ECJ rules that grid integrity and security may justify restrictions on free movement

08 November 2013

Peter Willis

In its judgment in Netherlands v. Essent and others of 22 October, the European Court of Justice held that Dutch rules imposing various restrictions on the ownership of transmission and distribution operators could be justified on public interest grounds, by way of derogation from EU free movement rules. The judgment provides support for the argument that other restrictions of fundamental EU freedoms may be justified in the interests of security of supply

The second and third EU electricity and gas directives, Directives 2003/53, 2003/54, 2009/72 and 2009/73 required unbundling of transmission and distribution system operators from supply and generation activities. Dutch law prohibited transfer of shares in a transmission or distribution system operator to any person other than the State of the Netherlands, its provinces, municipalities or other public authorities. It also prohibited system operators from being members of a group of which a member company carries out production/generation, trading or supply of electricity or gas in the Netherlands, and prohibited activities which might adversely affect system operation.

Essent and others challenged the prohibitions before the Dutch courts, which referred a series of questions to the European Court of Justice for a preliminary ruling. 

The ECJ held that Article 345 TFEU (which guarantees national systems of property ownership) permits Member States to provide for public ownership of certain undertakings. However, Article 345 does not mean that rules on property ownership fall outside the fundamental Treaty rules including non-discrimination, freedom of establishment and free movement of capital. The Court therefore examined the prohibitions in the light of Article 63(1) TFEU, which prohibits restrictions on the free movement of capital. It concluded that the Dutch rules restricted the free movement of capital, because they limited the extent to which companies from other Member States could invest in undertakings in the Netherlands, and vice versa.

However, the Court noted that it had previously held on numerous occasions that the free movement of capital could be restricted for overriding reasons in the public interest. Grounds of a purely economic nature cannot constitute overriding reasons in the public interest. The reasons underlying the legislator's decision to prohibit private ownership of the grid operators could amount to such overriding reasons. Furthermore, the restrictions on group ownership and other activities could be justified by the objectives of preventing cross-subsidisation, preventing exchanges of strategic information, guaranteeing investment in networks, guaranteeing the security of energy supply and consumer protection, all of which are overriding reasons in the public interest. 

The judgment is interesting not only because it provides justification for restrictions on the ownership of grid operators on the grounds of ensuring security of supply, consumer protection, etc. but also because it provides support for restrictions of the other fundamental freedoms (in particular the free movement of goods) on the basis of the same overriding grounds. So it could, for example, provide justification for restrictions on cross-border movement of gas or electricity on the grounds of ensuring security of supply.

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