The document discusses the rise and demise of the dogma of full ownership unbundling of distribution system operators in the Netherlands. Key events included EU directives requiring legal and managerial separation, proposals for full de-merger by 2007, and a Senate motion preventing mandatory unbundling unless grid independence was endangered. As a result, ownership unbundling did not occur, but new rules on grid management and oversight were implemented instead. Issues around financing grids and potential international alliances remained unclear.

1. UnbundlingUnbundling
Distribution SysDistribution Systemtem
OperatorsOperators in thein the
NetherlandsNetherlands::
““the rise and demisethe rise and demise
of a dogmaof a dogma””
Weero KosterWeero Koster

2. Theriseanddemise
Theriseanddemiseofadogma
ofadogma
 The Stage: EU
The Stage: EUrequirements
requirements The Plans: full ownership
The Plans: full ownership
unbundling
unbundling The Process: the Senate
The Process: the Senate
as lawmaker
as lawmaker The Product: the current
The Product: the current
situation in the
situation in theNetherlands
Netherlands

3. The Stage: EU DirectiveThe Stage: EU Directive ‘‘0303
 ““Legally separate entitiesLegally separate entities””
 ““Effective powers in respect of assets in caseEffective powers in respect of assets in case
they are owned by vertically integratedthey are owned by vertically integrated
companiescompanies””
 ““Independent management structuresIndependent management structures””
 ““Ownership questions not dealt with; noOwnership questions not dealt with; no
duty to separate ownership of assetsduty to separate ownership of assets””
 ““Compliance programCompliance program””

4. EU Sector enquiry report 10EU Sector enquiry report 10
January 2007January 2007
 Findings:Findings:
 Market concentration, whole sale marketsMarket 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

5. EU Commission EnergyEU Commission Energy
Package 2007Package 2007
 Communication:Communication: ““An energy package for EuropeAn energy package for Europe””
 Renewable Energy Roadmap & progress reports onRenewable Energy Roadmap & progress reports on
renewable electricity and bio fuels & communication:renewable electricity and bio fuels & communication:
““sustainable power generation fossil fuelssustainable power generation fossil 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 TechnologyProposal future European Strategic Energy Technology
planplan

6. Implementation of Directive inImplementation of Directive in
the Netherlandsthe Netherlands
 Gas and ElectGas and Electricity Acts already went beyondricity Acts already went beyond
EU requirements, e.g.:EU requirements, e.g.:
 Details separation producer/supplier/traderDetails separation producer/supplier/trader
 Requirements on composition of supervisoryRequirements on composition of supervisory
board/ full management boardboard/ full management board andand majoritymajority
supervisory board nosupervisory board no ““connectionconnection”” to production,to production,
purchasing, supplypurchasing, supply
 Mandatory list of supervisory board decisionsMandatory list of supervisory board decisions
 shareholders no influence on duties grid managershareholders no influence on duties grid manager
 group companies: code against discriminationgroup companies: code against discrimination

7. The Plans: even furtherThe Plans: even further
requirementsrequirements
 March 2004,March 2004, ““Privatisation letterPrivatisation letter””
 Complete de-merger of distribution grids perComplete de-merger of distribution grids per
1 January 20071 January 2007
 Reasons for de-merger:Reasons for de-merger:
 improper competitive advantagesimproper competitive advantages
 financing advantage compared to new entrantsfinancing advantage compared to new entrants
 influence independent decision makinginfluence independent decision making
 Remedy: full ownership unbundling of gridRemedy: full ownership unbundling of grid
managersmanagers ““at shareholders levelat shareholders level””

8. …… and further requirementsand further requirements
 Grid manager must have economic ownershipGrid manager must have economic ownership
of grid, its group must have legal ownershipof grid, its group must have legal ownership
 Elaborate rElaborate rules preventingules preventing security rights tosecurity rights to
support commercial activities and financialsupport commercial activities and financial
soundness of grid managers:soundness of grid managers:
 recapitalisation possibilitiesrecapitalisation 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

9. CoCommon vertically integratedmmon vertically integrated
structurestructure
Governmental shareholders
Holding company
Grid manager Production
Purchasing and supply

10. The dogma: full ownershiThe dogma: full ownershipp
unbundledunbundled structurestructure
Governmental shareholders
Holding companyGrid manager
ProductionPurchasing and supply

