O The VV II does not set incentives for efficient short-
term use of the networks, since no explicit account of energy losses is taken. Moreover, no incentives are
set for efficient investment of generation-capacity to take proper account of the network-configuration,
since transitionally the generators do not contribute to the costs of the network.
O The degree of differentiation in the tariff-structure is low. An explicit peak-load element is lacking. At the
moment, the structure of the access charges does not seem to fit the structure of the end-user prices very
well.
3. The sector