EU Energy Law, Volume II: Competition Law and Energy Markets [5 ed.] 9077644679, 9789077644676

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Edited Edited byby CHRISTOPHER CHRISTOPHER JONES JONES

EU EUENERGY ENERGYLAW LAW VOLUME VOLUMEIIII

EU EUCompetition CompetitionLaw Law and andEnergy EnergyMarkets Markets LEIGH LEIGH HANCHER HANCHER ADRIEN ADRIEN DEDE HAUTECLOCQUE HAUTECLOCQUE CHRISTOPHER CHRISTOPHER JONES JONES

FIFTH FIFTH EDITION EDITION

xxv

LARS LARS KJØLBYE KJØLBYE VALÉRIE VALÉRIE LANDES LANDES FRANCESCO FRANCESCO SALERNO SALERNO LENA LENA SANDBERG SANDBERG

EU ENERGY LAW VOLUME II

EU COMPETITION LAW AND ENERGY MARKETS

Fifth edition

EU ENERGY LAW VOLUME II

EU COMPETITION LAW AND ENERGY MARKETS Fifth edition

Leigh Hancher Adrien de Hauteclocque Christopher Jones Lars Kjølbye Valérie Landes Francesco Salerno Lena Sandberg Edited by Christopher Jones

CLAEYS & CASTEELS 2019

All views expressed are strictly personal. The opinions expressed in individual chapters are those of the author in question.

© 2019 by the authors

ISBN printed edition: 9789077644676 ISBN ebook: 9789077644683

The paper and board used in the production of this book is sourced exclusively from replanted forests.

All rights reserved. This publication, in whole or in part, may not be copied, reproduced nor transmitted in any form without the written permission of the copyright holder and the publisher. Applications to copy, transmit or reproduce any part of this work may be made to the publisher.

Published in 2019 by Claeys & Casteels Law Publishers Deventer (Netherlands) P.O. Box 2013 7420 AA Deventer Netherlands www.claeys-casteels.com

Table of contents

TABLE OF CONTENTS

Part 1

Introduction..........................................................................1

Part 2

The definition of the relevant market......................................5

CHAPTER 1

Introduction.................................................................5

CHAPTER 2

The relevant product market – Electricity...................11

1. 2.

3.

Introduction........................................................................................................ 11 The supply of electricity.................................................................................... 13 2.1 Wholesale supply markets.................................................................... 13 2.1.1 Introduction.......................................................................... 13 2.1.2 Definition and scope of the wholesale market............... 13 2.1.2.1 Generation and wholesale................................ 13 2.1.2.2 Supply to large end customers......................... 14 2.1.3 Submarkets within the wholesale market....................... 16 2.1.3.1 Power exchanges and wholesale...................... 16 2.1.3.2 Distinction according to the level of distribution......................................................... 16 2.1.3.3 Regulated part of the market........................... 17 2.1.3.4 Peak hours and off-peak hours........................ 17 2.2 Retail supply to final customers.......................................................... 18 2.2.1 Supply to eligible customers and to the regulated market..................................................................................... 18 2.2.2 Distinction according to size of customers..................... 20 2.2.2.1 Sub-markets according to the customers’ size......................................................................... 21 2.2.2.2 Criteria................................................................. 23 2.3 Conclusion.............................................................................................. 27 Electricity trading.............................................................................................. 27 3.1 Introduction............................................................................................ 27 3.2 A trading market distinct from wholesale supply........................... 27 3.3 Financial and physical trade................................................................. 31 3.4 On-line trading portal products......................................................... 33 v

Table of contents

4.

3.5 Facilitation of wholesale electricity trading...................................... 33 3.6 Wider energy trading market.............................................................. 34 Network infrastructure and related services................................................ 34 4.1 Transmission and distribution............................................................ 34 4.2 Balancing................................................................................................. 36 4.3 Network asset management, operation and services...................... 38 4.3.1 Introduction.......................................................................... 38 4.3.2 Network services.................................................................. 39 4.3.3 Connection services............................................................ 40 4.3.4 Metering reading and operation....................................... 41

CHAPTER 3 1.

The relevant geographic market – Electricity..............43

Supply................................................................................................................... 43 1.1 Introduction............................................................................................ 43 1.2 Relevant criteria..................................................................................... 50 1.2.1 Entry barriers........................................................................ 50 1.2.1.1 Regulatory trade barriers.................................. 50 1.2.1.2 Transmission rules and charges....................... 52 1.2.1.3 Interconnection capacity.................................. 54 1.2.1.4 Critical size and local generation activities... 60 1.2.2 Low prices............................................................................. 61 1.2.3 Switching behaviour and customer loyalty..................... 62 1.3 Relevant evidence.................................................................................. 64 1.3.1 Dominant national companies......................................... 64 1.3.2 Actual flow of trade............................................................. 65 1.3.3 Customer switching............................................................ 68 1.3.4 Price differences between neighbouring areas............... 68 1.3.5 Different regulatory frameworks...................................... 71 1.3.6 General market structure, regional exchanges and market coupling............................................................ 72 1.4 Case-by-case examination of Member States................................... 76 1.4.1 Austria.................................................................................... 76 1.4.2 Belgium.................................................................................. 77 1.4.3 Croatia................................................................................... 78 1.4.4 Cyprus.................................................................................... 79 1.4.5 Czech Republic.................................................................... 79 1.4.6 Denmark................................................................................ 79 1.4.7 England, Wales, Scotland................................................... 80 1.4.8 Estonia.................................................................................... 84 vi

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2. 3. 4. 5. 6.

1.4.9 Finland................................................................................... 84 1.4.10 France..................................................................................... 85 1.4.11 Germany................................................................................ 86 1.4.12 Greece.................................................................................... 88 1.4.13 Hungary................................................................................. 88 1.4.14 Ireland.................................................................................... 89 1.4.15 Italy......................................................................................... 89 1.4.16 Latvia...................................................................................... 90 1.4.17 Lithuania............................................................................... 90 1.4.18 Luxembourg.......................................................................... 90 1.4.19 Malta....................................................................................... 91 1.4.20 The Netherlands................................................................... 91 1.4.21 Norway................................................................................... 92 1.4.22 Poland.................................................................................... 92 1.4.23 Portugal.................................................................................. 93 1.4.24 Romania................................................................................. 94 1.4.25 Slovakia.................................................................................. 94 1.4.26 Slovenia.................................................................................. 95 1.4.27 Spain....................................................................................... 95 1.4.28 Sweden................................................................................... 96 Trading................................................................................................................. 97 Facilitating Electricity Trading........................................................................ 99 Transmission and distribution......................................................................100 Balancing...........................................................................................................101 Network management and operation and networks services.................103

CHAPTER 4 1. 2. 3.

The relevant product market – Gas...........................105

Introduction......................................................................................................105 High and low calorific value gas....................................................................107 Gas supply..........................................................................................................110 3.1 Wholesale market................................................................................110 3.1.1 Scope of the wholesale market........................................110 3.1.2 Trading markets and hubs................................................113 3.1.3 Submarkets within the wholesale market.....................114 3.2 End (retail) customers........................................................................115 3.2.1 Power plants and large industrial customers................117 3.2.2 Small business customers..................................................118 3.2.3 Domestic customers..........................................................118 3.2.4 Regulated and open segments of the market...............119 vii

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4. 5. 6.

7.

Gas transportation...........................................................................................120 Distribution......................................................................................................120 Gas storage.........................................................................................................121 6.1 Gas storage and gas flexibility...........................................................121 6.2 HCV and LCV gas storage................................................................122 6.3 Pore and cavern storage......................................................................123 Network asset management and operation and network services.........123

CHAPTER 5 1. 2.

3.

Introduction......................................................................................................125 Gas supply..........................................................................................................125 2.1 No wider than national markets.......................................................126 2.2 Smaller than national markets...........................................................130 2.3 Trading and gas hubs...........................................................................133 Transport and storage infrastructures and related services.....................134 3.1 Gas transportation...............................................................................134 3.2 Gas storage and flexibility tools........................................................135 3.3 Network asset management and operation and network services...................................................................................................136

Part 3

Agreements, decisions concerted practices and abuse of dominance – Articles 101 and 102 TFEU.......................139

CHAPTER 1 1. 2.

4.

Introduction.............................................................139

Overview............................................................................................................139 The basic requirements of Articles 101 and 102.......................................146

CHAPTER 2 1. 2. 3.

The relevant geographic market – Gas......................125

Horizontal agreements.............................................157

Introduction......................................................................................................157 Cartels and hard-core restraints....................................................................165 Co-operation agreements between energy companies............................169 3.1 General principles and factors...........................................................172 3.1 Factors relevant to the assessment under Article 101(1) FEU...172 3.3 Efficiency defence under Article 101(3) FEU...............................175 Commercialisation of energy........................................................................181 viii

Table of contents

4.1 4.2

5. 6. 7.

Joint selling............................................................................................182 Distribution of energy by a competitor..........................................187 4.2.1 Market partitioning...........................................................189 4.2.2 Safe harbour (block exemption regulation) for unilateral distribution agreements and individual assessment............................................................................190 4.2.3 A distributor becoming a competitor through liberalisation........................................................................192 4.3 Other cooperations for the commercialisation of energy...........193 Production of energy.......................................................................................195 5.1 Competition issues of production cooperations...........................196 5.2 Safe harbour for production cooperations.....................................201 Production and sale of energy.......................................................................205 6.1 The Corrib case.....................................................................................207 6.2 The DUC case.......................................................................................208 Construction, ownership and exploitation of energy .............................210 infrastructure....................................................................................................210 7.1 Merger or antitrust law?.....................................................................212 7.2 Hardcore restrictions..........................................................................212 7.3 Analysis of likely effects of infrastructure cooperations..............213 7.3.1 Cooperations granting third party access to infrastructure......................................................................214 7.3.2 Special competition issues of cooperations granting third party access...............................................217 7.3.3 Captive use of infrastructure...........................................218

CHAPTER 3 1. 2.

Vertical agreements..................................................221

Introduction......................................................................................................221 Exclusive energy purchasing and supply arrangements............................224 2.1 Non-compete obligation imposed on energy buyers...................226 2.1.1 Competition issues of non-compete obligations in energy supply and distribution contracts.................228 2.1.2 Safe harbour: the Vertical block exemption Regulation...........................................................................233 2.1.3 Analysis in individual cases..............................................237 2.1.4 Efficiency defence – Article 101(3) EC........................241 2.2 Individual cases dealt with by the Commission............................249 2.2.1 Distrigas...............................................................................250 2.2.2 Repsol...................................................................................253 ix

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3.

4.

2.2.3 Gas Natural-Endesa...........................................................254 2.2.4 Electrabel/Mixed intercommunal electricity distribution companies.....................................................255 Partitioning of energy markets by territory or by customer....................256 3.1 Direct market partitioning by territory...........................................257 3.1.1 The Commission proceedings against destination clauses...................................................................................257 3.1.2 The GDF/ENI/ENEL cases and Gazprom case.........260 3.2 Indirect market partitioning by territory........................................261 3.3 Customer and use restrictions...........................................................265 Exclusive energy distribution agreements...................................................266 4.1 Competition issues of exclusive energy distribution agreements.............................................................................................269 4.2 Safe harbour: Vertical block exemption Regulation.....................274 4.3 Analysis outside the safe harbour.....................................................275 4.4 Efficiency defences – Art. 101(3) TFEU........................................277 4.5 Capacity reservation agreements......................................................280

CHAPTER 4 1. 2.

3.

Article 102 TFEU – Abuse of a dominant position...283

Introduction . ...................................................................................................283 Structure and context of Article 102 TFEU..............................................288 2.1 Rule and example.................................................................................288 2.2 Public measures and conduct by firms.............................................289 2.3 Structural control and conduct control..........................................290 2.4 Conduct control and the merger test..............................................290 2.5 Differences between Articles 101 and 102 TFEU.......................290 2.6 Union law and national law: geographic impact...........................291 2.7 Union law and national law: effect on trade..................................292 2.8 Union law and national law: substantive differences...................293 2.9 Competition law and sector specific law........................................293 The existence of a dominant position..........................................................295 3.1 Concept.................................................................................................295 3.1.1 Dominance, a special responsibility...............................295 3.1.2 Dominant position and relevant market......................296 3.2 Horizontal dominance........................................................................296 3.3 Vertical dominance..............................................................................297 3.3.1 Essential facilities...............................................................297 3.3.1.1 Essential facilities: infrastructure..................300 3.3.1.2 Essential facilities: information.....................300 x

Table of contents

4.

5.

3.3.1.3 The Bronner case..............................................301 3.3.2 Essential facilities in the energy sector..........................302 3.4 Individual and collective dominance...............................................303 3.4.1 Collective dominance: groups of undertakings..........304 3.4.2 Collective dominance: economic and legal links........304 3.4.3 Collective dominance and the significant impediment to effective competition test.....................305 3.5 Indicators of dominance.....................................................................307 3.5.1 Market share........................................................................308 3.5.2 Size and importance of competitors..............................309 3.5.3 Stability of market share and price wars........................309 3.6 Temporary dominance........................................................................309 3.7 Potential competition and barriers to entry...................................310 3.8 Barriers to entry....................................................................................311 3.9 Goodwill, trade marks and vertical integration.............................311 Abuse..................................................................................................................313 4.1 Concept.................................................................................................313 4.2 Abuse on connected markets.............................................................314 4.3 Abuse and collective dominance......................................................315 Types of abuses.................................................................................................316 5.1 The Sector Inquiry...............................................................................317 5.2 Exclusive dealing..................................................................................320 5.2.1 Customer foreclosure........................................................320 5.2.1.1 The Gas Natural case......................................321 5.2.1.2 The E.ON-Ruhrgas case..................................322 5.2.1.3 The Distrigaz settlement................................322 5.2.1.4 The EDF settlement........................................323 5.2.2 Input foreclosure................................................................325 5.2.3 Network foreclosure agreements....................................327 5.2.3.1 The UK-French Interconnector....................327 5.2.3.2 The GDF and E.ON cases..............................328 5.2.3.3 The CEZ case....................................................328 5.3 Tying.......................................................................................................329 5.3.1 Tying and market power...................................................330 5.3.2 Contractual and economic tying....................................330 5.3.3 De facto tying......................................................................331 5.3.4 Tying scenarios in the energy sector...............................332 5.4 Refusal to supply..................................................................................333 5.4.1 General considerations.....................................................333 5.4.2 Refusal to supply and tying..............................................334 xi

Table of contents

5.4.3 5.4.4

5.5

5.6

5.7

Refusal to license................................................................334 Refusals to supply and essential facilities......................336 5.4.4.1 The principle.....................................................336 5.4.4.2 The sector inquiry report...............................337 5.4.4.3 The Marathon commitments.........................339 5.4.4.4 The TTPC case . ..............................................340 5.4.4.5 The E.ON case..................................................341 5.4.4.6 The RWE case...................................................341 5.4.4.7 The ENI case.....................................................342 5.4.4.8 The BEH Electricity case................................342 5.4.4.9 The BEH Gas and Romanian gas interconnector cases..........................................343 5.4.4.10 Upstream gas supplies in Central and Eastern Europe.................................................344 Discrimination.....................................................................................345 5.5.1 Discrimination and competition on downstream markets.................................................................................345 5.5.2 Discrimination without competition on downstream markets.........................................................347 5.5.3 Discrimination and price retaliation.............................348 5.5.4 Discrimination according to nationality: the Svenska Kraftnet, OPCOM and DE/DK interconnector cases............................................................350 Exclusionary pricing practices...........................................................352 5.6.1 Predatory pricing...............................................................353 5.6.1.1 The AKZO case................................................353 5.6.1.2 After AKZO.....................................................354 5.6.1.3 Predatory prices and cross subsidies.............356 5.6.2 Exclusionary pricing practices and the energy sector.357 5.6.3 The price squeeze...............................................................358 5.6.4 Loyalty rebates....................................................................360 5.6.5 Target rebates......................................................................361 5.6.6 Quantitative rebates..........................................................362 Unfair prices..........................................................................................364 5.7.1 The test.................................................................................364 5.7.1.1 Introductory observations.............................364 5.7.1.2 Excessive and unfair prices . ..........................365 5.7.1.3 A difficult test to apply...................................367 5.7.2 Unfair pricing in the energy sector................................369 5.7.2.1 The sector inquiry............................................369 xii

Table of contents

6.

5.7.2.2 National networks...........................................370 5.7.2.3 The Spanish temporary congestion case.....371 5.7.2.4 The Elsam case..................................................371 5.7.2.5 Upstream gas supplies in Central and Eastern Europe.................................................372 5.7.3 Capacity withdrawals: the E.ON wholesale market case..........................................................................373 Conclusion........................................................................................................374

CHAPTER 5 1. 2.

Procedure.................................................................377

Introduction......................................................................................................377 The procedure before the Commission.......................................................378 2.1 Origin of cases......................................................................................379 2.1.1 Complaints..........................................................................379 2.1.2 Own-initiative proceedings.............................................383 2.1.3 Investigations into sectors of the economy and into types of agreements...........................................................383 2.1.4 No notification system/possibility of informal guidance...............................................................................384 2.2 Initial assessment . ...............................................................................386 2.2.1 Requests for information.................................................387 2.2.2 Inspections..........................................................................392 2.2.3 Power to take statements..................................................398 2.2.4 Meetings and other contacts with the parties and third parties.........................................................................399 2.3 Infringement proceedings..................................................................400 2.3.1 The opening of formal proceedings...............................400 2.3.2 The statement of objections.............................................402 2.3.3 Access to the Commission’s file......................................405 2.3.4 The reply to the statement of objections.......................413 2.3.5 Oral hearings......................................................................413 2.3.6 Consultation of the advisory committee......................414 2.4 Procedural safeguards.........................................................................415 2.5 Commission decisions........................................................................417 2.5.1 Common requirements....................................................417 2.5.2 Finding of inapplicability.................................................419 2.5.3 Interim measures................................................................420 2.5.4 Commitments decisions...................................................421 2.5.5 Finding and termination of infringement....................427 xiii

Table of contents

2.6 Part 4

2.5.6 Decisions imposing fines .................................................428 Judicial review.......................................................................................445 Merger control...................................................................451

CHAPTER 1

Introduction.............................................................451

CHAPTER 2

Jurisdiction: When does a merger fall under the merger Regulation?.............................................457

1.

2. 3.

4.

Concept of a concentration...........................................................................457 1.1 Introduction..........................................................................................457 1.2 Control..................................................................................................458 1.3 Full-function joint ventures...............................................................468 1.4 Non-controlling minority shareholdings.......................................475 Turnover thresholds .......................................................................................476 2.1 Notification thresholds.......................................................................476 2.2 Turnover calculation...........................................................................477 Referrals.............................................................................................................481 3.1 Introduction..........................................................................................481 3.2 Referral from the Commission to the Member States.................481 3.3 Referral from the Member States to the Commission.................485 Legitimate interests..........................................................................................487

CHAPTER 3 1. 2. 3. 4. 5. 6. 7. 8.

Substantive assessment of concentrations..................493

Introduction......................................................................................................493 The relevant market.........................................................................................493 The substantive test..........................................................................................494 Efficiencies.........................................................................................................496 Remedies............................................................................................................497 Acquisition of a failing company..................................................................499 Ancillary restraints...........................................................................................500 Judicial Review.................................................................................................503

xiv

Table of contents

CHAPTER 4 1. 2. 3.

4.

Merger control in the electricity and gas sectors........505

Introduction......................................................................................................505 Categories of mergers and acquisitions common to the energy sector...................................................................................................................509 Factors relevant to the assessment of market power in the gas and electricity sectors..............................................................................................510 3.1 Relevant factors....................................................................................510 3.1.1 Market share........................................................................510 3.1.2 The size and importance of competitors.......................512 3.1.3 Closeness of competition between merging parties ..513 3.1.4 Commercial advantages of the company in question.514 3.1.4.1 Vertical integration: ownership of transmission and distribution facilities.......515 3.1.4.2 Economies of scale, balancing.......................516 3.1.4.3 Advantageous generation portfolio.............516 3.1.4.4 Horizontal integration....................................517 3.1.4.5 Existence of long-term retail/industrial supply contracts................................................517 3.1.4.6 Supplier of last resort/regulated tariff supplier...............................................................517 3.1.5 Entry barriers......................................................................517 3.1.5.1 Regulatory barriers..........................................518 3.1.5.2 Interconnection capacity................................518 3.1.5.3 Customer loyalty..............................................518 3.1.5.4 Maturity of the market...................................518 3.1.5.5 Stranded costs . ................................................519 3.1.5.6 Availability of wholesale capacity.................519 3.1.6 Relevant evidence..............................................................519 3.1.6.1 Changes in market share................................519 3.1.6.2 Market surveys..................................................520 3.1.6.3 Price levels.........................................................520 3.1.7 The Energy Sector Inquiry and merger review ever since: a more sophisticated approach to defining market power......................................................521 Horizontal mergers..........................................................................................526 4.1 Horizontal mergers within the same relevant geographic market.....................................................................................................526 4.2 Horizontal mergers between companies active on neighbouring geographic markets....................................................532 xv

Table of contents

5. 6.

7. 8.

Vertical mergers................................................................................................548 Conglomerate mergers between electricity and gas companies.............559 6.1 Introduction..........................................................................................559 6.2 Merger between a dominant and a non-dominant undertaking, or between two non-dominant firms......................560 6.3 Merger between a dominant gas and a dominant electricity . ...564 company.................................................................................................564 6.4 Cases dealt with by the Commission...............................................564 6.4.1 EDP/GDP..........................................................................565 6.4.2 DONG/Elsam/Energy E2..............................................570 6.5 Cases dealt with by national competition authorities..................574 6.6 Conclusions..........................................................................................575 Coordinated effects and oligopolistic dominance....................................576 Conclusion........................................................................................................583

CHAPTER 5 1. 2.

3. 4. 5.

6. 7. 8.

Introduction......................................................................................................585 Divestiture of shareholdings..........................................................................587 2.1 Divestiture and severance of structural links.................................587 2.2 Accompanying commitments to divestiture..................................600 2.3 Up-front buyer.....................................................................................602 Other remedies in relation to shareholdings..............................................602 Access to generation capacities......................................................................606 Access to infrastructure / divestiture of infrastructure............................613 5.1 Access to transmission and storage infrastructure........................613 5.2 Improvement of the functioning of the infrastructures...............614 5.3 Release of capacity at interconnectors.............................................616 5.4 Increase of interconnector capacity.................................................617 5.5 Divestiture of infrastructure..............................................................618 Remedies related to contracts........................................................................620 Remedies related to tariffs and prices..........................................................623 Insufficient remedies........................................................................................625

CHAPTER 6 1. 2.

Remedies in energy mergers.....................................585

Merger procedure.....................................................631

Pre-notification contacts................................................................................631 Notification ......................................................................................................633 2.1 Mandatory notification......................................................................633 2.2 Suspension effect..................................................................................634 xvi

Table of contents

3. 4. 5. 6. 7.

8.

2.3 Content of the notification................................................................639 2.4 Language................................................................................................639 Simplified procedure.......................................................................................640 Standard procedure.........................................................................................642 4.1 Phase I....................................................................................................642 4.2 Phase II...................................................................................................643 Third party involvement in the proceedings..............................................649 Business secrets.................................................................................................650 Sanctions for violation of procedural obligations.....................................652 7.1 Failure to notify....................................................................................652 7.2 Implementation of a concentration.................................................653 7.3 Failure to implement a remedy.........................................................653 7.4 Supply of incorrect or misleading information.............................654 Judicial review . ................................................................................................654 8.1 Decisions open to appeal ..................................................................655 8.2 Standing to appeal ..............................................................................657 8.3 Scope of judicial review......................................................................662 8.4 Consequences of the annulment of a merger decision ...............664

Part 5

State aid.............................................................................665

CHAPTER 1

Introduction.............................................................665

CHAPTER 2

Coal and Nuclear Aid

Section I: Coal: the ECSC Treaty...........................................................................669 1. Introduction......................................................................................................669 2. EC Council Regulation 1407/02 and the Coal Decision 2010............671 2.1 Substantive provisions........................................................................672 2.2 Procedural provisions..........................................................................672 3. Individual decisions under Regulation 1407/02.......................................673 3.1 New Member States............................................................................675 Section II: Nuclear: the Euratom Treaty................................................................682 1. Introduction......................................................................................................682 2. Commission decisions....................................................................................684 2.1 Decisions pre-Lisbon..........................................................................686 3. Hinkley Point C...............................................................................................689 xvii

Table of contents

4. 5.

3.1 The General Court judgment............................................................691 Recent Commission Decisions ....................................................................696 Transparency.....................................................................................................705

CHAPTER 3 1. 2. 3. 4. 5.

6. 7. 8. 9. 10.

11.

State aid in the TFEU...............................................707

Introduction......................................................................................................707 The beneficiary.................................................................................................708 State resources . ................................................................................................709 3.1 State resources and tradeable certificates........................................714 Imputability......................................................................................................715 4.1 Imputability and Taxation on Energy Products............................718 4.2 Imputability and Power Purchase Agreements (PPAs)...............719 The concept of advantage...............................................................................720 5.1 Disposal of public land or assets at less than full market value..726 5.2 State participation and the market economy investor test..........727 5.2.1 Introduction........................................................................727 5.2.2 The private investor test or the ‘MEIT’ and investments by State Undertakings................................729 5.2.3 The market investor test and the PPAs..........................730 5.2.4 The EDF rulings.................................................................732 Selectivity...........................................................................................................734 6.1 Selectivity issues and the EC Directive 2003/87..........................739 Effect on trade..................................................................................................741 The de minimis Regulation............................................................................742 Conclusion........................................................................................................743 Forms of state aid.............................................................................................744 10.1 Introduction..........................................................................................744 10.2 The Communication on state guarantees.......................................744 10.2.1 Background.........................................................................744 10.2.2 The Commission’s 2008 Notice on State Guarantees...........................................................................745 10.2.3 Benchmarks.........................................................................746 10.3 Infrastructure aid.................................................................................750 10.4 Aid granted through energy sector companies..............................750 10.4.1 Introduction........................................................................750 10.4.2 Cross-subsidisation............................................................752 The Relationship between Article 107(1) TFEU ....................................753 with other Treaty Articles..............................................................................753 11.1 Introduction..........................................................................................753 xviii

Table of contents

11.2 The free movement principles...........................................................754 11.3 Para-fiscal charges and indirect taxation.........................................755 11.4 The Competition rules.......................................................................762 11.4.1 Articles 101 and 102 TFEU............................................762 11.4.2 The Merger Regulation.....................................................763 11.4.3 Conclusion..........................................................................764 CHAPTER 4 1.

2.

3.

4.

The application of EU state aid lawto the energy sector.......................................................................765

Introduction......................................................................................................765 1.1 The automatic exceptions – Article 107(2) TFEU......................765 1.2 The discretionary exceptions – Article 107(3) TFEU.................766 1.3 The exemption regulations.................................................................768 The individual exemptions.............................................................................772 2.1 Article 107(3)(a): Regional aid........................................................772 2.2 The Financial Crisis – the Temporary Frameworks......................774 2.3 Article 107(3)(b) TFEU: Projects of common interest..............775 2.4 Article 107(3)(c) TFEU: Development of economic activities or areas..................................................................................779 2.5 The Regional Aid Guidelines ...........................................................780 2.6 The Regional Aid Guidelines for 2014-2020................................783 2.7 Research and Development and Innovation Framework............784 Guidelines with relevance to the energy sector.........................................786 3.1 Rescue and restructuring aid.............................................................787 3.1.1 Introduction........................................................................787 3.1.2 Rescue aid............................................................................789 3.1.3 Restructuring aid...............................................................790 The methodology on stranded costs............................................................796 4.1 Introduction..........................................................................................796 4.2 The criteria for stranded cost exemption........................................798 4.3 The individual decisions.....................................................................799 4.3.1 Austria..................................................................................799 4.3.2 Belgium................................................................................800 4.3.3 Greece..................................................................................801 4.3.4 Hungary...............................................................................801 4.3.5 Ireland..................................................................................801 4.3.6 Italy.......................................................................................802 4.3.7 Luxembourg........................................................................802 4.3.8 The Netherlands.................................................................803 xix

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5.

6.

4.3.9 Poland..................................................................................803 4.3.10 Portugal . .............................................................................804 4.3.11 Slovenia................................................................................804 4.3.12 Spain.....................................................................................805 4.3.13 United Kingdom................................................................806 Public service obligations...............................................................................806 5.1 Introduction..........................................................................................806 5.2 The SGEI frameworks and decisions...............................................810 5.3 The energy sector and Article 106(2) TFEU.................................813 5.4 The Commission’s guidance notes on Directives 2003/54 and 2003/55.........................................................................................815 The Clean Energy Package.............................................................................816

CHAPTER 5 1. 2.

State aid for environmental protection......................819

Introduction......................................................................................................819 The 2014 Guidelines on State aid for environmental protection and energy.........................................................................................................821 2.1 Introduction..........................................................................................821 2.1.1 Legal basis and common assessment principles...........822 2.1.2 The General Compatibility provisions..........................823 2.2 Key features in the 2014 Guidelines................................................824 2.2.1 Changes in the mechanisms for renewable energy support.................................................................................825 2.2.2 Aid for generation adequacy...........................................825 2.2.3 Competitiveness of European Industry and the exemption from funding of RES....................................827 2.2.4 Cross-border energy infrastructure................................828 2.2.5 Individual aid measures covered by the 2014 Guidelines...........................................................................828 2.2.6 (a) Objective of common interest..................................829 2.2.7 (b) Need for State intervention......................................829 2.2.8 (c) appropriateness of the aid measure (Section 3.2.3);...................................................................830 2.2.9 (d) incentive effect (Section 3.2.4);...............................830 2.2.10 (e) proportionality of the aid (aid kept to the minimum) (Section 3.2.5);.......................................832 2.2.11 (f ) avoidance of undue negative effects on competition and trade between Member States (Section 3.2.6);...................................................................832 xx

Table of contents

3.

2.2.12 (g) transparency of aid (Section 3.2.7).........................833 2.3 Measures previously covered by the 2008 Guidelines..................834 2.3.1 Aid for efficiency measures, including cogeneration and district heating and cooling.....................................834 2.3.2 Aid for resource efficiency and in particular for waste management.............................................................837 2.3.3 Aid for environmental studies.........................................838 2.3.4 Aid for early adaptation/ going beyond Union standards or for higher environmental protection in the absence of Union standards (including aid for the acquisition of new transport vehicles).............838 2.3.5 Aid for the remediation of contaminated sites............839 2.3.6 Aid for the relocation of undertakings..........................840 2.3.7 Aid involved in tradable permit schemes......................842 2.3.8 Aid for carbon capture and storage................................843 2.4 New Measures under the 2014 Guidelines.....................................844 2.4.1 Capacity mechanisms.......................................................847 2.4.2 Tax reductions or exemptions and in particular exemptions from RES funding........................................850 2.4.3 Exemption from network charges for large electricity consumers.........................................................856 2.4.4 Aid for energy infrastructure...........................................857 Concluding remarks........................................................................................859

CHAPTER 6 1. 2. 3. 4.

State aid procedure...................................................861

Introduction......................................................................................................861 The Treaty regime............................................................................................861 New aid..............................................................................................................862 Existing aid........................................................................................................864 4.1 Existing or New Aid and Preferential Tariffs.................................867 4.2 Existing aid in the new Member States...........................................868 4.3 Existing versus New Aid in the Hungarian and Polish PPA cases.........................................................................................................869 4.4 New aid..................................................................................................872 4.4.1 Formal notification is often preceded by an informal pre-notification procedure. .............................................872 4.4.1.1 Pre-Notification...............................................872 4.4.1.2 The preliminary investigation.......................872 4.4.2 The formal or contentious phase....................................877 xxi

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4.5

4.6

5.

4.4.3 Information requirements................................................878 4.4.4 Procedures in relation to existing aid schemes.............882 Recovery of unlawful aid................................................................................883 4.5.1 Introduction........................................................................883 4.5.2 Recovery in the Hungary PPA case................................885 4.5.3 Contractual termination..................................................886 4.5.4 International Law aspects.................................................887 4.5.5 Legitimate expectations....................................................890 4.5.6 Recovery from a subsequent owner...............................891 4.5.7 The ‘Deggendorf ’ Principle.............................................894 4.5.8 Para-fiscal charges and recovery......................................894 Judicial review...................................................................................................896 4.6.1 Introduction........................................................................896 4.6.2 Locus Standi........................................................................897 4.6.3 The “Plaumann” Test . .....................................................897 4.6.4 Trade associations and NGOs.........................................899 4.6.5 The role of the national courts........................................901 4.6.6 Energy cases........................................................................902 Ex Post Monitoring.........................................................................................904 5.1 Evaluation Plans...................................................................................904 5.2 Monitoring of Aid Schemes..............................................................905

Part 6 Chapter 1 1. 2. 3.

Article 106 TFEU..............................................................907 Special and exclusive rights.......................................907

Introduction......................................................................................................907 The Treaty Article............................................................................................908 Article 106(1) TFEU......................................................................................908 3.1 Introduction..........................................................................................908 3.2 Public undertakings.............................................................................909 3.3 Special and exclusive rights................................................................911 3.4 The scope of Article 106(1) TFEU..................................................912 3.4.1 Article 106(1) TFEU and Treaty rules on the four freedoms..............................................................................913 3.4.2 Article 106 (1) and Article 102 EC...............................915 3.4.2.1 Accumulation of rights...................................915 3.4.2.2 Manifest failure to satisfy demand...............916 xxii

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4.

5. 6.

7.

3.4.2.3 The Corbeau-type cases..................................917 Article 106(2) TFEU......................................................................................918 4.1 Introduction..........................................................................................918 4.2 Article 14 TFEU and the Protocol 26 on SGIs.............................919 4.3 What are services of general economic interest?...........................920 4.4 The requirements of Article 106(2) TFEU....................................921 4.4.1 Specific task or mission.....................................................921 4.4.2 Task entrusted by a public measure................................922 4.4.3 The Necessity and Proportionality Tests......................923 4.4.4 The Union interest.............................................................924 Article 106(3) TFEU......................................................................................925 Services of general economic interest in the energy sector.....................927 6.1 Introduction..........................................................................................927 6.2 The “electricity cases” of 1997...........................................................928 6.3 Article 106(2) and the IEM Directives...........................................933 6.4 Federutility, v Autorità per l’energia elettrica e il gas (C-265/08)...........................................................................................935 6.5 Financing public service obligations and Article 106(2) TFEU.....................................................................................................937 6.6 Trends in Commission Practice before and after Altmark..........941 Conclusion........................................................................................................945

Appendices Appendix 1

TFEU Articles..........................................................................947

Appendix 2

Implementation of the rules on competition.....................955

Appendix 3

Horizontal cooperation agreements................................. 1001

Appendix 4

Guidelines on Vertical Restraints...................................... 1125

Appendix 5

Control of concentration between undertakings.......... 1219

Appendix 6

Guidelines on State Aid....................................................... 1269

Appendix 7

Application of Article 108 of the Treaty.......................... 1365

Index ........................................................................................................................... 1403 xxiii

Part 1 Introduction

Part 1 Introduction

Competition policy has always played a central role in the EU’s efforts to change its electricity and gas markets from a series of national electricity and gas markets dominated by a single, usually state-owned, incumbent, into a single European market, characterised by liquid competitive markets with customers enjoying a wide choice of suppliers. It continues to play this role as markets continue to integrate further, regulated by increasingly detailed mechanisms to deepen liquidity and competition. It has equally played a major role in the EU’s attempts to decarbonise its economy. In 2007 the EU’s Heads of State and Government agreed the target of reducing carbon emissions by 20% by 2020. In 2008, they agreed the objective of 20% of renewable energy in the EU’s energy mix by 2020, and a 20% improvement in energy efficiency by the same date. The EU has now set the objective of ensuring that, by 2030, the EU has 32% of its overall energy use from renewable sources, greenhouse gas emissions are cut by at least 40% (from 1990 levels), and there is an improvement on energy efficiency of at least 32.5%. Achieving these targets will continue to require very considerable amounts of state aid, as will meeting the longer term objective of a (quasi or completely) decarbonised EU energy system by 2050 In the early years of energy liberalisation, competition policy focused on the one hand on ensuring that third-party access to networks was non-discriminatory and that incumbents were prevented from abusing their dominant market position to deter market entry by potential competitors; and on the other hand it focused on guaranteeing that mergers and acquisitions were used to promote market entry and competition rather than to reinforce existing dominance and create new entry barriers. In renewable energy and energy efficiency the Commission (following a number of seminal Court judgments) intervened rather lightly, allowing Member States a great deal of freedom in choosing the support schemes they wished to implement, focusing on preventing over-compensation, 1

Part 1 Introduction

as well as enabling them to restrict any support to operators within their own borders – an exception to the normal free movement rules. A major shift in enforcement can be detected in recent years, as reflected in the fourth and fifth editions of this book. Since the entry into force of the 2009 Third Internal Energy Market package, and the much stronger rules on transmission system unbundling that this requires, the need for enforcement of non-discriminatory access to networks, customers and balancing by transmission companies has greatly reduced, as the incentives to discriminate have in many cases greatly evaporated due to the resultant structural changes in ownership and operation. Equally, a great deal of the restructuring and merger activity in these sectors has reached a level of maturity as all the major EU gas and electricity groups have now a multi-country presence, leading to far less activity in the merger field. However, this does not mean that the role of competition policy has diminished; far from it. In terms of state aid, the EU as a whole, and the Commission in particular, has been addressing the fact that renewable electricity production is becoming increasingly competitive with ‘traditional’ forms of generation, and the need for subsidies is rapidly falling. This led to new State Aid Guidelines in 2014 that started a process of limiting options for Member States in terms of renewable energy support schemes, focusing on encouraging increased competition between suppliers and driving down prices. As the EU seeks to meet its new target of 32% renewable energy in its energy mix by 2030, this is an area of law that will grow in importance. Equally, as the market share for renewable electricity has increased rapidly and has a zero or very low marginal cost, this has had significant effects on spot prices. Member States have become concerned that the price incentives for companies to invest in other forms of electricity generation that they consider to be essential on the grounds of energy security, such as nuclear, are inadequate, leading to state aid whereby Member States guarantee minimum prices for new investors. In addition, as wind and PV are intermittent forms of energy, Member States have become concerned about ensuring that adequate reserve capacity exists. In 2016, the Commission finalised its sector inquiry on capacity mechanisms, showing that transparent, balanced, market-oriented enforcement of State Aid rules will be key in this area, and in pursuing the transition to a decarbonised 2

Part 1 Introduction

energy model more generally. Specific capacity mechanisms have been approved by the Commission in several Member States in recent years. Further, the 2018 judgment of the EU General Court in the Tempus Energy case showed the need for detailed scrutiny of capacity mechanisms, and any other state aid measures, by the Commission. In the anti-trust area, the Commission continues to be determined to ensure that consumers in all Member States enjoy the benefits of an integrated and energy market. The Gazprom case was brought to an end in 2018 with the acceptance of commitments aimed to address the Commission’s main concerns, including market segmentation, excessive pricing and potential competitive distortions in the development of gas infrastructure. Other cases have also been concluded since this book was last edited, such as the Commission’s investigation into access to key natural gas infrastructure in Bulgaria, leading to fines imposed on the incumbent gas operator. In addition, the Commission has now launched an investigation into restrictions to the free flow of LNG sold by Qatar Petroleum in Europe. As regards mergers, the Commission has recently had the chance to look into some significant cases, especially in electricity markets. The acquisition of ­Uniper by Fortum, two important electricity suppliers in the Nordic region was cleared unconditionally in 2018, not least because of the high level of interconnectivity between different countries in the Nordic region, and the amount of spare generation. This case is yet another example of European energy markets heading towards regional consolidation, and regional market definition. The Commission however scrutinized the potential for market abuse in the wholesale electricity very carefully, following the principles used in other cases in the past. An in-depth review of E.ON’s proposed acquisition of RWE’s Innogy was ongoing when this edition went to print. All of these developments, and many more covered in this Fifth edition, reflect the fact that the EU’s Internal Energy Market and decarbonisation agenda are maturing rapidly becoming more complex and requiring increasingly intricate layers of regulation. There is little doubt that competition policy is, and will remain, at the forefront of the EU’s Energy Union.

3

Part 2 – The definition of the relevant market Chapter 1 – Introduction Lena Sandberg and Lyndy Davies

Part 2 The definition of the relevant market

CHAPTER 1 Introduction Identification of the market(s) in which a given transaction or behaviour may have effects – the relevant market(s) – is a necessary precondition for the assessment of any concentration or anticompetitive behaviour.1 The main purpose of this exercise is to identify the competitive constraints that the undertakings involved face, by assessing the market power of the companies concerned and of their competitors.

2.1

Under European Community competition law:2

2.2

“a relevant product market comprises all those products and/or services which are regarded as interchangeable or substitutable by the consumer, by reason of the prod‑ ucts’ characteristics, their prices and their intended use”; and “the relevant geographic market comprises the area in which the undertakings con‑ cerned are involved in the supply and demand of products or services, in which the conditions of competition are sufficiently homogeneous and which can be distin‑ guished from neighbouring areas because the conditions of competition are appreci‑ ably different in those area”.

1 2

See e.g. cases C-68/94 and C-30/95, France v Commission (Kali & Salz), [1998] ECR I-1375, paragraph 143. Section 6 of Form CO (Annex 1 of Commission Regulation No. 802/2004 of 7.04.2004 implementing Council Regulation No. 139/2004 of 20.01.2004 on the control of concentrations between undertakings); as well as the Notice on the definition of the relevant market, OJ C 372/5, 9.12.1997.

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Part 2 – The definition of the relevant market Chapter 1 – Introduction Lena Sandberg and Lyndy Davies

2.3

The Commission’s Notice on the definition of the relevant market lists the basic principles upon which the Commission relies in the process of defining a relevant market.3

2.4

Demand substitution is the main yardstick: an undertaking cannot be considered to be able to act independently from competitive constraints if its customers are in a position to switch easily to substitute products or to suppliers located elsewhere. The exercise of market definition therefore consists in identifying the effective alternative sources of supply for the customers of the undertakings involved, in terms both of products or services and of geographic location of suppliers.

2.5

Starting from the products that the undertakings involved sell and the area in which they sell them, additional products and areas will be included in, or excluded from, the market definition, depending on whether competition from these other products and areas affect or restrain sufficiently the pricing of the parties’ products in the short term. The main economic test applied in this respect is “whether the parties’ customers would switch to readily available substitutes or to suppliers located elsewhere in response to a hypothetical small (in the range 5 % to 10 %) but permanent relative price increase in the products and areas being considered”.4 Where the hypothetical price increase would be unprofitable because significant substitution would result in a loss of sales, the substitutes and areas concerned are included in the relevant market.

2.6

In practice, the process of defining relevant markets is undertaken as follows. On the basis of the information available, the Commission is usually in a position to broadly establish the various conceivable alternative market definitions within which a concentration or a restriction of competition has to be assessed. If it is then satisfied that the transaction or behaviour does not raise competition concerns under these alternative market definitions (i.e. if one includes in the market definition all plausible alternative products and competitors to those of the undertakings in question), it will not seek to arrive at a precise market definition, and will leave open the question of market definition. Only when doubts remain as to the existence of competition issues will the Commission seek to reach a definitive conclusion on the precise product and geographic markets. For example, as most mergers do not raise competition issues even on widely defined markets, it is rare that merger control decisions take an express view as to the precise market definition. 3 4

Commission notice on the definition of the relevant market OJ, C 372/5, 9.12.1997. Commission Notice on the definition of the relevant market, at paragraph 17. Available on www.europa. eu.int/comm/competition/mergers/legislation/mergmrkt.html

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Part 2 – The definition of the relevant market Chapter 1 – Introduction Lena Sandberg and Lyndy Davies

The main challenge faced by market definition in the gas and electricity sector is to take account of the recent and ongoing evolutions that are taking place in the wake of market opening under the EC Gas and Electricity Directives.5

2.7

As regards product market definition, liberalisation has fundamentally changed the structure and functioning of the industry, at production, transport, and supply levels. From a situation where the supply and transport of electricity and gas were in the hands of the same or few companies benefiting from network and distribution monopolies, EC rules have substituted market opening, unbundling of supply and transport and third party access. With independent companies being active in energy supply, and the process of market opening, a distinction between transport and supply activities, or eligible and non eligible customers6, has to be drawn. The development of energy trading also raises the issue of the distinction between supply and trading activities, and, within trading, between physical and financial trading, or between trading on a bilateral basis or on developing energy exchanges. Finally, completely new activities are emerging, such as balancing and network services, or grid management and operation. This developing economic and market reality arising from market opening should be reflected in market definitions.

2.8

The same challenge has to be faced at geographic level. Because transmission and distribution activities were until recently subject to national and local monopolies in Europe, the relevant geographic market for electricity and gas supply was logically no wider than national or even local in scope. As a result of market opening and third party access, it is now possible for foreign suppliers to enter national and local markets and supply eligible customers. A number of Community initiatives are also bringing about increasingly converging national regulatory frameworks.

2.9

Arguably, these changes will lead to the development of wider than national markets within the EU, and possibly, in the longer term, to a single EU market. However, for the Commission, the relevant geographic markets for the supply of gas and electricity remain at present largely national in scope within EU Member States, and the more recent decisions strongly suggest that this is not likely to change in the near future. In January 2007, the Commission’s Final Report on the Enquiry into the European Gas and Electricity Sectors unequivocally con-

2.10

5 6

See Volume I of EU Energy Law. An eligible customer is one that is free to choose its supplier. Under EC law, as from July 2007, all customers should be eligible. However, under the legal framework of some Member States, such as France, Spain and Portugal, there are regulated eligible customers, i.e. customers that are eligible to switch but remain under the pre-market opening regulated framework until they opt to join the free market.

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Part 2 – The definition of the relevant market Chapter 1 – Introduction Lena Sandberg and Lyndy Davies

cluded that “at the wholesale level, gas and electricity markets remain national in scope”.7 This question whether, or how quickly, national markets have evolved or will evolve into wider regional ones is a key issue for competition policy in the energy sector, as former national incumbents will almost always have dominant positions on nationally defined markets.

2.11

The Commission’s Notice on the definition of the relevant market makes clear that, especially in relation to merger control where the purpose of the competition analysis is essentially prospective,8 the Commission must take into account ongoing evolutions arising from EC market integration in “a situation where national markets have been artificially isolated from each other because of the existence of legislative barriers that have now been removed”.9 As a consequence, the Commission shall be cautious in situations where “companies (…) enjoy high market shares in their domestic markets just because of the weight of the past”.10 7

8

9

10

Communication from the Commission – Inquiry pursuant to Article 17 of Regulation (EC) No 1/2003 into the European gas and electricity sectors (Final Report) {SEC(2006) 1724}, at paragraph 14. The Commission also stated that cross-border sales do not currently impose any significant competitive constraint. Incumbents rarely enter other national markets as competitors. Insufficient or unavailable cross-border capacity and different market designs hamper market integration (paragraph 21). As an exception, it should be noted that in GDF/Suez (Case M.4180 of November 2006), the Commission admitted that gas trading at the Zeebrugge Hub was part of the same market as the English NBP hub (see book paragraph 2.392). The report is available at http://ec.europa.eu/comm/competition/sectors/energy/inquiry/index.html#final This is because what is at stake is the assessment of the – future – position of the undertaking resulting from the transaction in question. In contrast, the analysis of past behaviour under Articles 81 or 82 EC should focus on the factual situation relevant at the time of the agreement or conduct in question. See Notice on the definition of the relevant market. Paragraph 32 of the Commission’s Notice: “Finally, the Commission also takes into account the continuing process of market integration, in particular in the Community, when defining geographic markets, especially in the area of concentrations and structural joint ventures. The measures adopted and implemented in the internal market programme to remove barriers to trade and further integrate the Community markets cannot be ignored when assessing the effects on competition of a concentration or a structural joint venture. A situation where national markets have been artificially isolated from each other because of the existence of legislative barriers that have now been removed will generally lead to a cautious assessment of past evidence regarding prices, market shares or trade patterns. A process of market integration that would, in the short term, lead to wider geographic markets may therefore be taken into consideration when defining the geographic market for the purposes of assessing concentrations and joint ventures”. Paragraph 29 of the Commission’s Notice: “The reasons behind any particular configuration of prices and market shares need to be explored. Companies might enjoy high market shares in their domestic markets just because of the weight of the past (...). The initial working hypothesis will therefore be checked against an analysis of demand characteristics (importance of national or local preferences, current patterns of purchases of customers, product differentiation/brands, other) in order to establish whether companies in different areas do indeed constitute a real alternative source of supply for consumers. The theoretical experiment is again based on substitution arising from changes in relative prices, and the question to answer is again whether the customers of the parties would switch their orders to companies located elsewhere in the short term and at a negligible cost”. See also paragraph 50: “Barriers and switching costs associated to divert orders to companies located in other areas. The absence of trans-border purchases or trade flows, for instance, does not necessarily mean that the market is at most national in scope. Still, barriers isolating the national market have to be

8

Part 2 – The definition of the relevant market Chapter 1 – Introduction Lena Sandberg and Lyndy Davies

In attempting to clarify the Commission’s approach to market definition in the energy sector, significant indications can so far mostly be found in merger control decisions. For this reason, the vast majority of decisions referred to under this chapter are merger control decisions. However, subject to the time-related considerations of the analysis mentioned above, there is no reason to expect that trends and reasoning identified in merger decisions should not apply mutatis mutandis to anti-trust cases. Electricity and gas are two distinct product markets and will therefore be examined separately below.

identified before it is concluded that the relevant geographic market in such a case is national”.

9

2.12

2.13

Part 2 – The definition of the relevant market Chapter 2 – The relevant product market – Electricity Lena Sandberg and Lyndy Davies

CHAPTER 2 The relevant product market – Electricity 1.

Introduction

The European Commission has, in its decision practice over the years, analysed the possible relevant markets in the electricity sector. Electricity is a relevant product market distinct from gas and other energy sources.11 It alone can be used for a number of purposes such as lighting. Furthermore, although for a limited number of applications, essentially the production of heat,12 there is a potential substitutability with other sources of energy used by households and industrial operators, this substitutability remains very limited because of the high equipment costs induced by switching from one source of energy to the other.

2.14

Within the electricity sector, on the basis that they require “ different assets and resources, and the market structures and conditions of competition are different for each”,13 the four following segments have traditionally been identified as constituting different product markets:14

2.15

11

12 13 14

See, recently in cases M.6984, pagraph 15, M.3448, paragraph 8 and M.3440, paragraph 14. The same statement was made in the early decisions M.568, paragraph 17 and, in relation to gas, M.493, paragraphs 21-24. In these later decisions, the Commission also mentioned the exclusive use of electricity to get some chemical reactions and for traction purpose, and referred to the fact that, as electricity is produced from another source of energy, it is necessarily more expensive, and is therefore only used when the characteristics of heat requires it. It was added that, from a supply-side point of view, each source of energy has different requirements for production, storage and transport, so that switching from electricity to other sources of energy also requires specific and important investments from the supply point of view. The Commission refers to water and space heating and cooking for households and limited industrial applications (case M.3448, paragraph 8). Case M.1659, paragraph 7. Also see case M.5978, paragraph 12. The distinction was first made in relation to the UK, in EDF/London Electricity, case M.1346, paragraph 12, and then in cases M.1659, paragraph 7; M.3210, paragraph 8; M.803, paragraph 9; M.3173, paragraph 8; M.3007, paragraph 10; M.2801, paragraph 8; M.2679, paragraph 8; M.1673, paragraph 11; M.1606, paragraph 10; JV.36, paragraph 25; M.2209, paragraph 10; M.2890, paragraph 17; M.1557, paragraph

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Part 2 – The definition of the relevant market Chapter 2 – The relevant product market – Electricity Lena Sandberg and Lyndy Davies

(i)

generation and wholesale, the production of electricity in power stations;

(ii)

transmission, the transport of electricity over high tension networks;

(iii) distribution, the transport of electricity over the low tension network; and (iv) retail supply, the sale of electricity to the final consumer.

2.16

Also traditionally, although only in more recent decisions, and not systematically, an electricity trading market has been identified, generally defined as the purchase and resale of electricity which is not necessarily directed to final consumers15. The more recent decisions also refer to a market for ancillary services16.

2.17

As often stated at the beginning of the market analysis: “the definition of the relevant product market(s) in the electricity sector must take into account the existing degree of market opening thereof ”.17 In recent cases, the Commission has therefore undertaken an in-depth analysis of the state of liberalisation in the country or countries concerned. It is therefore likely that market definitions will continue to evolve to fit with the reality of liberalised markets. It should be noted in this regard that, under the Directive, as from July 2007 all customers should be eligible.

2.18

Another important feature of the Commission’s decision-making practice is that market definitions are largely influenced by the specific characteristics of the national market in question, and the competition issues raised by the transaction or anticompetitive practices or behaviour, so that market definitions vary from one country to another.

15 16 17

22; M.3448, paragraph 9; M.3210, paragraph 8; M.3318, paragraph 12; M.3075 M.3080, paragraph 11; M.1949, paragraphs 10-12; M.3696, paragraph 209; M. 3868, paragraph 228; M.5911, paragraph 21; M.5978, paragraph 12; M.5979, paragraph 7; M.6540, paragraph 16; M.6984, paragraphs 15-17. The distinction between transport, generation, distribution (as both supply and local transport) and trade was however already made in the early decision M.493, paragraph 29. The market was first formally identified in EDF/Louis Dreyfus in case M.1557, paragraph 22, and then in cases JV.36, paragraph 25; M.3210, paragraph 8; M.3318, paragraph 12; M.3075-3080, paragraph 11; M.3306, paragraph 8; M.5911, paragraph 21; and M.5979, paragraph 11. Cases M.5911, paragraph 21; M.5512, paragraph 14. Also see the earlier decisions in cases M.4180, M.3440 and M.5224. Case M.3448, paragraph 9.

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Part 2 – The definition of the relevant market Chapter 2 – The relevant product market – Electricity Lena Sandberg and Lyndy Davies

2.

The supply of electricity

The Commission has traditionally made a general distinction, within the supply of electricity, between generation and wholesale on the one hand and supply to final customers on the other hand.

2.19

2.1 Wholesale supply markets 2.1.1 Introduction The main issues addressed by the Commission in relation to the wholesale supply market concern the precise scope of the market and possible subdivisions within this market.

2.20

An essential issue for market definition in a liberalised electricity sector is the distinction between electricity trading and wholesale supply. So as to comply with the traditional distinction made by the Commission between trade and supply, this is addressed in the section on trade below.18

2.21

2.1.2 Definition and scope of the wholesale market 2.1.2.1 Generation and wholesale In most decisions, the Commission identifies a generation and wholesale market, or simply a wholesale market, as a distinct market.19 “Generation and wholesale” is traditionally defined as covering the production of electricity at power stations as well as electricity physically imported through interconnectors20 and its sale on the wholesale market to traders, distributors or large industrial 18 19

20

See book paragraphs 2.62-2.80. See e.g. cases M.2209, paragraph 10; M.2679, paragraph 9; M.2801, paragraph 12; M.2890, paragraph 14; M.3007, paragraph 11; M.3075-3080, paragraph 11; ; M.3210, paragraph 8; M.3268, paragraphs 14 and 19; M.3318, paragraph 12; M.3440, paragraph 31; M.4180, paragraph 674; M.5519, para 15 and 16; M.5978, paragraph 18; M.5979, paragraph 15; and M.7131, paragraph 29. An express distinction between generation and wholesale was never made. In a recent case, the parties submitted that generation and wholesale should be part of separate markets as electricity production may be regarded as the first part of the value chain and the production of electricity is required to take place in a separate legal entity from the delivery of electricity to end-users. The Commission left open the precise market definition (case M.3268, paragraph 15). In its Verbund/Energie Allianz ( June 2003) decision, the Commission gave an example of a situation in which the distinction may have an impact on market shares calculation: “in the generation of electricity there is no overlapping between the parties’ activities on the market, because each party’s power generation branch supplies the power it generates only inside the organisation, so that power is available to the market not at the generation stage but only at the downstream commercial stage” (case M.2947, paragraph 27).

13

2.22

Part 2 – The definition of the relevant market Chapter 2 – The relevant product market – Electricity Lena Sandberg and Lyndy Davies

2.23

2.24

end-users.21 The Commission recently confirmed that generation and wholesale should be seen as a single product market.22 In a slightly different form, in relation to the German supply market, earlier Commission decisional practice identified a separate market for the supply of electricity at transmission level (high voltage lines).23

2.1.2.2 Supply to large end customers In substance, the above definitions of the wholesale market cover electricity supply to traders and distribution companies or retailers. There is however some uncertainty as to the inclusion of very large end customers, directly supplied at transmission level, as part of the wholesale market. Under the traditional market definition, the Commission separates the generation and wholesale market from the market for supply to end users, large end customers in principle being part of the latter market. This is the case, for example, in the Commission’s decisions concerning the English and Welsh market and, more recently, for the German market.24. On the other hand, this distinction is generally not applied by the Commission in “Phase II” cases raising significant competition issues, nor has it been applied in certain recent Phase I decisions.25 Following a different approach in such cases, the Commission makes a distinction between wholesale and retail markets, the latter being defined as the market for electricity offered subsequently by retailers to eligible customers. Although, in substance, these different definitions are broadly similar as they both identify a wholesale market, they do not coincide as regards large end customers directly supplied by producers, which are part of the supply market to end customers under the traditional definition, but also fall under the wholesale market in the distinctions adopted in Phase II decisions.26 21 22 23 24

25 26

See e.g. cases M.5911, paragraph 21 and M.7131, paragraph 29. M.3696, paragraph 224; M.5978, paragraph 15; and M.7137, paragraph 28. Case M.1673, paragraphs 13-19. Case M. 5467, paragraphs 231 to 234: the wholesale market is expressly defined as the market of imports and generation of electricity for further resale. This contrasts with earlier decisions on the German market where the Commission identified a wholesale market for the supply of electricity at transmission level including large industrial customers supplied at transmission level (Case M.1673, paragraphs 13-19; confirmed in M.2349, paragraph 11 and M.2801, paragraph 18). See e.g. cases M.5911, paragraph 21 and M.7131, paragraph 29. In Spain, following the definition formulated by the Spanish Competition Court, the Commission defined the wholesale market as including electricity that is bought and sold through the pool and via bilateral contracts, including, on the demand side, in addition to the distributors and the traders, the large eligible customers (cases M.2434, paragraph 19 and M.2684, paragraph 22). Still in relation to Spain, the distinction between wholesale and retail was adopted in the recent Phase I decision in case M.3448, paragraphs 11-15. In Sydkraft case M.3268, the Commission also included large customers in the wholesale market

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For example, in its Phase II decision in Verbund/Energie Allianz ( June 2003),27 concerning the Austrian market, the Commission specifically addressed the question whether large customers should be included within the end supply market or the general wholesale market. Firstly, it excluded that supply to large end customers was part of the same market as supply to small end customers.28 The Commission then examined whether distributors and large end customers were part of the same market. Because small distributors supply mainly households and small firms, both their purchasing behaviour and their power requirements differ from that of large end customers. This was supported by the Commission’s market investigation which showed that less favourable terms were generally offered to small distributors than to industrial and large end commercial consumers. Further large end customers, smaller distributors have to compete with other larger distributors to supply certain categories of final consumers. For the Commission, these factors suggested the existence of separate markets for supply to large customers and small distributors; it however left the precise market definition open.29 In a different approach, in DONG/Elsam (March 2006),30 TenneT/Elia/Gasunie/APX-Endex (September 2010)31 and EDF/Dalkia ( June 2014),32 large customers were included in the wholesale market, whereas in E.ON/Mol (December 2005)33 and KGHM/Tauron Wytwarzanie ( July 2012),34 they were considered to be part of the end user market and separate from the retail supply markets. In GDF/Suez (November 2006), the statement was made that “big commercial and industrial customers may, under certain conditions, be part of the wholesale market”.35

27 28 29

30 31 32 33 34 35

(paragraphs 15 and 31), although distinguishing from a market for supply to end users. In the merger control prohibition decision on the joint acquisition of the incumbent Portuguese gas company GDP by the Portuguese ex-incumbent electric company EDP and ENI (case M.3440), a distinction was made between wholesale and retail but supply by generators to end-customers was included in retail (wholesale supply was limited to resale to retailers (paragraph 37) and retail supply was defined as the sale of electricity to the final consumer (paragraph 56)). Case M.2947, paragraphs 32 & 41-42. See below, book paragraphs 2.34-2.55. Case M.2947, paragraph 41. The parties had argued that the small distributors should be included among the service oriented customers, along with industrial and large commercial consumers. They pointed to similar prices, similar purchasing behaviour, and a need for additional services alongside the necessary power itself. Case M.3868, from paragraph 230. Case M.5911, paragraph 21. Case M.7131, paragraph 29. Case M.3696, from paragraph 236. Case M.5979, paragraph 11. Case M.4180, at paragraph 675.

15

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2.1.3 Submarkets within the wholesale market 2.27

The possible distinctions (or sub-markets) within a wholesale market considered by the Commission concern power exchanges and the recognition of different levels of distribution.

2.1.3.1 Power exchanges and wholesale 2.28

The Commission has not considered that a separate “electricity exchange” market for electricity exists, and this is typically viewed as an integral part of the wider wholesale market. For example, in relation to the Nordic, the Italian, the Spanish, the Belgian and the UK markets, the Commission has concluded that the wholesale electricity market covers both electricity sold on the basis of bilateral contracts and the exchange markets.36 In relation to the Nordic spot market, the Commission came to this conclusion on the basis that producers would easily be able to substitute between these different markets in reaction to permanent price differences. In the more recent DONG/Elsam decision (March 2006), the Commission however envisaged a distinction between electricity sold on the basis of bilateral contracts and on the spot market, as access to the Nordic spot market was difficult for small retail suppliers. The precise market definition was left open.37

2.1.3.2 Distinction according to the level of distribution 2.29

In Verbund/Energie Allianz ( June 2003),38 within the framework of the Austrian market, the Commission recognised the existence of a product market for the supply to small distributors, including all the municipal and local utilities and private utilities, distinct from supply to large, or “regional”, distributors. Contrary to large distributors, small distributors with an annual consumption 36

37 38

As regard the pool Spanish exchange see case M.2434, paragraph 19 and M.2684, paragraph 22. For the Nordic spot market see M.3268, paragraphs 19-20 where the Commission left open the precise market definition. For the Italian market, see M.3729, at paragraph 28, where the Commission stated that the wholesale electricity market encompasses the production of electricity at power stations and the import of electricity through interconnectors, whether sold bilaterally or through IPEX . For the Belgian market, see M.5978, paragraph 69, where the Commission identified a wholesale electricity market comprising electricity generation, imports and trading on organised markets (e.g. the power exchange) or over the counter, for both physically and financially settled products. For the market in Great Britain (i.e. England, Wales and Scotland), see M.5224, paragraph 17, where the Commission concluded that the market investigation did not support the definition of narrower product markets, but rather favoured the definition of one wholesale electricity market comprised of various segments. M.3696, paragraphs 230 to 232. Case M.2947, paragraphs 38-40.

