A public authority that acts as a private operator may charge what the market can bear.


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In January 2019, Germany notified to the Commission, for reasons of legal certainty, investment of the municipality of Hamburg in a district heating network. The Commission, in decision SA.52390, found that the investment in Hamburg District Heating Network conformed with the Market Economy Operator Principle [MEOP] and, therefore, it was free of State aid.[1]

The owner and operator of the network was Vattenfall Wärme Hamburg [VWH]. The municipality had a 25.1% share in VWH via HGV, a holding company wholly owned by the municipality.

In 2014, Vattenfall agreed to sell to HGV its share of the network [i.e. 74.9%] for a minimum amount of EUR 712 million. At about the same time Hamburg announced that it would replace two coal-fired plants by high-efficiency gas-fired combined heat and power [CHP] plants and upgrade and extend the network.

In 2018, different independent experts retained by the municipality calculated VWH’s equity value. The equity value of a company is in principle equal to the value of its assets as a going concern minus its net debt. The value of assets for this purpose is not their book value but the discounted stream of net revenue they can generate over their economic life.

Consultants BDO estimated the equity to be EUR 645 million. Consultants LBD reached an amount of EUR 1,097 million. Consultants PwC estimated the equity to be EUR 615 million.

Commerzbank performed verification checks under all available financial methodologies [“applying the multiple, dividend discount and discounted cash flow approaches”] and concluded that the minimum price agreed between Vattenfall and HGV was adequate.

The Commission decision indicates in paragraphs 14-15 that there were different points of view with respect to four main issues.

First, with respect to the rate of discount, LBD applied a discount rate of 5.5%. PwC considered that rate to be too low. Commerzbank used a higher discount rate of [5.5-7.5]%. Germany proposed that the discount rate used to calculate the equity value of VWH to be [4.3-7.5]%.

Second, there were different expectations about the possibility that the network would be eligible for State aid.

Third, there were different assumptions about the evolution of revenue, costs and the cost of debt.

Fourth, there were disagreements on the magnitude of feasible price increases. Germany pointed out to the relatively low-price sensitivity of the district heating customers who could not easily switch to alternative sources or technologies. It considered that HGV would be able to implement an additional [2-4]% price increase, without breaching competition rules prohibiting abuse of dominant position.

In the end, Germany considered that the correct equity value of VWH would be EUR [940-1000] million and therefore Vattenfall’s 74.9% share would correspond to EUR [704-749] million.

Assessment of the conformity with the MEOP

The Commission focused its assessment on the existence of an advantage and whether a private investor would enter into that transaction.

“(20) An advantage, within the meaning of Article 107(1) TFEU, is any economic benefit which an undertaking could not have obtained under normal market conditions, that is to say in the absence of State intervention. Whenever the financial situation of an undertaking is improved as a result of State intervention on terms differing from normal market conditions, an advantage is present. The test to determine whether an economic transaction is in line with normal market conditions is referred to as the Market Economy Operator Principle (MEOP). The purpose of the MEOP test is to assess whether the State grants an advantage to an undertaking by not acting like a market economy operator with regard to the transaction at stake.”

“(22) The measure can be regarded to satisfy the MEOP test if the purchase price paid by HGV corresponds to the price that a market economy operator would be ready to pay. The Commission considers this condition to be fulfilled if the overall purchase price reflects the equity value of VWH."

“(23) According to the Commission’s Notice on the notion of State aid, whether a transaction is in line with market conditions can be established on the basis of a generally-accepted, standard assessment methodology. Such a methodology must be based on the available objective, verifiable and reliable data, which should be sufficiently detailed and should reflect the economic situation at the time at which the transaction was decided, taking into account the level of risk and future expectations.”

“(24) The Commission acknowledges that the evaluation made by LBD in October 2018 takes into account the new energy generation concept that HGV intends to implement after the reacquisition. Moreover, the Commission acknowledges that PWC has confirmed the appropriateness of the general methodology applied by LBD. The corrections subsequently made by PWC aim at ensuring strict compliance with international accounting standards, but do not put the general methodology into question. The Commission therefore shares the view of the German authorities that the LBD evaluation indeed can serve as a fair approximation of the equity value of VWH. The Commission moreover approves the view of the German authorities that a prudent market investor would however critically assess the various assumptions underlying the LBD evaluation, notably by taking into account the significant difference in value compared to the BDO evaluation of May 2018 and the corrections proposed by PwC in its review of the LBD report.”

“(25) The most significant correction proposed by Germany to the evaluation of LBD relates to the discount rate applied. While the LBD evaluation applied a discount rate of 5.5%, Germany argues that the correct discount rate should be set at [4.3-7.5]%. To this end, Germany has submitted a sensitivity analysis applying the CAPM, while using input variables (beta, market premium etc.) that were provided by the various independent consultants. The outcome of this sensitivity analysis demonstrates that a discount rate of [4.3-7.5]% corresponds to a median value. (By applying the CAPM methodology, Germany implements the recommendation of PWC, which found the initial 5.5% as proposed by LBD to reflect the expected return only and recommended to determine the discount rate via the CAPM.) Against this background, the Commission considers a discount rate of [4.3-7.5]% to be an assumption that a private market operator would make.”

