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European Court of Justice on Independence of German Energy Regulator

In its judgment of 2 September 2021, the ECJ ruled in particular that the German Federal Network Agency (Bundesnetzagentur) does not have the sufficient independence required under EU law. According to the ECJ, EU law requires the national regulatory authority to be independent not only from the government, but also from the national legislator. In the following, we give a brief overview of the background, content and consequences of the decision.
 

Background

The ECJ‘s decision was issued in the infringement proceedings under Article 258 TFEU initiated by the European Commission against the Federal Republic of Germany on 16 November 2018 (Case C-718/18). The European Commission accused Germany of inadequate implementation of the EU Power and Gas Directives (Directive 2009/72/EC and Directive 2009/73/EC)1 basing its action on a total of four complaints relating to the following areas:

  1. Restriction of the German definition of vertically integrated undertaking (“VIU”) in Section 3 No. 38 of the German Energy Industry Act (“EnWG”) to activities within the European Union (complaint 1).
  2. Restriction of the provisions on transitional periods in the event of a change of position under the independent transmission system operator model to certain activities in Section 10c para 2 and para 6 of the EnWG (complaint 2).
  3. Restriction of the obligation to dispose of any shares held in the capital of the VIU to shares held by the management in Section 10c para 4 EnWG (complaint 3).
  4. Incorrect interpretation of the independence of the national regulatory authority required under EU law: infringement of the exclusive powers of the national regulatory authority due to the regulations issued by the Federal Government on the basis of Section 24 para 1 No. 1 EnWG (e.g. Ordinance on Incentive Regulation (“ARegV”), Ordinance on Gas Network Fees (“GasNEV”), Ordinance on Gas Network Access (“GasNZV”), Ordinance on Electricity Network Fees (“StromNEV”), Ordinance on Electricity Network Access (“StromNZV”)) (complaint 4).

In his opinion of 14 January 2021, Advocate General Giovanni Pitruzzella shared the European Commission‘s view and proposed that all motions for judgment should be granted.
 

Decision

In its judgment in the infringement proceedings, the ECJ upheld the Commission‘s complaints in their entirety.

Lack of independence of the Federal Network Agency (complaint 4)

The legal basis for the activities of the Federal Network Agency in the electricity and gas sector is essentially the EnWG. It contains the regulatory areas that are subject to the supervision of the Federal Network Agency and provides guidelines for the design of the regulatory framework, e.g., in the areas of Redispatch, network reserve and fee regulation. In addition, the Federal Government is authorized to issue regulations pursuant to Section 24 para 1 EnWG. The legal framework is therefore supplemented by numerous regulations of the Federal Ministry of Economic Affairs and Energy (BMWi), e.g., ARegV, StromNEV, GasNEV, StromNZV, GasNZV, Ordinance for Regulating Grid Connection of Electricity Generating Installations (“KraftNAV”), Ordinance regarding general conditions of the network connection and its use for the gas supply at low pressure (“NAV”), etc. These contain further requirements, some of which are very detailed, ranging as far as the regulation of index series for the determination of new daily values (Tagesneuwerte) and benchmarks for the determination of interest rates (Sections 6a, 7 StromNEV/GasNEV).

The ECJ has now ruled that the power of the Federal Government to issue regulations containing specific and detailed requirements for the decisions of the Federal Network Agency violates the political independence of the national regulatory authorities required by the directives in Art. 37 of Directive 2009/72/EC and Art. 41 of Directive 2009/73/EC.

The directives assign exclusive competencies to the national regulatory authorities in certain areas. The determination of the methodologies for calculating or establishing the terms and conditions for connection and access to national networks, including the applicable tariffs, forms part of the powers directly reserved to national regulation authorities by the directives (cf. 105).

According to the ECJ, a determination or approval by the national government of the methodologies to be applied by the national regulatory authority for calculating rates for access to the network and the balancing services is inadmissible in the light of an equally detailed legislative framework at EU level (cf. 123 et seq.).

In addition, the ECJ also agreed with the Advocate General to the effect that the areas of exclusive competence of the national regulatory authority may also not be restricted by acts of parliament and in this respect requires “complete independence” from any political bodies, i.e., also from the national legislator (cf. 112, 130).

