The EU has been on an accelerated transition towards a more climate-friendly energy sector since 2009.  EU Member States are committed to decrease CO2 emissions by 20% by 2020, and to increase generation from Renewable Energy Sources (“RES”) to mandatory targets.  After implementation of the Paris Agreement, these targets will likely be revised upwards, given the EU’s initial commitment for a 40% reduction of CO2 emissions by 2030.  Strong demand for clean energy, government support including subsidies and tax incentives, and governmental mandates create attractive opportunities for investment in RES generation and the transmission infrastructure needed to bring clean energy to users.

Against this background, the strict rules passed by the European authorities in 2009 to curtail conflicts of interest resulting from the simultaneous holding of transmission and production/supply interests, the so-called unbundling rules, are often perceived as stymieing investment.  Strategic and financial investors such as private equity and infrastructure funds are worried about running afoul of these unbundling rules.  Uncertainty hampers investment that national governments and the EU want to attract and welcome.  The EU Commission has developed a balancing approach to ensure that an overly mechanical application of the unbundling rules will not have a disproportionate effect and that legal uncertainty will not discourage the much needed build-out of RES.

In situations where there is no material functional overlap between production and transmission investments or where there is significant geographic distance between investments, strategic and financial investors should be able to pursue transactions with reasonably predictable—and favorable—regulatory outcomes.  Moreover, the EU and national authorities have developed precedents involving structural separation and firewalls to minimize the potential for conflicts of interest while enabling participations in the market by experienced energy investors.

The 2009 Unbundling Rules in a Nutshell

The rationale for unbundling is the concern that vertically integrated utilities could use their control over transmission systems operators (“TSOs”) to discriminate against rivals in the markets for electricity generation, gas import and retail supply.  These concerns are familiar to investors in the energy sector in the US, as ‘unbundling’ legislation based on the same premises is in force there since the 1990s as regards gas transmission and wellhead ownership.[1]  In the electricity sector, the regulatory focus is more on enforcing non-discriminatory open access to transmission assets combined with an enhanced scrutiny of regulatory applications where equity cross-ownership or vertical integration are involved.[2]

The EU ownership unbundling rules[3] prohibit the same person(s) from controlling a producer/supplier and controlling or “exercising any right” over a TSO.[4]  “Exercise any rights” means in EU parlance (1) exercise voting rights, (2) have power to appoint members of the governing bodies, or (3) hold a majority share.[5]

It is also forbidden to control a TSO and at the same time control or “exercise any right” in a producer/supplier.[6]  Also, person(s) appointing members of the governing bodies of a TSO must not control or exercise any right over a producer/supplier.[7]

Finally, there are provisions addressing the risk of improper information exchanges between a TSO and an undertaking carrying out production/supply activities, including by limiting the transfer of personnel from a TSO.[8]

The rules cut across sectors, i.e., control over an electricity TSO impedes controlling or exercising any right in a gas producer/supplier.[9]

Member States were given a limited ability to avoid outright ownership unbundling and keep the status quo: if on September 3, 2009, an undertaking owning a transmission system was part of a vertically integrated business, the Member State could elect between ownership unbundling or setting up an Independent Transmission Operator (“ITO”) or an Independent System Operator (“ISO”) within the vertically integrated business.[10]  In practice, an ITO/ISO is a legal entity which, although part of the same group as an energy producer or supplier, is subject to strict ring-fencing, to ensure an equivalent level of independence as if the ITO/ISO was subject to ownership unbundling.

The Commission 2013 Guidance – Overview

The 2009 legislation set up a TSO certification procedure to ensure compliance with the unbundling rules.  In essence, each TSO must file an application with its National Regulatory Authority (“NRA”), which, in turn, must provide the EU Commission (the “Commission”) with its draft opinion.  The Commission may comment whether it agrees or not with the NRA’s draft.  The NRA must take the Commission’s comments into the “utmost account,” but could in theory maintain its stance in case of disagreement.[11]

In practice, the NRAs and TSOs have always conformed to the Commission’s views.  When the Commission issues negative comments, TSOs typically adopt the changes requested by the Commission to avoid a refusal of certification viz. inability to operate.

Throughout its decisional practice, the Commission has gained significant experience in the application of the unbundling rules.[12]  In particular, the Commission has come to realize that a mechanical application of the unbundling rules would be inappropriate, especially in cases where a shareholder has no incentive or practical ability to influence the TSO to favor its production or supply interests in a meaningful way.

