Law and disorder: the impacts of a court ruling on Germany’s energy regulator

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n early August this year, the European Court of Justice (ECJ) ruled that Germany’s Federal Network Agency (FNA) has thus far shown insufficient energy regulatory methods, in particular, calling out the German concept of a vertical integrated undertaking as being ‘too narrow’. The ECJ has called for the regulator to act independently when implementing its electricity and gas regulations, a system that is currently incompatible with the German regime.

In response, FNA said it would study the ruling and maintain its existing legislation until details of the new system are ironed out, making legal stability a priority for investors, with Bundesnetzagentur President Jochen Homann commenting in a statement that the group will ‘support the federal government to evaluate the ruling as quickly as possible’.

While the process is anticipated to take some time to be effectively established, the case may provide something of an example of what’s to come for other EU member states as the ECJ pushes for regulators to show more independence from federal agencies. We took a closer look at the ruling, and the changes it may indicate for the sector.

Herbert Smith Freehills regulatory partner Dr Marius Boewe and corporate councsel Dr Sebastian Schürer say the change will be a 'huge task' for the next federal governmnet, particularly given the change in administration following Germany's general election last month.

“The impact on the German energy law and the Federal Network Agency FNA is massive,” say the lawyers. “The ECJ decided that the FNA must become truly independent, not guided by decisions of the federal government (as set out in specific ordinances). As a consequence hereof, large parts of the German energy law, namely the rules relating to the regulation of grid fees must be replaced, which will affect the wider industry and the customers.”

Indeed, the pair comment that the ruling will have a knock-on effect on a variety of legislatures, and necessitates an entire overhaul of the system of grid fee determination.

“The ruling is of fundamental significance for the German energy market and the German energy law,” they say. “Even though significant rulings of the ECJ have had a great impact on the member states ever since its foundation, this ruling will affect numerous parliamentary acts and ordinances, requiring inter alia a new system of grid fee determination.”

Yet despite the logistical challenges in determining and implementing an entirely new system, the ruling is not necessarily a bad thing, and there are some who believe it may pave the way for lower fees and a better outcome for consumers; though at this point any conclusions are largely based on speculation.

Boewe says opinions are divided on what the ruling could mean.

“If you ask, let's say German constitutional lawyers, they may indicate that this brings constitutional problems because the authorities get too much power, which is typically - at least in the German constitution - reserved to a parliament or the government,” he says. “I think that the Federal Network Agency is pretty impressed by the ruling, they get more power, and have more to decide. But I think it’s too fresh to have a general feeling - some people say it will be good for consumers because they expect that the fees will get lower, while others say the contrary.

“Regarding the unbundling regime, again, this has nothing to do with the end consumer - it’s more related to investors,” he adds. “I think it's getting harder to invest in a German or European electricity company with this ruling, because the requirements that must be met are now broader. Though that, again, has no impact on the consumer side.”

Yet there are no particular concerns that the ruling will cause the country’s energy sector to face problems getting investors, as Boewe says the ‘mismatch’ between German and European rules were evident prior to the ruling.

The general consensus is that the outcomes are uncertain for consumers and providers alike - yet the significance of the ruling itself is not uncertain. The move marks the beginning of the ECJ’s clamping down on member states and enforcing their national regulators’ independence from federal networks, and we may well expect to see similar changes to countries’ energy systems in coming months.

Perhaps important to note is that the ruling, regardless of its outcome, came as something of a surprise to the FNA given its belief that it had thus far been following the ECJ’s stipulations.

“I think it's fair to say that Germany was proud of its unbundling regime and of its off-grid fee, which has been established over the last few years,” says Boewe. “I think, in the eyes of everybody in the agency, it was a working product and led to fair results. But now this has happened and it’s caused a fair bit of uncertainty about what’s going to happen.”

While Germany is by no means the only country with regulations that may be perceived as at odds with the ECJ’s ruling, the decision to sue Germany rather than turn attention to various member states at once is highlighted by Boewe as a potential means of making an example of one country to get the others in line.

“It's not unusual that they just pick one country and sue them rather than sue ten or 15 countries, just to make the process quicker,” Boewe says. “Germany is the biggest country within the European Union so it's always a good idea to sue them because if they lose, then the others don't see a realistic chance to fight against the Commission. So sooner or later the 27 national agencies will be as independent as Germany’s new one.

“The lesson I'm talking about is that we expect that other member states will adjust their legal system to avoid being sued,” he says.

“We would expect that all other member states now check their specific regulations, and the relationship between the federal government and the National agencies,” adds Schürer.

Defining exactly what the ECJ’s ruling will mean for consumers or investors is, at this stage, arbitrary. The new regulations for Germany (and indeed, any other country that may be similarly targeted in future) will be up to national legislation and could even follow the same lines as their current systems. It would appear, however, that Europe is set to see far more national independence when it comes to energy ruling - though how this will change the energy landscape is yet to be seen.