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
Total electricity generation for the public network in Germany in 1998 was 457 TWh, with an installed
capacity of 98 GW. Compared with the maximum load of little over 70 GW there appears to be substantial
excess capacity. The generation-mix is given in Table 1, with the two columns on the right giving the generation-
Table 1 Generation mix based on production
a
Germany 1998 UK 1990
UK 1998 Hydro
4.12 2.5
1.5 Nuclear
33.22 19
26 Lignite
26.79 –
– Coal
26.70 67
33 Oil
0.46 7
1.5 Gas
7.24 0.5
32.5 Other
1.47 4
5.5
a
Source: VDEW 1999, table 23, p. 80; EA 2000, p. 45. Note: all figures in .
20 G. Brunekreeft, K. Keller Utilities Policy 9 2000 15–29
mix in the UK for 1990 and 1998. German electricity generation still relies quite heavily on coal and lignite;
domestic coal is still although decreasingly so subsid- ized for socio-political reasons. The use of lignite stems
mainly from special arrangements for East-Germany, which is an inheritance of reunification.
The comparison suggests that the mix in Germany is roughly comparable with the mix in the UK as it was at
the time of liberalization. After liberalization, the UK witnessed a strong increase of mostly independent gas-
fueled CCGT-generators “the dash for gas”, at the expense of coal. It is noticeable that the planned and
projected capacity expansion up to 2002 in Germany is 3.5 GW lignite and 1.3 GW gas VDEW, 1999, p.
79. This figure is probably an underestimation, because the retreat from nuclear power has been decided by
government in the Summer of 2000. Although this will be a phased retreat over 30 years, it nevertheless opens
up opportunities for new capacity.
Unlike many other European countries e.g. UK, France, Italy, the German ESI was not monopolized in
a strict sense. There have been and still are many firms. Until recently, up to 1000 firms were involved in the
public provision of electricity. At present, this figure is declining rapidly. Despite the fairly large number of
firms, the ESI has been quite concentrated both horizon- tally and vertically. Until recently eight firms, the so-
called Verbundunternehmen VUs dominated the sector: RWE,
VIAG i.e.
Bayernwerk, VEBA
i.e. PreussenElektra, EnBW, VEAG, HEW, VEW and
BEWAG. Things are changing rapidly. In July 2000, a merger between RWE and VEW now under the name
RWE on the one hand and VEBA and VIAG now under the name E.ON on the other hand reduced the
number of VUs to six. Together these six firms control up to 80 of the generation capacity in Germany and
produce up to 90 of the total production. They each control an extra-high-voltage network and together they
exclusively but not collectively control the German transmission network. Moreover, these six VUs own and
operate a significant number of distribution networks. As intended or rather, not prohibited by the Energy Act,
the owner of the network is also the system operator. Most of these firms supply small and large end-users
either directly through a fully owned subsidiary or through a participation in communal retailers.
Apart from these six VUs, there is a vast number of regional and especially communal distributorsretailers.
As a rule, the communities have taken over responsi- bility for the final stage of public utilities. Sectors like
electricity, gas, water, public transport and waste dis- posal may be separate legal entities, but are fully or
partly owned by communal holdings Stadtwerke, which are completely owned by the communities. These
communal utilities traditionally both owned the distri- bution network and handled retail for the consumers con-
nected to the corresponding distribution network; i.e. the distribution network demarcated a closed service area.
Although the communal distributors concentrate on dis- tribution and retail, they do own some generation
capacity as well, especially CHP.
The communal retailers are striving for scale-enlarge- ment. Before liberalization, there were roughly up to
1000 communal retailers. Not surprisingly, the average scale of these communal retailers turns out to be too
small. With billing, advertising and especially purchase of electricity on rather complex wholesale markets, scale
effects can be realized. As a result, the list of cooperations between communal retailers, be it by
merger, tight or loose cooperation or joint venture, is huge. In the world before liberalization, distribution and
retail were one and the same and the retail service area was defined as the group of consumers connected to a
specific distribution network. After liberalization, distri- bution and retail are definitely separate stages and the
phrase “service area” has become meaningless. The tra- ditional concept of the communal retailer Stadtwerke
will soon be history and many of these may be expected to either withdraw form the electricity market com-
pletely or concentrate on the distribution network and leave the retail to other firms. A recent example of the
latter strategy is Stadtwerke Jena ZfK, 2000, p. 1.
13
The VUs are actively buying distributorsretailers; they are penetrating the retail market on a large scale.
One reason for this may be to “secure” the sale of pro- duced electricity. Shortly
after liberalization, the
communal retailers started switching their suppliers i.e. the VUs. One way of responding to this is to set up a
retail department and sell directly to the end-users. Another way is to buy the retailer. In the face of
idiosyncratic excess generation capacity, this may lower transaction costs by lowering risks.
14
Another rea- son may be that many communal retailers are simply too
small and not sufficiently specialized to be competitive. If they are bought by the far larger VU, many small
retailers are effectively merged into one large retailer. This also seems to aim at increasing efficiency and ther-
eby competitiveness rather than increasing market power. In one case, the federal antitrust agency raised
concern about increased concentration on the retail mar- ket as PreussenElektra intended to increase its partici-
pation in the communal retailer Stadtwerke Bremen; on 5 May 1999 a lower-court in Berlin ruled that, due to
liberalization, the relevant market for retail had widened to at least the national market and, consequently, that
the increased participation would not substantially lessen competition.
15
13
To get an idea of the size, this concerns roughly 60,000 end-users.
