The Netherlands: No end to the ownership unbundling saga

Jan Erik Janssen and Stephanie Goossens
Stek
Amsterdam

One of the main developments in the Dutch energy sector in 2010 is the shock ruling of the Court of Appeal of The Hague of June 22 2010 in the cases of energy companies Essent, Eneco and Delta against the Dutch State. The Court ruled that the legal requirement for integrated energy companies to separate their network management companies from their production, trade and supply companies is contrary to European law. This so-called 'group ban' is contained in the Dutch Unbundling Act (Wet onafhankelijk netbeheer) of November 23 2006 (State Gazette 2006, 214). The State has lodged an appeal against the ruling before the Supreme Court.

After its entry into force on July 1 2008, the integrated energy companies Essent, Nuon, Eneco and Delta, whose shares were held by municipalities and provinces, had until January 1 2011 to comply with ownership unbundling. The group ban prohibits production, trade and supply activities to be performed in the same group as the distribution activities performed by the network managers (netbeheerders).

This group ban is more restrictive than the unbundling requirements in the European Commission's third legislative package, whereby ownership unbundling is an alternative option for transmission system operators only. In the Netherlands the gas and electricity TSO's (GTS and TenneT respectively) are owned by the State.

Dutch energy companies Essent, Eneco and Delta argued before the Court that the group ban violates European law, particularly the free movement of capital laid down in Article 63 Treaty on the Functioning of the European Union (TFEU). The group ban, among other things, precludes investors engaged in energy activities from other Member States from investing in the Dutch distribution sector.

The Court agreed and ruled the group ban incompatible with the free movement of capital. The restriction on the free movement of capital could not be justified by overriding reasons in the public interest. The State had argued that the group ban was necessary (i) to prevent cross-subsidisation between the regulated transport activities of the network managers and the 'commercial' energy activities, (ii) for the protection of the customers of the distribution companies through more transparency, and (iii) to guarantee security of supply. These arguments did not convince the Court since these public policy objectives either concerned economic interests which could not serve as a justification for a violation of the free movement of capital or had already been addressed by existing, less far-reaching legislation. The main example of such legislation is the Implementation and Intervention Act, which requires the network manager to hold the economic ownership of the network assets, prevents outsourcing of critical network tasks, and intro-duces various other provi-sions to the Electricity Act and the Gas Act preventing cross-subsidisation and the use of the proceeds from the networks for non-network related purposes.

Furthermore the State pleaded that Article 345 TFEU prevents an assessment of the group ban against the four freedoms. This Article provides: "The Treaties shall in no way prejudice the rules in Member States governing the rules of property ownership". The State argued that the Electricity Act and the Gas Act contain a prohibition on privatisation of the network companies. This would prevent the application of the provisions on the free movement of capital. The Court dismissed this plea. The legislation explicitly provides for the possibility of the privatisation of the networks. The prohibition is not absolute. One can only agree as the Court of Justice has held in numerous judgements that Article 345 TFEU does not have the effect of exempting the Member States' systems of property ownership from the fundamental rules of the EU.

As a consequence of the ruling the group ban has been put on hold for the moment. The same goes for certain provisions restricting the permitted activities of the network manager. The Minister of Economic Affairs has stated that pending the proceedings before the Supreme Court unbundling of integrated energy companies will not be enforced. The ruling has come as a shock to the energy companies, their shareholders and policy makers. The shareholders of Nuon and Essent had already sold the production, trade and supply activities to RWE and Vattenfall respectively. The remaining two integrated companies, Eneco and Delta, have put their advanced separation efforts on hold. If the Supreme Court upholds the ruling of the Court, all these companies may submit claims for damages.

Pending the proceedings before the Supreme Court, the State and the Dutch Competition Authority (NMa) have started to encourage Eneco and Delta to separate voluntarily. Furthermore the Minister of Economic Affairs has announced the introduction of new legislation that will safeguard the current privatisation prohibition with respect to networks.

All in all, the ownership unbundling saga in the Dutch energy sector, that has already demanded so much management time, is set to continue well into 2011.