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below 500 GWh were found not to have the financial and administrative capacities to purchase electricity on the trading market. They also do not normally purchase balancing energy separately. These distributors were therefore usually supplied under long‑term, stable, “ full” supply contracts (making it unnecessary for them to buy or trade additional energy, and including the delivery of balancing energy). The same conclusion was reached in relation to Germany, where the wholesale market was subdivided vertically between (i) national distributors connected at transmission grid level, (ii) regional suppliers, and (iii) local distributors consisting mainly of municipal electricity companies39.

2.1.3.3 Regulated part of the market In Eon/MOL (December 2005), the regulated segment of the market, in which power generators supply electricity to the public utility wholesaler for public utility purposes according to a “single-buyer” scheme, was deemed to constitute a distinct market. The Commission however considered that, with full market opening, this market was to progressively become part of the same product market as the wholesale supply of electricity to other traders.40

2.30

In Romanian Power Exchange (March 2014), the Commission examined possible abusive behaviour by Romania’s only power exchange. While not explicitly confirming the existence of separate markets, the Commission, in its assessment, distinguished between the regulated wholesale electricity market, and the competitive wholesale market.41 The regulated wholesale electricity market in Romania concerned those wholesale transactions for the supply of customers with electricity at regulated prices, concluded bilaterally between certain designated generators and suppliers of last resort under the regime set by Romania’s energy regulator. To the contrary, electricity on the competitive wholesale market was traded at freely agreed prices, either bilaterally, brokered or via a power exchange.

2.31

2.1.3.4 Peak hours and off-peak hours In RWE/Essent,42 the Commission envisaged a distinction within the market for generation and wholesale supply between “peak hours” and “off-peak hours” (and even a further distinction between peak and “super-peak hours”). The dis39 40 41 42

Case M.1673, paragraphs 13-19; confirmed in M.2349, paragraph 11 and M.2801, paragraph 18. Case M.3696. Case AT.39984, paras. 33 and 35. Case M.5467, para 25. The distinction was made in earlier case such as the Phase II decision Dong/Elsam of March 2006 (Case M.3868) in relation to the geographic market definition (see the section on Denmark in the geographic market definition part).

17

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tinction had been made by the Dutch Competition Authority (the “NMa”). The response to the market investigation was however inconclusive in this regard and the Commission left open this market definition.

2.33

This was again assessed in KGHM/Tauron Wytwarzanie43 in the context of the Polish market. Again, the Commission’s market investigation showed that such further sub-segmentation of the wholesale electricity market according to peak and off-peak hours was not warranted. The Commission confirmed this approach in EDF/Dalkia.44

2.2 Retail supply to final customers 2.34

The market for the supply to final customers has been given different names by the Commission, sometimes describing it as “the sale of electricity to the final customer”,45 alternatively referring to it as a market for “retail customers” excluding very large consumers46 (i.e. those connected directly to the transmission grid or directly supplied by generators, and included in the definition of the wholesale market). The main distinctions referred to by the Commission within this market definition concern (i) eligibility and (ii) size.

2.2.1 Supply to eligible customers and to the regulated market 2.35

Relevant product markets in the electricity sector must be defined according to the existing degree of liberalisation. This is made clear by the Commission in a number of decisions.47 In line with the distinction made by the Electricity Directive,48 eligible customers that are free to choose their supplier should be distinguished from non-eligible customers, who cannot yet choose their supplier and are therefore supplied by a national or local monopoly. The conditions of competition are obviously different for the two categories, and they are often subject to different regulatory frameworks, such as price controls for non-eligi43 44 45

46 47 48

Case M.5979, paragraph 17. Case M.7131, paragraphs 31-34. See e.g. cases M.2801, paragraph 8 and M.5979, paragraph 25. Definitions vary. In the recent decision case M.3448, paragraph 9 of 9.09.2004, the Commission refers to supply as “the delivery of electricity to the customer”. On a different point, it should be noted that, for the Commission, supply traditionally includes billing services (M.2890, paragraph 30 and M.3007, paragraph 12). See book paragraphs 2.24-2.26. See first in EDF/EnBW case M.1853, paragraph 19; and then in M.2434, paragraph 18; M.2684, paragraph 18; M.2801, paragraph 8; M.3448, paragraph 9; M.3440, paragraph 16; and M.5979, paragraph 11. See Volume I of EU Energy Law. Under the Electricity Directive, provided the Member Sates have complied with their obligations under the Directive, market opening applies, since July 2004 at least to all the non household consumers, and from July 2007, to all customers.

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ble customers. This essential distinction leads to the recognition of two separate sub-product markets for the supply of electricity (i) to eligible customers and (ii) to non-eligible customers.49 The supply of electricity to non-eligible customers is a legal monopoly in which there is no competition. The relevant product market must therefore be viewed in the context of the liberalised segment of the market: the Commission’s competition assessment always focuses on supply to eligible customers.50

2.36

With all customers being eligible under the Electricity Directive as from 1st July 2007, the above distinction should have now disappeared. However, some Member States have been granted transitional derogations from market opening.51 Moreover, under the legal framework of some Member States, such as France, Spain and Portugal, there are “regulated” eligible customers, i.e. customers that are eligible to switch but remain under the pre-market opening regulated framework until they have opted to purchase in the open “non-regulated” market. As regards the latter, the Commission clearly indicated in ENI/EDP/ GDP (December 2004) and E.ON/MOL (December 2005), that, in countries where eligible customers remain part of this so-called “regulated market”, all eligible customers should be viewed to be part of one and the same market.52 This analysis was confirmed in relation to the Romanian market: because all customers choose freely to be in the regulated or in the non-regulated system according to the price and the conditions in each system and the results of the market investigation indicated that there were no switching costs for the customers, the Commission took the view that all eligible customers should be considered, irrespective of whether they are in the regulated or in the non-regulated regime, as belonging to the same market.53 However, in French Long-term Contracts decision, the Commission considered that with regard to the French market, it may be appropriate to distinguish between eligible customs which have and have not exercised their eligibility. Such distinction was justified by a number of features

2.37

49

50

51 52 53

The statement of principle can be found in case M.1557, paragraph 23; confirmed by M.1803, paragraph 11; M.1853, paragraph 19; M.2857, paragraph 12; M.3075-3080, paragraphs 11-12; M.3210, paragraph 8; and M.3318, paragraphs 12-13. See, historically, the recognition of a market for supply (distribution) of electricity to non eligible household customers in Belgium in the old decision 493, 30. See cases M.3318, paragraphs 12-13; M.3075-3080, paragraphs 11-12; M.2857, paragraph 12; M.2684, paragraph 22; M.2434, paragraph 18; M.2353, paragraph 7; M.1853, paragraph 19; and M.1557, paragraphs 23 & 31-32. The Commission however considered, as regard the gas sector, that it could assess the foreseeable effect of a concentration on markets that will be opened to competition in the next years following a clear and binding calendar imposed under the Gas Directive (case M.3440, paragraphs 210-214). Malta, Cyprus and Estonia (see Volume I, at Chapter 11). Case M.3440, paragraphs 62-63 and M.3696, paragraph 238. Case M.4841, paragraph 16.

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specific to (i) the regulated sector and (ii) the price differentials between the regulated tariff and the price at which alternative suppliers are able to supply their electricity. In particular, the Commission considered that consumers currently supplied under regulated prices have little or no incentive to switch to an alternative supplier, even in the case of small but non-transitory variations in the regulated tariff and in the market price for those customers who have exercised their eligibility.54

2.2.2 Distinction according to size of customers 2.38

Among eligible customers, the Commission has traditionally distinguished between various groups likely to form separate markets according to their size. The distinction is strongly connected with the process of market opening as the size of customers normally corresponds to the evolution of market opening. The distinction is however also applied in fully liberalised markets.

2.39

It is logical that such a distinction should be made. Whilst in principle a company supplying a medium sized industrial undertaking can also supply households,55 in reality this requires very different faculties and expertise. However, in a number of Commission decisions no such sub-distinction is made; instead a single market for retail supply is identified, not differentiating between categories of customer according to size. This is not because the existence of submarkets is rejected but because it is not necessary for the competition analysis of certain cases. In cases concerning Finland, Sweden and Belgium, the Commission has however expressly accepted the possibility that the supply market to end customers may form one single market which could not be further segmented irrespective of the size, consumption level or consumption profile of the final customers.56 It is submitted that too much weight should not be given to these statements: in these cases, the precise market definition was left open by the Commission as the finding of sub-market for supply had no competition implications.57

54 55 56

57

Case AT.39386, paragraph 18. E.g.case M.3440, paragraph 64. For Finland and Sweden: case M3268, paragraphs 77-79. For Belgium: M.3318, paragraph 13; M.30753080, paragraph 12 and M.2857, paragraph 12. In none of these cases, has the Commission disclosed the reason for this finding. As regard Finland and Sweden, the party had submitted that the market could not be subdivided because market opening concerned all customers and contracts were standardised. In the Belgium cases, the party was dominant on the overall Belgium supply market; in the Nordic case, they were not dominant irrespective of the market definition.

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This is also supported by the fact that in later decisions regarding the Belgian retail electricity market, the Commission concluded that the market should be sub-segmented according to the traditional distinction between (i) large industrial and commercial customers connected to the transmission network (at above 70kV); (ii) small industrial and commercial customers connected to the distribution networks (below 70kV); and (iii) eligible household customers.58

2.40

In recent years, Phase II cases have reaffirmed that a general distinction based on the size of customers should be made.59 In E.ON/Mol (December 2005), for instance, the Commission concluded that large industrial and commercial customers, on the one hand, and small commercial customers on the other hand, were part of different markets as large industrial and commercial customers usually have professional staff and resources available to effectively negotiate and compare the various offers presented by the traders, usually open tenders for electricity procurement and seek offers from various market players. As a consequence, they usually receive individual offers tailored to their needs from their electricity suppliers, and are usually dealt with by so-called key-account managers by their commercial partners. On the contrary, small commercial customers have limited resources to compare terms and conditions and are characterised by a mass marketing approach from electricity suppliers. As a result of these distinct procurement patterns more industrial and commercial customers had switched supplier than small commercial customers.60

2.41

The different categories of customer identified by the Commission in specific cases differ somewhat, to reflect the specificities of the different national markets. However, the following categories and criteria usually taken into account by the Commission can be identified.

2.42

2.2.2.1 Sub-markets according to the customers’ size The main distinctions referred to by the Commission to distinguish final customers according to their size relate to consumption level and customer type.

58 59 60

Cases M.4180, paragraphs 688-695 ; M.3833, paragraph 14 and M.5549, paragraph 131. M.3696, paragraphs 236 to 250; M.4180, paragraph 689, and M. 3868, paragraph 251. For recent Phase I decisions, see e.g. M. 5519, para 15 and 16; and M.5467, para 26-32. Case M.3696, paragraph 243.

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–

Consumption level

2.44

As regards consumption level, the Commission mainly distinguishes two markets: supply of electricity (i) to large customers and (ii) to small customers. The thresholds used are not identical in each case as they generally follow historical or current national regulatory frameworks.

2.45

In Austria, for example, the distinction was made according to the current regulatory framework, between customers with an annual consumption of less than 100 000 kWh a year, or a connected load of less than 50 kW (including private households, small businesses and farms) and bigger customers (referred to as industrial and large commercial consumers)61. The Commission’s market testing had not identified any grounds for further differentiation. In England and Wales, based on the historic timing of market opening, the traditional distinction was made in the past, in EDF/London Electricity ( January 1999)62 between customers with a maximum demand below 100 kW and customers with a demand of 100 kW and above. Similarly, in EDF/Dalkia ( June 2014), the Commission confirmed that the French retail electricity market for professional customers63 could be segmented into separate markets for the supply of electricity to: (i) large industrial clients whose annual consumption exceeds 7GWh; (ii) small industrial and commercial clients whose annual consumption ranges between 36kVA and 7GWh; (iii) small professional clients whose annual consumption does not exceed 36 kVA. Although never reaching a definite conclusion on the issue, in several cases, the Commission suggested subdividing big customers into large and medium sized customers,64 or into “very large” and other large customers,65

2.46

–

2.47

Type of customers

Distinctions can also focus on types of customers according to their different consumption patterns or demand profile, instead of consumption volume. In more recent cases concerning England and Wales following market opening, a 61 62 63 64 65

Case M.2947, paragraphs 34-37. Case M.1346, paragraphs 13-17, confirmed in M.1606, paragraph 14; M.2209, paragraph 15; M.2801, paragraph 15; M.2890, paragraph 32; M.3007, paragraph 12 and JV.36, paragraph 27. Given that the transaction would have no impact on household customers, the Commission only examined the retail market with respect to professional customers. With a demand between 1MW and 100kW. See case M.1346, paragraph 17 as regard the English market. Such as the Austrian rail company ÖBB, although in this case the Commission s enquiries had not identified any grounds for this distinction (case M.2947, paragraphs 34-37).

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subdivision between three categories of customers was made on the basis of different tariff regulation: large commercial and industrial enterprises, small and medium-size enterprises, and household customers.66 With respect to Nordic countries, many replies to the market testing in Sydkraft/Graninge (October 2003)67 suggested the same division into large industrial customers, smaller commercial customers and households. A similar conclusion was reached in KGHM/Tauron Wytwarzanie ( July 2012)68 with regard to the Polish market, which is segmented into (ii) industrial and institutional customers; and (ii) household users. In the Netherlands, however, although recognising a market for large customers, the Commission adopted a different distinction between medium sized customers on the one hand, and commercial/household customers on the other hand.69 In VEBA/VIAG ( June 2000), in a mixed approach combining voltage of supply with consumption level and customer type, the Commission made a distinction between (i) small customers, from low voltage networks, with an annual power consumption of less than 30 MWh, such as household, commercial and agricultural customers, and (ii) industrial customers from medium and high voltage levels70. This approach was also used in the recent ENI/EDP/GDP (December 2004), GDF/Suez (November 2006) and E.ON/Mol (December 2005) decisions71 as regards Portugal, Belgium and Hungary.72 With regard to Belgium, the Commission confirmed in EDF/Segebel that the retail electricity market could be segmented into (i) the market for the supply of electricity to large industrial and commercial customers connected to the transmission network (at above 70kV); (ii) the market for the supply of electricity to small industrial and commercial customers connected to the distribution networks (below 70kV); and (iii) the market for the supply of electricity to eligible household customers.73

2.48

2.2.2.2 Criteria In distinguishing submarkets on the basis of consumption level, customer type or a mixed approach, the Commission in substance relies on three criteria: the regulatory framework, consumption patterns, and voltage of supply. 66 67 68 69 70 71 72 73

Cases M. 5224, para 85 to 87; M.3007, paragraphs 13-14 and M.2890, paragraph 32. Case M.3268, paragraph 78. Case M.5979, paragraph 28. Case M.1659, paragraph 7; but see below the approach taken in the more recent RWE/Essent (Case M.5467, para 58). Case M.1673, paragraph 17, referred to in M.3173, paragraph 8. Cases M.3440, paragraphs 33 and 64-73; M.4180, paragraph 689, and M.3696, paragraphs 236 to 250. See also more recent cases: Case M.5512, para 14 M.5224, M.5496: M.5467 and M.6984, paragraph 28. Case M.5549, paragraph 131.

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–

2.50

2.51

2.52

2.53

Regulatory framework

The evolution of market definitions in England & Wales shows that different regulatory frameworks can play a strong role in the finding of different product markets. Following full market opening, the traditional market definition distinguished between small, medium and large customers according to their consumption level, in line with the pace of liberalisation for these different classes of customers.74 In addition to the different competitive conditions stemming from the timing of market opening, the rationale behind the distinction was that small customers, with an annual consumption below 100kW, were still protected by regulatory maximum prices (price caps) after market opening.75 Three years after market opening to all customers, and a few months after the suppression of price caps, the Commission, in EDF/Seeboard ( July 2002), put into question the above traditional distinction as becoming “ increasingly meaningless”. It suggested to follow the new regulatory framework distinguishing three categories of customers according to the tariff structure applicable to them and their different right of negotiating their supply contracts: complete freedom to negotiate for large customers, limited freedom (with standard terms) for SME’s and no negotiation power at all for domestic customers.76 In E.ON/Mol (December 2005), domestic customers were considered as a separate market on the basis that the market was not yet open for them.77 – Consumption patterns The distinction between different types of customers often relies on the finding of different consumption patterns or demand profiles.78 The Commission highlighted the differences between the demand behaviour of large customers and “mass” customers in Verbund/Energie Allianz ( June 2003) concerning the Austrian market.79 74 75 76 77 78 79

The England & Wales market was opened in 1989 for customers with a consumption above 1 MW, in 1994 for customers with a consumption above 100 kW, and in 1999, for all customers. Case M.1346, paragraphs 13-14; M.1606, paragraph 14. In a later decision, the Commission referred, more generally, to the fact that supply to small customers was generally subject to specific rules and regulatory supervision ( JV.36, paragraph 27). Case M.2890, paragraphs 30-33, see also M.3007, paragraphs 13-14. The traditional distinction was however still considered in later cases JV.36, paragraph 27 and M.3007, paragraph 12. Case M.3696, paragraph 239. See Case M.3007, paragraphs 13-14; M.2890, paragraph 32; M.3268, paragraph 78; and M.1659, paragraph 7. Case M.2947, paragraph 36. See also, very recently, the same reasoning as regards the Portuguese market,

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For the Commission, as far as Austria was concerned:

2.54

“large customers are usually more price‑sensitive, and correspondingly more ready to change suppliers than small customers are. Negotiating power and conduct of negotiations are also different. This is reflected in different sales strategies adopted by the energy suppliers and a different level of prices. For large customers value for money and flexibility of supply are the major consid‑ erations, while for mass customers there is a further marketing differentiation ( for example between ‘clean energy’, especially from domestic hydroelectric sources, and electricity from fossil fuels or nuclear energy), and a qualitative approach to custom‑ ers.” In an earlier decision concerning the English market, the fact that small customers were less “sophisticated”, and had a weaker reactivity to prices as electricity is not for them a major item of expenditure, had already been stressed.80 The fact that sales forces are usually different for each group of customers was also considered by the Commission as supporting the distinction between big and small customers.81 The different switching rates of the different categories of customers have also been used.82

2.55

In DONG/Elsam (March 2006), the Danish market was divided into customers with and without hourly metering requirements as there was no arbitrage possibility between them, they pay different prices, consume different products (metered/non-metered) and purchase in different ways (negotiation vs. standard purchases).83 In a more recent case concerning Great Britain, the Commission has also distinguished, in addition to domestic customers, between smaller industrial and commercial customers (SMEs) which do not use “half hourly rates” and large industrial and commercial (“I&C”) customers which do use half hourly rates.84

2.56

In RWE/Essent of June 2009, the retail German market was divided into supply of (i) large/industrial (load-measured/individually metered) customers and (ii)

2.57

80 81 82 83 84

M.3440, paragraphs 66-71. Case M.1606, paragraph 14. Case M.2890, paragraphs 30-33. Case M.3440, paragraph 69. M. 3868, paragraph 251. See also the reference to small customers that are non half hourly metered in M.5512, para 14. Case M.5224, para 85 to 87.

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household/small commercial, agricultural (non-load measured) customers.85 The differentiation between the two groups is due to different needs and profiles on the demand side and different services and technologies offered on the supply side. The distinction follows the distinction made by the German Federal Cartel Office which is based on the argument that load measured customers have greater price elasticity, a structured demand profile due to their need of differentiated products and as a consequence different buying power and behaviour as opposed to non-load measured customers, which instead require simple products and uniform tariffs. –

Voltage level and connection capacity

2.58

The voltage level of supply was key to the finding of two distinct markets for large and small customers in Germany in VEBA/VIAG ( June 2000).86 More recently, as regards the Austrian market, in Verbund/Energie Allianz ( June 2003), the Commission similarly took into account, in distinguishing between large and small customers, the impact on the pricing structure of the voltage level at which customers are supplied: “the lower the voltage at which current is delivered, the higher the share of the entire bill accounted for by the grid itself ”, and as a consequence “the relative advantage to the customer of a change of suppliers is lower at lower grid voltages with higher grid prices”.87 This distinction of principle between large/industrial and small customers respectively connected to the high and low voltage grid can also be seen in some more recent decisions.88

2.59

In RWE/Essent of June 2009,89 in relation to the Netherlands the Commission relied on a distinction based on connection capacity in line with the Dutch competition authority (NMa). The NMa distinguished between small scale users with a maximum transmission value of 3.80 A (kleinverbruikers) and large and medium sized users with a maximum transmission value of more than 3.80 A (grootverbruikers). The NMa considered that different competition conditions apply to low-volume users in relation to consumption profiles, sales and marketing, price structure and delivery conditions. Furthermore, medium and high volume end users also show more evidence of willingness to switch suppliers than low-volume users. Finally, only suppliers of “ kleinverbruikers” are obliged to have a licence to supply. 85 86 87 88 89

Case M.5467, para 282; see also before Case M.5496, para 14. Case M.1673, paragraph 17. Case M.2947, paragraph 37. See also GDF/Suez (November 2006) and E.ON/Mol (December 2005), cases M.4180, paragraph 689, and M.3696, paragraphs 236 to 250. See Case M.5512, para 14 M.5224, M.5496, M.5170 and M.5467. Case M.5467, para 58.

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2.3 Conclusion Although, as the market develops and electricity customers become more sophisticated (thus possibly slowly eroding the difference in supply conditions between large industrial, commercial and domestic clients), this basic distinction – which runs through all decisions, is likely to remain for the foreseeable future. The precise delimitation between these different groups will depend upon the circumstances on the market in question, due to the differing regulatory frameworks, commercial patterns and voltage levels, but on final analysis will probably largely pursue the following distinction: –

supply to large customers with the exception of very large customers connected directly to the transmission grid (i.e. steel mills etc).90 The large customers falling within this category will be sophisticated purchasers, having considerable negotiating power and capable of actively shopping around for a supplier;

–

supply to medium-sized customers, usually purchasing from distributors, but sufficiently large to actively seek alternative suppliers;

–

eligible households and small commercial customers.

3.

Electricity trading

2.60

3.1 Introduction Three key issues must be addressed in relation to market definition in the electricity trading sector: (i) the existence of a trading market distinct from a wholesale supply market, (ii) the distinction between physical and financial trading, and (iii) the recognition of a wider energy trading market.

2.61

3.2 A trading market distinct from wholesale supply Energy trade has traditionally been identified as a distinct market from generation/wholesale and supply91 as, for the Commission, (i) it requires specific know90 91

Usually included within the wholesale market. See book paragraphs 2.20-2.30. The trade market was first formally identified in EDF/Louis Dreyfus in case M.1557, paragraph 22, and then in JV.36, paragraph 25; M.3210, paragraph 8; M.3318, paragraph 12; M.3075-3080, paragraph 11; and M.3306, paragraph 8.

27

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how, (ii) it is often characterised by short term contracts, (iii) it does not always give rise to physical delivery, (iv) it does not always concern final consumers and (v) the same undertakings are not always present in trade and supply.

2.63

Electricity trading is generally defined as “the buying and selling of electricity at one’s own risk and for one’s own account”,92 or as “the purchase and resale of electricity which is not necessarily directed to final consumers”.93 For the Commission, it involves the following activities:94 1.

over‑the‑counter (“OTC”) trading, where individual bilateral contracts are negotiated between supplier and customers or via brokers outside any exchange;

2.

the physical trade of electricity on exchanges; and

3.

trade in non‑physical financial derivatives.

2.64

As regards the structure of the electricity trading market, the Commission has stated that electricity traders include: “ in addition to independent traders with no generating capacity or grid of their own, on the supply side and to some extent on the demand side as well, electricity generators, distributors and importers”.95

2.65

It may be argued that within liberalised markets, the distinction between trade and wholesale supply has become increasingly difficult to sustain. Indeed, as suggested by the parties in various decisions,96 because the business of a distributor largely matches the accepted definition of electricity trading, namely the purchase and sale of electricity with a view to a gain, there is prima facie little reason to distinguish supply to distributors from a wider electricity trading market.97 92 93 94 95

96 97

See 1673, 18; confirmed in 2947 46, 47. The Commission clearly stated, in relation to the German market, that, as a consequence, agency activities which do not bear the marketing risk are not trading activities (M.1673, paragraph 18). Case JV.36, paragraph 25. Case M.2947, paragraph 47. Case M.2947, paragraphs 46-47. A very similar definition was already given in Veba/Viag, the Commission adding at the time that trade takes place at all voltage levels (M.1673, paragraph 18). Similarly, in relation to the UK market, the Commission stated that generators and exporters bilaterally sell electricity to operators supplying end users (suppliers) or to traders (who will in turn trade it to other traders or sell it to suppliers (M.2890, paragraph 14; M.2801, paragraph 12); or defined trade as a subset of the overall interaction of generators and suppliers in the vertical chain (M.2801, paragraphs 13 and 19). See Case M.2947, paragraph 38. For the opposite statement by the parties in a recent decision, see M.2801, paragraphs 13 and 19: The parties indicate that direct sale between generators and suppliers should not be included in the notion of trading in order to separate the trading activity from the markets of generation and supply. It is not entirely clear whether the traditional distinction of trading also means that, at retail level, a market

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Until recently, the Commission seemed to hold strong to the traditional distinction between supply and trade.98 In Verbund/Energie Allianz ( June 2003), for example, the distinction between wholesale supply and trading was expressly addressed.99 The Commission came to the conclusion that a separate relevant product market for supply to large regional suppliers, distinct from the trading market, was likely to exist. The issue was however left open, as the transaction did not create or strengthen a dominant position on this market. It is worth quoting the Commission’s analysis which led to this conclusion: ‘The Land corporations (big distributors) essentially supply final consumers (large customers and tariff customers) and smaller distributors. (…) the Land suppliers’ customers usually take all of their electricity requirements (beyond what they gener‑ ate themselves) from one and the same supplier. To guarantee their customers full supply of this kind, the regional suppliers depend on long‑term fixed contracts for the greater part of their electricity requirements at least. For this reason most of the electricity required by the Land suppliers cannot be met through short‑term exchange dealings. Whether more long‑term supplies purchased OTC on the open market would be sufficient is not clear from the Commission’s enquiries; at least one regional supplier stated that the electricity trading markets had not got the necessary liquidity for this either”. As regards smaller distributors, it was even more clear to the Commission that demand for electricity from such companies, including all the municipal and local utilities and private utilities, was part of a different market than the trading market.100

2.66

2.67

While the Commission’s analysis in Verbund/Energie Allianz suggests that the distinction between trade and supply is not as incontestable, it still supports, at least within the Austrian market, the distinction between trading and wholesale supply activities.

2.68

However, more recently, the Commission has moved towards a view that a single market may exist for electricity wholesale, including trading. For example,

2.69

for supply by traders to end consumers should be distinguished from supply buy suppliers or distributors to end consumers. In relation to the Spanish market, the Commission considered only one overall market at retail level encompassing the electricity offered by traders and suppliers to eligible customers (case M.2434, paragraphs 19 & 26). 98 Cases M.3210, paragraph 8; M.3318, paragraph 12; M.3075-3080, paragraph 11; M.3306, paragraph 8; M.3696, paragraph 227 to 229 and M.4180, paragraph 677. 99 Case M.2947, paragraphs 43-50. 100 Case M.2947, paragraphs 32 and 38-40.

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in several cases, market shares have been calculated based on a wider market including wholesale traders and distributors. In none of the more recent decisions concerning the English and Welsh market, for instance, is a trading market referred to101 and in the recent EDF/British Energy of December 2008, the Commission clearly rejected any segmentation of the wholesale market.102 This was again upheld in the GDF Suez/International Power decision of January 2011. In the same way, in countries with a market based on an electricity exchange such as Spain, the wholesale market is considered to be part of a wider market encompassing electricity sold to distributors and to traders, as well as electricity sold from traders.103 Similarly, in the recent Sydkraft/Graninge (October 2003)104 and DONG/Elsam (March 2006)105 decisions, no distinction was made between electricity sold through the Nordic spot market, Nord Pool: all trading activities going through the exchange, including short term trading, were included in the wholesale supply market. As regards the Netherlands, in RWE/Essent, the Commission also concluded as to the existence of a wide wholesale market encompassing electricity bought and sold through energy exchanges (day ahead, intra day and spot market platforms) and through bilateral contracts).106 In RWE/Essent the Commission highlighted that the Report of the Sector Inquiry “showed that there is no reason to consider physical trading as distinct from other wholesale sales of electricity where two parties agree on a price and other terms for a physical supply of electricity”.107

2.70

With regard to the Belgian market, in earlier decisions the Commission had indicated that separate markets could exist for (i) electricity generation and electricity imported to be sold on to retailers and (ii) electricity trading, where 101 See case M.3007, paragraphs 10 and 32; and M.2890, paragraph 14 (with the statement, under Generation and supply that: “Generators and exporters bilaterally sell electricity to operators supplying end users (suppliers) or to traders (who will in turn trade it to other traders or sell it to suppliers)”. In previous decisions concerning England & Wales, the reference to trade as a distinct market was also not made in M. 1346; M.1606 and M.2209, but was made in M.1557 and JV.36. 102 Case M.5224, paragraph 19. 103 In Spain, the Commission recognises the existence of one overall market encompassing both the electricity offered through the pool and bilateral contracts (cases M.2434, paragraph 19 & M.2684, paragraph 22). 104 Case M.3268, paragraphs 16-19. This includes, namely, the Elspot market for physical trading of electricity for next day delivery, and the Elbas continuous physical market for balance purposes, i.e. trade in electricity closer to delivery time than the Elspot market. See paragraph 19: “generation and wholesale of electricity constitutes a separate product market. The market encompasses electricity sold on bilateral contract as well as electricity sold on Elspot and Elbas”; see also paragraph 16, under wholesale supply, “electricity can be traded on the wholesale market in a number of ways” (see also in paragraph 31 the reference to electricity suppliers and traders in relation to the competition analysis). See also, as regard the Portuguese market, M.3440, paragraph 31. 105 Case M.3868. 106 Case M.5467, paragraph 23. 107 Case M.5467, paragraph 52.

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electricity is bought and sold, not necessarily with a view to being supplied to a final customer. However, in EDF/Segebel (November 2009), the Commission’s market investigation showed that the conditions of competition on the Belgian market were sufficiently homogeneous so that electricity trading no longer had to be distinguished from other wholesale activities such as generation and import.108 Thus, it seems that the markets of electricity trading are becoming increasingly integrated, leading the Commission to consider a single wholesale electricity market in many countries.

2.71

3.3 Financial and physical trade Electricity trading can essentially be sub-divided into two main categories: “physical” trade of electricity and “non-physical” financial trading.109

2.72

Physical trading involves the delivery of electricity to suppliers and industrial customers through bilateral contracts (over‑the‑counter or “OTC” trading), as well as trade in physical electricity products on exchanges, the two activities being part of the same market.110

2.73

Financial trading involves trading derivatives based on electricity such as futures, forwards, options or swaps, based on financial settlement and not involving physical delivery. Financial trading is mainly used to reduce the risk for electricity traders stemming from high variations in the price of electricity due to differences in, for example, rainfall and temperature. To reduce this risk, market players can hedge their purchases and sales with these financial derivatives. Financial trading was defined by the Commission as “the trading of financial products suitable for providing insurance against the risk of unforeseen future price developments in physical electricity wholesale markets (financial hedging)”.111

2.74

The Commission had until recently not formally decided whether physical and financial trade are part of the same or different markets. In Sydkraft/Graninge (October 2003) and DONG/Elsam (March 2006)112 concerning the Nordic spot market Nordpool, where specific markets for financial derivatives have been

2.75

108 109 110 111 112

Case M.5549, paragraph 17. Cases M.2947, paragraphs 46-47; M.2801, paragraph 19, JV.28, paragraph 15. Cases M.3268; M.2684, paragraph 22; M.2434, paragraph 19 (in relation to wholesale supply). Case M. 3867, at paragraph 14. Cases M.3268, paragraph 65, and M. 3868, paragraph 246. See also M.3867 at paragraph 15.

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set up in parallel with the spot market for physical trade,113 the Commission’s market investigation strongly suggested, without however reaching any definitive conclusions, that physical and financial electricity trading were part of two different markets, although confirming that they are closely linked, having the same price as a common reference price. The more important difference, for the Commission, was that all financial electricity trading results in a mere financial settling of contracts without any physical delivery of electricity, whereas physical electricity trading obliges the supplier to physically deliver of electricity.

2.76

In Gas de France/Suez (November 2006), as the physical trade market was developed in Belgium, the Commission considered that it was not relevant to distinguish it from the financial trade market.114

2.77

In essence, financial trading is a service involving the trading of risk, whereas physical trading concerns the sale of electricity. As financial trading develops, a distinction should increasingly be made between the two activities.115 This is supported by the fact that the definition of trading, even in the most recent decisions, as “the buying and selling of electricity”, or “the purchase and resale of electricity” 116 would seem to include sale of energy not sale of financial products. In RWE/Essent of June 2009,117 the Commission concluded as to the existence of a financial trading market as a separate product market form wholesale and physical trade on the basis that “financial trading does not entail any commitment to supply electricity”.

2.78

To the contrary, in EDF/Segebel (November 2009), with regard to the Belgian markets, the market investigation showed a significant interaction between over-the-counter traded electricity products and electricity traded on organised markets. Similarly, sufficient interaction was found to exist between financial and physical products, as the former use the latter as underlying products. As 113 Eltermin, the financial market for price hedging and risk management when buying and selling electricity power, and Eloptions, the financial market for risk management and for forecasting future income and costs related to trade in electricity contracts. 114 Case M. 4180, paragraph 682. 115 In JV.28, paragraph 16 concerning the Benelux, the parties submitted that physical and financial trading are part of two distinct markets being carried out in a dissimilar way, in pursuit of different objectives, requiring different assets and resources, and involving different types of risk. The parties further submitted that the Commission has previously defined trading in financial derivatives as a distinct product market in 1122.8, including energy derivatives. In another case (M.2801, paragraph 19), however, the parties took the opposite view that physical and financial trades are part of the same market as they are used to hedge each other, it is possible to sell option contracts to deliver physical electricity at some time in the future, if the option is exercised, the contract results in a physical delivery, but if it is not, it would remain a pure financial transaction. 116 Case M.1673, paragraph 18; M.2947, paragraphs 46-47; JV.36, paragraph 25. 117 Case M.5467, paragraph 52.

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such, the Commission concluded there were no grounds to segment the wholesale electricity market further.118

3.4 On-line trading portal products In RWE/Essent of June 2009,119 the Commission looked into the possible existence of a potentially emerging new market for online trading portal products without reaching any definitive conclusion on its existence. Both RWE and Essent were acting as agent for CHPs (combined heat and power generation) and greenhouse operators in the wholesale market (APX or Endex) through an online trading platform to which anyone active on the wholesale market had access to sell or buy electricity. In the market test conducted by the Commission a slight majority of respondents, including the NMa, considered online trading portal products to be an integral part of the generation and wholesale market and not as a separate product market.

2.79

3.5 Facilitation of wholesale electricity trading In TenneT/Elia.Gasunie/Apx-Endex (September 2010),120 the Commission examined the previously undefined product market for the facilitation of wholesale electricity trading. APX provides services facilitating the trading of electricity in the Netherlands, the UK and Belgium by offering a trading platform and related services for short-term electricity contracts, which include daily auctions, day-ahead markets and intra-day markets, as well as long-term electricity contracts. APX is also active in ensuring market coupling between Belgium, the Netherlands and France, in cooperation with TenneT and Elia in their capacities as TSOs.

2.80

The notifying parties had proposed to define the product market as the market in which power exchanges facilitate electricity trading, more specifically offering a trading platform and related services to their members. Related services include acting as a central counterparty and ensuring the settlement of trades. The Commission considered that it is possible to distinguish between different services to facilitate electricity trading: (i) facilitation of short-term product trading (including day-ahead auctions, intra-day trading and day-ahead trading); (ii) facilitation of long-term physically settled contracts; and (iii) facilitation of long-term financially settled contracts. The market investigation concluded that

2.81

118 Case M.5549, paragraphs 19-20. 119 Case M.5467, paragraphs 68 to 74. 120 Case M.5911.

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a separate market for the provision of facilitation services for electricity trading may exist, but it was not conclusive whether further sub-segmentation according to short-term and longer-term products was appropriate.121

3.6 Wider energy trading market 2.82

The existence of a wider energy trading market extending beyond electricity to include gas, oil, etc, has on a number of occasions been argued by parties to a merger and the Commission has always formally left this question open.122 However, the existence of such a wider market for energy trade was put into question by several respondents to the Commission’s market investigations on the basis that trade of one product implies a good knowledge of the specificities of the market in question and of the evolution of supply and demand within this market, and that as a consequence traders, in practice, do not trade in all energy products.123 It is submitted therefore, that for the foreseeable future, such a wider market for energy trading is unlikely to be found to exist.

4.

Network infrastructure and related services

4.1 Transmission and distribution 2.83

In line with the Electricity Directive, the Commission has traditionally identified two separate relevant product markets for the transport of electricity: transmission and distribution.124 The Commission considers that the two activities require “ different assets and resources”, the market structures and conditions of competition being different for each.125 Distribution is further identified as a dis121 122 123 124

Case M.591,1 paragraphs 30-37. JV.28, paragraph 19; M.3210, paragraph 10; and M.1557, paragraph 17. Cases M.1557, paragraph 17; JV.36, paragraph 28. Or, sometimes, the low and medium tension local cables (1803,9 as regard the Italian market), or the conveyance of electricity from the national grid to consumers through a local network (2679,13;2890,17). Under the Electricity Directive, “transmission” is defined as “the transport of electricity on the extra high-voltage and high-voltage interconnected system with a view to its delivery to final customers or to distributors, but not including supply”, and “distribution” as “the transport of electricity on high-voltage, medium voltage and low voltage distribution systems with a view to its delivery to customers, but not including supply” (Article 2(3) and (5)). 125 See Cases M.1346, paragraph 12; M.1659, paragraph 7; M.3210, paragraph 8; M.1803, paragraph 9 ; M.3173, paragraph 8; M.3007, paragraph 10; M.2801, paragraph 8; M.2679, paragraph 8; M.1673, paragraph 11; M.1606, paragraph 10; JV.36, paragraph 25; M.2209, paragraph 10; M.2659, paragraph 8; M.2890, paragraph 17; M.1557, paragraph 22; M.3210, paragraph 8; M.3318, paragraph 12; M.3075-3080, paragraph 11; M.3268, paragraph 13; M.3440, paragraph 31; M.1949, paragraphs 10-12; M.3306, paragraph 8; M.3696, paragraphs 212 to 218; see also the recognition of a transport market in the early decision

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tinct market as “there are no alternative methods by which electricity can be delivered to its end-users”.126 This distinction was confirmed in RWE/Essent ( June 2009)127 and in TenneT/Elia/Gasunie/APX-Endex (September 2010).128 Following market opening, and the implementation of unbundling and third party access to electricity networks, these two activities should be clearly distinguished. Given the requirements of the second Electricity Directive with respect to unbundling, it is also clear that these services are distinct from generation/wholesale and supply.

2.84

Several recent decisions have established that transport activities for electricity, at both transmission and distribution levels, should be considered, at least at present, to be natural monopolies in the area covered, including internet connectors connected to the voltage level of the transmission network.129 In addition, for the Commission, each grid constitutes a separate market so that no overlap can arise from the addition of two networks.130 More recently, in Sydkraft/Graninge (October 2003) and E.ON/Mol (December 2005),131 the Commission, confirming that transmission and distribution of electricity was normally regarded as a natural monopoly, added that no competition concerns could normally exist as transmission and distribution grids are subject to regulated access and control by the network authorities,132 and are therefore not affected product market within the meaning of the Merger Regulation.133 In its analysis of the geographic market definition, the Commission in more recent cases however looked into the issue of substitutability of interconnectors.134

2.85

126 127 128 129 130 131 132 133 134

M.493, paragraph 29. Case M.2586, paragraph 9. Case M.5467, paragraphs 176 to 180. Case M.5911, paragaph 40. E.g.. cases M.3696, paragraph 212; M.5467, paragraph 177; M.5911, paragraph 39 ; and Case AT.39351, paragraph16. Case M.4841, paragraph 12 for Romania; M.3440, paragraph 34 as regards Portugal; M.2947, paragraph 27 as regards Austria; M.2340, paragraph 9 as regards Spain; and, implicitly, as regard the UK see M.2586, paragraph 11. Case M.3696. Case M.3268, paragraphs 72-74, as regard transmission and distribution lines in Finland and Sweden; this was in substance confirmed in M.3440, paragraph 34 as regard Portugal. M.3696, paragraphs 214 and 218. See the geographic market part below.

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In several recent decisions,135 the existence of a separate market relating only to the transmission of electricity involving a cross-border flow was considered.

4.2 Balancing 2.86

At any given point in time, the power being put into a network must be the same as the power being taken out. Otherwise the frequency will vary excessively and the lights will go out. However, electricity suppliers can never know exactly how much electricity their customers will use and there will inevitably be too much or too little power being put onto the grid. To maintain this balance, the transmission system operator (the “TSO”) normally buys “regulation power” to cover the imbalances of the market players136 and charges suppliers/customers for this “balancing” service. Balancing power enables the TSO to increase or decrease the electricity production, almost in real time, to maintain the overall balance between injected (produced) and withdrawn (consumed) electricity.137

2.87

In five decisions over the alst decade, EDP/ENI/GDP (December 2004), Sydkraft/Graninge (October 2003) Verbund/Energie Allianz ( June 2003), DONG/ Elsam (March 2006), and GDF Suez/International Power ( January 2011), the possible existence of a market for balancing services (or regulating power) was envisaged. In the five decisions, however, no final decision on this issue was reached.138 In Sydkraft/Graninge, the Commission concluded that the market for regulating power in the Nordic countries could be distinct from the wholesale market because of the specific characteristics of the provision of regulating power: due to the need to adjust production within short notice, requiring a high degree of flexibility and important available capacity, and the strong technical and financial requirements needed,139 only a limited number of suppliers can participate in this market. This was confirmed in DONG/Elsam as, for the Commission, balancing power was not traded on Nord Pool, the network op135 Cases M.5467, paragraphs 182 to 184; M.4922 and M.5154. 136 In M.2947, paragraph 52 the Commission identified three ways to provide balancing energy in a control area: (a) by adjusting the volume of electricity generated inside the control area (this is known as secondary regulation); or (b) by drawing on what is called the minute reserve, which is an additional regulatory instrument that can be called upon in the short term; or (c) if complete adjustment cannot be achieved either by secondary regulation or out of the minute reserve, by involuntary exchange between a control area and the surrounding UCTE control areas. 137 Case M.5978, paragraph 48. 138 Case M.3440, paragraphs 31 and 51-55; M.2947, paragraphs 51-54; M.3268, paragraphs 46-51; and M.5978, paragraph 57. 139 In the Nordic market, because the overall balance of the transmission system is at stake, to be authorised to supply regulating power, an operator on the balancing market must provide a guarantee for its economic liability. Bids have to be at least 10 MW and at most 500 MW.

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erators were the sole buyers of these services, the need to be able to launch extra capacity at very short notice distinguished both types of electricity/services and restricts the possibility of supply-side substitutability, and the pricing of regulating/balancing power was different from the rest of the wholesale market.140 In ENI/EDP/GDP (December 2004), it was concluded that the emergence of a market for balancing energy in Portugal was likely following full market liberalisation. In Verbund/Energie Allianz ( June 2003), the Commission however stressed the connection between supply and balancing, arising from the fact that the position of the parties in the provision of balancing energy could help strengthen their dominant positions on the supply market. In E.ON/Mol (December 2005), the Commission however clearly indicated that the provision of balancing energy constituted a separate market in Hungary as “the electricity used for system balancing is only produced by gas power plants as nuclear and lignite power plants do not offer the appropriate technical requirements (load charging, speed) and is purchased by the system operator at the national level”.141 The existence of a balancing market was also confirmed in GDF/Suez (November 2006) as regards the Belgian market.142

2.88

2.89

In Sydkraft/Graninge (October 2003), it was further suggested that a market for balancing energy could be divided into submarkets for (i) primary balancing regulation, where the physical balance in the system is adjusted by automatically increasing or decreasing the production in a number of power plants and (ii) secondary balancing regulation, where the physical balance in the system is made by manual adjustment which is carried out through power trades with the balance providers, when the primary regulation is not sufficient to restore balance in the power system. No conclusion was, however, reached.

2.90

In GDF Suez/International Power, the possible existence of a separate market for balancing power in the UK was examined. While it ultimately left open the exact product market definition, the Commission indicated towards a market for balancing power, separate from the wholesale market, balancing power services are procured through specific mechanism pursuant to license conditions and are designed to meet specific technical issues resulting from the management of the transmission system.

2.91

140 M.3868, paragraphs 235 to 239. 141 M.3696, paragraph 222. 142 M.4180, paragraph 683.

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In that regard, balancing power services are not completely the same as those services relevant to the electricity generation and wholesale market.

2.92

Also, the market investigation showed that there were different types of balancing power services: (i) frequency response, i.e. the ability of generators to automatically and immediately increase or decrease generation levels at short notice in order to maintain system frequency within required limits; (ii) standing reserve (or short term operating reserve), i.e. the ability to produce output or reduce demand at very short notice; (iii) fast reserve, i.e. the rapid delivery of electricity through an increased output from generation or a reduction in consumption upon instruction of the TSO; (iv) warming/hot standby, i.e. the contingency reserve which can be used where a generation unit, that would normally take hours to start up, keeps warm to ensure a short notice to synchronise and start generation quickly. The Commission’s market investigation was however inconclusive as to whether each service constituted a separate market in and of itself.

2.93

In accordance with the Commission’s decisions in E.ON/Mol and GDF/Suez, it is submitted that there are good grounds for considering the existence of a separate balancing market. In a mature liberalised electricity market, the transmission system operator will obtain the balancing energy it needs from a specific balancing exchange, separate from the wider power market. Not all generators can participate in this market. “The cost of balancing is vital in enabling real competition to develop.143 Because of the nature of the service some forms of generation (notably hydro) are particularly suited to balancing.” Thus, a merger between two firms with a limited share of the overall generation/wholesale market may have a much greater impact on competition if they have a large share of the balancing market.

4.3 Network asset management, operation and services 4.3.1 Introduction 2.94

In electricity markets that have been liberalised for some time the maintenance and operation of the network, traditionally done by the owner of those assets in the electricity, gas and water industries, is increasingly being carried out by independent contractors, leading to the emergence of a competitive market. The question of the recognition of a product market for such network services distinct from ownership of the network has therefore been raised. In two decisions concerning the UK market, the Commission suggested that, within 143 See below, book paragraph 4.158.

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the distribution market, a distinction could be made between the ownership of the network on the one hand, and the service for the operation of utility network assets144 on the other. In both decisions, the Commission left open the question of whether network asset management and operation forms a separate product market from the distribution of electricity, and whether, if it existed, it should encompass not only electricity, but also gas and water networks.145

4.3.2 Network services In the UK, in the wake of liberalisation, the authorities have gradually opened certain network related services to competition, such as the provision of connection and metering services that traditionally had been provided by the incumbent distribution company. The question has therefore been raised whether a specific market has developed for these services, or whether these activities were still part of the distribution market. Although the Commission envisaged the existence of connection and metering markets in several decisions, it has until now always left open the question as to whether it was a distinct market from distribution.146 Given the continued development of such services across the EU and the specific nature of the service, it is logical to consider that a separate market for such services now exists in countries where the service is outsourced by the network owner.

2.95

In a decision of August 2008 concerning the creation of the “European Market Coupling Company” (“EMCC”),147 the Commission looked at the existence of a market concerning the creation and operation of companies active in the provision of services in the congestion management services for cross border electricity transmission systems by market coupling.148 EMCC was set up to provide congestion management services for cross border electricity transmission systems by market coupling and a platform for a secondary trading of transmission

2.96

144 Case M.2679, paragraphs 14-15; and JV.36, paragraphs 22-24. 145 In JV.36, paragraph 23, the parties argued that the market covered the management and operation of electricity, gas and water networks, since identical management skills are required for each and the regulatory authorities set out certain criteria and standards that similarly apply to all three sectors. The Commission however considered that the management and operation of each type of network (electricity, gas and water) might constitute a different product market due to the different nature of the services. 146 With the limited exception of a market for the installation and distribution of devices that are used for the distribution of electricity, in Austria. See below, book paragraphs 2.102-2.104. 147 Case M.4922, paragraph 15. 148 Market coupling was defined by the Commission as a method for integrating electricity markets in different areas. With market coupling the daily cross-border transmission capacity between the various areas is not explicitly auctioned among the market parties, but is implicitly made available via energy transactions on the power exchanges on either side of the border (hence the term implicit auction). It means that the buyers and sellers on a power exchange benefit automatically from cross-border exchanges without the need to explicitly acquire the corresponding transmission capacity.

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rights in compliance with the requirements of the EC Regulation 1228/2003 on conditions for access to the network for cross-border exchanges in electricity.149 The Commission stated that it had not, to date, identified or defined any relevant markets regarding the creation and operation of companies active in the provision of services in the congestion management services for cross border electricity transmission systems by market coupling. It further stated that “with the eventual creation of other market coupling companies in other regions there could, in the future, be a separate market for electricity coupling services vis-à-vis interconnector/transmission system operators”. It concluded that “given that such companies have either not been yet created or they are in an initial set-up phase, such a market currently does not exist”.

2.97

In the sister decision also of August 2008,150 the Commission looked at the creation of CASC which was founded in order to provide cross-border capacity allocation services with respect to the interconnectors within the Central Western Europe region, also in compliance with the requirements of the EC Regulation 1228/2003 on conditions for access to the network for cross-border exchanges in electricity. The Commission indicated that it had not, to date, identified or defined any relevant markets regarding the creation and operation of companies active in the provision of services in relation to the allocation of transnational interconnector capacity (“auction offices”). It added that “given that such offices have either not been yet created or they are in an initial set-up phase, such a market currently does not exist” but that “with the eventual creation of other auction offices in other regions there could, in the future, be a separate market for auction office services vis-à-vis interconnector/transmission system operators”.

4.3.3 Connection services 2.98

Connection services involve the provision of new assets (e.g. cables or transformers) for the purpose of connecting a new customer to the existing electricity network (in particular the distribution network), the removal of assets from that network, either permanently or temporarily (for example during repair or replacement of equipment), and the alteration of assets within the network (for example to upgrade the capacity of the connection). It also includes the restoration of supplies (for example the reconnection of a street-light after its repair or replacement).151 The Commission has always left open whether the above ac149 EC Regulation 1228/2003 repealed by Regulation (EC) No 714/209 of the European Parliament and of the Council of 13 July 2009 on conditions for access to the Network for cross-border exchanges in electricity, OJ L 211, p. 15. 150 Case M.5154, paragraph 22. 151 Case M.1949, paragraphs 13-14; M.2586, paragraph 10; M.2679, paragraph 15; M.2890, paragraphs 22-23;

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tivities should constitute a sub-market within a potential connection services market.152 Again, given the increasing trend towards outsourcing these services, it is submitted that in countries where they are outsourced, a separate market should be considered to exist.

4.3.4 Metering reading and operation Meter-related activities involve both the installation and operation of electricity meters for distributors (which generally own the meters), and meter reading and associated data processing activities.153 For the Commission, the two activities demand different skills and incur different responsibilities. In addition, meter reading will be more and more remotely, whereas meter installation will always require substantial human resources.

2.99

The Commission therefore considers that, if a market for metering activities were to be defined, it should be split in two distinct relevant product markets for meter installation/operation on the one hand and meter reading on the other154.

2.100

As regard meter reading, it was also suggested that a further distinction should be made between metering reading in relation to clients with half-hourly meters (i.e. meters that are to read consumption in each half-hour period which were required in the UK for certain categories of customers), and clients without half-hourly meters, as the characteristics of services provided to these two categories of clients were significantly different.155

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Finally, in a decision concerning Austria, the Commission seems to have accepted the existence of a market comprising “the installation and distribution of devices that are used for the distribution of electricity”, which arguably covers metering operations.156 Again, therefore, in countries where this service is out-sourced, it may be considered that such a separate relevant product market exists.

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M.3306, paragraph 9. 152 In JV.36, paragraph 24, the notifying parties identified the connection work in the electricity network as a separate market, although part of a wider market of utility network asset management and operation. 153 M.2890, paragraph 25; M.2679, paragraph 16; and M.1949, paragraph 15. 154 M.2890, paragraph 25. The Commission referred to the fact that skilled people are needed in order to carry out meter operation, while reading can be done by anybody. 155 Case M.1949, paragraph 15. 156 Case M.2513, paragraph 14.

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CHAPTER 3 The relevant geographic market – Electricity 1.

Supply

1.1 Introduction Before market opening in Europe, the geographic scope of the electricity supply markets in the Member States was, logically, no wider than national. As a consequence, companies involved in the production, transport and distribution of electricity are historically active on a national basis in Europe, and the structure of supply is therefore different in each country. In addition, before the Florence process and the subsequent Electricity Directive,157 regulatory frameworks were purely national and could strongly differ from one Member State to another.158

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As a result of the liberalisation process, mainly driven by Community law under the 1st, 2nd and 3rd Electricity Directives, but in some Member States, such as the UK, even in advance of this process, the situation has evolved.

2.104

Market opening, third party access and unbundling of transmission and supply are enabling foreign suppliers and electricity traders to progressively enter national markets.159 Companies have therefore often argued during merger proceedings that this process of market opening should be reflected in the definition of the relevant geographic market: the geographic market for electricity supply, at least at wholesale level, having evolved to a Community-wide market, or at least wider than national regional markets.160

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157 See Volume I, EU Energy Law. 158 See the description of the electricity markets in early decisions, in 1994 in case M.493, paragraphs 21 and 25; and in 1995 in M.568, paragraph 18. 159 See e.g. M.2947, paragraph 99. On the EC Electricity Directives generally see Volume I. 160 In addition to the legal opening of the markets to foreign suppliers, the main arguments raised by the parties

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Although, in early cases, the Commission has recognised that the process of liberalisation has opened the road to the creation of a market of Community dimension161, the existence of an EC-wide market for supply of electricity has, so far, never been accepted.162 Despite the liberalisation process, the relevant geographic market for the supply of electricity is still, in principle, national in scope.163 A trend towards a possible recognition of wider than national markets could however be seen in two decisions adopted in 2003. In Verbund/Energie Allianz ( June 2003), it was accepted that the market for electricity supply to large Austrian regional distributors could extend beyond Austria.164 Going one step further, in Sydkraft/Graninge (October 2003), it was concluded that the geographic scope of the wholesale market was “likely to be larger than Sweden”, encompassing probably at least Finland and Denmark. In both cases, the precise scope of the market was however left open. In both decisions, the specificities of the markets at stake should be highlighted. Interconnectors from Germany and Switzerland to Austria have significant capacity and are not congested, so there are no technical barriers to access to the Austrian market. In addition, part

161

162

163 164

in this regard relate to the increase in cross-border trade resulting from the liberalisation process. For the submission that the electricity supply market is of Community wide scope, see e.g. cases M.2701, paragraph 8; M.3173, paragraph 9; M.1659, paragraph 9; M.1673, paragraph 21; or a wider than national scope: see e.g. M. 5467, paras. 26-32 and 61, M.5467, M.2947, paragraph 56 or M.1557, paragraph 31. In addition to the legal opening of the markets to foreign suppliers, the main arguments raised by the parties in this regard relate to the increase in cross-border trade resulting from the liberalisation process. See the early decision M.568, paragraph 18 ( June 1995): “The regulatory frameworks may evolve and consequently national markets may develop into wider markets at some point in the future. However, they are to be considered as national, at least for the foreseeable future”. At the time, the decision was referring to the challenge by the Commission of the monopolies on imports in several member States (see Volume I). See also, even earlier M.493, paragraph 26; and later e.g. M.2792, paragraph 29; M. 2532, paragraph 34. See e.g. case M.3173, paragraph 9: “the parties view above markets as being EU-wide in scope. However, it is also true that a number of regulatory barriers to entry still exist in a number of large Member States and imports of electricity remain of a modest dimension”. Also see, more recently, case M.7137, paragraph 35, where the Commission confirmed that it generally considers the market to be national in scope, in particular due to the limited capacity and weakness of interconnectors between neighbouring Member States. See e.g. case M.1557, paragraph 32, invoking the limited capacities available on the interconnectors, the existence of significant price differences between Member Sates, or national regulatory frameworks; see also M.2684, paragraphs 23-26 and M.2701, paragraph 8. Cases M.2947, paragraphs 65 and 98-100. In its EDF/Seeboard decision (M.2890, paragraph 15), the Commission also indicated that the geographic dimension of the generation market could be broader than England & Wales considering the fact that the network was connected to Scotland and France but left open the definition (see the same statement more recently in M.3007, paragraphs 19-20). In the same case, the Commission made the same suggestion of a possible wider market for large customers (either above 100kW or non-domestic), but only in relation to Scotland (M.2890, paragraph 37; confirmed in M.3007, paragraph 24). As regard interconnections with France, in a more recent subsequent decision in August 2003, the Commission considered that the French market was likely to be national in scope, partly because of the limited interconnection capacities (M.3210, paragraph 11), closing the door to the recognition of a geographic market encompassing France, England and Wales. It is not excluded however, under the current case law of the Commission that a market for Great Britain, including Scotland could exist.

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of Austria is technically operated together with the German control block so that significant electricity imports from Germany have always taken place. As regards the Nordic countries, electricity markets were fully liberalised a number of years ago; the Nordic market forms an integrated power system in technical terms because of the existence of adequate inter-connectors between the national high-voltage transmission networks, and in commercial terms, because of the existence of a common wholesale electricity exchange, Nord Pool.165 Also, although the Commission eventually specifically limited the geographic scope of the market to France, several respondents in the market investigation in EDF/Dalkia ( June 2014) indicated the possible existence of one market covering France, Belgium, Luxembourg, the Netherlands and Germany.166

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Aside from these few cases, however, the Commission has maintained that markets remain no wider than national in scope. Moreover, three more Phase II decisions, E.ON/Mol in December 2005 concerning Hungary, Dong/Elsam in March 2006 concerning Denmark, and GDF/Suez in November 2006 on the Belgian market, have clearly demonstrated that, for the Commission, despite strong interconnections, important cross border electricity flow and regional market organisations, as long as significant congestions would exist between Member States, electricity markets will remain no wider than national. In all these cases, the precise delineation of the geographic scope of the market was key to the competition analysis and the commitments to be granted by the parties for the approval of the transaction by the Commission.

2.108

Due to its central position in Eastern Europe, Hungary is highly interconnected with its neighbouring countries. Moreover, imports represent a significant share of the national consumption. In spite of this, the Commission considered in E.ON/Mol that the Hungarian market was national in scope because the electricity interconnectors with Austria and Slovakia were almost all the time congested, the influence of imports on the electricity wholesale prices in Hungary being therefore limited.

2.109

165 Nordpool commenced its operation in 1993 comprising first only Norway. Sweden joined Nordpool in 1996, Finland in 1998 and Denmark in 2000. See the report: Relevant markets in the Nordic area, Copenhagen Economics (21.10.2002). The report is available on www.nordel.org. 166 Case M.7137, paragraph 38.

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2.110

In Dong/Elsam, the finding of Sydkraft/Graninge that a market encompassing Denmark East and Sweden was likely to exist was not confirmed. In line with a decision of the Danish Competition Authority in 2004, the Commission considered that the significant congestions between Denmark and the other Nord Pool areas, leading to separate price areas part of the time, prevented the existence of a wider than Danish market.

2.111

In GDF/Suez, despite strong interconnections and trade with France, the Netherlands and Germany, the Belgium market was considered to be national in scope because congestion from France to Belgium and from Belgium to the Netherlands allowed for no or little more electricity trade than the transit flow from France to the Netherlands. Congestions from Germany to the Netherlands also prevented exports of German electricity to the Belgian market. Even the introduction of market coupling and a common spot market between France, Belgium and the Netherlands did not modify this conclusion as it would not prevent congestions in particularly during peak hours.

2.112

In GDF/Suez, the Commission emphasised two further elements which may show that the acceptance of a wider than national market for electricity is a long way away. First, being a stable external supplier, with no local production, is particularly difficult when interconnectors are congested even to a limited extent. This is because congestions prevent external suppliers from committing on the uninterrupted supply and stable prices needed by its customers, and balancing requirements create additional uncertainty as to export planning. Secondly, the absence of a liquid trading market constitutes a strong obstacle to any supply strategy based on exports as electricity may not be available in the required quantities with the necessary flexibility.

