Introduction
In 2000, the undertakings Vereniging voor Energie, Milieu en Water (hereinafter referred to as ‘VEMW’),
Amsterdam Power Exchange Spotmarket BV and Eneco NV lodged an appeal, with the College van Beroep voor het bedrijsleven, the Administrative Court for Trade and Industry in the Netherlands or ‘the College’, against a controversial decision made by the Directeur van de Dienst uitvoering en toezicht energie (hereinafter referred to as ‘DTE’), the Dutch transmission system operator, concerning the preferential allocation of electricity transport capacity via cross-border systems afforded to Samenwerkende Elektriciteits Produktiebedrijven NV (hereinafter referred to as ‘SEP’). The claimants argued that the reservation of import capacity for the electricity purchase contracts concluded by SEP was in breach of the prohibition of discrimination laid down in Directive 96/92/EC of the European Parliament and of the Council of 19 December 1996 concerning common rules for the internal market in electricity. It is in this context that the College decides to stay the proceedings and refer to the European Court of Justice for a preliminary ruling.
This Case Note examines the ECJ’s forward-thinking decision and inquiries into its precedential potential
within the EU’s legal framework. Part I provides the factual, legal, and procedural background behind the
origins of this legal dispute. Part II explores the rationale of the Court’s decision. Finally, Part III focuses on the critical assessment portion of this Case Note, which comprehends a brief analysis of the advocate general’s opinion, Mrs. Stix-Hackl, and my commentary on the decision.
I. Factual, Legal, and Procedural Background
With a view to liberalizing and harmonizing an internal energy market within the European Union, many essential measures have been adopted since 1996. The Directive 96/92/EC of the European Parliament and of the Council of 19 December 1996 concerning common rules for the internal market in electricity (hereinafter referred to as ‘the Directive’) was one of those critical measures, and it represented merely the second stage of the gradual implementation of an internal market in electricity within the European Union. This Directive’s aim was to “complete a competitive internal market on electricity” according to its Recital (2) and Recital (4) states that “establishment of the internal market in electricity is particularly important in order to increase efficiency in the production, transmission, and distribution of this product while reinforcing security of supply and the competitiveness of the European economy.” It contained measures such as management unbundling, disregard for exclusive rights to import or export, and prohibited discriminatory access to transmissions and distributions.
This particular case – Decision C-17/03 on VEMW and Others – revolves around the fact that, before the transposition of this Directive to the Netherlands’ internal legal order, there was only one company, the SEP, that was authorized to import electricity to the Netherlands for public distribution. This undertaking was entrusted with services of general economic interest, which also included ensuring the security of supply. To successtully fulfill its task, SEP entered into several long-term electricity purchase contracts. However, after the transposition of this Directive and the consequential liberalization of the market in electricity in the Netherlands, SEP naturally lost its import monopoly because the market was now open to other competing operators.
The dispute arises from the fact that the DTE, who is responsible for operating, ensuring the maintenance of, and developing the transmission system in a given area, guarantying security of supply, afforded SEP preferential status in relation to the allocation of importation capacity after the market had been opened up, under the System Code of 12 November 1999, to allow SEP to continue to honor those contracts it had entered into before the transposition occurred, which hindered the openness of the market and resulted in the refusal of access to other potential operators.
The three aforementioned competing companies challenged this decision on the basis that it distorted competition and infringed the principle of equal treatment by lodging an administrative complaint with the DTE, who quickly dismissed it as unfounded. The claimants appealed against that decision with the Administrative Court for Trade and Industry, claiming that the preferential allocation for the electricity purchase contracts concluded by SEP was an infringement of the prohibition of discrimination laid down in the Directive. To settle this community matter accordingly, the national Court decided to stay the proceedings and refer to the European Court of Justice for a preliminary ruling.
