The legal framework – recent developments

This summer, the Dutch Minister of Finance is expected to decide on the partial privatisation of the national power and gas transmission system operators (TSOs), Tennet and Gas Transport Services. Initially, the plans for those privatisations met with skepticism due to complications resulting from the ownership unbundling requirements introduced by the 2009 Third EU Energy Package (Third Package).

The EU Commission recently released a document summarizing its views on ownership unbundling. This newsletter briefly explains the main issues of ownership unbundling and discusses the Commission’s view and its impact on the envisaged privatisation of the Dutch TSOs.

Ownership unbundling

To reduce the perceived negative effects of vertically integrated energy companies on the completion of the EU internal energy market for natural gas and electricity, the Third Package specifies the rules for the activities of energy companies which are simultaneously involved in generation, production, supply or trading activities (GPST) on the one hand and the transport over the transmission and distribution networks on the other hand. These rules are intended to prevent conflicts of interests relating to these activities. For example, a shareholder in a TSO may not have an interest in investing in a network if that would be detrimental to GPST activities of other companies in which he has invested. These rules equally apply to the positions of financial investors, such as pension funds, insurance companies and infrastructure funds. Such financial investors often have diversified portfolios, including investments in energy transmission, generation, production and/or supply, located in different places. The ownership unbundling provisions of the Third Package apply across the gas and electricity markets.

Applied to the Dutch TSOs, the Third Package prohibits a person from controlling GPST activities on the one hand and on the other exercising “any right” in a Dutch TSO, vice versa. In other words:

  • an investor that exercises any right in a Dutch TSO must not to acquire a controlling interest in a GPST business, for example, a wind farm or an LNG vessel; and
  • an investor that exercises any right in a GPST business must not exercise control over a TSO.

The term “any right” is not defined, but includes the exercise of voting rights. The term “control” must be interpreted in line with the EC Merger Regulation and can result from the powers that an investor may have. These powers may include voting rights, board appointment rights and veto rights, i.e. rights that financial investors normally claim. The holding of purely passive financial rights related to a minority shareholding (e.g. the right to receive dividends) is not explicitly excluded from this concept.

EU Commission’s views

The national regulators of the EU member states must certify their national TSOs from time to time. Compliance with the unbundling rules is one of the tests for the TSO certification. Proposals for certification must be submitted for prior approval to the Commission.

According to the Commission, the objective of unbundling rules in EU legislation is the prevention of conflicts of interest as explained above. This objective is not served if certification is being refused in cases where there is no incentive for an investor in a TSO to influence the TSO's decision making to favor GPST activities to the detriment of other network users.

According to the Commission this can be the case where an investor, for example:

  • participates in a transmission network in the EU as well as in generation activities in the United States or in Australia, because there is no connection or interface between the energy activities concerned;
  • simultaneously controls a waste disposal company generating electricity in Denmark and controls a gas TSO in Sweden, if only limited quantities of electricity are being generated that are sold for pre-established prices; in that case it is not possible to use the gas transmission activities in a manner so as to favor the electricity generating interests in a neighboring country;
  • is the ultimate owner of the Italian gas TSO, and also participates in solar energy companies in Spain, if the interface between the Spanish electricity market and the Italian gas market is limited;
  • is the ultimate owner of the Italian gas TSO, and also participates in a waste management company in the U.K. which generates electricity from waste and bio gas through small sized production units, as the geographical distance between the two countries excludes the possibility for this investor to discriminate between network users in favor of its waste management activities in the U.K.

Impact on investments in the Dutch TSOs

The Commission confirms that it will continue its pragmatic case-by-case approach. Factors that, we believe, will play a role in the national regulator/Commission’s assessment include: the difference between gas and electricity, the difference between the various generation facilities for electricity (waste management, windmills), the geographic distance between the two activities, the supervisory mechanisms in the member states, the difference between pre-determined sales prices and the prices which can be negotiated with customers at any moment, and the size of the GPST activities. Investors that are looking at investing in the Dutch TSOs should consider whether a real impact on the TSO's decision making could arise from other energy related activities in their portfolio.