In March 2004, the Dutch Minister of Economic Affairs submitted a Bill requiring, inter alia, Dutch energy companies to unbundle. The purpose of the proposal was to secure independent network management amid suspicions that integrated energy companies cross-subsidised commercial activities with proceeds from their regulated networks.

In addition, the legislation purported to create a level playing field in the Dutch energy market. Despite extensive lobbying by the energy companies, which were generally opposed to forced unbundling, the Dutch Parliament adopted the proposal on 27 April, 2006. On 14 November this year, the Senate also agreed to adopt the proposal, albeit with the unexpected proviso that the compulsory unbundling is to be postponed indefinitely.

This proviso has been strongly criticised and the question remains whether the Independent Network Management Act, previously known as the Unbundling Act, will benefit energy policy in the Netherlands.

Structure of the Act

The original intention of the Act was to require, by compulsory demerger, the separation of integrated energy companies, such as Nuon, Essent, ENECO and Delta, into separate companies to ensure they operate as a 'commercial' energy company involved in the sale, distribution or production of energy or as a 'net-work' company operating gas and/or electricity networks.

The Senate, however, has stipulated that a compulsory unbundling only needs to be realised if:

. a directive is implemented which requires such unbundling in the European Community (EC); or

. the integrated energy companies jeopardise public and independent network management through: engaging in activities abroad; creating alliances with foreign companies; disruption of the market balance; a lack of transparency of financial positions; or failure to provide non-discriminatory access to energy networks.

The Office of Energy Regulation (DTe), part of the Dutch Competition Authority, supervises and reports on alleged frustrations of the network management by integrated energy companies. If the DTe determines that public and independent network management is jeopardised by integrated energy companies, it can – after consultation with Parliament and the Senate – "pull the trigger", as some senators have stated. In other words, the minister can impose forced unbundling on misbehaving energy companies.

It is uncertain whether misconduct of one integrated energy company would allow the minister to require all integrated companies to unbundle in accordance with the Act. Furthermore, it is unclear whether voluntary unbundling by the energy companies would have to be done in accordance with the relevant provisions of the Act.

Nonetheless, other aspects of the Act will be implemented. The Act extends the mandatory management of the high-voltage grid by TenneT, the national grid manager, to all networks of 110kV and higher from 1 January, 2008. TenneT currently manages all networks of 220kV and higher and has stated that it intends to purchase those parts of the high-voltage network that it does not already own.

The Act does not obligate parties to sell such networks to TenneT, but they must at least appoint it as grid manager for these networks. Therefore, the current grid owners can either sell their networks or negotiate a management agreement. The Act does not provide for any arrangements, price or otherwise, that would apply to any network sale or management arrangement. The current grid owners will therefore have to negotiate either alternative with their backs against the wall.

Furthermore, the Act requires energy companies to implement a so-called 'fat grid manager'. This implies a transfer of economic ownership of electricity and gas networks to the grid-manager entity. The grid-manager entity must be self-proficient. To safeguard self-proficiency, outsourcing of grid-management activities and related services by the grid-manager entity is restricted by the Act.

Finally, the Act prohibits the network manager from granting security for the financing of activities of group companies, unless this granting of security is related to network management. As a result – and despite the fact that forced unbundling has been delayed – Dutch integrated energy companies will have to restructure to some extent.

The consequences

The response to the Senate adopting the Act without forced unbundling was mixed. While most politicians were satisfied with the outcome of the Senate vote, commentators have suggested that the decision was simply a politically correct way to kill the core element of the Act.

Cynics have even described the position as xenophobic as the Senate explicitly said alliances with foreign energy companies or activities abroad could jeopardise independent grid management in the Netherlands.

On the other hand, energy companies have not claimed all-out victory as the minister still has the power to force unbundling if public and independent grid management is jeopardised. However, whether the minister would be able to implement forced unbundling on the basis of the vague criterion of jeopard-ising independent grid management is questionable. The DTe is not equipped to prove conclusively that activities under-taken by energy companies jeopardise independent grid management, except for cases of extreme misconduct.

The position of the Senate means the Dutch Government has surrendered decision-making on the structure of the national energy market to third parties. The EC could adopt a directive requiring unbundling, integrated energy companies could unbundle voluntarily or the DTe could discover and report miscon-duct to the minister.

The minister controls none of these third parties – not even the DTe, which became an autonomous administrative authority in July 2005. Consequently, the minister cannot make any orders and has no supervisory role on DTe policy.

Parts of the Act will take effect on or before 1 January, 2008. However, it is uncertain whether forced unbundling will ever take effect and it seems unlikely the minister will be able to exercise those powers to effect the unbundling provisions. In addition, it is not likely that a European directive is adopted any time soon that would force European integrated energy companies to unbundle. Consequently, Dutch energy companies control their own destiny and can decide themselves whether or not they want to unbundle.

Under the Electricity Act and Gas Act, the transfer of energy networks or shares in a grid-manager entity is subject to the prior consent of the minister. Such consent will be withheld if the transfer is made to a party that does not currently hold shares in a grid-manager entity (i.e. provinces and municipalities).

The minister may only consent to a transfer (outside the current circle of shareholders) after a ministerial decree on privatisation has been adopted. The minister has not stated if and when he expects to put forward such a decree. Without this, the acquisition by Macquarie Group of NRE Network last year, for example, cannot be closed. It remains to be seen if this transaction will be closed or aborted.

Yet privatisation of the commercial business (production, supply and trade) of integrated energy companies is possible and not subject to specific consents. However, as long as the commercial business is part of a group of companies that also has network activities, consent of the minister is required.

A voluntary unbundling of the energy companies would therefore be necessary to allow the current public shareholders to sell the shares in the commercial business. This has not changed as result of the Act. With regard to the anticipated M&A activity in the Dutch energy market, the Senate position on the Act has maintained the status quo. After two and a half years of intense lobbying, we are back where we started – waiting for a ministerial decree on privatisation.

Increased supervision by the DTe, the enduring interest of foreign energy players to acquire Dutch energy companies and the creation of a 'fat grid manager' may result in a decision by some companies to voluntarily unbundle – at which point it would become possible to merge the commercial businesses of Dutch energy companies with larger foreign energy companies.

Harm Kerstholt is a partner and Miriam van Ee a solicitor at NautaDutilh.