**Case C-274/08**

**Commission of the European Communities**

**v**

**Kingdom of Sweden**

(Failure of a Member State to fulfil obligations – Directive 2003/54/EC – Article 15(2) – Article 23(2) – Internal market in electricity – Prior approval of the methodologies used to calculate or establish the terms and conditions for connection and access to
national networks, including transmission and distribution tariffs – National regulatory authority)

Summary of the Judgment

*Approximation of laws – Measures for the establishment and proper functioning of the internal market in electricity – Directive
2003/54 – Organisation of access to networks*

*(European Parliament and Council Directive 2003/54, Art. 23(2)(a))*

A Member State which fails to make the regulatory authorities responsible for approving, in advance, at least the methodologies
used to calculate or establish the terms and conditions for access to national networks, including transmission and distribution
tariffs in accordance with Article 23(2)(a) of Directive 2003/54 concerning common rules for the internal market in electricity
and repealing Directive 96/92, fails to fulfil its obligations under that directive.

Even if the transposition or the interpretation put forward by a Member State serves, or better serves, certain aims pursued
by that directive, that Member State may not disregard the provisions expressly laid down in that directive. In order to comply
with the requirements of Directive 2003/54, a Member State cannot merely apply a system in which review of the methodology
used to establish, inter alia, the electricity transmission and distribution tariffs is carried out a posteriori, even if
that review were as effective as a system of prior review, since the directive expressly provides for use of a system of prior
approval and does not allow the Member States the possibility of applying a different system. It is apparent from the very
wording of Article 23(2)(a) of that directive that, firstly, the national regulatory authorities are to fix or approve, before
their entry into force, at least the methodologies used to calculate or establish the terms and conditions for connection
and access to national networks, including transmission and distribution tariffs, and, secondly, that those tariffs or methodologies
must allow the necessary investments in the networks to be carried out in a manner allowing these investments to ensure the
viability of the networks. Accordingly, the objective of the directive can be achieved only by the establishment of precise
tariffs or of elements of a methodology of tariff calculation of a level of precision such as to allow economic operators
to estimate their cost of access to the transmission and distribution networks.

(see paras 33-34, 37, 40, 43, operative part)


JUDGMENT OF THE COURT

29 October 2009 ([\*](#Footnote*))

(Failure of a Member State to fulfil obligations – Directive 2003/54/EC – Article 15(2) – Article 23(2) – Internal market in electricity – Prior approval of the methodologies used to calculate or establish the terms and conditions for connection and access to
national networks, including transmission and distribution tariffs – National regulatory authority)

In Case C‐274/08,

ACTION under Article 226 EC for failure to fulfil obligations, brought on 25 June 2008,

**Commission of the European Communities,** represented by B. Schima and P. Dejmek, acting as Agents, with an address for service in Luxembourg,

applicant,

v

**Kingdom of Sweden,** represented by A. Falk, acting as Agent,

defendant,

THE COURT (Fourth Chamber),

composed of K. Lenaerts, President of the Third Chamber, acting as President of the Fourth Chamber, R. Silva de Lapuerta,
E. Juhász (Rapporteur), G. Arestis and T. von Danwitz, Judges,

Advocate General: D. Ruiz-Jarabo Colomer,

Registrar: N. Nanchev, Administrator,

having regard to the written procedure and further to the hearing on 18 June 2009,

having decided, after hearing the Advocate General, to proceed to judgment without an Opinion,

gives the following

**Judgment**

1        By its application, the Commission of the European Communities claims that the Court should declare that the Kingdom of Sweden
has failed to fulfil its obligations under Directive 2003/54/EC of the European Parliament and of the Council of 26 June 2003
concerning common rules for the internal market in electricity and repealing Directive 96/92/EC (OJ 2003 L 176, p. 37; ‘the
Directive’),

–        by failing to adopt appropriate measures to ensure that the requirement is met for a functional division between distribution
and production interests in a vertically-integrated undertaking in accordance with Article 15(2)(b) and (c) of the Directive,
and

–        by failing to ensure that the regulatory authority is responsible for approving, prior to their entry into force, at least
the methodologies used to calculate or establish the terms and conditions for connection and access to national networks,
including transmission and distribution tariffs, in accordance with Article 23(2)(a) thereof.

