Alongside the efficiency benchmarking, the general X-factor is one of the key elements in the context of incentive regulation that aims to simulate competition. The general X-factor takes over the role of ensuring that network operators, like companies acting on competitive markets, pass on productivity changes caused by technical progress to network customers during a regulatory period.
With regard to the German incentive regulation of energy networks, the design of the general X-factor is currently under review. As part of this study, we analysed in more detail some crucial aspects, such as double adjustments of capital costs (double inflation and double productivity requirements) as well as changes of the supply task of network operators during regulatory periods. These issues can be considered as problematic under the current regime.
With regard to possible adjustments of the productivity factor, none of the proposals under discussion could be identified as clearly favourable compared to the other alternatives. The choice of future adjustments of the general X-Factor depends decisively on the focus and weighting of the evaluation criteria. Furthermore, the future transformation process of the energy sector as well as other framework conditions have to be taken into account.
Some points - such as the time lag associated with the German scheme and the functional form of the update term for the base year costs, which is based on the consumer price index and the productivity factor - can be adjusted independently of the choice of how the general X-factor is determined and to what it is applied (operating costs or total costs).
Irrespective of the future design of the general X-factor, the importance of maintaining an efficiency benchmarking based on total costs must also be emphasised. Appropriate further development of the general X-factor can only be achieved in conjunction with such an efficiency benchmarking.