2.113

The existence of a wider than European market was also especially relevant to the competition analysis in the E.ON/Endesa case (April 2006) as it concerned the merger of two European energy giants not located in adjacent territories. The Commission clearly confirmed that no wider than national markets existed because of the lack of available interconnection capacities: “The Commission considers in general that in light of Council Directive 2003/54/CE the possible emergence of wider than national markets needs to be examined. Based on the market investigation, the electricity markets in Spain, Italy, France, Poland and Germany are likely to be still not wider than national in scope. In particular market participants have pointed out that the lack of available interconnection capacity militates in favour of the persistence of national markets. In addition, according to third parties, price differences between Member States further con46

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firm the existence of national markets. Some of the respondents have referred to the emergence of a European-wide market and refer to a current trend towards promoting a single European market. The vast majority of the respondents have pointed out that a single European electricity market has not yet arisen.” 167 It should be highlighted that the Final Report on the Sectoral Enquiry into the European Gas and Electricity Sectors shows that almost all borders between Member States are congested and this congestion is increasing on most borders.168 The Final Report unequivocally concluded that “at the wholesale level, (gas and) electricity markets remain national in scope”.169 This overall strongly suggests that absent massive investments in stronger interconnector capacities, wider than national markets will not emerge. More recent decisions, following this report, have confirmed that markets wider than national ones, can yet been identified. In a decision of November 2009,170 the Commission concluded that the Slovakian market was national in scope even though in 2009 market coupling had been put in place between Slovakia and the Czech Republic. This was because trading volumes between the two countries were still low and the price differences between the two countries continued to exist. In the RWE / Essent decision of June 2009,171 the market investigation showed a notable price convergence in the Central West Europe region. The Commission however concluded that the German market was no wider than national due to congestion at German borders and the different competitive landscapes in the countries surrounding Germany. A slight but inconclusive opening towards the recognition of a wider than national market can be seen in the same decision concerning the Netherlands172 in which the Commission admitted as a possible market definition an area encompassing Germany and the Netherlands for off-peak hours. The rational for the finding was that during offpeak hours imports from Germany exercise a significant competitive pressure on 167 Case M.3883, at paragraph 21. The same statement was made in case M.4110, at paragraph 20. See also M.4180, GDF/Suez at paragraph 696. 168 See DG Competition report on energy sector inquiry (SEC(2006)1724, 10 January 2007), from paragraph 526. Available at http://ec.europa.eu/comm/competition/sectors/energy/inquiry/index.html#final 169 Communication from the Commission – Inquiry pursuant to Article 17 of Regulation (EC) No 1/2003 into the European gas and electricity sectors (Final Report) {SEC(2006) 1724}, at paragraph 14. The Commission also stated that “Cross-border sales do not currently impose any significant competitive constraint. Incumbents rarely enter other national markets as competitors. Insufficient or unavailable cross-border capacity and different market designs hamper market integration” (paragraph 21). The report is available at http://ec.europa.eu/comm/competition/sectors/energy/inquiry/index.html#final 170 Case M. 5591, paragraph 11. 171 Case M.5467, paragraph 235. 172 Case M.5467, paragraphs 26-32 and 61.

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2.117

Dutch suppliers because during those hours there is more capacity available on the interconnector with Germany. The Commission however did not reach any conclusion on this possible market definition. In a number of cases the Commission has considered that markets are likely to be even smaller than national, being regional in scope. As regards the wholesale level, this issue was raised in countries which historically had strong local features, such as Germany, where the market opening process had a strong impact on the evolution from local to national geographic markets.173 At end user level, this issue is significant in countries where different distributors operate at regional or local level. The evolution in England and Wales, with a strong history of regional licenses, shows how the market definition for large, medium and small customers can evolve from regional to national markets in line with the liberalisation process.174 In these countries, however, it has been possible to see a logical progression from market definition being regional, to develop towards national. In all most recent decisions, the Commission refers to the fact that the market for retail supply of electricity including the market for supply to small customers is in principle no smaller than national under the condition that the market is “fully liberalised”.175 The evolution in Germany, for instance, however shows that even if market opening is legally implemented, remaining dominant local positions in the facts still hamper the finding of a national market at retail level.176 In the recent Electrabel/E.On decision of October 2009, the Commission therefore refers to “uniform” conditions of competition as a key criteria additional to liberalisation.177 In line with the Commission’s Notice on the definition of the relevant market, especially in relation to merger control, account must be taken of the ongoing evolutions arising from the process of market opening and the implementation of the Electricity Directive. It is clear however that wider than national market definitions, based on future developments, are only accepted when the developments will take place with certainty and in the short term. In Verbund/Energie Allianz ( June 2003), for example, the Austrian market for supply to large customers was deemed to be still not integrated with the German market, despite implementation measures of the Directive on market opening already having 173 A national market is now being recognised at wholesale level but not yet at retail level. See below, Germany, at book paragraphs 2.236-2.239. 174 See the developments in this regard concerning Austria, Belgium, England and Wales, the Netherlands, and the Nordic countries, from book paragraphs 2.206. 175 E.g. Cases M.5496, paragraph 15 and M.5512, paragraph 16. 176 See below, Germany, at book paragraphs 2.236-2.239. 177 M.5512, paragraph 16.

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been adopted or to be shortly adopted, since “the sought‑after results are not certain and immediate enough to justify the conclusion that the relevant geographic market is in fact larger”.178 In a similar way in E.ON/Mol (December 2005), the Commission did not take into consideration the potential market evolution in its assessment although noting that: “ it cannot be excluded that, in the future, depending on future developments such as changes in the regulatory framework, additional interconnection capacity and potential price convergence, the market for the wholesale supply of electricity to traders in Hungary will acquire a broader geographic dimension”.179 Another significant example is the rejection of an Iberian electricity market in all recent decisions, despite the agreement concluded by Spain and Portugal in November 2001 for the creation of an Iberian electricity market through the progressive convergence of the electrical systems of the two countries, as the agreement was not yet implemented.180 Only when developments will happen with certainty in the near future are they taken into account for the purpose of market definition.181 In VEBA/VIAG ( June 2000), for example, it was considered that the German wholesale supply market, although still showing strong local features, was already national in scope because it was without doubt going to develop into a national market in the foreseeable future.182 In Dong/Elsam (March 2006), the Commission examined the integrating effect of the Great Belt Interconnector cable connecting the East Danish and West Danish areas, and coming into operation after 2010, although stating that “both the remote time-frame and the uncertainty as to how strong that integrating effect will actually be limit the weight that the Commission can give to those effects”.183 In E.ON/Mol (December 2005), the Commission clearly indicated that, as soon as the non-eligible residential customers were 178 Case M.2947, paragraph 69. In the same decision, the Commission similarly took into consideration the fact that “ it cannot be assumed that developments in retail prices and in the prices for supplying small distributors in Austria and Germany will be driven by sufficiently homogeneous factors in the foreseeable future“ (paragraph 93), or that the opening up of the eastern control area to Germany was unlikely to change in the short term (paragraph 102). Another decision, concerning the German market does not take into consideration a possible increase of imports due to market opening because “ for want of specific pointers to the future development of exports, it is premature, however, at this stage to take account of such an, as yet, uncertain development” (1673,29). 179 Case M.3696, paragraph 267. 180 See below, Spain, at book paragraphs 2.277-2.278. 181 When the developments are not certain enough, they are normally taken into account within the competition assessment of the transaction, see e.g. case M.2947, paragraph 103. 182 Case M.1673, paragraph 32-45; confirmed in M.2349, paragraph 13. See below, Germany, at book paragraphs 2.236-2.239. 183 Case M. 3868, paragraph 261.

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not obliged to procure electricity from the regional distributors, the market for retail supply of electricity to residential customers would acquire a national dimension.184 In the RWE/Essent of June 2009, the Commission recognised185 that competition on the retail market in Germany is progressively expanding and that this could likely lead to the recognition of wider than local markets in the future but concluded that for the moment there are still strong indications pointing to local electricity retail markets.

1.2 Relevant criteria 1.2.1 Entry barriers 1.2.1.1 Regulatory trade barriers

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2.121

– Regulatory monopolies Prior to market opening, national production, transport and supply monopolies constituted absolute barriers to entry for foreign producers and suppliers. No significant cross-border trade of electricity could therefore take place between Member States, at least as regards final customers.186 At infra-national level also, before the liberalisation process, where exclusive distribution zones existed noneligible customers had no choice of electricity supplier, and were restricted to the supply company responsible for their geographic area: the geographic market was therefore necessarily limited to each exclusive local supply area.187 Under the Second Electricity Directive, Member States were under the obligation to implement market opening to all non-household customers by July 2004, and to non-household customers by July 2007.188 Before July 2007, the Commission’s market and competition analysis only covered the opened – or eligible – segment of the market.189 This analysis should no longer be relevant, subject however to the proper implementation of the Directive by the Member States. In a number of Member States, however, such as France, Spain and Portugal, there are “regulated” eligible customers, i.e. customers that are eligible to switch but remain under the pre-market opening regulated framework until 184 185 186 187

Case M.3696, paragraph 278. Case M.5467. See e.g. case M.493, paragraph 25 and M.1853, paragraph 21. See e.g. Cases M.1803, paragraph 21 for the Netherlands; M.1346, paragraph 25 and M.3007, paragraph 22 for England & Wales; and M.1673, paragraph 32 for Germany. 188 See Volume I. 189 See book paragraphs 2.35-2.37.

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they opt to join the free market and are supplied exclusively by the pre-liberalisation incumbent. – Licences Following market opening, the various authorisations to be obtained by new entrants to supply eligible customers can be seen as a barrier to entry. The requirement to obtain authorisations to supply electricity on the Belgian market from both national and local authorities was considered to be an administrative burden on foreign suppliers, constituting a barrier to entry to the Belgian market (see ECS/Sibelga (December 2003)).190 Again, in E.ON/Mol (December 2005), the Hungarian law obliging electricity traders set up a Hungarian trading company and obtain a Hungarian trading license in order to be active on the Hungarian market, and requiring a crossborder trading license to import electricity, was seen as clearly restricting the possibilities for any foreign company to pursue electricity trading and wholesale activities on the Hungarian market.191 – Price caps Market opening rules do not prohibit the imposition of price caps; a maximum price level fixed by the authorities. Following the opening of the English and Welsh market in 1999, the existence of price caps for small customers (with demand not exceeding 100kW), was until 2002 considered to be a strong indication of remaining regional markets limited to the historic distribution areas within England and Wales. In addition to creating different pricing conditions between the regions, as they applied locally, they could, depending on their level, hinder effective competition from developing in each region, therefore contributing to the historic operators maintaining their local positions.192 Following the abolition of the price caps by the UK regulator, Ofgem, in April 2002, it was considered that the relevant geographic market for supply had evolved 190 Case M.3318, paragraph 25. 191 Case M.3696, at paragraph 265. 192 Case M.1346, paragraph 25. In a subsequent decision, adopted a few months after the completion of the liberalisation process for small customers, the Commission less conclusively stated that local markets were likely to still exist (M.1606, paragraph 19). Price caps arguably did not prevent small customers from switching: almost one year and a half before they were abolished, it was already stated that “customer inertia appears to have reduced, and each month approximately 1% of all small customers change their electricity supplier, there do not therefore appear to be any significant barriers to switching suppliers”. As a result of the increased customer switching, it was concluded that, the relevant geographic market for supply was probably wider than regional (M.2209, paragraph 20-21).

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to probably wider than regional markets.193 Although these developments have no more than a historical interest in relation to the English market, the Commission’s reasoning could apply to other Member Sates where market opening for household customers is recent or has not yet taken place.

2.125

Equally, where a price cap is set at a very low level, this may deter new entry.194

1.2.1.2 Transmission rules and charges –

Transmission rules

2.126

In the absence of effective regulated third party access, the ownership by incumbent companies of transmission and distribution infrastructures de facto prevented entry by suppliers from other Member States or other regions within the same Member State even if third party access was legally required. In VEBA/ VIAG ( June 2000), for example, it was considered that the German market for the supply of electricity at wholesale level was likely to develop into a national market in the near future as rules for third party access to the transmission network had already been adopted.195 This conclusion was not altered by the fact that, for a transitional period, the new regulatory framework was not yet fully operational throughout the country, and that accounting procedures for balancing energy still made it more difficult for market participants to operate nationally. Despite the imperfections of the new regulatory framework, it was concluded that, in the near future, it would be possible to sell electricity everywhere in Germany at the wholesale level. The market was therefore no longer limited to the former regional supply areas, but was considered to be national in scope.

2.127

Under the Second Electricity Directive, Member States are, since July 2004, under the obligation to implement regulated third party access to the transmission and distribution network.196 In several Member Sates, the Directive is however not yet fully implemented. In any event, the quality of existing access rules must be taken into consideration. In a case concerning Belgium, ECS/Sibelga (December 2003), the fact that at that time no cross-border transmission contracts existed and, for foreign suppliers who wanted to enter Belgium a negotiation 193 Case M.2890, paragraph 34-35. 194 See the Commission s fourth Benchmarking Report (Communication from the European Commission to the European Parliament and the Council of 5.01.2005, Annual Report on the Implementation of the Gas and electricity Internal Market), available at http://europa.eu.int/comm/energy/electricity/benchmarking/doc/4/sec_2004_1720_en.pdf 195 Case M.1673, paragraphs 32-45. 196 See Volume I, Chapter 3.14.

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had to take place with the TSO, were considered to be barriers to entry suggesting that the Belgium market was not of a supra-national dimension.197 – Transfer charges Cross-border transfer charges are now abolished within the European Union.198 In the past, cross-border transmission fees charged by grid companies for transmission of electricity between Member States have been considered to be significant barriers to entry, depending on their level. As regards the German market, in particular, the transmission charge known as the “T-component”, to be paid by foreign suppliers wishing to export electricity to Germany, was considered to be a strong impediment to cross border trade.199 In the recent Verbund/Energie Allianz decision ( June 2003) concerning Austria, less weight was given to the cross‑border tariff, of 0.5 euros/MWh, to be paid for transmission of electricity between Germany and Austria.200 Because of the specific features of the Austrian market, the tariff acted as a barrier to entry only to a limited extent. As two Austrian control areas (the Vorarlberg and Tyrol control areas) were part of the German control block, routing electricity through this part of Austria made it possible to export electricity from Germany to Austria without paying any transfer charges.201

2.128

A requirement for transfer charges to be paid for the transport of electricity within different parts of the same Member State can similarly lead to the finding of local markets within a Member State. Despite the existence of two trading zones within Germany, and the payment of a transmission charge (the “T-component” referred to above), and although the charge was making it more difficult for independent electricity traders to operate nationally, the existence of a national German market was accepted in VEBA/VIAG ( June 2000).202

2.129

Given the new cross-border Regulation and the increasing elimination of regional charges at national level, this factor is unlikely to play an important role in future decisions.

2.130

197 Case M.3318, paragraph 25. 198 Since the entry into force of the EC Regulation No. 1228/2003 on cross-border exchanges in electricity in July 2004; and even since January 2004 as a result of the Florence Forum. See Volume I. 199 Case M.1673, paragraph 30; see earlier M.931, paragraph 26. 200 Case M.2947, paragraph 67. 201 As, also, no transfer charges were payable on transmission between control areas inside Austria. 202 Case M.1673, paragraphs 39-41. The Commission however took the charge into account in its competition assessment.

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1.2.1.3 Interconnection capacity 2.131

2.132

2.133

2.134

Adequate interconnection capacity is of key importance to the definition of wider than national geographic markets. Import capacity is constrained by the limited capacity of the interconnectors enabling the transmission of electricity between Member States. These limited capacities therefore act as a strong technical barrier to entry for foreign suppliers. – Significant interconnection capacity The absence of interconnections between two countries, or even between two areas within a country, normally lead to the finding of distinct markets. As the Commission stated in DONG/Elsam (March 2006): “as there is at present no direct interconnection between the two Danish price areas, Denmark East and Denmark West, it would seem inappropriate to define the relevant geographic market as all-Danish in scope”.203 This was again confirmed in EDF/Dalkia ( June 2014), where the Commission recalled it generally considers the market for generation and wholesale of electricity to have a national dimension, in particular due to the limited capacity and weakness of the interconnectors between neighbouring Member States.204 The mere existence of interconnection capacity between two countries is, in the Commission’s view, not sufficient to lead to the recognition of wider than national markets.205 To enable wider than national markets to develop, interconnectors should have enough capacity to allow substantial imports, capable of exercising a competitive pressure on the national producers.206 It has never precisely been stated what level of interconnection is needed in this respect. The analysis below however shows that 25% is enough but 13% is not. In Verbund/Energie Allianz ( June 2003), the finding that the interconnector capacity could allow for significant imports into Austria was vital to the recognition of a possibly wider than Austrian market for wholesale supply.207 The interconnector capacity represented about 25% of Austrian electricity consumption so that substantial imports were possible from Germany or Switzerland and Austria. 203 204 205 206 207

Case M.3868. Case M.7137, paragraph 35. Although this was suggested in one decision: M.2890, paragraphs 15 & 37. See below under Imports, at book paragraphs 2.168-2.174. Case M.2947, paragraph 65.

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However, in all other cases in which the issue was raised, the Commission concluded that inadequate interconnection capacity existed, providing strong evidence of the national scope of the market under consideration. The maximum technically available capacity from the Netherlands to Belgium, allowing a maximum 13% of imports, led, as such, to the conclusion that there was no common electricity market between Belgium and the Netherlands.208 In 2001, the import capacity being less than 10% of the installed generation capacity, the French market was deemed to be of national scope.209 The limited capacity between England and Wales and neighbouring countries, amounting to less than 6% of total consumption, led to the definition of a relevant geographic market for generation no wider than England and Wales.210 In Germany, the interconnection capacity of 9,5%, reduced by three times to take into account congestion in the distribution network, led the Commission to conclude the existence of a German market.211 The limited commercial interconnection capacity between Spain and neighbouring countries representing approximately 7% of the capacity needed at peak demand times,212 led to the recognition of a Spanish market. The interconnection capacity from Spain to Portugal, representing 7% to 13% of the capacity needed in Portugal at peak demand times, similarly led to the recognition of a Portuguese market.213 The existence of an Iberian market was therefore excluded because of the limited interconnections between Spain and Portugal.214

2.135

The possible evolution of interconnection capacity is sometimes taken into account. In one decision, the fact that a substantial increase in the capacity of the interconnectors between Belgium and the Netherlands was not planned in the short to medium term was highlighted. The Commission added that considerable time was necessarily involved in the decision-making process, the planning and the investment needed.215 In ENI/EDP/GDP (December 2004), the Commission outlined an in-depth analysis of the reasons for which it was highly unlikely that a truly Iberian market would be created in the near future despite Spain’s and Portugal’s intention to create a common electricity market.216

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208 209 210 211 212 213 214 215 216

Case M.1803, paragraph 22; see also M.3318, paragraph 24. Case M.1853, paragraph 22. Case M.1346, paragraph 18 and, identically, M.2209, paragraph 16. Case M.1673, paragraphs 22-27. Case M.3448, paragraph 21; the same statement was made in M.2684, paragraph 24, M.2434, paragraphs 24-26 and M.2620, paragraph 7. Case M.3440, paragraphs 81-82. See case M.2340, paragraph 10; in M.3440, paragraphs 81-82, the fact that the level of available interconnections between Spain and Portugal was reduced at times oh high demand was also taken into consideration. Case M.1803, paragraph 20. Case M.3440, paragraphs 94-186.

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2.137

2.138

In DONG/Elsam (March 2006), the Commission took into consideration the situation arising from the coming into operation, after 2010, of the Great Belt Interconnector cable, connecting the East Danish and West Danish wholesale areas. It considered however that “both the remote time-frame and the uncertainty as to how strong that integrating effect will actually be limit the weight that the Commission can give to those effects”. Similarly, in EDF/Segebel (November 2009), the Commission took into account the fact that interconnection capacity had not significantly increased since the GDF/Suez Decision and that such increase could not appear to be envisaged in the near future.217 The Commission considered the market for Belgian electricity wholesale market, including electricity trading, as national in scope.218 – Available capacity In most cases, the Commission refers to the usable technical capacities after deduction of the capacity that is not available for technical reasons such as the security of the system.219 The physically available technical capacity may be significantly lower than the total theoretical capacity. It was, for instance, considered that the interconnector capacity between France and its neighbouring countries amounting to approximately 20 to 25 GW, should be reduced to approximately 10 GW of usable capacities to take into account technical limitations.220 Most importantly, to be used, capacities must also be available and allocated. Free capacities in the interconnectors may sometime not be available because they are reserved through long-term contracts, often by incumbent companies. They are therefore not taken into consideration.221 Again this may be very significant: electricity imports into the Italian market were limited by the fact that about 50% of the interconnection capacity was booked under long term contracts by the Italian incumbent company ENEL.222

217 Case M.5549, paragraph 23. 218 Case M.5549, paragraph 38. 219 See case M.1853, paragraph 22 as regards France; M.1803, paragraph 22 and M.3318, paragraph 24 as regards Belgium; M.1673, paragraph 27 as regards Germany; and M.2947, paragraph 65 as regards Austria. See also the reference to available capacities in M.2684, paragraph 24; M.2434, paragraphs 24-26 and M.2620, paragraph 7. In M. 2947, paragraph 65, the Commission considered that the net transfer capacity – not the thermal transfer capacity – is relevant in practice because that calculation takes account of the weak points in the grid and therefore of the capacities in reality available on the interconnectors in order to ensure steady network operation in the event of the failure of a circuit or transformer. The Commission referred to data from UCTE Statistical Yearbook. 220 Case M.1853, paragraph 22. 221 Case M.1803, paragraphs 17-23 or M.1673, paragraph 27. On “contractual congestion”, see Volume I. 222 Case M.2792, paragraphs 29-31.

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The Commission may also take into account the fact that the spare capacity is not allocated, possibly due to ineffective capacity allocation mechanisms.223 –

2.139

Congestion

The existence of absence of congestion – or bottlenecks – in cross-border interconnectors has always been taken into account in determining whether interconnection capacity represents a barrier to entry.224 This is becoming increasingly central to the Commission’s analysis.225 The Sydkraft/Graninge decision (October 2003), for example, made congestion key to the analysis of the relevant geographic market.226 Because congestion had isolated Sweden from the rest of the Nordic area only for an insignificant period of time over the last years,227 and as a consequence prices were very rarely different in Sweden from the rest of the Nordic market, the wholesale electricity market was considered to be likely to be larger than Sweden. However, the Commission did not assess precisely what the capacity of the interconnectors were and stated that sufficient interconnection capacity existed for a competitive Nordic market to develop because the Nordic market, fully liberalised, was “connected through interconnectors, and that anyone connected to any part of a national network in Denmark, Finland, Norway and Sweden can in principle buy (or sell) electricity from (to) anyone else connected to the network”.228

2.140

This approach was confirmed in DONG/Elsam (March 2006). Even though interconnector capacities were relatively high between West Denmark and the other Nordic countries, accounting for about 67% of peak demand, in a very substantial fraction of the hours producers in West Denmark were not constrained by producers in the rest of the Nordic region as shown by the fact that congestion led Denmark West to constitute a separate price area at Nord Pool in 39% of the hours in 2005. For the Commission, this conclusively showed that the transaction could not entirely be assessed on the basis of a wider than Denmark market.229 The analysis of the competitive effects of the concentration needed to take into account “the possibility that, at least partly and possibly limited to some (congested) periods, the relevant framework for analysis is separate

2.142

223 224 225 226 227 228 229

In Spain: M.2434, paragraphs 24-26. E.g., in the past, among the Nordic countries: M.931, paragraph 26. See the above Introduction to “The relevant geographic market – Electricity” at book paragraphs 2.110-2.116. Case M.3268, paragraphs 25-27. In 2000, 5.5% of the time. In 2001, 0%, in 2002, 0.1% and 0% in January-September 2003. Case M.3268, paragraph 8. Case M. 3868, paragraphs 253 to 262.

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(a) East-Danish and (b) West Danish wholesale sub-markets”, while recognising “situations in which Nord Pool price zones are larger than individual East Danish or West Danish price zones” and even in which “all Nord Pool areas could, at times, be joined price areas”, or “any other combination linking East Denmark and/or West Denmark with one or more other Nord Pool price area”.

2.143

This tendency to evolve towards a distinction between peak hours and off peak hours was confirmed in RWE/Essent ( June 2009).230 The Commission considered that for the Dutch wholesale market, there could be two possible market definitions: either of national scope for all hours, or of national scope for peak hours and an area equal to Germany and the Netherlands for off-peak hours. As there is more capacity available on the interconnector with Germany during off-peak hours, imports from Germany exercise a significant competitive pressure on Dutch suppliers during those hours. In GDF Suez/International Power ( June 2011),231 the Commission took the same approach as in RWE/Essent and considered that the geographic scope for generation and wholesale of electricity can be left open with regards to the Netherlands.

2.144

In Italy, the fact that the market could be divided into different pricing zones which are very frequently isolated because of physical network limitations pointed towards the existence of regional markets.232 The existence of congestion preventing imports between Spain and Portugal during 25% of the year was also central in the Commission’s finding that no Iberian market existed in the ENI/EDP/GDP decision (December 2004).233

2.145

In E.ON/Mol (December 2004), the finding that the electricity interconnectors with Austria and Slovakia are almost all the time congested so that no additional imports are possible, was also central to the finding of a market Hungarian in scope. In addition, the Commission emphasised the fact that limited interconnection capacity with countries in the North of Hungary, where electricity production costs were lower, led to expensive auctions and prevented electricity prices between Hungary and its Northern neighbouring from converging as the auction prices were offsetting the electricity prices differences.234

230 231 232 233 234

Case M.5467, paragraphs. 26-32 and 61. Case M.5978, paragraph 34. Cases M.4368 and M.3729. Case M.3440, paragraphs 83-90. Case M.3696, paragraphs 262 to 264.

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Strong congestions from France to Belgium and Belgium to the Netherlands, preventing all capacity demand from being satisfied from 20% to 50% of the time, and from Germany to the Netherlands, were central to the finding of a Belgium market in GDF/Suez (November 2006) despite strong interconnections with neighbouring countries. The Commission emphasised the extreme difficulty of being a stable external supplier when interconnectors are congested even to a limited extend: congestions prevent an external supplier from committing on stable prices and constant supply. Balancing requirements for congested network were also deemed to create strong uncertainty as to export planning.

2.146

The fact that cross-border flows are still typically congested at all German borders with the exception of the interconnectors with Austria, led the Commission to conclude that Central West Europe region did not constitute a market despite a notable price convergence.235

2.147

Transportation is more important for importers than for local producers. Congestion within the internal electricity network of a Member State can therefore also make it difficult for importers to trade electricity within the country concerned. The limited capacity of the distribution networks was considered to be an element limiting import capacity into Germany;236 bottlenecks between the North and South of Austria were similarly considered as “ultimate” barriers to imports.237

2.148

– Overlap of import and export flows It can be argued that available import capacity is in reality much higher than the interconnectors’ technical capacity: the interconnectors can be freed up by simultaneous imports and exports of electricity, so that capacity equivalent to the balance of imports and exports is again made available (known as “netting” of flows). As a consequence, trade volume can be argued to exceed technical connection capacity.238

235 236 237 238

Case M.5467, paragraph 235. Case M.1673, paragraph 25. Case M.2947, paragraph 66. See Volume I.

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2.150

However, in practice this argument has not been accepted by the Commission in cases concerning Germany,239 Portugal240 and France.241 The mere fact that exports in the opposite direction to prevailing flow could in theory, free up additional trading capacity is irrelevant unless such flow actually occurs.

1.2.1.4 Critical size and local generation activities 2.151

In Verbund/Energie Allianz ( June 2003), the geographic markets for supply to large customers, small distributors and regional suppliers were deemed not to extend beyond Austria, although the Austrian electricity market was protected by neither technical nor regulatory barriers to entry.242 In addition to the structure of supply on the Austrian market and the actual flow of trade with neighbouring countries, the strong non-technical or regulatory barriers to entry consisting of established customer relationships and preferences and distribution costs were taken into account243 as factors indicating the existence of a national market.

2.152

Firstly, it was concluded that entry into the Austrian market with a view to long‑term supply to distributors and large customers is worthwhile only if a certain minimum number of customers can be secured, in particular because of the costs of establishing distribution arrangements which are needed for market entry. These costs were particularly high in Austria because of the fragmentation of distributors, the country being covered by more than 100 network operators. This also made market entry especially difficult for suppliers not possessing a detailed knowledge of the market. Secondly, the cost of balancing energy was considered to form a very strong barrier to entry: because it works on a smaller scale and does not have generation capacity in the control area concerned, a new entrant inevitably has a higher percentage requirement of balancing energy244 than an incumbent, involving a higher risk of increased costs. Thirdly, as a substantial proportion of small Austrian customers attached great importance to “clean” hydroelectric electricity, a new entrant would have to have a significant hydroelectric component in its electricity portfolio. This, again, required a critical size of operations in the country. Against this background, a relatively small increase in electricity prices for large Austrian customers, of around 5%, was 239 Case M.1673, paragraph 28. The predominant flows were going from France to Germany, and from Germany to the Netherlands. 240 Case M.2434, paragraphs 24-26. 241 Case M.1853, paragraph 23. 242 Case M.2947, paragraphs 55-97. 243 As well as a price level lower in Austria than in the neighbouring Member States, see below 2.1.5. 244 Balancing energy needs were defined as the offset between unexpected consumption surpluses and deficits. On balancing energy, see book paragraphs 4.158.

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deemed not to be enough to make the distribution and customer acquisition costs profitable in the short to medium term245 by a new entrant. The Commission again highlighted that a local presence was essential for all electricity retail activities, whether to small or large customers, for brand recognition, marketing, customer service, metering and billing in ENI/EDP/GDP decision (December 2004) and E.ON/Mol (December 2005).246

2.153

In GDF/Suez (November 2006), the Commission emphasised the extreme difficulty of being a stable external supplier when interconnectors are congested even to a limited extend, as it prevents committing on uninterrupted supply and stable prices, and balancing requirements create uncertainty as to export planning. The lack of liquid market also pointed towards the need of having a local generation presence to meet customers’ requirements on a stable basis.

2.154

1.2.2 Low prices In Verbund/Energie Allianz ( June 2003), the fact that the retail price level was lower in Austria than in the neighbouring Member States was decisive in the finding that the geographic market was limited to Austria.247 Electricity tariffs imposed on large customers in Austria were well below the German level, with a gap in prices to industrial customers of about 20% in 2001. Prices for household customers were even lower than in Germany, therefore preventing German suppliers from entering the Austrian market. A major factor explaining this price difference was the low average production costs of Austrian hydroelectric generators constituting a large proportion of Austrian electricity production.248 In an earlier decision, the fact that in the Netherlands the electricity price level was higher than in Germany, so that deliveries took place from Germany to the Netherlands, but not the other way around, was also taken as an indication that 245 In an early decision concerning Sweden, the Commission had also considered that a physical presence on the national market was required in order to achieve significant sales, case M.931, paragraph 26. 246 Cases M.3440 and M.3696 at paragraph 272. 247 Case M.2947, paragraphs 79-94. 248 The favourable production cost base of the largest Austrian electricity producer, Verbund, had been increased by the grant of compensation for stranded costs – in order to compensate for the higher costs of unprofitable power stations that were built in the expectation of continued monopoly rights. By decision of 25 July 2001 the Commission authorised aid of E 560 million for a number of run-of-river hydroelectric stations and one thermal station belonging to Verbund (state aid measure No N34/99, Austria, compensation of stranded costs). On state aid decisions on stranded costs, see book paragraph 4.168 under State Aid. The Commission also rejected the existence of predatory pricing policy from the Austrian companies as an explanation for the lower prices (case 2947, paragraphs 79-94).

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markets were national in scope.249 Surprisingly, the argument was never made as regards the French market, although the lower production cost base in France arising from nuclear energy is arguably one of the main entry barriers into France.

2.157

In many respects, however, such indications are more relevant as evidence of the existence of a separate geographic market rather than an entry barrier (see below, book paragraphs 2.176-2.182).

1.2.3 Switching behaviour and customer loyalty 2.158

2.159

2.160

Within the framework of market opening, customer loyalties/preferences can act as a strong barrier to entry for suppliers from other countries or from other regions within the same country. Where customers have a tendency to stick to their national or local historical supplier, effective market opening will always be slow. The analysis of customer behaviour was therefore key to the finding of the evolution from local to national markets in England and Wales. Switching patterns may be considered to be either a barrier to entry or a factor indicating whether markets should be widely or narrowly defined. In fact they can be both. The willingness of customers to switch, the existence of customer loyalty or unwillingness to switch due to fears of security of supply, or a regulatory system giving customers insufficient information to help them to take the step of switching supplier, can all be important entry barriers. The fact that few customers have in fact switched to foreign supplies, can be strong evidence that the market remains national in scope. However considered, it is submitted that in the future this factor/entry barrier may play an essential role in geographic market definition in the electricity sector. In EDF/London Electricity ( January 1999), the analysis of customer behaviour, and especially the switching rate, was central to the finding that electricity supply to medium sized customers250 was of no smaller geographic scope than England and Wales.251 For the UK regulatory authorities, the relevant geographic markets for supply to these medium sized customers was still, more than four years after market opening, limited to the individual regional distribution areas since the incumbent supplier at stake still had a market share of 58% of these customers in its distribution area. The UK authorities’ finding was reversed by the Commis249 Case M.1673, paragraph 28. 250 Customers with an annual demand between 100kW and 1MW, see book paragraphs 2.44-2.48. 251 Case M.1346, paragraphs 22-24.

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sion which, taking into account the dynamics of the market, relied on the fact that this stable high market share was hiding a competitive market marked by frequent changes of suppliers, with approximately 40% of medium-sized customers switching from the incumbent regional supplier each year. The stable market share was explained by the fact that these customers were being replaced by approximately the same number of customers, switching from other suppliers which the incumbent supplier attracted every year. This high switching rate suggested that brand loyalty, advertising costs and the difference in market shares between the competing suppliers did not prevent customers from switching, and therefore did not constitute significant barriers to entry. The Commission added that brand loyalty was unlikely in a commodity market such as electricity for this type of customers: medium sized customers were normally well aware of the possibility of changing suppliers and knew how to compare competing tariffs.252 Customer behaviour was also central in the evolution, in England & Wales, from the finding of regional markets for supply to small customers to the acceptance that this market was in the process of becoming national. In the months immediately following market opening to small customers, which was completed on April 1999, the small customers supply market was considered to be of regional scope as the vast majority of customers exhibited considerable inertia to switching supplier. In the wake of liberalisation, in EDF/London Electricity ( January 1999)253, the Commission considered that it was likely to take some time before a significant number of these customers changed their electricity supplier, as many small customers were found to be unlikely to be familiar with the process involved in changing supplier, or did not know how to compare the competing offers. A few months later, although a survey had shown that 89% of domestic customers were aware of their ability to switch supplier, the Commission questioned the existence of proper information of these customers, as the same survey showed that 72% of the customers could not name more than three suppliers. This lack of adequate information, together with the fact that no more than 5% of customers in the areas concerned had already changed supplier, suggested to the Commission that the geographic market for the supply to small customers was still limited to the regional distribution areas.254 In a second series of decisions, in December 2000 and later in 2002, the Commission accepted that, as a result of the increased customer switching rate, the geographic market for supply to small customers was in the process of becoming national.255 In 2000, approximately 252 253 254 255

In addition, the former incumbent operator was bidding annually to supply all medium size customers. Case M.1346, paragraph 25. Case M.1606, paragraph 19. Case M.2209, paragraphs 20-21 and M.2890, paragraph 35.

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1% of all small customers were switching electricity suppliers each month.256 In 2002, the overall rate of customers having switched suppliers was around 35 %.257

2.162

2.163

In Verbund/Energie Allianz ( June 2003),258 following market opening to small Austrian customers two years earlier in October 2001, the switching rate was again taken into account to determine whether the geographic scope of the market was national, or remained local along the traditional supply areas of each Austrian distributor. The market still had strong regional features as small customers’ switching rates were still low and they overwhelmingly obtained electricity from their original local distributor. The fact, however, that small customers did switch to other Austrian regional suppliers was taken as an element showing a trend towards the integration of the markets at a national level within Austria. As a consequence, the precise scope – local or national – of the market was left open. With respect to customer behaviour, reference was also made to the fact that, as a substantial proportion of small Austrian customers attached great importance to “clean” hydroelectric electricity; a new entrant had to develop a brand image in this regard.259 In DONG/Elsam (March 2006), the fact that the switching rates in the nonmetered customer area was low was taken as an indication that this market could still be regional in scope.260 Similarly, in Germany, overall low and regionally different customer switching rates across Germany was taken a strong element pointing to local electricity retail markets for small customers approximately corresponding to each DSO area in Germany.261

1.3 Relevant evidence 1.3.1 Dominant national companies 2.164

In line with market definition principles, a comparison of the market shares of the main players on a national market with their market shares in neighbouring countries or at European level is a strong indication of the extent to which market structure is specific to the country concerned. Leading companies only having high markets shares on their historical market imply that barriers to entry

256 257 258 259 260 261

Case M.2209, paragraphs 20-21. Case M.2890, paragraph 35. Case M.2947, paragraphs 95-96. Case M.2947, paragraph 73. See above book paragraphs 2.153-154. Case M.3868. Cases M.5512, paragraphs 17 and 18, M.5496 and M.5467.

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are present and indicate that national geographic markets exist.262 For example, in Verbund/Energie Allianz ( June 2003), it was indicated that “ fundamental differences” as regards the market shares of the parties and their competitors, on the electricity supply markets in Austria, in the neighbouring countries, and in the EU, “ in itself indicates that in geographic terms the relevant markets are confined to Austria” .263 All the main electricity suppliers at EEA level or at German level had a market share below 5% in Austria, and none of the major Austrian electricity suppliers had a market share of 5% or more of any electricity supply market in a neighbouring Member State or at EC level. In other decisions, reference is simply made to the fact that the incumbent historic operator remains dominant in the country concerned whereas the penetration of strong players from neighbouring countries is limited.264 Similarly, at infra-national level, the fact that the historic local supplier remains largely dominant at local level is taken to be a strong indication that regional markets still exist within a Member State.265 In Germany for instance, there is over 800 municipal utilities – Stadtwerke – which control the electricity distribution network and still exert a significant influence on the electricity retail supply to small customers. The continuing dominance of these municipal utilities in their municipal area was taken a strong element pointing to local electricity retail markets for small customers approximately corresponding to each Stadtwerk area in Germany.266

2.165

1.3.2 Actual flow of trade The actual flow of trade, especially the levels of imports, is key in the finding of a wider than national market. Only a level of imports of enough significance to represent a competitive constraint on national producers can conclusively point towards the existence of a wider than national market.267 Transit flows, which 262 In fast evolving markets, this should however be put in context, see the General Introduction, at book paragraphs 2.105-2.119. 263 Case M.2947, paragraph 58. 264 Case M.3318, 23-24 as regard the Belgian market, see also the early decisions M.493, paragraph 25 and M.568, paragraph 18. 265 See, as regard the English and Welsh market: case M.2209, paragraph 20 (“the vast majority of customers were supplied by the incumbent regional operator”); or M.2890, paragraph 35 (“the incumbents still have high market shares in their historic region [& ] the average market shares were around 70%”). 266 Cases M.5512, paragraphs 17 and 18, M.5496 and M.5467. 267 On “significant level of imports”, see case M.2947, paragraph 99; on “competitive constraints” see M.3318, paragraph 24. In fast evolving markets, this should however be put in context. Under the Commission’s Notice on Market Definition “the absence of trans-border purchases or trade flows (& ) does not necessarily mean that the market is at most national in scope. Still, barriers isolating the national market have to be identified before it is concluded that the relevant geographic market in such a case is national” (paragraph 50).

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cross a country and are delivered to others, should not normally be taken into account as they are not made available to the national market concerned.268

2.167

In the Commission’s practice, a proportion of less than 6% of imports normally strongly suggests that the market is not wider than national.269

2.168

A somewhat higher rate of imports of 14% to 15% can also lead to the same conclusion. For example, although the precise market definition was left open, it was considered that imports into the Netherlands limited to 14% of national demand pointed to the existence of a national Dutch market.270 In two decisions in 2001 and 2002, the trade flow from neighbouring countries representing 15% of the total electricity consumption in Italy (in 2000), led the Commission to conclude that the Italian market for electricity supply to eligible customers was of national dimension.271 In some decisions, reference is simply made to the very low volume of imports272 or very rare exports.273 In Verbund/ Energie Allianz ( June 2003), the Commission also took into consideration as evidence of very limited cross border trade the fact that foreign suppliers were very rarely asked to submit a bid in tenders made by Austrian customers, even more rarely responded, and had practically never secured contracts.274 The same reasoning was applied in Verbund/Energie Allianz at retail level.275 In Sydkraft/ Graninge (October 2003), the indication given by a market investigation that no or almost no end-users were supplied by suppliers outside of their country of residence led to the rejection of the parties’ submission that a Nordic end-user market existed276 at retail level. Finally, exports taking place only at certain times of the year, such as rainy seasons, do not seem to be accepted as valid indications of a wider than national market.277 In ENI/EDP/GDP (December 2004), the 268 Case M.1673, paragraph 22. 269 Less than 3% for Austria (M.2947, paragraphs 60-62) and France (M.1853, paragraphs 24-25), 4,3% for Spain (M.3448, paragraph 21), 5% for the Netherlands (M.1803, paragraphs 17-23) or 6% for Germany (M.1673, paragraph 22). The import ratio is not always calculated in the same way: it is sometimes compared with the group of customers concerned (level of imports for this group/consumption of this group), as in M.2947, paragraphs 60-62, or, sometimes, on a general basis, with eligible customers (M.1853, paragraph 24), or even general consumption (M.1673, paragraph 22 and M.3448, paragraph 21). 270 Case M.1659, paragraph 9. In another, old, case (M.931, paragraph 25), significant imports of 10% of the total electricity supply, were also not enough for the Commission to conclude at a wider than national Finnish market. However, the vast majority of imports were coming from Russia not from other Nordic countries. 271 Case M.2792, paragraphs 29-31 and earlier M.2532, paragraphs 34-36. 272 As regard Belgium, M.3318, paragraph 24. 273 As regard Spain, M.2434, paragraphs 24-26. 274 Case M.2947, paragraph 63. The market survey had shown that, out of 75 Austrian distributors, only one had been supplied by a foreign supplier. 275 Case M.2947, paragraphs 63-64. 276 Case M.3268, paragraph 81. 277 Case M.2434, paragraphs 24-26.

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level of imports from Spain accounting for 9% of the Portuguese total wholesale supply was an indication that markets of national scope existed. In DONG/Elsam (March 2006), the fact that the largest industrial companies sourced electricity from Danish electricity supply companies and that there was no direct entry by foreign supply companies led to the recognition of a no wider than Denmark market for metered customers.278

2.169

The fact that the volumes of energy that were subject to the market coupling put in place between Slovakia and the Czech Republic was relatively low as compared to the whole consumption in the Slovak Republic was taken as a strong element showing that this market was still national in scope.279

2.170

Only in one decision was cross-border trade considered of enough significance to hint towards a wider than national market. In Verbund/Energie Allianz ( June 2003), the fact that the Austrian regional distributors draw a significant proportion of their electricity supplies from non‑Austrian suppliers led to the recognition of the possible existence of a geographic market extending beyond Austria for supply to regional distributors.280

2.171

Export data may however be misleading when the country is a transit country. In E.ON/Mol (December 2005), the Commission noted that the real size of electricity transit through Hungary was difficult to estimate since there was no differentiation between export, import and transit. For the Commission, this meant that gross import figures and the interconnection capacities were not entirely relevant for the assessment of the geographic scope of the market.281 Similarly, in GDF/Suez (November 2006), the volume of electricity exported from France to Belgium and from Belgium to the Netherlands did not show that Belgium was part of a wider market as these volumes represented exports from France to the Netherlands transiting through Belgium.

2.172

278 Case M.3868, 270. 279 Case M. 5591, paragraph 11. 280 Case M.2947, paragraphs 99-100. The situation of the Austrian market is very specific in that two out of the three control zones, the western Länder of Vorarlberg and the Tyrol, technically belong to the German control block. All the other Länder together are the eastern control area, or “Austrian Power Grid” area, which is a separate control block. This last control area however accounts for, by far, the larger part of the country. 281 Case M.3696, paragraph 260.

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In both cases, despite strong cross border trade flow, the Commission concluded that markets were no wider than national. Congestions prevented any significant additional trade flow than electricity in transit.

2.173

Similarly, at local level, the fact that suppliers operate on a national scale is a strong element showing that local markets have been replaced by a national market.282 In DONG/Elsam (March 2006), the fact that customers both in the east and the west of Denmark regarded suppliers that historically originated from the other area as viable alternatives, and that these suppliers were selling in both areas, was an indication that the historic pre-liberalisation separation of intraDanish markets has lost its importance and of a transformation of the Danish end customer electricity regional markets into a national market.

1.3.3 Customer switching 2.174

As explained above, at book paragraphs 2.160-2.166, the level of customer switching (and the supplier to which customers switch to) is considered to be an important indication of the geographic scope of the market in question.

1.3.4 Price differences between neighbouring areas 2.175

In addition to being considered as an entry barrier in Member States where prices are significantly lower than in neighbouring countries,283 the existence of significant price differences between Member States, or within the same Member State, is often taken as an indication of different market structures leading to distinct national or local geographic markets.

2.176

In ENI/EDP/GDP (December 2004), the fact that Spanish and Portuguese prices were “poorly correlated and fluctuated a lot from each other” was central to the Commission’s conclusion that no Iberian market existed.284 Higher prices in Italy than in neighbouring countries, or the existence of significant price differences between Belgium, France (with lower prices) and the Netherlands (with higher prices), also contributed to the definition of no wider than national Italian285 and Belgian markets.286

282 See case M.2209, paragraphs 20-21 for England and Wales; and M.931, paragraph 27 for Finland. 283 See above, book paragraphs 2.157-2.159. 284 Case M.3440, paragraphs 91-93: prices were different from each other by more than 20 to 30% for 50 to 60% of the time. 285 Case M.2792, paragraphs 29-31 and earlier M.2532, paragraph 34-36. 286 Case M.3318, paragraph 24.

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The existence, in the past, of relatively significant price differences between Finland and the other Nordic countries also led, among other factors, to the recognition of a national Finish market.287

2.177

In E.ON/Mol (December 2005), the fact that the Hungarian electricity wholesale prices were lower than prices in Austria, Germany and Croatia but higher than in Slovakia, Romanian, Ukraine and Serbia was an important element in the finding of a market national in scope. Interestingly, the Commission noted that congestions at interconnectors led to expensive capacity auctions preventing electricity prices between Hungary and its Northern neighbouring to converge as the auction prices were offsetting the electricity prices differences.288 At infra-national level, despite the fact that several suppliers were competing in each English and Welsh region, it was not accepted that a national market for electricity at retail level necessarily existed. In addition to the incumbents still having high market shares in their historic region, this was because the prices differed on a regional basis for small and medium-sized customers.289 Conversely, it was accepted that no regional markets existed inside Finland as, inter alia, wholesale prices for electricity were homogeneous throughout the country.290 In this last decision, highlighting the effect of possible congestion on the homogeneity of prices, the Commission stated that homogeneous pricing was possible because the system of balancing could prevent bottlenecks in the transmission network, enabling therefore producers and wholesalers to sell throughout the country at the same price. In the same way, in Germany, the existence of different local pricing policy according to the DSO areas was taken a strong element pointing to local electricity retail markets for small customers.291

2.178

The existence of an electricity exchange normally leads to homogeneous prices in the area covered by the exchange.292 It is therefore, normally, a strong indication of the existence of a single geographic market encompassing the area it covers. In Sydkraft/Graninge (October 2003) for example, the impact of Elspot, the daily market for physical trade on Nord Pool, on the homogeneity of prices among

2.180

287 Case M.931, paragraph 26. 288 Case M.3696, paragraphs 263-264. 289 Case M.2890, paragraph 35. Even though the difference in prices was limited: according to calculations for an annual bill for standard rate electricity provided by Energywatch, an independent consumer watchdog, the price range in the Seeboard distribution area is for a low user GBP 107 to GBP 182, while in the Swalec distribution area it is GBP142 to GBP 219. For a medium user the range in the Yorkshire distribution area is GBP 196 to GBP 302, while in the Swalec area it is GBP 236 to GBP 317. 290 Case M.931, paragraph 27. 291 Cases M.5512, paragraphs 17 and 18, M.5496 and M.5467. 292 On exchanges generally, see below at book paragraphs 2.194-2.204.

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Nordic countries was strongly taken into consideration.293 In principle, Elspot sets common prices for all the Nordic countries based on supply and demand from all the market players in the area. However, when congestion develops on the transmission network, several price areas can develop.294 As a consequence the Nordic region was one single price area 52% of the time in 2001, and 35% in 2002. The existence of different price areas parts of the time limits the number of suppliers able to supply electricity in a given area and thereby the competitive structure of the market. The Commission investigated the frequency and distribution of the different price areas. As the price in Sweden was identical to Finland and East Denmark more than 90% of the time,295 the Commission concluded that “Sweden has only constituted a separate geographic area during an insignificant period of time in each of the last years, (and therefore) the price correlation between Sweden and Finland and Sweden and Denmark seems to imply that the generation/wholesale market is likely to be larger than Sweden”. In DONG/Elsam (March 2006), the fact that Denmark West constituted a separate price area at Nord Pool in 39% of the hours in 2005 indicated that a Denmark West market existed at these moments.296

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The fact that price differences between the two countries continued to exist was taken as a strong element showing that despite the market coupling and common exchange put in place between Slovakia and the Czech Republic these markets were still national in scope.297

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The impact of national exchanges on the homogeneity of prices at national level can also be an indication that the market does not extend to other Member Sates: England and Wales were identified as a separate market for generation on the basis that the English and Welsh exchange, the Pool and later NETA, only applied to England and Wales and therefore identical prices could only be found in England and Wales and not, for example, Scotland.298

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On the other hand, it seems that price convergence between several Member States cannot as such lead to the recognition of a single market. In RWE / Essent ( June 2009),299 the market investigation showed a notable price convergence 293 Case M.3268, paragraphs 21-27. 294 These are: Sweden, Finland, Denmark West (DK1), Denmark East (DK2), South Norway (NO1) and Middle/North Norway (NO2). 295 As regard Finland, 84.2% of the time in 2000, 99.1% in 2001, 95.0% in 2002 and 70.2% in 2003; as regard East Denmark, 92.8% of the time in 2000, 94.6% in 2001, 90.7% in 2002 and 93.6% in 2003. 296 Case M. 3868, paragraphs 253 to 262. 297 Case M. 5591, paragraph 11. 298 Case M.1346, paragraph 18. See also M.2209, paragraph 16 and M.2679, paragraph 18. 299 Cases M.5467, paragraph 235.

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in the Central West Europe region. In view of remaining congestion at German borders, the Commission refused to conclude that Germany was part of a broader market at wholesale level.

1.3.5 Different regulatory frameworks The existence of different regulatory frameworks in neighbouring countries, or within a country, is a strong indication that markets remain national or even infra-national. The Austrian regulatory framework being different from the German one, as the first Electricity Directive had been implemented in significantly different ways in the two countries,300 led to the finding of two distinct national markets.301 Differences between the Spanish regulatory framework on the one hand, and the French and Portuguese regulatory frameworks on the other hand, led to the same conclusion.302 In two decisions concerning Italy, the fact that the regulatory framework was substantially different from the neighbouring Member States, or even unique as regards the specific regulatory framework for the generation of renewable electricity, also led the Commission to conclude that the Italian market for supply of electricity was national in scope.303 At local level, the different regulatory frameworks and the different stage of market opening between the three Belgian regions was taken to be an indication that infra-national markets could exist within Belgium.304 In E.ON/Mol (December 2005), the fact that the Hungarian regulatory framework was substantially different from those of neighbouring countries, was taken as a strong indication of the existence of a market of national scope. In particular, the legal framework for state aid for local coal and nuclear differed between 300 In particular as regard third party access to the network, with negotiated network access in Germany, and regulated “postage stamp tariff ” in Austria. 301 Case M.2947, paragraph 59. 302 Case M.2684, paragraph 24; see the same statement more recently but where the market definition was left open in M.3448, paragraph 21. 303 Case M.2792, paragraphs 29-31 and earlier M.2532, paragraphs 34-36. See also, generally, the older cases M.493, paragraph 25, highlighting the different European regulatory framework before EC harmonisation, and M.931, paragraph 26 mentioning, as regard Finland, differences in electricity taxation, environmental policies and different requirement concerning the levels of back-up capacity. 304 Cases M.3075-80, paragraph 20. Contrary to other Belgian regions, in the Brussels region, the historic supplier was under obligation neither to inform the clients becoming eligible of their right to switch to another supplier, nor to authorise its customer to terminate its contract with a one month notice. The indication was, however, not considered strong enough to conclude as to the existence of regional markets as similar structures of supply and demand among the three Belgian regions conclusively showed, for the Commission, that no infra-national existed. Ten months later, the same considerations however led the Commission to leave the market definition open as dominant positions existed on both regional or national market definitions (M.3318, paragraphs 26-28).

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countries, as well as environmental and other regulations affecting power generation. As a result the power generation mix of Hungary and its neighbouring country differed much, which had an impact on the homogeneity of electricity wholesale markets.305 In EDF/British Energy (December 2008), the Commission concluded that at retail level, the relevant market comprised the whole of Great Britain as this area is regulated by the same regulator and similar conditions of competition therefore apply.306

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The implementation of the second internal market Electricity Directive by the Member Sates as from July 2004 have strongly contributed to the harmonisation of regulatory framework in Europe. This will be strengthened by the transposition of the Third Package which is compulsory for Member States as from 3 March 2011.307 The Agency for the Cooperation of European Regulators (ACER) which is put into place under the Third Package should have a strong role in facilitating harmonisation of regulatory framework. It will however only apply as from 3 March 2011.308

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The chart below shows the different level of market opening and eligibility threshold among Member States as of the end of 2006 and 2007.309 Under EC law, market opening was to reach 100% in all Member States by July 2007.310

1.3.6 General market structure, regional exchanges and market coupling 2.190

The general structure of supply and demand has been used by the Commission to be an indication that the market is no wider, but also no smaller, than national. For example, one argument leading to the conclusion that Spain was not part of the same market as France and Portugal was the fact that the organisation of the wholesale market in Spain differed significantly from the electricity systems in those two neighbouring countries.311 305 Case M.3696, paragraph 266. 306 Cases M.5224, paragraph 88, and before Case M.4517. 307 Articles 50 (electricity directive), 54 (gas directive), 26 (electricity regulation), 32 (gas regulation) and 35 (Agency regulation). 308 Article 35 (Agency regulation). 309 Extract from the Technical Annex to the Communication from the Commission to the Council and the European Parliament of 11 March 2010 - Report on progress in creating the internal gas and electricity market, Table 1.1. Source: National Regulators. 310 Malta, Cyprus and Estonia however have been granted derogations from market opening (see Volume I, at Chapter 11). 311 Case M.2684, paragraph 24; see the same statement more recently but where the market definition was left

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In another case, the homogeneity of the market conditions in Belgium, and the fact that the structure of supply and demand was strongly different from neighbouring markets, constituted strong evidence that the market was not wider than national.312

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In the past, distinctions were also made between Member States with one unique supplier, such as France, from countries with regional suppliers, such as Germany; or countries with developing trading activities, such as the United Kingdom.313 Where a single national supplier exists, the market is more likely to be national than regional in scope. In another case, the fact that only Italian companies were active on both demand and supply sides led to the conclusion that the market for the generation of renewable electricity was limited to Italy.314 The fact that there is a different competitive landscape in the countries surrounding Germany led the Commission to conclude that Central West Europe region did not constitute a market despite a notable price convergence.315

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At local level, the existence of similar structures of supply and demand among the three Belgian regions was taken as conclusive evidence that no infra-national markets existed, despite the existence of different regulatory frameworks and levels of market opening among the Belgian regions. The fact that the structure of production and import capacities were planned and managed on a nationwide basis was highlighted by the Commission.316

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In Germany, the existence of local marketing strategies focusing on the territorial incumbent was taken a strong element pointing to local electricity retail markets for small customers.317

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Exchanges and market coupling

When considering whether different market structure between neighbouring Member States constitutes evidence of national geographic markets, probably the most important consideration is the existence of electricity exchanges or pools. open in M. 3448, paragraph 21. 312 The Belgian market was predominantly supplied by the historic Belgian incumbent company, see M.3318, paragraph 23; M.3075-80, paragraphs 19 and 21 and M.2857, paragraphs 15 and 17. 313 Case M.493, paragraph 25. 314 Case M.2792, paragraph 31 and earlier M.2532, paragraph 36. 315 Case M.5467, paragraph 235. 316 Cases M.3075-80, paragraphs 20-21 and M.2857, paragraphs 16-17. In a more recent case (M.3018, paragraphs 27-28), the same consideration was also taken as a strong indication that no regional markets could be defined, although the Commission left the market definition open. 317 Cases M.5512, paragraphs. 17 and 18, M.5496 and M.5467.

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Depending on their geographical scope, the existence of national exchanges and pooling arrangements constitutes a strong indication that a market is no wider or no smaller than national, or has a supra-national dimension.

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It was accepted as an indication that the Dutch market was not wider than national because it was governed by a pooling arrangement which did not apply to neighbouring countries.318 The wholesale trading arrangement called The Pool, which was in place in 1999 in England and Wales, was considered strong evidence, together with low interconnection capacities, of a geographic market limited to England & Wales, as the arrangement only covered this area.319 The fact that electricity was to be traded nationwide on the Frankfurt and Leipzig exchanges which were to be established in the near future was taken to be an indication that the German market would in the near future be national in scope.320

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The existence of a regional exchange covering several Member States is also a strong indication of a wider than national market. The existence of Nord Pool, the regional electricity market for the Nordic countries was key to the recognition of a possible geographic market encompassing the region.321 The existence of a regional exchange is however not in itself sufficient to determine the existence of a supra-national market: in the past, the restrictions still applying to cross-border trade of electricity between Nordic countries led the Commission to conclude, in 1998 and again in 2001, that the relevant geographic market was limited to Sweden and Norway, although the Nord Pool electricity market covering these countries had already been in place for several years.322 318 Case M.1659, paragraph 9. The low volume of electricity traded on the Dutch exchange APX (3,8% of the national production capacity) was also taken as a reason, it seems, for the recognition that the geographic market was limited to Holland in the subsequent decision 1803,19. 319 In 1999, in EDF/London Electricity (case M.1346, paragraph 18). This was confirmed in the following decision (M.2209, paragraph 16 EDF/Cottam Power Station) in which the Commission stated: “the electricity trading arrangements in England and Wales, (i.e. the Pool) were established via legislation which provides for the geographic market”. In a more recent decision, although leaving the market definition open, the Commission confirmed that the introduction of the New Electricity Trading Arrangement (NETA), on 2001, did not as such lead to a wider market as it only applies to England and Wales. For the Commission, the introduction of NETA did not affect the capacity of electricity to be traded between England and Wales and the neighbouring regions such as Scotland and France and that the trading arrangements would continue to differ between England and Wales and these regions (M.2679, paragraph 18). More recently, the parties still based their argument that the market for generation was confined to England and Wales, in addition to the limited interconnections capacities with Scotland, Northern Ireland and France, on the fact that NETA only applied to England and Wales (M.3007). 320 Case M.1673, paragraph 45. 321 Cases M.3268 and M.3868 at paragraph 253. 322 Cases M.1231, paragraphs 10-11 and M.2349, paragraph 12.

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Similarly, the market coupling put in place in 2009 between Slovakia and the Czech Republic did not lead to the recognition of a wider than Slovakian market as the liquidity of the Czech and Slovak energy exchanges was still low and trading volumes were not larger than interconnector capacity allocated through market coupling, and the volumes of energy that were subject to market coupling was relatively low as compared to the whole consumption in the Slovak Republic.323

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Markets in derivatives of electricity may also have a certain integrating effect by smoothing the risk of diverging wholesale prices. In Dong/Elsam (March 2006), the Commission however considered that, because they belong to a separate product market, financial derivatives of electricity cannot determine the geographic scope of the physical wholesale electricity market.324 In GDF/Suez (November 2006), the introduction of the common spot market and of market coupling between France, Belgium and the Netherlands did not change the Commission’s conclusion that the Belgium market was of national scope because it would not suppress congestions in particular at peak hours.325 This market coupling, still in 2009, did not lead to the recognition of a wider than national Dutch generation and wholesale market326. Similarly, in EDF/Segebel327 (November 2009), the Commission did not consider that market coupling would change the available interconnection capacity between France and Belgium.

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When an exchange is not yet in place, and there is no proof that it will definitively be in place in the future, it cannot be taken as an indication of the geographical scope of the market: the envisaged MIBEL market between Spain and Portugal cannot therefore not yet be taken as evidence showing the existence of an Iberian market.328

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323 324 325 326 327 328

Case M. 5591, paragraph 11. Case M.3868. Case M.4180, paragraph 727. Case M.5467, paragraphs. 26-32 and 61. Case M.5549, paragraph 31. Cases M.2684 and M.2434; see also M4685. Initially set to start on January 2003, the Iberian electricity market, MIBEL, was postponed on several occasions and only started in 2007.

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1.4 Case-by-case examination of Member States 2.203

In the following section each country329 is examined to determine the present position regarding the Commission’s approach to geographic market definition for electricity supply markets. It should be underlined that this examination is based on previous decisions and market development. The fact that markets are evolving quickly will need to be taken into account in using this section as an indication of the Commission’s likely approach in future cases.

1.4.1 Austria 2.204

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In Verbund/Energie Allianz ( June 2003),330 the Commission considered that Austrian electricity market is not protected by limited interconnection capacities preventing foreign suppliers from entering. With a total capacity equal to 25% of Austrian electricity consumption, the interconnections between Switzerland and Austria, and Germany and Austria had enough capacities for a wider market to develop. There was also no, or very little, regulatory barriers to entry, the Austrian market being fully opened to competition since October 2001. Within the supply market, a distinction was made between supply to large regional distributors on the one hand and supply to large customers, small distributors and regional suppliers on the other hand.331 Because of the strong interconnection capacities and the absence of regulatory barriers, it was accepted that a market of supply to large regional distributors may be wider than Austria although the issue was left open.332 It was however decided that the wholesale market of supply to large customers, small distributors and regional suppliers did not extend beyond Austria.333 This finding, which led to commitments being imposed on the parties to the concentration, was based on the structure of supply on the Austrian market, the actual flow of trade with neighbouring countries, and non-technical or regulatory barriers to entry. Both the structure and the legal framework of the Austrian electricity markets were “ fundamentally different from those of the neighbouring countries”. Electricity imports were de facto limited as regards supply to large customers and smaller distributors, foreign suppliers rarely responded to invita329 Romania and Bulgaria have joined the European Union at the beginning of 2007 but are not covered hereafter because of lack of relevant statistical data. 330 Case M.2947. 331 See the product market analysis on the wholesale market at book paragraphs 2.24-2.27. 332 See above at book paragraphs 2.153-2.154, 2.157 and 2.164. 333 Case M.2947, paragraphs 55-97.

