Legislative Developments in The Netherlands

On April 27, 2006, the Lower House of the Dutch Parliament approved legislation proposed by the Minister of Economic Affairs (MEA) relating to, inter alia, the ownership unbundling of integrated energy companies. Of the 150 Members of Parliament who sit in the Lower House, 129 voted in favor of the proposed legislation.

Legislative Developments in The Netherlands

The action taken by the Lower House is the result of a long period of public and Parliamentary debate and hearings that began in 2004. Essent expects this debate to continue as the legislative process moves forward to the next stage.

Essent's understanding of the next steps in the legislative process is as follows: The proposed legislation will now be submitted to the Upper House of the Dutch Parliament. A committee of the Upper House will decide whether to schedule a vote on the proposed legislation or to conduct a preparatory study. Essent expects that the latter course is the more likely, and that the Upper House of the Dutch Parliament will review and ultimately debate the proposed legislation later this year. At the time of voting, the Upper House can either approve or disapprove the legislation in the form adopted by the Lower House. If the Upper House of the Dutch Parliament does not approve the legislation as adopted, the MEA and/or the Lower House will be able to consider possible amendments or modifications to the legislation and, if approved by the Lower House, to then resubmit the same to the Upper House. If the Upper House of the Dutch Parliament approves the legislation as adopted (either in the present form or after subsequent amendments or modifications by the Lower House), the legislation would then be submitted to the Queen for Royal assent and publication in the Official Gazette ('Staatscourant'), following which the legislation would become law in accordance with its terms and subject to any effective dates therein contained or established by separate decree.

The proposed legislation has as its stated purpose 'an efficient, reliable and durable provision of energy at social costs which are kept as low as possible'. Essent is convinced that the proposed legislation will not achieve these objectives and has previously stated its strong opposition to the MEA's original proposal, believing that the current integrated form of its business provides the best guarantee of safe, cost-effective and sustainable generation, distribution and supply of energy. Essent will carefully study the details of the proposed legislation as adopted by the Lower House for purposes of assessing the impact thereof on its business operations and its contractual arrangements and obligations to and with its financiers and other business partners.

Based on Essent's preliminary review of the legislation adopted by the Lower House, the proposed legislation includes provisions with respect to, inter alia, the following:

• Ownership Unbundling of Zntegrated Energy Companies
  It is proposed that management of gas and/or electric network systems may not be conducted in combination with energy production, supply, sale or other commercial activities by a single company or a group of companies. Full separation of economic interests would be required and network companies (or groups) would not be allowed to hold shares in companies (or groups) engaged in power generation or other commercial activities, and vice versa.
  If the proposed legislation is adopted, these changes would be required to be implemented within two years and six months after the date the legislation comes into force.
• Economic Ownership of Energy Networks
  It is proposed that statutory provisions adopted in 2004 requiring that the economic ownership of gas and electric networks reside with the network manager or its subsidiary become effective two years and six months after the date of the new legislation comes into force.
  It is furthermore proposed that the legal ownership of these networks must remain in the hands of governmental shareholders.
• Management of the HV Grid
  It is proposed that the grid management powers of TenneT (the Dutch transmission system operator of The Netherlands' 220 kilovolt ((kV) and higher voltage grid) would extend to all networks of 110 kV and above.
  If the proposed legislation is adopted, these particular changes would be required to be implemented by January 1, 2008.
• Gas and (non HV) Electric Networks
  Various proposals have been made to ensure the financial stability and independence of the managers of energy networks, including limitations on the granting of financial security.
• Cross Border Leases
  The proposed legislation also contains certain transitional and grandfathering provisions relating to the cross border leases entered into by the respective energy companies.
• Plan of Unbundling
  If the proposed legislation is adopted, the energy companies affected thereby are required to prepare a plan of implementation within one year after the date the legislation comes into force and submit this plan for approval to the MEA. The implementation plan would have to address various matters, including with respect to (i) the manner in which the required legal and economic ownership unbundling of network and generation/commercial activities would be accomplished, and (ii) how to ensure that the costs of unbundling are not passed on to consumers.
• Possible Privatization
  The debates with respect to the proposed legislation included discussion on the possible privatization of the energy companies.
  Essent's shares are currently held by local municipalities and provinces. Under current law they cannot sell their stakes in network companies to private sector parties. However, there is presently no such legal impediment to the sale of shares in power generation and commercial energy companies to the extent the same are not engaged in network management in the Netherlands.
  Note should be made that certain members of the Lower House of the Dutch Parliament have requested that the government approach the current shareholders of the integrated energy companies to discourage the sale of their shares in the commercial activities to private parties.
  The MEA has previously indicated that the prohibition of privatization of the network companies will no longer be necessary if the integrated energy companies such as essent are unbundled as contemplated by the proposed legislation. In furtherance of this, the MEA has also previously indicated that after any enactment of the proposed legislation, further amendments may be pursued to allow the sale of a minority interest in the network companies.   

Note that the summary descriptions of the contents of the proposed legislation set forth above - as well as the other matters set forth in the proposed legislation and not referenced above - are qualified in their entirety by reference to the specific text of the proposed legislation and the laws proposed to be amended thereby, and that no assurances can be made regarding the future ownership structure of Essent or any unbundfed entities or as to any actions that the MEA or the government may or may not take on the subject of future privatizations.

Response of Rating Agencies
The rating agencies Standard & Poor's and Moody's Investors Service published statements in response to the action taken by the Lower House of the Dutch Parliament with respect to the proposed legislation on ownership unbundling.

On April 28, 2006, Standard & Poor's announced that it was placing the short and long term credit ratings of certain integrated Dutch energy companies including Essent on 'CreditWatch' with negative implications.

On May 4, 2006 Hoody's Investor Services announced that the ratings assigned to Essent's senior unsecured debt will remain unchanged at this time although it will continue to monitor for further developments.

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As noted above, Essent is convinced that the proposed legislation will not achieve its stated objectives and, as the legislative process continues Essent will continue to articulate its concerns with respect thereto in the interest of customers, shareholders, employees, financiers, other business partners and suppliers. Essent will also participate in and support efforts to convince the Upper House of the Dutch Parliament that it should reject the proposed
legislation.

In the event that the proposed legislation does become law, Essent will be required to restructure its business units and operations. Essent will do its utmost to mitigate any adverse impact that would arise as a result thereof.

5 May 2006

Published: 05 May 2006