In its press release (nr.: 13649/08, provisional version, October 13, 2008), the Council of the EU announced that the European Energy Ministers reached an agreement on the so-called Third package of legislative measures concerning the internal energy market.

In Dutch media news messages appeared regarding this agreement stating that it has been agreed that member states will be allowed to prevent an acquisition of a Dutch (unbundled) energy company by a foreign company that did not unbundle its business engaged in production on the one hand, and its network company on the other.

It is yet unclear what exactly has been agreed upon and therefore what implications this may have in the possible takeovers of Dutch energy companies. Below we outline more detailed information regarding this subject.

Unbundling

Rationale

On 19 September 2007, the European Commission ("Commission") announced a proposal for a new legislative package to reform the regulation of the European Energy Sector. Under that proposal the operation of electricity and gas networks from supply and production activities needed to be effectively unbundled, which proposal would find its expression in an amendment of European Directive 2003/54 for the electricity market and Directive 2003/55 for the gas market.

In 2003 both European Directive 2003/54 for the electricity market and Directive 2003/55 for the gas market came into force (hereinafter jointly: "Directives"). The Directives contain community rules with respect to the internal market for electricity, respectively gas. The aimed result of the Directives is to realise an efficient market and equal competition for market participants.

With respect to network operations, the current Directives require that network operations be legally and functionally separated from supply and production or production activities. This requirement was implemented in the different member states of the EU in different ways.

In the Netherlands this requirement resulted in an amendment of the Dutch Electricity Act 1998 ("Electricity Act") and the Dutch Gas Act 2000 ("Gas Act"). After the amendment clause 10b of the Electricity Act prohibits companies engaged in the production, trading and/or supply of electricity from being a member of the same group of companies as a manager of an electricity network. After the amendment, the Gas Act provides in clause 2c for a similar provision with respect to a manager of a gas network. Both amendments came into force on 1 July 2008.

Other member states have maintained the operations within a single vertically integrated legal entity.

The Commission, however, considers that where a network operator is a legal entity within an integrated company this could damage the competition and security of supply on the EU's energy market as due to the following possible issues:

  • Discrimination by the network owner in favour of its affiliated companies, including disclosure of market sensitive information to the production or supply branch of the integrated company.
  • The use of network assets to make entry more difficult for competitors.
  • Distortion of investment incentives. Vertically integrated companies have no incentives to develop the network in the overall interests of the market.

Proposal

The Commission therefore proposed to amend the Directives and to introduce a new primary obligation on member states to require that the same entities are not entitled:

  1. Directly or indirectly, to exercise control over an undertaking performing any of the functions of production or supply, and to, directly or indirectly, exercise control or hold any interest in or exercise any right over a transmission system operator or over a transmission system.
  2. Directly or indirectly exercise control over a transmission system operator or over a transmission system, and to, directly or indirectly, exercise control or hold any interest in or exercise any right over an undertaking performing any of the functions of production or supply.
  3. To appoint members of the supervisory board, the administrative board or bodies legally representing the undertaking, of a transmission system operator or a transmission system, and to, directly or indirectly, exercise control or hold any interest in or exercise any right over an undertaking performing any of the functions of production or supply.
  4. To be a member of the supervisory board, the administrative board or bodies legally representing the undertaking, of both an undertaking performing any of the functions of production or supply and a transmission system operator or a transmission system.

The Commission proposal contains two options for effective unbundling of supply and production companies on the one hand and network management activities on the other:

  1. Ownership unbundling.
  2. The member state can designate an Independent System Operator ("ISO") to which the role of management of the transmission network is transferred, while allowing the vertically integrated companies to retain ownership of the network assets.

The Commission also proposed a 'third party clause': the unbundling requirements should apply equally to companies from non EU-countries. Third country individuals and companies should not be able to acquire control over a Community transmission system or transmission system operator unless this is permitted by an agreement between the EU and the third country.

Council deal

On 10 October 2008 the EU Energy Ministers reached an political agreement on this so-called Third Energy reform package during a meeting of the Transport, Telecommunications and Energy Council. The agreement was based on the broad agreement on the essential elements of the package reached in June 2008.

The provisional press release on the Council Meeting noted, in particular, the agreement reached on the following points:

  • Unbundling: the Council has agreed that effective separation of supply and production activities from network operations should be achieved. The Council has now agreed on three alternative models to achieve unbundling. Next to the Commission's original proposals (see above) the Independent Transmission Operator model ("ITO") is intended to ensure the effective separation by establishing independent managers of the transmission systems. This option would allow the companies to preserve the assets of the transmission systems on the condition that they are managed by an independent body. From the now available information from the political agreement, we cannot yet determine the difference between the ISO model and the ITO model.
  • Third party clause: the Council has agreed that the 'third party clause' should treat third countries in a non-protectionist manner which guarantees that third country companies should comply with the same rules as those which apply to EU countries. The agreed text specifies the criteria for evaluating a third country investment, in particular the security of EU supplies. The text approved by the Council envisages a procedure for the certification of investors from third countries who wish to take control of an energy network or a network operator. It specifies the details of the respective role of the national regulators and the Commission.

We understand from other news messages regarding the third party clause that each member state will remain free to decide whether to allow foreign bidders entering their market. However, the Commission will have the final say on this blockade. A member state is only allowed to take action in a takeover, when this action is non-discriminating, transparent and proportional. A blockade will be possible in the public interest.

It is unclear however, whether these conditions regard the third-party clause (takeover by non-EU companies of network companies) or the situation that a not-unbundled company (either EU or non-EU) wants to take over an unbundled energy production/supply company. As the text of the political agreement has not yet been released, we cannot therefore verify the news messages that the Dutch government will be allowed to prevent an acquisition of an unbundled Dutch Energy company by a foreign company that has not unbundled yet.

Procedure

On the basis of the political agreement of 10 October 2008, a common position will be prepared on the basis of discussions between the Council, Parliament and the Commission, which will be sent to the Parliament for second reading under the co-decision procedure by the end of the year. The Commission expects that the package can be agreed in the first half of 2009. By that time the package will be incorporated in new directives, that must be implemented in Dutch law next.

At the moment there is no regulation that forbids a not-unbundled company to take over an unbundled company, however it is clear that such a take-over will encounter political resistance. In what way this may effect take-overs in the short term, is yet unclear.