Outliers and rewards in regulation: Insights from German electricity benchmarking

Abstract

Benchmarking is a key tool in regulatory frameworks for assessing the efficiency of network industries. In this context, identifying outliers is crucial, as their presence can significantly distort benchmarking outcomes and the resulting firm incentives. This paper focuses on two types of performance-related outliers: influential units – firms that define the frontier and significantly affect the efficiency scores of others, and atypical units – firms that have unusual input–output profiles but little or no influence on the rest of the sample. Using the German electricity sector as a case study, we examine the methodology of the Bundesnetzagentur (BNetzA), a pioneer in regulatory benchmarking. We show that its reliance on standard dominance and super-efficiency analysis fails to distinguish between these two types, which may result in misaligned incentives. To address this gap, we propose two methodological refinements – a revised dominance measure and a radius-based super-efficiency approach – embedded in a transparent procedure tailored to regulatory benchmarking. The proposed approach is designed to support a more consistent and targeted application of performance-based rewards, while remaining fully compatible with existing regulatory procedures.