Background
The 'Mankala model' is an ownership model for energy producers which is unique to the Finnish energy markets. It originated in the 1960s, when the Supreme Administrative Court delivered two separate rulings permitting it. The first of these rulings concerned a company called Oy Mankala Ab – hence the name of the model. In the Mankala model, energy producers are jointly owned by a number of parties that bear the costs of operating the company. The owners of Mankala companies are typically energy wholesalers, retailers or distributors and large industrial companies. Their obligations and rights in relation to the company and each other are set out in the articles of association and shareholders' agreement.
Mankala companies are limited liability companies which are governed by the Companies Act. However, the purpose of Mankala companies, unlike typical limited liability companies, is not to produce a profit. Instead of taking payment on a dividend, the owners of Mankala companies are both allowed and obliged to purchase energy from the company on a cost price basis, regardless of whether the cost price is below or above the current market price. This right or obligation is limited to an amount that is proportionate to each owner's share in the company. The energy purchased from a Mankala company can be used by the owners in any way they choose. That is to say, it can be sold either directly or through the Nordic power exchange Nord Pool Spot, or used by the owners in their own production.
The permissibility of the Mankala model was called into question in Spring 2010, when the Finnish government was in the process of approving the construction of two new nuclear reactors to be operated by Mankala companies. At that time, two Finnish members of the European Parliament submitted a written question to the European Commission as to whether the Mankala model constitutes a concealed distribution of dividends and infringes EU competition and state aid rules. As a result, the commission issued a request for information to Finland. However, the commission has yet to take a position on the matter.
This update examines various legal issues connected to the Mankala model.
In Finland, when a limited liability company charges its shareholders prices which essentially differ from the ordinary or provides them with products or services free of charge, this is generally classified as a 'concealed distribution of dividends' under tax law. The benefit incurred constitutes taxable profit. However, despite there being no specific exemption in the law, this general rule does not apply to energy producers. This has been established by the Supreme Administrative Court, which has stated that when an energy producer sells all of the energy it produces to its owners at cost price and those owners stand for the costs of operating the company, this does not constitute a concealed distribution of dividends.
The reasoning behind the court's rulings is that a Mankala company itself does not gain any taxable profit and that, on the other hand, its owners pay the full tax for any additional profit that they may make as a result of being able to acquire cheaper energy. Furthermore, the owners of a Mankala company are liable for the costs of operating the company even when the company is not profitable. Therefore, the owners also directly suffer from any loss that the company may make. In fact, a Mankala company can be seen more as an outsourced energy generation unit than as an independent company.
In addition to being allowed by the Supreme Administrative Court and the National Board of Taxes, for nearly five decades the Mankala model has enjoyed acceptance from the Competition Authority. The Mankala model has not been found to violate competition or state aid rules, since it does not restrict competition.
On the contrary, the Mankala model promotes competition on the energy markets, as it enables smaller energy companies to invest in production capacity and thus compete with larger companies. This is especially true in respect of investments in power generation models, which require considerable initial capital but are cheaper to operate in the long term (eg, nuclear power, hydropower and wind power). The Mankala model also makes it possible for energy producers, regardless of their size, to diversify their power generation portfolios. Instead of being dependent on one generation model only, with the help of the Mankala model energy producers can easily invest in a wide variety of power generation models and several power plants.
It is clear that without the Mankala model, most Finnish energy producers' possibilities to function and compete would be restricted. As a consequence, without the model it is likely that the Finnish energy markets would be dominated by a few large companies with the resources necessary to invest in their own power plants.
High levels of concentration hinder the successful entry into the market by new players, and this is a genuine problem in the energy markets on an EU-wide scale. This was identified by the commission in its 2005 sector inquiry concerning the gas and electricity markets. According to the commission, consumers (ie, individuals and businesses) are paying the price for these barriers to competition.
In comparison with typical EU energy markets, Finnish energy markets are significantly more competitive. This can be attributed largely to the Mankala model, which has made it possible for numerous small, often municipality-owned energy companies to compete with the main market players.
According to the Competition Authority, production capacity, diversity of production forms and equal opportunities for all market players to invest in new production capacity are central to the functioning of the energy markets. The Mankala model encourages small market players to invest in a variety of production forms, especially in adjustable and inexpensive production capacity such as hydropower. Moreover, the Mankala model makes it possible for all market players to make economically sound investments in new, eco-friendly production forms (eg, wind power) which are in line with contemporary energy policy and binding EU and national targets. In fact, in Finland, the majority of current investments in wind power have been executed using the Mankala model.
The economies of scale and other efficiency gains involved in the Mankala model ultimately benefit consumers. By allowing new market players to more easily acquire financing and enter into and compete on the energy markets, the model helps to secure a constant and sufficient supply of energy. This in turn decreases fluctuations in energy prices and keeps consumer prices down, since consumers are free to choose their energy supplier from a large number of options.
The pro-competitive effects of the Mankala model are undisputable. However, at present, the permissibility of the model rests on case law, which is arguably somewhat dated, and the tacit approval of various government authorities. This is an undesirable state of affairs in a situation in which investments worth billions of euros and, more importantly, the entire structure of the Finnish energy markets are on the line. Therefore, instead of arguing over whether the existing legislation permits the Mankala model, politicians in Finland and the European Union would be better advised to spend their time considering how best to secure its future.
For further information on this topic please contact Mikko Pirttilä or Sarita Schröder at Krogerus by telephone (+358 29 000 6200), fax (+358 29 000 6201) or email ([email protected] or [email protected]).