Pursuant to the ECJ, this does not constitute a violation of the principle of democracy. This is justified on the grounds that the democratic legitimacy of the regulatory authority is derived directly from the European legislative procedure and the – in this respect sufficiently detailed – substantive requirements of EU law, which, in addition to the directives, also includes further regulations of the European Parliament and the Council as well as network codes in the form of Commission regulations. The establishment of criteria at the national level was therefore considered unnecessary and therefore inadmissible (cf. 122 et seqq.). The ECJ invokes that sufficient parliamentary influence on the independent authority is guaranteed by the fact that persons who head the regulatory authority can be appointed by parliament or by the government, parliamentary scrutiny of the authorities can be carried out in accordance with the constitutional law of the Member States, and proceedings can be brought before a body independent (cf. 126 et seqq.). Against this background, in the ECJ‘s view it is also not permissible to delegate to administrative bodies a margin of discretion (in this case, namely the Federal Ministry of Economic Affairs and Energy, which, as part of the government, belongs to the executive branch, cf. 131).

In conclusion, the ECJ thus finds that the Federal Republic of Germany has not properly implemented its obligation to transpose the requirements on the independence of the Federal Network Agency and has thus breached its obligation under the directives.

Concept of VIU not geographically limited (complaint 1)

In the opinion of the ECJ, the concept of VIU in Section 3 No. 38 EnWG was not transposed in accordance with Art. 2 No. 21 of Directive 2009/72/EC or Art. 2 No. 10 of Directive 2009/73/EC, as the directives does not contain any territorial restriction of the scope of application to undertakings active in the field of generation and supply in the European Union. According to the ECJ, the restriction leads to an unjustified narrowing of the concept and endangers effective unbundling (cf. 29 et seq.).

This provision relates in particular to the issue of certification of transmission system operators in accordance with the unbundling requirements in Sections 8 et seq. EnWG. The inclusion of non-European activities in competitive areas (generation, distribution) could necessitate a reassessment of certification in some instances.

Transitional periods under the model of the independent transmission operator also apply to non-energy activities (complaint 2)

In the opinion of the ECJ, the restriction of the prohibitions on prior activities in Section 10c para 2 and para 6 EnWG to the energy sector is also not compatible with the requirements in Art. 19 para 3 and para 8 of the directives and allows the European unbundling provisions to be evaded. The ECJ found that in order to guarantee the independence of the network operator, a restriction of the freedom of movement for workers and the right to pursue a freely chosen occupation by the transitional period rules is also justified (cf. 52 et seqq.).

Obligation to dispose of shares in VIU does not only apply to management (complaint 3)

The ECJ also considers the restriction of the scope of application of Section 10c para EnWG, according to which only persons in management are obliged to sell their shares in the VIU, to be a violation of Art. 19 para 5 of the Directives. According to the ECJ, employees who do not participate in the everyday management are also in a position to influence decisions of their employer and are thus obliged to sell their shares because of conflicts of interests that could arise if they hold shares in the VIU or in parts of it in order to ensure effective unbundling (cf. 75 et seq.).
 

Consequences

The ECJ‘s finding that the norm-based regulation provided for in the EnWG is contrary to EU law raises complex questions for the existing German regulatory system. The German legislator must react promptly to the ECJ‘s ruling. In addition, the ruling is also of significance for the already fundamentally existing discussion on the relationship between national law and EU law, which should not be underestimated.

Primacy of application of EU law

With the issuance of the ECJ judgment, the unlawfulness of the national regulations under EU law is established and the convicted Member State is obliged to end the infringement (with effect for the future) pursuant to Art. 260 para 1 TFEU. However, the ruling does not lead to the direct invalidity of the existing national regulations; the ECJ itself cannot reject the regulations of national law or declare them inapplicable.2 Rather, the legislative bodies are required to repeal the provision that is contrary to EU law immediately and to adopt a provision that complies with EU law or to amend the original provision in such a way that it complies with the requirements of EU law.3 Failure to comply with the judgment may result in financial sanctions, Art. 260 para 2 TFEU. 

With regard to Section 24 EnWG and the regulations based on it, primacy of application under EU law applies once it has been determined that they are contrary to EU law. In principle, this means the obligation not to apply the regulations that are contrary to EU law. Before this, however, an attempt must be made to interpret the national law in conformity with EU law.4

No immediate inapplicability of national regulations according to the Federal High Court

However, in the light of the forthcoming ECJ decision, the German Federal High Court (“BGH”) has already stated what the legal framework during the transitional period will look like in its view.  The BGH assumes that the national regulations will continue to apply for the time being until new regulations are passed by the German legislature. There is no immediate inapplicability of the German or direct application of the European requirements.