**Legal context**

*Community law*

2        Recital 2 in the preamble to the Directive states that concrete provisions are needed to ensure a level playing field in generation
and to reduce the risks of market dominance and predatory behaviour, ensuring non-discriminatory transmission and distribution
tariffs, through access to the network on the basis of tariffs published prior to their entry into force.

3        Recital 6 in the preamble to the Directive states that ‘for competition to function, network access must be non-discriminatory,
transparent and fairly priced’.

4        Recital 13 in the preamble to the Directive states that further measures should be taken in order to ensure transparent and
non-discriminatory tariffs for access to networks and that those tariffs should be applicable to all network users on a non-discriminatory
basis.

5        Recital 15 in the preamble to the Directive reads:

‘The existence of effective regulation, carried out by one or more national regulatory authorities, is an important factor
in guaranteeing non-discriminatory access to the network. Member States [shall] specify the functions, competences and administrative
powers of the regulatory authorities. It is important that the regulatory authorities in all Member States share the same
minimum set of competences. Those authorities should have the competence to fix or approve the tariffs, or at least, the methodologies
underlying the calculation of transmission and distribution tariffs. In order to avoid uncertainty and costly and time‐consuming
disputes, these tariffs should be published prior to their entry into force.’

6        Recital 18 in the preamble to the Directive is worded as follows:

‘National regulatory authorities should be able to fix or approve tariffs, or the methodologies underlying the calculation
of the tariffs, on the basis of a proposal by the transmission network operator or distribution network operator(s), or on
the basis of a proposal agreed between these operator(s) and the users of the network. In carrying out these tasks, national
regulatory authorities should ensure that transmission and distribution tariffs are non-discriminatory and cost-reflective,
and should take account of the long-term, marginal, avoided network costs from distributed generation and demand-side management
measures.’

7        In accordance with recitals 26 and 31 in the preamble to the Directive, its objectives include ‘equivalent levels of competition
in all Member States’ and ‘the creation of a fully-operational internal electricity market, in which fair competition prevails’.

8        According to the definition given in Article 2(21) of the Directive, for the purposes thereof, ‘vertically integrated undertaking’
means ‘an undertaking or a group of undertakings whose mutual relationships are defined in Article 3(3) of Council Regulation
(EEC) No 4064/89 of 21 December 1989 on the control of concentrations between undertakings [OJ 1989 L 395, p. 1; corrigendum
OJ 1990 L 257, p. 13, as amended by Council Regulation (EC) No 1310/97 (OJ 1997 L 180, p. 1)] and where the undertaking/group
concerned is performing at least one of the functions of transmission or distribution and at least one of the functions of
generation or supply of electricity’.

9        Article 15, which concerns the unbundling of distribution system operators, is set out in Chapter V of the Directive, entitled
‘distribution system operation’, and provides as follows:

‘1.      Where the distribution system operator is part of a vertically‐integrated undertaking, it shall be independent at least in
terms of its legal form, organisation and decision-making from other activities not relating to distribution. These rules
shall not create an obligation to separate the ownership of assets of the distribution network operator from the vertically-integrated
undertaking.

2.      In addition to the requirements of paragraph 1, where the distribution network operator is part of a vertically-integrated
undertaking, it shall be independent in terms of its organisation and decision-making from the other activities not related
to distribution. In order to achieve this, the following minimum criteria shall apply:

(a)      those persons responsible for the management of the distribution network operator may not participate in company structures
of the integrated electricity undertaking responsible, directly or indirectly, for the day-to-day operation of the generation,
transmission or supply of electricity;

(b)      appropriate measures must be taken to ensure that the professional interests of the persons responsible for the management
of the distribution network operator are taken into account in a manner that ensures that they are capable of acting independently;

(c)      the distribution network operator shall have effective decision-making rights, independent from the integrated electricity
undertaking, with respect to assets necessary to operate, maintain or develop the network. This should not prevent the existence
of appropriate coordination mechanisms to ensure that the economic and management supervision rights of the parent company
in respect of return on assets, regulated indirectly in accordance with Article 23(2), in a subsidiary are protected. In particular,
this shall enable the parent company to approve the annual financial plan, or any equivalent instrument, of the distribution
network operator and to set global limits on the levels of indebtedness of its subsidiary. It shall not permit the parent
company to give instructions regarding day-to-day operations, nor with respect to individual decisions concerning the construction
or upgrading of distribution lines, that do not exceed the terms of the approved financial plan, or any equivalent instrument.

