Ownership unbundling Dutch integrated energy companies in breach of European law

The 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 before 1 January 2011. Today the Court of Appeal ruled that the legal requirement of ownership unbundling 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.

The Dutch Unbundling Act
The Dutch unbundling regulation is part of the liberalisation and restructuring of the energy sector as initiated by the European Commission. 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 WON exceed the requirements laid down in the European Directives of the so-called 'Third Package'. The WON 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 WON prohibits network managers to be part of the same group as the commercial gas and electricity companies (the so called ´group-ban´). The group-ban is implemented in Article 10b of the Electricity Act’98 and Article 2c of the Gas Act.

Ruling in first instance
The Dutch Energy Companies Eneco, Essent and Delta have brought proceedings against the Dutch State in relation to the legal requirement of ownership unbundling, taking the position that the group-ban is in violation of the principle of free movement of capital of Article 63 TFEU, the principle of freedom of establishment of Article 49 TFEU and Article 1 of the First Protocol on the European Convention for the Protection of Human Rights and Fundamental Freedoms which provides for the rights to the peaceful enjoyment of one's possessions.

According to the Dutch State the principle of free movement of capital does not apply to the group-ban due to the prohibition of privatization as set out in Article 93 Electricity Act’98 and Article 85 Gas Act and as further elaborated on in the Decree Shares Network Managers. The State moreover took the position that where the ownership unbundling was deemed to constitute an obstacle to the free movement of capital, this would be justified by compelling reasons of public interest.

In March 2009 the Court of first instance ruled that the prohibition of privatization does not mean that the European legislation on free movement of capital would not be applicable to the group-ban. The Court found, however, that an infringement on the principle free movement of capital was justified in the interest of the security of energy supply and protection of consumers. Consequently, the Court dismissed the action of Eneco, Essent and Delta.

Today's ruling of the Court of Appeal
Today the Court of Appeal has set aside the aforementioned Court ruling. In today's decision the Court of Appeal rules that the group-ban of Article 10b Electricity Act’98 and Article 2c Gas Act is in violation of the principle of free movement of capital as set out in Article 63 TFEU and that consequently the provisions of the WON relating to the group-ban are non-binding.

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 (stipulating that treaties will not affect the regulation of ownership rights in the EU member states) does not prevent the applicability of the fundamental freedoms of the TFEU. By amending the Decree Shares Network Managers the government is free to determine which parties are allowed to become a shareholder in network managers. As a consequence, the Court of Appeal agrees with the Court of first instance that the prohibition of privatization does not mean that the European legislation on free movement of capital will not be applicable to the group-ban. In addition, the Court of Appeal rules that security of energy supply nor the other reasons mentioned by the Dutch State, being the prevention of cross subsidies and the protection of consumers through more transparency, constitute a justification for infringement on the free movement of capital. This is partly due to the fact that such issues have already been addressed by legislation and partly since it concerns economic interests which cannot justify such infringement.