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tions to tender from Austrian buyers and had practically never secured contracts with them. Finally, strong non-technical or regulatory barriers to entry existed, consisting of established customer relationships and preferences, distribution costs, and a price level lower in Austria than in the neighbouring Member States. At retail level, the Austrian supply market to small customers, which had been open to competition in October 2001, still had strong local and regional characteristics. In particular, the switching rates of customers were still low, so that a very large majority of small Austrian customers still obtained electricity from their original distributors. An existing trend towards a wider than regional market for small customers was however evidenced by the fact that switching to other regional suppliers, and in particular new suppliers, was taking place. In addition, small customers were forming supra‑regional purchasing pools. Whether the market was of national or regional scope was therefore left open.334

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1.4.2 Belgium In ECS/Sibelga (December 2003), it was concluded that the Belgian market for the supply of eligible clients was national.335 First, high barriers to entry, mainly due to the limited interconnector capacities, especially at the border with France, isolated the Belgian market. Reference was also made to the lack of cross-border contracts enabling Belgian customers to purchase electricity abroad, and to the fact that new market entrants into Belgium had to comply with cumbersome approval procedures imposed by both national and regional Belgian authorities. As a result, the volume of imports was extremely low. Secondly, the market structure was national in scope. The historic incumbent Belgian producer had a very strong position in Belgium, whereas strong players in neighbouring territories only had small market shares. In addition, a different pricing structure between Belgium and France, with lower tariffs, or the Netherlands, with higher tariffs, existed.

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This was confirmed in GDF/Suez (November 2006),336 where it was decided that despite strong interconnections and trade flow with France, the Netherlands and Germany, the Belgian market was of national scope. Strong congestions from France to Belgium and from Belgium to the Netherlands, preventing all capacity demand from being satisfied from 20% to 50% of the time, prevented stronger exports and showed that Belgium was a transit country for electricity generated

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334 Case M.2947, paragraphs 95-96. 335 Case M.3318, paragraphs 21-25, confirming the previous decisions M.3075-80, paragraph 19 and M.1803, paragraphs 17-23. 336 Case M.4180, from paragraph 696. See also M.3883 and M.3729.

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in France and supplied to the Netherlands. The higher price of electricity in the Netherlands prevented potential exports to Belgium. Congestion from Germany to the Netherlands prevented exports of German electricity to Belgium. Even the introduction of the common spot market between France, Belgium and the Netherlands, and the introduction of market coupling between these countries, did not change this situation as it would not prevent congestions in particular at peak hours. This analysis was confirmed more recently in October 2009.337 Also, in EDF/Segebel and GDF Suez/International Power, the Commission concluded that the Belgian electricity generation and wholesale market remained national in scope as there were no special circumstances that would require a revision of the market definition.338 In EDF/Dalkia, it was suggested by some respondents in the market investigation that a wider market, covering Belgium, the Netherlands, Luxembourg, France and Germany could exist, but the Commission explicitly defined the market as national in scope.339

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With respect to the existence of local markets within Belgium, in two cases the Commission considered that similar structures of supply and demand existed among the three Belgian regions. Furthermore, the fact that the structure of production and the import capacities were planned and managed on a national wide basis was considered to be a conclusive evidence that no infra-national market existed, despite different regulatory frameworks and levels of market opening among the regions.340 In GDF/Suez (November 2006),341 the Commission however concluded that regional markets existed for domestic customers based on the different timing of market opening between the three Belgian regions. This analysis was also confirmed more recently in October 2009.342

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The geographical scope of the electricity supply markets in Croatia is likely to be no wider than national. The Commission has confirmed that competition in the Croatian energy market is still very limited and that further market opening is required. In particular, Croatia has not yet fully liberalised its energy markets and should step up its efforts to deregulate wholesale and retail prices, as well as complete the unbundling process.343 While the cross-border transmission and 337 338 339 340 341 342 343

Case M.5519, paragraph 15. Cases M. 5549, paragraph 38 and M.5978, paragraph 71. Case M.7137, paragraphs 38-39. Cases M.3075-80, paragraphs 20-21 and M.2857, paragraphs 16-17. See also M. 3318 and M. 3883. Case M.4180, from paragraph 740. Case M.5519, paragraph 15. Commission Staff Working Document of 13 October 2014, Progress towards completing the Internal En-

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allocation of interconnection is progressing, it is unlikely to be sufficiently significant to warrant a deviation from the Commission’s standard approach of defining the relevant market as national in scope.

1.4.4 Cyprus With no interconnection capacities with the European continent, Cyprus is likely to be considered to be a separate national market.

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1.4.5 Czech Republic In a decision of July 2006, the Commission left the market definition open but suggested that the market was in any event not smaller than national.344

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1.4.6 Denmark In 2001, it was still being considered that the electricity markets in the Nordic countries could be seen as remaining essentially national in scope because of the restrictions still applying to cross-border trade.345

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The reasoning followed in the recent Sydkraft/Graninge decision (October 2003), seemed to imply that the Danish market was likely to have become larger than national.346

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In the recent Phase II decision Dong/Elsam (March 2006),347 relating to the merger of the Danish gas and electricity incumbents, the parties argued that the market for electricity wholesale was at least pan-Nordic as a result of the Nord Pool spot market covering wholesale of electricity in Denmark, Norway, Sweden, and Finland.

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Moreover, generally below 15%, the congestion of the interconnector between Sweden and East Denmark was not high and interconnector capacities are relatively high in East Denmark (74% of peak demand) and in West Denmark (67% of peak demand). The finding of Sydkraft/Graninge that a market encompassing Denmark East and Sweden existed was however not confirmed, the Commission concluded that the electricity wholesale market could be either East

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344 345 346 347

ergy Market Country Reports, p. 30. Case M.4238, paragraph 19; see also case M.3665. Case M.2349, paragraph 12. Case M.3268, paragraph 27, see book paragraphs 2.143 and 2.181. Case M.3868; see before case M.3867.

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Danish and West Danish respectively or wider.348 Arguably this was because interconnection congestion figures were substantially higher in 2004 and 2005, and, consequently, the Danish Competition Authority, in its decision on the Elsam/NESA merger in 2004, had defined the relevant geographic wholesale markets as Denmark East and Denmark West respectively, on the basis of significant price differences and congestion between these areas.

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To reject the existence of a wider than Danish market all the time, the Commission based itself on the fact that, in a very substantial fraction of the hours (39% in 2005), Denmark West constituted a separate price area at Nord Pool, and producers in West Denmark were therefore not constrained by producers in the rest of the Nordic region. Moreover, as there was no direct interconnection between the two Danish price areas, Denmark East and Denmark West, a Danish market could not exist. The Commission also considered that the geographic market for final metered customers was not broader than Denmark as the largest industrial companies also source electricity from Danish electricity supply companies, and there is no direct entry by foreign supply companies. As an example, Vattenfall, the largest Swedish supplier, was not currently active in Denmark as a retail supplier to industrial customers. The historic pre-liberalisation separation of regional Danish markets had however lost its importance, the market being of no smaller than national dimension. The Commission finally left open whether the market or markets for supply of electricity to non-metered customers (household customers and small business customers) was regional (i.e. coinciding with previous monopoly distribution areas) or national in scope.

1.4.7 England, Wales, Scotland349 2.221

In England and Wales, market opening took place in 1989 for customers consuming above 1MW, in 1994 for customers consuming above 100kW, and in 1999 for all customers. Because market opening took place at such an early stage, England and Wales are a good example of the influence over time of the process of liberalisation on geographic market definition. Because of the guidance it can provide as regards more recently liberalised countries, it is worth recalling the 348 Case M.3868, paragraphs 253-273. 349 England and Wales is referred to as a “national” market as historically its electricity sector was distinct from Scotland and Ireland. It is however neither a “nation” nor a Member State.

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evolution of market definition even if it is of only historical value with respect to the English and Welsh market. In EDF/London Electricity ( January 1999), it was concluded that the relevant geographic market for generation could be no wider than England and Wales.350 First, the wholesale trading arrangement, called the Pool, in which generators had to sell electricity, was limited to England and Wales. Secondly, the interconnection between England and Wales and neighbouring countries, such as Scotland and France, had a limited capacity representing less than 6% of total capacity.

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This position was not formally reversed for some time.351 A trend towards the recognition of a geographic market of wider scope could however be evidenced. Later, although confirming that the introduction of the New Electricity Trading Arrangement (NETA), in 2001, did not as such lead to a wider market as it only applies to England and Wales and does not affect the capacity for electricity to be traded between England and Wales and other regions, the Commission did not expressly conclude that the geographic scope of the market was limited to England and Wales and left the market definition open.352 This was followed by the EDF/Seeboard case ( July 2002), where the Commission indicated that the geographic dimension of the markets for generation and supply to large customers (i.e. customers with a demand exceeding 100 kW) could be broader on the basis that the network was connected to Scotland and France.353 It was again envisaged, in a decision of December 2002, that the geographic scope of the market for supply of electricity to large customers might be Great Britain.354 In EDF/British Energy (December 2008), the Commission concluded that at wholesale level, the relevant market comprised the whole of Great Britain (including England, Scotland and Wales but excluding Northern Ireland).355

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350 Case M.1346, paragraph 18. 351 See the same finding in case M.2209, paragraph 16, and before in M.1606, paragraph 16; see also JV.36, paragraph 30 where the Commission left the exact definition of the geographic market open. 352 Cases M.2679, paragraph 18; and M.2675, paragraph 18. 353 Case M.2890, paragraphs 15 & 37. The parties were claiming that the market was limited to England and Wales because of the geographic scope of NETA, and the capacity constraints with France, North Ireland and Scotland. 354 Case M.3007, paragraphs 24-25. 355 Cases M.5224, paragraph 22, and before Case M.4517.

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This was again confirmed in GDF Suez/International Power ( January 2011) where the Commission found that the markets for generation and wholesale of electricity as well as retail supply of electricity encompass England, Wales and Scotland.356

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In relation to the supply of electricity to large and medium-sized customers – with a demand exceeding 100kW – in EDF/London Electricity ( January 1999), it was accepted that the geographic scope of this market was no smaller than England and Wales.357 For the Commission, this was because these customers have been able to choose freely any of the public electricity supply companies operating in this area for over four years (eight years for those whose demand exceeds 1MW). With respect to medium-sized customers, the Commission considered, contrary to the UK regulatory authorities, that the fact that the historic incumbent company in the area concerned (London) still had 58% of the medium sized customers in its distribution area did not lead to the existence of a regional market, as these customers were switching from one supplier to another on a frequent basis.358 The Commission concluded that the conditions of competition in the London area were not substantially different from those elsewhere in England and Wales.359

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Until 1999, small customers – with a demand not exceeding 100kW – had to buy their electricity from the public electricity supply company responsible for supply in their geographic area. The geographic market was therefore limited to each of the twelve exclusive distribution areas covering England and Wales. In the wake of market opening to small customers, in EDF/London Electricity ( January 1999), it was concluded that the geographic markets for supply to smaller customers, immediately post-liberalisation, were still limited to each of the former twelve suppliers’ distribution area.360 This conclusion was reached despite the fact that the smallest customers had, or were to have shortly, the 356 Case M.5978, paragraphs 42-44. 357 Case M.1346, paragraphs 22-24; confirmed in M.2679, paragraph 24. 358 As stated by the Commission: “40% of LE’s customers with a demand of between 100kW and 1MW will transfer away from LE each year. They are replaced by approximately the same number of customers which LE attracts from other suppliers”. This showed that “ brand loyalty” (unlikely in any event in a commodity market such as electricity), advertising costs and the difference in market shares between the competing suppliers in the LE area do not appear to have deterred customers from switching and therefore are not significant barriers to entry. In addition, the incumbent supplier was bidding each year to supply customers and they, as medium size customers, were well aware of the possibility of changing suppliers and of how to compare competing tariffs. Finally a number of customers in this class currently supplied by LE is relatively small (c.5,000), suggesting that competing suppliers could seek their custom without major additional investment”. 359 Case M.1346, paragraphs 23-24. 360 Case M.1346, paragraph 25.

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possibility of freely selecting their supplier. This was because: (i) some of these customers still had no choice in their electricity suppliers, (ii) the price for the supply of the smallest customers was limited by a price cap at a maximum level fixed by the authorities and which was to remain in force for at least one year, and (iii) it would take some time before a significant number of these customers would change their electricity supplier, as many small customers were not familiar with the process involved in changing suppliers or did not know how to compare the competing offers. The Commission concluded that the ability of these customers to change supplier was not, at the time, sufficient in itself to constrain the prices charged by the regional supply companies. A few months after market opening to small customers had been completed, in EDF/South Western Electricity (May 1999), it was suggested that the geographic market for supply to small customers was likely to remain limited to the distribution areas since: (i) these smaller customers remained protected by price caps at least in the short term, (ii) there was no conclusive evidence showing that these customers were well informed about the identity of competitors, and (iii) no more than 5% of customers in the areas concerned had already changed supplier.361 In later decisions, in 2000 and 2002, in the years following market opening, the Commission, although leaving the issue open, accepted that the geographic market for supply to small customers was in the process of becoming national, as a number of suppliers were operating on a national scale and customer switching was increasing.362 Some regional characteristics however remained, such has price differences and high market shares of incumbent companies within their historic region. In EDF/British Energy (December 2008), the Commission concluded that at retail level, the relevant market comprised the whole of Great Britain (including England, Scotland and Wales but excluding Northern Ireland) as this area is regulated by the same regulator and similar conditions of competition therefore apply.363 This was again confirmed in GDF Suez/International Power ( January 2011) where the Commission found that the markets for generation and wholesale of electricity as well as retail supply of electricity encompass England, Wales and Scotland.364

361 Case M.1606, paragraph 19. The same reasoning was followed in JV.36, paragraph 34, where the market definition was left open. 362 In 2000 in case M.2209, paragraphs 20-21 and later in 2002 in M.2890, paragraph 35. The market definition was again left open later in December 2002 (M.3007). In 2000, approximately 1% of all small customers changed their electricity supplier each month (M.2209, paragraphs 20-21). In 2002, the overall rate of customers having switched suppliers was around 35 % (M.2890, paragraph 35). 363 Cases M.5224, paragraph 88, and before Case M.4517. 364 Case M.5978, paragraph 42.

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1.4.8 Estonia 2.227

Estonia, Latvia, and Lithuania are not connected to the UCTE system and no direct import or export of electricity therefore takes place between these three countries and the rest of the European Union. With interconnection capacities amounting to 66%, Estonia is however strongly interconnected with Lithuania and Latvia. It is therefore not certain whether it would be considered as a separate national market distinct from the two other Baltic countries. As Estonia benefits from a specific derogation enabling it to postpone the implementation of the Electricity Directive and full market opening until 2013, only 10% of the market was however opened at the end of 2004.

1.4.9 Finland 2.228

In IVO/Neste ( June 1998), the view was taken that the relevant geographic market was limited to Finland.365 This was because: (i) imports, although increasing, were still limited to about 10% of total electricity supply in Finland, (ii) there existed relatively significant price differences between Finland and the other Nordic countries, (iii) a cross-border transmission fee was charged by the grid companies, (iv) differences in electricity taxation, environmental policies and back-up capacity requirements existed between Finland and other Nordic countries, (v) interconnection capacity was limited, and (vi) there were bottlenecks in the transmission of electricity between the Nordic countries.366 If confirmed, the reasoning followed in the recent Sydkraft/Graninge decision (October 2003), however implies that, at wholesale level, the Finish market may be larger than national.367

2.229

As regards end customers, following the full liberalisation of the Nordic electricity sector, enabling a customer in any Nordic country to freely choose a supplier from another Nordic country, it was accepted that the market for supply to end users in Finland was at least of national scope if not wider. However, the indication given by the market investigation that no or almost no end-users are supplied by companies outside of their country of residence and that suppliers 365 Case M.931, paragraphs 24-26. 366 Considering Finland’s advanced stage of full liberalisation, as early as 1998, the Commission excluded the existence of wholesale markets of narrower scope than Finland, since wholesale supply of electricity could as yet freely be done on a national basis with no technical constraints arising from congestion issues and as a result the wholesale prices for electricity was homogeneous throughout the country (931,27: ‘even if a producer’s generation capacity is limited to one part of Finland, he can sell throughout the country, since a system of balancing is used to deal with potential bottle-necks in the transmission network’). This was confirmed in M.3268, paragraphs 80-82. 367 Case M.3268, paragraph 27. See below book paragraphs 2.279-2.280.

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have to have a balancing agreement with a balance provider in the customer’s country, led the Commission to reject the parties’ submission that a Nordic enduser market existed, leaving however the final definition of a national or wider than national market open.368

1.4.10 France In EDF/EnBW (February 2001), it was concluded that the geographic market for the supply of eligible customers of electricity was limited to France.369 This finding was based on two main arguments: the limited interconnection capacity between France and neighbouring countries, and the only recent and still limited imports to France. Interconnection capacities represented less than 10%, this situation being, according to the Commission’s finding, unable to evolve in the short term. Imports had only begun recently and the proportion of imports only represented 3% of the electricity consumption of eligible customers. In EDF/EDFT (August 2003), although leaving open the precise geographic scope of the market, the Commission confirmed that the market was likely to be national for the same two reasons, adding that significant price variations between countries and different national regulatory frameworks existed.370 In the EON/Endesa decision of April 2006, the Commission, although leaving the market definition open, stated that, based on the market investigation, the electricity markets in France is likely to be still not wider than national in scope, pointing to lack of available interconnection capacity and price differences between Member States.371 In GDF/Suez (November 2006), it was decided that Belgium was not part of the French market despite important exports from France because of the congestion level.372 More recently, in EDF/Dalkia the scope of the market was again confined to France, due to the limited capacity of interconnectors between neighbouring Member States. Although some respondents in the market investigation indicated a possible market covering France, the Benelux and Germany, the Commission explicitly limited the geographical scope to France.373 368 Case M.3268, paragraphs 80-82. 369 Case M.1853, paragraphs 21-25. The Commission had reached the same conclusion in an earlier Phase I decision M.1557, paragraph 33. 370 Case M.3210, paragraph 11. Reference was made to the import ratio on the overall consumption in France (less than 1%), not on the consumption of eligible consumers as in EDF/ENBW. 371 Case M.4110, paragraphs 20-21. 372 Case M.4180, at paragraph 253. See under Belgium at book paragraphs 2.211-2.213. 373 Case M.7137, paragraphs 38-39.

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1.4.11 Germany 2.233

In VEBA/VIAG ( June 2000), it was excluded that supply of electricity at wholesale level was no wider than Germany in scope.374 As a consequence of the limited interconnection capacities with neighbouring countries only small quantities of electricity could be imported. In addition, interconnector capacities were reserved to a considerable extent to long-term contracts and additional costs were incurred for imports and the use of interconnectors. In a later decision, in E.ON/Fortum ( June 2003), the precise market definition was left open. Reference was however made to the fact that the process of market opening under the EC directives, and the development of exchanges, had not eliminated regulatory barriers to entry; imports of electricity generally remaining of a modest dimension in the EU.375

2.234

In the EON/Endesa decision of April 2006, the Commission, although leaving the market definition open, stated that, based on the market investigation, the electricity market in Germany is likely to be still not wider than national in scope, pointing to lack of available interconnection capacity and price differences between Member States.376 In GDF/Suez (November 2006), the Commission held that congestions from Germany to the Netherlands prevented exports of German electricity to Belgium (see under Belgium). That the wholesale German market was no wider than national was confirmed in more recent decisions377. In particular in RWE/Essent ( June 2009), the Commission based itself on the fact that cross-border flows are still typically congested at all German borders with the exception of the interconnectors with Austria, and there is a different competitive landscape in the countries surrounding Germany. The market investigation has however showed a notable price convergence in the Central West Europe region.378

2.235

At infra-national level, it was accepted in VEBA/VIAG that regional markets no longer exist within Germany at wholesale level and for large customers. The Commission considered that the German wholesale market for the supply of electricity, although still showing strong signs of being regional, was going to develop into a national market in the foreseeable future, and could therefore al-

374 Case M.1673, paragraphs 22-31. The analysis was fully confirmed by the Commission in a subsequent case one year later (M.2349, paragraph 13). 375 Case M.3173, paragraphs 9-10. 376 Case M.4110, paragraphs 20-21. 377 Cases M.5512, paragraph 15; M.5496; M.5467; and M.6540, paragraph 24. 378 Case M.5467, paragraph 235.

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ready be deemed to be national in scope.379 This conclusion was reached despite the fact that: (i) the activity of energy suppliers was still largely limited to their own historic supply areas, (ii) two trading zones existed within Germany leading to the payment of a transmission charge (“T-component”) which arguably was making it difficult for independent electricity traders to operate nationally, (iii) the accounting procedures for balancing energy also made it more difficult for market participants to operate nationally, and (iv) the establishment of the Frankfurt and Leipzig exchanges, on which electricity was to be physically traded nationwide, was not yet functioning. For the Commission as “the initial basic requirements for a national market (were) satisfied”, it was already not accurate to refer to the old regional supply areas as separate geographic markets or even to two trading zones within Germany. On the basis of other decisions, it seems unlikely that the Commission will be so forward-looking when examining whether or how quickly national markets will evolve into regional or European ones. That the wholesale German market (including supply to large customers) was now no smaller than national in scope was confirmed in more recent decisions380. As regards the market for the supply of electricity to small customers in Germany, the Commission recognised in previous decisions381 that competition in Germany is progressively expanding and that this could likely lead to a broadening of the geographic scope of the market for the retail supply of electricity to small customers in the future. It considered however in these recent decisions that there still are specific factors pointing towards a market that is narrower than national in scope, such as (i) the continuing dominance of the municipal utilities (the over 800 Stadtwerke which control the electricity distribution network and still exert a significant influence on the electricity retail supply to small customers) in their municipal area, (ii) overall low and regionally different customer switching rates across Germany, (iii) local marketing strategies focusing on the territorial incumbent, and (iv) different local pricing policy according to the DSO areas. The Commission therefore concluded that there are still strong indications pointing to local electricity retail markets for small customers approximately corresponding to each DSO area in Germany. The Commission considered a similar approach in Dong/KomStrom382 (September 2009) although it left the market definition open.

379 380 381 382

Case M.1673, paragraphs 32-45. The decision was confirmed in case M.2349, paragraph 13. Cases M.5512, paragraph 15, M.5496 and M.5467. See also COMP/39.388. Cases M.5512, paragraphs 17 and 18, M.5496 and M.5467. Case M.5604, paragraphs 8 and 9.

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1.4.12 Greece 2.237

In a decision of August 2008, the Commission considered that the Greek was no wider than national in scope. It also stated that there may be potential smaller markets because as a distinction could be made between the interconnected system (i.e. mainland Greece and interconnected islands) and the non-interconnected system (non-interconnected islands). The precise market definition was left open.383

1.4.13 Hungary 2.238

Due to its central position in Eastern Europe, Hungary is highly interconnected with its neighbouring countries, notably Austria, Slovakia, Ukraine, Romania, Serbia and Croatia (amounting to 38% in 2003). Electricity imports represent a significant share of the national consumption (18% in 2003). The Hungarian market could therefore arguably be considered to be wider than national in scope.

2.239

In the Verbund/Energie Allianz decision ( June 2003), it was however decided that the Hungarian market was not integrated with Austria, because the two markets were not sufficiently integrated in technical and commercial terms. In its Phase II decision E.ON/MOL (December 2005), relating to the acquisition of the Hungarian incumbent company, the Commission made an in depth assessment of the relevance of a geographic market wider than Hungary for electricity wholesale. It concluded that the relevant product market was national for the following reasons.384 Import figures and the interconnection capacities are not entirely relevant for the assessment of the geographic scope of the market. First, Hungary is a transit country and exported quantities amounted to around 40% of imported quantities in 2003. Secondly, the electricity interconnectors with Austria and Slovakia were almost all the time congested. As a result, the influence of imports on the electricity wholesale prices in Hungary could only be limited.

2.240

2.241

2.242

Further, under the Hungarian regulatory framework, electricity traders should set up a Hungarian trading company and obtain a Hungarian trading license to be active on the Hungarian market, and the Hungarian regulatory framework 383 Case M.5249, see also case COMP/38.700. 384 Case M.3696, paragraphs 256-271.

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and market opening rules still remained substantially different from those of neighbouring countries. The Commission, however did not exclude that, in the future, the market for the wholesale supply of electricity to traders in Hungary could acquire a broader geographic dimension.

2.243

The Commission also found that the Hungarian retail supply of electricity to end users was of national scope.385

2.244

1.4.14 Ireland No decisions have so far been adopted in relation to the Irish supply market. With interconnection capacities amounting to about 6% and the historic Irish incumbent holding a 85% market share and not being present in neighbouring Member States, Ireland is likely to be considered to be a separate national market.

2.245

1.4.15 Italy In two decisions in 2001 and 2002, the Italian market for supply of electricity to eligible customers was deemed to be national in scope.386 Interconnection capacities were limited by the fact that about half of available capacity was booked under long term contracts by the Italian incumbent company ENEL. Trade flows with neighbouring countries were also limited, with imports representing 15% of the total electricity consumption in Italy in 2000. In addition, the regulatory framework as well as prices on the Italian market were substantially different (higher) from neighbouring Member States.

2.246

In two further decisions, in 2005 and 2006, the Commission noted that the frequency of splitting of the Italian wholesale market into different pricing zones pointed towards the existence of four distinct zonal markets very frequently isolated because of physical network limitations (North zone, Macro-South zone (covering the zones of Centre North, Centre South and South), Macro-Sicily (covering the geographical zones of Sicily and Calabria) and Sardinia)387 but ultimately left open the exact definition of the geographic market.388

2.247

385 Case M.3696, paragraphs, 272-278. 386 Cases M.2532, paragraphs 34-36 and M.2792, paragraphs 29-31. 387 Sardinia was almost always isolated, the North was isolated 26% of the time, Sicily was isolated 41% of the time and Calabria often isolated from both the South and Sicily. 388 Cases M.4368 and M.3729.

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2.248

In the EON/Endesa decision of April 2006, the Commission, although leaving the market definition open, stated that, based on the market investigation, the electricity market in Italy is likely to be still not wider than national in scope, pointing to lack of available interconnection capacity and price differences between Member States.389

2.249

The specific Italian system for the generation of renewable energy, constituting a separate product market, was also considered to be national in scope as the specific regulated system only existed in Italy, and only companies located within Italy were active.

1.4.16 Latvia 2.250

Estonia, Latvia, and Lithuania are not connected to the UCTE system and no direct import or export of electricity therefore takes place between these three countries and the rest of the European Union. With interconnection capacities amounting to 100%, Latvia is however fully interconnected with Estonia and Lithuania. It is therefore not certain that it would be considered as a separate national market distinct from the two other Baltic countries. At present, however, given the very strong position of the Latvian electricity company at national level and low switching, at least at present the market is likely to be considered to be national in scope.

1.4.17 Lithuania 2.251

As Estonia and Latvia, Lithuania is not connected to the UCTE system, and no direct import or export of electricity therefore takes place between these three countries and the rest of the European Union. With interconnection capacities amounting to 50%, Lithuania is however strongly interconnected with Estonia and Latvia. At present, however, given the very strong position of the Lithuanian electricity companies at national level and low switching, at least at present the market is likely to be considered to be national in scope.

1.4.18 Luxembourg 2.252

No decisions have so far been adopted in relation to Luxembourg. With interconnection capacities amounting to about 90%, Luxembourg is unlikely to be considered to be a separate national market. 389 Case M.4110, paragraphs 20-21. See also more recently cases M.4672 and M.4368

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1.4.19 Malta With no interconnection capacities with the European continent, Malta is likely to be considered to be a separate national market.

2.253

1.4.20 The Netherlands In Electrabel/EPON (February 2000), the Commission came to the conclusion that the generation and supply markets in the Netherlands were no wider than national in scope.390 The import capacity into the Netherlands was limited to some 14% of the total national demand because of limited interconnection capacities. This limited capacity was fully used and a major proportion was booked under long terms contracts. In addition, regulatory constraints were considered to be important. As a result, importers accounted for less than 5% of the national Dutch market.391

2.254

In GDF/Suez (November 2006), it was decided that, despite strong interconnections and trade with the Netherlands, the Belgium market was of national scope. Congestions of the interconnectors from Belgium to the Netherlands by electricity generated in France prevented stronger exports. Higher price of electricity in the Netherlands prevented potential exports to Belgium. Congestions from Germany to the Netherlands also prevented exports of German electricity to Belgium.392

2.255

That the Netherlands electricity markets were probably national in scope was confirmed in October 2009.393 In RWE/Essent ( June 2009),394 however, the Commission considered that for the wholesale market, there could be two possible definitions for the geographic market: either of national scope for all hours, or of national scope for peak hours and an area equal to Germany and the Netherlands for off-peak hours. This was because during off-peak hours imports from Germany exercise a significant competitive pressure on Dutch suppliers because during those hours there is more capacity available on the interconnector with Germany. The argument was also made by respondents of the market testing that wholesale spot prices in the Netherlands and Belgium are the same for a

2.256

390 Case M.1803, paragraphs 17-23. 391 In an earlier case (M.1659, paragraph 9), the Commission had also invoked the fact that the Dutch market was governed by a pooling arrangement (the APX market) which geographic scope was limited to the Netherlands, but left the definition of the market open. 392 Case M.4180. 393 Case M.5519, paragraph 16. See before case M.5467, paragraphs 26-32 and 61. 394 Case M.5467, paragraphs 26-32 and 61.

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considerable percentage of the time and that Belgium is a likely candidate for a common generation and wholesale market with the Netherlands. The parties had also submitted that in view of existing trilateral market coupling between the Netherlands, Belgium and France and the fact that by the end of 2009 market coupling will extend to Germany and Luxembourg, there are indications that the geographic scope of the generation and wholesale market will become wider than national.

2.257

In GDF Suez/International Power ( June 2011)395, the Commission took the same approach as in RWE/Essent. While indicating that the geographical scope is either national for all hours, or national for peak hours and covering the Netherlands and Germany for off-peak hours, the Commission ultimately left this open. No mention was made of a possible move to a wide than national market covering the Benelux and Germany.

1.4.21 Norway396 2.258

As already mentioned, the Commission was still considering in 2001 whether the electricity markets in the Nordic countries could be seen to be essentially national in scope because of the restrictions still applying to cross-border trade.397 In the Sydkraft/Graninge decision (October 2003), it was however suggested that a Nordic market comprising Norway, Sweden, Denmark and Finland could exist, as electricity markets were fully liberalised in all these countries and connected through interconnectors, enabling anyone connected to any part of a national network in any of these countries to buy electricity from anyone else connected to the network.

1.4.22 Poland 2.259

With interconnection capacities amounting to only about 10%, Poland is currently likely to be considered to be a separate national market. In the EON/ Endesa decision (April 2006), the Commission, although leaving the market definition open, stated that, based on the market investigation, the electricity market in Poland is likely to be not wider than national in scope, pointing to lack of available interconnection capacity and price differences between Member States.398 395 396 397 398

Case M.5978, paragraph 34. Norway is not an EU Member State but is part of the European Economic Area (EEA). Case M.2349, paragraph 12. Case M.4110, paragraphs 20-21.

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In KGHM/Tauron Wytwarzanie ( July 2012), the parties also emphasised that all customers in Poland could purchase electricity from a number of suppliers active in the country. At the same time, the Polish electricity network was not sufficiently connected to the network of neighbouring Member States as to enable a wider geographic network and the Commission therefore considered the market as national in scope.399 The retail market is generally considered to be national in scope, in line with the Commission’s decisional practice, as well as that of the Polish competition authority.400

2.260

1.4.23 Portugal In a decision adopted in March 2001, the electricity supply market in Portugal was considered to be no larger than national, in particular because of the limited interconnection capacities limiting imports and exports of electricity between Spain and Portugal.401 The existence of an Iberian electricity market was clearly excluded. More recent decisions concerning Spain show that this finding has not been modified, despite the agreement concluded by Spain and Portugal, in November 2001, calling for the creation of an Iberian electricity market through the progressive convergence of the electrical systems of the two countries.402 The Portuguese electricity market was subject on 9 December 2004 to the first merger control prohibition decision in the energy sector, relating to the planned joint acquisition of the ex-incumbent gas company GDP by the ex-incumbent electric company EDP and the Italian company ENI. The Commission confirmed that the Portuguese electricity market was no wider than national in scope, and in particular, that it was highly unlikely that it will become Iberian in scope in the near future, despite the new agreement on the creation of an Iberian market reached by Spain and Portugal.

2.261

This was again confirmed in 2011, in GDF Suez/International Power where the Commission considered the market for generation and wholesale of electricity in Portugal as national in scope.403

2.262

399 400 401 402 403

Case M.5979, paragraph21. Case M.5979, paragraph31, referring to M.1673, M.1731, M.2947, M.3268, and M.5467. Case M.2340, paragraph 10. Case M.2684, paragraph 25. See under Spain at book paragraphs 2.277-2.278. Case M.5978, paragraph 23.

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1.4.24 Romania 2.263

The Romanian retail supply market is deemed to be national in scope as a result of the liberalisation process.404

2.264

In Romanian Power Exchange,405 the Commission limited the scope of its investigation to practices in the wholesale market in Romania, i.e. the organised framework for the trading of electricity and related services to which the electricity producers, the transmission and system operator, the distribution operators, the electricity market operator and wholesale customers participate, was examined.

1.4.25 Slovakia 2.265

The high interconnection capacity of 37% would suggest that a wider than national market could be or is, in the future, likely to exist. The fact that the leading Slovakian supplier has market shares of around 75% at national level would however strongly indicate that the market structure currently remains national in scope.

2.266

In a decision, the parties submitted that due to the convergence of the different national legislation, which followed the EU accession, and to the high level of interconnection, the geographic scope of the wholesale market should include the Central European countries, Poland, Hungary, Czech Republic and Slovakia. The Commission however considered that some evidences also points towards national markets and left the question open.406

2.267

In a decision of November 2009407, the Commission concluded that the Slovakian market was national in scope. The market test had however indicated that because in 2009 a market coupling was put in place between Slovakia and the Czech Republic, the market could have become wider than national.

2.268

The Commission however considered that market coupling does not in itself mean that markets should be considered wider than national. Three strong indications pointed towards the existence of a no wider than national market.

404 405 406 407

Case M.4841. Case AT.39984, paragraph 31. Case M.3665, paragraph 14. Case M. 5591, paragraph 11.

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First, the liquidity of the Czech and Slovak energy exchanges was still low and trading volumes were not larger than interconnector capacity allocated through market coupling.

2.269

Secondly, the volumes of energy that were subject to market coupling was relatively low as compared to the whole consumption in the Slovak Republic.

2.270

Thirdly, the price differences between the two countries continued to exist.

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1.4.26 Slovenia Slovenia has high interconnection capacities, amounting to about 68%, especially with Austria. In the Verbund/Energie Allianz decision ( June 2003), it was however decided that the Slovenian market was not integrated with Austria, because the two markets were not sufficiently integrated in technical and commercial terms. However, as these issues are dealt with, one may expect the market to widen in the coming years.

2.272

1.4.27 Spain In several decisions, including two phase II investigations, in 2002 and 2001, it was concluded that the supply market in Spain was national in scope.408 Imports to Spain were constrained by the limited interconnection capacity available between Spain and its neighbouring countries France, Portugal and Morocco, representing about 6.6% of the capacity needed at peak demand times. In addition, both the regulatory framework and the structure of supply at wholesale level differed from those of neighbouring countries such as France and Portugal. Finally imports of electricity to Spain were limited.409 The existence of an Iberian electricity market was in particular clearly excluded, even following the agreement concluded by Spain and Portugal in November 2001 for the creation of an Iberian electricity market through the progressive convergence of the electrical systems of the two countries. It was considered that, despite the conclusion of the agreement, the emergence of a truly Iberian market was still going to be prevented, in the coming years, by the limited interconnection capacity available between Spain and Portugal, and was still dependent “on the progressive implementation of a number of successive steps, that include not only technical 408 Cases M.2684, paragraphs 23-26 and M.2434, paragraphs 24-26. See also M.2353; M.2340, paragraph 10 and M.2620, paragraph 7. 409 See Cases M.2434, paragraphs 24-26 and M.2620, paragraph 7. The statement is not made in the more recent M.2684.

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measures on the electrical grids and interconnectors but also the elimination of regulatory and administrative barriers and the harmonisation of the functioning and management methods of the systems’ operators”.410 The Commission’s analysis proved to be right as, initially set to start on January 2003, the Iberian electricity market, MIBEL, was postponed on several occasions and only started in 2007. In ENI/EDP/GDP (December 2004), it was confirmed that no Iberian market existed or was likely to exist in the near future.411

2.274

In the EON/Endesa decision of April 2006, the Commission, although leaving the market definition open, stated that, based on the market investigation, the electricity market in Spain is likely to be still not wider than national in scope, pointing to lack of available interconnection capacity and price differences between Member States412. This analysis was still confirmed in July 2007.413

1.4.28 Sweden 2.275

The Swedish electricity market, including production and supply, was fully liberalised in January 1996. The Nordic exchange market, Nord Pool, and in particular Elspot, the daily market allowing for physical trade of electricity between countries, was also extended to Sweden in 1996. Despite this early market opening the restrictions still applying to cross-border trade of electricity between Nordic countries led the Commission to conclude in two cases, in 1998 and 2001, that the relevant geographic market was limited to Sweden.414 More generally, all electricity markets in the Nordic countries were still considered as remaining essentially national in scope in 2001.415 This finding has now probably been reversed following the abolition of cross-border transmission charges and the suppression of back-up capacity obligations. The Commission concluded in Sydkraft/Graninge (October 2003) that, at wholesale level, the market was likely to be larger than Sweden, although formally leaving the market definition open.416

410 Case M.2684, paragraph 25. 411 See above Portugal at book paragraph 2.265. The precise market definition as regard Spain was left opened in the recent case M.3448, paragraph 21 decision of September 2004. 412 Case M.4110, paragraphs 20-21. This was confirmed in the more recent case M.5171. 413 Case M.4685. 414 Case M.1231, paragraphs 10-11 and M.2349, paragraph 12. 415 Case M.2349, paragraph 12. 416 Case M.3268, paragraph 27. The precise market definition was also left open in the first decision following the abolishment of cross-border transmission charges M.2659, paragraphs 9-11.

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Also in Sydkraft/Graninge, it was accepted that the market for supply to end users in Sweden is at least national in scope if not wider. However, the indication given by the market investigation that no or almost no end-users purchase from suppliers outside of their country of residence, and that suppliers have to have a balancing agreement with a balance provider in the customer’s country led the Commission to reject the parties’ submission that a Nordic end-user market existed at retail level, leaving the definition of a national or wider than national market open.417

2.

2.276

Trading

The precise geographic market definition of the electricity trading market was until recently always left open by the Commission. However, it has been traditionally accepted that the geographic scope of a market for trading in energy products, including electricity, could be wider than national.418 In two more recent decisions it was, however, stated that probably no Community-wide market for energy or electricity trading at least as yet existed.419

2.277

The existence of an EC or even worldwide trading market was often put forward by the companies in merger proceedings, arguing that the essence of trading is to take advantage of differences in prices among different Member States,420 and that it is possible to intervene on any existing exchanges from a unique market.421 In EDF/Louis Dreyfus (September 1999), although accepting that the ongoing market opening plays in favour of the internationalisation of energy trading which has a natural international dimension, it was considered that the existence of a Community-wide market for the trading of electricity was contradicted by the fact that energy trading was strongly dependent on: (i) transport capacities which were generally limited in Europe because of low available interconnection capacities, and (ii) the existence of standard, or at least similar, trading contracts and trading systems. However, in Europe, certain countries have exchanges, others have pools with a single buyer and others do not have an organised system for trading.422 The different trading structure of the Benelux

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417 Case M.3268, paragraphs 80-82. 418 The statement was first made in case M.1557, paragraphs 24-28; see also M.2701, paragraph 8; JV.36, paragraph 35; and JV.28, paragraph 21. 419 Cases M.3210, paragraph 13 and M.1557, paragraphs 24-28. Also see Case AT.39984, where only the Romanian market was assessed. 420 Cases M.3210, paragraph 13 and M.1557, paragraphs 24-28. 421 Case M.1557, paragraphs 24-28. 422 Case M.1557, paragraphs 25-27. The Commission did not provide any indications of its reasoning in another decision M.3210, paragraph 13 concluding identically.

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countries, and especially the different stage of liberalisation and the fact that the Dutch exchange was limited to the Netherlands, was also taken into consideration, in 1999 and 2000, to reject the existence of a Benelux market for physical trade.423 It should be noted that in some decisions concerning physical trading in liberalised markets, trading activities are treated under supply not trade.424

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In GDF/Suez (November 2006), the Commission formally took position and concluded that the Belgium trade market was of national scope, despite the introduction of Belpex, a common spot market between France, Belgium and the Netherlands, and of market coupling between these countries, as it would not suppress congestions in particular at peak hours.425

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As regards financial trading, the existence of supra-national markets has been recognised. Arguably, the scope of financial energy trade could be global as the use of financial instruments by no means requires a local presence. In the Sydkraft/Graninge decision (October 2003), concerning the Nordic financial market Eltermin, which is part of the Nordic spot market Nord Pool, the market investigations showed that the geographic market should not be narrower than the Nord Pool area, i.e. the Nordic countries, the precise market definition however being left open.426 In an earlier decision, in 1999, it was accepted that financial trading in electricity derivatives, at Eltermin, and soon at the Dutch APX exchange, was likely to be wider than national, as no physical settlement or local presence was required.427 The Commission added that “financial trading of electricity derivatives varies little from financial trading in derivatives based in any other commodities”, an analogy could therefore be drawn with the geographic scope of the market for trading in financial derivatives in general, for which indications had shown in earlier decisions that the market was international in scope.428

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In the Dong/Elsam decision (March 2006), the Commission accepted the arguments of the parties that a market for financial derivatives of electricity encompassing the Nord Pool area existed, because trading take place on Nord Pool’s Eltermin. The Commission however made a reservation for special financial

423 JV.28, paragraph 21; and M.1803, paragraph 24 as regard the Dutch exchange. 424 E.g. as regard the activities on the Nordpool market and the recognition of a probable Nordic Market, see M.3268 above at book paragraph 2.202. 425 Case M.4180, paragraph 727. 426 Case M.3268, paragraph 67. 427 JV.28, paragraphs 22-24. 428 Case M.1172.

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product which hedges against the risk of area prices (e.g. Denmark East or Denmark West being different from the Nord Pool system price). The relevant market for these products was deemed to be of East Danish and West Danish dimension respectively, as companies trading in these products were mainly the wholesale suppliers and customers in these price areas.429

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In more recent cases, the Commission admitted that financial electricity trading “ has a potentially EEA geographic scope” without reaching definitive conclusions.430

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3. Facilitating Electricity Trading In 2011, the Commission examined the previously undefined market for the facilitation of wholesale electricity trading.431 The notifying parties had argued that the geographical scope of any relevant market would coincide with that of the market for generation and wholesale supply of electricity, given that electricity trading is inextricably linked to physical availability, production and delivery of contracted electricity to the grid. In that regard, the notifying parties claimed that the market for facilitating electricity trading should be national in scope.432 The Commission recalled that electricity trading involves contracts which specify the network to which the electricity needs to be delivered. In that regard, from a demand-side point of view, contracts for the delivery to different networks can only be substitutable to the extent that they are traded on networks that form part of the same wholesale electricity market. As the latter has been defined as national in scope, the market for electricity trading is also likely to be national in scope. This is further confirmed by the fact that the possibility of supply-side substitutability is low. The Commission’s market investigation showed that entry in different geographical areas is difficult and requires overcoming significant regulatory, organisational and economic barriers. The Commission therefore concluded that there were no grounds to consider a widerthan-national market.433

429 430 431 432 433

Case M.3868, paragraph 268. Case M.5467, paragraph 53; see also cases M.4110 and M.4517. Case M.5911. Case M.5911, paragraph 41. Case M.5911, paragraphs 42-43.

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4.

Transmission and distribution

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Several recent decisions have confirmed that, in principle, transport activities (transmission and distribution) in the electricity sector are natural monopolies in the areas covered, subject to regulated access and control of the network by regulatory authorities.434 In light of this natural monopoly, the geographical scope of the electricity transmission market is at least confined to each transmission operator’s network.435 Thus, in principle, no competition concerns can normally arise from a merger in this sector, in particular from the merging of two networks as no overlaps can occur from the addition of networks.436

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In E.ON/Mol (December 2005) for instance, the Commission stated that as in Hungary, the transmission grid was owned and operated by one company, the electricity transmission market was national in scope.437 In a similar way, at regional level, within the framework of electricity distribution in England and Wales, the Commission has always considered the geographical scope of the electricity distribution markets to be regional, as it was determined by the geographical scope of the licenses under which the companies operate.438 In E.ON/Mol (December 2005), as the six Hungarian electricity distribution grids were owned and operated by the six regional distribution companies, the electricity distribution market was deemed to be sub-national in scope, each of the distribution grid regions constituting a distinct relevant geographic market.439

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434 Case M.5911, paragraph 39. 435 Cases M.3440, paragraph 75; M.5467, paragraph 181; and M.5911, paragraph 45. 436 Cases M.3440, paragraph 75; M.3268, paragraph 75; M.2947, paragraph 27 and M.2340, paragraph 9. This last consideration is relevant as regard merger control, not issues of unilateral abuse of dominant position under Article 82 EC. 437 Case M.3696 at paragraph 253. 438 Case M.1346, paragraph 20; confirmed in JV.36, paragraph 32; M.2679, paragraph 19; M.2675, paragraph 19; M.2890, paragraph 18; M.3306, paragraph 12; M.1949, paragraph 18 and M.2586, paragraph 11. When the electricity industry in England and Wales was privatised, twelve regional electricity companies were established, each inheriting the low-tension distribution network in its defined geographic area. This remained the situation after market opening, so that each local distributor retained sole ownership of its distribution network, access being made available on a fair and non-discriminatory basis. The Commission considered that no possible substitution between networks was possible as, although access to these networks was available to any other electricity supplier selling electricity to customers located in the area covered by a given local distribution network, electricity suppliers wishing to supply electricity to any particular customer have no choice as to who distributes the electricity they supply, and there is no alternative methods by which electricity can be delivered to end-users. In one decision concerning the acquisition of control on two neighbouring areas, the Commission however examined whether the connections between the two areas were sufficient to enable the combined entity to operate as a single system in a wider geographic area; the conclusion was negative (M.2586, paragraph 12). 439 Case M.3696 at paragraph 254, more recently Cases M.4922, M.4685 and M.4841.

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A possible exception may be when a vertically integrated undertaking in one Member State, owning generation, transmission, distribution and sales facilities, purchases a network business in a neighbouring country. See in this respect Part 3 at book paragraph 3.236. This does not, however, change the likely relevant geographic market definition with respect to network assets.

2.288

In three decisions,440 the existence of a separate market relating only to the transmission of electricity involving a cross-border flow was considered. The Commission indicated that the geographic scope of such activity would in principle be limited to the transport of electricity on the respective interconnector line. This is because it is in principle possible for market participants to substitute certain interconnectors when booking interconnector capacity by using others. This would however normally lead to an increase in the number of interconnectors that are necessary to complete the booking path. The Commission concluded that to date, there was no single interconnector which could constitute a direct substitute for another.

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5.

Balancing

In Verbund/Energie Allianz ( June 2003), in relation to the Austrian market, it was stated that, provided the provision of balancing energy was to be considered as a relevant product market,441 the relevant geographic market should be confined to each specific control area concerned.442 As Austria is divided into several control areas, the relevant market was therefore to be limited to the eastern control area, for which Verbund was the responsible control area manager. The Commission based its finding on the fact that, under European transmission grid rules, balancing energy could only be provided in Austria inside each control area. In particular, the minute reserve component in balancing energy, which was considered as a decisive cost component, could not be transmitted over control area borders. This conclusion was reached despite ongoing negotiations on opening up the eastern control area to Germany as the situation was unlikely to change in the short term.

440 Cases M.5467, paragraph 182 to 184; M.4922 and M.5154. 441 See under Product Market at book paragraphs 2.89-2.94. 442 Case M. 2947, paragraph 102.

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In the Sydkraft/Graninge decision (October 2003), concerning the Nordic electricity market, the existence of a balancing market covering all the Nordic countries was suggested by the Commission.443 As all the regulating power sectors of the Nordic countries had been combined in 2002, bids for regulating power in all the countries were available to all Nordic transmission system operators in a common information system.444 Furthermore, the transmission system operators in Norway and Sweden take common decisions to maintain the frequency when the grid is congested. Finally, there was considerable flow of regulating power between the Nordic countries, especially from Norway, accounting for around 50% of the total regulating power market in the Nordic area. In the Dong/Elsam decision (March 2006), concerning Denmark, the Commission however concluded as to the existence of a balancing markets limited to each of the two Danish areas, as the provision of balancing services are dependent on immediate and reliable availability within a certain price area, and the existence of congestion of interconnectors impeded cross-border trade in these services in a considerable number of hours. The market investigation also showed that balancing services traditionally have been sourced from within each price area. The Commission added that “the likelihood of the cooperation between the Nordic TSOs actually leading to a wider geographic market in the foreseeable future is at the very least questionable”.445

2.291

In the ENI/EDP/GDP decision (December 2004), it was stated that the provision balancing services on a competitive basis are even more vulnerable to congestion and dependent on a harmonised market than wholesale markets. The market for balancing services cannot therefore be of wider than national scope if the wholesale market is national.446

2.292

In the E.ON/MOL decision (December 2005), the statement was made that the geographic scope of the market for balancing power was necessarily of no wider than national in scope, as electricity used for system balancing needs to be produced in the country and controlled by the national TSO in accordance with the UCTE regulation (as import and nominations were done for the next day and it is not possible to re-nominate them during the day). In GDF/Suez, the Commission also concluded that for technical reasons, electricity supplied to the balancing market had to be produced in Belgium which therefore con-

443 444 445 446

Case M.3268, paragraphs 52-54. The precise market definition was however left open. NOIS (Nordic Operational Information System). Case M.3868, paragraphs 263-266. Case M.3440, paragraph 178.

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stituted the relevant market.447 In Elia/IFM/50Hertz 448 (May 2010), the Commission left open the geographic market which was considered to be at most national in scope for balancing power but recalled that this cannot be substituted by imported electricity from outside the balancing area. In GDF Suez/International Power ( January 2011), with regard to Great Britain (i.e., England, Wales and Scotland, except the Northern Islands), the Commission referred to GDF/Suez and established that the provision of balancing power takes place on a national market.449 In EDF/Dalkia ( June 2014), with regard to the French market, the Commission also concluded that the market was national in scope, and could possibly even be limited to a certain region or to the region falling under the competent network managers’ regulation scope.450

6.

2.293

Network management and operation and networks services

It has been suggested by the parties in two decisions concerning the UK market that the relevant geographic market for utility network asset management and operation encompassed at least England, Wales and Scotland, since the same conditions of competition applied throughout this area, and would possibly in the future be of wider scope so as to cover the territory of the European Union as the markets develop and the regulatory regimes across Europe converge. The market definition was however left open.451

2.294

In two decisions concerning the UK regarding connection services, it was suggested that the market was in the process of becoming national.452 In the past, regional distribution companies held monopoly positions in their own region so that only local markets could be identified. The market for the supply of new connections, however, was in transition. It had only recently been opened up to competition and it seemed likely that in the future it was to become subject to competition on a national basis.

2.295

In a decision concerning the UK, the geographic scope of both meter operation and meter reading markets was deemed to cover the whole of Great Britain. This was because, for meter operations, the market conditions were homogene-

2.296

447 448 449 450 451 452

Case M.4180, paragraph 733. Case M.5827, paragraph 22. Case M.5978, paragraph 58. Case M.7137, paragraph 41. JV.36, paragraph 29 and M.2679, paragraph 20. Cases M.2679, paragraph 21 and M.2586, paragraph 14.

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2.297

ous and, as regards meter reading, the skills, technology and resources required were identical.453 In another decision, concerning Austria, where a market for “the installation and distribution of devices that are used for the distribution of electricity” was identified, probably including meter operation, the market was considered to be at least of national scope.454 All of these product markets concern the delivery of technical services. Whilst local specification requirements for these services may differ some-what between Member States, these differences are likely to be limited, surmountable and diminishing. If a significant price difference were to exist for these services between Member States, it is unlikely that the difference in technical terms would be so great that the supplier in the low price area would not have an interest in making the necessary investments to enter the higher price market. It is therefore submitted that for these services, the relevant geographic market can rapidly be expected to become wider than national in scope, if it is not already EU wide.

453 Case M.2890, paragraph 27; the issue was left open in the previous decisions M.1949, paragraph 19 and M.2679, paragraph 22. 454 Case M.2513, paragraph 15.

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CHAPTER 4 The relevant product market – Gas 1.

Introduction

In its most recent decisional practice,455 the Commission consistently considers that gas markets can be segmented as follows: i) the production and exploration for natural gas, ii) gas wholesale supply, iii) gas transmission (via high pressure systems), iv) gas distribution (via low pressure systems), v) gas storage, vi) gas trading, vii) gas supply to end customers and viii) the market for infrastructure operations for gas imports.

2.298

Within the gas sector an essential distinction should be made between upstream and downstream activities.456 The upstream gas sector involves four types of commercial activities: (i) exploration, the finding of new reserves, (ii) the development of those reserves (gas platforms, upstream pipelines or terminals (iii) the production and sales upstream from transmission level, the commercial exploitation of those reserves, including the sale of liquefied natural gas (LNG) and (iv) the offshore transportation and processing.

2.299

It is submitted that separate markets exist for (i) the exploration, and (ii) the production and sale of gas.457 It is only recently, in its Centrica case of August

2.300

455 See the reference to this segmentation most recently in 2009 in cases M.5649, para 11, M.5602, para 12, M. 5467, para 100, M.5220, para 13. M.3440 ENI/EDP/GDP, M.3294 EXXONMOBIL/BEB, M.3293 Shell/BEB, M.4180 Gaz de France/ Suez, M.3868 DONG/Elsam/Energi E2. 456 See cases M.1383; M.3080-3075, paragraph 13 and M. 3318, paragraph 14. In M.6984, EPH/Stredoslovenska Energetika, the Commission confirmed the distinction between the upstream and downstream wholesale supply of gas. 457 See cases M.1383, paragraphs 15-17; M.3318, paragraph 14; M.3293, paragraph 11 and M.3294, paragraph 11; also M.3052; M.3086, paragraph 8; M.1673; M.2822 and M.3288, paragraph 9. In previous, older, cases (M.88 and M.1573, paragraphs 9-12), the existence of relevant product markets for exploration, production

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2009 that this was expressly recognised by the Commission.458 The Commission added that no distinction is to be made between the exploration for oil and exploration for natural gas as the contents of underground reservoirs cannot be known at the stage of the exploration.459 On the contrary, as gas and crude oil have different applications and are subject to varying pricing behaviour as well as cost restraints, the Commission concludes that separate product markets exist for the upstream production of crude oil and for the upstream production of natural gas.460 In the Centrica case the Commission also recognised the existence of a market for offshore transportation and processing of natural gas.461 Sale of LNG also constitutes a distinct market.462 In M.6477 BP/Chevron/ENI/Sonango/Total/JV, the Commission confirmed there was a separate market for LNG (wholesale) supplies. In case M.4545 Statoil/Hydro, the Commission found that in countries where import infrastructure for LNG is present (re-gasification terminals, underground gas storage facilities, and international pipelines), LBG provides a direct competitive constraint to gas imported via pipelines.

2.301

The following sections relate to downstream markets. On these markets, gas should be considered as a product market distinct from electricity or other energy sources, as substitutability is very imperfect both from the demand and the supply side point of view.463

458 459

460 461 462 463

and marketing of firstly crude oil and secondly natural gas, was accepted. In the recent case M.3410, paragraph 13 of October 2004, the Commission referred to separate markets for exploration and production; these markets were, however, not concerned by the decision. See recently, the development on upstream trading in Case M.3696, E.ON/Mol, at paragraphs 101-102 and 131-133. Case M.5585, para 8. Case M.5585, para 8, see also case M.1532, para 13-15. Previously, in Exxon / Mobil (1383,16), it was already considered unjustified to make a distinction between exploration for oil and exploration for natural gas for the same reason that “the possible contents of the underground are not known at the time of exploration”. Cases M.5585, para 10 and M.1532, para 14. Cases M.5585, para 12 and M.1532, para 41. The Commission indicated that although the owners of natural gas fields require both transport and processing to be able to market their gas, “clearly pipelines and processing facilities fulfil different functions”. See e.g. case M.1573, paragraph 11. In cases M.493, paragraphs 21-24 and M.568, paragraph 17, referring to the fact that natural gas is used for both domestic applications, such as heating, cooking and hot water, and industrial application, such as production of heat, and, increasingly, the generation of electricity, it was accepted that substitutes existed for each of these usages: for domestic applications, essentially electricity and fuel (the later only for the production of heat and hot water), and for industrial applications, essentially fuel and gasoil, it was considered that this substitutability remained very imperfect because of direct and indirect cost differences. As regard electricity, the Commission stated that it is necessarily more expensive than gas as it is produced from another source of energy, and it is therefore utilized only when the characteristics of heat and the technical process require it. In addition, the Commission referred to structural rigidity to switch for the consumers arising from the fact that each type of energy requires different choices of equipment according to the source

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Within downstream gas markets, distinctions should be made, horizontally, between high calorific value and low calorific value gas, and, vertically, between markets relating to supply, transport and storage, and trading.464

2.

High and low calorific value gas

Originally discovered in the Netherlands’ Groningen gas field, low calorific value (LCV) gas has a lower energy value than high calorific value (HCV) gas as it contains more inert nitrogen.465 Several Commission decisions therefore sought to distinguish, within an overall natural gas market, submarkets for HCV and LCV gas.466 The distinction can only arise in countries that have dual production or supply: mainly the Netherlands and Northwest Germany, part of Belgium and the northern part of France.467 Despite their different calorific value, it has never been contested that HCV and LCV gas could have the same usage from the demand side. For the supply side, however, because of their different specifications, HCV and LCV gas necessarily use different transmission and distribution networks, as well as different underground storage facilities. Burners used by final consumers cannot also use either for LCV and HCV gas without adaptation.468

2.302

In the Exxon/Mobil decision (September 1999),469 an in depth analysis of the substitutability of LCV gas by HCV gas in relation to the German gas supply market was carried out. It was concluded that a relative price increase of LCV gas of between 5 to 10% would be unprofitable as LCV gas consumers in the relevant German area could switch to HCV gas. Therefore, LCV gas did not constitute a separate product market. The following elements were taken into

2.303

464 465 466 467 468 469

of energy chosen. Finally, from a supply-side point of view, the Commission considered that every source of energy presents some different requirements as far as production, storage and transport are concerned, which requires specific and important investments. See also the recognition of electricity as a distinct product market, at book paragraph 2.14. See e.g. recently cases M.3410, paragraph 13; M.3318, paragraph 14; M.3080-3075, paragraph 13; or earlier M.493, paragraph 29. The Commission often refers to the fact that each of these activities involves “specific technical knowledge and different infrastructures”. LCV gas is defined in Commission s decisions as having a Wobbe Index of up to 13 kWh/m³. Contrary to LCV gas coming from the Netherlands, HCV gas is supplied in Europe by the UK, Norway, Algeria and Russia. Cases M.1573, paragraph 10; M.1383, paragraphs 112-133; M.3075 to M.3080, paragraphs 14-15; M.3318, paragraphs 15-18; M.3297, paragraphs 12 and 22 and M.3410, paragraphs 16 and 22. For Belgium, the provinces of Antwerp and Limburg. For France, the administrative regions of Nord-Pas de Calais and Picardie. See case M.1383, paragraph 114. Case M.1383, paragraphs 112-133.

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account. First, it would be economically feasible for transmission and storage companies to switch to HCV gas. As regards storage, the conversion to HCV gas was more difficult than for the transport network, but could be made faster and more economically by blending gas, i.e. by adding LCV gas to HCV gas, to obtain a HCV gas of lower calorific value but within the HCV gas range, or vice versa. Secondly, most industrial customers and power generators could also switch from LCV gas to HCV gas as switching costs were low compared to their annual gas bill.470 In the same way, it was considered to be economically feasible for households to switch from LCV to HCV, as the costs involved could be absorbed by the suppliers within two to four years. Thirdly, alternative HCV gas supplies were available in the relevant area by a competitor: both large customers and retailers had therefore de facto the possibility to switch their demand to HCV gas. Finally, for the Commission, sooner or later the LCV gas chain had to be converted into HCV gas (given that LCV gas reserves were likely to dry up in the forthcoming decades), and a price increase of LCV gas was only likely to speed up this conversion.

2.304

The finding that LCV gas could be substituted for HCV gas was strongly put into doubt by subsequent decisions, even in those cases concerning markets where both HCV and LCV gas is available. In two decisions concerning Belgium,471 although leaving the precise market definition open, the Commission concluded from its market survey that HCV and LCV gas were likely to be part of two distinct product markets as (i) the market conditions were significantly different for the two types of gas, in particular as the spot market and the hub only covered HCV gas, (ii) the possibilities of converting LCV into HCV gas were very limited, and (iii) contrary to the Commission’s finding in Exxon/ Mobil, it would not be economically viable for competitors to built a HCV gas network or to convert equipment. A HCV gas network could therefore not rapidly replace the LCV network.