“(26) Furthermore, the Commission is of the view that a private investor would not consider a continuation of CHP support at the current level beyond the expiry of the relevant legal basis for granted. In this regard, the Commission also notes that PwC bases its corrections on the accounting standards that do not foresee to take into account a cash flow, which is not sufficiently certain. Nevertheless, the Commission acknowledges that a private market investor would assess the probability that such support will continue to be granted. In this spirit, the German authorities have corrected the LBD assumptions as regards the CHP support that the two high-efficient CHP plants which are expected to be operational as of 2025 and 2030 respectively as foreseen by the new energy generation concept will receive. While the LBD assumptions rely on an unchanged continuation of the current CHP support as foreseen by the CHP Act as approved by the Commission (SA.42393) until 2022, the German authorities apply a probability factor of 90% in relation to the CHP-plant expected to be operational in 2025. To this end, the German authorities in particular took into account that the German parliament has decided on a prolongation of the CHP support until 2025, which however is subject to State aid approval. At the same time, the German authorities apply a probability factor of 50% in relation to the second CHP plant that is envisaged to be operational as of 2030. To this end, the German authorities rely on e.g. on the recommendations of the Coal Commission which recommended a further prolongation of the CHP support until 2030. The Commission considers the probability approach as presented by the German authorities to reflect the economic assessment that a private investor would make when making a purchase decision.”

“(27) The Commission furthermore acknowledges that the potential for an increase of heat prices is supported by the findings of the second LBD report issued as referred to in recital (12). LBD confirmed the potential for heat price increases that a prudent market operator would indeed intend to implement. To this end, LBD identified a potential to increase prices by 10% without entering into conflict with national antitrust rules, while they conclude that a prudent market operator would limit the price increase to [2-4]% in 2024 in order to maintain a safety buffer to the abuse threshold under national antitrust rules. The Commission considers the assumption put forward by Germany to be very optimistic, taking into account the already high level of heat prices at [7-10]% above market average. Nevertheless, the Commission cannot exclude that a private market investor would make such assumption when evaluating the equity value of VWH.”

“(28) Moreover, the Commission is of the view that it is not inappropriate from the perspective of a private market investor to cautiously factor in half of the corrections proposed by PWC in relation to the LBD assumptions regarding the increase of sales volumes, maintenance costs as well as the cost of debt when evaluating the equity value of VWH:”

“(a) While LBD in its evaluation of October 2018 assumed an annual net increase of sales volumes of [1-1.5]%, PWC in its review considered this assumption too ambitious and proposed a correction to an annual increase of sales volumes of [0.4-0.8]% based on historical figures. The Commission acknowledges that it is for a private investor to define its business plan and to pursue ambitious targets in terms of sales volumes, the prospect of which cannot solely be determined on the basis of historical figures, in particular where the investor intends to implement a new energy generation concept. By accepting half of the correction proposed by PWC, the German authorities lower their assumptions as regards sales volume increases to a level which a private market investor that intends to implement such new energy generation concept including two high-efficient CHP plants and an extension of the district heating grid infrastructure would factor in when evaluating the equity value of VWH.”

“(b) PWC considered the costs of maintaining the district heating network as assumed by LBD to be too little. To this end, PWC relied on data collected via its own project expertise, while the LBD cost assumption relied on historical data from VWH’s own maintenance experience as well as the project expertise of LBD. Against this background, the Commission finds it plausible that a private market investor would factor in a value that corresponds to the median of the two sets of project experiences.”

“(c) Moreover, PWC corrected the cost of debt as assumed by LBD. While LBD assumed the cost of debt to be 2.25%, PWC corrected this value to 2.75%. PWC relied on a range justified this correction by the range of observed cost rates as communicated by HGV ranging from 2.5% to 3% at the time of the PWC review. The German authorities however have submitted updated data that suggests that HGV was more recently able to qualify for a cost of debt ranging from 2.46% to 2.62%. Against this background, the German authorities propose to apply the value of 2.5% for the cost of debt when evaluating the equity value of the VWH. As 2.5% indeed is within the ranges as identified by PWC as well as observed more recently, the Commission considers that this assumption is justifiable from a private market operator perspective.”

“(29) The Commission also takes note of the fairness opinion issued by Commerzbank, which assesses the market compliance of the purchase price in light of the terms under which comparable transactions have taken place. To this end, Commerzbank applied the multiples approach analysing a representative set of comparable transactions as well as comparable companies. In addition, Commerzbank has conducted yet another evaluation of VWH’s equity value applying the discounted cash flow and discount dividend methodology. The various methodologies support an equity value ranging from EUR 929 million to 1,316 million. On this basis, Commerzbank concluded that the purchase price of EUR 950 million is appropriate.”

“(30) Furthermore, the Commission takes note of the alleged tax advantage that would arise following the transaction at issue as well as the operational synergies presented. The Commission acknowledges that such possibility to optimize the tax burden by acquiring a profit making company together with operational synergies constitute considerations that a private investor would take into account when deciding to invest.”

On the basis of the above analysis, the Commission found that “(31) Germany has provided evidence showing that the decision to purchase the district heating network was taken on the basis of economic evaluations comparable to those which, in similar circumstances, a rational market economy operator would have had carried out.”

A couple of concluding thoughts

The disagreements noted in the introduction demonstrate that a project with long economic life can be shown, without much difficulty, to be profitable or unprofitable, as the case may be, by adjusting the discount rate or the expected future stream of revenue. An increase of the discount rate by a mere 1% can have a significant impact on net present value. For example, if interest increases from 5% to 6%, the revenue that will be earned in 25 years from now will be worth 20% less in today’s money!

Germany pressed its case on all the right issues: discount rate, possible eligibility for State aid, tax advantages and ability to increase prices up to the limit of competition law and consumer tolerance. Although a public authority is not expected to test the boundaries of legality or to exploit captive consumers, a public authority that is supposed to act as a private operator must behave just like a private operator who aims for profit.


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

 [Photo by Riccardo Annandale on Unsplash]



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Phedon Nicolaides

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

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