According to the BGH, an interpretation by which the regulations could be applied in accordance with EU law is not possible, because such an interpretation would be in clear contradiction to the binding regulatory content of the regulations. However, an exceptional direct application of the directives is also excluded pursuant to the court, since the relevant provisions of the directives, do not provide for sufficiently specific rights in favor of individuals, but merely regulate the tasks and powers of an authority. Therefore, the BGH states that the adjustment of the regulations by the German legislator will have to be awaited.
 

Outlook

Constitutionally, this independence of an administrative authority from the legislature is practically incompatible with the national understanding of the rule of law. The separation of powers is the central element of the principle of democracy, i.e., the binding of the administration to the requirements of the legislature and the control of administrative action by the judiciary. At the national legal level, the ECJ simply abandons this requirement, because it also considers the legal requirements of the national parliament to be an inadmissible influence that limits the independence of the regulatory authority.

However, the ECJ justifies this highly problematic view with the fact that there is already a sufficiently detailed legal framework at the level of EU law with the directives and regulations and network codes of the EU Commission. In the area of real cross-border regulation, this is true insofar as the scope, complexity and level of detail of the EU legal requirements have recently increased considerably.  Other areas, such as unbundling requirements, have also been implemented into national law merely in such a way that the European requirements have been incorporated into the EnWG more or less unchanged. Beyond this, however, it is difficult to imagine granting the Federal Network Agency far-reaching powers of design and intervention with considerable relevance to the fundamental rights of those affected without this being legitimated by parliament. The ECJ is thus urging not only the German government but also the German legislator to step back in order to strengthen the position of the Federal Network Agency. However, this means above all an increase in power for European institutions, which can thus more strongly determine the guidelines of administrative action.

In addition, the BGH has in the meantime consistently granted the Federal Network Agency a broad “regulatory discretion” that is subject to only limited judicial review. In terms of the constitutional state, this threatens a legal protection vacuum because the ECJ restricts the legislative competence of the legislature, while the BGH reduces the control density of jurisdiction. This threatens to promote a regulatory and judicial “escape into regulatory discretion”, which was already feared in the context of the decisions on the return on equity and the productivity factor. The BGH could oppose this without abandoning its case law by further developing the control of the authorities’ scope for decision-making. This should not be limited, as has been the case to date, to examining whether another method would have been “clearly superior” to the one chosen by the Federal Network Agency, which is practically impossible for the companies concerned to prove. Instead, the Federal Network Agency and the courts must be able to orient their actions on clear legal requirements for consideration.

The legislator will have to respond to the ECJ‘s decision by creating a framework (e.g., through verifiable consideration requirements) that provides market participants with sufficient legal certainty, which is essential in the light of the ever-increasing demands of the energy transition. Within the scope of the independence granted to the Federal Network Agency by EU law, the Federal Network Agency is also likely to be concerned that its decisions enjoy a sufficiently high level of acceptance among market participants. The retreat to the role of a consumer protection authority, which can still be observed from time to time today, will therefore no longer suffice; instead, it must continue to take on the active role of a climate protection authority.

In a press release on the ECJ‘s decision, the Federal Network Agency has already clarified that it will continue to apply the applicable German law for the transitional phase until the decision is implemented by the national legislature. The BGH has also already ruled that, even in the event of an infringement of EU law, there is no immediate inapplicability of the German requirements or direct application of European directives (decision of 8 October 2019, reference number: EnVR 58/18, Normativer Regulierungsrahmen). An interpretation in conformity with EU law was ruled out, as this would contradict the binding regulatory content of the ordinances. However, an exceptional direct application of the directives was also ruled out, since the relevant provisions of the directives, according to the BGH, do not provide for sufficiently specific rights in favor of individuals, but merely regulate the tasks and powers of an authority. Therefore, the adjustment of the regulations by the German legislator had to be awaited.

 

1 Directive 2009/72/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in electricity and repealing Directive 2003/54/EC (OJ 2009 L 211, p. 55) and Directive 2009/73/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in natural gas and repealing Directive 2003/55/EC (OJ 2009 L 211, p. 94).
2 Ruffert, in: Calliess/Ruffert, EUV/AEUV, 5. Aufl. 2016, AEUV Art. 1 para 18.
3 Wunderlich, in: von der Groeben/Schwarze/Hatje, Europäisches Unionsrecht, 7. Auflage 2015, AEUV Art. 260 cf. 6.
4 EuGH, 4 July 2006 - C-212/04, Slg. 2006, I-6057 cf. 111 – Andeneler.
5 BGH, 8 October 2019, reference number: EnVR 58/18.
6 Burmeister/Kistner, Zur weiteren Europäisierung der Netzwirtschaft durch das Clean Energy Package, RdE 2021, 179.

 

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