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Regulation and licensing do not constitute obligations for the provision of an SGEI. Compensation for changes in public policy is not compensation that complies with the Altmark conditions.

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Introduction

The calculation of the compensation for the net extra costs of public service obligations [PSO] is a difficult task. On 15 May 2019, in case C-706/17, Achema et al v Lithuania Energy Regulator, the Court of Justice had to deal with the issue of compensation of electricity producers and distributors.[1]

The judgment arose from a reference for a preliminary ruling concerning a dispute on the financing of services of general economic interest[SGEI] in Lithuania. Under Directive 2009/72 on the electricity market, Member States may impose public service obligations such as those related to security of supply, universal provision, quality, price, etc.

Lithuania had appointed Baltpool for an unlimited period of time as administrator of the funds that were used to finance the SGEI or public interest service [PIS], as it was named in the relevant Lithuanian law. The funds were collected from final electricity consumers by the distribution and network operators, who passed them on to the fund administrator, who then transferred them to the providers of the PIS after deducting an amount to cover its operating costs. According to Lithuanian law the administrator had to be an entity controlled directly or indirectly by the state. Prices and compensation rates were regulated by the state.

Lithuania also promoted the generation of electricity from renewable energy sources. Any losses sustained by producers of green electricity were compensated by Baltpool.

Achemaand the other applicants were companies operating combined heat and power plants. The electricity they generated was consumed for their own needs or was provided to third persons. In the event of a shortfall, they purchased electricity from independent suppliers.

Lithuanian law required Achema et al to bear part of the cost of the PSO. The amounts were calculated by the energy regulator on the basis of the quantity of electricity which they generated or purchased from independent suppliers and consumed for their own economic needs.

Achema et al challenged that decision of the regulator for being an unlawful State aid measure to green electricity producers which had not been notified to the European Commission.

The referring Lithuanian court requested guidance on five issues concerning the interpretation of the concepts of state resources, advantage, selectivity, distortion of competition, affectation of trade and the application of the Altmark criteria.

State resources

The first question of the referring court was whether the funds earmarked for financing PIS constituted state resources in the meaning of Article 107(1) TFEU.

The Court of Justice, first, recalled that an advantage is State aid if it can be “(47)granted directly or indirectly through State resources and be attributable to the State”.

“(48) In order to assess whether a measure is attributable to the State, it is necessary to examine whether the public authorities were involved in the adoption of that measure”.

“(49) The various PIS and the method of their financing were adopted by the State by way of various laws and government resolutions. They must therefore be regarded as attributable to the State”.

“(50) In order to determine whether the advantage has been granted directly or indirectly through State resources, it should be borne in mind that, …, the prohibition laid down in Article 107(1) TFEU covers both aid granted directly by the State and aid granted through a public or private body appointed or established by that State to administer it”.

The reason being that “(51)EU law cannot permit the rules on State aid to be circumvented merely through the creation of autonomous institutions charged with allocating aid”.

“(52) An obligation to purchase energy may come within the concept of ‘aid’, even though it does not involve a transfer of State resources”.

This is a sentence that appears in many judgments. I wish the Court would stop using it because the last sentence of the very next paragraph [i.e. 53] appears to contradict the statement in paragraph 52. What the Court means is that the state also controls resources that do not come directly out of its own budget.

The Court explained that “(53)Article 107(1) TFEU covers all the financial means by which the public authorities may actually support undertakings, irrespective of whether or not those means are permanent assets of the public sector. Even if sums corresponding to the aid measure in question are not permanently held by the Treasury, the fact that they constantly remain under public control, and are therefore available to the competent national authorities, is sufficient for them to be categorised as ‘State resources’”.

In the case of electricity, “(54) the Court has held that funds financed through compulsory charges imposed by State legislation, and administered and apportioned in accordance with that legislation, may be regarded as State resources within the meaning of Article 107(1) TFEU even if they are administered by entities separate from the public authorities”.

Then the Court stressed that “(55) the decisive factor in that regard is that such undertakings are appointed by the State to administer a State resource and are not merely bound by an obligation to purchase by means of their own financial resources”.

In other words, when the state merely imposes on a company an obligation to buy electricity from another company, such an obligation is attributed to the state, but does not involvetransfer of state resources, as the state does not earmark any specific resources to be used for that purpose.