(d)      the distribution network operator shall establish a compliance programme, which sets out measures taken to ensure that discriminatory
conduct is excluded, and ensure that observance of it is adequately monitored. The programme shall set out the specific obligations
of employees to meet this objective. An annual report, setting out the measures taken, shall be submitted by the person or
body responsible for monitoring the compliance programme to the regulatory authority referred to in Article 23(1) and published.

Member States may decide not to apply paragraphs 1 and 2 to integrated electricity undertakings serving less than 100 000
connected customers, or serving small isolated networks.’

10      Article 20, concerning third-party access, which is set out in Chapter VII of the Directive and is entitled ‘Organisation
of access to the system’, provides in paragraph 1:

‘Member States shall ensure the implementation of a system of third‐party access to the transmission and distribution systems
based on published tariffs, applicable to all eligible customers and applied objectively and without discrimination between
system users. Member States shall ensure that these tariffs, or the methodologies underlying their calculation, are approved
prior to their entry into force in accordance with Article 23 and that these tariffs, and the methodologies – where only methodologies
are approved – are published prior to their entry into force.’

11      Article 23, concerning regulatory authorities, which is set out in the same chapter, provides in paragraphs 2 to 5:

‘2.      The regulatory authorities shall be responsible for fixing or approving, prior to their entry into force, at least the methodologies
used to calculate or establish the terms and conditions for:

(a)      connection and access to national networks, including transmission and distribution tariffs. These tariffs, or methodologies,
shall allow the necessary investments in the networks to be carried out in a manner allowing these investments to ensure the
viability of the networks;

(b)      the provision of balancing services.

3.      Notwithstanding paragraph 2, Member States may provide that the regulatory authorities shall submit, for formal decision,
to the relevant body in the Member State the tariffs or at least the methodologies referred to in that paragraph as well as
the modifications in paragraph 4. The relevant body shall, in such a case, have the power to either approve or reject a draft
decision submitted by the regulatory authority. These tariffs or the methodologies or modifications thereto shall be published
together with the decision on formal adoption. Any formal rejection of a draft decision shall also be published, including
its justification.

4.      Regulatory authorities shall have the authority to require transmission and distribution system operators, if necessary, to
modify the terms and conditions, tariffs, rules, mechanisms and methodologies referred to in paragraphs 1, 2 and 3, to ensure
that they are proportionate and applied in a non-discriminatory manner.

5.      Any party having a complaint against a transmission or distribution system operator with respect to the issues mentioned in
paragraphs 1, 2 and 4 may refer the complaint to the regulatory authority which, acting as dispute settlement authority, shall
issue a decision within two months after receipt of the complaint. This period may be extended by two months where additional
information is sought by the regulatory authority. This period may be further extended with the agreement of the complainant.
Such a decision shall have binding effect unless and until overruled on appeal.

Where a complaint concerns connection tariffs for major new generation facilities, the two-month period may be extended by
the regulatory authority.’

12      Article 30(1) of the Directive provides that Member States are to bring into force the laws, regulations and administrative
provisions necessary to comply with the Directive not later than 1 July 2004 and that they are forthwith to inform the Commission
thereof. Under Article 30(2), Member States may postpone the implementation of Article 15(1) until 1 July 2007, without prejudice
to the requirements contained in Article 15(2).

*National law*

13      In accordance with Chapter 3, Paragraph 3 of the Law (2005:551) on limited companies (Aktiebolagslagen (2005:551)), the object
of a limited company is to make profit for its shareholders, if there is no provision to the contrary in the statutes of that
company. The powers of general meetings of the shareholders are set out in Chapter 7 of the Aktiebolagslagen. Chapter 8 thereof
contains provisions concerning the board of directors and the managing director and lays down, inter alia, the principal tasks
of the board of directors, the functions of the managing director and general restrictions on the powers of proxy holders.
The same law, in Chapter 17, Paragraph 3, entitled ‘Protection of fixed own capital and the principle of prudence’, contains
provisions which restrict distribution of profits of a subsidiary to its parent company.

