Reference for a preliminary ruling (Article 267 TFEU) Hoge Raad der Nederlanden

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1 CASE NAME AND NUMBER; DATE OF JUDGMENT: Joined Cases C-105/12 to C-107/12, Staat der Nederlanden v Essent NV (C-105/12), Essent Nederland BV (C-105/12), Eneco Holding NV (C-106/12), Delta NV (C-107/12) TYPE OF PROCEDURE REFERRING COURT (IF APPLICABLE) Reference for a preliminary ruling (Article 267 TFEU) Hoge Raad der Nederlanden KEY WORDS Free movement of capital Article 63 TFEU Rules governing the system of property ownership Article 345 TFEU Electricity and gas distribution system operators Prohibition of privatisation Prohibition of links with undertakings which generate/produce, supply or trade electricity or gas Prohibition of activity which may adversely affect system operation OPERATIVE PART OF THE JUDGMENT Article 345 must be interpreted as covering rules entailing the prohibition of privatisation, such as those at issue in the main proceedings, which have the effect that shares held in an electricity or gas distribution system operator active in the Netherlands must be held, directly or indirectly, by the public authorities identified by the national legislation. However, that interpretation does not mean that Article 63 TFEU does not apply to provisions of national law, such as those at issue in the main proceedings, which prohibit the privatisation of electricity or gas distribution system operators, or, further, which prohibit, first, ownership or control links between companies which are members of the same group as an electricity or gas distribution system operator active in the Netherlands and companies which are members of the same group as an undertaking which produces, supplies, or trades in electricity or gas in the Netherlands and, secondly, engagement by such an operator and by the group of which it is a member in transactions or activities which may adversely affect the operation of the system concerned. As regards the rules entailing the prohibition of privatisation at issue in the main proceedings, which falls within the scope of Article 345 TFEU, the objectives which underlie the choice of the legislature in relation to the adopted rules governing the system of property ownership may be taken into consideration as overriding reasons in the public interest to justify the restriction on the free movement of capital. As regards the other prohibitions, the objectives of combating crosssubsidisation in the broad sense, including exchange of strategic information, in order to achieve transparency in the electricity and gas markets, and to prevent distortions of competition may, as

2 overriding reasons in the public interest, justify restrictions on the free movement of capital caused by provisions of national law, such as those at issue in the main proceedings. PRESS RELEASE CURIA [COPY-PASTE HYPER LINK IF AVAILABLE - FEEL FREE TO ADD YOUR OWN SUMMARY OF THE CASE IN THIS SECTION] TO BE NOTED: The Essent cases concern the compatibility with EU free movement law of the Dutch approach towards unbundling electricity and gas distributors and suppliers. Electricity and gas are provided to consumers by means of transmission and distribution networks that allow for the transportation of gas and electricity towards an intermediate landing station (transmission) and on the final consumer (distribution). Once those networks have been in place, it is difficult to replicate them and to construct an additional and alternative distribution network. Network operators are therefore said to benefit from a natural monopoly. In the wake of the second liberalization package in the electricity and natural gas sectors, Directives 2003/54 and 2003/55 proposed the functional and legal unbundling of distribution systems and production/supply operators, in order to allow nondiscriminatory access to the former. EU law did not however mandate a complete legal separation of ownership between distribution system and supply operators, but only asked for some separation. The Netherlands went beyond the obligation imposed by the Directives and adopted a privatisation prohibition. That prohibition implied that shares in distribution systems could only be transferred between and held by the State, provinces, municipalities and other specified legal persons whose shares were owned directly or indirectly by one of those public authorities. As a result, distribution networks could not be transferred to private undertakings. In addition, the Netherlands also adopted a group prohibition in accordance with which a distribution system operator cannot be a member of a group of which one legal person or company generates, supplies or trades in electricity in the Netherlands. In practice, this meant a prohibition to hold shares and to have an interest in a legal person or company that generates, supplies or trades electricity. In addition, distribution operators could not engage in activities which could adversely affect system operation, i.e. activities unrelated to the operation of that system The Wet Onafhankelijk Netbeheer (won) crystallized this approach in an effort to avoid cross-subsidisation between different parts of energy distribution and supply companies, as such cross-subsidisation would distort competition EU law tried to create in the electricity and gas sectors.