2.305

This distinction between HCV and LCV gas was confirmed for the Belgian and French markets in GDF/Suez (November 2006).472 The market survey clearly showed that the qualities of the two gas types could not be substituted; highlighting the fact that for certain manufacturing process in the chemical industry only HCV gas could be used. According to a study by the Belgian energy regulator, the cost of converting equipment was prohibitive both on the supply and 470 In particular, it was accepted that “ it would be economically feasible for an important industrial consumer or power generator to have a new specifically dedicated pipeline built linking the customer to a nearby (up to 50 km at most) HCV high-pressure pipeline” (paragraph 121). 471 Cases M.3075 to M.3080, paragraphs 14-15 and M.3318, paragraphs 15-18. 472 Case M.4180, paragraphs 64 to 69 for Belgium and 344 to 345 for France.

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the demand side. Moreover, clients connected to the distribution network are dependent on the network operator decision to switch to another gas. It is unclear that Exxon/Mobil can be reconciled with GDF/Suez. One difference could be that alternative supply of LCV or HCV gas was more easily available in Germany than in France or Belgium. Other elements of the Commission’s reasoning, such as the cost of converting equipment however, are not necessarily convincing.

2.306

In the RWE/Essent decision of June 2009 concerning the German natural gas market, the Commission departed from its analysis in Exxon/Mobil and established a distinction between LCV and HCV gas at both the wholesale and retail supply levels.473 The Commission rejected RWE’s argumentation that substitution was made easy by the existence in Germany of five quality converter stations. On the contrary, the majority of the respondents to the Commission’s market study were of the view that the characteristics, storage and delivery of HCV and LCV gas are different. While it is technically possible to switch from LCV to HCV gas, this process is considered by market players to be expensive, relatively time-consuming, and difficult since conversion facilities are booked on a market where the liquidity of LCV gas is low.

2.307

Nevertheless, in M.6910 Gazprom/Wintershall/Target Companies, the Commission found that in Germany, while some factors limited the interchangeability of HCV gas and LCV gas, and that there were also indications of the presence of some technical constraints that could limit interchangeability, and while leaving open the question as to whether they form a single product market, the Commission pointed out that the two types of gas are likely to be part of the same product market by 2016 given that:

2.308

–

technical gas conversion was already occurring at converter stations on the Dutch-German border (by the Dutch transmission system operator), and in the NetConnect Germany market area;

–

virtual conversion also occurred between the two gas types in GASPOOL and NetConnect Germany;

473 Case M. 5467, para 329 (wholesale) and para 370-371 (retail). In the same decision, the Commission left open the same question for the Dutch market noting however that both gas qualities could possibly be seen as part of the same market as the quality conversion cost were to be fully socialised in the near future. Large customers however strongly argued that two separate markets had to be recognised (para 140-143). See also the development on the Dutch market in Case M.3297, paragraph 12., and to the German and Dutch markets in the recent M.3410, paragraphs 16 and 22.

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2.309

–

declining LCV gas production; and

–

the socialisation of the German conversion fee in 2016 into the standard transmission fee charged to all operators.

Interestingly, the BundesKartellamt also found LCV and HCV gas to be part of the same relevant product markets in Germany in 2012.474

3. 2.310

Gas supply

The main distinctions within the gas supply market focuses on the wholesale and end-supply markets.

3.1 Wholesale market 2.311

The main issues addressed by the Commission in relation to the wholesale supply market concern the precise scope of the market and possible subdivisions within this market.

3.1.1 Scope of the wholesale market 2.312

The wholesale market normally includes supply to resellers. The main issue is the inclusion of very large end users within the wholesale market. In the gas sector, this includes not only large industrial customers but also gas fired power plants. Like retailers, these customers normally have buying power and are directly connected to the high pressure network.

2.313

Referring to the transportation network level as the main differentiating criteria, a distinction between wholesale and retail markets has been made based on earlier cases which noted that at wholesale level, gas is supplied via high-pressure transmission pipelines to industrial customers, power generators and local distribution companies, whereas at retail level, local gas companies supply gas to final consumers, such as business customers and households, through the lowpressure distribution pipelines.475

474 BKartA B8-116/11 Gazprom/VNG 31 January 2012. 475 Cases M.1383, paragraph 70; M.1673, paragraphs 180-183; M.2822, paragraphs 14-15; see also M.3294, paragraph 13.

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In more recent cases concerning Belgium, it was similarly suggested that a distinction could be made between eligible customers connected to the transmission network, such as suppliers, large consumers and electricity producers, and customers connected to the distribution network.

2.314

For the Commission, the distinction was strengthened by the fact that each of the two networks was operated by different entities and had different dominant suppliers.476

2.315

More recently, in Total/Gas de France (October 2004), a distinction was suggested between a wholesale market for supply to retailers, such as municipalities, on the one hand, and supply to final eligible customers, composed of industrial and commercial customers, on the other hand.477 Reference was made to the specific needs of retailers on the upstream supply market, because of the public service obligations relating to security of supply and the strong seasonal swing in demand involved in the supply to non eligible household customers.

2.316

Three recent Phase II cases and one important Phase I case have indicated that the markets for industrial customers and gas fired power plants should in principle be distinguished from both supply to resellers and smaller customers478.

2.317

In the ENI/EDP/GDP decision (December 2004), the Commission strongly rejected the parties’ submission that supply to large end-customers was part of a wider market including supply to retailers (which were local distributors), based on the fact that retailers have different supply and commercial needs and use different types of contracts and flexibility tools.479 The Commission highlighted the fact that bigger customers were significantly different in terms of “consumption, margins, tariffs and prices, commercial relationships/organisation of sales force and specific needs”.480

2.318

In DONG/Elsam (March 2006), the wholesale market was expressly defined as comprising “transactions between traders/resellers and not between a trader/sup-

2.319

476 Case M.3075-3080, paragraph 16; M.3318, paragraph 19; see also, concerning the Dutch market, the reference to a wholesale market in M.3297, paragraph 7. In a more recent case, The Commission however dismissed a distinction based on connection to the transmission network or to a distribution network, as traders compete to gain customers connected both to the transmission and distribution networks, and there are also large customers connected to the distribution networks (Eon/Mol 95). 477 Case M.3410, paragraph 21. 478 As regards smaller customers, see below at book paragraph 2.344. 479 Case M.3440, paragraphs 217-270. 480 Case M.3440, paragraphs 215-216.

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plier and an end customer”.481 The Commission however included sales to the major “central” power plants within the wholesale market, but only to the extent that they take over at least some of the services regularly provided by a supplier or intend to resell the gas. In this regard, the Commission listed the specific elements of retail supply: (i) the management of a supply portfolio; (ii) the booking and management of storage capacity and balancing requirements; (iii) the booking of transport “to the power plant gate” in order to meet a power plant’s exact demand on time, and (iv) the management of the associated risks. Apart from this exception, it was considered that supply of natural gas to large power plants constitutes a separate market from the market for the wholesale supply of natural gas, although with mutually low entry barriers. The Commission however added that, given the process of liberalisation, large power plants may at some point expand their activities into the wholesale market, “at which point a separate market for the retail supply to central CHPs would disappear”.

2.320

In GDF/Suez (November 2006), in relation to the French market, the Commission distinguished the market for trading on the Zeebrugge hub from supply to large customers, on the basis that the latter implies contracts of fixed duration and delivery at a certain point, whereas the former implies an immediate transaction with the hub as a delivery point.482

2.321

In the RWE/Essent decision of June 2009 concerning the German natural gas market, the Commission distinguished within the retail supply of gas market, retail gas supply to electricity power plants on the one hand, and retail gas supply to large industrial customers on the other hand from retail gas supply to small customers.483 The Commission retained these product market definitions in ENI484 (a 2010 Article 102 case) and in Centrica/Bord Gais Energy485 (2014) held there were distinct markets for the retail supply of gas consisting of: (i) the retail supply of gas to gas-fired electricity plants, while acknowledging that depending on their technical characteristics, some types of power plant may be within the market for industrial customers, (ii) the retail supply of gas to large industrial customers, and (iii) the retail supply of gas to small customers.

2.322

In its Statement of Objections in ENI, the Commission distinguished between markets for gas sales to wholesalers and to final consumers. The Statement of Objections distinguished three separate markets within the market for final 481 482 483 484 485

Case M.3868, paragraph 71. Case M.4180, paragraph 72. Case M. 5467, para 367. COMP/39.315. Case M.7228.

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consumers: supplies of natural gas to (i) power plants, (ii) (large) industrial consumers, and (iii) small customers (households and commercial customers).

3.1.2 Trading markets and hubs As in the electricity sector, a gas trading industry is rapidly developing in Europe. Trading markets, including gas hubs,486 start being identified as these markets develop. In the past it was traditionally recognised as a distinct product market487 but only expressly recognised and examined as such in more recent cases.

2.323

In E.ON/MOL (December 2005), a distinction was made between an emergent trading market and supply to local distributors. The distinction resulted from the regulatory framework: the public utility wholesaler has the exclusive right to supply the distributors for the sales to non-eligible residential customers and eligible customers that have not switched to alternative suppliers. The Commission noted that the market for the supply of gas to regional distributors would cease to exist as a separate market from the market for the supply of gas to traders at the latest in July 2007 when all customers will become eligible.488

2.324

In GDF/Suez (November 2006), as regards the French market, the Commission distinguished the market for trading on the Zeebrugge hub from supply to other retailers on the basis that, on the former, all actors act as both buyers and sellers.489

2.325

In ENI/Distrigaz (October 2008), the Commission has also considered whether the trading of natural gas on hubs constitutes a product market distinct from the wholesale supply market. In this context, the Commission defined a gas hub as an instrument which facilitates exchanges of gas amongst market players in order to allow buyers and sellers to find sufficient volume for supply or demand exceeding the capacities in the short term. For the Commission, the hub can be either physical in nature or a virtual trading point.490

2.326

486 A gas hub can be defined as an instrument which facilitates exchanges of gas among market players in order to allow buyers and sellers to find sufficient volumes for supply or to sell exceeding their capacities in the short term. It can be either physical in nature or a virtual trading point. 487 See recently cases M.3410, paragraph 13; M.3318, paragraph 14 and M.3080-3075, paragraph 13. In case M.3306, paragraph 10, the parties to the concentration had overlapping activities in “gas trading”, the market was however not affected by the transaction. The argument was made by the parties in M.2801, paragraph 23 and M.3410, paragraph 21 that trading of gas in Belgium was part of the wholesale market. See the developments on trading in the electricity sector at book paragraphs 2.62-2.82. 488 At paragraphs 101-106. 489 At paragraph 72. 490 Case M.5220, para 21.

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2.327

In RWE/Essent ( June 2009), the Commission looked at whether the Dutch TTF hub constituted a separate market. It ultimately left the question open but indicated that a number of elements suggested that it did not constitute a separate market as claimed. First, in an earlier decision, Nuon/Essent, the Dutch authorities found no reason to consider the TTF trade as a separate market, notably because (i) accession to TTF is relatively simple for market parties that whish to operate as shippers and (ii) suppliers of gas via bilateral contracts that do not trade via TTF also have the possibility to trade via this market place. Thus the NMa concluded that it was sufficiently plausible that the trade on TTF was already disciplined by the bilateral trade. Secondly, a vast majority of gas competitors questioned during the market investigation took the view that prices of gas traded on the TTF are close to prices of gas purchased by other means at wholesale level in the Netherlands, and that gas trading on the TTF is part of the Dutch wholesale market.

3.1.3 Submarkets within the wholesale market 2.328

Historically, in Germany, there were two levels of gas wholesale companies.491 This led, in Exxon/Mobil (September 1999) and VEBA/VIAG ( June 2000), to the recognition of two distinct wholesale markets in this country: the “longdistance” wholesale market and the “short-distance” regional wholesale market.492 In these decisions, this horizontal distinction within wholesale was key to the finding of the creation or strengthening of a dominant position. For the Commission, “ long-distance” wholesale was characterised by the import of large quantities of gas from producing countries, and the need therefore to have long term supply contracts with producers and the installations required for long-distance transport, as well as specific services to customers in particular as regards storage. The existence of a regional wholesale gas market in Germany, distinct from “ long distance” wholesale, was confirmed in a more recent case, in 2002, on the basis that large commercial customers and municipality-owned utilities tended to conclude supply contracts with gas wholesalers active in their respective regions.493 In 2003 however, the distinction, which was strongly doubted by the notifying parties as a result of market liberalisation, was left open by the

491 Large wholesale operators sell gas that they have imported directly from foreign producers and transport it over high pressure pipelines to the regional wholesalers or directly to certain large end-customers such as large business users and electricity generators; regional supply companies, which use short-distance medium and low pressure transmission pipelines, sell to local distributors and to certain end customers. 492 Case M.1383, confirmed in M.1673, paragraphs 180-184. 493 Case M.2822, paragraphs 13-15; see also M.2791, paragraph 11.

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Commission.494 The distinction, in relation to the German market, was however confirmed more recently in the RWE/Essent decision of June 2009495 in which the Commission has distinguished between a market for sales to regional resale companies (long-distance wholesale supply) and to municipal utilities – “Stadtwerke” (short-distance wholesale supply). In Gazprom/Wintershall/Target Companies, while leaving the market definition open, the Commission acknowledged that “some indications” in the market investigation pointed towards the existence of one overall wholesale gas supply market in Germany, on which both producers and non-producers compete.496 It noted that the vast majority of relevant market investigation respondents indicated there was no longer a distinction between (i) supra-regional wholesale supply to regional wholesalers, and (ii) supra-regional wholesale supply to distributors, following market liberalisation.

3.2 End (retail) customers Large and small customers have different consumption profiles, face different transport costs and pay different prices for their supplies.497 In line with the electricity sector, distinctions according to the size of customers were therefore often envisaged within the gas supply market.

2.329

In all decisions predating ENI/EDP/GDP, the precise product market definition had always been left open since no competition issues could be identified in all possible product market definitions envisaged. The existence of important price differentials between different categories of customer, even those with identical consumption profiles, was highlighted. For the Commission, this was mainly because prices are traditionally based on the alternative energy source to which the customer can switch: heating oil for households, heavy fuel for industrial users and, to a certain extent, nuclear energy or coal for power generators. Reference was also made to qualitative differences in supply arising from different consumption profiles and requirements.

2.330

494 Case M.3294, paragraphs 13-14; the parties wee arguing that short-distance wholesalers increasingly have a choice to contract their own imports, or to buy local production, being able to re-formulate their purchase decisions in case long-distance wholesalers were to increase prices, (and) there are no significant either entry or exit barriers for importing gas into Germany, as it is possible to negotiate access to any infrastructure needed for delivery under third-party access rules. 495 Case M. 5467, paragraph 329; see also in 2007 the recognition of these markets in M.4890, paragraph 11. 496 Case M.6910, paragraph 94. 497 Cases M.1383, paragraphs 51-53; M.3096, paragraphs 10-11; M.3007, paragraphs 17-18; M.3294-5, paragraph 15; M.3306, paragraph 11; and M.3410, paragraph 22. See the rejection of the price criteria in E.ON/ MOL, M.3696, paragraph 96.

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2.331

2.332

2.333

2.334

Electricity generators, for instance, have a high consumption pattern and lengthy supply contracts. Large industrial customers can accept interruptions to their supply in return for lower prices. As a consequence, for the Commission, in order to expand supply to a different category, it would be necessary to develop appropriate skills and competencies. As regards different types of customers, a distinction between “ large business users” or “ industrial customers”, and small household and commercial customers was suggested in Germany.498 In England and Wales, based on the historic timing of market opening to competition, in several cases a distinction between three segments within the gas supply market was also suggested: (i) domestic customers, (ii) small industrial customers, and (iii) large industrial customers.499 Reference was made to the fact that the above segmentation was generally used within the industry. In the same vein, it was envisaged in England and Wales and in Germany that supply of gas to electricity generators was a distinct market.500 In France, a distinction in relation to client activities, especially as regards electricity producers and industrial customers, was also put forward.501 A distinction between the distinguishing supply of gas on an interruptible basis and the supply on a non-interruptible basis has also been suggested,502 although interestingly, this distinction has so far not been made in the electricity sector. In four recent Phase II cases, ENI/EDP/GDP (December 2004), E.ON/Mol (December 2005), DONG/Elsam (March 2006) and GDF/Suez (November 2006),503 the Commission recognised distinct markets among end-customers, in Belgium, France, Portugal, Denmark and Hungary, for (i) power plants, (ii) industrial customers, (iii) small industrial and commercial customers and, (iv) possibly, domestic customers. The Commission highlighted the strong differences between these categories of customer as regards supply needs and commercial behaviour. In EPH/Stredoslovenska Energetika, the Commission’s market investigation confirmed that the market for the retail supply of gas could 498 Case M.3294-5, paragraph 15, see also the reference to a possible distinction between large and small customers in M.3268, paragraph 99 concerning Sweden and Finland; M.3086 concerning France; and M.3297, paragraph 11 concerning the Netherlands. 499 Cases M.3306, paragraph 11; M.3096, paragraphs 10-11; and M.3007, paragraphs 17-18. 500 Case M.3294-5, paragraph 15 in relation to Germany and M.3096, paragraph 11 in relation to England & Wales. 501 Case M.3410, paragraph 22. 502 Cases M.3294-5, paragraph 15; M.3306, paragraph 11; M.3096, paragraphs 10-11; M.3007, paragraphs 17-18 and M.3410, paragraph 22. 503 Cases M.3440, M.3696, M.3868, and M.4180.

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be segmented based on customer type.504 In ENI (Article 102), the Statement of Objections distinguished between markets for gas sales to wholesalers (that is, suppliers intending to resell gas to other wholesalers or downstream suppliers) and to final consumers. The Statement of Objections also distinguished between three separate markets within the market for final customers: supplies of natural gas to (i) power plants, (ii) large industrial customers, and (iii) small customers (households and commercial customers).

3.2.1 Power plants and large industrial customers Power plants were identified as a separate market within the end customer market, especially from other large industrial customers, in all the recent Phase II decisions. As indicated above, markets for gas fired power plants should also be distinguished from supply to resellers within the wholesale market.505

2.335

In E.ON/Mol, and GDF/Suez, for instance, the Commission made the distinction between the supply of gas to power plants and other large industrial customers on the basis of different consumption patterns (quantities and consumption profile), supply conditions, flexibility, needs, and marketing approach from gas suppliers. In GDF/Suez, the stronger seasonal variation of demand for power plants, and the direct connection to the transport network, were also highlighted. In DONG/ Elsam, the Commission focused on the fact that prices paid by central power plants are significantly below prices paid by large industrial customers.

2.336

In the ENI/EDP/GDP decision, the Commission strongly rejected the parties’ submission that a single market for supply to big end-customers included both power plants and large industrial customers.506 The Commission highlighted the differences in terms of supply needs and consumption patterns, as well as type, duration and flexibility provisions of contracts, and customer relationship.

2.337

The distinction is, however, not an absolute one. In E.ON/Mol,507 small power plants were considered part of the large industrial customers market. In DONG/ Elsam, this was left open. Subdistinctions can be made within the power plant market. In DONG/Elsam, the Commission concluded as to the existence of different product markets for

2.338

504 505 506 507

Case M.6984 See book paragraph 2.230. Case M.3440, paragraphs 217-270. Case M.3696, at paragraphs 100-124.

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supply to central and decentralised power plants (both consisting of combined heat and power plants producing both heat and electricity). For the Commission, decentralised power plants only had a limited degree of flexibility to switch between heat and electricity production as they could not “switch off ” heat production while producing electricity. In addition, central power plants consumed much larger amounts of gas, the seasonal consumption patterns of central and decentralised power plants varied significantly, and they used different types of contracts and had different pricing conditions.

3.2.2 Small business customers 2.340

In DONG/Elsam (March 2006), for instance, the Commission considered that small business customers did not belong to the same product market as large business customers and power plants, as prices, marketing and distribution channels, costs and market structure, switching rates and price sensitivity of customers are substantially different. The Commission highlighted the fact that large industrial customers and small business customers also had different demand patterns: large industrial customers have a rather flat and stable demand subject to little seasonal variation, whereas the demands of small business customers mostly follow heating requirements. The Commission added that metering requirements did not exist for small business customers.

2.341

In E.ON/Mol (December 2005),508 the Commission similarly highlighted the differences in terms of consumption patterns (quantities and consumption profile), supply conditions, flexibility needs, and marketing approach from gas suppliers.

3.2.3 Domestic customers 2.342

The existence of a separate market for domestic customers distinct from small business customers was left open by the Commission in E.ON/Mol and DONG/ Elsam. In GDF/Suez, the Commission identified a market for domestic customers on the basis of the different timing of market opening.

2.343

In the past, as for electricity markets,509 and in line with the distinction adopted by the EC Directives in relation to end customers, the opening of gas markets in Europe led to an distinction being made between eligible and non eligible customers, as the former were free to choose their supplier, whereas the latter 508 Case M.3696, at paragraphs 100-124. 509 See the same distinction for electricity at book paragraphs 2.35-2.37.

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were supplied by a national or local monopoly.510 The competition assessment therefore normally focused on supply to eligible customers.511 In ENI/EDP/ GDP and GDF/Suez (for Belgium but not for France), the Commission however considered that it should assess the foreseeable effect of a concentration on markets that would be opened up to competition in the following years following a clear and binding timetable imposed by the Gas Directive.512 Markets for all domestic customers were due to be liberalised under EC law as from July 2007 so that this distinction would no longer be relevant.513 However, under the legal framework of some Member States, such as France, Spain and Portugal, there are “regulated” eligible customers, i.e. customers that are eligible to switch but remain under the pre-market opening regulated framework until they opt to join the free market.

3.2.4 Regulated and open segments of the market In E.ON/MOL, the Commission rejected any distinction between the regulated and open segments of the market, on the basis that eligible customers can easily switch back and forth between the free and the regulated (i.e. customers that have not opted for the liberalised market and are supplied by the incumbent) segments of the market, and switching does not entail any significant costs or time for eligible customers.514

2.344

In GDF/Suez, the Commission took the reverse approach, taking into account only the market for eligible clients who had exercised their switching rights under French law.515 This can be explained by the fact that, in France, customers could not return to the regulated market.

2.345

510 See Volume I, EU Energy Law. All non-households had to be open to competition on 1st July 2004. All households must be open to competition by 1st July 2007. 511 See cases M.1383, paragraph 54; M.3075-3080, paragraph 16; M.3318, paragraph 19 in relation to Belgium; M.3410, paragraph 20 and M.3086, paragraphs 11&25 in relation to France. See also the recognition of a market for the supply of gas to non eligible household customers in Belgium (M.493, paragraph 30). 512 Case M.3440, paragraphs 210-214; case M.4180, paragraphs 85 (Belgium). and 340-343 (France). 513 Finland, Latvia, Greece and Portugal however have been granted derogations from market opening (see Volume I, at Chapter 11). 514 Case M.3696, paragraph 94. 515 Case M.4180, paragraph 353.

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4.

Gas transportation

2.346

The existence of a distinct market for gas transportation has traditionally been recognised516 by the Commission. In line with the electricity sector and following the approach of the EC internal market Directives, in recent decisions, a further distinction was made between transmission, and distribution.517 The definitions of transmission and distribution generally used conforms to the definition of the Gas Directive: “transmission” is defined as “the transport of natural gas through a high pressure pipeline network other than an upstream pipeline network with a view to its delivery to customers, but not including supply”; and “ distribution” as “the transport of natural gas through local or regional pipeline networks with a view to its delivery to customers, but not including supply”.518

2.347

Following market liberalisation, and the implementation of unbundling and third party access to networks, it should be noted that transmission and distribution only concern transport services, and not supply.

2.348

In E.ON/Mol (December 2005), it was noted that both the transmission and distribution of gas constitute a natural monopoly.519 In GDF/Suez (November 2006), it was not considered as a relevant market on the basis that gas transportation is subject to a regulatory monopoly.520

5. 2.349

Distribution

In ENI, the Statement of Objections distinguished between high pressure transmission networks and low pressure transmission networks, given that competitive conditions significantly differ between the two.

516 Cases M.493, paragraph 29; M.1383, paragraph 69; M.3294, paragraph 11; M.3306, paragraph 10; M.3318, paragraph 14 and M.3080-3075, paragraph 13. 517 Cases M.3318, paragraph 14 and M.3080-3075, paragraph 13 for Belgium; M.3410, paragraph 15 for France; and M.3696, paragraphs 97 and 98 for Hungary. 518 Articles 2(3) and 2(5). 519 Case M.3696, paragraphs 97 and 98. 520 Case M.4180, paragraph 58.

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6.

Gas storage

Gas demand varies both seasonally and within individual days or weeks. To cope with these variations, gas companies require a considerable amount of flexibility. The transmission system operators also require flexibility in order to balance imbalances of supply and demand within the network and to cope with emergency situations. The most important flexibility tool is gas storage, allowing for gas to be stored when supplies exceed demand and to be withdrawn when demand exceeds supply. It also contributes to the balancing of the gas network and ensuring security of supply.

2.350

6.1 Gas storage and gas flexibility In earlier decisions, the Commission found that gas storage constitutes a separate product market.521

2.351

Other flexibility tools are arguably substitutes for storage: interruptibility or other modulation of customers’ demand, flexible supply contracts, flexible trading in gas hubs or bilaterally, and line-packs (a method of storing gas in the transport pipelines by increasing or decreasing the gas pressure in those pipelines).

2.352

In recent decisions, especially the Total/GDF decision and the Phase II DONG/ Elsam decision of March 2006, the Commission looked at the question of the substitutability of gas storage with these other flexibility tools.

2.353

In the Total/GDF decision, it concluded that other flexibility tools such as flexible or interruptible supply contracts cannot sufficiently fulfil the same functions as physical storage, confirming that storage should be seen as a distinct product market.522

2.354

In DONG/Elsam, the Commission looked in more details at the question of the substitutability of gas storage with these other flexibility tools in relation to the Danish market. Although it left the issue open, it stated that the market investigation confirmed flexible supply contracts that they may be considered as fairly good substitutes for physical storage, provided they are available to all customers and offer a high degree of flexibility.

2.355

521 Case M.1383, Exxon/Mobil, and M.3410, Total/GdF. 522 Paragraphs 67 and 68.

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2.356

With respect to modulation of customers’ demand, the Commission considered that flexible consumption by power plants is an important actual and potential means of achieving flexibility and therefore also constituted a close substitute for storage both for seasonal and short-term flexibility and emergency supply. Because power plants accounted for a very large part of the Danish overall consumption (approximately 20-25%), any demand shift therefore had an impact on the overall demand of gas.

2.357

Because prohibitive payments to the transmission system operator were due if the daily imbalances exceeded a certain threshold, line-pack storage was considered to be insufficiently flexible, even for short-term demand variations, as soon as these exceed the duration of one day. It therefore did not constitute, for the Commission, a relevant alternative to storage in physical storage facilities. Flexible trading at gas hubs or bilaterally was also not a viable flexible storage alternative, as there was very little flexible trading in Danish hubs, and Danish customers generally considered other hubs too remote for flexibility purposes. The Commission however left open the possibility that in the future, flexible trading could form part of a wider storage/flexibility market.

6.2 HCV and LCV gas storage 2.358

The Commission has historically considered distinguishing between storage facilities suitable for HCV gas and storage facilities suitable for LCV gas, while leaving the question open.

2.359

In Gazprom/Wintershall/Target Companies (2013), the Commission stated that the market investigation had provided indications that in Austria and Germany, the interchangeability of HCV gas storage facilities and LCV gas storage facilities followed “the existing degree of interchangeability” between HCV and LCV gas. The Commission noted that the majority of respondents to the market investigation believed that both HCV and LCV gas storage facilities would belong to the same relevant product market in the absence of the existing conversion fee for conversion between HCV gas and LCV gas. As this conversion fee is due to be incorporated into the general transmission (entry/exit) tariff charged to all operators in 2016 and therefore cease to exist, the Commission acknowledged that at least in Germany, both HCV and LCV gas storage facilities may belong to the same relevant product market in the near future.

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6.3 Pore and cavern storage The storage market for natural gas has also been considered to be capable of being subdivided into pore and cavern storage: pore storage is especially well suited for changes in seasonal demand as well as for the storage of high volumes of gas. Cavern storage is better suited for rapid changes in local demand because gas can be injected and withdrawn more rapidly.523 This issue was, however, always left open as market investigations have showed that pore and cavern storage are to some extent substitutable.

2.360

7. Network asset management and operation and network services In markets that have been open to competition for a number of years, the maintenance and operation of network assets, traditionally carried out by the owner of those assets in the electricity, gas and water industries, are increasingly being carried out by independent contractors, leading to the emergence of a competitive market. The question therefore arises – in relation to electricity524 – of the recognition of a distinct relevant product market for such services. In two decisions concerning the UK market it was suggested that, within the distribution market, a distinction could be made between the ownership and operation of utility network assets.525 Utility network assets was defined as the infrastructure by means of which not only gas and electricity, but also heating, water and telecommunications services are distributed. Their management includes “the construction of new assets, the maintenance of existing assets and the operation of those assets in the most efficient manner possible”. In both decisions, whether network asset management and operation forms part of a separate product market from the distribution of gas, or whether, if it existed, it should encompass not only electricity, but also gas and water networks was left open.526

2.361

In one decision, the existence of a market for natural gas related logistic services was envisaged.527 The activity of the joint venture at stake was to assist gas traders in managing the transport of gas through networks owned by third parties,

2.362

523 524 525 526

Case M.1383, paragraph 262; Case M.3086, paragraphs 14-15 and Case M.3410, paragraph 18. See above, at book paragraph 2.97. Cases M.2679, paragraphs 14-15 and JV.36, paragraphs 22-24. In JV.36, paragraph 23, the parties argued that the market covered the management and operation of electricity, gas and water networks, since “ identical management skills are required for each and the regulatory authorities set out certain criteria and standards that similarly apply to all three sectors”. The Commission however considered that “the management and operation of each type of network (electricity, gas and water) might constitute a different product market due to the different nature of the services”. 527 Case M.2744, paragraphs 15-17.

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i.e. to provide customers with the most cost efficient transport of natural gas, referred to as “transport services”; and to provide services to network owners and operators relating to the management and handling of commercial obligations resulting from third party access, referred to as “network services”.

2.363

Whether the provision of natural gas related logistics comprising of transport services on the one hand and network services on the other hand belonged to the same product market was left open: the two services are derived from the obligation to grant access to third parties to gas networks, but it is possible to access the market without offering both services.

2.364

As explained at book paragraph 2.97 above, it appears very likely as liberalisation progresses, that transmission system operator will increasingly outsource such services. Where they do, it is submitted that a relevant product market for such services will develop.

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CHAPTER 5 The relevant geographic market – Gas 1.

Introduction

In line with the above product market definition, within the gas sector, an distinction should be made between upstream and downstream activities. In relation to the upstream gas sector, the market for exploration of oil and natural gas is traditionally considered to be worldwide,528 and the market for development and production of natural gas to probably include the EEA, Algeria and Russia. As for the UK, the market for the offshore transportation and processing of gas was defined as the UK North Sea divided into the northern and southern parts.529

2.365

The following developments relate to downstream markets on which gas is considered to be a distinct market from other energy sources. In line with product market definitions in the gas sector, distinctions should be made between markets relating to supply, transport and storage.

2.366

2.

Gas supply

The Commission has never formally recognised geographic market definitions wider than national markets for gas supply, rather focusing on the existence of infra national markets. In recent decisions however, an evolution can be seen in relation to trading and gas hubs.

528 Case M.5585, paragraph 9; M.1532, paragraph 6. 529 Cases M.1532, paragraphs 42-48; M.5585, paragraph 13.

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2.1 No wider than national markets 2.368

Before market opening in Europe, the geographic scope of the gas supply markets in the EC was logically no wider than national.530 However, even following market opening and the Gas Directive, the Commission has systematically taken the view that gas markets remain at least national in scope. The limited analysis often provided in decisions by the Commission when reaching this conclusion would suggest that the definition of national market in the gas sector currently results to a large extent from strong inertia, rather than sound reasoning.531 In relation to market structure, the Commission generally states that supply markets are no wider than national since the wholesale supply of natural gas is largely a national activity,532 or that the historic ex-incumbent company is dominant in its country where operators from neighbouring countries have not significantly penetrated.533 It has often been the case, including in several Phase II cases ENI/EDP/GDP (December 2004), E.ON/Mol (December 2005) and GDF/Suez (November 2006),534 that the possibility of a wider than national market is not even contemplated by the notifying parties and therefore not discussed535. In E.On/Endesa, (April 2006) the Commission also strongly hinted to the fact that German, Italian, French and Polish gas markets are not wider than national.536 However, as discussed below, this appears to be changing.

530 See the statement of principle made by the Commission as early as 1994 (M.493, paragraphs 21-25). 531 Even when it has an impact on the competition analysis: see recently M.3268, paragraphs 100-101 in relation to the Nordic market, where the merging parties were active on two different Nordic countries. It was simply stated that “Both Sydkraft and Graninge are active on the market for supply of gas. However, Sydkraft is only active in Sweden and Graninge is only active in Finland. The Commission has in previous decisions defined the geographic market for the supply of gas to be national in scope”. The decision referred to (3007) concerned the UK market. 532 See, recently, for the Netherlands: case M.3297, paragraph 14; Germany: M.3294, paragraph 20; Sweden and Finland: M.3268, paragraphs 100-101. In an earlier case, Germany and the Netherlands were identified as two distinct national markets because of the national ownership of the infrastructure, and as the conditions for third party access were essentially determined on a national basis (M.1383, paragraphs 135-136). 533 See, for Belgium: cases M.3075, paragraphs 23 and M.3318, paragraph 30. See also, as regard France, the indication that the French incumbent company, Gaz de France, holds strong positions in the supply to customers in France but not in other territories in M.3086, paragraphs 12-13 (this was considered as a strong indication that the market was national, although the precise market definition was left open). See also the definition of a market for Great Britain in M.3007, paragraph 27; M.3096, paragraph 12 and M.3306, paragraph 13 where the analysis focus on the existence of infra national markets, see below at book paragraph 2.385. 534 Cases M.3440, paragraph 271; M.3696, paragraph 125, and M.4180, paragraph 100. 535 See recently, as regard France, case M.3410, paragraph 32 or Portugal, M.3440, paragraphs 271-273. 536 Case M.4110, para 25. For the Dutch market, see case M. 4370, for the Czech market see case M. 4238, for the Belgian market, see case M.3883.

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A significant issue in relation to geographic market definition in the gas sector is the existence of sufficient physical transportation capacity (i.e. pipelines) between Member States to meet demand and permit cross border competition to exist. Without sufficient transportation capacity a territory is isolated from neighbouring countries and cannot be part of a wider market.537 In the gas sector, in contrast with the electricity sector, it is generally considered that there is enough physical transportation capacity to meet demand and enable competition between Member States. However, the capacity is often booked under long term contracts – normally by national ex-incumbents – and is therefore not available to new entrants.538 As an illustration of this, it was considered that despite strong interconnection capacity with neighbouring countries, Belgium was seen as a separate national market: this interconnection capacity could not lead to significant competitive pressures from operators of neighbouring countries as the capacity was either booked under long term contracts by the historic incumbent Belgian operator, or used for transit of gas outside Belgium.539

2.369

It is uncertain how long it will take for markets wider than national markets to develop in Europe as a result of liberalisation in the gas sector.540 However, as the liberalisation of gas markets in Europe took place two years after the liberalisation of the electricity markets, and it is also generally considered that competition is less well developed in the gas sector, this may take some time. In particular regulatory issues – such as access to storage – are still not the subject of legally binding common rules at Community level. Furthermore, customer

2.370

537 This was made clear in a case where Finland was considered to be a separate market since it was not connected to any other Member State (M.931, paragraphs 22-23). Reference was made to the fact that, as submitted by the parties, “the geographic market depends on the location of the pipelines”. 538 See case M.3440, paragraph 273; see also Volume I. 539 Cases M.3075, paragraph 23 and M.3318, paragraph 30. In addition, the interconnector between the United Kingdom and Belgium was not well functioning and could not represent a secure source of supply. In both cases, the definition of Belgium as the relevant geographic market was of particular importance as it was conditioning the possibility to refer the case to the Belgian competition authorities; the analysis was therefore more elaborated. 540 The evolution towards wider than national markets was already referred to as early as in 1994 (M.493, paragraphs 21-25); it is also envisaged in the more recent decisions (see e.g. M.3297, paragraph 15: “ it may be left open whether, due to Directive 2003/55 and other efforts to liberalise the gas market, the relevant geographic market could in the future become larger than only the Netherlands ). In 2822 (at 2.4), reference was made to the fact that the Commission cannot assume with the required degree of certainty that the characteristics of the gas markets will change in the short-term, it must rely on the current characteristics of the concerned markets which are regional in scope. See, generally, on the consideration to be given to evolution for the purpose of market definitions the General Introduction at book paragraph 2.11 and the developments concerning the electricity sector at book paragraphs 2.105-2.119. See also the data concerning the structure and evolution of the gas markets in EC Member Sates, as a result of the Gas Directive, in the Communication from the European Commission to the European Parliament and the Council of 10 January 2007, Prospects for the internal gas and electricity market, available at http://ec.europa.eu/energy/ electricity/report_2006/index_en.htm.

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switching in the gas market is far behind the electricity market in virtually all Member States. In this light, it appears that, with the possible exception of some organised trading markets, relevant geographic markets in the gas sector which are wider than national markets can be expected to be some years away.

2.371

In the DONG/Elsam case (2006) concerning the geographic scope of the gas wholesale market in Denmark was discussed in detail. Contrary to the submission of the notifying party that the relevant geographic market was wider than Denmark and included at least Germany, the market investigation conclusively showed, for the Commission, that the market for wholesale supplies of gas was no wider than national.541 This was for the main following reasons.

2.372

First, all gas consumed in Denmark was produced in Denmark. This gas was exported to Germany and Sweden, but no imports took place or were likely to take place in the future. The Commission highlighted the relevance of the physical origin of the gas, as contractual gas sales do not in its view provide for the same security, and often not the same flexibility of supply as physical gas, and there were constraints as to the possible shifting of physical gas from Denmark to other markets, in particular due to capacity constraints of export pipelines.

2.373

Secondly, in 2003-2005, commercial imports represented a very small amount of total Danish consumption (less than 12%), and therefore did not exert any strong competitive constraint. Moreover, hub trading was very low, and swapping only constituted 5% of total supply volume, so that gas was not readily available to be transported to Denmark.

2.374

Thirdly, prices in other countries or hubs had little impact on the wholesale price situation in Denmark which was driven by other demand factors. In addition, Danish wholesale gas customers generally considered importing gas a weak substitute to the availability of wholesale gas in Denmark. Moreover, wholesale gas suppliers seeking to import gas would face significant transport costs through network “pancaking” capacity constraints and important administrative obstacles (such cost negotiations, negotiation on reservation terms, and the risk of reservation cancellations).

541 Cases M.3868, paragraphs 147-192. The Commission left open the possible existence of a Swedish market encompassing Sweden and Denmark as Danish transactions might constrain Swedish ones but not the other way round. It also left open the possible inclusion within the Danish market of the German side of the Danish entry/exit point at Ellund to the extent that this gas was actually used for wholesale supplies for Denmark.

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Fourthly, the market structure in the different countries showed very considerable differences in the market shares of the different players, with in particular DONG reaching market shares largely above 60% in Denmark but less than 10% in Germany, the Netherlands, Belgium and the United Kingdom. The Commission highlighted the fact that it had taken account in its appraisal of these market positions the continuing process of market integration in the Community, considering that “this process, in regard to the gas markets is not at such a stage nor can be expected to be at such a stage within the near future or indeed the foreseeable future with sufficient certainty, as to render current very important market share differences of mere historic relevance”.

2.375

However, recent Commission cases appear to indicate that the Commission is opening up to the idea of geographic markets which are larger than national.

2.376

In the ENI Article 102 case, the Statement of Objections (issued in 2009) concluded that for the purposes of that case, the entirety of the viable routes that could be used by a shipper or supplier to bring gas to the wholesale market in Italy constituted the relevant market, although on the facts it found that the existing supply routes to and from Italy constituted the relevant market given the lack of competitive constraints from transportation services other than ENI’s import infrastructures.

2.377

In Gazprom/Winterhall/Target Companies (2013), while leaving the exact geographical delineation open, the Commission acknowledged that the market investigation respondents indicated that both the supply and demand side of the upstream wholesale gas supply market formed part of a regional geographical market, although not an EEA-wide market. It noted the following:

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–

most respondents considered that this regional market encompassed several EEA Member States (in particular, Germany, Belgium, the Netherlands, and the UK);

–

parties active on the demand side of the upstream wholesale gas supply market in Germany indicated gas could be directly sourced from at least one of Norway, the UK, or the Netherlands;

–

upstream producers confirmed they would divert volumes to Germany, away from “at least the Netherlands”, if there was a non-transitory, significant increase in German gas prices;

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2.379

–

there were no indications of restricted interconnection capacity limiting the amount of gas capable of flowing between the Netherlands, Norway, and Germany; and

–

there appears to be increasing price convergence between gas prices quoted on gas trading hubs “located in the putative regional gas market”.

Similarly, in Centrica/Bord Gais Energy (2014),542 while leaving the exact geographic market definition open; the Commission noted the market investigation in this case confirmed the geographic market was at least national and “might” encompass the Republic of Ireland and the UK. The Commission noted that: –

almost all respondent customers from the Republic of Ireland considered there were homogenous conditions of competition in the area encompassing the Republic of Ireland and the UK (including Northern Ireland);

–

almost all of these respondent companies actually purchased their gas in the UK; and

–

almost all customers stated there is sufficient interconnector capacity between Great Britain and the Republic of Ireland.

2.2 Smaller than national markets 2.380

Markets of infra national scope may still exist, even after the suppression of regional monopolies. In 2002, it was decided in ENBW/ENI/GVS (December 2002) that the German market for the “short-distance” (or regional) wholesale of gas was still limited to regional areas corresponding to the former monopolies held by regional distributors prior to liberalisation.543 This was because most large industrial customers and municipality-owned utilities were still supplied by gas wholesalers active within their regional area in which they operated prior to liberalisation. In addition, customers did not consider the use of spot markets to be a viable alternative supply source, as their supplies could only be used for small volumes under short-term delivery contracts. In this respect, municipality-owned utilities were found to be too inexperienced in managing spot pur542 Case M.7228. 543 Case M.2822, paragraphs 16-31. The possible regional scope of the German market was examined in the earlier M.1383, paragraph 152 and 1673, paragraphs 185-186 cases. In both decisions, the issue was left open.

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chase on a continuous basis to secure permanent gas supply. Furthermore, the first EC liberalisation directive544 had not been properly implemented so that key steps necessary to make the gas market fully open to newcomers had not yet been fully implemented. In particular, transmission tariffs were not transparent and remained distance related, and the need to enter into several third party agreements with each regional network owner made it costly and complicated for alternative suppliers to transport gas over long distances. It was therefore concluded that the market was still regional in scope “and likely to remain so in the future”.545 In the more recent RWE/Essent decision ( June 2009), the Commission concluded that the geographic market for the wholesale supply of natural gas in Germany is at least regional and corresponds to the geographic extension of the respective grid areas of the long-distance transmission companies for the long-distance wholesale supply market and the short-distance transmission companies (regional resellers) for the short-distance supply market.546 The situation is different in Great Britain where, contrary to Germany, the transport network in each regional supply areas was owned by a national company instead of different regional companies. The fact that the vast majority of the population of Great Britain is served by the same natural gas pipeline network, operated by the same company for both the high-pressure transmission system and the lower pressure distribution networks, was taken to conclude that no infra-national market existed, as was the absence of significant differences in the regulatory framework applying to England and Wales as compared to Scotland was taken into account.547

2.381

In several decisions concerning Belgium, including recently in GDF/Suez (November 2006),548 the Commission similarly took the following facts as indications that no infra national markets existed: (i) most of the relevant regulations, including third party access rules, was set at national level, (ii) transport networks were managed on a national level, and (iii) as a result of nationally homo-

2.382

544 EC directive No. 98/30 of 22 June 1998, see Volume I. 545 In a more recent case (M.3294, paragraph 18), the parties submitted that the wholesale market was “at least national and possibly wider”, because of the market evolution as a result of the ongoing liberalisation of the gas sector following the Second Gas Directive. They argued that “all Germany is interconnected by a series of transmission lines which, together with the non-discriminatory access to them, facilitates competing suppliers at national level to bid for the supply of gas to local distributors, power generators or industrial customers”. The decision does not take any position on the issue. 546 Case M.5467, paragraph 329. 547 Cases M.3007, paragraph 27; M.3096, paragraph 12; and M.3306, paragraph 13. 548 Cases M.3318, paragraphs 29-33, M.3075, paragraph 23, M.3883 and M.4180, paragraphs 102 to 104 (see a similar reasoning on Belgium in the early case M.493, paragraph 32 where the precise market definition was left open).

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geneous competitive conditions, prices were determined at national level for the whole of Belgium. The existence of certain regulatory specificities for the Brussels region, including a temporary difference in the timing of market opening among the region, was however an indication that regional markets could still exist. In all these case, the Commission left the issue open.

2.383

In Total/Gaz de France (October 2004), the existence of local supply markets within France was not excluded since several tariff zones and congestion existed within the French territory. In addition, access to the network through entry points was not possible everywhere on a homogeneous basis, network access being far easier for competitors of Gas de France in the more Northern and Eastern zones than in the South of France.549

2.384

In GDF/Suez (November 2006),550 this analysis was confirmed, the Commission concluding that the geographical markets have to defined according to the existing balancing zones as competitive conditions between these zones are significantly different due to barriers to entry from one zone to another such as transmission costs, different physical congestion, insufficient interconnection capacity and considerable different link tariffs. The market integration process however leads to the progressive reduction of the balancing zones. The more recent decision ENI/Distrigaz (October 2008) therefore took into account in its market definition the merging of the North, East and West into one single new North zone as of 1 January 2009.551

2.385

In the same way, in E.ON/Mol (December 2005),552 the fact that Hungary constituted a single balancing zone and under the new entry/exit fee system the tariff was the same for all points, led to the definition of a national wide market.

2.386

Market opening to all customers, which is compulsory under EC law as from July 2007, has a tendency to harmonise market conditions and the national level regulatory framework, and led to the recognition of nationally wide markets. In ENI/EDP/GDP (December 2004), it was stated that, based on the experience in Spain, the market for gas supply to small customers in Portugal would probably rapidly evolve to a national market following market opening.553 Similarly, in GDF/Suez (November 2006) it was noted that market opening was to applied soon to all customers in all Belgian regions which was to bring about a progres549 550 551 552 553

Case M.3410, paragraph 33. Case M.4180, paragraphs 380 to 385. Case M. 5220, paragraph 28. Case M.3696, paragraph 136. Case M.3440, paragraphs 274-278.

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sive convergence of competition conditions in all regions.554 A reference to the integrative effect of market opening for domestic customers was also made in E.ON/Mol (December 2005).555 The existence of distinct networks for high calorific value gas (HCV) and low calorific value gas (LCV) has also lead to a regional market definition for gas supply. In the above-mentioned decisions concerning Belgium,556 it was suggested that the Brussels or the Flemish regions could constitute distinct markets as exclusively or predominantly LCV gas was supplied in these regions.

2.387

2.3 Trading and gas hubs In GDF/Suez (November 2006), the Commission found that gas trading at the Zeebrugge Hub was part of the same market as the English NBP hub.557 The fact that the interconnector linking Zeebrugge to England (the “Interconnector”) was often congested and that there were significant price differences between the two hubs (in particular due to the cost of using the Interconnector) could have been seen as evidence of the existence of separate markets, particularly following the Commission’s analysis of electricity spot markets.558 The Commission however, focused on the growing price convergence between the two hubs. There had been a price difference of 7,5% for 17% of days from 2000 to April 2006, but only for 8% of days from July 2004 to June 2006, despite strong diverging trends at time of heavier congestion such as winter 2005/2006. The fact that the Interconnector’s capacity was to be strengthened, and that, as a result of the commitments given by the parties, the liquidity on the hub was to be increased therefore contributing to more converging prices, was also taken into consideration. The Commission however considered that the market comprising the NBP and Zeebrugge hubs was distinct from the Dutch TTF hub because of more important price differences, despite the fact that the exchange market on the three hubs was being operated by the same Dutch company APX Gas. 554 555 556 557 558

Case M.4180, paragraph 104. Case M.3696, paragraph 140. Cases M.3318, paragraphs 29-33, M.3075, paragraph 23, M.3883 and M.4180. Case M.4180, paragraphs 87 to 99. See book paragraph 2.283.

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2.391

In E.ON/MOL (December 2005), the Commission however considered that the trading market was national in scope, despite the fact that gas for the Hungarian market was procured from international companies such as Gazprom, E.ON, and GDF, and was commonly traded at the European level. The Commission considered that the relevant geographic market was to be defined by the destination of the product, i.e. the Hungarian markets as gas imported into Hungary is not re-exported and is solely intended to meet Hungarian demand. Competition was therefore taking place at the Hungarian level. The Commission however concluded that the supply side (procurement) of the wholesale supply of gas was clearly international in scope.559 As previously mentioned, in ENI, the Commission concluded the existing supply routes to and into Italy constituted the relevant geographic market, given the lack of competitive constraints from transportation services other than ENI’s import infrastructure. The Commission also stated in E.ON/MOL, and reiterated in EPH/Stredoslovanska Energetika, that the narrowest possible delineation of the geographic market is the region covered by the physical infrastructure grid.

3.

Transport and storage infrastructures and related services

3.1 Gas transportation 2.392

In Total/Gas de France (October 2004), the existence within France of transport markets limited to a regional tariff area was not excluded. The main reasons for this finding were that (i) transport tariffs in France were dependent on distance560 with a specific fee to be paid for crossing zones, (ii) the structure of tariffs was different in each zone as, although being decided by national authorities, they were based on the specific costs of the local operator, (iii) the conclusion of a specific transport contract with the local operator was necessary, and finally (iv) congestion existed between zones.561 The above considerations seem more relevant to the definition of geographic supply markets rather than geographic transport markets. It is submitted that each pipeline defines its own geographic market scope or more precisely each entry point to each exit point – unless another pipeline or other entry to exit points – can achieve gas transport from the same two geographic destinations under comparable conditions.

559 Case M.3696, paragraphs 131 to 133. 560 Because of the important congestions existing within the French network, distance can be a significant element of the French entry-exit tariff system. 561 Case M.3410, paragraphs 23-26.

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In E.ON/Mol (December 2005), the Commission concluded that the market for transmission was owned and operated on a national basis and therefore national in scope, and that the market for distribution was owned and operated on a regional basis and therefore regional in scope.562

2.393

3.2 Gas storage and flexibility tools In Exxon/Mobil (September 1999), concerning Germany, the Commission distinguished between the relevant geographic markets for pore and cavern storages.563 It considered that it is only viable for customers to use pore storage within an area of a maximum of 200 kilometres from the storage site, whereas for cavern storage the distance from end users is limited to 50 kilometres. As a consequence, competitive pressures from other storage facilities do not exist outside these geographic areas which determine the scope of the relevant geographic market for each of the two different types of storage. The above finding in Exxon/Mobil led the Commission to envisage the existence of regional storage markets within France, especially given that it considered that the existence of different tariff zones within France contributed to the cost of transport between storage facilities.564 The principles developed in Exxon/Mobil were, however, ignored in cases concerning Belgium,565 where reference was simply made to the fact that, as shown by the market study, storage in neighbouring countries did not represent an economically viable alternative to storage in Belgium, as both transport and storage facilities in the neighbouring countries were expensive. It was therefore suggested that the storage market in Belgium was of no wider than national scope.

2.394

The geographic scope of the Danish storage market was key to the Commission’s analysis in the recent Phase II DONG/Elsam decision (March 2006).566 The parties submitted that the relevant geographic market was wider than Denmark and also encompassed Sweden, northern Germany and the Netherlands. The Commission however concluded that the geographic market for storage or for flexibility services was confined to Denmark for the main following reasons.

2.395

562 Case M.3696, paragraphs 126 and 127. 563 Case M.1383, paragraphs 262-263. The distinction was confirmed for Germany in M.3086, paragraph 16; and referred to in M.3410, paragraph 27. 564 Case M.3410, paragraphs 27-30. 565 Cases M.3318, paragraph 31 and M.3075-3080, paragraph 25. 566 Case M.3868.

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2.396

In Germany and the Netherlands, storage tariffs were significantly higher. In addition, any physical transport from Denmark to the storage in Germany would cause additional transport costs, including entry and exit fees in the different transmission networks. The complexity of synchronising the reserved storage and transport capacities with the actual gas needs would add to the difficulty of storage abroad. In particular, the transport capacity reservations needed would be difficult to obtain and very expensive.

2.397

Applying the Exxon/Mobil distance criteria, the Commission considered that storage could also encounter technical difficulties, at least in emergency situations, as the closest German cavern storage was located more than 50 km, from the Danish border, and the closest pore storage was located about 200 km from this border. In addition, respondents to the Commission’s market investigation generally considered it more efficient to store near the area where the gas is used and expressed considerable doubts as to the possibility of storage abroad. Moreover, most flexibility tools were only available on a national level, cross-border flexibility being therefore extremely difficult.

2.398

As for Sweden, storage capacity in Sweden was too limited to constrain a monopolist in flexibility/storage services in Denmark. The Commission, however, admitted that the market for storage in Sweden could be Danish-Swedish in scope due to a certain dependency of Sweden on the provision of Danish storage facilities. Similarly, while the Commission left open the exact delineation of the relevant product market in Gazprom/Wintershall/Target Companies, it acknowledged that the large majority of respondents confirmed that the market for the storage of natural gas in Germany was at least national in scope and should include and Haidach and 7 fields facilities located in Austria but connected to the German grid.

2.399

More generally, in E.ON/MOL, the Commission acknowledged a potential future broadening of the geographical market in line with the further liberalisation of the European gas market.

3.3 Network asset management and operation and network services 2.400

No position has yet been taken as to the relevant geographic market for utility network asset management and operation. As regards the British market, the parties have suggested in two decisions that the relevant geographic market covered at least England, Wales and Scotland, since the same conditions of competition apply throughout this area, and possibly in the future could extend to 136

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cover the EU, as the markets develop and the regulatory regimes across Europe converge.567 Equally, no position has yet been taken as to the relevant geographic market for transport and network services. In one case, it was suggested by the parties that the market was at least national in scope.568 As with respect to electricity,569 it is submitted that these markets are likely to be, or become, at least European wide in scope.

567 JV.36, paragraph 29 and M.2679, paragraph 20. 568 M.2744, paragraphs 19-21. With regard to transport services, the parties argued that the related services could be provided on a Community wide basis, the joint venture being active in all Member States and Switzerland. In relation to network services, the parties argued that the market might have a more narrow scope, network services being only provided to and demanded by owners and operators of regional gas networks, and the activities of the joint venture being, at the beginning, limited to offering network services in Germany and the Netherlands. The market definition was left open. 569 See book paragraphs 2.344-2.346.

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Part 3 – Agreements, decisions corrected practices and abuse dominance Chapter 1 – Introduction Lars Kjølbye

Part 3 Agreements, decisions concerted practices and abuse of dominance Articles 101 and 102 TFEU

CHAPTER 1 Introduction 1.

Overview

The objective of Articles 101 and 102 TFEU is to protect competition on the market for the benefit of consumers.570 This objective is achieved by prohibiting conduct that harms consumers directly such as price fixing as well as conduct that harms consumers indirectly by adversely affecting the competitive structure on the market.571 Importantly, the aim of the EU competition rules is not to protect individual competitors or particular groups of market players against competition on the merits. The consumer focus also means that competition policy does not aim at achieving industrial policy goals. However Articles 101 and 102 TFEU play a key role in promoting the creation of an internal energy market which is presumed to benefit consumers. Competition is generally considered to benefit consumers by ensuring cost reflective prices, increasing choice and promoting innovation. Competition policy forms an essential part of the policies of the European Union. This is reflected in protocol 27 to the treaties on the internal market and competi570 See Commission Guidelines on the application of Article 101(3) TFEU, OJ C 101/97 of 27.04.2004, paragraph 13, and Case T-168/01 GlaxoSmithKline [2006) ECR II-2969, paragraph 118. 571 See e.g. Case C-8/08 T-Mobile Nederland ECR 2009, p. I-4529, paragraph 38.

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tion according to which the internal market as set out in Article 3 EU includes a system ensuring that competition is not distorted.572

3.3

3.4

3.5

3.6

Restrictions of competition may result from agreements between economic operators or from unilateral conduct engaged in by such operators having a strong position on the market. When economic operators, jointly or unilaterally, have market power they are able to increase prices and reduce output to the detriment of consumers. They may also be able to exclude their rivals from the market, which by restricting competition may also cause harm to consumers. Measures adopted by Member States may also have a very significant impact on competition and consumer welfare. Indeed, when Member States grant specific firms exclusive rights to supply certain products, competition may be eliminated. Energy is a good example. In the past exclusive rights to supply electricity and gas were common in the EU. This only began to change when the EU adopted directives with a view to liberalising European gas and electricity markets. While most special and exclusive rights granted by Member States to incumbent energy companies have been eliminated some remain and may raise issues under EU competition law.573 In the energy sector liberalisation and enforcement of competition rules have gone hand in hand. The objective of liberalisation is to introduce effective competition in the energy sector. Once legal monopolies have been dismantled and harmonisation and supporting measures have been adopted with a view to creating a functioning internal market, competition policy plays an essential role in terms of ensuring that effective competition becomes a reality. Well functioning energy markets that ensure secure energy supplies at cost reflective prices are of key importance in terms of achieving consumer welfare. Active competition policy enforcement at European and national level is important to foster competition and ensure that consumers have access to energy at affordable prices.574 The introduction of competition in EU gas and electricity markets is an integral part of EU energy policy which is directed at achieving competitiveness, security of supply and sustainability.575 All European consumers, i.e. households, 572 This principle was previously set out in Article 3(1)(g) EC. 573 For a recent example see Commission Decision of 5.3.2008, Case COMP/38.700 – Public Power Corporation concerning rights for the exploration of lignite deposits in Greece. 574 See Commission Communication of 10.11.2010, Energy 2020 – A strategy for competitive, sustainable and secure energy, COM(2010) 639 final, p. 14 575 See Commission Communication of 10.11.2010, Energy 2020 – A strategy for competitive, sustainable and secure energy, COM(2010) 639 final.

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commercial users and industrial users, heavily depend on the secure and reliable provision of energy at cost reflective prices. The importance of creating a competitive internal energy market has been reiterated by the Commission on numerous occasions. For instance, in the Communication on a Framework Strategy for a Resilient Energy Union the Commission sets out its vision of an integrated continent-wide energy system where energy flows freely across borders, based on competition and the best possible use of resources, and with effective regulation of energy markets at EU level where necessary.576 The Commission explains that an integrated energy market is needed to create more competition, leading to greater market efficiency through better use of resources across the EU and to produce affordable prices for consumers.577 The EU took a significant step towards creating integrated and competitive energy markets when the EU legislator adopted the third gas and electricity liberalisation package on 13 July 2009.578 The third package inter alia strengthens the unbundling requirements to prevent the conflicts of interest that may arise when a firm is at the same time involved in network operations and supply, establishes an agency for the cooperation of national regulators (ACER) to deal more effectively with cross-border issues, and strengthens the powers of national regulators in a number of ways to enhance their ability to monitor markets and address harmful conduct. In the present context it is of particular significance that national regulators obtained new powers to engage in monitoring and ex post control and enforcement.579 These powers resemble those held by the Commission and the national competition authorities, thereby creating a new interface vis-à-vis national energy regulators.580 576 COM (2015) 80 Final. 577 Id., p. 3. 578 The package which consists of three regulations and two directives is available at http://ec.europa.eu/energy/gas_electricity/third_legislative_package_en.htm. 579 See in this respect Article 37 of Directive 2009/72 concerning common rules for the internal market in electricity and repealing Directive 2003/54/EC, OJ [2009] L 211/55. 580 Unlike Regulation 1/2003 which creates a network of competition authorities, the third package does not provide developed tools for ensuring effective cooperation between regulators and competition authorities. For instance, there is a no legal base for exchanging confidential information between regulators and competition authorities which significantly limits cooperation between them. Thus, there is no provision equivalent to Article 12 of Regulation 1/2003, which empowers the Commission and the national competition authorities to exchange confidential information and use it in evidence. Article 38 of Directive 2009/72/EC concerning common rules for the internal market in electricity and repealing Directive 2003/54/EC, OJ L211/55 of 14.8.2009, provides a legal base for the regulators and ACER to exchange information subject to compliance with the confidentiality obligations in the originating Member State. However, the article does not regulate the use of the information exchanged and does not extend to competition authorities.

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3.8

The third liberalisation package is a good example of the interplay between liberalisation and competition policy. The Commission used a competition inquiry into gas and electricity markets (the Energy Sector Inquiry) to support its call for further liberalisation and pave the way for what became the Third Package.581 At the same time the sector inquiry provided a basis for launching a significant number of competition cases to address the concerns identified by the Commission in the course of the inquiry which in turn provided further support for the Third Package. Given the significance of the Energy Sector Inquiry in terms of shaping the Commission’s competition law enforcement focus in the gas and electricity sectors in recent years, it is useful to recall its main findings and the enforcement actions that the Commission took to address the concerns that it identified.

• 3.9

3.10

Market concentration

According to the Energy Sector Inquiry, wholesale gas trade had been slow to develop, and the incumbents remained dominant on their traditional markets, by largely controlling up-stream gas imports and/or domestic gas production. With little new entry in retail markets, customer choice was limited and competitive pressure constrained. Analysis of trading on power exchanges shows that, in a number of them, generators had scope to exercise market power. In the German Electricity Wholesale Market case the Commission accepted commitments to divest significant generation capacity as a remedy to suspected withdrawal of generation capacity with a view to influencing wholesale market prices.582 The Commission thus addressed conduct that was a direct result of market concentration, namely the exercise of market power. More recently, national competition authorities such as the UK CMA have focused on the potential exercise of market power on retail energy markets.583

• Vertical foreclosure According to the Energy Sector Inquiry new entrants often lacked effective access to networks (in gas, also to storage and to liquefied natural gas terminals) 581 The final report on the Energy Sector Inquiry was adopted on 10 January 2007, see Commission Communication COM (2006) 851 Final. The full report is a technical annex to the Communication taking the form of a DG Competition report on the energy sector inquiry (SEC (2006) 1724). On the same day the Commission adopted a Communication on Prospects for the internal gas and electricity market (COM (2006) 841 Final). 582 See Commission Decision of 26.11.2008, Case COMP/39.388 – German Electricity Wholesale Market. 583 See CMA Energy Market Investigation – Updated issues statement, 18.2.2015: https://assets.digital.cabinet-office.gov.uk/media/54e378a3ed915d0cf7000001/Updated_Issues_Statement.pdf.

