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Maintaining capacity that is necessary for the provision of normal services cannot be classified as a service of general economic interest. State aid may not be granted towards the costs of cleaning up pollution caused by the aid recipient itself. State aid to a legal monopoly may still affect trade if there is competition for the monopoly rights or if the monopolist operates in other markets which are open to competition.


Introduction

Germany, in case T-295/12, Germany v Commission, petitioned the General Court to annul Commission Decision 2012/485, (OJ L236, 1/9/2012).[1] The Decision concerned State aid that had been granted to Zweckverband Tierkörperbeseitigung in Rheinland-Pfalz (public law association for the disposal of dead animals in Rhineland-Palatinate) [ZT]. The business of ZT was the collection and disposal of dead animals. The aim of the aid was to compensate ZT for the costs of a public service obligation. Germany imposed a public service obligation on ZT to maintain a reserve capacity to collect and render a higher than normal number of animal carcasses in the event of an outbreak of an epidemic. The Commission examined the payments to ZT and found them to constitute incompatible aid that had to be recovered.

The gist of the German position was that the obligation to maintain reserve capacity in addition to the normal capacity was a service of general economic interest and that the compensation for the net costs of the SGEI satisfied the Altmark criteria. In its judgment of 16 July 2014, the General Court rejected the appeal.

A similar appeal had been lodged by ZT itself in case T-309/12, Zweckverband Tierkörperbeseitigung in Rheinland-Pfalz v Commission.[2] On 16 July 2014, the General Court dismissed that appeal too. Because most of the arguments and reasoning in the case ZT v Commission are the same as in the case Germany v Commission, I do not examine them in this article. However, at the end of this article I review a number of additional pleas made by ZT concerning the nature of its activities.

The judgment in T-295/12

The polluter must pay

In its first plea, Germany alleged infringement of Article 107(1) TFEU and Article 106(2) TFEU on the existence of an SGEI.

The General Court noted that Member States have a wide discretion as to the definition of what they consider to be an SGEI and, therefore, the definition of such services by a Member State may not be questioned by the Commission unless there is a manifest error. The Commission is not empowered to rule on the policy choices of Member States, the scope of the public service tasks, the level of costs of the SGEI or the economic efficiency of the operator [paragraph 44]. But then in the very next paragraph, the Court clarified that the power of Member States to define SEGI is not unlimited and cannot be used arbitrarily in order to evade the application of competition rules. This is because an SGEI exhibits special characteristics in comparison to other economic activities. These special characteristics have to be demonstrated.

The Commission contended that the costs of disposal of carcasses should be borne by farmers according to the polluter-pays principle which, according to the guidelines on agricultural State aid, also applies to the costs of preventive measures.

Interestingly, the General Court’s response was that Commission guidelines do not limit the discretion of Member States which is acknowledged by the Treaty itself in Article 14 TFEU. But then it recalled the landmark judgment in case C-126/01, GEMO, according to which the disposal of dead animals and slaughterhouse waste was considered to be an intrinsic part of the economic activities of farmers and slaughterhouses and, consequently, the financial burden of that disposal had to be borne by farmers and slaughterhouses.

Altmark

The second plea of Germany was that the Commission was wrong to conclude that the Altmark criteria were not satisfied.

The General Court recalled that the notion of public service obligation referred to in Altmark was the same as that of SGEI in Article 106(2) TFEU. Since the service in question was not an SGEI, the Court pointed out that the Commission was correct to find that the 1st Altmark criterion was not satisfied. [paragraph 72]

The 2nd Altmark criterion requires that the parameters of compensation must be established in advance in an objective and transparent manner.

The Commission in its decision found that the 2nd Altmark criterion was not satisfied because no parameters had been defined in advance on how to calculate the costs of additional rendering capacity.

The General Court explained that Member States had a wide discretion not only as to the definition of a public service mandate, but also in determining the compensation cost that depended on an assessment of complex economic facts. However, because this determination is subject only to limited control by the Commission, the 2nd criterion requires that the Commission is able to verify the existence of objective and transparent parameters and for this reason these parameters must be defined in a way that Member States do not misuse the concept of SGEI. [paragraph 87]

Then the Court declared that the 2nd Altmark criterion was not satisfied because the relevant German legislation merely provided for ZT to receive payments to cover any shortfall of revenue. But since this was done ex post, according to the Court, it was not equivalent to setting ex ante objective and transparent parameters. [paragraphs 89-90]

The 3rd Altmark criterion requires that compensation does not exceed the net extra costs of the PSO.

