Background
Court of Cassation
Comment
In its long-awaited judgment of February 24 2012, the Dutch Court of Cassation decided to ask the European Court of Justice (ECJ) preliminary questions regarding the Netherlands' mandatory legal ownership unbundling of energy networks.
"New ban on privatisation of energy networks and network operators enacted" and "Legislation Amendments Force Energy Companies to Unbundle by 2011" reported on the amendments to the Electricity Act 1998 and the Gas Act which led to Dutch energy companies being required to unbundle up to shareholder level.
Privatisation was banned, as a change of ownership in a network or in the shares in a network operator was subject to approval by the minister of economic affairs. The minister would withhold approval if the transfer of ownership would lead to any grid rights being transferred to a person outside the "circle of the government". A regulation setting out the possible parties falling within this category was issued by the minister.
As from January 1 2011, gas and electricity networks must be operated and owned by operators that are legally and economically independent from (former) vertically integrated commercial group members. Energy companies such as Essent and Nuon have effectively been split into commercial companies and separate network companies under strict regulatory supervision. The commercial activities of Essent were sold to RWE and the commercial business of Nuon is now part of Vattenfall, while the networks of both former companies have remained in the hands of public share holders.
Essent, Delta and Eneco brought an action against the Dutch state before the Court of The Hague, claiming that the unbundling requirements were contrary to EU law (ie, the free movement of capital). At first instance, the court ruled in favour of the Dutch state. It held that that Article 345 of the Treaty on the Functioning of the European Union must be interpreted narrowly, and that the unbundling provisions did not fall under the scope of this article. The unbundling provisions therefore had to be assessed against the principle of the free movement of capital (Article 63 of the treaty). The court regarded the prevention of cross-subsidies as an objective of general interest that could justify a breach of this principle.
On appeal, the court held that the prohibition against privatisation was not as solid as the Dutch state had presented. Both the Electricity Act and the Gas Act provided merely that ministerial consent was required for a change of ownership in a network or the shares in a network operator. With respect to the consent for a change of ownership in the shares in a network operator, further rules were to be established in secondary regulations that could be changed by the minister without the amendment of formal legislation. The court therefore ruled that the prohibition against privatisation was not absolute and, because privatisation was not impossible, the rules on the free movement of capital were applicable irrespective of Article 345 of the treaty.
In its judgment, the court of appeals ruled that the unbundling provisions constituted an impediment to the free movement of capital which could not be justified by the objective of minimising cross-subsidisation, as this did not qualify as a non-economic objective of general interest. The provisions were also judged to be disproportionate in view of the purpose of security of supply, as other provisions in the Electricity Act and the Gas Act already provided for sufficient means to protect security of supply.
As a result of this judgment, the Dutch government quickly amended the Electricity Act and the Gas Act to strengthen the privatisation ban. Simultaneously, the Ministry of Economic Affairs lodged an appeal with the Court of Cassation.
In its judgment the Court of Cassation first ruled that the old privatisation ban was an absolute ban. The fact that further rules were to be established in secondary regulations that could be changed by the minister without the amendment of formal legislation was irrelevant. Only the question of whether the privatisation of grid operators was possible under the current prevailing legislation was relevant. That regulations could, at some point, be amended did not affect this.
Once this had been established, the Court of Cassation decided to ask the ECJ three preliminary questions.
The first question is whether the absolute ban on privatisation is in compliance with Article 345 of the EU Treaty. Reference was made to the so-called 'golden shares' judgments of the ECJ, in which it ruled on the (partial) privatisation of certain former state-owned companies in which the Belgian, Portuguese and French governments respectively retained special controlling rights. The ECJ deemed such special controlling rights to violate the right to the free movement of capital, which requires a justification pursuant to the interest of safeguarding the public order, public safety or the general interest.
This first question is relevant to the two following questions with respect to the free movement of capital.
The second question is whether such compliance with Article 345 means effectively that the freedom of capital/golden shares discussion can be set aside, as it is the member state's right to organise its state property without interference from EU law.
The third question applies only if the first or second question is answered in the negative. The Court of Cassation asked whether the objectives underlying the unbundling measures - being the prevention of cross-subsidies and impediments to competition - are pure economic interests or whether they can be considered (also) as non-economic interests, in the sense that under certain circumstances they can justify a violation of the freedom of capital. In this respect, the Court of Cassation took into consideration that the EU Third Package Electricity and Gas Directives envisage fair access to ensure transparent and non-discriminatory access to networks, which it regarded as a possible indication that the Dutch legislature's objective had non-economic aspects and could be considered a compelling reason of general interest.
The unbundling discussion has been ongoing for almost a decade. From the moment that the legislative proposal was sent to Parliament in August 2005, it has been the subject of fierce debate. This debate is likely to cool off for a couple of years, as proceedings before the ECJ tend to be time consuming.
It appears that the Court of Cassation has ruled on one question only: was the privatisation ban absolute? Although this question is relevant, it is merely a precursor to the real issues that have been the subject of legal debate: is the absolute ban compliant? If so, is the state off the hook? If not, can the objective behind the act justify the violation of EU law? These are the most important questions and they have been forwarded to European judges.
For Nuon and Essent, the final outcome will have little relevance, as they have already been completely unbundled and their commercial businesses have been sold. However, for integrated companies such as Eneco and Delta, the court judgment and the outcome of the preliminary questions remain relevant. If the first two questions are answered in the negative, such companies can continue in their present form or, in due time, decide themselves to unbundle their activities on their own respective terms.
For further information please contact Roland de Vlam or Max Oosterhuis at Loyens & Loeff NV by telephone (+31 20 578 5785), fax (+31 20 578 5800) or email ([email protected] or [email protected]).