Acquisition of hydropower plants in Norway

Author: Johan Fredrik Remmen, Haavind Vislie, Oslo

1. Introduction

One of the most valuable real estate assets in Norway is related to Norway's main source of energy production – hydropower. Hydropower accounts for 99% of Norway's energy generation, amounting to a production of approximately 121 TWh of electricity per year including wind, thermal and hydropower. The electricity generation industry is the most capital-intensive land-based industry in Norway.

Although the electricity market in Norway has been liberalized since the implementation of the Energy Act of 1990, today 87% of hydropower production is owned by Norwegian public entities: municipalities, counties and the Norwegian state (the latter through the fully state-owned Statkraft SF) or companies owned by public bodies. The reason is largely related to the fact that the Norwegian legislation on the acquisition of waterfalls and watercourses treats Norwegian public entities differently to any other entity, be that a private entity originating from Norway or any other country, or a public entity from a country other than Norway. This legislation is now under substantial pressure from the EFTA Surveillance Authority (the ESA) under the EEA Agreement. The future of the present Norwegian legislation is therefore uncertain, and the development is of great importance for the future ownership of Norwegian hydropower production facilities.

Advising both the authorities and public and private entities under today's regulation has brought a broad insight into the diversity of regulatory questions arising from today's complex regime. The assignment as the appointed independent lawyer for the Law Commission on right of reversion has given further insight into both issues arising from today's regulation and the challenges and possibilities embedded in the different alternatives for a possible future regime. In the following I would like to give a brief overview of the main issues at hand.

2. Acquisition of waterfalls in Norway

According to Norwegian legislation, acquisition of waterfalls over a certain size requires a concession under the Industrial Concession Act of 1917. The same applies for an acquisition of the right to use such waterfalls, which to a large extent is prohibited. Similarly, regulation of a watercourse requires concession under the Watercourse Regulation Act of 1917. Both the Industrial Concession Act and the Watercourse Regulation Act differentiate between Norwegian public entities and all other legal entities, including foreign private and public bodies.

Norwegian municipalities and counties and state-owned enterprises are regarded as public entities under the Industrial Concessions Act and the Watercourse Regulation Act. There may, however, be elements of private or foreign public ownership in the public companies. To stay public, the Norwegian public ownership must represent at least two-thirds of the capital and votes of the company.

If the purchaser is a non-public entity, a concession will only be granted for a limited period of time (maximum 60 years). At the expiry of the concession period, the waterfall and all installations at the power plant are transferred to the Norwegian state without compensation (the so-called condition of reversion).

The reversion system was established at the beginning of the 20th century in order to safeguard the interests of the Norwegian kingdom at a time when Norway was a poor country and foreign funded companies began the exploitation of the Norwegian waterfalls for industrial purposes. Public entities may therefore be granted concessions without any time limit and without conditions of reversion, giving the public entities a better economic foundation for ownership in the electricity production sector. This is exacerbated by the fact that if a non-public entity acquires a waterfall that has been granted a non-limited concession, the Norwegian government claims that the concession time will be calculated from the date of the first concession. This claim has never been tested, since no non-public body has purchased such rights.

The same system of differentiation applies for regulations of waterways.

3. The process of the EFTA Surveillance Authority

Since 2001, the ESA has claimed that the differentiation that lies within the Norwegian concession system infringes the EEA Agreement articles 31 and 40 (the right of establishment and the free movement of capital).

Norway has stated that the differentiated system is part of the natural resource management system and falls outside the scope of the EEA Agreement. Furthermore, Norway has alleged that the Norwegian system, in any case, is covered by Article 125, which states that the EEA Agreement "shall in no way prejudice the rules of the contracting parties governing the system of property ownership".

The ESA brought the case before the EFTA Court in July 2006 and the case is expected to be handled by the court in 2007.

4. Possible future regimes

The ESA has not disputed that the agreement allows a system involving conditions of reversion. The alleged breach of the agreement is related to the differentiation.

If the EFTA Court concludes that the present Norwegian legislation does infringe the EEA Agreement, it is likely that the government will establish a new regime ensuring more equal treatment of entities from other EEA states. It is on the other hand unlikely that the right of reversion will be abandoned under a new regime.

Several alternative regimes have been discussed. Among these are different reversion conditions, where the concessionaire may retain parts of the ownership after the expiry of the concession period, or sell it off.

A different issue is how new conditions of reversion should be implemented, securing equal treatment of all possible investors. Since most larger waterfalls in Norway are not under conditions of reversion today, the implementation system will be of great importance. One option is to impose conditions of time limitation and reversion by law. Such a system is reliable and predictable, but also burdensome for the present owners. An alternative is a transaction-based system where the conditions of time limitation and reversion are imposed under certain transactions of waterfalls or ownership to bodies directly or indirectly owning the waterfalls. A transaction-based system is a simpler option for the present owners, but raises practical problems – particularly due to the fact that the Norwegian energy sector is characterized by a high degree of cross-ownership.

If the EFTA Court concludes that the reversion regime does infringe the EEA Agreement, it is expected that a new regime treating all possible purchasers equally will create considerable interest in ownership of Norwegian hydropower plants among foreign investors.