ECJ Judgment of 17 July 2008 declaring Spain’s failure to fulfil its obligations under the EC Treaty

29 September 2008

Antonio Creus

On 17 July 2008, the European Court of Justice (ECJ) declared that Spain had failed to fulfil its obligations under Articles 43 and 56 of the European Community Treaty (EC Treaty) due to the adoption of Royal Decree-Law 4/2006 of 24 February 2006.

Pursuant to Royal Decree-Law 4/2006, any company, be it domestic or not, be it active in the energy sectors or not, acquiring a stake in another company carrying out regulated activities in the energy sector, was obliged to request the authorisation of the Spanish energy regulator. In fact, the regulator’s powers were also enlarged as to the cases to be examined and as to the discretion it had. The regulator was entitled to deny or subject any authorisation to conditions in a wide range of cases, some of them with a very high degree of discretion such as “any other reason of public safety”. Before such a decree the regulator’s powers were limited to a number of cases and on the basis of serious risks to the energy markets.

Royal Decree-Law 4/2006 was approved on the basis of urgency in the middle of the tender battle to gain control over Endesa, one of the largest electricity companies in Spain. Gas Natural had initiated a public tender offer that had met competition from E.on, and that was precisely the time when the legislative piece was issued. Given such a situation, the European Commission (Commission) decided to initiate proceedings against Spain on the basis of infringement of freedom of establishment and free movement of capital.

The Commission based its claim on the prohibition of restricting the free movement of capital and the freedom of establishment in the sense of Articles 43 and 56 of the EC Treaty. The Commission considered that the prior authorisation by the regulator is a condition for the acquisition of a shareholding in an undertaking which carries out activities in the energy sector which constitutes a restriction to the free movement of capital and freedom of establishment in the sense that it prevents companies from outside Spain from purchasing shares in Spanish companies carrying out activities in the energy markets. Moreover, in the view of the Commission, the restriction is not justified and does not safeguard the supply of energy. In fact, there are other adequate and less disproportionate measures to get the same purpose.

In contrast, Spain claimed that Royal Decree-Law 4/2006 had to be exclusively analysed from the perspective of freedom of establishment. In its view, the main purpose of the movement of capital is the establishment of companies in a given Member State. In this sense, the Kingdom of Spain defends the system of prior authorisation because it would not imply a restriction to this freedom as it does not create discrimination and, moreover, it constitutes a mechanism to defend the general interest.

The ECJ considered that the system of prior authorisation adopted by Royal Decree-Law 4/2006 can dissuade investors from other Member States other than Spain, from acquiring shareholdings in Spanish companies carrying out activities in the energy sector, therefore the system of prior authorisation constitutes a clear restriction to the movement of capital prohibited by Article 56 of the EC Treaty. In fact, assessing the justification of the measure, the ECJ admitted that the objective of safeguarding the energy supply could be deemed as an issue of public order, however it said that only in cases of real and sufficiently serious threat, which affect the public interest, can the reason of public safety can be invoked.

Consequently, the ECJ pointed out that the mere acquisition of shares or assets can not be considered as a real and serious threat for the safeguarding of energy supply and even having the regulator’s authorisation can not always ensure the supply in cases of real and sufficiently serious threat. Moreover, the regulator may decide not to authorise a concentration also on the basis of the objectives of energy policy which, in the ECJ’s view, are not necessarily related to the safeguarding of energy supplies. In addition, the ECJ stated that there was no justification to this excessively broad and discretionary power of the Spanish Energy regulator; it also noted that the grounds in which an operation could be denied or subject to conditions are written in general and imprecise terms which can lead to a discretional behaviour of the regulator and clear risk of discrimination.

Finally, the ECJ declared that the Kingdom of Spain had failed to fulfil its obligations under Articles 43 and 56 of the EC Treaty by adopting Royal Decree-Law 4/2006.

Now it is Spain’s duty to adapt the national legislation to Community Law if it wants to fulfil its obligations under the Treaty. The timing could not be better since Gas Natural has launched a tender offer for Unión Fenosa, another electricity company.