The Court went on to examine the characteristics of the PIS regime.

First, an obligation was imposed on consumers to pay an amount fixed by the regulator to distribution and system operators. Electricity producers which consumedthe electricity they generated were also charged a ratefixed by the regulator. [paragraph 57]

Second, the sums collected by the distribution and system operators were paid to the administrator of PIS, which, was controlled directly or indirectly by the state. [paragraph 58]

Third, the administrator of PIS paid the various PIS providers. [paragraph 60]

Fourth, distribution and system operators received PIS money to offset the additional costs they incurred as a result of the obligation imposed on them to purchase green electricity. [paragraph 61]

On the basis of the those observations, the Court of Justice concluded that “(63)the PIS regime is based, first, on several obligations that it imposes on both economic operators and end consumers and, second, on the intervention, as the sole entity responsible for administering PIS monies, of a body controlled directly or indirectly by the State.” “(64)Thus, PIS monies are collected by the distribution and transport system operators from all end consumers of electricity without any legal possibility of derogation. Such a payment obligation imposed by the PIS regime is therefore in the nature of an obligatory contribution. In addition, those system operators are required under that regime to purchase PIS from various providers, without being able to refuse to comply with that obligation either.” “(65) Such funds may be regarded as State resources within the meaning of Article 107(1) TFEU, even if they are administered by entities separate from the public authorities.” “(67)Consequently, in such circumstances, the PIS monies must be regarded as remaining under public control.”

Then the Court tried to clarify the difference between the present case and PreussenElektra. In the case of PreussenElektra, the obligation imposed on distribution companies to buy green electricity was not “(69)an intervention through State resources in so far as it [did] not lead to any direct or indirect transfer of State resources to the undertakings producing that type of electricity”. Unfortunately, this statement does not clarify much.

But the Court went on to note that “(70)private undertakings had not been appointed by the Member State concerned to administer a State resource, but were bound by an obligation to purchase by means of their own financial resources”. This is  a bit clearer, but it does not explain why the resources of those undertakings were not indirectly or implicitly controlled by the state since they were obliged to buy green electricity. We must infer that what the Court must have meant is that the undertakings under obligation to buy green electricity could choose the resources to use for that purpose. In essence, the state had not earmarked any specific resources for that purpose.

The next paragraph is more illuminating. “(71)In the present case, it appears, first, that the administrator of PIS monies is appointed to administer an obligatory contribution, which constitutes a State resource, imposed on all end consumers of electricity and, second, that the PIS obligation to purchase imposed on distribution and transport system operators is offset by the payment to those operators of PIS monies.”

Indeed, this paragraph reveals that for transfer of state resources to occur it is necessary, first, that the state identified a resource [i.e. the levy on users] and, second, determines how the resource is to be used [i.e. to compensate operators]. Therefore, revenue generated by a levy or charge imposed by law is a state resource. And, the use of that revenue to offset costs imposed by law results in transfer of state resources.

The Court concluded that “(72)the funds earmarked for financing a public interest service scheme, such as the PIS, constitute State resources”.



For those interested in legal statistics, recent research by my colleagues at the University of Maastricht has revealed that PreussenElektra is the second most frequently cited judgment in case law. The most frequently cited judgment is Bosman [free movement], while the third most frequently cited judgment is Francovich [state liability].

Advantage for distribution companies and system operators

The second question of the referring court was whether there was any advantage for distribution companies and system operators who received PIS money to offset the losses caused by the obligatory purchasing of electricity from green electricity producers.

The Court of Justice replied that “(74)measures which, whatever their form, are likely directly or indirectly to favour certain undertakings or which fall to be regarded as an economic advantage that the recipient undertaking would not have obtained under normal market conditions are regarded as State aid”.

In addition, “(75)an advantage directly granted to certain natural or legal persons may constitute an indirect advantage and, therefore, State aid for other natural or legal persons that are undertakings”.

Then the Court explained that “(77) although the sums intended to offset […] losses are paid to distribution and transport system operators, it appears that, […], it is the producers of energy generated from renewable energy sources that are the actual recipients of the aid which that compensation mechanism involves.”