II. Reasoning of the Court
In order to reach a decision on this material transitional issue, firstly, the Court analyzed the scope of application of Article 7(5) of the Directive, which states that “the system operator shall not discriminate between system users or classes of system users, particularly in favour of its subsidiaries or shareholders.” According to its wording, the context in which it occurs, and the objects of the rules of which it is part, the Court arrived at the conclusion that the norm wasn’t limited to covering technical rules but should be interpreted as applying to all discrimination. It even stated that, even if that wasn’t the case, Article 16 of the Directive, read alongside Article 3(1), prohibited Member States from organizing access to the system in a discriminatory manner, meaning that there was no indication contained in this Directive that supported a restrictive interpretation to the general prohibition of discrimination, which is a more specific expression of the general principle of equal treatment. Following this, the Court had to decide whether or not the measures in issue amounted to discrimination contrary to the Directive. Simply put, the Court stated that the prohibition of discrimination requires that comparable situations are not treated differently unless such difference in treatment is objectively justified.
It’s relatively easy to understand that grating priority access to SEP amounts to differential treatment. Still, the real hard-hitting question is whether this differential treatment could possibly be justified in light of the Directive. According to the Court, it couldn’t be justified for several reasons, the most important being that Article 24 of the Directive provided the possibility of applying for a transitional regime under which Member States could seek derogations from certain provisions of this Directive, namely Articles 7 and 16. Therefore, the existence of discrimination had to be appraised, disregarding the fact that SEP was required to conclude those long-term contracts in the performance of its designated task, given the fact that “the Kingdom of the Netherlands could have had recourse to Article 24 of the Directive to request, in good time, a temporary derogation from Articles 7(5) and 16 thereof in favor of the SEP in the form of a request to be allowed to allocate to that undertaking, on a priority basis, part of the capacity for the cross-border transmission of electricity.” (see Case C-17/03, VEMW and Others [20051, paragraph 60).
The Court concludes that the preferential allocation of a portion of the capacity of the cross-border transmission network was, in fact, a discriminatory measure that couldn’t be objectively justified just because SEP once held the import monopoly on the transmission of electricity into the Netherlands. It had infringed on the Directive in question. Furthermore, the Court held that SEP couldn’t rely on the fundamental principles of the protection of legitimate expectations and of legal certainty because, for one, “Community institutions didn’t create well-founded expectations on the part of the SEP that a monopoly for the importation of electricity into the Netherlands would be maintained” (see Case C-17/03, VEMW and Others |20051, paragraph 70), and, secondly, “a Member State cannot bind the Community in such a way that the latter is unable to undertake or pursue the liberalization of the market in electricity” (see Case C-17/03, VEMW and Others [2005], paragraph 79).
III. Critical Assessment of the Case
This case raised a lot of eyebrows because it was the first instance where the Court was presented with the question of whether the formation of an internal market in electricity could be delayed because of prior statist commitments that nevertheless served to perform tasks of general economic interest. The Court had to decide between prioritizing the Union’s objective of liberalization of electricity markets, which further its commitment to establishing an internal energy market, or determining that the arguments of legal certainty and protection of legitimate expectations, fundamental principles of European law, would prevail. What makes this case so interesting is that both alternatives could be construed as being legitimate.
From my personal standpoint, I believe the Court reached the right conclusion, although through a dubious path. Allow me to explain. The Court based its entire decision mainly on the fact that the Directive provided for the possibility of applying for a transitional regime. Article 24(1) of the Directive states that “those Member States in which commitments or guarantees of operation given before the entry into force of this Directive may not be honoured on account of the provisions of this Directive may apply for a transitional regime which may be granted to them by the Commission (.)” and according to Article 24(2) “The transitional regime shall be of limited duration and shall be linked to expiry of the commitments or guarantees referred to in paragraph 1. ” This was the main point of focus of the Court when it came to the reasoning behind the national measure being regarded as discriminatory, and it was recalled by the Court even a second time regarding the refusal of the argument of legal certainty to justify that the legislator had taken account of particular situations and provided adaptations of the new legal rules. This reasoning is not flawed; quite the opposite, the Directive’s very own text supports it, and, in this case, a literal interpretation and application of the Directive were considered sufficient by the Court, but I am of the opinion that it was a missed opportunity, and I will expand on that thought later.