14      Chapter 4 of the Law (1997:857) on electricity (Ellagen (1997:857)); governs network tariffs, while Chapter 12 thereof covers
regulation and control. They provide as follows:

‘Chapter 4 – System tariffs

General provisions on system tariffs

1.      System tariffs shall be so formulated that the concession holder’s total revenue from operation of the system is reasonable
with respect, firstly, to the objective requirements for operation of the network and, secondly, to the concession holder’s
method of operating the system.

System tariffs shall be objective and non-discriminatory.

The number of connection points, their geographical positions, the quantity of electricity transmitted, the subscribed demand,
the costs of the upstream system and the quality of the electricity transmission shall be taken into consideration when formulating
system tariffs for the transmission of electricity.

When formulating system tariffs with a view to connection to a line or circuit, the geographical positions and the subscribed
demand at the point of connection shall, in particular, be taken into consideration.

The Government or, on the basis of authorisation given by the Government, the systems regulatory authority may adopt more
detailed provisions regarding formulation of the network tariffs.

...

Chapter 12 – Regulation

...

2.      A regulatory authority shall be entitled, on request, to receive information and documents necessary to its regulation. Failure
to comply with that request may lead to an administrative fine.

A decision adopted in accordance with the first subparagraph shall be applicable immediately.

The Government or, on the basis of authorisation given by the Government, the systems regulatory authority may adopt provisions
concerning collection of the information necessary for assessment of the fairness of the network tariffs.

3.      A regulatory authority may issue the necessary directions in order to ensure compliance with the provisions and conditions
relating to regulation. Failure to comply with such directions may lead to an administrative fine.

A direction which concerns electrical safety or the operational safety of the national electricity system shall be applicable
immediately.’

15      Administrative instructions No 3 of 2003 of the Swedish Energy Authority (Statens energimyndighets författningssamling (STEMFS)
(2003:3)), as amended by that authority’s administrative instructions No 2 of 2005 (Statens energimyndighets författningssamling
(STEMFS) (2005:2); ‘the administrative instructions’), contain detailed provisions concerning the supply of information with
a view to assessing the fairness of system tariffs, the technical specifications of the tariffs and rules governing the supply
of information to the regulatory authority.

16      In accordance with Chapter 1, Paragraph 2, of the Law (2004:875) on special administration of certain electrical installations
(Lag (2004:875) om särskild förvaltning av vissa elektriska anläggningar), the Länsrätt (Administrative Court), at the request
of the systems regulatory authority, may order that an electrical installation be managed separately if an undertaking operating
a system which uses an electrical installation does not fulfil its obligations substantially in accordance with the applicable
legislation.

**Pre-litigation procedure**

17      Since the Commission took the view that Articles 15(2)(b) and (c) and 23(2)(a) and (b) of the Directive had not been correctly
transposed by the Kingdom of Sweden, it initiated the infringement procedure laid down in Article 226 EC.

18      After having given that Member State formal notice to submit its observations, on 15 December 2006 the Commission, taking
the view that those observations were not satisfactory as regards all the matters raised, issued a reasoned opinion, requesting
it to adopt the measures necessary to comply with that opinion within a period of two months from its receipt.

19      The Kingdom of Sweden replied to that reasoned opinion on 14 January 2007, setting out the various elements of the national
legislation.

20      Taking the view that the measures necessary for full transposition of Articles 15(2)(b) and (c) and 23(2)(a) of the Directive
still had not been adopted by the Kingdom of Sweden, the Commission brought the present action.

**The action**

*The first plea in law, alleging failure to have regard to the provisions of Article 15(2)(b) and (c) of the Directive*

21      By this plea, the Commission criticises the Kingdom of Sweden for failing to adopt the necessary measures in accordance with
Article 15(2)(b) and (c) of the Directive to ensure a functional division between distribution and production interests in
a vertically-integrated undertaking.