“(78) The offsetting of the losses sustained by those operators through PIS monies is inherently connected to the advantage envisaged in favour of the producers of electricity generated from renewable energy sources, as intended by Article 20(2) of the Law on renewable energy sources, when that article highlights the fact that the generation of such electricity is encouraged, pursuant to PIS procedure, ‘by paying the difference between the fixed rate established for a producer and the rate of the electricity sold by that producer’. That difference corresponds to the additional costs incurred or losses sustained by those operators, offset by PIS monies.”

“(80)Consequently, the answer to the second question is that Article 107(1) TFEU must be interpreted as meaning that, when distribution and transport system operators receive PIS monies in order to offset the losses sustained by reason of the obligation to purchase electricity at a fixed rate from certain electricity producers and to balance it out, that compensation constitutes an advantage, within the meaning of that provision, granted to the electricity producers.”

The Lithuanian system certainly contains State aid for green electricity producers. But it is puzzling that the Court of Justice did not reach the same conclusion for the distribution companies and system operators. The state relieved them from costs that the state itself imposed on them through the obligation to buy green electricity at fixed rates. It is true that the compensation merely offset their extra costs. But compensation that removes a disadvantage imposed by the state is still State aid. After all, the Court of Justice has ruled in numerous cases that compensation is not State aid only when it seeks to offset the net costs of providing SGEI is State aid and complies with the Altmark criteria.

Selectivity and affectation of trade

The third question of the referring court was whether PIS system was liable to affect trade between Member States.The referring court mentioned four categories of recipients of PIS money. Those were: (i) the undertaking implementing NordBalt, a project of strategic importance to Lithuania, (ii) the undertakings which were entrusted with the task of ensuring the security of electricity supply, (iii) the operators of solar power plants, which were compensated for their losses, and (iv) the distribution companies and system operators.

“(84) In order to assess […] the selectivity of the advantage, it is necessary to determine whether, under a particular legal regime, the national measure in question is such as to favour ‘certain undertakings or the production of certain goods’ over others, which, in the light of the objective pursued by that regime, are in a comparable factual and legal situation and which are accordingly subject to different treatment that can, in essence, be classified as ‘discriminatory’”.

“(87)It is apparent […] that each category of operators mentioned […] above is granted an advantage on a selective basis. […[ the PIS scheme provides an advantage only to certain electricity producers including, in particular, those generating electricity from renewable energy sources or by cogeneration and those contributing to the security of supply or national energy security or independence, to the security and reliability of the national energy system or to the implementation of strategic supply projects. Moreover, each of those operators, […], is designated by name as a potential recipient of PIS funds by the Lithuanian Government”.

“(88)Article 107(1) TFEU must be interpreted as meaning that funds, such as the monies intended for certain PIS providers, must be regarded as conferring on them a selective advantage within the meaning of that provision.”

This is the right conclusion, but the Court did not explain why the beneficiaries were in a comparable factual and legal situation in the light of the objective pursued by the PIS regime.

Then the Court turned its attention to the concept of trade. “(89) In order to categorise a national measure as ‘State aid’, it is necessary, not to establish that the aid has an actual effect on trade between Member States, but only to examine whether the aid is liable to affect such trade”. “(90)However, the adverse effect on trade between Member States cannot be purely hypothetical or presumed. Thus, it is necessary to determine why the measure concerned is liable, by reason of its foreseeable effects, to have an impact on trade between Member States”.

The Court observed that “(91)there was already trade between the Republic of Lithuania and other Member States on the electricity market by reason of connections with the electricity systems of the Republic of Estonia and the Republic of Latvia, which were used to import electricity. That information, which is not disputed by the Lithuanian Government, weakens that government’s argument that the electricity market in that country was relatively isolated.”“(92)In addition, when aid granted by a Member State strengthens the position of one undertaking in comparison with other undertakings competing in intra-Community trade, the latter must be regarded as being affected by that aid”. “(93)In that regard, it is not necessary that the recipient undertakings are themselves involved in intra-Community trade. Where a Member State grants aid to undertakings, internal activity may be maintained or increased as a result, so that the opportunities for undertakings established in other Member States to penetrate the market in that Member State are thereby reduced”.