In 2013, the Commission published guidance on this matter which still stands.[13]  The next section draws on this guidance, presenting three cases which are illustrative of situations where a TSO was certified as complying with the ownership unbundling rules while its controlling shareholders also had an interest in production or supply.  The guidance is based on TSOs’ corporate structure, as the certification procedure concerns TSOs (there is no certification requirement for generators or suppliers).

Lack of Geographic Interface Between TSO and Production/Supply and/or Small Size of Generation Holdings as a Ground for Granting Certification: the Mitsubishi/Barclays Cases

The Commission found that no conflict of interest existed where the controlling shareholder of a European TSO had production/supply interests located in a different continent.[14]  A similar conclusion was reached for intra-EU cases.[15]  The Mitsubishi/Barclays cases are illustrative of this trend.[16]

Since 2007, Mitsubishi became active in transmission infrastructure linking offshore wind farms to the mainland grid, notably in the United Kingdom.  In two cases, it formed a JV with Barclays.  While Mitsubishi built and operated these facilities, Barclays acted as a financial investor.

The JVs had to apply for TSO certification.  Mitsubishi also had interests in generation assets in other parts of Europe, namely Spain, France, and Bulgaria, and Barclays had interests in generation activities in the United Kingdom.

The Commission found that Mitsubishi’s transmission and production activities in other parts of the EU created little potential for interference with the transmission infrastructure in the United Kingdom.  As regards Barclays, the size and market share of its generation activities were small compared to the total generation capacity in the same country[17]  Moreover, the Commission emphasized that the TSO’s role was limited to operating a single cable connecting offshore wind farms to the wider national system.  Thus, in practice, the TSO joint venture would be coordinating its actions with the main TSO in the United Kingdom, National Grid, which in turn would be responsible for giving directions on the day-to-day operation of the cable; the owners would not play any role in this respect.

Finally, financial regulation aimed at preventing conflicts of interest added another layer of comfort: fund managers controlled by Barclays must implement appropriate ring-fencing between different businesses with compliance overseen by the relevant financial regulators; disciplinary, criminal, and civil sanctions could be imposed in case of infringement.[18]

This approach was confirmed in the Eleclink case, where private equity sponsor Star Capital wanted assurance that its interest in a TSO would not hamper its future ability to invest in generation assets.  In reply, the Commission, referring to its 2013 guidance, stated that “not every investment in generation and supply would necessarily entail” a breach of the unbundling rules.[19]

Thus, the Mitsubishi/Barclays cases confirm that lack of geographic interface and size of the generation assets can lead to unbundling compliance, despite simultaneous holdings in generation activities.

Corporate Structure Guaranteeing the Independence of the TSO: the Transport et Infrastructures Gaz France (“TIGF”)/EDF Case

Through its subsidiary Société C31, leading electricity generator EDF co-controlled TIGF Holding, which in turn controlled TIGF Investissements, the controlling entity directly above the TSO, i.e., TGIF TSO.[20]


EDF appointed two out of nine board members in TIGF Holding.  The case posed a text-book example of a potential conflict of interest, given that “Société C31 could have an inherent incentive to use its influence over TIGF in a way so as to favour its mother company’s interests, given that it is active in the supply of both electricity and natural gas in the area where TIGF is the TSO.”  Nonetheless, the Commission issued a favorable opinion considering the following features:

  • TIGF Holding’s board could vote on the business plan and annual budget of TIGF Holding only, but not at the level of TIGF Investissements or TIGF. These decisions could be taken by qualified majority (2/3), hence EDF could be outvoted.
  • TIGF Holding could not adopt any strategic decision concerning TIGF Investissements and TIGF, such as investment decisions in the network.
  • EDF could not appoint any of the members composing the boards of directors of TIGF Investissements or TIGF.
  • Wherever a decision by TGIF Holding concerned TGIF Investissment, EDF board members were not entitled to receive the information on this matter, nor were they able to vote on it.

In sum, the Commission was persuaded that EDF’s powers did not go beyond TIGF Holding and were limited to the veto rights that are usually accorded to minority shareholders to protect their financial interests as investors.[21]  On this basis, the Commission issued a positive opinion.