22      In its defence, the Kingdom of Sweden does not dispute the Commission’s claims concerning transposition of Article 15(2)(b)
and (c) of the Directive. Even though it takes the view that its legislation on company law does largely have the effect of
ensuring the functional division required by those provisions, it accepts that certain specific measures necessary for its
transposition are still to be adopted. In that regard, it adds that the Energimarknadsinspektionen (national Inspectorate
of the energy market) has been tasked by the Government with examining the amendments to laws and regulations necessary for
the correct transposition of Article 15 of the Directive and with submitting a report by 1 October 2008 at the latest.

23      In the present case, it is not disputed that all the measures necessary to ensure the complete and correct transposition of
the provisions in question of the Directive in the Swedish legal order had not yet been adopted on expiry of the time-limit
fixed in the reasoned opinion.

24      The question whether a Member State has failed to fulfil its obligations must be determined by reference to the situation
in that Member State as it stood at the end of that period (Case C‐103/00 *Commission* v *Greece* [2002] ECR I‐1147, paragraph 23, and judgment of 5 June 2008 in Case C‐395/07 *Commission* v *Germany*, paragraph 8).

25      In those circumstances, it must be held that the Commission’s first plea in law is well founded.

*The second plea in law, alleging failure to have regard to the provisions of Article 23(2)(a) of the Directive*

26      The Commission submits, by this plea, that Article 23(2)(a) of the Directive has not been correctly transposed in the Swedish
legal order, since the regulatory authority has not been given the task of fixing or approving, prior to their entry into
force, at least the methodologies used to calculate the network tariffs, in accordance with that provision.

27      Conversely, the Kingdom of Sweden takes the view that its rules comply with the Directive, since its legislation contains
the methodologies required by that directive, together with the possibility of correction a posteriori by the regulatory authorities
of the results obtained.

28      Having regard to that assertion, it must be considered whether that legislation meets the requirements of Article 23(2)(a)
of the Directive.

29      That provision of the Directive also sets out a substantive rule, stating, inter alia, that the tariffs or methodologies must
allow the necessary investments in the networks to be carried out in a manner allowing these investments to ensure the viability
of the networks. Such investments can be expected from economic operators only if those tariffs or methodologies are sufficiently
precise and give a satisfactory level of predictability.

30      It must be noted first of all that the Kingdom of Sweden admits the lack of provisions in its domestic law relating to prior
approval by the national regulatory authority at least of the methodologies used to calculate or establish the terms and conditions
for connection and access to national networks, including transmission and distribution tariffs.

31      However, that Member State takes the view that the Swedish system enables the objective of the Directive, that is to say,
the creation of a fully operational internal electricity market, in which fair competition prevails, to be achieved, in order
to ensure, inter alia, that network access is, in accordance with recital 6 in the preamble to the Directive, non-discriminatory,
transparent and fairly priced.

32      That argument cannot be accepted.

33      It must be pointed out that, even if the arrangements for transposition or the interpretation put forward by a Member State
serves, or better serves, certain aims pursued by that directive, that Member State may not disregard the provisions expressly
laid down in that directive (see, by analogy, Case C‐243/03 *Commission* v *France* [2005] ECR I‐8411, paragraph 35).

34      Consequently, the Commission is correct to point out that, in order to comply with the requirements of the Directive, the
Kingdom of Sweden cannot merely apply a system in which review of the methodology used to establish, inter alia, the electricity
transmission and distribution tariffs is carried out a posteriori, even if that review were as effective as a system of prior
review, since the Directive expressly provides for use of a system of prior approval and does not allow the Member States
the possibility of applying a different system.

35      The Kingdom of Sweden also asserts that, in order to comply with the requirements set out in Article 23(2)(a) of the Directive,
it is sufficient to provide for a national regulatory system under which only the guidelines on the basis of which the network
tariffs will later be applied must be approved in advance. In the present case, the domestic legislation establishes the methodologies
for the fixing of network tariffs within the meaning of Article 23(2)(a) of the Directive. In that regard, that Member State
refers to Chapter 4 of Law (1997:859) relating to electricity, to the administrative instructions and to the decision of 21
June 2004 of the Swedish Energy Authority.