“(94) The fact that an economic sector, such as the energy sector, has been involved in a significant liberalisation process at EU level may serve to determine that the aid has a real or potential effect on trade between Member States”.

The Court of Justice concluded that “(96) in so far as electricity is the subject of cross-border trade, the grant of PIS funds to the PIS providers […] is liable to affect trade between those States”.

Altmark compliant compensation

The fourth question of the referring court was whether the compensation for PIS to recipient undertakings in order to discharge public service obligations was compliant with the conditions in the Altmark Trans judgment [case C 280/00].

The reply of the Court of Justice was that in order for such a measure not to be categorised as State aid, all four Altmark conditions had to be satisfied. The Court explained that “(102) the purpose of the verification of the conditions laid down in the Altmark case-law is to determine whether the measures at issue must be categorised as ‘State aid’, which is an issue that must be resolved before that which consists in examining, where necessary, whether incompatible aid is nevertheless necessary for the performance of the tasks assigned to the recipient of the measure at issue, under Article 106(2) TFEU”. At this point the Court cited the judgment in case C-660/15 P, Viasat Broadcasting UK v Commission, paragraph 34. The reference to incompatible but necessary aid is another incongruous phrase that should not appear in judgments. If an aid measure is incompatible, it is futile to examine its necessity. Just because a company may need aid for its survival does not mean that the aid is compatible with the internal market.

The Court clarified that “(103)the conditions laid down in the Altmark case law are no longer to be applied where it has been found that a measure must be categorised as ‘aid’, in particular in so far as the recipient undertaking is unable to pass the test of comparison with a typical undertaking, well run and adequately equipped so as to be able to meet the necessary public service requirements, and it is necessary to examine whether that aid can be justified under Article 106(2) TFEU”.

The Court reiterated the principle that “(104)the Member States are entitled, while complying with EU law, to define the scope and organisation of their services of general economic interest, and may take into account, in particular, objectives pertaining to their national policy and, in that respect, the Member States enjoy a wide discretion, which may be called into question only in the event of a manifest error”.

Furthermore, “(105)Article 3(2) of Directive 2009/72 provides that Member States may impose on undertakings operating in the electricity sector, in the general economic interest, public service obligations which may relate to security, including security of supply, regularity, quality and price of supplies and environmental protection, including energy efficiency, energy from renewable sources and climate protection.”

Verification of compliance with the Directive was left to the referring court which had to “(106)satisfy itself that, in defining PIS, the Republic of Lithuania exercised its discretion without committing a manifest error of assessment, in particular in the light of the objectives pursued by PIS, which must relate to those set out in Article 3(2) of Directive 2009/72.”

We see again, that national courts play a vital role in ensuring the correct application of EU law and, in particular, the correct assignment of PSO.

“(107)In the second place, it is apparent from the reasoning underlying the exception established by the judgment of 24 July 2003, Altmark Trans and Regierungspräsidium Magdeburg[…], that the first condition laid down by that judgment presupposes, […], that the recipient undertaking is under a genuine obligation to provide the service in question under given conditions, and that it is not merely authorised to provide such a service.”

This is another important point that is often misunderstood by Member States. Authorisation, licensing, certification and, in general, compliance with regulatory requirements are not the same as imposition of a specific obligation on a specific undertaking to supply a specific service to specific users in a specific region on specific terms.

The Court of Justice went on to express doubts as to whether obligations had actually been imposed. [paragraph 108]

“(109)Such is the case, first, of the producers of electricity generated from renewable energy sources. Those producers have no obligation whatsoever under national legislation to provide the electricity that they produce under specific conditions relating, inter alia, to the universal nature or duration of the services to be provided. On the contrary, […], producers of that type of electricity merely agree to sell the electricity generated and the administrators of distribution and transport systems merely agree to buy it, with those transactions taking the form of contracts entered into on a voluntary basis.”

“(110)Second, a similar observation may be made regarding the generation of electricity in combined heat and power plants. Again, it may be observed that the participation of the producers in question in the PIS regime is voluntary”.