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despite unbundling requirements. The operators of the networks/infrastructures were suspected of favouring their own affiliates. According to the Energy Sector Inquiry vertical integration also led to a situation where operational and investment decisions were not taken in the interest of network/infrastructure operations, but on the basis of the supply interests of the integrated company. This concerns – which was closely related to the call for stronger unbundling measures in the context of the third liberalisation package – was at the core of the Commission’s enforcement follow up. In the RWE Gas foreclosure and ENI cases the Commission accepted commitments to divest transmission pipelines as a remedy to suspected capacity hoarding, margin squeeze and strategic underinvestment in pipelines.584 The concerns that vertically integrated energy companies use their networks to foreclose competition persist despite the stronger legal and functional unbundling measures in the Third Package.585

•

Market integration

For gas, available capacity on cross-border import pipelines was limited. According to the Energy Sector Inquiry new entrants were unable to secure transit capacity on key routes and entry capacity into new markets. In electricity, integration was hampered by insufficient interconnector capacity and a lack of adequate incentives to invest in additional capacity to eliminate long-established bottlenecks. This has been another area of activity in terms of the Commission’s enforcement follow up. In the GDF and E.ON gas foreclosure cases the Commission accepted commitments to release significant amounts of capacity at the entry points into the French and German markets, which GDF and E.ON had reserved on a long term basis.586 Finally, in Swedish Interconnectors the Commission accepted commitments to sub-divide the Swedish electricity transmission system into two or more bidding zones and manage congestion in the Swedish transmission system without limiting trading capacity on interconnectors.587 These commitments address the Commission’s concern that the Swedish TSO hindered exports by limiting the interconnection capacity that it made available. Similarly, in Romanian gas interconnectors the Commission intervened against a strategy to restrict the free flow of natural gas from Romania to neighbouring Member States 584 See Commission Decisions of 18.3.2009, Case COMP/39.402 – RWE Gas Foreclosure, and of 29.9.2010, Case COMP/39.315 - ENI. 585 See e.g. Commission press release IP/14/1442 on the opening of a Phase II investigation in Case M.7095 Socar/DEFSA: http://europa.eu/rapid/press-release_IP-14-1442_en.htm. 586 See Commission Decisions of 3.12.2009, Case COMP/39.316 – Gaz de France, and of 4.5.2010. Case COMP/39.317 – E.ON Gas. In 2016 the Commission released E.ON from its commitments because of significant market change since the commitments were offered, see IP-16-2646 – Successful opening of German gas markets allows early termination of E.ON. 587 See Commission Decision of 14.4.2010, Case COMP/ 39.351 – Swedish Interconnectors.

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through e.g. underinvestment or strategic delays in the building of infrastructure relevant for exports, tariffs that made exports commercially unviable and vexatious technical arguments as pretext for restricting exports.588

3.12

3.13

• Downstream markets According to the Energy Sector Inquiry the cumulative effect of long contract durations, contracts with indefinite duration, contracts with tacit renewal clauses and long termination periods can be substantial. The analysis showed that the degree to which the industrial customers were tied to incumbent suppliers on a long-term basis differed significantly between Member States. For gas, restrictions on how customers could dispose of their gas, in combination with restrictive practices by suppliers regarding delivery points, limited competition and prevented the achievement of efficiencies by these customers. The competition concerns relating to long-term contracts with industrial users were initially addressed by the Commission in the Distrigas case, in which the Commission accepted commitments whereby the incumbent gas supplier undertook to reduce the share of the market covered by such contracts and limit their duration.589 Subsequently, in the Long term electricity contracts France the Commission accepted similar commitments regarding supply of electricity to French industrial electricity users.590 • Balancing markets For gas, the Energy Sector Inquiry provided that the small size of balancing zones increased the complexity and costs of shipping gas within Europe. Costs were increased by highly complex and divergent rules in each zone, and by the obligation to reserve capacity at each border point. According to the Energy Sector Inquiry these problems were exacerbated by the time dimension: the shorter the balancing period, the higher the risk of imbalance for the supplier. These various elements created major obstacles for new suppliers to enter the market, which the vertically integrated incumbents had little incentive to remove. Furthermore, balancing charges, clearing costs and penalty charges were not transparent and often contained unjustified penalty charges, favouring incumbents. In electricity, the markets on which transmission system operators had to acquire balancing and reserve energy were highly concentrated, which according to the Energy 588 See Commission Communication of 25.9.2018 published pursuant to Article 27(4) of Council Regulation (EC) No 1/2003 in Case AT.40335 – Romanian gas interconnectors. 589 See Commission Decision of 11.10.2007, Case COMP/37.966 – Distrigas. 590 See Commission Decision of 17.3.2010, Case COMP/ 39.386 – Long-term contracts France.

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Sector Inquiry gave generators scope for exercising market power. In the German Electricity Balancing Market case the Commission accepted a commitment by the incumbent to divest its electricity transmission network.591 The commitments were offered to address the Commission’s concerns that the incumbent’s TSO affiliate had favoured its own production affiliate by inflating its balancing costs and preventing power producers from other Member States from exporting balancing energy into the incumbents’s balancing markets. Active competition law enforcement at European and national levels remains important to foster competition and ensure that consumers have access to energy at affordable prices.592 Enforcement in the energy sector remains a priority for the Commission and the national competition authorities.593 Regulation 1/2003 on the implementation of the Treaty rules on competition594 has created a framework for close cooperation between the competition authorities in the EU. This means that an effective framework exists for ensuring that the Commission and Member State competition authorities maximise the overall impact of their enforcement actions. The national competition authorities and the Commission can assist each other in the collection of evidence and have the power to exchange confidential information and use it in evidence for the purpose of applying Articles 101 and 102 TFEU. They inform each other of new cases and have entered into a practical work sharing arrangement whereby cases are dealt with by authorities that are well placed to do so.595 Member State competition authorities are generally well placed to deal with cases involving a single or a limited number of Member States whereas the Commission is particularly well placed to deal with cases involving three or more Member States or cases where there is a Community interest in setting a precedent. However, in the energy sector where relevant markets tend to be national in scope, the Commission has taken action in a number of cases that do not extend beyond a single Member State because of the nexus with the regulatory agenda and the overarching objective of creating an internal energy market, confirming the fact that the network created by Regulation 1/2003 is based on practical work sharing and not rigid rules of competence. In energy markets national regulators also 591 See Case COMP/39.388 – German Electricity Balancing Market. 592 See Commission Communication of 10.11.2010, Energy 2020 – A strategy for competitive, sustainable and secure energy, COM(2010) 639 final, p. 14 593 The creation of a European Energy Union is a Commission priority: http://ec.europa.eu/priorities/energyunion/index_en.htm. The Energy Union means making energy more secure, affordable and sustainable. 594 See OJ [2003] L 1/1. 595 See Commission Notice on co-operation within the Network of Competition Authorities, OJ [2004] C 101/43, paragraphs 9-15.

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play an important role and this role has been increased by the third liberalisation package. As a result, there is an increasing need for close cooperation between regulators and competition authorities. At present, however, the absence of common rules providing for inter alia the right to exchange confidential information creates obstacles to such cooperation.596 This lacuna is not addressed by the Third Package.

3.16

From a competition law enforcement perspective the European energy industry does not differ from other European industries. The same competition rules apply597. These rules are sufficiently flexible to take into account the specificities of individual markets. The following chapters will deal with the most common restrictions of competition that are arguably typical for the European electricity, gas and petroleum industry. A particular focus will be placed on cases in the electricity and gas sectors. However, by way of introduction it is useful to briefly recall the basic framework of Articles 101 and 102 FEU.

2. 3.17

The basic requirements of Articles 101 and 102

Article 101 of the FEU Treaty, concerning agreements that are restrictive of competition, provides as follows: “1.

The following shall be prohibited as incompatible with the common market: all agreements between undertakings, decisions by associations of undertak‑ ings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or dis‑ tortion of competition within the common market, and in particular those which: (a) (b) (c) (d)

directly or indirectly fix purchase or selling prices or any other trading conditions; limit or control production, markets, technical development, or in‑ vestment; share markets or sources of supply; apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;

596 Commission Communication on Prospects for the internal gas and electricity market (COM (2006) 841 Final, contains various ideas for enhancing co-operation between national regulators so as to close the gap that currently exists for cross-border issues. 597 This was confirmed by the Court of Justice already very early, see Case 6/64 Costa vs Enel [1964] ECR 1251.

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(e)

make the conclusion of contracts subject to acceptance by the other par‑ ties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such con‑ tracts.

2.

Any agreements or decisions prohibited pursuant to this article shall be auto‑ matically void.598

3.

The provisions of paragraph 1 may, however, be declared inapplicable in the case of: •

any agreement or category of agreements between undertakings,

•

any decision or category of decisions by associations of undertakings,

•

any concerted practice or category of concerted practices, which con‑ tributes to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit, and which does not: (a) (b)

impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives; afford such undertakings the possibility of eliminating compe‑ tition in respect of a substantial part of the products in ques‑ tion.”

Thus, in order for the prohibition of Article 101(1) to apply, four conditions must be satisfied: (1)

there must be an agreement or concerted practice;599

(2)

concluded between undertakings;

(3)

resulting in (an appreciable)600 restriction of competition, and

(4)

capable of affecting trade between Member States.

598 Moreover, fines may be imposed on firms entering into such arrangements either intentionally or negligently. See article 23(2) Reg. 1/2003, Appendix 2. 599 In the following the term “agreements” encompasses the term “concerted practices”. 600 See below, book paragraph 3.31.

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3.19

Chapters 2 and 3 examine horizontal agreements, i.e. agreements between companies operating at the same level of the supply chain and vertical agreements, i.e. agreements between companies operating at different levels of the supply chain. These chapters deal only with the third requirement of Article 101(1) (restriction of competition) and the efficiency defence of Article 101(3). The other condition for applying Article 101(1) FEU (agreement, undertakings, effect on trade) are outside the scope of this book, being generic concepts common to agreements in all sectors. More detailed information on these issues can be found in the more general works on Community competition law.601 However, as an introduction the basic conditions for applying Article 101 are summarised in the following.

3.20

The terms “agreement”, “ decision by associations of undertakings” or “concerted practice” are interpreted widely to catch all forms of co-ordination of market conduct between economic operators. In essence, there must be a concurrence of wills of at least two parties as regards their conduct on the market. Article 101 thus applies to coordinated (as opposed to unilateral) market conduct. An agreement may be written or oral; explicit or tacit. A concerted practice is a less developed form of collusion. However, the distinguishing feature remains the same, namely that there is a meeting of minds as regards the market conduct to be engaged in by at least one of the parties.602

3.21

The concept of undertaking encompasses any entity exercising an economic activity, irrespective of the legal form of the entity, its financing or its profit or non-profit aim. As long as it is active on the market as an economic operator, the entity is regarded as an undertaking for the purposes of Articles 101 and 102.603 According to settled case law it is the activity consisting in offering goods and services on a given market that is the characteristic feature of an economic activity. Whether a purchasing activity constitutes an economic activity thus depends on the subsequent use of the purchased product.604

3.22

The concept of undertaking is an autonomous concept of EU law. It does not depend on national corporate law. This means that the legal form of undertaking is irrelevant. The concept of undertaking can include private firms 601 See, for example, Richard Whish, Competition Law, Oxford University Press 2003, Faull and Nikpay, The EC Law of Competition, Oxford University Press 2007, second edition, or Bellamy and Child, European Community law of competition, Sweet & Maxwell. 602 See Commission Guidelines on the application of Article 101(3), OJ 2004 C101/ 97 of 27.04.2004, paragraphs 14 and 15. 603 Case C-41/90, Höfner v. Macrotron, ECR 1991, p. I-1979. 604 See Case C-205/03, FENIN, ECR 2006, p. I-6295, paragraphs 25 and 26.

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and corporations or public entities, such as state controlled utility companies. An entity forming part of the public administration is also an undertaking for the purposes of EU competition law provided that it carries out an economic activity.605 This means that a TSO run by a public administration is an undertaking for the purpose of the EU competition rules.606 The concept of undertaking encompasses all economic activities exercised under the control of the same persons or shareholders. In fact, the same undertaking may encompass a multitude of corporations belonging to the same group or concern. As a rule, such a group is seen as one undertaking. This finding has practical relevance in three respects. First, when calculating market share or turnover of an undertaking, reference must be made to group results. Second, agreements concluded between entities belonging to the same undertaking are not caught by Article 101(1).607 The conduct of a single undertaking is subject only to Article 102. Third, a parent company is liable for the conduct engaged in by subsidiaries that do not determine their own conduct on the market. In the case of wholly owned subsidiaries there is a presumption that the parent company determines the subsidiaries’ market conduct and that as a result it is liable for their anti-competitive conduct.608 The requirement that the agreement must be capable of affecting trade between Member States is a jurisdictional criterion, which determines the scope of application of Articles 101 and 102. Agreements and abusive conduct that is not capable of affecting trade between Member States is subject only to Member State competition law. The Court of Justice has given a wide interpretation to the effect on trade concept, holding that ‘‘ it must be possible to foresee with a sufficient degree of probability on the basis of a set of objective factors of law or fact that the agreement or practice may have an influence, direct or indirect, actual or potential, on the pattern of trade between Member States.’’ If the agreement covers at least the territory of a whole Member State there is generally a strong presumption that it is capable of affecting trade between Member States.609 The case law also requires that the effect on trade is appreciable. In a notice, which codifies and explains the relevant case law, the Commission has developed a threshold below which it is presumed that the agreement is not capable of appreciably affecting trade between Member States. For this presumption to apply two cumulative conditions must be satisfied: the turnover of the undertakings 605 606 607 608 609

See Case 18/88 RTT v GB-INNO ECR 1991, p. 5941 See in this respect Commission Decision of 14.4.2010, Case COMP/39.351 – Swedish Interconnectors. See Case C-73/95 P, Viho, ECR 1996, p. I-5457. See Case C-97/08 P, Akzo Nobel, ECR 2009, p. I-8237, paragraphs 58-60. See Joined Cases C-125/07 P a.o., Erste Group Bank, ECR 2009, p. I-8681, paragraphs 38 and 39.

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in the products covered by the agreement must not exceed € 40 million and their market share must not exceed 5% of the relevant market.610

3.25

The concept of restriction of competition contained in Article 101(1) will be dealt with in detail in subsequent chapters. However, it is useful already here to recall some of the core principles, which are common to horizontal and vertical agreements.

3.26

The concept of restriction of competition has evolved substantially in recent year from a form-based approach whereby restrictions on commercial freedom of conduct were equated with restrictions of competition and to a more effects-based approach according to which the objective of Article 101(1) is to protect competition on the market for the benefit of consumers.611 This means that in most cases Article 101(1) only applies if the agreement is likely to produce adverse effects on competition and consumers. The exception is agreements that have as their object to restrict competition. This approach has led to a narrowing of the scope of the prohibition of Article 101(1).612 Some restrictions, referred to as restrictions by object, are deemed to be restrictive of competition without any need to analyse their negative effects on competition and consumers.613 It is presumed that such restrictions have effects that are contrary to Article 101(1). Cartels and destination clauses preventing resale are examples. The concept of restriction by object is interpreted restrictively, catching only certain types of coordination between undertakings which reveal a sufficient degree of harm to competition.614 If an agreement is not restrictive of competition by object it must be examined whether it has restrictive effects on competition. Account must be taken of both actual and potential effects.

3.27

610 See Commission, Guidelines on the Effect of Trade Concept contained in Articles 101 and 102 (Guidelines on the Effect of Trade), OJ C 101/81 of 27.4.2004. 611 See Case T-168/01, GlaxoSmithKline, ECR 2006, p. II-2969, paragraph 118 612 Recent judgments might suggest that the European Courts have yet to sanction fully this consumer welfare oriented approach to the concept of restriction of competition, see e.g. Case C-8/08, T-Mobile Nederland, ECR 2009, p. I-4529, paragraph 38, where the Court held that Article 101 FEU, like the other competition rules of the Treaty, is designed to protect not only the immediate interests of individual competitors or consumers but also to protect the structure of the market and thus competition as such. However, since it is clear that the EU competition rules aim at protecting competition the judgment may also be interpreted as merely stressing the fact that consumers may be harmed directly and indirectly by anticompetitive conduct and that indirect harm occurs when the conduct adversely affects the competitive structure since it may allow undertakings to exercise market power. 613 Case C-8/08, T-Mobile Nederland, ECR 2009, p. I-4529, paragraph 31. 614 See e.g. Case C-345/14 SIA 150 Maxima Latvia – ECLI:EU:C:2015:784, paragraph. 18.

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In the case of restrictions of competition by effect there is no presumption of anti-competitive effects. For an agreement to be restrictive by effect it must affect actual or potential competition to such an extent that on the relevant market negative effects on prices, output, innovation or the variety or quality of goods and services can be expected with a reasonable degree of probability.615 Negative effects on competition within the relevant market are likely to occur when the parties individually or jointly have or obtain some degree of market power and the agreement contributes to the creation, maintenance or strengthening of that market power or allows the parties to exploit such market power.616 Market power is the ability to maintain prices above competitive levels for a significant period of time or to maintain output in terms of product quantities, product quality and variety or innovation below competitive levels for a significant period of time.

3.28

The restriction must also be appreciable. However, when an agreement that is capable of appreciably affecting trade between Member States has an anticompetitive object, appreciable effects on competition are presumed.617 The Commission has in a notice indicated on the basis of market shares when an agreement can normally be presumed to not appreciably restrict competition.618 A distinction is made between agreements between competitors and agreements between noncompetitors. For the first category, agreements between undertakings with an aggregate market share not exceeding 10% on any of the relevant markets affected by the agreement are deemed not to infringe Article 101(1). They are considered to be “ de minimis”. For the second category the relevant threshold is 15%. As already mentioned, the thresholds indicate when agreements are not capable of appreciably restricting competition. They do not indicate when an appreciable restriction is likely to be present. Since in practice the finding of a restriction of competition by effect requires a detailed market analysis and a finding of likely negative effects on competition and consumers, it is likely that the thresholds will be higher than the 10% and 15% thresholds laid down in the notice. For restrictions by object there is no need to take account of the concrete effects of an agreement since they are presumed to be appreciable.619 However, such agreements must still be capable of appreciably affecting trade between Member States.

3.29

615 See Commission Guidelines on the application of Article 101(3), OJ 2004 C101/ 97 of 27.04.2004, paragraph 24. It is not sufficient in itself that the agreement restricts the freedom of action of one or more of the parties, see Case T-112/99, Métropole télévision (M6) and others, ECR 2001, p. II-2459 paragraphs 76 and 77. 616 See Commission Guidelines on the application of Article 101(3), OJ 2004 C101/ 97 of 27.04.2004, paragraph 25. 617 See Case C-226/11, Expedia, ECR 2012, p. I-0000, paragraphs 35 to 37. 618 See Commission, Notice on agreements of minor importance which do not appreciably restrict competition under Article 101(1) TFEU (de minimis Notice), OJ C 291/1, 30.8.2014, paragraph 8. 619 See Case C-226/11, Expedia, ECR 2012, p. I-0000, paragraphs 35 to 37.

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3.30

Article 101(1) applies to restrictions of inter-brand competition, i.e. competition between products from different suppliers, and to restrictions of intrabrand competition, i.e. competition between distributors of products sourced from the same supplier. This is reflected in the counterfactual, which is used in the assessment of whether an agreement has likely negative effects on competition. This counterfactual is set out in paragraph 18 of the Commission’s guidelines on the application of Article 101(3)620 which provides that ‘‘ for the purpose of assessing whether an agreement or its individual parts may restrict inter-brand competition and/or intra-brand competition it needs to be considered how and to what extent the agreement affects or is likely to affect competition on the market.” The following two questions provide a useful framework for making this assessment. The first question relates to the impact of the agreement on inter-brand competition while the second question relates to the impact of the agreement on intra-brand competition.

3.31

The first question asks whether the agreement restrict actual or potential competition that would have existed without the agreement. If so, the agreement may be caught by Article 101 (1). In making this assessment it is necessary to take into account competition between the parties and competition from third parties. For instance, where two undertakings established in different Member States, which produce competing products, undertake not to sell products in each other’s home markets, (potential) competition that existed prior to the agreement is restricted.621 Similarly, where a supplier imposes obligations on its distributors not to sell competing products and these obligations foreclose competing suppliers, actual or potential competition that would have existed in the absence of the agreement is restricted.

3.32

The second question asks whether the agreement restrict actual or potential competition that would have existed in the absence of contractual restraint(s). If so, the agreement may be caught by Article 101(1). For instance, where a supplier restricts its distributors from competing with each other, (potential) competition that could have existed between the distributors absent the restraints is restricted. Such restrictions include resale price maintenance and territorial or customer sales restrictions between distributors. However, a contractual re620 See OJ 2004 C101/ 97 of 27.04.2004. 621 In assessing whether the parties to an agreement are actual or potential competitors the economic and legal context must be taken into account. For instance, if due to the financial risks involved and the technical capabilities of the parties it is unlikely on the basis of objective factors that each party would be able to carry out on its own the activities covered by the agreement the parties are deemed to be non-competitors in respect of that activity. It is for the parties to bring forward evidence to that effect. See in this respect e.g. Commission Decision in Elopak/Metal Box – Odin, OJ 1990 L 209, p. 15, and in TPS, OJ 1999 L 90, p. 6.

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straint may in certain cases not be caught by Article 101(1) when it is objectively necessary for the existence of an agreement of that type or that nature.622 If absent a restraint the agreement would not have been concluded, there is no intra-brand competition to be restricted and Article 101(1) does not apply. The philosophy is simple. Vertical agreements may restrict competition that is made possible by the agreement. However, since it is the agreement that makes competition possible, no restriction of competition can arise if absent the contractual restraint no agreement would have been concluded. This illustrates the fundamental difference between intra-brand competition and inter-brand competition. Inter-brand competition exists absent the agreement whereas inter-brand competition does not. Article 101(3) explicitly recognises that not all restrictive agreements are harmful. Restrictive agreements may generate economic benefits that outweigh the adverse effects of the restriction on consumers. This is true both for agreements that have as their object to restrict competition and for agreements that have restrictive effects on competition. Restrictive agreements may for instance allow the parties to reduce costs or improve the quality of their goods and services. By enabling such benefits to be taken into account, Article 101(3) creates an efficiency defence that may allow agreements to escape the prohibition of Article 101(1) and nullity provided for in Article 101(2). If only parts of an agreement are null and void under Article 101(2), the automatic nullity generally applies only to those parts, provided that such parts are severable from the agreement as a whole. However, it is for the applicable national law to determine the consequences of partial nullity for the remaining part of the agreement.623

3.33

In order to benefit from the exception of Article 101(3), the agreement must satisfy four cumulative and exhaustive conditions:

3.34

(1)

The agreement must create objective economic benefits;

(2)

The restrictions must be indispensable to achieve the benefits;

(3)

Consumers must receive a fair share of the benefits; and

(4)

The agreement must not allow the parties to eliminate competition on the market concerned.

622 See in this respect Case 56/65, Société Technique Minière, ECR 1966, p. 337, and Case 258/78 Nungesser, ECR 1982, p. 2015. 623 See Case 56/65, Société Technique Minière, ECR 1966, p. 337.

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3.35

The Commission has published guidelines, which explain how this efficiency defence should be applied in practice.624 The Guidelines have deliberately laid down more rigorous conditions for applying Article 101(3) to match the corresponding narrowing of Article 101(1). Previously a wide application of Article 101(3) was required in order to ‘save’ the great many agreements that should not have been caught by Article 101(1) in the first place. Under the more effects based approach, absent a restriction by object, Article 101(1) only applies to agreements that create genuine competition concerns due to their likely adverse effects on the market. As a consequence, restrictive agreements only escape prohibition when it has been convincingly demonstrated that they create genuine countervailing benefits. Most agreements escape Article 101(1) but those that are caught are subject to rigorous scrutiny under Article 101(3).

3.36

The assessment of restrictive agreements under Article 101(3) (and Article 101(1)) is made within the actual context in which they occur and on the basis of the facts existing at any given point in time.625 The assessment is sensitive to material changes in the facts. The exception rule of Article 101(3) applies as long as the four conditions are satisfied and ceases to apply when that is no longer the case. When applying Article 101(3) in accordance with these principles it is necessary to take into account the initial sunk investments made by any of the parties and the time needed and the restraints required to commit and recoup an efficiency enhancing investment. Article 101 cannot be applied without taking due account of such ex ante investment. The risk facing the parties and the sunk investment that must be committed to implement the agreement can thus lead to the agreement falling outside Article 101(1) or fulfilling the conditions of Article 101(3), as the case may be, for the period of time required to recoup the investment. This is of significant importance in the energy sector where operators often have to make significant investments and where cooperation arrangements may be a way to shoulder such large investments and the accompanying risks.

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Article 101(3) can be applied in individual cases and by way of block exemptions that apply the exception rule to categories of agreements. The Commission has adopted a number of such block exemption regulations. If an agreement meets the requirements of a block exemption regulation, it is presumed to be legal unless a competition authority expressly withdraws the benefit of the exemption. The Commission may withdraw the benefit of a block exemption for 624 See in particular the Guidelines on the application of Article 101(3), OJ 2004 C101/97 of 27.04.2004. 625 Guidelines on the application of Article 101(3), paragraph 44, and Case C-238/05, Asnef-Equifax, ECR 2006, p. I-11125, paragraph 49.

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the whole of the EU, whereas Member State competition authorities have the power to withdraw the benefit of a block exemption for their own territory on condition that the relevant geographic market does not extend beyond the territory of the Member State in question626. The withdrawal of a block exemption is a rare occurrence. Many if not most agreements covered by a block exemption regulation are not caught by Article 101(1) in the first place for lack of likely negative effects on competition and consumers. Article 102 of the Treaty on the Functioning of the European Union prohibits abuse of dominance. As is clear from the Commission’s recent enforcement practice following its Energy Sector Inquiry, Article 102 is highly relevant to undertakings in the energy sector. This provision provides as follows:

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“Any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market in so far as it may affect trade between Member States. Such abuse may, in particular, consist in: (a) (b) (c) (d)

directly or indirectly imposing unfair purchase or selling prices or other un‑ fair trading conditions; limiting production, markets or technical development to the prejudice of consumers; applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage; making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.”

A number of conditions must thus be satisfied for Article 102 to apply: –

an abuse,

–

of a dominant position,

–

by one or more undertakings,

–

which affects trade between Member States.

626 See Article 29 of Regulation 1/2003, Appendix 2.

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In Chapter 4, a detailed analysis is made of dominance and abuse with respect to energy markets, again focussing in particular on the electricity and gas sectors. The indications regarding the terms “undertakings” and “affect on trade” made above, are also relevant here.

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Although the development has been less pronounced than in the field of Article 101, the application of Article 102 has also become more effects-based. This development is reflected in the Commission’s 2008 Guidance on its enforcement priorities in applying Article 102 TFEU to abusive exclusionary conduct by dominant undertakings and the recent judgment of the European Court of Justice in Intel.627

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In its Guidance Paper the Commission sets out the principles that it relies on when determining whether or not to give priority to a potential abuse of dominance case. While the Commission expressly states that the Guidance is not intended to state the law,628 it nevertheless establishes a useful framework for analysing Article 102 cases. Two elements merit particular mention. First, the Commission states that it will normally intervene under Article 102 where, on the basis of cogent and convincing evidence, the allegedly abusive conduct is likely to lead to anti-competitive foreclosure.629 Second, the Commission makes clear that it will analyse efficiencies in much the same was as it does under Article 101(3).630 Dominant firms may thus in principle avoid a finding of abuse if the likely anticompetitive effects are outweighed by pro-competitive efficiency benefits. However, as is clear from its recent case practice, the Commission is only cautiously embracing the effects-based approach in the field of Article 102.631 The Commission tends to argue its cases first on the basis of the traditional more legalistic approach and only then argue that in addition there are likely negative effects on competition and consumers. Recent case law embraces the need to consider competitive effects. In Intel the European Court of Justice made clear that Article 102 targets practices that have an exclusionary effect on as-efficient competitors. The Commission is required to consider all relevant circumstances including the share of the market covered by the challenged practice, the conditions and arrangements imposed by the dominant firm and the existence of any strategy aiming to exclude as-efficient competitors.632 627 OJ 2009 of 24.2.2009, C 45/7 and Case C-413/14 P Intel ECLI:EU:C:2017:632. The Guidance Paper does not deal with exploitative abuses such a discrimination or unfair pricing. 628 See Guidance Paper, paragraph 3. 629 Id., paragraph 20. 630 Id., paragraphs 28-31. See also Case C-209/10, Post Denmark, 2012 ECR page I-0000, paragraphs 41 and 42. 631 See e.g. Commission Decision of 13.5.2009, Case COMP/37.990 – Intel. 632 Case C-413/14 P Intel ECLI:EU:C:2017:632, paras. 133-134.

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CHAPTER 2 Horizontal agreements 1.

Introduction

Horizontal agreements are arrangements entered into by undertakings operating at the same level of trade. Such agreements are generally633 only capable of restricting competition when they are concluded by undertakings that are actual or potential competitors. The following sections deals with various horizontal arrangements which are in principle capable of restricting competition and which are of relevance to the energy sector. However before dealing with these categories of agreements, it is useful to clarify the concept of actual or potential competitors.

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Two parties are deemed to be competitors when they supply products that in the eyes of consumers are substitutable. Actual competitors are suppliers that are active on the same product market in the same geographical area. In addition, suppliers that have not yet entered the market may be considered actual competitors when – despite the fact that currently they are not active on the same product and geographic market – they impose an actual competitive constraint on the existing operators. These are suppliers that in response to a small and permanent increase in relative prices are able and likely to switch production in the very short term without incurring significant additional costs or risks to the relevant products and/or geographical area and offer their products to customers (so-called immediate supply-side substitutability). For instance, a manufacturer of goods, which generates electricity for its own requirements, may in reaction to an increase in the electricity price start selling electricity. Such generators that

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633 In rare cases horizontal agreements may give rise to foreclosure concerns. This may e.g. be the case where parties to a horizontal agreement agree not to deal with third parties. This type of arrangement is often referred to as a collective boycott.

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could start supplying the market in response to a small but nevertheless significant increase in prices are counted as actual competitors, although they are currently not serving the market.

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The difference between this latter group of actual competitors and potential competitors is the time they need and the costs they incur to enter the market in question in order to offer customers an alternative. Potential competitors require more time and investment to enter the market than actual competitors with flexible supply capacities. For an operator to be considered a potential competitor it must be likely to enter the market within a short period of time in response to a small and permanent increase in relative prices. What constitutes a ‘short period of time’ depends on the facts of the case at hand, its legal and economic context, and, in particular, on whether the company in question is a party to the agreement or a third party. In the case of a party to the agreement the Commission takes the view that a longer period should normally be considered to be a ‘short period of time’ than where the capacity of a third party to act as a competitive constraint on the parties to an agreement is analysed. In relation to the parties, Article 1(1)(n) of the Specialisation block exemption Regulation provides that there must realistic grounds to consider that entry would take place within not more than three years.634 For a third party to be considered a potential competitor, market entry would need to take place sufficiently fast so that the threat of potential entry is a constraint on the parties’ and other market participants’ behaviour.635 No time frame is indicated but given the logic of the Guidelines, it is presumably significantly shorter than three years.

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A horizontal agreement between actual or potential competitors normally affects competition on the market where the business activity, which is the object of the arrangement, is carried out. A price-fixing agreement, for instance, directly affects price competition for the product or service, which is the object of the arrangement. However, restrictions may also occur on markets downstream, upstream, neighbouring or otherwise related to the business activity covered by the agreement. 634 OJ 2010 L335/43 of 18.12.2010. 635 See footnote 5 of Horizontal co-operation guidelines, Appendix 3. The distinction between the parties to the agreement and third parties implies that the Commission will more readily consider the parties potential competitors. This distinction is not explained but is presumably based on the view that a competitive constraint is only effective if it has prevented the parties from exercising market power. It is not sufficient that it might do so some time in the future since consumers will be harmed in the mean time. As regards the parties the concern is a different one, namely that they will restrict competition that would otherwise have occurred, which includes realistic future competition.

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Traditionally, competition authorities have adopted a strict approach to horizontal agreements between competitors. One reason is that in horizontal relationships the exercise of market power by one firm, e.g. by increasing prices, may benefit its competitors. This fact provides an incentive for competitors to collude and engage in anti-competitive behaviour, which produces immediate consumer harm. Horizontal agreements may affect competition because of restrictions contained in the agreement. For instance, the parties may agree on the price that they charge or where they sell their products. The agreement may also contain non-compete obligations that prevent one or more parties from engaging in competing activities during or after the term of the agreement.636

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The agreement may also restrict competition because it reduces the parties’ incentives to compete. For instance, the agreement may lead to the disclosure of strategic information thereby increasing the likelihood of coordination among the parties or it may lead to a significant commonality of costs which in turn may facilitate the coordination of prices and output.637 When parties have similar cost structures it is generally easier to come to a common understanding on what constitutes mutually beneficial market conduct. However, horizontal agreements may also produce a number of benefits by allowing the parties to reduce costs or produce better products compared to what they would have been able to do on their own. Indeed, many horizontal agreements are innocuous or even pro-competitive. When competitors co-operate in order to jointly enter a new market, launch a new product or service or carry out a specific project or activity, which they could not independently bring about, the agreement is not caught by Article 101(1) in the first place if it does not restrict any competition that would have occurred in the absence of the agreement638. Moreover, co-operation agreements that do restrict competition may be compatible with Article 101 as a whole despite their negative effects on competition when they also generate economic benefits that outweigh their adverse effect on consumers (efficiency defence). In these circumstances the exception rule of Article 101(3) may be satisfied.

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636 See e.g. Commission Decision of 18.6.2012, Case COMP/39.736 – Siemens/Areva. 637 See Horizontal co-operation guidelines, paragraph 35, Appendix 3. 638 See Commission Guidelines on the application of Article 101(3), OJ 2004 C101/ 97 of 27.04.2004, paragraph 18(a).

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The Specialisation block exemption Regulation639 and the Horizontal co-operation guidelines the Commission distinguishes three categories of agreements, namely agreement that have restrictive effects on competition agreements that have as their object to restrict competition and finally a subset of the latter agreements containing so-called hard-core restrictions.640 The efficiency defence of Article 101(3) is relevant to the first two categories,641 the difference being that in the case of restrictions by object the party invoking the benefit of Article 101(3) is obliged to present a credible efficiency defence before the party invoking Article 101(1) is obliged to show likely effects on competition. Restrictions by object are presumed to restrict competition. In the case of hard-core restrictions that it can normally be presumed that there are negative effects on competition and consumers, which are not outweighed by efficiency gains. Hardcore restrictions are naked restrictions on competition between competitors such as price fixing, output restrictions and market sharing which have no reasonable link with any underlying integration of economic activity, having the potential of generating efficiencies that in turn may benefit consumers. The clearest example is cartels that have as their sole object to restrict competition and thus do not provide for any integration of economic activity.642

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A finding that undertakings have entered in to an agreement to restrict competition requires proof that the conduct of the undertakings concerned is the result of collusion and not their independent individual decisions. Unilateral conduct may be subject to Article 102 but is not caught by Article 101. For this latter provision to apply there must be direct or indirect contacts between operators, the object of which is to influence the conduct on the market of a rival or to disclose to such rival the course of conduct, which the operator itself has decided to adopt or contemplates adopting on the market.643 It is not sufficient to merely point to the fact that prices have been increased in parallel by a similar amount unless there is no other plausible explanation for such conduct than price fixing.644 Competition law does not deprive economic operators of 639 Article 4, OJ 2010 L335/43 of 18.12.2010. 640 It is submitted that the Horizontal co-operation guidelines depart from the line taken by the Commission in the Guidelines on the application of Article 101(3), OJ 2004 C101/ 97 of 27.04.2004. These latter guidelines seemed not to distinguish hard-core restrictions and restrictions by object. 641 See Horizontal co-operation guidelines, paragraph 48, Appendix 3. 642 According to paragraph 60 of the Guidelines on the application of Article 101(3), OJ 2004 C101/ 97 of 27.04.2004, efficiencies generally stem from an integration of economic activities whereby undertakings combine their assets to achieve what they could not achieve as efficiently on their own or whereby they entrust another undertaking with tasks that can be performed more efficiently by that other undertaking. 643 See Case T-25/1995 a.o., Cimenteries CBR, ECR 2000, p. II-491, paragraph 1849-1852. 644 See Joined Cases C-89/85 a.o., Wood Pulp (II), ECR 1993, p. I-1307. At times, competition authorities have gone quite far in excluding alternative explanations. For instance, in a 2008 decision involving the Greek

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the right to adapt themselves intelligently to the existing or anticipated conduct of their competitors.645 Parallel conduct may be the result of the conditions of competition in a particular market, e.g. the nature of the products, the size and number of suppliers and the entry barriers. Where there exists, for instance, a limited number of suppliers on a market for a homogeneous product parallel pricing may be explained by a phenomenon called “conscious parallelism” or “tacit collusion”.646 This means that each firm is aware that its market behaviour will affect the other sellers and their market behaviour. As a result, each firm will take the expected actions and reactions from the other players into account before determining its own strategy.647 Three conditions must generally be satisfied for a market to be conducive to conscious parallelism.648 First, the market must be sufficiently transparent for the undertakings which coordinate their conduct to be able to monitor sufficiently whether the rules of coordination are being observed. Second, the discipline requires that there be a form of deterrent mechanism in the event of deviant conduct. Third, the reactions of undertakings which do not participate in the coordination, such as current or future competitors, and also the reactions of customers, should not be able to jeopardise the results expected from the coordination.

645 646

647 648

petrol market, the Greek NCA found that the two leading petrol suppliers used their strong brand names to align their wholesale prices. There was no written proof of coordination but the NCA concluded that the only plausible explanation of the alignment of prices was the existence of a concerted practice. This conclusion was based on the fact that the two companies concerned allegedly applied a common discount policy by dividing the domestic market into regions: in some regions, Shell would offer discounts 50% above BP s discounts in those same regions, whereas in other regions it was the other way around, with the result that their net wholesale prices were equalized across the market. Price alignment could not be justified by market transparency, as discounts offered by wholesalers to retailers were not announced publicly. The strong brand name of the two players differentiated them from the rest of domestic players, because the only competitive threat for each of the two companies was the other. The two companies priced systematically higher than their rivals and their market shares consistently converged over the investigated period. It is not clear to the author that these factors support the conclusions drawn in the decision. See Joined Cases 40/73 a.o., Suiker Unie, ECR 1975, p. 1663, paragraphs 4 and 5. See in this respect judgment of the cour d’appel de Paris of 9.12.2003, annulling the French competition authority s decision in Case 3-D-17 concerning an exchange of retail price information between petrol stations operated by ESSO, Shell and Total. The operators of the stations informed each other of the prices charged at the pump, which the French competition authority considered to infringe competition rules. In annulling the decision, the court pointed inter alia to the transparent nature of petrol distribution markets which led to parallel and interdependent conduct. Hence, price formation was due mainly to the inherent characteristics of the market and not the information exchange. Given the explicit exchange of price information it is doubtful that the outcome at European level would have been the same, see in this respect Case C-8/08, T-Mobile Nederland, ECR 2009, p. I-4529. See footnote 29 of Guidelines on horizontal mergers, Appendix 7. See Case T-342/99, Airtours, ECR 2002, p. II-2585, paragraph 62, Case T-464/04, Impala, ECR 2006, p. II-2289, paragraph 247, and Case C-413/06, Bertelsmann and SONY, ECR 2008, p. I-4951, paragraph 123.

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The fact that the pricing behaviour of a small group of suppliers can sometimes be explained by the conditions on the market concerned can be illustrated by surveys of price developments within the former English and Welsh electricity pool which showed that the parallel price movements of the participating electricity generators were a consequence of high supply concentration, market transparency, the homogeneity of the product, the rigid regulation of the pool, which did not allow bilateral sales outside the pool and the low flexibility of demand.649 In other words, generators did not need to expressly fix prices. They could achieve a similar result by adopting an economically rational strategy of conscious parallelism which due to the absence of explicit collusion was not caught by Article 101(1).650 The electricity pool for England and Wales was subsequently replaced by a much more open and less transparent market arrangement allowing transactions over the power exchange as well as through bilateral sales contracts. Another illustrative example of the consequences of (an artificially) high degree of market transparency is the Danish cement sector.651 In October 1993 the Danish Competition Authority began collecting and publishing information on firm-specific actual transaction prices, i.e. list prices less discounts. During the first six months of 1994 prices rose by almost 20% and price differences among suppliers were virtually eliminated. The example shows that public authorities have to think twice before artificially increasing market transparency. The Third Package is promoting market transparency in various respects. It is not given that enhancing transparency promotes competition.652

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If undertakings in a concentrated market agree to exchange commercially sensitive information that facilitates tacit collusion, such agreement may be caught by Article 101(1) either as a restriction by object or effect.653 The Commission’s Horizontal cooperation guidelines contain a chapter on the assessment of information exchange under Article 101 and this is an area of increasing enforcement focus at both European and national level. Technological advances are raising concern that pricing algorithms enable undertakings to exchange information and more effectively monitor pricing behaviour.654 649 See A European Market for Electricity? (R. Vaitilingam ed.) 1999, p. 93-102. 650 However, undertakings that engage in tacit collusion may be held to have abused a collective dominant position contrary to Article 102, see e.g. Joined Cases C-395/95 and C-396/95, Compagnie maritime belge, ECR 2000, p. I-1365. 651 See Church & Ware, Industrial Organisation – A Strategic Approach, McGraw-Hill, 2000, p. 341f. 652 See in this respect Article 40 of Directive 2009/72/EC concerning common rules for the internal market in electricity and repealing Directive 2003/54/EC, OJ L211/55 of 14.8.2009. 653 See Case C-7/95 P, John Deere, ECR 1998, p. I-3111 and Horizontal co-operation guidelines, Appendix 3, Chapter 2. 654 See e.g. OECD paper on Algorithms and Collusion, 9 June 2017. The emergence of intelligent algorithms does not affect the legal test under Article 101(1) TFEU. There must be evidence of collusion between

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Information exchange is relevant to all forms of cooperation agreements. The parties will need to exchange a certain amount of information for their cooperation to function properly. Such ancillary exchanges that are necessary for the agreement to function are assessed together with the other elements of the cooperation. This means that the information exchange does not need to generate separate benefits in order to Article 101(3) to apply.655 In the case of non-ancillary exchanges, the information exchange must generate efficiencies that are necessary to outweigh any restrictive effects. Most information exchanges are caught by Article 101(1) only when they have likely appreciable adverse effects on competition. The main exception is where competitors inform each other of their intentions concerning future pricing, output or sales.656 Such exchanges are considered restrictions by object and are liable to be treated as hard-core cartels. Even a single meeting in which competitors exchange commercially sensitive information may be considered to have as its object to restrict competition.657 In T-Mobile Netherlands the Court of Justice took the view that an exchange of information and discussion amongst competitors of standard dealer remunerations in a single meeting amounted to a concerted practice involving price fixing.658 When transparency is imposed by an EU or Member State measure Article 101 does not apply because transparency does not result from any autonomous conduct by the undertakings concerned.659 For instance, compliance with the transparency obligations imposed by the REMIT Regulation660 does not expose energy compnies to liability under Article 101. However, this “state action defence” is narrowly construed. Thus, if energy companies agree to exchange commercially sensitive information beyond the requirements of REMIT Article 101 may be infringed.

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Absent a restriction by object, the exchange of information between competitors may restrict competition within the meaning of Article 101(1) when it reduces or removes the degree of uncertainty as to the operation of the market in

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655 656 657 658 659 660

undertakings and thus that there is a meeting of minds regarding market conduct. See in this regard, Case C-74/14, Eturas, ECLI:EU:C:2016:42. See in this regard also Case C-382/12 P, Mastercard, 2014 ECR page I-0000, paragraph 90. See Horizontal co-operation guidelines, paragraph 73. Information exchanges are not considered to have a restrictive object when they occur in the context of and are reasonably related to a wider business cooperation such as a joint venture to construct and operate a new power plant. See Case C-8/08, T-Mobile Netherlands, ECR 2009, p. I-4529, paragraph 37. See e.g. Joined Cases C-359/95 P and C-379/95 P, Ladbroke Racing ECR 1997, p. I-6265, paragraphs 33 and 34 Regulation 1227/211 on wholesale energy market integrity and transparency, OJ 2011 L 326/1 of 8.12.2011.

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question, with the result that competition between undertakings is restricted.661 A distinction is made between transparency that occurs naturally in the market and transparency that is created by undertakings by exchanging commercially sensitive information. This distinction is illustrated by the French Petrol Stations case. In this case operators of petrol stations on French motorways informed each other by phone of the prices charged for the various types of fuel. The information was exchanged the evening before the prices were applied. It thus gave each operator the opportunity to adjust its own prices to those of its competitors. The French competition authority adopted a prohibition decision with fines. The decision was annulled on appeal by the Paris court of appeal.662 The court reasoned that the market was concentrated and very transparent and that the observed parallelism in prices – which was not perfect – could be explained by the normal functioning of the market. This assessment is highly unlikely to reflect the current state of the law. It may well be the case that the information exchange did not significantly affect competition in the market concerned. However, information on contemplated prices is by nature sensitive and the exchange did provide the participants with information that they would otherwise only have had access to at a later point in time if they would go through the trouble of collecting it themselves. The information was not generally accessible in the exchanged form. Information is considered genuinely public only where it is generally accessible in terms of cost of access to all competitors and customers.663 In view of the T-Mobile Netherlands case law it is likely that such a scheme is caught by Article 101(1).664

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The assessment of whether an information exchange has likely restrictive effects on competition is bases on a number of factors relating to the structure of the market and the nature of the information exchanged. The structural factors include concentration levels, the degree of market transparency and the contribution of the exchange to such, the degree of market complexity and stability and the symmetry of market positions. The more concentrated and stable the market and the more the exchange contributes to market transparency, the greater the likelihood of adverse effects on competition.665 The likely impact of the exchange on competition also depends on the nature of the information that is 661 See e.g. Case C-194/99 P, Thyssen Stahl, ECR 2003, p. I-10821, paragraph 81. 662 See judgment of cour d’appel de Paris of 9.12.2003 annulling the decision of the French competition authority in Case 03-D-17, distribution of petrol on motorways. 663 See paragraph 92. 664 The Horizontal co-operation guidelines, Example 5 (paragraph 109) in effect contradicts the Paris court of appeal in the French Petrol Stations case. Thus, it is clear that the Commission does not share the court s interpretation of Article 101(1). 665 See Horizontal co-operation guidelines, paragraph 77 seq., Appendix 3.

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exchanged. The more sensitive the information the more likely it is to adversely affect competition. A number of factors are taken into account in the assessment of sensitivity:666 the strategic importance of the information. Information on prices and output is generally considered the most sensitive. Other factors include the frequency of the exchange, the age of the data and whether the data is individualised or aggregated such that it is no longer possible to identify the firm to which the data relates. In general, an information exchange is more likely to give rise to competition concerns when it involves a frequent exchange of recent individualised data. The following discussion of horizontal restrictions of competition will start with “hard-core” restraints and then address various forms of co-operation between competitors providing for an integration of economic activity. Where necessary the general principles are recalled in order to put energy-specific topics into their proper perspective.

2.

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Cartels and hard-core restraints

Cartels are the most serious violations of the competition rules. They are secret agreements or concerted practices between competing firms to fix prices, limit production or share markets or customers. Cartels cause direct and immediate harm to competition and consumers without producing any objective economic benefits. Recurrent and widespread cartel activity can also result in lower productivity gains, fewer technological improvements or the creation or maintenance of uneconomic industry structures. The weakening of competition caused by cartels may eventually lead to a loss of competitiveness of European industry. For these reasons the detection, prosecution and punishment of cartels constitutes an enforcement priority of EU competition policy not only in the energy sector but in all sectors.667 The Commission and the national competition authorities alike apply a policy of zero tolerance. There used to be a limited exception for so-called “crisis cartels”, i.e. sector-wide arrangements in chronically declining industries to limits capacity.668 However, this limited exception is no longer applied.669 The cartel enforcement policy at European level has to a very significant extent been based on the “leniency policy” which was introduced in 1996 and subsequently revised in 2002 and 666 See Horizontal co-operation guidelines, paragraph 86 seq., Appendix 3. 667 See Commission, Competition Report 2002, p.28, 32 paragraphs 26, 52; Communication p.18; recital 1 of Commission Notice on immunity from fines and reduction of fines in cartel cases, OJ C 298/17, 8.12.2006. 668 See for the most recent example, Commission Decision in Stichting Baksteen, OJ L131/15 of 26.5.1994. 669 See in this respect Case C-209/07, Beef Industry Development Society, 2008 ECR, page I-8637.

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2006. Under this policy the Commission grants reductions of fines or even total immunity from any fine to companies voluntarily submitting evidence of a secret cartel aimed at fixing prices, production or sales quotas, sharing markets including bid-rigging or restricting imports or exports.670 Suppliers fix prices when they agree amongst themselves on the price they charge to their customers for a particular product or service or components of the price. Sometimes it is easier to agree on output limitations than on prices. The result for consumers is however very much the same. Price-fixing and output limitations directly lead to consumers paying higher prices and not receiving the desired quantities. Market or customer sharing occurs when suppliers agree to limit their activities to certain energy products or geographical supply areas and abstain from competing for other energy products or supply areas. Market partitioning reduces the choice of consumers between energy suppliers and deprives them of the benefits of price and quality competition.671 The agreement of European producers of steel tubes used by the oil and gas industry not to compete in each other’s domestic markets is an example of geographic market sharing. The Commission detected the illegal practice and imposed very significant fines fine.672 Price-fixing, output limitations and market sharing agreements are referred to as “ hard-core restrictions”. The Guidelines on the application of Article 101(3) provide that for such types of restraints, “ it can be presumed that [they] have negative market effects. They are therefore almost always prohibited”.673 This statement contains two important messages. First, the negative effects of hardcore restrictions are so well known and established that they do not have to be proven in each individual case.674 It suffices to show that two or more firms actually fixed prices or agreed on any of the other hard-core restraints. Second, price-fixing, output limitation and sharing of markets or customers have almost 670 See Commission, Notice on immunity from fines and reduction of fines in cartel cases, OJ C 298/17, 8.12.2006. 671 Territorial sales restrictions agreed between competing suppliers are furthermore contrary to the market integration goal of the EU. Suppliers are not allowed to re-erect private barriers between Member States where state barriers have been successfully abolished and thereby hold up the economic interpenetration of national markets which will ultimately lead to the creation of a single European energy market. This would be contrary to the Community policy to build and maintain an internal market, see Article 3(3) EU. 672 See Commission, decision of 8.12.1999, OJ L 140/1, 6.06.2003 – Seamless steel tubes. In 2007 the Commission fined eleven groups of companies a total of 750 million EUR for participating in a cartel for gas insulated switchgear projects. Between 1988 and 2004, the companies concerned rigged bids for procurement contracts, fixed prices, allocated projects to each other, shared markets and exchanged commercially important and confidential information, see press release IP/07/80. 673 See Guidelines on the application of Article 101(3), paragraphs 20, 46. 674 See Case C-49/92 P, Anic Partecipazioni, ECR 1999, p. I-4125, paragraph 99.

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always only negative and no positive effects. They are therefore normally prohibited and cannot be justified under the efficiency defence of Article 101(3). The defence can in principle be invoked against any restriction of competition.675 However, in practice hard-core restrictions are unlikely to satisfy the four conditions for exception laid down in Article 101(3). This is particularly true for horizontal hard-core restrictions. Such restrictions do not produce any objective economic benefits, consumers do not receive a fair share and they are generally not indispensable. Cartels are penalised very severely. The parties to such arrangements are not only ordered to bring the infringement to an end,676 they are also imposed the most severe amounts of fines. Regulation 1/2003 allows the Commission to fine individual cartel members up to 10% of their total turnover of the business year preceding the infringement.677 Between 2014 and March 2018 the Commission imposed fines exceeding 8.5 billion €.678 Fines of 3.8 billion € were imposed in the Trucks cartel case.679 The exposure to firms engaging in cartel activity is thus significant. The Commission’s policy on hard-core cartels is illustrated by its decision in GDF/E.ON, which is the first case in which the Commission has imposed very substantial cartel fines on energy companies.680 The case concerns the MEGAL pipeline jointly owned and operated by E.ON Ruhrgas and GDF Suez. MEGAL transports gas across Southern Germany between the German-Czech and German-Austrian borders to the east and the French-German border to the west. When Ruhrgas and Gaz de France decided in 1975 to build the MEGAL pipeline together, they agreed in two letters that GDF would not sell any gas transported over the MEGAL in Germany and neither would Ruhrgas in France. At that time, Gaz de France enjoyed a legal monopoly to import natural gas into France, which was only removed in August 2000. Ruhrgas’ supply area in Germany was de facto protected from competition by a system of so-called “ demarcation agreements” with other German suppliers until such agreements became illegal in April 1998. According to the decision the parties maintained this market-sharing agreement after European gas markets were opened to com675 See Case T-17/93, Matra, ECR 1994, p. II-595, paragraph 85, and judgment of 27.9.2006, Case T-168/01, GlaxoSmithKline, ECR 2006, p. II-2969, paragraph 233. 676 The legal basis for the cease and desist order is Article 7 Reg.1/2003. 677 See Article 23(2) Reg. 1/2003, Appendix 2. 678 See Commission statistics available at http://ec.europa.eu/competition/cartels/statistics/statistics.pdf. 679 Id. 680 See Commission Decision of 8.7.2009, Case COMP/39.401 – GDF/E.ON. The decision is under appeal; see Case T-360/09, E.ON v Commission and Case T-370/09, GDF v Commission.

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petition as from August 2000 by Directive 98/30/EC. They allegedly met on a regular basis at various levels, discussed the implementation of the agreement in the newly liberalised market and monitored each other’s actions. The decision also states that although the parties declared in August 2004 that they had long regarded the letters as “null and void”, they continued until the end of September 2005 to implement the prohibition imposed on Gaz de France to supply gas in Germany that had been transported over the MEGAL pipeline. The Commission imposed fines of 553 million € on each of the two undertakings. The fine imposed on each company was subsequently reduced by the General Court to 320 million €.681 The Commission’s decision illustrates very clearly its tough stance on market sharing and other hard-core restrictions and the risks associated with maintaining agreements that were legal prior to liberalisation but subsequently became subject to Article 101 post-liberalisation. If such agreements are not clearly and unequivocally brought to an end there is a clear risk that in light of surrounding circumstances they are considered to have been maintained.

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More recently, the Commission intervened against two European power exchanges that allegedly engaged in market sharing. The case was closed with a catel settlement whereby EPEX and Nordpool agreed to pay fines of 3,651,000 respectively 2,328,000 €. The Commission took the view that the power exchanges engaged in a non-competition arrangement covering all their spot electricity trading services in the EEA and beyond. The aim was to restrict competition between them, to protect their traditional market and to agree on expansion to new countries.682 In 2012 the Romania competition authority imposed fines totalling € 200 million on six Romanian oil companies for coordination on the market. The companies were found to have exchanged information on their future conduct on the market and agreed on ceasing the supply of gasoline Eco Premium.683 Another example of a hard-core restriction of competition is the French jet fuel case684. This case involves alleged bid rigging between four suppliers of jet fuel. Air France launched a call for tender for the supply jet fuel to its flights from the island of Réunion. The four suppliers allegedly coordinated their bids by agreeing that they would each offer a volume reflecting their existing market share. Air France was thereby obliged to contract with all of them to cover its needs. Price competition was thereby eliminated. The French competition authority imposed fines of 41 million €. 681 682 683 684

See e.g. Case T-360/09, E.ON, ECR 2012, page II-0000. Commission Decision in Case AT.39.925, Power Exchanges of 5.3.2014. Romanian NCA, 10 January 2012, Pterom, Lukoil, Rompetrol, Downstream, Mol Petroleum, ENI. See Decision of the French Competition Authority in Case 08-D-2008 concerning the practices of Shell, ESSO, Chevron and Total. The decision is under appeal.

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The Commission’s intervention against cartels in the energy sector begs the question why it is not taking action against the Organisation of Petroleum Exporting Countries (OPEC).685 OPEC operates as a cartel in that its members decide collectively on the production volumes and quota for each of its Member countries. However, OPEC is an organization of States in which Ministers act in their capacity as owners and managers of a natural resource. Their decisions on production levels are acts of sovereign States and not an agreement entered into by undertakings as required by Article 101. Even where some Ministers are at the same time members of the board of petroleum selling companies, their participation in OPEC decisions do not turn them into decisions of undertakings caught by EC competition law and Article 101 in particular. The acts of OPEC are thus not subject to antitrust scrutiny. This analysis of the Commission is shared by the U.S. antitrust authorities and courts.686 A similar conclusion would have to be drawn if gas exporting countries were to form a ‘gas’ OPEC. It would only be otherwise if the representatives of the gas exporting companies themselves met and entered into discussions about production levels or prices. In such circumstances it is irrelevant that some of the world’s largest gas exporters are state-owned. They remain undertakings for the purposes of Article 101.

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Co-operation agreements between energy companies

The following sections deal with various types of horizontal co-operation agreements between energy companies. Co-operation agreements can take a great variety of forms. Companies operating at the same level of trade may choose to cooperate with respect to one or several functions of their energy business. They may opt, for example, to collaborate only with regard to energy production or energy commercialisation or both production and commercialisation. The envisaged co-operation may furthermore integrate parts or all their activity with respect to a specific business function. Another relevant aspect is whether the parties will carry out one or more functions jointly, e.g. in a joint venture, or will entrust each other reciprocally or unilaterally to carry out such activities, which is generally referred to as specialisation. The subsequent sections focus on those types of co-operation that have attracted the attention of the competition authorities in the past.

685 See Case No. M.1383 of 29.09.1999 – Exxon/Mobil, paragraph 28. 686 See Commission Memo/00/55 of 20.09.2000, Appendix 12 and Statement of the Federal Trade Commission of 29.03.2000, available at http:// www.house.gov/judiciary/park0329.htm.

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Co-operation in the form of “ full-function joint ventures” will under certain conditions be subject to merger control and not antitrust law.687 They will therefore not be dealt with here but in Chapter V on merger control.688 Here, the focus is on competition issues raised by co-operations that are not full-function joint ventures and which do not therefore fall within the scope of the Merger Regulation. More specifically, the discussion will focus on co-operation agreements between competitors in the areas of energy commercialisation, production and infrastructure.

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Generally speaking, horizontal restraints on competition are more likely to arise where a co-operation relates to business functions close to the market and to customers. The more a co-operation directly or indirectly leads to the co-ordination of the competing parties’ market conduct towards customers, the more the arrangement is likely to raise competition concerns. Consequently, all forms of commercialisation cooperations (i.e. joint sales agreements) between competitors are more likely to cause problems than cooperations in the area of exploration and production.

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Where parties carry out a joint commercial activity, non-compete obligations are common and are often necessary to align incentives and ensure that the parties are fully committed to that joint activity. While such obligations between competitors are generally deemed to be restrictions by object because they necessarily restrict competition that would have occurred in their absence, that is not the case when they are ancillary to a legitimate joint commercial activity, that is, when they are directly linked and necessary to implement it.689

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A distinction is generally made between in-term and post-term non-compte obligations. The Commission has made clear that “a non-competition obligation between the parent undertakings and a joint venture may be considered directly related and necessary” to the implementation of the joint venture agreement.690 The Commission explains further that “non-competition clauses reflect, inter alia, the need to ensure good faith during negotiations; they may also reflect the need to fully utilise the joint venture’s assets or to enable the joint venture to assimilate know-how and goodwill provided by its parents; or the need to protect 687 An example for such a joint venture is the entry of Wingas in the gas trading company of Norsk Hydro in the United Kingdom Hydro Wingas. See Norsk Hydro/Wingas/Hydrowingas JV in Case No. M.3350 of 2.02.2004. 688 See book paragraphs 4.30. et seq. 689 Case 42/84 Remia ECR 1985 page 2545, paragraph 20 690 See paragraph 36 of the Commission Notice on restrictions directly related and necessary to concentrations, OJ C 56/24, 05.03.2005.

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the parents’ interests in the joint venture against competitive acts facilitated, inter alia, by the parents’ privileged access to the know-how and goodwill transferred to or developed by the joint venture.” 691 However, in-term non-competition obligations qualify as ancillary restraints only if they “correspond to the products, services and territories covered by the joint venture agreement”.692 An obligation to purchase a product exclusively from a joint venture is block exempted.693 Post-term non-competition obligations are typically found to be ancillary in the context of the transfer of a business where the purchaser may need protection against competition from the seller in order to obtain the full value of the assets transferred.694 Siemens/Areva illustrates the Commission’s assessment of non-compete obligations.695 In 2001, Siemens and Areva created a full-function joint venture in which they combined their respective activities in relation to nuclear power plants. In 2009, Siemens decided to leave the joint venture. The joint venture agreement between the two companies included a non-compete obligation, which not only covered the lifetime of the joint venture but was to continue for a period of eight to 11 years after Siemens’ loss of joint control in the joint venture. In its commitments decision, the Commission took the preliminary view that the non-compete clause infringed Article 101 due to its broad scope and long duration. The clause prevented, on a worldwide basis, competition by Siemens on the markets of the joint venture’s core products and core services, in particular nuclear islands, nuclear services, and nuclear fuel assemblies. It also prevented competition with respect to a number of markets where the joint venture was not active or was active only occasionally as a reseller of Siemens’ products (various components and conventional islands for nuclear power plants). Thus, the non-compete obligations included products that did not form part of the joint activities.

