The Dutch legislation requiring energy companies to unbundle their energy network companies violates European law. This was the decision reached on 22 June 2010 by the Court of Appeal of The Hague in a case brought by three large energy suppliers (Essent, Delta and Eneco) against the Dutch State.
Essent, Delta and Eneco are integrated energy companies. They produce energy (gas and electricity) and supply this energy over their gas and electricity networks to consumers. These networks are managed by a separate company within each group, the network manager.
The Unbundling Act (Wet onafhankelijk netbeheer), passed in 2006, amended the Dutch Electricity Act and Gas Act to require integrated energy companies in the Netherlands to unbundle their network management companies from the rest of the group. Under the amendments, network managers and energy companies operating in the Netherlands are no longer allowed to form part of the same group (the "group ban"). In addition, neither is allowed to own shares in the other. The unbundling must be completed prior to 1 January 2011. In view of this deadline, Essent has already completed the unbundling process. The Dutch State's main justification for the unbundling is that energy companies that are also network managers otherwise have an unfair advantage over competitors that do not manage networks. The State is also concerned that energy companies could pass on the costs of their commercial activities to consumers who purchase energy. Ultimately the network quality could suffer or disruptions in energy supply could occur.
The court of appeal ruled in favour of Essent, Delta and Eneco, holding that the Unbundling Act infringes the EU provisions on the free movement of capital. This means it is incompatible with EU law unless the restriction can be justified by overriding reasons in the general interest. The court of appeal considered at length the reasons put forward by the State to justify the unbundling but concluded that they do not constitute overriding reasons in the general interest. In part, the State's concerns have already been removed by existing regulation. This applies, for example, to the need to safeguard network quality and an uninterrupted energy supply to consumers. Some of the reasons given by the State are purely economic in nature, such as the relationship between competitors on the energy market. According to the European Court of Justice, economic interests cannot justify an infringement of the free movement of capital.
- The Dutch energy market has long been dominated by four vertically integrated energy companies: Essent, Nuon, Eneco and Delta. The Unbundling Act has always been controversial, as it went far beyond what was prescribed by the EU electricity and gas directives.
- Essent and Nuon proactively unbundled in 2009 in the context of the sale of their commercial businesses to RWE and Vattenfall, respectively. The unbundling was necessary to effect these sales in light of the network privatisation ban. In retrospect, based on this judgment, the unbundling would not have been necessary.
- Conversely, Eneco and Delta have not yet unbundled their network business from their commercial business. The judgment takes effect immediately, notwithstanding the State's decision to challenge the judgment before the Supreme Court. Consequently, Eneco and Delta are not required to unbundle prior to 1 January 2011.
- The court of appeal has not rendered judgment on the validity of the privatisation ban for "technical" reasons. The judgment, however, suggests that the current privatisation ban may be incompatible with EU law and therefore also unenforceable.
- This afternoon, members of parliament expressed concern about the implications of the judgment and urged the government to take measures to prevent the acquisition of networks by private parties. Given the current status of the outgoing government and the complex government-formation process following the outcome of the June elections, we believe it is unlikely that repair measures can be taken on short notice. This creates a window of opportunity for investors.