Unbundling
Independent Network Operation Act
In 2007, the Independent Network Operation Act (the ‘WON’) became effective. The principal purpose of the WON is to compel all Dutch integrated energy companies, including Nuon, to separate management and economic ownership of their network activities (gas distribution and electricity transportation) from their commercial activities (production and supply). The mandatory unbundling of these activities is required to be implemented no later than January 2011.
As a result of this legislation, we are in the process of implementing Step 1, have implemented some aspects of Step 2 and we plan to implement the remaining aspects of Step 2 and all of Step 3 according to the timetable described below:
Step 1: Transfer of the management of the high-voltage networks of 110 kV and higher
The WON requires that, as of 1 January 2008, all Dutch high-voltage electricity networks with a voltage of 110 kV and higher must be managed by TenneT, the national electricity transmission system operator. Accordingly, TenneT designated itself as manager of all such networks, with the exception of any network that is subject to a cross border lease. However, in view of the complexity of the implementation and the need to safeguard security of supply, the transfer of actual management of the high-voltage networks to TenneT is being implemented in the first instance by a number of transitional measures. We are currently discussing with TenneT implementation of this mandate with a view to achieving a final satisfactory arrangement at the earliest possible date.
Step 2: Transfer of economic ownership of electricity and gas networks to Continuon Netbeheer and unbundling of network related and commercial activities
Title to Nuon's electricity and gas networks resides in three indirect wholly-owned subsidiaries: Nuon Infra Oost, Nuon Infra West and Nuon Transport (the ‘Network Owners’). The WON requires economic ownership of such networks to be transferred to Continuon Netbeheer, a wholly-owned subsidiary of Nuon and our designated gas and electricity network manager. Transfer of such economic ownership will be realised on or before 1 July 2008 through an internal restructuring pursuant to which all of the shares of the Network Owners will be transferred to Continuon Netbeheer. As from that date, Continuon Netbeheer will also be required to perform the majority of its legal tasks as network manager on its own (i.e., the ‘broad’ network manager concept).
In addition to the foregoing, in order to prepare for the unbundling described in Step 3 below, we have internally reorganised our subsidiaries by incorporating a new sub-holding company (PLB Holding) and contributing the subsidiaries that are engaged in commercial (production and supply) activities to this sub-holding company. Nuon may interpose a similar sub-holding company between itself and its subsidiaries that are engaged in network activities (gas distribution and electricity transmission).
Step 3: Unbundling of network and commercial activities
As stated above, once the WON is fully implemented, we will no longer be able to operate as an integrated energy company encompassing both network activities and commercial activities. Nuon will retain ownership of the network activities, although, as indicated in the charts below, it will change its name. So, whatever happens to the ultimate ownership of our commercial activities, ownership of the networks will continue to reside in governmental entities.
Although we strongly objected to the unbundling plans when initially proposed by the Dutch legislature and have pursued a strategy to remain an integrated energy company, unbundling has become unavoidable. As of the date of this Report, we are still in the process of investigating whether legal redress is available to secure compensation from the Dutch State for the costs associated with the unbundling. In the meantime, in close consultation with our Supervisory Board and shareholders, we have decided to proactively position our organisation (structurally and otherwise) to implement the separation of network and commercial activities by July 2008. At this date, we are not certain when the unbundling will actually be effectuated.
We believe that this proactive approach has strategic, competitive and practical advantages for both the network businesses and the commercial businesses as this will enable them to enter their respective markets and develop activities independently from each other without the burden of the unbundling process consuming management time and attention until 2011. The major challenges we face in our attempt to be ready for a separation of commercial and network activities by July 2008 are the creation of two companies each with its own organisational structure that allows it to respond effectively to its markets and customers and each with its own IT landscape, customer care activities and services centers (which now service network and commercial activities). Other challenges include the staffing and financing of both companies, and conducting their day-to-day business during the unbundling period with the same care and quality that customers expect from them.
The following charts illustrate the manner in which the unbundling is currently expected to be implemented, irrespective of any future strategic steps. These charts may change over time due to knowledge gained during the process.
The first chart shows the simplified group structure after the execution of steps 1 and 2 (to be fully implemented by July 2008). At that point the Company will be ‘ready for unbundling’.
The second chart shows the simplified group structure after the completion of the mandatory unbundling (steps 1, 2 and 3), no later than 1 January 2011.
In order to achieve the unbundling, certain Board Members and key management personnel have been charged with the task of establishing the NWB and PLB companies. Board Member Peter Erich will be heading the formation of the network company and Board Members Øystein Løseth and Doede Vierstra will be heading the formation of the commercial company. These Board Members will remain on the Board of Management of n.v. Nuon.
The teams that were appointed for the formation of the NWB and PLB companies are currently in the process of developing the future strategy of the NWB company and the PLB company. The final strategy for each individual company will be established in consultation with our shareholders.