11. …… aand some more idea’s andnd some more idea’s and
conceptsconcepts
 Privatisation of production and supplyPrivatisation of production and supply
allowedallowed
 Privatisation of minority interest in gridPrivatisation of minority interest in grid
managers under consideration, but nomanagers under consideration, but no
involvement parties engaged in supply orinvolvement parties engaged in supply or
production (exceptionproduction (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 SLAand employees for strategic tasks and SLA’’ss
subject to EU public procurement rulessubject to EU public procurement rules
 RegulatRegulator (DTe)or (DTe) advice on outsourcingadvice on outsourcing

12. The Process: Parliament andThe Process: Parliament and
SenateSenate Draft Bill on de-merger/ unbundling: approved byDraft Bill on de-merger/ unbundling: approved by
Parliament 27 April 2006,Parliament 27 April 2006, in Senate 14 Novemberin Senate 14 November
20062006
 Issues abundant:Issues abundant:
 Violation EU law/ appropriatenessViolation 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

13. Motion Doek and SylvesterMotion Doek and Sylvester
- Objective: mandatory de-merger /Objective: mandatory de-merger /
ownership unbundling will not enter intoownership unbundling will not enter into
force “force “unlessunless””
- Conditions:Conditions:
- EU Directive, orEU Directive, or
- Independent grid management endangered,Independent grid management endangered,
through:through:
- Foreign activities / Cross border alliancesForeign activities / Cross border alliances
- ““Balanced” market relations distortedBalanced” market relations distorted
- Non-transparent non-discriminatory relationsNon-transparent non-discriminatory relations
distorteddistorted
- No equal access to gridNo equal access to grid
- Motion adopted on 21 November 2006Motion adopted on 21 November 2006

14. Motion Doek and SylvesterMotion Doek and Sylvester- Effect: the Senate takes over the legislativeEffect: the Senate takes over the legislative
functionfunction
- The wording of the MotionThe wording of the Motion “the public and“the public and
independent grid management shall beindependent grid management shall be
endangered”endangered” is not very clearis not very clear
- If conditions are triggered, the MEA willIf conditions are triggered, the MEA will
consult the Parliament and produce aconsult the Parliament and produce a “KB”“KB”
to have the unbundling legislation enterto have the unbundling legislation enter
into forceinto force
- The conditions are, and will remain,The conditions are, and will remain,
unclearunclear

15. The Product: ImplementationThe Product: Implementation
scheme new lawscheme new law
 No ownership unbundling distribution gridsNo ownership unbundling distribution grids
 Immediately in force: new rules prohibitingImmediately 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, andgrid managers, and
 financial supervision grid managersfinancial supervision grid managers
 Unclear: (minority) privatisation of gridUnclear: (minority) privatisation of grid
managersmanagers

16. Envisaged developments andEnvisaged developments and
issuesissues Financing, leveraging and the role of theFinancing, leveraging and the role of the
RegulatorRegulator
 Prohibition/ limitation of security rights in the gridProhibition/ limitation of security rights in the grid
in respect of non-transmission related mattersin respect of non-transmission related matters
 VoluntaryVoluntary de-merger and privatisation ofde-merger and privatisation of supply,supply,
trading and production companies; internationaltrading and production companies; international
alliances ?alliances ?
 Partial privatisation networks ? “Partial privatisation networks ? “Circle ofCircle of
ShareholdersShareholders””: further subordinate legislation: further subordinate legislation
 National champion NUON/Essent: NMa’s viewsNational champion NUON/Essent: NMa’s views

17. NMaNMa “vision” document“vision” document
 Cross border alliances of Dutch incumbentsCross border alliances of Dutch incumbents
should be financially transparent, withoutshould be financially transparent, without
material adverse effect on Dutch independentmaterial adverse effect on Dutch independent
grid managementgrid management
 NMaNMa ““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 ?

18. The “Dutch Experience”The “Dutch Experience” NRE, RWE, Intergas, Cogas, Rendo, Oxxio,NRE, RWE, Intergas, Cogas, Rendo, Oxxio,
WestlandWestland
 Grid operators have stable revenueGrid operators have stable revenue 
Private equity parties are interested inPrivate equity parties are interested in
those takeoversthose takeovers
 Interested private equity houses:Interested private equity houses:
 MacquarieMacquarie  NRE, RWENRE, RWE
 CVCCVC
 KKRKKR
 Babcock & BrownBabcock & Brown
 Strategic Industry PlayersStrategic Industry Players