36      Under recital 15 in the preamble to the Directive, the national regulatory authorities are to fix or approve those tariffs,
or at least, the methodologies underlying their calculation. Under recital 18 in the preamble to the Directive, those regulatory
authorities must ensure that transmission and distribution tariffs so fixed or approved are non‐discriminatory and reflect
the costs actually incurred in the transmission or distribution of electricity.

37      In the light of those recitals, which define the objectives which the Community legislature sought to achieve, there is no
reason to interpret Article 23(2)(a) of the Directive in a manner which departs from the wording of that provision. It is
apparent from the very wording of that provision that, firstly, the national regulatory authorities are to fix or approve,
before their entry into force, at least the methodologies used to calculate or establish the terms and conditions for connection
and access to national networks, including transmission and distribution tariffs, and, secondly, that those tariffs or methodologies
must allow the necessary investments in the networks to be carried out in a manner allowing these investments to ensure the
viability of the networks.

38      Article 23(2)(a) of the Directive thus requires a level of predictability of the abovementioned tariffs sufficient to ensure
that the necessary investments in the networks are carried out in a manner allowing these investments to ensure the viability
of the electricity transmission and distribution networks.

39      Even if, contrary to the Commission’s submissions, that provision does not require the Member States to lay down a formula
including a set of parameters permitting precise and direct calculation of the tariffs, it must be held that the legislative
framework referred to by the Kingdom of Sweden contains only general principles and criteria which the network tariffs must
meet and therefore does not contain any methodology allowing operators to predict, even approximately, the applicable tariffs.

40      The objective of the Directive can be achieved only by the establishment of precise tariffs or of elements of a methodology
of tariff calculation of a level of precision such as to allow economic operators to estimate their cost of access to the
transmission and distribution networks.

41      It follows that the Swedish legislative framework does not meet the requirement for predictability of tariffs under the Directive,
necessary to allow investments in the networks to be carried out in a manner allowing these investments to ensure the viability
of the electricity transmission and distribution networks. In any event, it does not introduce in the domestic law the mechanism
for review in advance laid down in Article 23(2)(a) of the Directive. The Swedish legislation does not put into place a system
under which tariff proposals are submitted to the regulatory authority before their entry into force.

42      The Commission’s second plea in law must accordingly be considered to be well founded.

43      In the light of all of the above, it must be held that:

–        by failing to adopt the measures necessary to ensure a functional division between distribution and production interests in
a vertically-integrated undertaking in accordance with Article 15(2)(b) and (c) of the Directive, and

–        by failing to make the regulatory authorities responsible for approving, in advance, at least the methodologies used to calculate
or establish the terms and conditions for access to national networks, including transmission and distribution tariffs in
accordance with Article 23(2)(a) of the Directive,

the Kingdom of Sweden has failed to fulfil its obligation under the Directive.

**Costs**

44      Under Article 69(2) of the Rules of Procedure, the unsuccessful party is to be ordered to pay the costs if they have been
applied for in the successful party’s pleadings. Since the Commission has applied for the Kingdom of Sweden to be ordered
to pay the costs and the Kingdom of Sweden has been unsuccessful, it must be ordered to pay the costs.

On those grounds, the Court (Fourth Chamber) hereby:

1.      **Declares that, by failing to adopt measures necessary to ensure a functional division between distribution and production
interests in a vertically integrated undertaking in accordance with Article 15(2)(b) and (c) of Directive 2003/54/EC of the
European Parliament and of the Council of 26 June 2003 concerning common rules for the internal market in electricity and
repealing Directive 96/92/EC and by failing to make the regulatory authorities responsible for approving, in advance, at least
the methodologies used to calculate or establish the terms and conditions for access to national networks, including transmission
and distribution tariffs in accordance with Article 23(2)(a) thereof, the Kingdom of Sweden has failed to fulfil its obligations
under Article 15(2)(b) and (c) and Article 23(2)(a) of that directive;**

2.      **Orders the Kingdom of Sweden to pay the costs.**

[Signatures]

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[\*](#Footref*) Language of the case: Swedish.