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The case demonstrate that even in an industry characterized by long-term investments, such as the nuclear industry, non-compete clauses are scrutinized carefully and must be limited to the strict minimum in terms of duration and scope. Moreover, in order for a non-compete clause to be acceptable following the end of joint activities, it is necessary that there is a genuine nexus between the restraint and the previous joint activities. In the absence of such nexus between the scope of the restraint and the economic activity covered by the cooperation agreement, a non-compete clause will be difficult to justify.

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691 692 693 694 695

Id. Id. See Article 2(3)(a) of Commission Regulation1218/2010 on categories of specialisation agreements. See Commission Decision of 18.6.2012, Case COMP/39736 – Siemens/Areva (2012), paragraph. 50. Commission Decision of 18.6.2012, Case COMP/39.736 – Siemens/Areva.

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3.1 General principles and factors 3.72

Before dealing with the individual aspects of the various types of cooperation arrangements between energy companies it is useful to first set out a number of general principles and factors that are common to these cooperation agreements. These factors form the basis of the self-assessment that energy companies need to engage in when concluding and implementing cooperation agreement.

3.1 Factors relevant to the assessment under Article 101(1) FEU 3.73

The competition assessment required under Article 101(1) is based on a number of market related factors that collectively aim at allowing the person conducting the assessment to ascertain the likely market effects of the agreement. The main factors are the following:696 •

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Market position of the parties to the co-operation agreement

Market shares are commonly regarded as a useful indicator of market power, i.e. the ability to charge prices above the competitive level and adversely affect other important aspects of competition and consumer welfare. The higher the combined market share of the parties, the greater is the probability that they possess a significant degree of market power. However, the market share analysis has to be refined taking into account the specificities of the industry and the market concerned. This may mean for electricity markets, for instance, that the market power of a generator may be more significant than its market share might suggest. Since electricity cannot yet be stored on a large scale,697 a generator may have power over price or output at certain times because its power plants are mainly geared towards producing peak power or because its capacity is in any event indispensable to satisfy market demand. Market power analysis can therefore usefully draw on additional indicators such as the Pivotal Supplier Index (PSI) and Residual Supply Index (RSI).698 The PSI provides the percentage of hours during which a given operator is indispensable to meet demand in the market, i.e. where the sum of the available generation capacities of all other

696 See Horizontal co-operation guidelines paragraph 20 seq., Appendix 3 and Vertical restraints guidelines paragraph 111 seq., Appendix 4. 697 Advances in battery technology is paving the way for storage of electricity that over time may affect the traditional economics of power generation where continuous generation is required to balance supply and demand. See in this regard https://www.forbes.com/sites/kensilverstein/2018/07/13/energy-storage-making-headway-in-california-and-paving-way-for-other-states/#2617d48f6ee9. 698 See Final Report on the Energy Sector Inquiry, pp. 319 et seq.

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producers in the market is not sufficient to meet demand in the given hour.699 A high percentage of hours indicates that the operator is indispensable (Pivotal) for a substantial period of time, giving it the scope to exercise market power for sustained periods of time. The RSI of a given operator in a given hour is a ratio between the between the sum of the available capacity of all other operators and total demand in that hour. In addition to measurements of concentration and indispensability other factors that may be indicative of market power are taken into account. Competitive advantages like cost advantages, superior technology, flexible power plants based on broad fuel mix, brand leadership or superior product portfolios may further underpin an indication of market power based on market shares. The ensuing additional factors may or may not confirm the competition analysis of the market position of the parties to the co-operation agreement.700 •

Market position of competitors

Actual competition from third parties is generally the most important competitive constraint facing the parties to the agreement. The stronger the rivals are and the greater their number, the less likely it is that the agreement restricts competition. If their competitors have significantly lower market shares than the parties, this is an indication that the agreement may allow the parties to gain, maintain or increase market power. If the number of rivals is small and their market position similar to that of the parties, one speaks of an oligopolistic market. On such markets a restriction of competition through tacit collusion may occur. It is recalled that tacit collusion requires that the firms belonging to the oligopoly have similar views on what is in their common interest and how the co-ordination mechanisms functions. This means that the firms must be able to monitor each other’s market behaviour and that there must be adequate deterrents to ensure that there is not an incentive to depart from the common policy on the market. While tacit collusion as such is not caught by Article 101, agreements that facilitate tacit collusion may restrict competition within the meaning of that provision. •

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Countervailing buyer power

Besides rivals, buyers may also be capable of exerting a competitive constraint on the parties to the agreement. The market share of professional buyers as pur699 The PSI index thus measures the extreme situation where an operator ceases entirely to supply. 700 See in this respect study on Structure and Performance of Six European Wholesale Electricity Markets in 2003, 2004 and 2005, February 2007. The study is published on the DG Competition website.

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chasers, and if they are resellers, their share of the respective resale markets, the geographic spread of their outlets and other competitive characteristics provide indications of the probability of the existence of bargaining strength that buyers have because of their commercial significance and their ability to switch to alternative suppliers. However, the existence of countervailing buyer power presupposes that they have a real possibility to sponsor new entry or switch between existing suppliers. If the agreement allows the parties to obtain a high degree of market power buyers may have little scope for reducing such market power. This is particularly the case in energy markets where demand is inelastic. Moreover, buyer power is only taken into account as a significant competitive constraint if it affects the overall market. It is not sufficient that a few large buyers get a better deal if the agreement still allows the parties to exercise market power over the rest of the market.701 •

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Mobility or entry barriers

Regulation, import constraints, natural limitations on energy resources, economies of scale and other obstacles may limit the growth of actual competitors or the entry of potential competitors. If, for example, the minimum efficient scale702 for the production or commercialisation of an energy product is large compared to the size of the market, potential competition may be less likely because efficient entry may be costly, require time and therefore be risky. This means that the size of the geographic market matters. For instance, the risks of entering a market with a new nuclear power plant may be greater in a small market than a large market because the volume and price impact will be greater in a small market. The viability of entry depends inter alia on the likely postentry price. If, on the other hand, potential entrants have access to cost-efficient methods or other competitive advantages allowing them to compete successfully against incumbents, this may facilitate entry. For network industries like electricity and gas the lack or scarcity of available transmission capacity, especially on a trans-European basis, often forms an important barrier for competition to emerge. The Commission regards entry barriers to be low if a new market entrant is likely to erode supra-normal profits (prices above minimum average costs) within one or two years.703

701 See Commission Guidelines on the application of Article 101(3), paragraph 115. 702 The minimum efficient scale is defined as the rate of output where average costs are minimised. If the minimum efficient scale is large compared to the size of the market, efficient entry is likely to be more costly and risky. 703 See Vertical restraints guidelines paragraph 117, Appendix 4.

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•

Other factors

Other factors such as the maturity of the energy market or the level of trade can complete the analysis of the above mentioned elements. Negative competition effects of cooperation agreements are more likely in a relatively stable or declining market. In contrast, negative competition effects are generally less probable at the level of intermediate energy products or services.

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3.3 Efficiency defence under Article 101(3) FEU For all co-operation agreements between energy suppliers found to restrict competition and not benefiting from the safe harbour of a block exemption regulation, the efficiency defence of Article 101(3) may be invoked. When the four cumulative and exhaustive conditions of Article 101(3) are satisfied, the agreement enhances competition within the relevant market, since it leads the undertakings concerned to offer cheaper or better products to consumers, compensating the latter for the adverse effects of the restrictions of competition. The very essence of competition is the effort to win customers by offering cheaper, better and more innovative products on the market. Agreements that on balance improve supply to the market are pro-competitive.

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The Commission’s Guidelines on the application of Article 101(3)704 reflect the regime created by Regulation 1/2003, where undertakings have to self-assesses whether their agreements are compatible with Article 101 and where the Commission is focussing on pro-active enforcement against agreements and practices that give rise to real competition concerns. As a result of the more effects based approach under Article 101(1), fewer cases will be caught by the prohibition rules.705 However, when Article 101(1) does apply, careful analysis of all four conditions of Article 101(3) is required.

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•

Does the co-operation contribute to improving the distribution of energy products or services706 or contribute to promoting technical or economic progress?

The purpose of the first condition of Article 101(3) is to establish whether a cooperation restricting competition generates objective and verifiable economic 704 OJ 2004 C101/ 97 of 27.04.2004 705 See above book, Chapter 3.36. 706 Article 101(3) TFEU applies by analogy also to services, see Guidelines on the application of Article 101(3) paragraph 48.

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benefits. The benefits can derive from cost reductions (“quantitative efficiency gains”) or from advantages of a qualitative nature, e.g. new products, improved quality, greater product variety etc. (“qualitative efficiency gains”)707. The benefits that are taken into account under the first condition must result from the economic activity covered by the agreement but need not flow from its restrictions. The nexus between the benefits and the restrictions is analysed under the condition of indispensability. In general, relevant economic benefits stem from the economic activity which is regulated by the agreement and more specifically from an integration of economic activity whereby undertakings combine assets to achieve what they could not achieve as efficiently on their own or whereby they entrust another undertaking with tasks that can be performed more efficiently by that other undertaking.708 The research and development, production and distribution process may be viewed as a chain709 that can be divided into a number of stages. Cooperation between undertakings at each stage of this chain may give rise to economic benefits within the meaning of Article 101(3)710. Distribution agreements may in particular allow the parties to reduce costs or provide better services to customers.

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In order to maintain a proper balance between Article 101(1) and Article 101(3) and as a consequence of the greater weight attributed to economic analysis and the consumer welfare objective, the Guidelines impose more rigour in the assessment of efficiency claims. Efficiency claims must be backed up by evidence before they can be given weight by the Commission. As the Court of Justice has confirmed, the burden of proof falls on the undertaking invoking the benefit of Article 101(3).711 However, the facts relied on by that undertaking may be such as to oblige the other party to provide an explanation or justification, failing which it is permissible to conclude that the burden of proof has been discharged.712 The Guidelines713 provide that all efficiency claims must be substantiated so that the following can be verified: (1)

The nature of the claimed efficiencies;

(2)

The link between the agreement and the efficiencies;

707 708 709 710 711

See Guidelines on the application of Article 101(3) paragraphs 59, 69. See Guidelines on the application of Article 101(3), paragraph 60. This term has been developed by Porter, Competitive Advantage, The Free Press, 1985. See Guidelines on the application of Article 101(3), paragraph 61. See Joined Cases C-501/06 P a.o., GlaxoSmithKline Services, ECR 2009, p. I-9291, paragraph 83. This allocation of the burden of proof is codified in Article 2 of Regulation 1/2003. 712 Id., and Horizontal co-operation guidelines, paragraph 48, Appendix 3. 713 See paragraphs 98 and 102.

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(3)

The likelihood and magnitude of each claimed efficiency; and

(4)

How and when each claimed efficiency would be achieved.

While the Guidelines clearly establish a rigorous framework for assessing efficiency claims, they also explicitly acknowledge that the assessment of efficiencies is not an exact science. Words such as “as accurately as reasonably possible” suggest that the obligation imposed is one of best efforts. ­Moreover, the Guidelines as a whole are based on a sliding scale approach:714 the greater the competition concerns identified under Article 101(1), the greater must be the efficiencies and the more they must be substantiated. The analysis of pro-competitive and anti-competitive effects under Article 101 is often a question of probabilities.715 What the party invoking Article 101(3) is required to do is to make a convincing case in its favour.716

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Are the co-operation agreement and its individual restriction indispensable to achieve the efficiencies?

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The second condition of Article 101(3) requires an analysis of whether the agreement as such or its individual restrictions, e.g. a market sharing clause, are indispensable to attain the benefits. It must therefore be asked whether the collaborating suppliers could not have achieved the same benefits through internal growth (“agreement-specificity of the benefit”) or without the restriction (“restriction-specificity of the benefit”)?

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A restriction is indispensable if its absence would eliminate or significantly reduce the efficiencies that follow from the agreement or make it significantly less likely that they will materialise. If there are less restrictive means to achieve the benefits of the envisaged co-operation, only these will be compatible with Article 101.717

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When applying the indispensability test, the decisive factor is whether or not the restrictive agreement and individual restrictions make it possible to perform the underlying economic activity more efficiently than would likely have been the case in the absence of the agreement or the restriction concerned.718 The question is not whether, in the absence of the restriction, the agreement would

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714 715 716 717 718

See e.g. paragraph 90. See Case T-168/01, GlaxoSmithKline, ECR 2006, p. II-2969, paragraph 302. See Joined Cases C-501/06 P a.o., GlaxoSmithKline Services, ECR 2009, p. I-9291, paragraph 82. See Guidelines on the application of Article 101(3), paragraphs 75, 78. See Guidelines on the application of Article 101(3), paragraph 74.

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have been concluded or not, but whether more efficiencies are produced with the agreement or restriction than would have been the case in the absence of the agreement or restriction.719

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Moreover, it is important to note that undertakings invoking the benefit of Article 101(3) are not required to consider hypothetical or theoretical alternatives. The Commission makes clear that it will not second-guess the business judgment of the parties. It will only intervene where it is reasonably clear that there are realistic and attainable alternatives. The parties must only explain and demonstrate why such seemingly realistic and significantly less restrictive alternatives to the agreement would be significantly less efficient. •

Do consumers receive a fair share of the economic benefits resulting from the distribution agreement?

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According to the third condition of Article 101(3) the negative effects of the arrangement have to be balanced against its positive effects on consumers. The net effect of the co-operation has to be at least neutral in order to be compatible with competition law. This implies that actual or potential customers of the collaborating parties must be fully compensated for any actual or likely adverse effect (“full compensation principle”).720 On the other hand it is not a condition that consumers require a certain minimum share of the benefits or that they receive a share of all the different types of benefits that may flow from an agreement.721 The third condition of Article 101(3) is satisfied once the positive effects of the agreement on consumers outweigh the negative effects. It is also not a condition that each and every consumer in an adversely affected relevant market benefits. Under Article 101(3), it is the beneficial nature of the effect on the affected group of consumers that must be taken into consideration, not the effect on each member of that category of consumers.722

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In previous guidelines723 the Commission assumed that sufficient pass-on would normally occur if sufficient residual competition was maintained on the market. The Guidelines on the application of Article 101(3) have abandoned this pre719 In the case of intra-brand restrictions, Article 101(1) does not apply if in the absence of the restraint such an agreement would not have been concluded, see Guidelines on the application of Article 101(3), paragraph 18(1). 720 See Guidelines on the application of Article 101(3), paragraph 85. 721 See Guidelines on the application of Article 101(3), paragraph 86. 722 See Case C-.238/05, Asnef-Equifax, ECR 2006, p. I-11125, paragraph 70. 723 See paragraph 34 of the 2000 Guidelines on horizontal cooperation agreements and paragraph 136 of the 1999 Guidelines on Vertical Restraints.

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sumption. Residual competition remains relevant but is only one factor amongst others. In the absence of restrictions by object, Article 101(1) applies only when the parties have or obtain a significant degree of market power and the agreement contributes to the creation, maintenance or strengthening of market power. In other words, Article 101(1) applies only where the undertakings concerned are not subject to an effective competitive constraint. In such cases it is not warranted to assume that residual competition on its own is sufficient to ensure that adequate pass-on of the benefits to consumers occurs. This is not to say that residual competition is irrelevant. The factors that according to the Guidelines are particularly relevant are (a) the characteristics and structure of the market, (b) the nature and magnitude of the efficiency gains, (c) the elasticity of demand, and (d) the magnitude of the restriction of competition.724 The reference to market structure and characteristics captures the degree of residual competition in the relevant market. The second factor reflects the fact that some types of efficiency are more likely to be passed on than others. Indeed, efficiencies of a qualitative nature that manifest themselves in the goods and services sold to consumers are necessarily passed on. If a production joint venture leads to the production of an improved product or a distribution agreement leads to the provision of improved services, these benefits are necessarily passed on to users of the goods and services in question. In such cases, the main task is to assess whether these benefits are sufficient to compensate for any price increase or other likely anti-competitive effects resulting from the agreement such as foreclosure of competitors and a resulting loss of product variety. In the case of cost efficiencies the situation is more complex. Cost savings will generally only benefit consumers if they lead the undertakings concerned to lower prices. Economic theory suggests that this is more likely to occur in the case of reductions in variable costs than in the case of fixed cost reductions. Undertakings maximise their profits by selling units of output until marginal revenue equals marginal cost. Marginal revenue is the change in total revenue resulting from selling an additional unit of output. Marginal cost is the change in total cost resulting from producing that additional unit of output. If marginal costs fall, even undertakings with market power may have an incentive to reduce prices whereas the same is not true for fixed costs. This does not mean that fixed costs savings cannot be taken into account. However, given the facts that economic theory predicts that undertakings have no direct incentive to pass on 724 See Guidelines on the application of Article 101(3), paragraph 96.

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fixed cost reductions, the burden of proof is higher in the case of such efficiencies. It may be that in reality reductions in fixed costs do have an impact on pricing decisions, and if undertakings can make a robust case in their favour, the Guidelines leave the door open for taking such efficiencies into account.

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The extent to which cost savings will lead to an increase in output and a reduction in price also depends on the elasticity of demand. The actual pass-on rate depends on the extent to which consumers respond to changes in price. The greater the increase in demand caused by a decrease in price, the greater the passon rate. This follows from the fact that the greater the additional sales caused by a price reduction due to an increase in output, the more likely it is that these sales will offset the loss of revenue caused by the lower price resulting from the increase in output.725 In energy markets where elasticity of demand is generally low, the pass-on of a high share of costs savings may thus be unlikely, since a price reduction will not have a large impact on demand. However, it must be taken into account that the elasticity of demand for the output of an individual undertaking is likely to be higher than the elasticity of demand on the overall market. However, as many gas and electricity markets are highly concentrated the firm specific and market elasticity of demand may often substantially converge with the result that significant pass on of cost efficiencies is unlikely.

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Finally, the second condition of Article 101(3) implies that the pro-competitive effects and the anti-competitive effects created by the agreement must be balanced against each other and the pro-competitive effects must outweigh the anti-competitive effects. The efficiency effect must dominate the market power effect of the agreement. This exercise can in practice be a difficult one. It is therefore important that the Guidelines726 provide that if the restrictive effects of an agreement are relatively limited and the efficiencies are substantial, it is likely that a fair share of the cost savings will be passed on to consumers. In such cases it is therefore normally not necessary to engage in a detailed analysis of the second condition of Article 101(3), provided that the three other conditions for the application of this provision are fulfilled. Conversely, if the restrictive effects of the agreement are substantial and the cost savings are relatively insignificant, it is very unlikely that the second condition of Article 101(3) will be fulfilled. Full-blown balancing is thus confined to “grey zone” cases, where it is unavoidable, unless the agreement has already failed one of the other cumulative conditions of Article 101(3). In practice, agreements are unlikely to escape Article 101 on efficiency grounds when their impact on competition is substantial. In such cases competi725 See Guidelines on the application of Article 101(3), paragraph 99. 726 See on the application of Article 101(3), paragraphs 90 and 91

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tion authorities will likely be reluctant to conclude that the restrictions of competition are justified on efficiency grounds. However, this does not mean that it is not worthwhile to demonstrate the benefits that consumers derive form the agreement. When the benefits are significant competition authorities will also be reluctant to prohibit the agreement and are likely to seek a settlement that leave the arrangement and the resulting benefits substantially intact. • Does the co-operation afford the possibility of eliminating competition in respect of a substantial part of the energy products in question? The last condition of Article 101(3) requires a comparison of the competition situation existing prior to the distribution co-operation and the situation thereafter. The more competition on the energy market is already weakened, the more likely it is that the co-operation eliminates competition. If, for example, the distribution co-operation eliminates price competition or any other important parameter of competition, the efficiency defence is unlikely to justify the restriction of competition it brings about.727 Suppliers enjoying a dominant or quasi-dominant position will find it more difficult to justify a distribution cooperation with a rival than less powerful energy suppliers. However, it is important to note that the concept of dominance is not synonymous with the concept of elimination of competition.728 Given that dominance is a question of degree,729 dominance may be sufficient for a finding of elimination of competition. However the mere finding of dominance is not sufficient. Further enquiry into the degree of market power and the relationship between the agreement and such market power is required.730 According to the Commission’s Guidance Paper on Article 102, it is only when the market position of the parties approaches monopoly that competition is likely to be eliminated.731

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Commercialisation of energy

Commercial cooperations exist in many shapes and forms. They may comprise multiple marketing functions or only one single function such as joint advertis727 See Guidelines on the application of Article 101(3) paragraphs 107, 110. 728 See T-395/94, Atlantic Container Line, ECR 2002, p. II-875, paragraph 330. 729 Compare e.g. Case T-65/89, BPB Industries and British Gypsum, ECR 1993, p. II-389 and Case T-219/99, British Airways, ECR 2003, p. II-5917. 730 Once remedies that reduce the impact on competition below the threshold of elimination of competition are found, the last condition of Article 101(3) cannot serve as a basis for removing further restrictions of competition. This can be required only if the other three conditions of Article 101(3) are not satisfied. 731 See Commission, Communication – Guidance on the Commission’s enforcement priorities in applying Article 102 to abusive exclusionary conduct by dominant undertakings, OJ C45/02, 24.2.2009.

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ing. The compatibility of commercialisation cooperations with competition law depends on their effects on competition. The following three types of commercialisation agreements seem to be particularly frequent or interesting for players in the energy industry: joint selling, distribution by a competitor and other joint marketing activities.

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Joint selling may lead to the determination of all commercial aspects of the sale of a product, e.g. promotion, distribution, sales and service, by the parties to a commercialisation agreement.732 Most importantly, joint selling by definition includes the fixing of the price for the jointly commercialised product.733 Pricefixing therefore constitutes an integral part of every joint selling activity irrespective of whether the partners expressly provide for it in their agreement or not.

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Price fixing between competitors is a hard-core restraint unless it relates to the fixing of prices charged to immediate customers in the context of joint distribution.734 This means that a pure joint sales agency whereby competitors jointly sell individually produced and distributed products will generally be considered to have as its object the restriction of competition irrespective of whether it is exclusive or non-exclusive.735 The fact that the parties would be able to show that the agreement would not have been concluded absent the restraint is of no consequence since the agreement – given that it is concluded between competitors – restricts competition between the parties that would have occurred in its absence.736 Moreover, given the absence of any significant integration of economic activity, a pure joint sales agency is highly unlikely to generate sufficient efficiencies to outweigh the anti-competitive aspects of the arrangement. Indeed, such arrangement generally amount to a cartel and will normally be subject to fines.

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However, if absent joint selling the parties would not have been able to enter a new market the agreement does not restrict competition between the parties on the market concerned. Such cases are sometimes referred to as consortia arrangements, which relate to cooperations between undertakings that are not capable 732 See Horizontal co-operation guidelines, paragraph 225, Appendix 3 733 Id. 734 Article 4(a) Specialisation block exemption Regulation. In this latter case joint selling is not naked but forms part of a broader integration of economic activity. 735 See Horizontal co-operation guidelines, paragraph 234, 235, Appendix 3. 736 Commission Guidelines on the application of Article 101(3), OJ 2004 C101/ 97 of 27.04.2004, paragraph 18(a).

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of independently carrying out a specific project or activity.737 An example of such an arrangement would be the case of two or more energy suppliers jointly selling energy into a new geographic market which it would not be economical for them to enter on their own, e.g. because of the costs and risks involved. Since the members of the consortium are not actual or potential competitors on the new geographic market, joint selling does not restrict competition on this market. However, consortia may have restrictive effects on other markets where they are independently competing. These possible restraints are called “spill-over effects” because co-operation in one market may negatively “spill-over” onto another market. An important prerequisite for such effects to occur is that the co-operating parties enjoy a strong position in the “spill-over market”.738 When joint selling forms part of an overall economic activity which provides for real integration of economic activity it can normally not be considered a hard-core restriction.739 Nevertheless, according to the Horizontal co-operation guidelines the price fixing associated with joint selling is considered a restriction by object unless it is necessary for carrying out the joint economic activity in the sense that the parties would not otherwise have an incentive to enter into the agreement in the first place.740 This is important since in the case of restrictions by object the investigated party has to make a credible efficiency defence before the Commission is required to show likely effects on competition. Hence, there is a greater burden on the investigated company than in the case of restrictions by effect where Article 101(3) becomes relevant only when likely adverse effects on competition have been shown.741 It remains to be seen whether this approach will be maintained following the judgement in Groupement des Cartes Bancaires.742 The case involved an association of French banks that determined various conditions imposed on participants in a payment card system. Unlike the Commission, the European Court of Justice held that the restrictions imposed did not have a restrictive object. It also made clear that for an agreement to restrict competition by object it must by its very nature be harmful to the proper functioning of normal competition. Arguably, this is not the case when joint price setting forms part of a broader integration of economic activity in which the parties market a jointly produced product. 737 See Horizontal co-operation guidelines, paragraph 237, Appendix 3. 738 See Horizontal co-operation guidelines, paragraphs 156, Appendix 3. 739 It may be otherwise if it is clear that there is no reasonable business justification for extending the cooperation to joint selling. 740 See paragraph 160, Appendix 3. 741 See Commission Decision of 14.7.2010, Case COMP/39.596 – BA/AA/IB and of 25.5.2013, Case AT.39.595 – Continental/United/Lufthansa/Air Canada. 742 Case C-67/13 P, Groupement des Cartes Bancaires, ECR 2014, p. I-0000.

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When effects-based analysis is required it is necessary to assess whether the parties have market power and whether the agreement allows the parties to obtain, maintain or strengthen such market power. If the parties have a weak position on the market, joint selling is unlikely to have adverse effects on competition. In such cases joint selling may actually allow the parties to compete more effectively with larger incumbents and therefore have pro-competitive effects. New entrants often face the problem of having insufficient access to gas and electricity. Joint selling may allow them to become a more credible competitor on the market.

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The next step in the analysis is to assess whether the adverse effects are outweighed by efficiency gains. The assessment of efficiencies under Article 101(3) implies inter alia that joint selling and the resulting fixing of prices must be indispensable to achieve the benefits of the cooperation. Price fixing must therefore in general be required for the integration of other marketing functions.743 When the parties collectively have a significant degree of market power joint selling will generally have significant adverse effects on competition in which case substantial efficiencies must be demonstrated.744 This means that when joint selling is caught by Article 101(1), it is unlikely that the conditions of Article 101(3) will be satisfied. In this regard it is important to note that cost savings that arise from the mere exercise of market power by the suppliers cannot be taken into account.745 When companies agree to fix prices they reduce output and thereby production costs. Reduced competition may also lead to lower sales and marketing expenditures. Such cost reductions are a direct consequence of a reduction in output and value and therefore do not constitute objective economic benefits within the meaning of Article 101(3) since they do not produce any pro-competitive effects on the market. In particular, they do not lead to the creation of value through an integration of assets and activities. They merely allow the undertakings concerned to increase their profits and are therefore irrelevant from the point of view of Article 101(3). Secondly, the size of the efficiencies generated through joint selling depends, inter alia, on the importance of marketing in terms of the overall cost structure of the energy product in question. Joint selling is generally more likely to lead to significant efficiencies where the product concerned is widely distributed to final consumers than where it is only bought by a limited number of professional users. A co-operation causing such substantial anti-competitive effects that it eliminates competition on the 743 See Horizontal co-operation guidelines, paragraph 246, Appendix 3. 744 See Guidelines on the application of Article 101(3), paragraphs 90 to 92. 745 See Guidelines on the application of Article 101(3), paragraph 49, and Horizontal co-operation guidelines, paragraph 247, Appendix 3.

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market concerned cannot be justified irrespective of its economic benefits. The last condition of Article 101(3) imposes an absolute ceiling on the exemption of restrictive cooperations. Ultimately the protection of rivalry and the competitive process is given priority over efficiency gains, which could result from cooperation746. This means that restrictive agreements entered into by parties with combined market shares approaching monopoly cannot normally be justified on efficiency grounds.747 The most prominent case involving joint selling in the energy industry has, to date, been the Norwegian gas negotiation committee called GFU (“Gassforhandlingsutvalget”). The GFU negotiated natural gas sales contracts with a limited number of mostly continental European buyers on behalf of all Norwegian producers and thus fixed the selling price, volumes and all other trading conditions. The sales activity was not combined with any other function, e.g. production or transport.748

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The Commission concluded that the arrangement infringed Article 101.749 The companies concerned claimed immunity from antitrust scrutiny arguing that they had been compelled by the Norwegian state to sell gas from the Norwegian continental shelf through the GFU system.750 Producers stated and the Norwegian government confirmed that the GFU had been established by the government itself. The GFU sales organisation always received endorsement by public institutions like the Norwegian Parliament and, in the year 2000 a Norwegian Royal Decree was adopted which obliged producers to market their Norwegian gas through GFU. The Commission argued, however, that state endorsement would not release gas producers from their antitrust responsibilities, and that a

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746 See Guidelines on the application of Article 101(3) paragraph 105. 747 See in this respect Guidance Paper on Article 102 FEU, OJ 2009 C 45/7 of 24.2.2009, paragraph 30. 748 See Commission, Competition Report 2002, p. 207; Lindroos/Schnichels/Svane, Liberalisation of European Gas Markets – Commission settles case with Norwegian gas producers, Competition Policy Newsletter 2002 (3) p. 51. 749 It is interesting to note that in 2007 the two largest Norwegian producers, Statoil and Hydro, merged. The merger was cleared by the Commission in its decision of 3.5.2007 in Case COMP/M.4545 – Statoil/Hydro. The merger case and the GFU case illustrate the importance of the distinction between restrictions by object and restrictions by effect. In the case of restrictions by object there is no need to show the likely negative effects of the restrictions. They are presumed to exist. In other cases, including merger cases, the Commission must show that the arrangement gives rise to likely negative effects on competition that are not outweighed by the benefits associated with the resulting integration of economic activity. In the GFU case there was no real integration of economic activity that could outweigh the presumed restrictive effects. 750 Community competition law recognises the so-called state action defence whereby an undertaking is not held liable if it is acting under state compulsion since in that case there is no autonomous market conduct; see e.g. Case C-198/01, CIF, ECR 2003, p. I-8055. The defence only applies when it precludes undertakings from engaging in autonomous conduct which remains capable of preventing, restricting or distorting competition.

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law creating obligations for gas companies which conflicts with the EEA Treaty could not have that effect either.751

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In the end the GFU case was settled. All gas producers concerned committed to market their Norwegian gas individually in future. The permanent members of the GFU, which were also by far the largest producers and exporters of Norwegian gas, undertook in addition to offer 13 bcm and 2.2 bcm respectively of gas for sales to new customers over a period of approximately 4 years, corresponding to more than 5% of the annual total sales of Norwegian gas.752 Moreover, the Norwegian authorities abolished the Royal Decree, which had expressly confirmed the operations of GFU.

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In GFU the Commission did not apply its normal approach to hard-core restrictions, which is to impose a cease-and-desist order and fines. This may be (partly) due to the involvement of the Norwegian state. If a national law requires undertakings to engage in conduct that restricts competition, the undertakings concerned cannot be exposed to any penalties in respect of past conduct where the conduct was required by the law concerned.753 Thus, in order to impose a fine in the GFU case the Commission would have had to discard the claim that the conduct engaged in by the gas producers was imposed by Norwegian law. Prima facie, this may have been difficult given the 2000 Royal Decree. Moreover, a cease and desist order would likely have meant that the parties would have been required not only to put an end to the joint selling but also to eliminate the restrictive effects residing in the long-term gas sales contracts that were concluded by the joint sales agency.754 In order to bring the infringement effectively to and end it would arguably have been necessary to end the existing jointly concluded long-term sales contracts since they would have been affected by the increase in market power that joint selling would normally entail755. However, the Commission did not take this route. In stead, it closed the case after the parties had undertaken to sell a significant volume of gas to “new customers”.756 In the particular context of the GFU case the Commission apparently considered it preferable from a competition policy perspective to accept remedies, which were forward-looking and actively contributed to the creation of an internal gas 751 752 753 754 755

See in this regard Case C-198/01, CIF, ECR 2003, p. I-8055. See Commission press release IP/02/1084; available at http://europa.eu.int/rapid. See Case C-198/01, CIF, ECR 2003, p. I-8055, paragraph 53. See Commission press release IP/01/830 of 13.6.2001; available at http://europa.eu.int/rapid. The Commission is empowered and sometimes even required to impose remedies to eliminate the consequences of an infringement, see e.g. Case C-119/97, Union française de l’express (Ufex), ECR 1999. p. I-1341, paragraph 94, and Case C-62/86, AKZO, ECR 1991, p. I-3359. 756 See Article 25(1)(b) Reg. 1/2003, Appendix 2.

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market. The commitments enhanced gas-to-gas competition in offering access to additional supply sources for new entrants. The lack of gas liquidity was one of the major obstacles to effective competition and successful liberalisation. However, even if such policy considerations may have played a decisive role, the fact remains that there is no nexus between the between the identified competition problem, i.e. joint selling, and the remedy, i.e. gas release. Indeed, the alleged infringement and the remedy relate to two distinct groups of consumers, namely those that purchased from the joint sales agency and those that did not but may have wanted to. While the agreement may have led to a reduction in output to the detriment of new entrants the fact remains that the main effect of joint selling is on the customers that actually bought long-term from the joint entity and paid a jointly fixed price. The remedy does not address this aspect and is arguably inconsistent with settled case law according to which the purpose of a remedy is “to re-establish compliance with the rules infringed”,757 and the power to impose remedies must “be applied according to the nature of the infringement found”.758 It follows from these requirements that there must be a nexus between the infringement and the remedy imposed. The nature of the infringement therefore determines the range of remedies available to the Commission in a given case. The remedy accepted by the Commission in the GFU case would have been entirely suitable if the Commission had been investigating a case involving market foreclosure instead of a collusion case. The GFU case is in this respect an example of contamination of competition policy by liberalisation objectives.

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It is highly unlikely that in future the Commission will refrain from imposing fines in cases involving hard-core restrictions of competition. As is clear from its decision in the E.ON/GDF case the Commission has a firm policy of zero tolerance towards naked price fixing, market sharing and output restriction.759

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4.2 Distribution of energy by a competitor Cooperation between energy suppliers may also take the form of distribution agreements whereby a supplier undertakes to distribute a competitor’s products.760 Distribution agreements are typically concluded on a long-term basis. A mere sale of electricity, gas or petrol to a rival does not qualify as distribution by 757 758 759 760

Joined Cases C-241/91 P and C-242/91 P, Magill, ECR 1995, p. I-743, paragraph 93. Id., paragraph 90 and Joined Cases 6/73 and 7/73, Commercial Solvents, ECR 1974, p. 223, paragraph 45. See Commission Decision of 8.7.2009, Case COMP/39.401 – E.ON/GDF. If the distribution agreement is concluded by non-competitors it is subject to the vertical restraints block exemption and guidelines, see Chapter 3 below.

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a competitor.761 Distribution agreements between actual or potential competitors may be pro-competitive. This may for instance be the case when a small supplier appoints another (small) supplier as its distributor. However, distribution agreements between competitors also have considerable potential for adversely affecting competition. This is clearly the case when the agreement provides for explicit exclusivity or territorial or customer sales restrictions. However, even in the absence of such explicit restraints the agreement may give rise to anti-competitive effects. The Commission thus has intervened against what it considered to de facto constitute a long-term supply agreement whereby the second largest supplier of rough diamonds agreed to supply large quantities of rough diamonds to a dominant competitor.762 In the assessment of distribution agreements between competitors it is useful to distinguish between unilateral or reciprocal agreements. Reciprocal distribution means that two (competing) suppliers appoint each other as distributors of their respective products. Unilateral or non-reciprocal distribution implies that one supplier becomes the distributor of the products of another supplier but that the latter does not become the distributor of the products of the first supplier. If the parties use a reciprocal distribution agreement to eliminate actual or potential competition between them by deliberately allocating markets or customers, the agreement is likely to have as its object a restriction of competition.763 However, such agreements may not be caught by Article 101(1) at all when it is unlikely that the parties would have been able to enter the market on their own.764 Reciprocal agreements are generally more likely to give rise to competition concerns even when they do not contain explicit restrictions on where and to whom the products may be sold. A reciprocal agreement creates a symmetry in terms of rights and obligations that may easily serve as a means to share markets. When two incumbents appoint each other distributors within the core area served by the other, there is a clear risk that each distributor will make little effort to sell the other supplier’s products765 and that prices will be set so as to avoid direct competition. In the case of non-reciprocal agreements this symmetry is absent which makes it less likely that the incentives of the parties are aligned. Moreover, when a supplier appoints another supplier as his distribu761 Trading at commodity exchanges, for example, and other short-term supply contracts between competitors are unlikely to raise competition concerns. 762 See Commission Decision in De Beers, OJ 2006 L205/24. The Commission accepted commitments whereby the supply relationship would be brought to an end within a period of three years.The decision was upheld by the ECJ in Case C-441/07 P. 763 See Horizontal co-operation guidelines, paragraph 236, Appendix 3. 764 See Horizontal co-operation guidelines, paragraph 238. 765 See in this respect the Commission Decision in Siemens/Fanuc, OJ 1985 L 376/29.

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tor on a non-reciprocal basis it is more likely that the cooperation generates real efficiencies. In non-reciprocal agreements exclusivity is less likely to give rise to significant competition concerns, particularly if the distributor is required to make significant investments and the distributor’s market position is not substantial.766

4.2.1 Market partitioning When the object of an agreement is to share markets, it reduces competition that would have occurred in the absence of the agreement without producing countervailing efficiencies. Market partitioning between actual or potential competitors is therefore a hard-core restrictions of competition.767 Market partitioning can take various forms. An energy supplier may entrust an actual competitor with the exclusive sale and distribution of its products within the same product and geographic market. The parties may agree, for instance, that one takes the northern and the other the southern part of their geographic market. They may also agree to divide up their market by classes of customers, e.g. one sells to local and regional distributors, the other to industrial customers. Market sharing is equally possible between potential competitors: an energy supplier in one Member State may, for example, distribute its products through the incumbent supplier in another Member State instead of entering this market itself. The same is possible for potential competitors currently serving different customer groups, e.g. industrial and household energy consumers. As mentioned, reciprocal distribution agreements are generally more suspect that unilateral distribution agreements. Even in the absence of explicit restraints in the agreement, market partitioning may flow from a concerted practice between the suppliers or an underlying secret agreement. For instance, in SAS/Maersk 768 two airlines had concluded a co-operation agreement which was notified to the Commission and which on the face of it did not give rise to serious competition concerns. However, the parties had also concluded an underlying secret agreement whereby they undertook to share markets by reciprocally abandoning certain routes and leave them to the other. The Commission uncovered this agreement and imposed substantial fines. The finding of a concerted practice or secret cartel is normally derived from circumstantial evidence. Elements of such evidence might be that the parties stop selling into the sales area or to the customer group of the other 766 See in this respect Commission, Notice Guidelines on the application of Article 101 to technology transfer agreements, OJ C101/2 of 27.4.2004, paragraph 164 et seq. 767 See Article 4(c) Specialisation block exemption Regulation. 768 See Commission Decision of 18.7.2001 OJ L 265/15. See also Commission Decision of 8.7.2009, Case COMP/39.401 – E.ON/GDF.

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after having concluded the contract or constantly refer interested buyers to each other.769 Similarly, in Power Exchanges the parties engaged in a non-competition arrangement covering all their spot electricity trading services in the EEA and beyond with a view to protecting traditional geographic strongholds.770 The arrangement was established in the context of legitimate cooperation between stakeholders which, in view of the creation of the internal energy market, were requested to find a common technical system for intraday and day-ahead crossborder trading.

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A block exemption regulation creates a legal presumption that a certain category of agreements is compatible with EU competition law. Irrespective of whether the agreement in question actually falls within the scope of Article 101(1), it is presumed to be compatible with Article 101 as a whole. Instead of having to prove in detail any economic benefits of their agreement, the parties only have to show that the conditions for the block exemption apply in case the validity of their contract is questioned. The presumption of legality remains valid as long as the Commission or any Member State competition authority does not formally withdraw the exemption with regard to a particular agreement between individual firms. The authorities can only do so if they show that the specific agreement is caught by Article 101(1) and does not satisfy the conditions of Article 101(3).

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The Vertical Block Exemption Regulation771 covers the following non-reciprocal distribution contracts between competitors:

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–

The supplier is a manufacturer and a distributor of goods, while the buyer is a distributor not manufacturing competing goods, or

–

The supplier is a supplier of services at several levels of trade, while the buyer does not provide competing services at the level of trade where it produces competing services.

These exceptions concern so-called “ dual distribution” where a supplier is distributing its goods and services and at the same time has appointed a distributor 769

The burden to prove market partitioning is on the authority or the plaintiff alleging the market sharing arrangement, see Article 2 Reg.1/2003, Appendix 2. 770 Commission Decision of 5.3.2014, Case AT.39.952 – Power Exchanges. 771 See Article 2(4) of the Vertical block exemption Regulation. See also Horizontal co-operation guidelines paragraph 12, Appendix 3 and Vertical restraints guidelines paragraph 27, Appendix 4.

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to also do so. This means that the distributor has to be a distributor only, i.e. it must not produce energy products competing with the contract products. This group includes, for instance, an electricity generator and distributor commercialising electricity through a competing distributor who is not at the same time a generator. Thus, the agreement is horizontal only at the level of distribution but not at the level of production. However, the agreement is only block exempted if it satisfies the main conditions for exemption, namely that: –

the market share of the supplier does not exceed 30% on the market where it sells energy;

–

the market share of the buyer does not exceed 30% on the market on which it purchases the energy; and

–

the contract does not contain hard-core restrictions, including restrictions on passive sales.772

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The fact that the market share threshold is exceeded does not imply that there is any presumption that the agreement is caught by Article 101(1) or that the conditions of Article 101(3) are not satisfied.773 It merely means that the agreement is subject to individual assessment. It is only when the agreement contains hard-core restrictions that can normally be assumed that it is contrary to Article 101. The competition analysis conducted outside the market share threshold aims at ascertaining whether due to their cooperation the participants are likely to gain, maintain or increase market power, and whether any such adverse effects are likely to be outweighed by the benefits generated by the agreement.

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Restrictive distribution arrangements between major suppliers of electricity or gas will need to generate substantial efficiencies to escape the prohibition of Article 101(1).774 The case has to be made that the distribution of these forms of energy by a competitor demonstrably provides consumers with a new or improved product, greater product variety or leads to cost efficiencies. Prima facie, it does not seem obvious that the distribution of homogeneous products like

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772 See Article 3(1), 4, 5 Vertical block exemption Regulation. 773 See Commission, Guidelines on the application of Article 101(3) paragraph 24, and recital 10 Specialisation block exemption Regulation. 774 The Horizontal co-operation guidelines, paragraph 246, Appendix 3, provide that joint distribution can generate significant efficiencies stemming from economies of scale and scope, especially for smaller producers. Agreements involving smaller producers are also much less likely to significantly restrict competition.

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electricity or gas can meet these requirements except in exceptional cases. Such a case might perhaps exist where green electricity is being distributed by a rival, which does not itself produce such products. Moreover, a distribution co-operation is more likely to generate significant efficiencies under two conditions. Firstly, the co-operation is likely to concern a product or service widely distributed to consumers, and secondly, distribution is likely to account for a high proportion of the total costs of providing the good or service. Applied to electricity or gas, efficiencies are thus more likely to occur in cases where the distribution co-operation does not target industrial but rather household consumers.775 It would furthermore seem that even then the costs of distributing electricity or gas (leaving aside network charges) probably are not significant enough to make up for a high proportion of the total costs. In sum, it is prima facie not obvious that a distribution agreement concluded by competing electricity or gas suppliers is capable of producing substantial efficiencies. Where two incumbents, who hold dominant positions on their respective markets, conclude a unilateral or reciprocal distribution arrangement it is very likely that the negative effects on competition will be such that the conditions of Article 101(3) are not satisfied.

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The assessment under Article 101 depends on the facts as they exist at the time when the assessment is made. The outcome may therefore change over time due to instance to changes in the regulatory environment. This important principle is illustrated by a case in which an independent hydropower generator had appointed, prior to liberalisation, the statutory monopolist in the same geographic market as its exclusive distributor.776 Prior to liberalisation, the monopolist was the only outlet for the generator for the sale of electricity. As a result, the agreement did not restrict any competition that would have occurred absent the agreement. The supplier was entitled to sell neither independently nor through other distributors. However, when liberalisation occurred, the unilateral distribution agreement became a competition issue.777 Two of the principal competitors on the national electricity market were locked into a long-term exclusive distribution contract, which as a result restricted competition. The Commission dealt with the competition problem in the context of a merger proceeding. 775 However, when the parties do not have a significant commonality of variable costs there is less of a risk of a collusive outcome, see Horizontal co-operation guidelines, paragraph 242, Appendix 3. 776 See Commission Decision of 7.02.2001, Case COMP/M.1853 – EDF/EnBW, paragraph 91 seq. 777 The assessment of restrictive agreements under Article 101 is made within the actual context in which they occur and on the basis of the facts existing at any given point in time. The assessment is sensitive to material changes in the facts. This means that Article 101(1) and (3) may become or cease to be applicable due to market developments.

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The proposed merger created competition concerns inter alia because of the said contractual link with one of its few rivals. The merging party holding the exclusive distribution rights undertook to release its rival from its exclusive supply obligation after a transitory period necessary to enable the smaller rival to develop its own sales business and customer base.

4.3 Other cooperations for the commercialisation of energy Apart from joint selling or distribution by a competitor, energy suppliers may also enter into more limited commercialisation arrangements. These other commercialisation cooperations relate to specific marketing functions, such as advertising, promotion, logistics, service or a combination of these.

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These more limited types of co-operation rarely raise serious competition concerns, in particular if only one of these functions is carried out jointly. Pricefixing or market partitioning are normally not the object of such co-operation agreements.778 Usually, the main competition concerns relating to this type of commercialisation co-operation is the disclosure or exchange of sensitive commercial information779 or an increase in the commonality of costs, which may facilitate collusion and soften competition.780

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One of the factors identified in the Horizontal co-operation guidelines that may give rise to competition concerns is a high degree of common costs resulting from agreements between competitors.781 The underlying idea is that when firms have a common cost structure, it is easier for them to come to a common understanding of what is the desirable price which in turn may facilitate collusion. Moreover, a high degree of commonality of costs in itself limits the scope for price competition and may thereby soften competition. Differences in cost levels provide incentives to increase efficiency and to engage in price competition. Agreements which provide for information exchange or which significantly increase commonality of cost may thus give rise to competition concerns.

3.122

However, while cost commonalities may be an issue it is submitted that the exchange of information and the terms and conditions that apply to a cooperation arrangement are likely to be of much more significance than the degree of cost commonality caused by the agreement. For instance, a cooperation agree-

3.123

778 However, where a limited marketing co-operation is a mere disguise for price-fixing or market partitioning it will obviously be treated as a cartel. 779 See Section 1 above. 780 Horizontal co-operation guidelines paragraph 243, 244, Appendix 3. 781 See Appendix 3.

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ment between electricity generators that leaves each generator free to determine where, to whom and at what price to sell its electricity is unlikely to restrict competition even if the agreement creates significant cost commonalities. It may be that the cooperation creates an incentive to raise prices by withdrawing capacity, but it is submitted that any such incentive depends more on the nature of the assets (base load, mid-merit, peak) that the parties have in common than on the absolute level of cost commonalities. In this respect it is interesting to note that in the German Electricity Wholesale Market case782 the Commission took the preliminary view that E.ON and RWE and possibly also Vattenfall were collectively dominant on the German electricity wholesale market due to inter alia to the fact that these three undertakings were linked by networks of agreements on production and wholesale supply. However, the Commission also considered that only E.ON had engaged in the alleged abuse of withholding production capacity. It would thus seem that despite the transparency and presumably also cost commonality created by the network of agreements the Commission did not have sufficient evidence that the allegedly collectively dominant firms had collectively reduced output.

3.124

In order to ascertain whether a limited co-operation in the area of advertising, promotion, logistics or service is compatible with the antitrust rules an analysis of the likely effects on competition on the market has to be carried out. It is thus necessary to examine, first, whether the disclosure of information or increase in commonality of costs is likely to lead to the co-ordination of the parties’ market conduct and second, whether less competition between the suppliers also translates into less competition on the energy market as a whole. This is only likely to be the case if due to the agreement the parties are able to gain, maintain or increase market power. However, even where the parties jointly have a significant degree of market power, competition on the market may not be adversely affected because of the limited scope of the commercialisation agreement. For instance, the joint promotion of gas as a heating fuel is very unlikely to have any negative effects on competition.

3.125

As in the case of distribution agreements between competitors, the Commission facilitates the competition analysis with administrative presumptions. Two presumptions are relevant here. The first presumption is the de minimis rule that also apply to other types of cooperation that do not involve hard-core restrictions.783 Consequently, it is unlikely that the parties to a limited marketing co782 See Commission Decision of 26.11.2008, Case COMP/39.388 – German Electricity Wholesale Market. 783 See Commission, Notice on agreements of minor importance which do not appreciably restrict competition under Article 101(1) TFEU (de minimis), OJ C368/13 of 22.12.2001.

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operation possess market power if they hold a combined market share of less than 10%. The second ‘negative market power’ presumption concerns cooperations between a large and a small competitor. Even a significant market share (i.e. more than 20%) is normally not indicative of a restriction of competition if one of only two parties has only an insignificant market share and does not possess important resources (“small competitor rule”).784 These two market-share related presumptions do not extend to dominant suppliers. In dominated markets any further reduction of competition caused by the dominant form is likely to quickly become appreciable. A marketing co-operation likely to restrict competition may generate efficiencies outweighing the anti-competitive effects. In order to ascertain whether a prohibition under Article 101(1) can be avoided, the four questions introduced in the previous section dealing with distribution agreements have to be considered here as well (see above, book paragraphs 3.76 et seq.). In conclusion, the practice of the competition authorities appears to demonstrate that there are few cases of a co-operation in the area of advertising, promotion, physical distribution or service, which have been found to infringe Article 101. This not only applies to the energy industry but to all industries in general.

5.

3.126

Production of energy

Co-operation in the area of production is a common phenomenon in the energy industry. Indeed, joint production of power, gas or petroleum products by competing suppliers are among the most, if not the most, frequent category of co-operation found in the energy industry. In general, competition law treats ‘pure’ production joint ventures favourably. The same is true for co-operation agreements to jointly provide services.785 ‘Pure’ means in this context that the co-operation is confined to production of goods or the provision of services. Production arrangements extending to joint selling are dealt with separately (see below, book paragraphs 3.147 et seq.).786 The existence of a safe harbour for certain production joint ventures confirms that up to a certain level of market power production agreements generally produce efficiencies that outweigh any negative effects. The safe harbour has been 784 See Horizontal co-operation guidelines, paragraph 44; Appendix 3, Guidelines for the application of Article 101(3), paragraph 115. 785 See Article 1(f ) Specialisation block exemption Regulation. 786 Service cooperations which are combined with other marketing functions have already been discussed above (see above book paragraphs 3.147 et seq.).

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created by a block exemption regulation that exempts certain production agreements, called “specialisation agreements”, between competitors from the prohibition of Article 101(1). Even if such cooperation agreements may “soften” competition between the parties, they are presumed to generate sufficient efficiencies, e.g. in the form of economies of scale or scope or better production technologies.787 This applies in particular to co-operation agreements significantly increasing production capacity and output for a specific form of energy. Within the scope of the block exemption such efficiencies are presumed to outweigh the possible negative competition effects of such agreements to the extent that they are caught by Article 101(1) in the first place.788

3.129

The application of the safe harbour does not in principle depend on the structure of the arrangement. Hence it is generally not important whether the suppliers agree to share a production facility, for instance through the creation of a joint venture, or enter into a specialisation or subcontracting agreement. In the case of specialisation, they may agree that one party ceases to produce a product and purchases it from the other party (“unilateral specialisation”). They may also agree that both parties cease production of a different product and purchase it subsequently from the other party (“reciprocal specialisation”). Given the reciprocal nature of the latter, there is a greater risk that it leads to the sharing of markets or customers. Subcontracting means that one party entrusts a subcontractor with the task of producing a certain product. The described forms of production cooperations are probably not all equally relevant for all parts of the energy industry. Subcontracting, for example, does not seem to be widely practised in the energy industry and is therefore not addressed in the following sections. Reciprocal specialisation agreements would appear to be only relevant for the petroleum industry.

5.1 Competition issues of production cooperations 3.130

“Pure” production agreements do not have the object of restricting competition provided that the parties only agree on the output directly concerned by the 787 When the parties to an agreement combine their respective assets they may be able to attain a cost/output configuration that would not otherwise be possible. The combination of two existing technologies that have complementary strengths may reduce production costs or lead to the production of a higher quality product. For instance, it may be that the production assets of firm A generate a high output per hour but require a relatively high input of raw materials per unit of output, whereas the production assets of firm B generate lower output per hour but require a relatively lower input of raw materials per unit of output. Synergies are created if by establishing a production joint venture combining the production assets of A and B the parties can attain a high(er) level of output per hour with a low(er) input of raw materials per unit of output. See Guidelines on the application of Article 101(3), paragraph 65. 788 See recital 8 of the Specialisation block exemption Regulation.

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production agreement.789 In the case of joint production the parties necessarily need to determine the production capacity of the joint facility and the allocation of this output between them. In the case of specialisation they need to determine how much they supply each other. These elements are assessed together with all the other competition consequences of a production co-operation.790 The elements of the cooperation that are objectively necessary to the implementation of the co-operation and proportionate to it are treated as being ancillary to it.791 Such elements are assessed under the effects standard.792 However, if the parties agree to restrict output of production facilities which are not jointly operated and which are also not closed or scaled down in the context of a specialisation agreement, such agreement is considered a hard-core restriction of competition.793 The same is true of agreements serving mainly the purpose of fixing prices or partitioning markets,794 and cases where in addition to a bona fide cooperation the parties have also entered into an agreement which serves no other purpose than to restrict competition. For instance, in the E.ON/GDF case795 the parties had jointly constructed a major import pipeline which they operated jointly. This joint venture agreement was pro-competitive in that it paved the way for a major infrastructure investment. However, according to the Commission the parties had also concluded an agreement restricting the sale of the gas transported in the pipeline. GDF agreed not to exit gas in Germany and E.ON agreed not to market its share of the gas in France. This agreement was concluded pre-liberalisation and was legal at the time. However, the agreement was allegedly continued post-liberalisation at which point it became restrictive of competition. The Commission treated this arrangement as a separate hard-core restriction and imposed high fines. The assessment of bona fide production joint ventures are assessed under the effects standard. As a result, they are only caught by Article 101(1) when they have likely negative effects on competition and consumers. In the Guidelines on horizontal cooperation agreements the Commission focuses on the direct impact of the joint determination of output levels, the exchange of commer789 See Horizontal co-operation guidelines, paragraph 160, Appendix 3, and Article 4(b) Specialisation block exemption Regulation. 790 See Horizontal cooperation Guidelines, paragraph 161, Appendix 3. 791 See e.g. Case C-382/12 P, Mastercard, ECR 2012, I page 0000, para. 89. 792 The only exception is where the agreement is a sham and merely intended as a cover up for an underlying cartel. Such cases are rare in practice. 793 See Article 4(b) Specialisation block exemption Regulation. 794 See Article 4 Specialisation block exemption Regulation. 795 See Commission Decision of 8.7.2009, Case COMP/39.401 – E.ON/GDF. See also Commission Decision of 5.3.2014, Case 39.952 – Power Exchanges.

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cially sensitive information and whether the agreement leads to a high degree of commonality of costs. These elements seek to determine whether the agreement allows the parties to obtain, maintain or enhance market power. In many ways production agreements resemble mergers, with the difference that a merger provides for a more far-reaching degree of integration. It therefore makes sense to ask how the cooperation would have been assessed under the Commission’s horizontal merger guidelines796 and then take account of the specific features of the cooperation that distinguish it from a merger.797

3.133

For instance, when two or more generators jointly construct and operate a new power plant, it is necessary to carefully analyse the parties’ joint market position and the cooperative framework created by the agreement. In particular, it is relevant to assess whether the agreement provides for joint decisions-making regarding production levels, planning of outages etc. which may allow the parties to jointly exercise market power. The Commission’s decision in the German Electricity Wholesale Market case is illustrative in this respect even if it involved alleged abuse of dominance.798 In this case a generator with a market share of approx. 25% allegedly withdrew available generation capacity from the market in spite of the fact that it was economical to run this capacity. In other words the generator allegedly exercised market power.799 As a result it was necessary to have recourse to more expensive plants in the merit order to satisfy demand which led to an increase in wholesale market prices. Parties to a production joint venture may be able to jointly exercise market power in a similar way by collectively deciding to reduce output or plan outages during periods when demand is high800. However, the incentive to engage in such conduct will depend inter alia on the nature of the jointly operated capacity. It is submitted that if the parties jointly operate generation capacity with low marginal costs such as nuclear plants, they will have limited incentives to withdraw capacity because the cost of doing so is likely to be high compared to other generation resources held by 796 See Commission, Guidelines on the assessment of horizontal mergers under the Council Regulation on the control of concentrations between undertakings, OJ C31/5 of 5.2.2004. 797 See in this respect Horizontal co-operation guidelines, paragraph 21, Appendix 3. 798 See Commission Decision of 26.11.2008, Case COMP/39.388 – German Electricity Wholesale Market. 799 A similar analysis was conducted in the Commission’s Decision of 22.12.2008 in Case COMP/M.5224 EDF/British Energy. 800 The Swedish Competition Authority has argued that the co-ownership of the Member State’s nuclear plants should be broken up, see 2008.09.12, DNR 500/2008. The Swedish nuclear plants are jointly owned by three operators. The Swedish competition authority voiced concern that due to their cooperation the parties would exchange sensitive information and jointly decide on the operation of the plants, which might allow them to jointly exercise market power. However, it is not clear that there is any incentive to withdraw nuclear capacity since they have low marginal costs and are designed to run as base load plants. They are therefore costly to withdraw.

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each of the parties. The risk is higher if the parties jointly operate generation capacity with relatively high marginal costs. By withdrawing this capacity they may be able to significantly influence prices and share the relatively lower cost of doing so. Competition concerns are also likely to arise when the parties are restricted in the sales of their share of the output, i.e. to whom, where and at what prices they sell, or in their ability to launch similar projects either on their own or with other partners. Such restrictions which go beyond the co-operation in the field of production are considered to have as their object to restrict competition.801 The parties will have to show that such restrictions are nevertheless necessary in order to achieve the benefits of their cooperation.

3.134

Competition concerns may further arise where the parties exchange commercially sensitive information. Where the exchange is limited to information that it necessary for the proper functioning of the joint production arrangement, the information exchange is assessed together with the rest of the agreement. Such exchanges are more likely to be compatible with Article 101 than exchanges that go beyond what is necessary for the joint production of the products covered by the agreement.802 Exchanges that are ancillary to the joint production benefit from the efficiencies as a whole whereas in the case on non-ancillary exchanges it is the information exchange that must generate the countervailing efficiencies.803

3.135

Competition concerns may further arise when the parties have a significant degree of market power and the agreement creates a high degree of commonality of variable production costs.804 A substantial degree of commonality of costs is likely to arise under two conditions:

3.136

(1)

Variable production costs accounts for a high proportion of the total costs of the energy product, and

(2)

Suppliers combine their production activities to a significant extent.

801 See Horizontal cooperation guidelines, paragraph 160, Appendix 3. The focus on variable costs is due to the fact that these are generally the costs that have the most direct impact on pricing decisions, see Guidelines on the application of Article 101(3), paragraph 98. 802 See Horizontal co-operation guidelines, paragraph 182, Appendix 3. 803 See in this regard Commission Decision of 18.6.2012, Case COMP/39.736 – Siemens/Areva, paragraph 82. 804 See Horizontal cooperation guidelines, paragraphs 168, 178, Appendix 3.

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3.137

The higher the degree of commonality of variable costs, the greater is the intrinsic limitation of the parties’ scope for independent behaviour in terms of price competition.805 Moreover, symmetrical cost structures may facilitate tacit collusion. This is particularly true for homogeneous products like energy. Where variable production accounts for almost all costs of the final product and the suppliers co-operate for all their production, the suppliers’ scope for price competition is much more limited than in the situation where the suppliers have only a small proportion of their total costs in common.

3.138

The Commission does not directly address the question when cost commonalities are sufficiently high to create competition concerns. It can, however, be inferred from the examples given in the Guidelines at which point cost commonality reaches “critical levels”. According to the Commission the scope for price competition is likely to be significantly reduced when the parties share all or most of their variable costs.806 It is important to note that ‘costs’ in this context means the input costs to the parties and not the production costs of the joint entity. The parties may achieve a high degree of commonality of costs and price co-ordination by increasing the transfer price between the joint entity and the parents. This is particularly true for variable cost components that can normally be presumed to feed directly into selling prices.807

3.139

Motor-fuel bought ex-refinery probably accounts for a high proportion of the total costs of motor-fuel sold to motorists at petrol stations. A co-operation of motor-fuel vendors providing for the joint refining of all their requirements may thus be apt to create a high degree of cost commonality and dampen price competition between them. However, if their agreement provides that each partner has to procure the crude oil independently and to cover only the refining costs for its own requirements, the parties may only have few costs in common and price competition between them may not at all be negatively affected provided that transfer prices are cost reflective. Two general conclusions might be drawn from this example. Each production co-operation has to be assessed on its own merits and, where it raises a competition problem, alternative arrangements may be available to either solve the problem completely or, at least, reduce the negative competition impact through modifications of the original co-operation agreement. 805 See Horizontal co-operation guidelines, paragraphs 36, Appendix 3. A similar restraining effect on the collaborators’ market conduct may also occur where the jointly manufactured good is an intermediate good which is a key component for a final product, see Horizontal cooperation guidelines, paragraph 179. However, this “qualitative commonality” does not seem to be very pertinent for energy production. 806 See Horizontal co-operation guidelines, paragraphs 107, 108, Appendix 3. 807 See Horizontal co-operation guidelines, paragraph 174, Appendix 3.

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5.2 Safe harbour for production cooperations The Specialisation block exemption Regulation provides a safe harbour for production cooperations between competitors. Agreements covered by the block exemption are presumed to be valid and fully compatible with Article 101.

3.140

For the purposes of the block exemption, ‘production’ is defined as the ‘manufacture’ of goods or the provision of services.808 This definition includes electricity. It also includes co-operation agreements relating to the extraction and processing of natural resources like oil and natural gas.