3 As a result of the won, Essent was forced to separate into two different holdings, Elexis and Essent, the latter of which was purchased by a German group specialized in the supply, generation and trade in electricity. Eneco and Delta have not yet split, yet entrusted fully-owned subsidiaries with distribution system responsibilities. All companies involved maintain that the privatization and group prohibitions are incompatible with Article 63 TFEU (free movement of capital), to which the Netherlands replied that Article 345 TFEU allows for a Member State to make a choice in favour of publicly held property rights. The Hoge Raad questioned whether Article 345 could indeed justify this choice and the effects it would have on the applicability of Article 63 TFEU. The Court acknowledged that the Member States may legitimately pursue an objective of establishing or maintaining a body of rules relating to the public ownership of certain undertakings (para 31). EU law is indeed neutral; it does not preclude, as a general rule, either the nationalisation of undertakings (see, to that effect, Case 6/64 Costa [1964] ECR 585, at 598) or their privatisation (see, to that effect, Case C-244/11 Commission v Greece [2012] ECR I-0000, paragraph 17). Maintaining a body of rules relating to public ownership of distribution system operators falls within the scope of that provision. Contrary to the Advocate General s opinion, the Court held that Article 345 does not mean that rules governing the system of property ownership current in the Member States are not subject to the fundamental rules of the FEU Treaty, which rules include, inter alia, the prohibition of discrimination, freedom of establishment and the free movement of capital. As a result, the privatization prohibition, as well as the group prohibition and additional limits on distribution network operations need to be considered in the light of Article 63 TFEU, all the more so since they do not form part of harmonized EU law. Important to note here is that the Court confirms the neutrality of Member States economic organization choices, but explicitly confirms that such neutrality only exists within the boundaries determined by EU law itself. Neutrality can therefore only survive if and to the extent that the EU legislator did not intervene and to the extent that national choices do not impede on the fundamental freedoms in an unrestricted way. The subsequent case analysis precisely deals with those elements. Building upon its case law on Article 63 TFEU and the notion of free movement of capital as referring to direct investments in the form of participation through the holding of shares or portfolio investments in the form of share acquisition for financial investment purposes without any attempt to influence the management and control of the undertaking, the Court easily concludes that the prohibitions constitute impediments or restrictions on the free movement of capital. As a result of the prohibitions, no private investor can acquire shares or interests in the capital of an electricity or gas distribution system operator active in the Netherlands. In addition, it follows from the group prohibition that a company of another Member State which is a member of the same group as an undertaking active in generation/production, supply or trade of electricity or gas in the Netherlands may not acquire shares in a company which is a member of the same group as an electricity or gas distribution system operator active in the Netherlands. the group prohibition also means that a company which is a member of the same group as an electricity or gas distribution system operator active in the Netherlands may not invest in an undertaking established in another Member State which is active in the sector of

4 generation/production, supply or trade of electricity or gas in the Netherlands, or in a company which is a member of the same group as such an undertaking the prohibition of activities which may adversely affect system operation is also such as to impose qualitative restrictions on investments in other Member States, since it prevents, directly or indirectly, companies in the same group as an electricity or gas distribution system operator active in the Netherlands from investing in undertakings active in sectors other than system operation As a result, the restrictions need to be justified on the basis of Treaty provisions or by virtue of overriding reasons in the public interest. In the justification stage, the Court distinguishes between the privatization prohibition and the group prohibition and related activities. In terms of the privatization prohibition, purely economic grounds cannot justify a choice in national law, as that would open the door for national protectionist measures to be introduced as overriding reasons. Article 345 and choices in property regimes do not fit that purpose. The Court here nevertheless starts to develop a rather slippery reasoning process where economic and non-economic reasoning seem to be hard to exclude. The Court restated that reasons of an economic nature could dictate the pursuit of an objective in the public interest. As a result, the interest underlying the legislator s choices for public or private ownership could be taken into account as an overriding reason. The Advocate General basically distinguished three models for allowing economic reasons to be a part of an overriding reasons analysis 1. Non-economic interests to which economic interests could be attached 2. Economic reasons that directly relate to a field in which EU law intervened in order to avoid national protectionism and that are invoked by the national legal order to avoid such protectionism (end is heavier than means) 3. One of the Treaty goals as the framework for an overriding reason grounded in national law. The Court basically holds that the reasons underlying a particular choice are relevant in this regard [distinguishes the case from golden share cases, where limits to privatization are meant to protect national undertakings from competition; in this case, the goal is to create competition among suppliers], but remain for the referring court to be conducted. The group prohibition and related activities restrictions seek to ensure undistorted competition on the markets for and adequate investment in the generation supply and trade of electricity, by disabling distributors to rely on the natural monopoly created by a distribution system. Ensuring adequate investment contributes to the security of energy supply, an overriding interest that had been recognized before. In addition, however, the Court makes a very interesting twist in relation to the notion of undistorted competition. According to the Court and in line with the third reading of the AGs interpretation of economic v non-economic interests, undistorted competition refers to fair competition, which has its ultimate aim in protecting consumers. As consumer protection constitutes an overriding interest, measures to avoid undistorted competition constitute overriding interests as well. The Court further adds that the national measures actually form part of a body of implemented EU law. Such inclusion appears to make them although the Court is once again not exactly explicit about this potential candidates for overriding reasons in the public interest. The Hoge Raad is nevertheless called upon to make the final judgment and to assess the proportionality and appropriateness of the measures in the light of the objectives given.

5 Relevant issues/items in this case: Vague line between economic justifications and overriding reasons blurred > more direct move towards an anti-protectionist national measures requirement? Reference to consumer protection as aim of fair competition > fair competition undistorted competition; judicial recognition of consumer protection as ultimate aim of competition law? Confirmation that neutrality in Article 345 TFEU only plays within boundaries clearly set at the EU level and by the four freedoms. Practical relevance: judicial confirmation of preference for Dutch ownership unbundling model, as also expressed by the EP in relation to transmission models; whilst not a model, appears to be deemed compatible Can EU law impose requirements such as unbundling that would go against the free movement provisions? The Court does not address that point here, yet AG refers to Bauhuis case and the Court s acknowledgement that this is possible therein. DEADLINE FOR SUBMISSION: One week (max.) after case law dinner. Please take account of the discussions during dinner in the to be noted section. Notes can be sent to: m.e.claproth@law.leidenuniv.nl