Unbundling Unbundling Distribution SysDistribution System tem

Operators Operators in the in the NetherlandsNetherlands::““the rise and the rise and

demise of a dogmademise of a dogma”” Weero KosterWeero Koster

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The Stage: EU

The Stage: EU requirements

requirements The Plans: full

The Plans: full ownership unbundling

ownership unbundling The Process: the

The Process: the Senate as lawmaker

Senate as lawmaker The Product: the

The Product: the current situation in the

current situation in the

Netherlands

Netherlands

The Stage: EU Directive ‘03The Stage: EU Directive ‘03

““Legally separate entities”Legally separate entities”

““Effective powers in respect of assets in Effective powers in respect of assets in case they are owned by vertically case they are owned by vertically integrated companies”integrated companies”

““Independent management structures”Independent management structures”

““Ownership questions not dealt with; no Ownership questions not dealt with; no duty to separate ownership of assets”duty to separate ownership of assets”

““Compliance program”Compliance program”

EU Sector enquiry report 10 EU Sector enquiry report 10 January 2007January 2007

Findings:Findings: Market concentration, whole sale markets Market concentration, whole sale markets Vertical foreclosure, unbundling gridsVertical foreclosure, unbundling grids Insufficient cross-border capacityInsufficient cross-border capacity Lack of transparency market informationLack of transparency market information Price formation not effective and transparentPrice formation not effective and transparent Competition downstream markets limitedCompetition downstream markets limited Balancing markets favour incumbentsBalancing markets favour incumbents Potential for LNG yet to be realisedPotential for LNG yet to be realised

EU Commission Energy EU Commission Energy Package 2007 Package 2007

Communication: Communication: ““An energy package for EuropeAn energy package for Europe”” Renewable Energy Roadmap & progress reports Renewable Energy Roadmap & progress reports

on renewable electricity and bio fuels & on renewable electricity and bio fuels & communication: communication: ““sustainable power generation sustainable power generation fossil fuelsfossil fuels””

Prospect report internal market gas and electricityProspect report internal market gas and electricity Priority interconnection planPriority interconnection plan Nuclear energy illustrative programmeNuclear energy illustrative programme Proposal future European Strategic Energy Proposal future European Strategic Energy

Technology planTechnology plan

Implementation of Directive Implementation of Directive in the Netherlandsin the Netherlands

Gas and ElectGas and Electricity Acts already went ricity Acts already went beyond EU requirements, e.g.:beyond EU requirements, e.g.: Details separation producer/supplier/traderDetails separation producer/supplier/trader

Requirements on composition of supervisory Requirements on composition of supervisory board/ full management boardboard/ full management board and and majority majority supervisory board no “supervisory board no “connectionconnection” to ” to production, purchasing, supplyproduction, purchasing, supply

Mandatory list of supervisory board decisionsMandatory list of supervisory board decisions

shareholders no influence on duties grid shareholders no influence on duties grid managermanager

group companies: code against discrimination group companies: code against discrimination

The Plans: even further The Plans: even further requirementsrequirements

March 2004, “March 2004, “Privatisation letterPrivatisation letter””

Complete de-merger of distribution grids Complete de-merger of distribution grids per 1 January 2007per 1 January 2007

Reasons for de-merger:Reasons for de-merger: improper competitive advantagesimproper competitive advantages

financing advantage compared to new entrants financing advantage compared to new entrants

influence independent decision makinginfluence independent decision making

Remedy: full ownership unbundling of grid Remedy: full ownership unbundling of grid managers “managers “at shareholders levelat shareholders level””

… … and further requirementsand further requirements Grid manager must have economic Grid manager must have economic

ownership of grid, its group must have ownership of grid, its group must have legal ownership legal ownership

Elaborate rElaborate rules preventingules preventing security rights security rights to support commercial activities and to support commercial activities and financial soundness of grid managers:financial soundness of grid managers: recapitalisation possibilities recapitalisation possibilities role of private equity /institutional investorsrole of private equity /institutional investors

(Most) existing group structures no longer (Most) existing group structures no longer allowedallowed

CoCommon vertically mmon vertically integratedintegrated structure structure

Governmental shareholders

Holding company

Grid manager Production

Purchasing and supply

The dogma: full ownershiThe dogma: full ownership p unbundledunbundled structure structure

Governmental shareholders

Holding companyGrid manager

ProductionPurchasing and supply

… … aand some more idea’s and nd some more idea’s and conceptsconcepts

Privatisation of production and supply Privatisation of production and supply allowedallowed

Privatisation of minority interest in grid Privatisation of minority interest in grid managers under consideration, but no managers under consideration, but no involvement parties engaged in supply or involvement parties engaged in supply or production (exception “production (exception “present circlepresent circle”)”)

