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Unbundling Act does not violate European fundamental freedoms – the ‘unbundling debate’, however, still continues

Unbundling Act does not violate European fundamental freedoms – the ‘unbundling debate’, however, still continues

Unbundling Act does not violate European fundamental freedoms – the ‘unbundling debate’, however, still continues

08.10.2015 NL law

On 26 June 2015, the Dutch Supreme Court decided that the Dutch legislation requiring vertically integrated energy companies to unbundle their network companies from their companies involved in commercial activities is not in violation of EU law. According to the Supreme Court, the prohibitions included in the Unbundling Act restrict the free movement of capital, but are nevertheless compatible with EU law as the restrictions are justified by overriding reasons in the public interest.

As part of the liberalisation and restructuring of the energy sector, initiated by the European Commission, the Unbundling Act was adopted in 2006. With this Act, the legislator aimed to safeguard independent network management in order to (inter alia) increase the transparency of the energy market and to ensure security of supply. Under the Unbundling Act, companies that operate electricity and/or gas transmission and distribution networks are not allowed to be part of the same group (as defined in the Dutch Civil Code) of companies carrying out energy production, trading and/or supply activities in the Netherlands (the “group prohibition”). In addition, the Unbundling Act prohibits network companies (and their group companies) from engaging in activities that could adversely affect the operation of the network concerned (the “prohibition of side activities”). Energy companies had to complete the unbundling process by 1 January 2011.

In three cases brought by the large energy companies Essent, Delta and Eneco against the Dutch State, the energy companies argued that the prohibitions included in the Unbundling Act violate the fundamental European principles of free movement of capital and freedom of establishment, and must therefore be declared non-binding.

The claims of the energy companies were initially rejected by the District Court of The Hague. On appeal, the Court of Appeal in The Hague ruled that the Unbundling Act violates European law as it restricts free movement of capital without any overriding reasons to justify the restriction. The dispute was finally submitted to the Supreme Court, who first referred the matter to  the European Court of Justice for a preliminary ruling. In short, the European Court of Justice held that the prohibitions included in the Unbundling Act constitute a restriction on the free movement of capital. The European Court of Justice ruled that the objectives of the Unbundling Act may, in principle, justify the restrictions on the free movement of capital and the Court underlined that it is up to national courts to determine whether the restrictions are appropriate and proportionate.

Following the preliminary judgment of the European Court of Justice, the Supreme Court assumed in its judgement that the group prohibition and the prohibition of side activities restrict the free movement of capital. The Supreme Court subsequently assessed the objectives pursued by the Unbundling Act: (i) the prevention of distortions of competition, by combating cross-subsidisation between the regulated activities (i.e. operation of networks) and the commercial activities (i.e. production/trade/supply); (ii) achieving transparency in the electricity and gas markets; and (iii) ensuring security of supply. The Supreme Court concluded that these objectives constitute overriding reasons in the public interest that justify the restrictions on the free movement of capital. The Supreme Court finally determined that the prohibitions included in the Unbundling Act are appropriate to the objectives pursued by the Act and do not go beyond what is necessary to attain those objectives. As such, the prohibitions included in the Unbundling Act do not violate the European fundamental principles of free movement of capital and freedom of establishment.

In their appeal, Eneco and Delta had also claimed that the group prohibition results in deprivation of their property and invoked the right to peaceful enjoyment of possessions, as protected by the First Protocol to the European Convention on Human Rights. In view of the fact that this part of their claim was not considered by the Court of Appeal, the Supreme Court has referred the cases of Eneco and Delta to the Court of Appeal in Amsterdam to decide on this remaining issue. For Eneco and Delta there is still a (small) chance that the Unbundling Act will be set aside. For Essent, however, the Supreme Court’s decision is the final chapter in the unbundling saga, as it did not (explicitly) appeal on this matter.

Following the Supreme Court’s judgment, Essent filed an enforcement request with the national regulatory authority for the energy sector: the Authority for Consumers and Markets. The members of the standing committee on Economic Affairs of the Dutch House of Representatives have requested a debate on the (enforcement of) the Unbundling Act, and urged the Minister of Economic Affairs to assure that in the meantime no irreversible steps shall  be taken.

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