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Dutch Supreme Court requests preliminary ruling of the European Court of Justice (ECJ) on ownership unbundling

28/02/2012

In it's decision of 24 February 2012 the Dutch Supreme Court (the 'Hoge Raad') decided to request the European Court of Justice (ECJ) for a preliminary ruling on the interpretation of EU law before making it's final decision on the Dutch Unbundling Act. As a consequence, the unbundling of integrated Dutch energy companies will remain on hold while the Supreme Court awaits the ECJ's final determination of the law in question. Surprisingly, pending the ECJ's ruling, the Supreme Court in it's interlocutory ruling expresses it's preliminary opinion on the compatibility of the Unbundling Act with EU law.

Legal proceedings
The legal proceedings were initiated in 2007 by the energy companies Eneco, Essent and DELTA against the Dutch State. In March 2009 the Dutch Court of first instance dismissed the action of the energy companies. However, the Dutch Court of Appeal ruled in favour of the energy companies by it's decision of 22 June 2010, setting aside the ruling in first instance. The Court of Appeal decided that the unbundling regulation is in breach of the principle of free movement of capital as set out in Article 63 of the Treaty on the Functioning of the European Union (TFEU) and therefore non-binding. Consequently, the Dutch State instituted cassation proceedings before the Dutch Supreme Court.

Background: Dutch Unbundling Act
The Dutch Unbundling Act requires all integrated Dutch energy companies to unbundle their operations into a network company on the one hand and a production, trade and distribution company on the other ultimately before 1 January 2011. The unbundling regulation is included in the Act of 23 November 2006 on independent network management (Wet onafhankelijk netbeheer (Won)), also referred to as the 'Unbundling Act'. The unbundling requirements pursuant to the Unbundling Act are part of the liberalisation and restructuring of the energy sector as initiated by the European Commission. They however exceed the requirements laid down in the European Directives of the so-called 'Third Package'.

Group-ban
The Unbundling Act requires unbundling of all electricity and gas networks and not only of the high voltage electricity and high-pressure pipeline networks. To ensure the independence of the Dutch electricity and gas network managers and to effectuate the ownership unbundling, the Unbundling Act prohibits network managers to be part of the same group as the commercial gas and electricity companies, the so called group-ban (groepsverbod). The group-ban is implemented in Article 10b of the Electricity Act’98 and Article 2c of the Gas Act.

Ban on additional activities
In addition the Unbundling Act requires that groups that include a network company, are prohibited to engage in additional activities that may conflict with the interest of the management of the networks concerned, the so called 'ban on additional activities' (verbod op nevenactiveiten). The 'ban on additional activities' is implemented in Article 17 of the Electricity Act’98 and Article 10b of the Gas Act.

Questions for resolution by the ECJ
The Supreme Court now submits three questions for resolution by the ECJ. The Supreme Court requests (I) whether or not the Dutch prohibition of privatization (privatiseringsverbod) constitutes a regulation of ownership under Article 345 TFEU, stipulating that the EU treaties will not affect the regulation of ownership rights in the EU Member States. If this question is answered affirmatively, the Supreme Court requests the ECJ (II) to stipulate whether as a consequence the rules of free movement of capital as set out in Article 63 of the TFEU are not applicable on the group-ban and the ban on additional activities, in such a way that these bans do not require to be tested against the rules of free movement of capital.

If the first two questions are answered negatively, the Supreme Court will have to decide whether or not the group-ban constitutes a limitation of the free movement of capital and whether or not such limitation is justified. Therefore, the Supreme Court requests the ECJ (III) whether or not the objectives on which the Unbundling Act is based (i.e. transparency on the energy market and prevention of distortion of competition by preventing cross subsidies) may constitute a justification for infringement of the free movement of capital.

Supreme Court: prohibition of privatization is absolute
Contrary to the Court of Appeal, the Supreme Court is of the opinion that the prohibition of privatization as it was laid down until 17 November 2010 in the Electricity Act’98 and the Gas Act in conjunction with the Decree Shares Network Managers (Besluit aandelen netbeheerders) was already absolute. According to the Supreme Court it does not matter whether or not such prohibition is regulated in a Parliamentary Act or a lower regulation which may be easily amended. Therefore the quick fix of the regulation concerned initiated by the Dutch State straight after the ruling of the Court of Appeal was not necessary.

Supreme Court: golden shares
The Court of Appeal takes the position that the group-ban resembles the golden share constructions. Previous decisions regarding golden shares have shown that Article 345 TFEU does not prevent the applicability of the fundamental freedoms of the TFEU. However, the Supreme Court rules that the group-ban differs from the golden share constructions in the sense that the group-ban does not constitute a privatization of network managers whereby the government will hold special rights of control but instead constitutes a statutory rule to prevent privatization.

Supreme Court: opinion pending preliminary ruling of ECJ
Pending the preliminary ruling of the ECJ the Supreme Court states that it is for the present of the opinion that the prohibition of privatization constitutes a regulation of ownership under Article 345 TFEU since it constitutes an absolute prohibition of privatization that prevents any privatization. The Supreme Court consequently takes the position that the Court of Appeal ruled on the basis of defective grounds that the principal defense of the State does not succeed.

Conclusion
Although the Supreme Court awaits the preliminary ruling of the ECJ, the Supreme Court seems to be of the opinion that the ruling of the Court of Appeal should be set aside. If the ruling of the Court of Appeal would be set aside the group-ban and ban on additional activities would no longer be non-binding. However, it may take two years before the ECJ will render its preliminary ruling. Until then the unbundling of integrated Dutch energy companies will remain on hold as well as the requirements for network companies not to engage in additional activities that fall within the scope of the ban on additional activities.

Authors

Picture of Cecilia Weijden
Cecilia van der Weijden
Partner
Amsterdam
Picture of Jacqueline Feld
Jacqueline Feld