In the present case, even though ZT was not entitled to make profit, the Commission concluded that the 3rd criterion was not satisfied.

According to paragraph 27 of the SGEI Framework, the method for calculating the maximum compensation is that of the net avoided cost. That is, the net cost of performing the PSO is the difference between the net cost incurred by the service provider when he carries out the public service tasks and the net cost of not having to carry out those tasks.

The Commission found that ZT did not have to incur any additional costs in order to maintain extra rendering capacity. This is because in the event of an epidemic, ZT could use its normal capacity during nights and weekends [i.e. outside normal operating hours]. The General Court agreed with the Commission that the compensation covered costs that would have to be incurred by ZT anyway under its normal operations. [paragraphs 116-118]

It should be noted at this point that although the General Court stressed earlier that the Commission was not entitled to question the costs associated with the PSO, it appears that the Commission can indeed challenge a Member State that proposes to offer compensation for costs that are unnecessary for the delivery of the SGEI in question.

The 4th Altmark criterion requires that the compensated costs do not exceed those incurred by a typical undertaking, well run and adequately equipped.

The Commission was of the opinion that the 4th criterion was not satisfied because ZT was not selected through a public procurement procedure and Germany had not proved that ZT was an average, well-managed company. The relative high costs for the disposal of animal carcasses in Rhineland-Palatinate showed that ZT was not an average, well-managed company. Germany counter-argued that the comparison with other German states was irrelevant.

The General Court, however, considered that the Commission was justified to take into account the situation in the other German states to establish the level of compensation that was needed. The compensation had to be based on an analysis of the costs which a typical undertaking, well-run and adequately equipped in order to satisfy the requirements of necessary public service requirements, would have incurred in discharging those obligations. [paragraph 130]

Then the General Court repeated part of the judgment in case T-137/10, CBI v Commission [concerning hospitals in Belgium] according to which the Altmark criteria apply to all sectors of the economy but their implementation must be flexible and take into account the specificity of the given sector, in view of the special nature of the SGEI mission in certain sectors. [paragraph 131]

The problem in the CBI case, as with ZT case, is that the Court did not explain what that flexibility might have meant and how the implementation of Altmark criteria could have taken into account sectoral specificities.

Structural disadvantages

The Court moved on to examine the second German plea that the Commission incorrectly found that contributions that were used to fund clean-up of abandoned sites constituted State aid. Germany contended that the reduction of structural disadvantages that a beneficiary has to bear in relation to other operators on the market is not an economic benefit. The Commission had found those contributions to be operating aid incompatible with the internal market because, under German law, ZT was entirely responsible for the clean-up costs of abandoned sites.

The General Court rejected this plea too because ZT was the polluter and therefore liable for the costs of cleaning-up of the pollution. [paragraphs 143-144]

Regional monopoly and affectation of trade

The third plea alleged that there was no effect on trade between Member States and distortion of competition. In view of the fact that ZT had a regional monopoly for collection and disposal of animal carcasses, Germany thought that there could be no distortion of competition or affectation of trade.

The Commission had found that while there existed regional monopolies for disposal of carcasses, the majority of responsible local authorities granted the monopoly rights after public procurement. That indicated the existence of competition and a market. According to the Commission, State aid strengthened the financial position of ZT over other potential bidders. To the extent that bidders from all Member States could participate in tenders, the aid granted to ZT was likely to hinder trade between Member States.