Completely independent (“Completely independent (“fatfat”, but not ”, but not ““purepure”) grid manager, with ownership grid ”) grid manager, with ownership grid and employees for strategic tasks and and employees for strategic tasks and SLA’s subject to EU public procurement SLA’s subject to EU public procurement rulesrules

RegulatRegulator (DTe)or (DTe) advice on outsourcing advice on outsourcing

The Process: Parliament and The Process: Parliament and SenateSenate

Draft Bill on de-merger/ unbundling: approved Draft Bill on de-merger/ unbundling: approved by Parliament 27 April 2006, by Parliament 27 April 2006, in Senate 14 in Senate 14 November 2006November 2006

Issues abundant: Issues abundant: Violation EU law/ appropriateness Violation EU law/ appropriateness Legal or economic ownership transferLegal or economic ownership transfer Cross border leasesCross border leases Tax issues, particularly tax groupsTax issues, particularly tax groups Lobbying activities incumbents (legal action / Lobbying activities incumbents (legal action /

compromise?) and local governmentscompromise?) and local governments

Motion Doek and SylvesterMotion Doek and Sylvester- Objective: mandatory de-merger / Objective: mandatory de-merger /

ownership unbundling will not enter ownership unbundling will not enter into force “into force “unlessunless” ”

- Conditions:Conditions:

- EU Directive, orEU Directive, or

- Independent grid management Independent grid management endangered, through:endangered, through:

- Foreign activities / Cross border alliancesForeign activities / Cross border alliances

- ““Balanced” market relations distortedBalanced” market relations distorted

- Non-transparent non-discriminatory relations Non-transparent non-discriminatory relations distorteddistorted

- No equal access to gridNo equal access to grid

- Motion adopted on 21 November 2006 Motion adopted on 21 November 2006

Motion Doek and SylvesterMotion Doek and Sylvester- Effect: the Senate takes over the Effect: the Senate takes over the legislative functionlegislative function

- The wording of the Motion The wording of the Motion “the public “the public and independent grid management and independent grid management shall be endangered”shall be endangered” is not very clear is not very clear

- If conditions are triggered, the MEA will If conditions are triggered, the MEA will consult the Parliament and produce a consult the Parliament and produce a “KB”“KB” to have the unbundling to have the unbundling legislation enter into forcelegislation enter into force

- The conditions are, and will remain, The conditions are, and will remain, unclear unclear

The Product: Implementation The Product: Implementation scheme new lawscheme new law

No ownership unbundling distribution gridsNo ownership unbundling distribution grids Immediately in force: new rules prohibiting Immediately in force: new rules prohibiting

transfer ownership in distribution gridstransfer ownership in distribution grids As per 1 January 2008, new rules on:As per 1 January 2008, new rules on:

transfer management 110 kV grids to TSO, transfer management 110 kV grids to TSO, ““fatfat”” grid managers, and grid managers, and financial supervision grid managersfinancial supervision grid managers

Unclear: (minority) privatisation of grid Unclear: (minority) privatisation of grid managersmanagers

Envisaged developments Envisaged developments and issues and issues

Financing, leveraging and the role of the Financing, leveraging and the role of the RegulatorRegulator

Prohibition/ limitation of security rights in the grid Prohibition/ limitation of security rights in the grid in respect of non-transmission related mattersin respect of non-transmission related matters

Voluntary Voluntary de-merger and privatisation of de-merger and privatisation of supply, supply, trading and production companies; international trading and production companies; international alliances ? alliances ?

Partial privatisation networks ? “Partial privatisation networks ? “Circle of Circle of ShareholdersShareholders”: further subordinate legislation”: further subordinate legislation

National champion NUON/Essent: NMa’s viewsNational champion NUON/Essent: NMa’s views

NMa NMa ““visionvision”” document document Cross border alliances of Dutch incumbents Cross border alliances of Dutch incumbents

should be financially transparent, without should be financially transparent, without material adverse effect on Dutch material adverse effect on Dutch independent grid managementindependent grid management

NMa NMa ““vision documentvision document”” on: on: National championNational champion Cross border TSO/ vertically integrated groupsCross border TSO/ vertically integrated groups

So international alliances favoured ? So international alliances favoured ?

The “Dutch Experience”The “Dutch Experience” NRE, RWE, Intergas, Cogas, Rendo, NRE, RWE, Intergas, Cogas, Rendo, Oxxio, Westland Oxxio, Westland

Grid operators have stable revenue Grid operators have stable revenue Private equity parties are interested in Private equity parties are interested in those takeoversthose takeovers

Interested private equity houses:Interested private equity houses: Macquarie Macquarie NRE, RWE NRE, RWE

CVCCVC

KKRKKR

Babcock & BrownBabcock & Brown

Strategic Industry PlayersStrategic Industry Players