22 October 2013

ECJ rules that Independent Grid Management Act may be compatible with EU law

ECJ rules that Independent Grid Management Act may be compatible with EU law – but it is not over yet. The European Court of Justice has issued a preliminary ruling in a case brought by the Dutch State against the energy companies Delta, Eneco and Essent.

Summary:

• The objectives of the Independent Grid Management Act may be considered overriding reasons in the public interest and justify the restrictions that the Act places on fundamental freedoms

• The restrictions at issue must be appropriate to the objectives pursued and not go beyond what is necessary to attain those objectives

• It is for the Supreme Court to determine whether the restrictions are appropriate/proportionate

• The ECJ’s judgment brings the unbundling of the energy companies closer, but it is not over yet as national court proceedings may go on for months, even years.

Background:

The preliminary proceedings were initiated following a referral by the Dutch Supreme Court. The matter concerns a group prohibition and, in the Supreme Court appeal against Essent, a prohibition on other side activities. Both prohibitions were introduced in the Electricity Act 1998 and the Gas Act by the Independent Grid Management Act (Wet onafhankelijk netbeheer). The central question was whether the group prohibition, which requires unbundling of the network business shared by energy companies and prohibits mutual shareholdership, and the prohibition on other side activities are in conflict with the free movement of capital. In its ruling of 24 February 2012, the Supreme Court stayed the appeal and made a preliminary referral to the ECJ. Advocate-General Jääskinen advised the ECJ in his opinion of 16 April 2013 to rule the Independent Grid Management Act not contrary to EU law.

Judgment:

The ECJ ruled:

1. Article 345 TFEU must be interpreted as covering rules entailing the prohibition of privatisation, such as those at issue in the main proceedings, which have the effect that shares held in an electricity or gas distribution system operator active in the Netherlands must be held, directly or indirectly, by the public authorities identified by the national legislation. However, that interpretation does not mean that Article 63 TFEU does not apply to provisions of national law, such as those at issue in the main proceedings, which prohibit the privatisation of electricity or gas distribution system operators, or, further, which prohibit, first, ownership or control links between companies which are members of the same group as an electricity or gas distribution system operator active in the Netherlands and companies which are members of the same group as an undertaking which produces, supplies, or trades in electricity or gas in the Netherlands and, secondly, engagement by such an operator and by the group of which it is a member in transactions or activities which may adversely affect the operation of the system concerned.

2. As regards the rules entailing the prohibition of privatisation at issue in the main proceedings, which falls within the scope of Article 345 TFEU, the objectives which underlie the choice of the legislature in relation to the adopted rules governing the system of property ownership may be taken into consideration as overriding reasons in the public interest to justify the restriction on the free movement of capital. As regards the other prohibitions, the objectives of combating cross-subsidisation in the broad sense, including exchange of strategic information, in order to achieve transparency in the electricity and gas markets, and to prevent distortions of competition may, as overriding reasons in the public interest, justify restrictions on the free movement of capital caused by provisions of national law, such as those at issue in the main proceedings.

Next steps:

The Supreme Court will take the ECJ’s response into consideration and allow parties to submit their written views before it rules on the State’s appeal. The Supreme Court is likely to reverse the Court of Appeal’s judgment and may order a re-examination of the case by a (different) Court of Appeal. Until a final judgment is given, it remains uncertain whether the division of ownership that derives from the group prohibition will continue to apply to the energy companies that have not been unbundled yet (Delta and Eneco).

For more detailed information, please see the ECJ’s ruling and the Supreme Court’s decisions in the appeal proceedings (in Dutch) against Delta, Eneco and Essent.

Please click here to read the Legal Alert in Dutch.

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