“(112)More fundamentally, it must, third, be noted that the PIS monies intended to offset the development costs of solar power plant projects do not appear to relate to any services that are provided by the operators of those plants in favour of end consumers or operators in the electricity sector in Lithuania. The purpose of that PIS is to offset the costs incurred by those operators on account of the amendment to Lithuanian law, introduced in 2013, which resulted in the authorisations held by them to operate such plants not being implemented.”

This is another important statement. Not every compensation is compensation in the meaning of Altmark case law and SGEI case law, more broadly. The compensation in the meaning of the SGEI case law aims to offset the net extra costs from the obligation to provide an uneconomic service. In other words, that compensation must be linked to a supply obligation.

“(113)In the third place, the second and third conditions laid down by the judgment of 24 July 2003, Altmark Trans and Regierungspräsidium Magdeburg […], require that the parameters on the basis of which the compensation is calculated must be established in advance in an objective and transparent manner, and that the compensation must not exceed what is necessary to cover all or part of the costs incurred in discharging the public service obligations.”

On the basis of the information available to it, the Court of Justice could not confirm that the beneficiary undertakings had not been overcompensated. It left it to the referring court to verify the absence of overcompensation. [paragraphs 114-117]

It is puzzling why the Court did not draw explicitly all the implications of the non-compliance with the first, second and third Altmark conditions. Any compensation that does not satisfy all of the four Altmark conditions is State aid. However, if it does not satisfy any of the first three Altmark conditions, automatically it also fails to satisfy the compatibility requirements in the 2012 SGEI package. Although a national court cannot assess the compatibility of the aid, it can assess the correct implementation of EU directives, regulations and decisions. If the aid measure is incorrectly implemented, the national court must stop that measure.

“(118)In the fourth place, the fourth condition laid down by the judgment of 24 July 2003, Altmark Trans and Regierungspräsidium Magdeburg[…] does not appear to have been met […]. The lack of information concerning the procedure according to which the monies earmarked for those PIS are calculated necessarily entails that it is not possible to know whether the level of compensation needed for that purpose has been determined on the basis of an analysis of the costs which a typical undertaking, well run and adequately equipped so as to be able to meet the necessary public service requirements, would have incurred in discharging those obligations.”

Again, the Court of Justice left it to the referring court to satisfy itself that the PIS providers had been chosen in accordance with the procedure of the fourth Altmark condition.

“(121)Consequently, the answer to the fourth question is that Article 107(1) TFEU must be interpreted as meaning that a State measure, such as the PIS regime, must not be regarded as compensation for services provided by the recipient undertakings in order to discharge public service obligations, within the meaning of the judgment of 24 July 2003, Altmark Trans and Regierungspräsidium Magdeburg […] unless the referring court establishes that any one of the PIS does in fact meet the four conditions set out in paragraphs 88 to 93 above.”

Distortion of competition

The fifth question of the referring court was whether the PIS regime distorted or was liable to distort competition.

“(124)For the purpose of categorising a national measure as ‘State aid’, it is necessary, not to establish that competition is actually being distorted, but only to examine whether that aid is liable to distort competition”.

“(125) However, actual distortion of competition cannot be purely hypothetical or presumed. Thus, it is necessary to determine why the measure concerned distorts or threatens to distort competition”.

“(126)In that regard, it must be borne in mind that aid intended to release an undertaking from costs which it would normally have to bear in its day-to-day management or normal activities distorts the conditions of competition”.

“(127) The PIS regime, […], must be regarded as distorting or liable to distort competition, subject to the referring court carrying out the necessary verifications, […[, in the light of the effects of the specific features of the exercise of their activity by various PIS providers on competition within the Lithuanian electricity market.”

The answer of the Court of Justice to the fifth and last question was that the PIS regime had to be regarded as distorting or liable to distort competition.

-----------------------------

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

http://curia.europa.eu/juris/document/document.jsf?text=&docid=214111&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=8071152.

[Photo by Patrick Tomasso on Unsplash]



Comments

by Marcos Araujo, Tuesday, 4 June 2019, 15:08:51

Interesting to see yet another case where the Court struggles to differentiate the facts from those of Preussen Elektra, despite the fact that there has not been any case since Preussen (over 18 yeas ago) where a State imposed payment has been considered not to entail State resources. One would think that the Court believes that at least some State-imposed obligations should remain outside the scope of State Aid rules, despite the angry winds to the contrary...



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