14
This follows the line of argument of Williamson 1975.
15
In defence of the federal antitrust agency, it has to be noted that its judgement was based on the situation before liberalization.
21 G. Brunekreeft, K. Keller Utilities Policy 9 2000 15–29
Forward integration may also focus on acquiring dis- tribution networks rather than the retail stage. Apart
from synergy effects, the argument of double mar- ginalization may fit. The transmission network and the
distribution network are complementary stages, and if both stages charge an excessive mark-up independently
from each other, the result will be worse for both the network owners and the consumers as compared to verti-
cal integration.
It seems that the sector’s tendency for vertical concen- tration is merely an adjustment to new market circum-
stances and increases efficiency; at present, there seems to be no antitrust-concern with this type of integration.
For this conclusion, the proper framework must be stressed. Antitrust concerns arise where vertical inte-
gration increases the possibility or likelihood of leverage of market power. This requires that a monopolistic stage
integrates into a competitive stage, which is not the case here. The current state of affairs is that the distribution
networks are already integrated with retail, and the trans- mission network with generation. Integration of these
two blocks does not increase the possibility of leverage of market power; this possibility is already given. If
leverage of market power is considered a problem at all, then the monopolistic network-stages should be verti-
cally separated from the competitive generation- and retail-stages. Apart from this, doubts can be raised about
the incentives of the network operators; since the access charges are unregulated, and thus excessive profits can
be made on the networks as such, they should not have an anticompetitive incentive to lever market power to
the competitive stages.
The market shares in generation, taking account of share participation, are presented in Table 2; the pre-
merger and post-merger situation is presented separately. To recall, VEBA and VIAG merged to E.ON, and RWE
and VEW merged under the name of RWE. The figures have been corrected for the shares of VEAG; a provision
for the mergers was the sale of the VEAG shares under
Table 2 Market shares in production
a
TWh Pre-merger
Post-merger VEBA
E.ON 89.93
18.77
28.74 VIAG
47.74 9.97
RWE
RWE 138.63
28.94
37.27 VEW
39.89 8.33
EnBW 41.21
8.60 8.60
HEW 12.31
2.57 2.57
BEWAG 10.21
2.13 2.13
VEAG 49.50
10.33 10.33
Other 49.60
10.36 10.36
Total 479.0
100.00 100.00
a
Source: Europa¨ische Kommission 2000, p. 23. Note: these shares are corrected for participation shares.
Table 3 Concentration ratios in generation output
a
HHI
b
CR1 CR2
CR3 CR4
Germany; pre- |1560
0.289 0.477
0.581 0.680
mergers Germany; post- |2417
0.373 0.660
0.763 0.850
mergers UK 199091
|3225 0.455
0.739 0.913
0.983 UK 199899
|1620 0.210
0.420 0.597
0.768
a
Source: Calculations based on Europa¨ische Kommission 2000 and EA 2000. Note: pre- and post-merger refers to the RWE-VEW
and VEBA-VIAG mergers.
b
HHI means Hirschman–Herfindahl Index, which is the sum of squared market shares of all firms 10 000 is monopoly. CR is the
sum of the market shares of the largest firms.
control of the merging parties. Table 3 presents different concentration ratios from these figures and compares
these with similar figures from the UK. It can be seen that the pre-merger concentration ratios were quite simi-
lar; whereas the concentration ratios in the UK show a steady decline since liberalization, the recent mergers
and take-overs in Germany increase concentration above those of the UK.
The ownership of the firms is mixed. Table 4 provides an impression for 1998 VDEW, 1999, Table 12. In this
table public is defined as more than 95 in public-own- ership, mixed as less than 95 public- and less than 75
private-ownership, and finally private as more than 75 private-ownership.
Two things are immediately suggested by these fig- ures. The majority of the firms are in public hands and
only few in private hands. Simultaneously, production is biased towards mixed ownership but comparatively
strongly biased towards private. This is caused by the communal distributors, which are relatively small but
large in numbers and are mainly in public hands, whereas the VUs, which are large firms but small in
numbers, are mostly privately owned andor mixed. This is confirmed by the observation that the share of private
firms in the retail to end-users is relatively small com- pared to the share of private firms in generation. The
core-activities of VUs is generation and they increase
Table 4 Ownership of the ESI in Germany in 1998
a
Generation Retail
in no. of in output in no. of
in supply firms
firms Public
61.5 4.6
63.5 27.4
Mixed 25.9
56.8 24.3
62.9 Private
12.6 38.6
12.2 9.7
a
Source: VDEW 1999, table 12, p. 75. Note: all figures in .
22 G. Brunekreeft, K. Keller Utilities Policy 9 2000 15–29
their activities in retail. As a rule, the VUs are mainly privately owned and the communal distributors are
mainly in public-ownership. Since, however, the VUs are acquiring the distributors, these figures will change
and more of the sector will be in private hands.
Table 5 provides an impression of the network con- figuration in both countries. The length of the network
is expressed as a ratio of units distributed and as a ratio of the number of customers connected to the network.
A subdivision has been made between the entire network transmission and distribution and the distribution net-
works alone. No further specification has been made; the costs of the network depend on many factors and it
would require a detailed benchmark study to come to reliable conclusions about the relative costs of the net-
works. The figures in Table 5 are intended to give an impression, which should be taken with care. The com-
parison indicates that the network in Germany is some- what more extensive. This might cause somewhat higher
average network costs in Germany.
4. Development of prices and assessment