Of course, opinions will diverge on a subject as complex as the one being analyzed in this case, and that compels me to briefly discuss the advocate general Mrs. Stix-Hackl’s opinion regarding this matter. Firstly, the Advocate General also reaches the conclusion that the prohibition of discrimination contained in Articles 7(5) and 16 of said Directive was also applicable to the case at hand by the same motives, but the AG took into further consideration the principles of protection of legitimate expectations and legal certainty. The AG’s opinion focuses on the possible protection of the long-term contracts that SEP entered into before the liberalization of the electricity market in the Netherlands, and it doesn’t disregard them instantaneously. While analyzing to which extent the national provision is in breach of the prohibition of discrimination, the AG admitted that the preferential treatment afforded to SEP could be construed, unlike the Court of Justice, given the fact that “the preferential treatment could be justified by the fact that it was afforded with a view to honoring the long-term electricity purchase contracts in question. Such justification presupposes that community law does not preclude the continuation of the long-term contracts in question after Directive 96/92 came into force and that the preferential treatment does not exceed the degree required to achieve its intended objective” (see Opinion of Mrs. Stix-Hackl – Case-17/03, paragraph 61). This opinion highly differs from the Court’s decision, and although the effort placed around the protection of long-term contracts is admirable, Mrs. Stix-Hackl completely disregards the existence of Article 24 and its importance in this dispute, given the fact that “the procedure, criteria, and limits set out in Article 24 of the Directive would be rendered meaningless if it were to be accepted that a Member State may unilaterally, and without complying with that procedure, apply differing treatment to electricity importers on grounds that are precisely capable of justifying, under Article 24 of the Directive” (see Case C-17/03, VEMW and Others [2005], paragraph 61).
Having said this, I still wouldn’t agree with the Advocate General’s opinion, even if Article 24 wasn’t applicable in this case, and this is where, from my perspective, the Court took a misstep. This part of my critical assessment revolves heavily around this case’s importance regarding European Union Energy Law. Even if Article 24 was not successfully relied on, I think that in no conceivable way could the long-term contracts, even if lawful according to the European Union’s Competition Law, constitute an obstacle to the liberalization of the electricity market in the Netherlands, nevertheless constitute an impairment to the creation of the internal energy market within the European Union. I believe the Court should ve focused more on the fact that a single member state cannot willingly bind the Union in such a drastic way that one of its core goals is affected negatively, given the fact that could’ve happened in this case hadn’t the Court successfully relied on the applicability of Article 24. The liberalization of the market in electricity and the introduction of the first energy package were all about removing obstacles to the development of competition within the European Union, which in this case means the opening of a previously monopolized and closed industry. From this perspective, if the Court had adopted the same opinion as the Advocate General, who knows how many more obstacles would’ve surfaced? Maybe the dream of an EU’s internal energy market would have died alongside the claimant’s hope for equal access to the cross-border network for the importation of electricity into the Netherlands in 2005. A more robust precedent that highlights the Union’s goals and targets and places them above statist ambitions on the subject of the internal energy market would have been highly valuable in this day and age, considering, for example, the reluctance of coal-dependent countries to fully commit to renewable energy targets, as seen in recent EU negotiations, which exemplifies how prior commitments from member states can hinder the EU’s goals of promoting sustainable energy and combating climate change.
Conclusion
In conclusion, Decision C-17/03 on VEMW and Others focuses on the delicate balance between the European Union’s goal of a liberalized internal energy market and prior national commitments. The Court’s emphasis on prioritizing market liberalization highlights the EU’s commitment to encouraging fair competition and breaking up statist monopolies within the electricity market whilst the first energy package was being introduced. From my point of view, while the Court’s decision derives mainly from the literal interpretation of a legal provision, it represents a missed opportunity for a more courageous step towards a more substantial precedent.
Peer-reviewed by:
- Professor Lucila de Almeida, PhD., Abreu Chair in ESG Impact and Professor at NOVA School of Law.
- João Lupi, Senior Associate at Abreu Advogados, practicing Finance and Public Law and Environment
