Given present changes in the European energy markets, in which governments of some Member States are taking an increasingly active role, the recent judgement of the Court of Justice of the European Union (the “ECJ”) in Staat der Nederlanden contra Essent NV, Essent Nederland BV, Eneco Holding NV and Delta NV (the “Essent Case”),* has great significance for private investors in the European electricity and gas markets.

In the Essent Case, the ECJ examined more specifically the compatibility with European Union (“EU”) law of the following three prohibitions under Dutch law:

  • The prohibition on the sale to private investors of shares held in electricity and gas distribution system operators (the “Distribution System Operators”) (the prohibition of privatisation);
  • The prohibition of Distribution System Operators from becoming members of a vertically integrated undertaking (the group prohibition); and
  • The prohibition of Distribution System Operators from engaging in activities that may adversely affect system operation (the prohibition on activities).

We summarise below the Essent Case and provide our interpretation of the issues examined by the ECJ in relation to the prohibition of privatisation.

Prohibition of privatisation

Under Dutch law, the acquisition of shares in Distribution System Operators required the consent of the Minister of Economy, which had to be denied in the case of a private investor intending to acquire shares in a Distribution System Operator. Hence, Dutch law resulted in an absolute prohibition of private investors’ involvement in the shareholding of Distribution System Operators.

Position of the parties

The undertakings argued that the prohibition of privatisation clearly violates the fundamental EU freedom of free movement of capital, as it restricts the right to acquire shares in Distribution System Operators and prevents other Member States’ investors from investing in the capital of Dutch Distribution System Operators.

The Dutch Government maintained that the prohibition on privatisation falls within the scope of Article 345 of the Treaty on the Functioning of the European Union (“TFEU”), pursuant to which Member States may freely regulate their system of property ownership. It further argued that Article 345 excludes the applicability of other TFEU provisions with respect to issues falling within its scope (i.e. relating to property ownership regulation).

ECJ’s analysis

The ECJ agreed with the Dutch Government’s position that Member States are entitled to regulate their system of property ownership, including the adoption of measures that result in the nationalisation of private property or the transfer of public property to private ownership (privatisation). The Court agreed that Article 345 TFEU entitles Member States to limit the exercise of certain activities in respect of publicly owned undertakings.

But the ECJ did not side with the Dutch Government on its claim that other TFEU provisions should not be considered when assessing measures falling within the scope of Article 345. Rather, the ECJ is of the view that such measures are not exempt from the general provisions of the TFEU, and that their compatibility with EU law must be assessed on the basis of the treaty’s fundamental provisions.

According to the ECJ, the Dutch law provisions prohibiting privatisation, which restrict the free movement of capital but fall within the scope of Article 345 TFEU, will be compatible with EU law only insofar as the conditions for the restriction on free movement of capital are met.

It is settled case law that a fundamental freedom of the European Union may be restricted only in cases expressly listed in the TFEU or of an overriding reason in the public interest, provided that, in the later case, the restriction also complies with the principle of proportionality. In the Essent Case, the ECJ referred this assessment to the national court.

Kinstellar comments

In our view the judgment of the ECJ in the Essent Case is of great significance for private investors in the European energy markets:

  • The ECJ declared, based on Article 345 TFEU, that Member States are free to decide that the right to carry out certain activities in the energy sector may be granted to undertakings in public ownership only, thereby excluding the involvement of private investors.
  • The Court also declared that the right of Member States to determine their system of property ownership is not unrestricted. Member States must take into consideration the fundamental principles of EU law, including its fundamental freedoms.
  • Measures adopted by Member States to limit the right to acquire shares in undertakings exercising certain activities are deemed restrictions on the free movement of capital. Such restrictions may only be adopted in cases of an overriding reason in the public interest (or other specific cause set out in the TFEU) and must meet the proportionality test.
  • The ECJ did not, in this particular case, take a stance on what constitutes an overriding reason in the public interest or whether the measures meet the proportionality test. Past judgments of the Court may offer some guidance on this issue.