The TIGF case can be contrasted with that of Finnish TSO Fingrid.[22]

Fingrid’s shareholders included ten insurance companies with interests in generation activities.  Fingrid sent a letter to these companies, alerting them about the potential conflict of interest and pointing out that they could not appoint the same persons to act as directors in Fingrid and in the generation activities.  The Commission, however, objected that it is for the TSO to demonstrate that the investors concerned effectively do not have the incentive or ability to influence the TSO decision-making; a simple letter would not be enough.  In sum, when lack of geographical interface or small size of the generation activities cannot be invoked, a mere unilateral promise not to abuse the simultaneous shareholding would not secure unbundling certification but an adequate corporate structure involving Chinese walls may be practicable and sufficient.

Close Scrutiny of Corporate Structure: the WoDS Case[23]

Macquarie won a tender (together with private equity fund 3i) to become the TSO operating the West of Duddon Sands offshore cable, a single cable connecting an offshore wind farm to the United Kingdom mainland.  Even if the TSO in question represented a negligible portion of the entire national system, and its role was essentially to coordinate with National Grid, the parties put in place a corporate structure similar to TGIF’s.  Nonetheless, the Commission asked the NRA to reconsider its positive stance on Macquarie’s ring-fencing from its generation assets in the EU.  In particular, the Commission asked the NRA to reexamine the extent of Macquarie’s voting rights to ensure that these were limited only to “matters that are necessary for Macquarie to maintain the necessary minimum level of oversight over its financial interest”.[24]

The WoDS case shows that the Commission remains vigilant.  It will not hesitate to ask national authorities for more in-depth analysis even where the size of the asset is small and there are corporate firewall arrangements in place.


The EU unbundling rules limit how and where strategic and financial investors can invest in transmission and generation.  However, when investments are not “contiguous” and/or small, there is usually less concern about conflicts of interest.  For significant projects where investors already participate in the same or contiguous markets, corporate structures can be designed that make the investors passive at the level of the operating assets.  As the WoDS case shows, investors will need to make a convincing case, through detailed and effective mechanics, that the risk for conflict of interest and undue influence is properly contained.


The table below lists the cases where the Commission made a finding in cases to date that the simultaneous participation in transmission activities and in production/supply activities was compatible with the unbundling rules because it did not give rise to any potential conflict of interest.  The “companies concerned” are those with a simultaneous participation in transmission and production/supply activities.  The “project” indicates the TSO that was the object of the certification procedure.

Opinion Companies concerned Project
C(2012) 2735
National Grid plc National Grids (UK)
C(2012) 3009
EQT Infrastructure Fund Swedegas AB (Sweden)
C(2012) 3526
Sociedad Estatal de Participaciones Industriales Red Eléctrica de España (Spain)
C(2012) 4171
Sociedad Estatal de Participaciones Industriales, Liberbank S.A., Kutxabank ENAGAS (Spain)
C(2012) 6260
Industry Funds Management Global Infrastructure Fund 50 Hertz Transmission (Germany)
C(2013) 380
Eiser Global Infrastructure Fund Società Gasdotti Italia (Italy)
C(2013) 979
Barclays PLC, Mitsubishi Corporation Blue Transmission Walney 1 (UK)
C(2013) 2030
Barclays PLC, Mitsubishi Corporation Blue Transmission Walney 2, Sheringham and London Array (UK)
C(2013) 2566
Balfour Beatty plc Thanet (UK)
C(2013) 3705
Balfour Beatty plc, AMP Strategic Infrastructure Trust of Europe Greater Gabbard (UK)
C(2013) 5631
Mitsubishi Corporation TenneT Offshore (Netherlands)
C(2013) 6891
S.C. Fondul Proprietatea, S.I.F. Oltenia Transelectrica (Romania)
C(2013) 8485
S.C. Fondul Proprietatea Transgaz (Romania)
C(2013) 9689
Gallega de Distribuidores de Alimentación S.A., Xunta de Galicia Regasificadora del Noroeste (Spain)
C(2014) 329
Imatran Seudun Sähkö, various insurance companies Fingrid Oyj (Finland)
C(2014) 679
3i Group plc Blue Transmission (UK)
C(2014) 3255
State Grid International Development Limited, Oman Oil Company, Parpública, EDP, Caixa Geral de Depósitos RENGasodutos (Portugal)
C(2014) 3837
Snam S.p.A., Pacific Mezz Luxembourg, Société C31 S.A.S. Transport et Infrastructures Gaz France S.A. (France)
C(2014) 5475
StarCapital ElecLink (France/UK)
C(2015) 40
Balfour Beatty Plc, John Van Deventer Gwynt y Môr (UK)
C(2015) 1614
3i Group plc, Macquarie Group limited WoDS (UK)


[1]           Federal Energy Regulatory Commission, Order No. 636 issued on April 8, 1992.