The General Court agreed with the Commission [paragraphs 156-158]. It further stated that the Commission was not obliged to demonstrate the link between State aid and the subsidisation of carcass disposal. Aid granted to an undertaking operating in a monopolised market can affect trade whenever the recipient company is also active in markets where it is subject to competition. [paragraph 160]

In its fourth plea, Germany alleged that the Commission was wrong to conclude that the State aid in question could not be justified under the Article 106(2) TFEU. In view of the fact that it was already found that ZT was not entrusted with a PSO, the General Court agreed with the Commission that Article 106(2) could not be applied. Moreover, even if the service provided by ZT could be classified as SGEI, the requirements of the SGEI Framework were not satisfied and consequently the aid could not be declared compatible with the internal market (because the parameters of compensation had not been predetermined). [paragraphs 168-170]

Lessons to be drawn

Once again, a Member State has failed to prove that the Altmark criteria apply to a State aid measure. This is not surprising. Complying with Altmark is a very difficult task. Bearing in mind, however, that the first three Altmark criteria and the requirements of the 2012 SGEI package are identical, it is better for public authorities to assume that the compensation they grant is State aid rather than attempt the largely impossible feat of scaling the heights of mount Altmark.

But this case is also a warning in relation to another tricky issue: not every obligation that is imposed on an undertaking automatically falls within the scope of SGEI. The obligation must relate to activities or tasks that the undertaking in question would not have performed under normal market conditions. Member States have discretion to define what they consider as an SGEI, but the starting point must always be a market survey for what is or is not available on the market: i.e. identification of market gaps. Once one or more market gaps are identified, then the discretion of Member States concerns which gap they wish to fill by imposing a PSO, the extent to which it should be filled [i.e. what level of service should be provided] and how to fill it [by tendering so that Altmark is fulfilled or by granting State aid].
Economic activities in case T-309/12

The following additional arguments were made in case T-309/12, Zweckverband Tierkörperbeseitigung in Rheinland-Pfalz v Commission.

ZT claimed that the collection and disposal of animal carcasses fell within the exercise of public powers because, first, they were compulsory, second, they relied on the power of the Member State to organise them as a public service and, third, there was no market.

With respect to the compulsory nature of the services, the General Court noted that private companies were responsible for the processing and disposal of dead animals. Only the decision to ensure the processing and disposal of animals was within the exercise of official authority. [paragraphs 58 & 59]

With respect to the involvement of the state in the organisation of the public services, the General Court considered that the services did not fall within the scope of public powers which were the sole prerogative of the state [paragraph 62]. The Court made an interesting distinction between the pursuit of public policy and the exercise of public powers [paragraph 63]. Moreover, the fact that a fee was charged for the purpose of covering the relevant costs was a strong indication, according to the Court, that the service was economic in nature [paragraph 66].

With respect to the absence of a market, again the General Court distinguished between the exercise of official authority and the carrying out of economic activities through the offer of goods or services on the market. In relation to economic activities, it did not matter whether the state was acting directly through a body forming part of the government or through an entity that was granted special or exclusive rights [paragraph 70]. Indeed, if exclusive rights precluded the existence of a market, Article 106(1) TFEU would be deprived of its effectiveness [paragraph 71]. Moreover, the fact that a body carrying out economic activities was incorporated in the administration of the state was not sufficient to make those activities non-economic [paragraph 73]. Lastly, and perhaps more importantly for other cases, it was irrelevant that a private operator would not carry out the same activity under the same conditions. The economic nature of an activity does not depend on whether a private operator is willing to carry it under the same conditions as those imposed by a public authority [paragraph 76].

More broadly, in relation to whether the maintenance of reserve capacity was of economic nature, the General Court referred to the FENIN case [C-205/03 P] concerning purchasing of pharmaceutical products by public hospitals in Spain and the Leipzig-Halle case [T-443/08] concerning the construction of airport infrastructure in Germany and pointed out that it was not necessary to dissociate the different components of the same activity [purchasing medicines – using medicines; constructing a runway – operating a runway]. Rather the existence of an economic activity was established by determining whether one component of an overall activity was linked to another component that was economic in nature such as the maintenance of reserve capacity and the use of that capacity to process dead animals. The latter was economic. [paragraphs 83-84]

 

 


[1] The text of the judgment can be accessed here:

www.curia.europa.eu/juris/liste

The text of the Commission Decision can be accessed here:

www.eur-lex.europa.eu/legal-content/EN/TXT

[2] The text of the judgment can be accessed here:

www.curia.europa.eu/juris/liste



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Professor at the College of Europe, Bruges, and at the University of Maastricht, and Academic Director at lexxion training

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