The Federal Court of Justice (FCJ) has laid the foundation for more competition on the district heating market in a landmark ruling of 5 December 2023 (KZR 101/20) on Stuttgart’s district heating network. The FCJ found that the state capital was not obliged to conclude a new concession agreement with the previous network operator EnBW, but could instead “organise competition for the network”. The Court also held, however, that ownership of the district heating pipe network did not automatically pass to the city at the end of the previous concession agreement as this had not been explicitly stipulated. The city had no claim to transfer of ownership of the pipe network nor could it require its removal.
Background
The case before the FCJ concerned the district heating network of the state capital Stuttgart. EnBW had previously operated the city’s district heating network under a concession agreement that expired at the end of 2013 and on the basis of wayleaves. The energy provider made substantial investments during the term of the agreement and expanded the network to 218 km in length. As the end of 2013 – and of the agreement between Stuttgart and EnBW – approached, disputes about the conclusion of a new concession agreement and the ownership of the district heating pipe network flared up.
Stuttgart (the plaintiff in the court proceedings) originally planned to carry out a transparent and non-discriminatory procedure to re-award the concession at the end of the contract term, modelled on section 46 Energy Industry Act (Energiewirtschaftsgesetz, “EnWG”). Several companies then expressed an interest in operating the district heating network, including EnBW (the defendant). The selection procedure was temporarily suspended in July 2013, leaving it unclear who would be operating the network in future. Three years later, the city council decided that the city should take over the district heating network and operate it itself. Stuttgart then demanded that EnBW transfer ownership of the district heating systems to it or remove them. EnBW refused to do either, instead filing a counterclaim demanding that the city issue a binding offer for a new concession agreement allowing the energy provider to continue operating the district heating network.
Decisions of the lower courts
Stuttgart Regional Court dismissed the action brought by the state capital and upheld EnBW’s counterclaim. The motions filed by both the city and EnBW were rejected on appeal, however, with the court ruling that EnBW was obliged to remove the district heating pipe network installed by it from city property. This ruling was presumably not in the interests of either the state capital or EnBW: Stuttgart would lose “its” district heating network at a time when district heating was supposed to make a significant contribution to the energy transition, while EnBW would have to bear the costs of dismantling it.
The FCJ’s ruling
According to the FCJ, which overturned only part of the Stuttgart Higher Regional Court’s ruling, the state capital was under no obligation to contract and was therefore not required to offer EnBW a new concession agreement. The city could instead choose to grant wayleaves for a limited period only and to introduce a competition-based selection procedure for the network once the stipulated period had expired. The FCJ also held that the pipe network remained in EnBW’s ownership and that EnWB was under no obligation to relinquish them to the city or even to remove them.
In more detail:
No obligation to contract under competition law
The FCJ first held that sections 19(1), (2) no. 1, (4) and 33(1) Act against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen) did not oblige the city to contract with EnBW. Although the city was acting as an undertaking and was subject to the prohibition of abuse due to its monopoly on granting wayleaves, it was not obliged to offer EnBW a new concession agreement and could instead grant wayleaves for a limited period only – as it had done in the case in dispute. While it was the legislator’s conscious intention not to extend the EnWG to district heating supply, the city had the autonomy to decide whether – in keeping with section 46 EnWG – it would “[organise] competition for the network with the objective of counterbalancing, at least in part, the competitive disadvantages associated with a pipeline monopoly”.
A different situation would only exist if it were possible to set up and operate parallel infrastructures, which was not the case here. The fact that EnBW had already established a network infrastructure had instead created a natural monopoly. The FCJ did not resolve the issue of whether the state capital may in fact be under an obligation to carry out a transparent and non-discriminatory selection procedure.
Ownership remains with network operator
With regard to the ownership of the pipe network, the FCJ held that EnBW had remained the owner even after the concession agreement had expired and that there was no obligation on EnBW to transfer its ownership rights to the city:
- The FCJ classified the pipe network as temporary elements of the city’s property (cf. section 95 Civil Code (Bürgerliches Gesetzbuch, “BGB”)) which could only become constituent parts of the property by way of an agreement that was obvious to outsiders and did not exist in this case.
- The FCJ also rejected a contractual and statutory right to the transfer of ownership. A claim based on supplementary interpretation of the agreement was rejected, among other things, on the principle of good faith. Since it was not even clear who would operate the network in the future, there could be no claim to ownership transfer based on the hypothetical will of parties contracting in good faith. After all, it was even theoretically conceivable that EnBW would prevail in the selection procedure and that ownership of its pipe network would therefore be transferred back and forth.
- Unlike Stuttgart Higher Regional Court, the FCJ also found EnBW to be under no obligation to remove the pipe network from the city property. The state capital was obliged to tolerate the interference with its ownership rights based on section 1004(2) BGB due to its contractual duties of good faith and regard for EnBW’s interests pursuant to sections 241(2) and 242 BGB. This was especially so given that the city had continued to allow the district heating network to operate even after the concession had expired and that it had made clear that it did not want to jeopardise the district heating supply. By demanding that the pipe network be removed, the state capital was acting in bad faith to assert a purely formal legal position without final clarification of who would operate the district heating network in the future.
Conclusion
This decision addresses key legal issues affecting district heating supply and makes a significant contribution to clarifying the legal framework. The FCJ has made clear that local authorities are free to organise competition in respect of existing district heating networks. This emphasises the importance of the municipal management of energy supply and promotes the possibility of a diversified and competitive energy infrastructure. The FCJ has also strengthened the position of network operators, who – unless contractually agreed otherwise – will not automatically lose ownership of their district heating pipe network when their concession agreement ends or be under an obligation to dismantle them.
Nevertheless, there is still potential for conflict since the FCJ expressly left open the question of whether municipalities are not just entitled to but in fact obliged to operate a competition-based selection procedure. It also did not answer the question of whether and under what conditions a network operator must transfer ownership of its pipe network (in return for recompense) or allow third parties to use them in the event of a change of network operator. According to the FCJ, it is also conceivable that heat production and the operation of district heating networks may be separated from each other in future, meaning that the heat producer will not necessarily be the new network operator and will therefore need a network use agreement.
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