[2]           Federal Energy Regulatory Commission, Order No. 888 issued on April 24, 1996.

[3]           The key legislative documents are: (i) 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 L 211, 14.8.2009, p. 55–93 (the “Electricity Directive”); and (ii) 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 L 211, 14.8.2009, p. 94–136 (the “Gas Directive”).  “Transmission system operator” means a natural or legal person who carries out the function of transmission and is responsible for operating, ensuring the maintenance of, and, if necessary, developing the transmission system in a given area and, where applicable, its interconnections with other systems, and for ensuring the long-term ability of the system to meet reasonable demands for the transport of electricity or gas (Articles 2(4) of the Electricity Directive and the Gas Directive).  “Producer” means a natural or legal person generating electricity (Article 2(2) of the Electricity Directive) or gas (Article 2(1) of the Gas Directive).  “Supply” means the sale, including resale, of electricity or natural gas, including liquefied natural gas (LNG), to customers (Articles 2(19) of the Electricity Directive and 2(7) of the Gas Directive).

[4]           See Article 9(1)(b)(i) of the Electricity Directive and the Gas Directive.

[5]           See Article 9(2) of the Electricity Directive and the Gas Directive.

[6]           See Article 9(1)(b)(ii) of the Electricity Directive and the Gas Directive.

[7]           See Article 9(1)(c) of the Electricity Directive and the Gas Directive.  A minority stake without voting rights in a TSO will be compatible with control/a minority stake with voting rights in a producer/supplier (see, e.g., Commission’s opinion C(2013) 9689, p. 5 and C(2014) 3255, p. 4).

[8]           See Article 9(7) of the Electricity Directive and the Gas Directive.

[9]           See Recital 14 of the Electricity Directive and 11 of the Gas Directive.

[10]          The main difference between ITO and ISO is that the former is both the owner and the operator of the network, whereas the latter is the operator, but not the owner.

[11]          Article 3 of the Electricity Regulation and the Gas Regulation.

[12]          See the Annex for a summary of relevant Commission’s certification opinions to date.

[13]          European Commission, Commission Staff Working Document-Ownership Unbundling – The Commission’s Practice in Assessing the Presence of a Conflict of Interest Including in Case of Financial Investors, SWD(2013) 177 final, 8.5.2013 (the “Commission Staff Working Document”), p. 3.

[14]          See, e.g., Commission’s opinions C(2014) 3255, p. 4, and C(2014) 3837, p. 2.

[15]          See also Commission’s opinions C(2013) 2030, p. 5, and C(2013) 3705, p. 5.  The lack of geographical interface also justifies appointing members of the board in a TSO and holding a controlling interest in a generator (see Commission’s opinion C(2014) 3255, p. 8).

[16]          See, Commission’s opinions C(2013) 979, C(2013) 2030, C(2013) 5631.

[17]          Commission’s opinions C(2013) 979, p. 5, C(2013) 2030, p. 5, and C(2013) 3705, p. 5.  Symmetrically, a participation in production activities might be allowed if the investor controls a TSO of negligible size, such as a single transmission line which serves merely to connect specific wind generation facilities to the main grid (Commission’s opinions C(2013) 979, p. 4, C(2013) 2566, p. 4, and C(2013) 3705, p. 5).

[18]          Commission’s opinions C(2013) 979, p. 5, C(2013) 2566, p. 5, and C(2013) 3705, p. 5.

[19]          Commission’s decision C(2014) 5475, p. 22.  The English and French NRAs had previously granted an exemption from ownership unbundling, provided that other Star Capital companies engaging in generation and/or supply had an enterprise value in the range of €100 million to €500 million, and had a small market share.

[20]          TGIF had originally been certified under the ITO model, With the transaction described in the text, TGIF moved away from the ITO model and became a fully-fledged ownership-unbundled TSO.  After ownership unbundling, it is not possible to revert to the ITO model.

[21]          Commission’s opinion C(2014) 3837, p. 3 and 4.  See also e.g., opinion C(2013) 5631, p. 3, where the Commission approved of an investor controlling an electricity TSO and acting as a mere lender for a producer (and holding limited veto rights aimed at securing its investment thereto).

[22]          See, Commission’s opinion C(2014) 329, p. 4.

[23]          See, Commission’s opinion C(2015) 1614, p. 3.

[24]          Ibidem, p. 4.