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Germany introduced incentive regulation in January 2009. Benchmarking approaches are used which usually assume a common production technology for all firms. Unobserved factors might be inappropriately understood as inefficiency. Thus, estimation is often carried out in two stages. First, splitting the sample; then separate analyses are conducted for each subgroup. This paper shows how to disentangle the heterogeneity from inefficiency in one step, using a latent class model for stochastic frontiers. We analyze technical efficiency of 200 regional and local German electricity distribution companies and test the hypothesis if larger distributors operate under a different technology than smaller ones.