3.141

The safe harbour of the Specialisation block exemption Regulation is based on a market share threshold and certain conditions concerning the content of the agreement. The first condition is that the participants’ combined market share does not exceed 20% in the market directly concerned by the co-operation.809 The market shares are calculated on the basis of the value of the products sold in the preceding calendar year.810 The sales of all companies belonging to the same group to each of the collaborating firms have to be included in the calculation (“connected undertakings”).811

3.142

The second condition concerns the content of the agreement. It must not contain any of the three hard-core restrictions: price-fixing, output limitation or allocation of markets or customers (so-called hard-core restrictions). If there are one or more hard-core restrictions in the production agreement the benefit of the safe harbour is lost.812 Importantly, however, the hard-core list is fairly narrowly defined. It does not apply to provisions on the agreed amount of products in the context of unilateral or reciprocal specialisation agreements or the setting of the capacity and production volumes in the context of a joint production agreement.813 Such agreements are also not considered to have as their object to restrict competition.814 It is not possible to engage in joint production with out agreeing on how much to produce.

3.143

Outside the safe harbour individual assessment is required. The Commission Guidelines on horizontal co-operation agreements provide that generally, a pro-

3.144

808 809 810 811 812 813 814

See Article 1(f ) Specialisation block exemption Regulation. See Article 3 Specialisation block exemption Regulation. See Article 5(b) Specialisation block exemption Regulation. See Article 1(2) and 5(c) Specialisation block exemption Regulation. See Article 4 Specialisation block exemption Regulation. Id. See Horizontal co-operation guidelines, paragraph 160, Appendix 3.

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duction agreement is more likely to lead to restrictive effects on competition in a concentrated market than in a market which is not concentrated. Similarly, a production agreement in a concentrated market may increase the risk of a collusive outcome even if the parties only have a moderate combined market share.815 If one of just two parties has only an insignificant market share and if it does not possess important resources, even a high combined market share normally cannot be seen as indicating a likely restrictive effect on competition in the market.816

3.145

In the analysis of whether the parties to the agreement have market power the Commission also takes into account the number and intensity of links (for example other cooperation agreements) between competitors in the market.817 Such links, which are common particularly in the electricity sector, may facilitate collusion by aligning incentives and increasing transparency. It is not clear, however, when links raise competition concerns. The Commission mentions a hypothetical example where two firms each with 15% market form a production joint venture and one of the parties already has a joint production plant with a competitor with 25% market share.818 The Commission takes the view that this cooperation increases the risk of collusion and as a result is likely to have restrictive effects on competition. It is submitted that in the real world such superficial analysis is insufficient to find an infringement of Article 101(1). Many sectors are characterised by overlapping joint ventures, yet the Commission has intervened only rarely. Joint production agreements are likely to be efficiency enhancing. For instance, when two generators jointly build a new power plant, more efficient capacity is put on the market. In such circumstances it takes more than theoretical arguments based on economic links to strike down the agreement. It is submitted that a competition authority would have a show that due to the production capacity which the various parties have in common they have the ability and incentive to exercise market power819. Moreover, when there are significant efficiencies competition authorities are unlikely to prohibit such cooperation, particularly when investments and risks are high. In stead, where competition concerns arise they are likely to seek remedies that limit the competition concerns and at the same time ensure that the project is maintained.

3.146

The Commission found, for instance, strong links between competitors in the UK upstream gas sector when examining a merger between two gas companies. In order to spread risks, companies tended to enter into numerous single 815 816 817 818 819

Paragraph 170. Horizontal co-operation guidelines, paragraph 44, Appendix 3. Horizontal co-operation guidelines, paragraph 172, Appendix 3. See Horizontal cooperation guidelines, paragraph 188, Appendix 3. See in this respect Commission Decision of 22.12.2008, Case COMP/M.5224 – EDF/British Energy.

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or multiple function cooperations with regard to gas exploration, development, production, processing and transport. As a result, most of the important decisions within joint ventures operating in the UK required unanimity from all partners in the project. Partners could exercise a right of veto to block a decision, which was not in their interest. The Commission concluded that these veto rights not only facilitated collusion, they also allowed a single player holding stakes in several joint ventures to veto decisions against its commercial interest. Since the merger would create a new largest player with stakes in the majority of cooperations agreements, the Commission considered that a dominant position would be created.820 Similarly, in German Electricity Wholesale Market the Commission took the preliminary view that two and possibly three of the main German generators held a collective dominant position inter alia due to the fact that they were linked by networks of production and wholesale supply agreements.821 The analysis of production joint ventures focuses primarily on the directly affected product and geographic market. This is the market on which the co-operating parties offer and sell the energy produced jointly. When one of the parties is a potential entrant competition concerns are particularly likely if actual competition in the incumbent’s market is already weak and the threat of entry is a major source of competitive constraint.822 In a few cases it may be necessary to extend the analysis to markets which are closely related to the aforementioned energy market because the cooperation leads to so-called spill-over effect.823 Cooperation in one market may influence the parties’ competitive behaviour also in another market. For instance, two petroleum suppliers jointly refining motorfuel for their own requirements may decide to improve their market position on downstream retail markets through co-ordinating their market conduct there. Competition may also soften due to the fear that aggressive behaviour in another market will destabilise the joint venture and negatively affect the profits that it generates. The significance of the joint venture to the overall profitability of the parties is thus of significance. Spill-over effects are most likely to occur in markets related to or showing some interdependencies with the market on which the joint venture operates. Interdependencies are thus in general likely to occur on downstream, upstream or neighbouring markets. They are particularly probable where there exist strong links between firms because of the vertical integration of some suppliers. Another condition for spill-over effects is that 820 See Commission Decision of 19.01.2001, Case COMP/M.1532 – BP Amoco/Arco, paragraph 60 seq. 821 See Commission Decision of 26.11.2008, Case COMP/39.388 – German Wholesale Electricity Market, paragraph 18. 822 See Horizontal co-operation guidelines, paragraph 166, Appendix 3. 823 See Horizontal co-operation guidelines, paragraph 156, Appendix 3.

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the parties enjoy a market position on the related market which confers them a significant degree of market power.824 It would thus be unlikely that the two petroleum suppliers mentioned in the example above consider aligning strategies if they together enjoyed insignificant market power on the retail market. Even if they aligned their strategy, it would have no market impact.

3.148

In the probably rare event that a production co-operation has the effect of appreciably restricting competition either on the directly affected or on a spill-over market, the efficiency defence can still avert the prohibition of the arrangement. It is up to the suppliers to invoke the defence and prove that its conditions apply.825 In order to find out whether the defence applies, the same four questions have to be asked for a production co-operation as for distribution by a competitor (see above, book paragraphs 3.76 et seq.).

3.149

The assessment of production joint ventures is illustrated by the Synergen Case, which involved a production co-operation agreement to which a dominant energy supplier was party. An incumbent generator and Statoil, a major gas supplier, had agreed to jointly construct and operate a new power plant in Ireland (“Synergen”).826 The generator would supervise generation and market all the power produced by the joint venture for a period of 15 years, whereas the gas supplier would mainly supply the gas for the same period of time.

3.150

The Commission established that the incumbent generator held a dominant position on the liberalised markets for the wholesale of electricity (97% market share) and for electricity sales to eligible customers (market share exceeding 60%). Statoil was found to be one of the few realistic potential competitors of the incumbent with gas reserves inside and outside of Ireland, electricity activities in other countries, as well as an established brand name in Ireland and significant financial resources. The production arrangement with the dominant supplier was likely to end Statoil’s ambitions to enter the market independently. It therefore restricted the newly emerging potential competition. The restriction was found to be appreciable despite the fact that a Northern Irish supplier was already committed to enter the Irish Republic’s electricity markets with a new power plant. The Commission’s analysis came to the conclusion that the Northern Irish entrant and the incumbent would be in a situation of mutual deterrence. Aggressive competition by the entrant would likely trigger retaliation in 824 Id. 825 See Article 2 Reg. 1/2003, Appendix 2. 826 The project did not constitute a full-function joint venture despite the fact that a new legal entity was created because of the considerable direct involvement of the two stakeholders in the business activities of Synergen.

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the entrants market in Northern Ireland. As a result, the Commission took the view that the new entrant unlikely to compete aggressively. The project was nevertheless cleared by the Commission after having received commitments. The incumbent generator undertook to auction, and Synergen committed to sell through bilateral contracts, electricity to competitors amounting to 50% of the volume of the eligible customer market until another new power plant of a certain minimum size came on stream.827 The clearance despite the dominant position of one of the parties and the negative impact on potential competition, illustrates the fact that competition authorities are reluctant to prohibit arrangements that result in significant investments in new capacity. Authorities run the risk that the project will not be continued by one of the parties if the cooperation is prohibited. As consumers are likely to be better off with the project than without it, there is a clear incentive to look for remedies that seek to address the competition concerns while maintaining the cooperation.

6.

3.151

Production and sale of energy

In the previous sections the competition concerns typical for a co-operation with the single function of either production or commercialisation have been discussed. However, energy suppliers sometimes also collaborate with regard to both production and commercialisation, the latter either in the form of joint selling or distribution by a competitor. In this situation all previously mentioned competition considerations have to be checked cumulatively.828 However, where the assessment differs according to the nature of the co-operation, a ‘centre of gravity’ approach is applied. This means that the entire co-operation is assessed on the basis of the principles that apply to the type of cooperation that forms the centre of gravity of the agreement.829

3.152

Co-operation agreements enabling competing energy suppliers to jointly produce and sell into a new market into which they could not sell alone do not raise competition concerns unless they give rise to spill-over effects.830 In other cases

3.153

827 See Commission Competition Report 2002, p. 192 seq. 828 A co-operation comprising production and commercialisation in the energy industry may constitute a fullfunction joint venture. This is particularly likely if two or more competitors create an entity carrying out joint production and selling, see Horizontal co-operation guidelines, paragraph 6, Appendix 3. For fullfunction joint ventures in general see below paragraphs 4.9-4.11. 829 See Horizontal co-operation guidelines, paragraph 13, Appendix 3. 830 See Guidelines on the application of Article 101(3), paragraph 18(a), and Horizontal co-operation guidelines, paragraph 237, Appendix 3.

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competition concerns may arise. The concerns are the same as for other cooperation arrangements, namely that the parties are able to obtain market power or increase it.

3.154

The joint determination of prices is the principal competition concern of all joint selling arrangements. As has already been explained, price fixing normally constitutes a hard-core restriction of competition. However, in the context of joint distribution and joint production extending to joint distribution the Commission block exempts up to the market share threshold of 20% the joint fixing of prices charged to the immediate customers.831 Sham production and commercialisation cooperations do not benefit from this approach irrespective of whether the sole purpose is to restrict competition or this is a distinct and separate objective.832

3.155

Outside the block exemption a case-by-case analysis of the agreement is required. The Commission in principle considers price fixing associated with joint production and distribution a restriction by object unless the restriction is necessary in the sense that the parties would not otherwise have an incentive to enter into the production agreement in the first place.833 However, the Commission also takes the view that joint distribution agreements for products which have been jointly produced are generally less likely to restrict competition than stand-alone joint distribution agreements.834 Since agreements that have as their object to restrict competition are deemed to have restrictive effects it may be that the Commission believes that it is still required to carry our an analysis of the likely effects before finding that production agreements which extend to joint distribution are caught by Article 101(1). This would also be consistent with the judgment in Groupement des Cartes Bancaires.835 The European Court of Justice made clear that for an agreement to restrict competition by object it must by its very nature be harmful to the proper functioning of normal competition. It is submitted that there is no basis for assuming that joint production and distribution adversely affects competition. Assessment of the likely effects on competition is required. The Commission should not use a purely legal construct to impose on the parties to show countervailing efficiencies without first having made a case that the agreement adversely affects competition. The Commission has dealt so far with two cases of joint production and commercialisation of energy suppliers after liberalisation. Both cases involved gas. 831 832 833 834 835

See Article 4 Specialisation block exemption Regulation See in this regard Commission Decision of 8.7.2009, Case COMP/39.401 – E.ON/GDF. See Horizontal co-operation guidelines, paragraph 160, Appendix 3. See Horizontal co-operation guidelines, paragraph 167, and paragraph 3, Appendix 3. Case C-67/13 P, Groupement des Cartes Bancaires, ECR 2014, p. I-0000.

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6.1 The Corrib case This case involved a situation typical for the upstream sector of the European gas industry. Gas companies usually collaborate in the exploration, development and production of gas, mostly in the form of field-specific cooperations, in order to diversify risk. In this particular case four gas companies planned to jointly market the gas they had discovered in a gas field off the West Coast of Ireland after it had been declared commercial. They explained to the Commission that they would have to sell jointly in the first five years to balance the countervailing purchasing power of the two incumbent Irish gas purchasers (a distributor and a generator).836 The Commission did not accept the buying power reasoning of the producers due to the intensity of the restriction. Moreover, the envisaged joint selling ran counter to the liberalisation efforts of the EU. The Commission emphasised this element in its published reports on the case when stating that an increasing number of gas consumers will soon become “eligible” through the openingup of the gas markets, i.e. gas customers will become free to choose between suppliers. It pointed out that energy-intensive industrial consumers in Ireland would be looking for alternative offers. In addition, the growing Irish electricity market would provide opportunities for new gas-fired power plants being built by market entrants. Also the request for a temporary exception was rejected by the Commission. Given the background of this case it is reasonable to assume that the Commission is unlikely to accept joint selling by significant suppliers in the gas industry unless compelling reasons are provided as a justification. The argument that joint selling is needed to acquire countervailing power is highly unlikely to be accepted since it is due to the very fact that joint selling creates market power that it is considered problematic.

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Another argument that might have been introduced in this case is that joint selling is needed because purchasers may not be interested in buying the exact quantity of gas produced from the field by any given owner offering gas on an individual basis. Large purchasers may want a single price and a single contract for ease of negotiation and administration. While this argument may have some merit, it must be analysed whether volume issues can equally be resolved through the aggregation of gas within the overall portfolio of individual participants. Most gas companies own shares in more than one single gas field. However, if

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836 Should the parties also have made the argument that it is for technical reasons impossible to individually market jointly produced gas, those familiar with the gas industry would probably have retorted that this technical problem can be solved through lifting and balancing agreements.

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the alternative is to sell to a larger producer, joint selling by a group of smaller producers may be pro-competitive where it allows the latter to impose a more effective competitive constraint on the former.

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Sometimes gas fields are developed under so-called production sharing agreements whereby the parties and the local government conclude an agreement for the exploitation of the field. Under such agreements the output is shared under a formula that first allows the parties to recover their investment costs. During this period they receive a higher share of the output. Subsequently, the government’s share of the output increases. The duration of the initial period depends on the selling price. Under such agreements it may be difficult for the parties to know with certainty the volumes of gas available to them and thus what is available for sale. However, such difficulties might be addressed through aggregation and optimisation within the overall portfolio. If this is not possible, joint selling may be required to create a marketable product. The parties market position compared to competitors that are not party to the cooperation is also relevant to the assessment. When the parties face strong competitors the cooperation will more quickly be viewed favourably because it may help the parties compete more effectively with their larger rivals.

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In the 1970s, three gas producers formed the Danish Underground Consortium (DUC), with the aim of jointly producing gas found in the Danish continental shelf. All gas produced by DUC was sold to the Danish gas wholesaler and exporter DONG. The terms and conditions of the gas supply contracts were negotiated jointly each time by the DUC partners and DONG, but subsequently entered into individually by each DUC party. The DUC partners defended their joint marketing activity by invoking the Specialisation block exemption Regulation and the special “ joint distribution exception” from the hard-core prohibition of price-fixing in particular.

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The Commission did not agree that the block exemption Regulation applied to the case. Irrespective of whether the DUC agreement could be characterised as a specialisation agreement falling under the Specialisation block exemption Regulation, the Commission took the view that the conditions for the joint distribution exception were not satisfied. The collective negotiation by the DUC members amounted in the eyes of the Commission to “ joint co-ordination of sales” rather than “ joint distribution” under the Regulation. The Commission furthermore assumed that the collective negotiations restricted competition 208

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without generating any countervailing benefits. While the agreement also covered joint production and thus did provide for an integration of economic activity, the addition of joint selling was not considered necessary for the proper functioning of the production joint venture and did not produce efficiencies of its own. For this part of the co-operation there was very little integration of economic activity. Moreover, collectively the parties had a strong position on the market implying that joint selling did contribute to the creation or strengthening of market power. Whilst reserving their legal position, the DUC partners agreed to discontinue their joint marketing activities for un-contracted gas produced on the Danish continental shelf. They undertook to market all gas in future individually. They also agreed to independently carry out negotiations concerning existing contracts when prices would be reviewed. Finally, they promised to offer for sale 7 billion cubic meters of gas to new customers. Taking into account these commitments, the Commission closed its investigation against the DUC partners.837 The informal settlement of this case resembles the compromise solution found in the GFU case mentioned earlier. The Commission was again ready to let the past remain untouched (by not unravelling existing long-term gas contracts) in exchange for the possibility to develop gas-to-gas competition through the sales of a specified volume of gas to customers other than the traditional clients.

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The DUC case demonstrates that not every small marketing activity, be it exploration, discussion or negotiation suffices for a co-operation to be labelled “ joint distribution”. Real and significant integration of economic activity is required. Otherwise the hard-core rule on price-fixing could be avoided too easily. From an economic viewpoint the basis for distinguishing could perhaps be found in the risk element. A joint venture bearing all commercial risks of selling its goods is likely to have fully integrated the sales function with the production function. In contrast, where shareholders become the owners of the jointly produced products before they are marketed, they assume all the commercial risks of selling such products. In these circumstances joint selling serves merely to coordinate the commercial conduct of the parties. The main purpose of Article 101(1) is to prevent such co-ordination.

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837 See Commission Competition Report 2003 p. 31; press release IP/03/566; Schnichels/Valli, Vertical and horizontal restraints in the European gas sector – lessons learnt from the DUC/DONG case in: Competition Policy Newsletter 2003 (2) p. 60 seq.

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Construction, ownership and exploitation of energy infrastructure

Co-operation agreements in the area of infrastructure play an important role in particular in network industries such as electricity and gas. Infrastructure owners often co-operate in the construction, ownership and exploitation notably of costly sub-marine cables and inter-connectors838 or gas pipelines, storage and LNG terminals. The Commission Guidelines do not expressly mention this type of co-operation. However, it is reasonable to assume that the competition analysis of infrastructure co-operation agreements follows in principle the pattern of production cooperations and, in case the exploitation of the infrastructure forms part of the agreement, the pattern of production and commercialisation cooperations. Consequently, many infrastructure cooperations will be compatible with EU competition law and may actually foster energy competition. This is notably true for arrangements establishing new network links or increasing transmission capacity of congested existing infrastructure between Member States, central and peripheral markets of the EU or with important energy exporting countries. Consumers on related energy markets are very likely to benefit from these projects in terms of enhanced energy competition and security of supply.839 The few energy infrastructure cases examined under the EU competition rules by the Commission after liberalisation, notably the UK – Belgium Interconnector and Viking Cable projects, appear to confirm this. It was through a co-operation amongst gas companies that the United Kingdom – Belgium sub-sea gas interconnection was built, linking for the first time the gas markets of the UK and the Continent through a high-pressure gas pipeline. It had the immediate effect, at the time of ample UK gas resources, of increasing the number of potential competitors, which could enter the Continental gas markets. The submarine cable project of Norwegian and German operators, the so-called Viking Cable, would have reinforced the existing links between the hydropower dominated Scandinavian countries with the primarily thermal power areas of the Continent, if it had been built after the clearance of the Commission.840 838 An interconnector is equipment used to link electricity systems, see Article 2 No 13 Gas Liberalisation Directive 2003. 839 See in this respect Commission staff working document on Article 22 of Directive 2003/55/EC concerning common rules for the internal market in natural gas and Article 7 of Regulation (EC) No 1228/2003 on conditions for access to the network for cross-border exchanges in electricity, paragraph 9. The document is available at http://ec.europa.eu/energy/gas_electricity/interpretative_notes/doc/sec_2009-642.pdf. 840 See Commission, Competition Report 1995, p. 125 seq. and Commission, Notice pursuant to Article 19(3) of Reg. 17 concerning Viking Cable, OJ C 247/11, 5.09.2001; see also Commission press release, “Role of interconnectors in the electricity market. A competition perspective”, MEMO/01/76 of 12.03.2001.

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Although most infrastructure joint ventures are unlikely to infringe EU competition law, a competition analysis of each individual co-operation will often be required. This is particularly true when the projects are brought forward by undertakings which individually or collectively have a strong position on the market. The analysis may have to tackle all main issues discussed in the previous sections and, moreover, examine effects on competition at two levels: the market for the exploitation of the infrastructure and the related energy markets. In addition, it is necessary take into account whether the cooperation extends into joint purchasing. For instance, in the case of a projected new gas pipeline, the parties may jointly purchase the gas to be transported in the pipeline. Such arrangements may give rise to foreclosure concerns.841 If gas in a given region is in tight supply joint purchasing agreements imposing long-term exclusive supply or volume obligations may exclude competing projects. It is submitted, however, that this is the case only where the volume requirements exceed what is required in order to for the investment to be made. An investment is viable only if there is sufficient demand for the new capacity which in turn requires availability of gas. Joint purchasing may be an appropriate way to underpin the joint investment.842

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New energy infrastructure projects may also raise particular regulatory issues, notably regarding possible exemptions from regulated third party access.843 The liberalisation directives provide for a special exemption procedure for infrastructure projects whereby the promoters of the project may apply to national regulators for an exemption from third party access to the new infrastructure. The decision of national regulators is subject to Commission oversight. The test laid down in the directives is in many respects a competition test requiring that the project must improve competition on the market.844 This means that in the

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841 See Horizontal co-operation guidelines, paragraph 200, Appendix 3. Joint purchasing may also give rise to collusion concerns if the parties have market power in the markets where they sell the jointly purchased products, see Horizontal co-operation guidelines, paragraph 200 seq. 842 Once a project has secured the necessary supply to underpin it, there may be insufficient supply to underpin other projects. However, this market outcome is not the result of a restriction of competition but scarcity of supply. The agreement does not exclude any competition that would otherwise have occurred since there is room for only one project. In that case there is no basis for intervening, see Guidelines on the application of Article 101(3), paragraph 18(a). Article 101 aims at preventing restrictions of competition and not at allowing competition authorities to pick winners in a competitive process. 843 See Volume I EU Energy Law. 844 See e.g. Article 36 of Directive – 2009/73/EC OJ L 211/94 of 13/07/2009. The condition for exemption did not change compared to Article 22 of the previous directive and are the following: (a) the investment must enhance competition in gas supply and enhance security of supply; (b) the level of risk attached to the investment is such that the investment would not take place unless an exemption was granted; (c) the infrastructure must be owned by a natural or legal person which is separate at least in terms of its legal form from the system operators in whose systems that infrastructure will be built; (d) charges are levied on users

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case of new infrastructure projects the competition analysis will often be carried out ex ante under the directives rather than ex post under Article 101. However, it is important to note that the test under the directive is less flexible. It is a condition that the risks are such that the investment would not take place absent the exemption. Under Article 101 this is not required in order to conclude that on balance the agreement is pro-competitive. It is merely required that the agreement with a given restriction produces more efficiencies than without it and that the benefits outweigh the adverse effects.

7.1 Merger or antitrust law? 3.169

Before a full competition analysis of infrastructure cooperations can be undertaken it has to be clarified whether antitrust or merger law applies to an individual project. Multiple-function cooperations encompassing the construction, operation and exploitation of a facility may not be subject to antitrust but to merger law. This applies notably to infrastructure cooperations in the form of joint ventures destined also to market capacity to all interested third parties. Such multiple-function cooperations are very likely to constitute a full-function joint venture. If, however, each of the parties to the agreement envisage, for example, to individually market the jointly owned capacity or the infrastructure, the co-operation has the sole purpose to serve the energy business of the parties and antitrust and not merger law will therefore apply.845

7.2 Hardcore restrictions 3.170

The first issue to examine when carrying out the antitrust analysis of an infrastructure joint venture is the existence of possible hard-core restrictions. If the capacity is allocated to each party and they agree not sell their share to third parties, such restraint is likely to be considered a restriction by object and possibly even a hard-core restriction unless the restraint is objectively necessary in order for the infrastructure to be built. This is more likely to be the case when the parties are producers and resellers as opposed to being only producers or of that infrastructure; (e) the exemption is not detrimental to competition or the effective functioning of the internal gas market, or the efficient functioning of the regulated system to which the infrastructure is connected. The Commission has provided guidance on the application of the exemption procedure in Commission staff working document on Article 22 of Directive 2003/55/EC concerning common rules for the internal market in natural gas and Article 7 of Regulation (EC) No 1228/2003 on conditions for access to the network for cross-border exchanges in electricity. The document is available at http://ec.europa.eu/ energy/sites/ener/files/documents/sec_2009-642.pdf. 845 See book paragraph 4.30 et seq. for a more in-depth discussion of what constitutes a full function Joint Venture.

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traders.846 It would also be a hard-core restriction if the parties were to agree on the price at which they individually sell to third parties or where or to whom they sell.847 On the other hand, for an infrastructure co-operation to function, the parties have to discuss and agree on the size of the facility’s capacity. The same is true for the setting of sales targets and the fixing of prices if the parties are also jointly selling the capacity to interested customers. Although price and output fixing are in principle hard-core restrictions, they are assessed as part of the overall cooperation if they are objectively necessary for the functioning of the co-operation.848 This does not imply that such restraints are not caught by Article 101). It does mean, however, that the parties can invoke the efficiency defence of Article 101(3) and that the cooperation is prohibited only where the negative effects outweigh the positive effects. In the UK–Belgium Interconnector case the Commission accepted joint marketing of the rights to the transport capacity the 9 partners had obtained through prior agreements with their joint venture Interconnector UK Ltd. The joint selling would, however, only occur in limited circumstances.849 On the other hand, in the E.ON/GDF case the Commission adopted a prohibition decision with very high fines in respect of an alleged agreement between two owners and operators of a major gas pipeline whereby they agreed not to use the gas transported in the jointly owned pipeline to compete in each other’s home markets.850 Thus, the agreement related to the commercialisation of the gas transported in the pipeline. It was unrelated to the operation of the jointly owned assets. As a result there was no basis for arguing that the restrictions formed part of the joint operation of the pipeline.

7.3 Analysis of likely effects of infrastructure cooperations Absent hard-core restrictions the likely effects of the agreement must be analysed either under the effects standard or for restrictions by object in the context of the efficiency defence unless the safe harbour of the Specialisation block exemption Regulation applies. The safe harbour exempts not only the joint production of goods but also the joint provision of services. Since granting access to a piece of infrastructure is a service, the safe harbour also applies to infrastructure joint ventures. However, the benefit of the block exemption may be limited in practice since it is a condition that the parties hold less than a 20% share on the relevant market. In some cases the relevant market will be identical with 846 In the former case the parties may have little incentive to make the investment if the infrastructure cannot be used exclusively or at least mainly to serve their mutual supply relationship. 847 See Article 4 Specialisation block exemption Regulation. 848 See e.g. Case C-382/12 P, Mastercard, ECR 2012, I page 0000, para. 89. 849 See Commission, Competition Report 1995, p. 125 et seq. 850 See Commission Decision of 8.7.2009, Case COMP/39.401 – E.ON/GDF.

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the facility itself, i.e. the marketable transmission capacity of an interconnector linking two distinct networks. In other cases relevant markets are wider than the facility operated by the parties where there exist competing infrastructures, such as gas pipelines or LNG terminals, which can be used for transmitting energy to the same relevant geographic market. Moreover, for the market share threshold to be satisfied such additional infrastructure must be controlled by other parties.

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Unless the safe harbour applies, the competition analysis must answer the two principal questions, (i) does the co-operation lead to the co-ordination of the competitive conduct of the co-operating parties and, (ii) do the collaborators gain, maintain or increase market power through the co-operation? Two distinct scenarios can be identified in this respect: (i) the collaborators intend to open up their infrastructure to all interested third parties, or (ii) the collaborators intend to use the infrastructure only for their own requirements.

7.3.1 Cooperations granting third party access to infrastructure 3.173

Where the infrastructure in question is subject to a regulated third party access system, which imposes tariffs so that the parties have no scope for fixing prices when exploiting the capacity of their jointly owned facility, the competition analysis is rather simple. However, this requires the finding that the applicable regulation fully and comprehensively controls tariffs and terms for accessing the infrastructure of the co-operation, to ensure that they are transparent and nondiscriminatory. For the following discussion it will be assumed that regulation does not prevent restrictions of competition through effective regulated third party access or does not even apply to the jointly owned infrastructure, as it may for instance be the case for so-called merchant infrastructure and cross-border transmission lines.851

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Participants in infrastructure joint ventures inevitably incur a high degree of cost commonality. This applies even to co-operation agreements limited to the construction and operation of a facility because the cost of constructing, maintaining and operating the facility will normally be significantly higher than the expenditure for the marketing of capacity rights. Commonality of costs is therefore a relevant factor, which may facilitate tacit collusion where the capacity is marketed independently by the parties. The cooperation may also lead to spill-over effects in down-stream supply markets. The main risk is that the joint venture allows the 851 In cases where the Commission accepts that an exemption is granted from regulated third party access for new infrastructure (see EU Energy Law, Volume I), the granting of such an exemption pursuant to e.g. Article 36 of the third Gas Directive does not provide any legal immunity from the competition rules.

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parties to exchange detailed data on capacity utilisation, which in turn allows them to monitor each others’ sales on the downstream market. Another important factor for finding co-ordinated conduct is the number of sellers of capacity rights. Where they are numerous, co-ordinated conduct may not be an issue at all. The same is true where the joint venture faces effective competition from other infrastructure, which customers regard as interchangeable with the facility owned by the co-operation. In situations where conditions for secondary rights’ trading are optimal, the co-ordination of the parties’ market conduct may also be too difficult and therefore improbable. However, where it is foreseeable that only the infrastructure owners will compete against one another for the sale of capacity rights, at least at the primary level, the smaller the number of companies involved, the greater the risk of the co-ordination of market conduct. The Commission does not indicate in its Guidelines when tacit collusion becomes likely within an oligopoly. A critical stage is arguably reached where the oligopoly comprises less than five suppliers.852

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Where the facility corresponds to the relevant market, the parties are the only suppliers on the primary level of the market. The fact that the capacity may be resold on a secondary market does not impose an effective competitive constraint on the primary market since the price on the primary market, which is determined by the parties, is the input cost on the secondary market. If it is likely under these circumstances that the parties align their market behaviour, they are also at the same time colluding to gain, maintain or increase market power. The two-step-analysis mentioned above requiring an examination of, first, the likelihood of the co-ordination of market conduct and, subsequently, whether the parties gain, maintain or increase market power, is then accomplished in one single step.

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However, the competition concerns will often be outweighed by efficiency gains when the cooperation leads to new infrastructure or additional infrastructure capacity as opposed to merely combining existing infrastructure. While the latter will probably only give rise to cost efficiencies, the former will normally create value through the construction of new infrastructure. Investment in infrastructure is likely to entail positive effects on competition through increased capacity. If absent the restriction the project would not go ahead or only on a smaller scale, the agreement triggering the investment will usually generate posi-

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852 In the merger case Gencor/Lonrho the Court stated that collusion is likely to occur with 2-4 suppliers in a market Case T-102/96, ECR 1999, p. II-879 paragraph 134.

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tive effects on competition.853 Benefits are particularly great if the new or additional capacity would benefit new entrants and allow them to enhance supplies on downstream energy markets.

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This raises the question whether beneficial effects on a related energy markets may be weighed against anti-competitive effects on the market of the facility itself. In general, efficiencies are analysed relevant market by relevant market. However, balancing anti-competitive and pro-competitive effects across market boundaries is permitted when the markets are related and the group of customers affected by the restriction and benefiting from the efficiency gains is substantially the same.854 It is submitted that infrastructure joint ventures normally fulfil both conditions. The energy consumers on the downstream markets, which likely suffer from the anti-competitive effects, will in most instances also profit from the efficiency gains. The UK–Belgium Interconnector project is an example of such a case. As the Commission stated in its published case report, the new pipeline between the UK and the Continental Europe created new opportunities for competition between gas markets which so far had been quite isolated.855

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Infrastructure is but a means for supplying energy. A competition analysis must therefore also assess whether an infrastructure joint venture produces any anticompetitive spill-over effects on related markets. What applies to beneficial effects applies thus also to restrictive effects. Anti-competitive effects are possible when vertically integrated suppliers participating in the infrastructure joint venture hold strong positions on an electricity or gas market related to the infrastructure. The co-operation at the infrastructure level may, for example, tip the balance in an already concentrated market and render tacit collusion on the supply market more likely (network effect).856 In reality, infrastructure agreements will probably only exceptionally carry enough commercial weight for parties to cause co-ordinated market conduct on a spill-over market. Where such anti-competitive spill-over effects are likely to occur, it might, however, require very substantial efficiencies to outweigh the restriction of competition. In particular, in a case where a co-operation agreement only combines existing infrastructure, a prohibition under Article 101 cannot be excluded. 853 See in this respect Commission staff working document on Article 22 of Directive 2003/55/EC concerning common rules for the internal market in natural gas and Article 7 of Regulation (EC) No 1228/2003 on conditions for access to the network for cross-border exchanges in electricity, paragraph 32. The document is available at http://ec.europa.eu/energy/gas_electricity/interpretative_notes/doc/sec_2009-642.pdf. 854 See Guidelines on the application of Article 101(3), paragraph 43, and Case C-382/12 P, Mastercard, ECR 2012, page I-0000, paragraphs 242 and 243. 855 See Commission, Competition Report 1995, p. 126. 856 See above, book paragraph 3.52.

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In conclusion, it can be said that infrastructure cooperations offering new capacity to all interested third parties are, in most cases, likely to be compatible with EU competition law. In contrast, cooperations which only combine already existing infrastructure may be found incompatible with the competition rules.

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7.3.2 Special competition issues of cooperations granting third party access It has already been mentioned that the framework for the trading of capacity rights may be important for the competition analysis of an infrastructure cooperation. The framework is, however, not the only consideration relevant to an assessment of the probability of co-ordinated market conduct or tacit collusion. The framework set by the parties may also on its own infringe Article 101. Generally speaking, the introduction of a third party access regime for the use of infrastructure is fully in line with the objective of free and open markets. A third party access regime will therefore only exceptionally be in conflict with the competition rules. Three issues may arise.

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Article 101 aims at protecting competition by prohibiting agreements which allow the parties to jointly exercise market power or which foreclose markets. In gas and electricity markets that historically have been characterised by dominant incumbents, foreclosure is a particular concern. Agreements between owners of an infrastructure and a dominant energy supplier that provide for long-term reservation of the transport capacity are therefore likely to attract scrutiny.857

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Technical limitations for the use of a piece of infrastructure by third parties fully justify any constraints for the trading of capacity rights. The Commission explicitly recognized this principle in its review of the arrangements concluded for UK – Belgium Interconnector. It paid particular attention in this respect to the provisions regarding any future increase of the interconnector capacity. The Commission emphasised in its report that the joint venture arrangements have to operate in such a way that technically viable flow enhancements to meet increasing demand are in place. Another issue is who would have to fund capacity increases? The Commission accepted in this case that those users who wish to increase flow capacity have to pay.

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857 See in this respect, Commission staff working document on Article 22 of Directive 2003/55/EC concerning common rules for the internal market in natural gas and Article 7 of Regulation (EC) No 1228/2003 on conditions for access to the network for cross-border exchanges in electricity, paragraph 33. The document is available at http://ec.europa.eu/energy/sites/ener/files/documents/sec_2009-642.pdf.

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A similar principle as for technical limitations seems to apply to the constraints that parties to a joint venture agree upon for the trading of their capacity rights for the facility. In its second review concerning the UK – Belgium Interconnector the Commission verified whether the standard transportation agreement, which restricts shippers in their right to transfer capacity to third parties, was not unduly rigid and artificially restrained trading in the secondary rights market. Of concern were the long duration of assignment and sublease contracts and the high minimal amounts due to be delivered through such contracts. The Commission also paid attention to the transparency of the interconnector operations, e.g. the advance announcement of flow reversals in order to guarantee a sufficient level playing field. The Commission did not raise any objections in this respect apparently because the collaborators envisaged to lift the constraints and to enhance the transparency of the operations.858

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Constraints on third parties to trade the capacity rights of an infrastructure joint venture, which are fully justified on technical or commercial grounds, do not fall within the scope of Article 101(1). As a result, there was no need to have recourse to Article 101(3).

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This scenario implies that participants in the infrastructure joint venture are not only infrastructure operators but at the same time also energy suppliers, i.e. vertically integrated energy firms. In this scenario a restriction of competition may arise on a market that is upstream, downstream or otherwise related to the infrastructure in question. Since the infrastructure is reserved for own use, there is no market for the exploitation of the facility on which competition could be distorted. The major competition concern under these circumstances is therefore that the rivals of the parties are foreclosed from accessing related energy market because of the agreement.859

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If the parties decide individually not to sell capacity to third parties Article 102 may be applicable provided that the parties are collectively dominant.860 It is a condition that the infrastructure, e.g. a cross-border pipeline or interconnector, is of key importance for accessing a related energy market. This could, 858 See Commission, press release IP/02/401 of 13.03.2002; Competition Report 2002, p. 206. 859 Lack of sufficient access to infrastructure has been identified as a major barrier to entry in the Energy Sector Inquiry; see Commission Communication COM (2006) 851 Final. The full report is a technical annex to the Communication taking the form of a DG Competition report on the energy sector inquiry (SEC (2006). 860 See in this respect Commission Decision of 4.5.2010, Case COMP/39.317 – E.ON gas foreclosure.

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for instance, be the case if the infrastructure(s) operated by the co-operation constitute(s) the bottleneck through which all or most of the electricity or gas sold in an area has to be transported. The reasons for the scarcity of transmission capacity can be manifold. One possible reason could be that long-term reservation agreements do not permit transportation through alternative transmission lines. Another reason could be that only the new capacity constructed will give access to new supply sources, which are crucial for meeting growing demand or replacing depleted sources. In the case of agreements that restrict the parties’ sale of the capacity, the agreement is likely to have as its object to restrict competition unless the parties are able to argue convincingly that absent the restriction the project would not have been implemented. This is more likely to be the case when the parties comprise producers and buyers of gas or electricity than where all parties are producers or traders. The former was the case in the Viking Cable case.861 Statkraft and E.ON concluded an agreement whereby the former would supply electricity to the latter. Moreover, in order to implement the agreement they also agree to build a new interconnector between Norway and Germany. It is likely that the interconnector would not have been built if it could not be reserved for the intended purpose, namely the supply of electricity generated by Statkraft to E.ON. The Commission noted that excess capacity could be traded. Hence, the restriction did not go beyond what was necessary. Moreover, the Commission considered that competitors of the collaborators disposed of sufficient alternatives to access in this case both the relevant upstream and downstream supply markets. They did not depend on the new sub-sea cable which the parties to the agreement intended to build.

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However, when infrastructure is a scarce resource, it is likely that the parties will be obliged to give third parties access to a certain share of the jointly held capacity. In this respect the Commission practice in the field of third party access exemptions is instructive.862 In its interpretative note the Commission services provide that the new infrastructure should have the effect of diluting the market power of the dominant undertaking(s). The share of capacity held by one or more dominant companies in the new infrastructure has to be significantly lower than its/their market share(s).863 In an recent individual exemption deci-

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861 See Commission Notice pursuant to Article 19(3) of Reg. 17 concerning Viking Cable, OJ C 247/11, 5.09.2001. 862 Exemption decisions are published by DG Energy: https://ec.europa.eu/energy/sites/ener/files/documents/exemption_decisions2018.pdf. 863 See Commission staff working document on Article 22 of Directive 2003/55/EC concerning common rules for the internal market in natural gas and Article 7 of Regulation (EC) No 1228/2003 on conditions for

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sion, the Commission required that any undertaking with a market share in any relevant market exceeding 40% must not reserve more that 40% of relevant exit point capacity.864

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The efficiency defence of Article 101(3) may be invoked in the case of a restriction of competition through the foreclosure of rivals. The Commission’s practice regarding third party access exemptions is also instructive in this regard. In practice, exemption is the rule, not the exception. Agreements concerning the construction of new or additional capacity are much more likely to fulfil the conditions of Article 101(3), even if built for captive use, than the withdrawal of existing infrastructure capacity from the market.

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Since for all new or enlarged infrastructure projects the foreclosure of rivals may be completely or at least partially avoided through the public offering of capacity to interested third parties the conditions of indispensability is likely to be of particular importance.865 The parties will have to substantiate why the project would be not executed (to the same extent) if the capacity could not be reserved for the parties. Exclusivity is normally only justified for the time required by the parties to ensure an adequate return on their investment in the infrastructure.866 Since the parties are suppliers it is likely that the project would not go ahead if they could not reserve a significant share for themselves. However, it may well be that partial access would not adversely affect the project and the parties’ incentives. This means that in practice a balance may need to be struck on the basis of the indispensability condition.

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In conclusion, parties to an agreement intending to exclusively use infrastructure for their own requirements may infringe the EU competition rules when foreclosing rivals on a related energy market. This also possibly applies where the co-operation serves the purpose of constructing a new piece of infrastructure. The reason for this is that foreclosure can usually be avoided through opening the co-operation to rivals (by offering an “open season”) or, at least, through offering capacity rights to competitors. Alternatively, efficiencies may not suffice to justify the parties’ exclusive use of all capacity for its whole lifetime.

access to the network for cross-border exchanges in electricity, paragraph 34. The document is available at http://ec.europa.eu/energy/sites/ener/files/documents/sec_2009-642.pdf. 864 See e.g. Commission Decision of 25.7.2018 on the exemption of the Interconnector Greece-Bulgaria from the requirements regarding third party access, tariff regulation and ownership unbundling, para. 72. 865 I.e. prior to building the infrastructure, others are invited to invest in it, enabling them to acquire capacity. 866 See Guidelines on the application of Article 101(3), paragraph 81.

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CHAPTER 3 Vertical agreements 1.

Introduction

Vertical agreements are characterised by the fact that two or more firms, each operating at a different level of the production or distribution chain, enter into an agreement or concerted practice. These so-called “vertical restraints” may for instance be part of a supply contract with a commercial or industrial energy end-user or a distribution agreement with an energy reseller. For a restraint to be qualified as vertical it must it relate to functions which for the purposes of the agreement both firms exercise at different levels of the supply chain.867 Vertical agreements entered into by energy suppliers and buyers may be prohibited by Article 101 when they restrict competition and do not confer sufficient benefits to outweigh their anti-competitive effects (efficiency defence).868 Unlike hardcore horizontal agreements such as cartels, vertical agreements generally produce efficiencies to a greater or lesser extent. Thus, although there is a presumption that the conditions of Article 101(3) are not satisfied in the case of vertical hard-core restrictions, there is greater scope for arguing that they are pro-competitive because they are necessary to produce efficiencies.869 In vertical relationships, the product of one firm is the input for the other. The exercise of market power by either the supplier or the buyer would normally hurt demand for the product of the other party. The firms involved in vertical relationships therefore usually have an incentive to prevent the exercise of market power by the other party. This “self-restraining” character is one of the rea867 See Commission Vertical restraints guidelines, paragraph 24, Appendix 4. 868 See Article 2(1) Vertical block exemption Regulation and the Vertical restraints guidelines, paragraphs 5, 23 et seq, Appendix 4. 869 See Commission Vertical restraints guidelines, paragraph 47, Appendix 4.

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sons why competition policy does not regard arrangements between a supplier and a buyer to be as damaging as horizontal agreements between competitors.870 However, this self-restraining character should not be over-estimated.871 When undertakings have market power they can use vertical restraints to exclude competition by raising the costs of their rivals and thereby increase their own profits. Moreover, when the parties face inelastic demand for their products and services, they may be able to pass on to consumers the price increases resulting from the exercise of market power and may therefore not seek to restrain it. This may be an issue in energy markets where the elasticity of demand is often low. The main competition concerns arising from vertical agreements are foreclosure of third party competitors (inter-brand competition) on the one hand and market partitioning and resale price maintenance (intra-brand competition) on the other hand. Unlike horizontal agreements, vertical agreements do not allow the parties to create market power where previously there was none. A vertical arrangement will not appreciably restrict competition, unless either the supplier or the buyer already possesses market power prior to entering into the arrangement. It is thus only when inter-brand competition at the horizontal level of the supplier or buyer is not effective that it becomes important to protect residual competition against the possible negative effects of vertical restraints.872 For example, in such circumstances it may no longer be compatible with the competition rules for a supplier to enter into non-compete obligations whereby buyers undertake to purchase all their energy requirements only from the supplier. Moreover, when inter-brand competition is weak (and there are only one or a few suppliers), it becomes important to protect intra-brand competition.873 For instance, where an electricity or gas supplier or any of its distributors has the power to raise prices above competitive levels, the supplier may not be able to grant its distributors exclusivity.874 Competition policy acknowledges that vertical arrangements serve useful economic purposes in the vast majority of cases. They may for instance be necessary for the parties to recoup an investment that either of them intends to make. Where, for example, the supplier invests in equipment, training of staff or pro870 See Vertical restraints guidelines, paragraph 98, Appendix 4. See also L. Peeperkorn, The Economics of Verticals, Competition Policy Newsletter 1998 (2). 871 Vertical restraints guidelines, paragraph 99, Appendix 4. 872 See in this respect Commission Communication COM (2006) 851 Final. The full report is a technical annex to the Communication taking the form of a DG Competition report on the energy sector inquiry (SEC (2006). 873 See Vertical restraints guidelines paragraph 6, Appendix 4. 874 This does not mean that the supplier is obliged to supply others but merely that he is prevented from contractually agreeing not to do so. Obligations to supply may only be imposed under Article 102 TFEU.

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motion on the reseller’s premises and such investment may also attract customers for its competitors, a vertical restraint such as a non-compete obligation may help to overcome the so-called “ free-rider problem” 875 that the investor could otherwise face. Similarly, where one party needs to invest in its production or distribution facilities before a supply or distribution contract can be implemented, the investor may wish to agree a vertical restraint lowering its investment risk. In this case, a vertical restraint in the form of a non-compete clause when the supplier is the investor, or an exclusive distribution right when the investment is made by the buyer, may solve the so-called “ hold-up problem”.876 Holdup arises when an investment, once it is made, creates a dependency which the other party exploits e.g. by asking higher prices. Such benefits may arise irrespective of whether the parties have a certain degree of market power. However, at low levels of market power it can normally be presumed that the pro-competitive effects outweigh the anti-competitive effects. This view is reflected in the Vertical block exemption Regulation, which has established a comprehensive safe harbour in favour of vertical agreements.877 Subject to a list of hard-core restrictions,878 the Vertical block exemption Regulation presumes all vertical restraints to be legal as long as a market share threshold of 30% is not exceeded. The market share threshold applies to the market(s) on which the supplier sells the products and the market(s) on which the buyer purchases the products covered by the agreement.879 Above the market share threshold the agreement is subject to self-assessment. There is no presumption of illegality above the market share threshold.880 The agreement will be caught by Article 101(1) only where it is likely to have negative effects on competition and these effects are unlikely to be outweighed by efficiencies. Below the market share threshold competition authorities may decide to intervene by withdrawing the benefit of the block exemption and prohibit the agreement. To do so, they must prove that the agreement is caught by Article 101(3) and that it does not satisfy the conditions of Article 101(3). Withdrawal of the benefit for the block exemption is normally unlikely to occur since below the market share threshold the parties are unlikely have sufficient market power to harm competition and 875 See Vertical restraints guidelines, paragraph 107(a), Appendix 4. 876 See Vertical restraints guidelines, paragraph 107(d), Appendix 4. 877 See Commission Regulation 330/2010 on the application of Article 101(3) to categories of vertical agreements and concerted practices, OJ L102/1 of 23.4.2010. 878 See Article 4. 879 See Article 3(1). Under the previous Vertical block exemption Regulation (Commission Regulation 2790/99) it was normally only the supplier s market share that was relevant. 880 Recital 9 to Vertical block exemption Regulation

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consumers. However, the contrary may be true in electricity markets where market share may be an imperfect proxy for market power.881 Moreover, withdrawal may be required when networks of vertical agreements entered into by several significant suppliers cumulatively foreclose the market (“cumulative effect”).

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Vertical agreements are common in the energy industry. The most important restraints in vertical agreements that have been examined by competition authorities will be discussed here, namely non-compete obligations and territorial restrictions including exclusive distribution agreements.

2.

Exclusive energy purchasing and supply arrangements

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Energy products are generally supplied either to large industrial clients or to intermediaries who in turn re-sell the energy to smaller professional or household consumers. Competition concerns may arise when these supplies are carried out on the basis of long-term exclusive purchasing and supply relationships. There exists a great variety of forms and means to establish exclusive dealing between a supplier and a buyer. The “classical types” of exclusivity arrangements are noncompete obligations and exclusive distribution agreements. A non-compete obligation requires the buyer to purchase all or practically all its requirements from a particular supplier.882 By contrast, an exclusive distribution agreement obliges the supplier to sell its product only to the buyer and not to any other reseller for distribution in a specific sales area or to a particular class of customers.883 These two classical exclusivity arrangements are often combined in distribution agreements with resellers.

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Exclusive relationships may occur at various levels of the electricity and gas supply chain as illustrated in the chart below. Exclusivity arrangements used to be customary in industry. However, more recently, competition authorities have increasingly intervened against exclusivity arrangements as part of their efforts to open up electricity and gas markets to competition. Moreover, as markets become more liquid and competitive non-exclusive arrangements become feasible and more attractive. 881 See book paragraph 3.71 above. 882 Article 1(d) Vertical block exemption Regulation. See also Vertical restraints guidelines, paragraphs 66 and 129. A non-compete obligation is different from exclusive supply. In antitrust terminology the latter is limited to the brand of the supplier, who is obliged to sell exclusively or predominantly to a single buyerwhereas the former includes the brand of the supplier and all competing goods or services, see Vertical restraints guidelines, paragraphs 129 and 192. 883 See Vertical restraints guidelines, paragraphs 50, 109, 161, 178.

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Typical vertical restraints in the electricity and gas industry. Exclusive dealing arrangements do not necessarily raise competition concerns. When a supplier and a reseller commit to deal only with each other, the arrangement may in fact promote competition. This is likely to be the case when it facilitates new market entry and stimulates investment. However, exclusive dealing arrangements may raise competition concerns when inter-brand competition – at the suppliers’ or buyers’ level – is reduced due to the existence of one or more firms with a significant degree of market power. Once inter-brand com225

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petition at the production or distribution level is not effective, exclusive dealing may have adverse effects because it may foreclosure rivals from access to energy markets or facilitate collusion among suppliers or re-sellers on their respective energy markets. In such circumstances, exclusive dealing may constitute a restriction of competition within the meaning of Article 101(1).

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To be caught by Article 101(1) a vertical restraint does not have to be the only or principal barrier to competition. It is sufficient that the restraint has appreciable effects on competition. Thus, when exclusive dealing agreements contribute to market foreclosure and do not generate countervailing efficiencies, these arrangements are not compatible with competition law, irrespective of the existence of other impediments to competition prevailing in an energy market. Non-compete obligations are generally more harmful to competition than exclusive distribution agreements as they may prevent competing products from reaching the market. By contrast, exclusive distribution agreements may restrict intra-brand competition but cannot prevent competing goods from reaching final consumers.884

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Non-compete obligations oblige the buyer to procure all or practically all its requirements on a particular market from a given supplier and oblige it not to engage in manufacturing, purchasing, selling and re-selling of competing goods or services.885 It is not required that the agreement provides for de jure exclusivity. It suffices for competition law purposes that due to obligations or incentives contained in the agreement the buyer de facto covers all or practically all its requirements from the same supplier.886

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De facto exclusivity may result from incentive schemes such as a rebate that is conditional on the buyer sourcing all or practically all its energy needs from the supplier.887

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De facto exclusivity may also follow from fact that it may not be technically possible or economically viable to have a second simultaneous supplier for the same site. In the Distrigas case the Commission took the view that only very large customers, with an annual off take exceeding 500 GWh of gas could in practice be 884 See Vertical restraints guidelines paragraph 151. 885 See Article 1(d) Vertical block exemption Regulation; Vertical restraints guidelines, paragraphs 66 and 129, Appendix 4. 886 See Vertical restraints guidelines, paragraphs 66 and 129, Appendix 4. 887 See Case 85/76, Hoffmann-La Roche, [1979] ECR p. 461.

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supplied by more than one supplier and there were very few such customers.888 As a result, contracts with other customers that contained minimum purchasing obligations were considered de facto exclusive. By contrast, in the Long-term contracts France case the Commission took the view that industrial electricity users were in principle able to have more than one supplier.889 Thus, the commitments accepted by the Commission contain an obligation on EDF to offer non-exclusive contracts that effectively allowed the customer to have a second supplier.890 Foreclosure concerns not only arise when the buyer is obliged de jure or de facto to obtain 100% of its energy requirements from the supplier. Negative effects on competition may also arise when a buyer is required to procure a substantial share of its requirements from one supplier.891 The Vertical block exemption Regulation treats direct and indirect obligations of a buyer to purchase more than 80% of its total requirements of the contract goods or services in question from the same supplier as a non-compete obligation.892 Obligations or incentives that make the buyer purchase less than 80% of its requirements from one supplier are defined as quantity forcing. Quantity forcing may be expressed as a minimum annual quantity (MAQ) set below 80% of the customer’s normal requirements over time. In cases where a minimum purchasing obligation does not lead to de facto exclusivity, only the share of demand that is effectively tied to a given supplier is taken into account. Thus, if a buyer is required to buy 50% of its needs from a given supplier, only that volume is taken into account when assessing the impact of the agreement on competition. To support a finding of exclusivity, it is not sufficient that the buyer as a matter of fact buys all its requirements from the same supplier. The agreement must contain obligations or incentives that prevent the buyer from switching supplier. In the absence of an obligation or an incentive scheme the buyer may at any time switch to another supplier and the mere fact that it has chosen not to do so is not sufficient to support a finding that the buyer is subject to a non-compete obligation.

888 See Commission Decision of 11.10.2007, Case COMP/37.966 – Distrigas, paragraph 20. 889 See Commission Decision of 17.3.2010, Case COMP/39.386 – Long-term contracts France, paragraph 83. 890 This commitments allows the customer to source from a second supplier, including arbitragers like KalibraXE, see in this respect the interim measures decision of the French competition authority of 25.4.2007 in case 07-MC-01, KalibraXE. 891 See Vertical restraints guidelines paragraphs 66 and 129; Appendix 4. See below the Gas Natural/Endesa case, at book paragraph 3.258. 892 See Article 1(d) Vertical block exemption Regulation.

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2.1.1 Competition issues of non-compete obligations in energy supply and distribution contracts 3.208

The principal competition concern relating to non-compete obligations is foreclosure of competition. By obliging energy buyers to purchase only from it, a supplier excludes rivals from selling to those customers. Rivals will at least temporarily not be able to successfully win their business even if they offer a lower price. Foreclosure effects may arise from contracts entered into by a single dominant supplier or from parallel networks of contracts entered into by several large suppliers. In the latter case foreclosure stems from the cumulative effect of these parallel networks of agreements. The following three conditions must generally be satisfied for non-compete and quantity forcing obligations to be caught by Article 101(1): (1)

One or more suppliers entering into non-compete obligations must individually or collectively have market power;

(2)

The agreements must cover a substantial part of the market;

(3)

The agreements must be of long duration.893

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As regards the first condition the Commission points out in its Vertical Restraints Guidelines that non-compete obligations are “unlikely” to create a single or cumulative foreclosure effect on competition as long as the market share of the largest supplier is less than 30% and the aggregate share of the five largest players remains below 50%.894

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Secondly, a substantial part of total market demand must be tied to the incumbent suppliers (“market coverage”).895 The assessment is based on a sliding scale. In markets dominated by a single undertaking the intervention threshold is lower than in cases where several firms operate on the market. In dominated markets competition is already substantially weakened and distorted in favour of the dominant firm. A larger part of the market therefore needs to be contestable in order to give other players the opportunity to enter the market and expand. Even so, for competition concerns to arise such obligations must cover a significant share of demand.896 893 See in this respect Commission Decision of 17.3.2010, Case COMP/39.386 – Long-term contracts France, paragraph 30. 894 See Vertical restraints guidelines, paragraph 35, Appendix 4. 895 As to the relevance of market coverage, see Case C-413/14 P, Intel, ECLI:EU:C:2017:632, para. 139. 896 See in this respect Case C-413/14 P, Intel, ECLI:EU:C:2017:632, para. 139 and Commission Decision of

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Where more than one supplier impose non-compete obligations, each has to tie a significant part of total demand and the parallel networks of non-compete agreements must cause a significant “cumulative foreclosure effect”.897 As long as most buyers are still free to switch to other energy suppliers, rivals can grow and are not foreclosed from a market. The Commission states in its de minimis Notice that a cumulative effect is unlikely to occur as long as less than 30% of demand is tied.898 This threshold is intended to apply to all products, including final consumer goods. In cases involving such products non-compete obligations may be an issue at relatively low levels of market coverage, because access to wide-spread distribution is often a precondition for successful entry.899 In the case of intermediate products such as gas and electricity (when supplied for industrial use) significant foreclosure due to cumulative effects is likely to require a significantly higher tied market share. In the Vertical Restraints Guidelines the Commission takes the view that for intermediate products a serious cumulative effects is unlikely to arise as long as less than 50% of the market is tied.900 In cases where a single firm has a significant degree of market power the intervention threshold is lower. For instance, in the Repsol case the undertaking concerned had tied around 25-35% of demand.901 In cases involving dominant firms the threshold for insignificant foreclosure is likely to be below 20-25%.902

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In the de minimis Notice the Commission considers that suppliers with a tied market share of less than 5% do not in general significantly contribute to foreclosure due to the cumulative effect of non-compete obligations.903 It follows that an individual supplier does not have to possess market power for its exclusive supply arrangements to be caught by Article 101(1) where the cumulative effect of numerous exclusive arrangements is being considered. In cumulative effects cases the application of Article 101(1) only presupposes a significant contribution by each supplier to the overall foreclosure effect.904 In dominated markets the threshold for significant contribution to a foreclose effect is likely to be higher than 5% to the extent that it is relevant at all. In such markets the dominant firm is the main source of distortion of competition. Even if small competitors conclude non-compete agreements they are not the source of the

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17.3.2010, Case COMP/39.386 – Long-term contracts France, paragraph 33. See Vertical restraints guidelines, paragraphs 76 and 134, Appendix 4. See Commission de minimis Notice paragraph 10. See in this respect Case T-9/93, Schöller, ECR 1995, p. II-1611. Vertical restraints guidelines paragraphs 38, Appendix 4. See Commission Decision of 12.4.2006, Case COMP/38.348 – Repsol, paragraph 24. See Commission Decision of 11.10.2007, Case COMP/37.966 – Distrigas, paragraph 35, and Commission Decision of 17.3.2010, Case COMP/39.386 – Long-term contracts France, paragraphs 72 to 74. 903 See Vertical restraints guidelines, paragraph 134, Appendix 4. De minimis Notice paragraph 8. 904 See Case T-9/93, Schöller, ECR 1995, p. II-1611, paragraphs 76 seq. 897 898 899 900 901 902

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foreclosure problem. If the contracts entered into by the dominant firm are dealt with, it is likely that the foreclosure problem is effectively addressed. Moreover, non-compete obligations may be necessary for small market players to establish a foothold on the market. In dominated markets it may therefore be detrimental to competition to apply the same standard to all players. Thirdly, the exclusive relationship must in general be of significant duration to cause an appreciable foreclosure effect. This is particular true in cases that do not involve dominant firms. Short-term exclusivity obligations are normally unlikely to exclude as-efficient rivals.905 Ex ante competition between suppliers to obtain short-term exclusive contracts from energy buyers is likely to make up for any ex post foreclosure of rivals for the short duration of the supply relationship. As long as no single firm is dominant rivals ought to be in a position to compete effectively for the contracts when they come up for grabs. In fact, ex ante bidding for contracts may intensify competition between suppliers. This is not least the case in markets for homogeneous products.

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However, it is important to keep in mind that ex ante bidding does not create new competition that did not previously exist. It is therefore not a general defence in favour of non-compete obligations that the agreement was entered into following an open tender procedure. This is particularly true when dominant firms participate in the tender, since other players may not be able to bid effectively against the dominant firm. For instance, it may be that the dominant firm is an unavoidable contracting party because competitors are unable to supply the range of energy products that they demand. In that case, competitors may be unable to bid for the buyers’ entire needs. Long-term contracts that result from a tendering process may therefore raise competition concerns despite the facially competitive nature of the process.

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For the Commission, short-term means in general and across all industries one year.906 The one-year period does not have to be a calendar year. It can also be a gas year running from 1 October till 30 September. Non-compete obligations 905 The assessment may differ in cases involving dominant firms. In case COMP/39.386 – Long-term contracts France, the dominant firm concerned offered commitments whereby it would offer non-exclusive contracts effectively allowing the customer to contract for additional supplies with another supplier, see Commission Decision of 17.3.2010, Case COMP/39.386 – Long-term contracts France, paragraph 83. If the dominant firm is an unavoidable supplier for a share of customers’ demand, exclusivity is sufficient to restrict competition even if it is a short duration because it turns competition into an ‘all or nothing’ game which distorts competition in favour of the dominant firm. 906 The Commission assumes that non-compete obligations shorter than one year entered into by non-dominant suppliers does not give rise to appreciable anti-competitive or net negative effects, see Vertical restraints guidelines, paragraph 133, Appendix 4.

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lasting longer than one year risk being caught by Article 101(1) if the other two conditions for foreclosure are met.907 However, each case has to be assessed on its merits. At the end of the day what matters is whether a sufficiently large part of the market is contestable on a recurrent basis so as to conclude that the market is not significantly foreclosed. The Commission’s approach to long-term non-compete obligations has been developed in two cases, namely the Distrigas and the Long-term contracts France cases.908 In Distrigas, a dominant incumbent, committed to ensure that for each calendar year a minimum of 65% and on average for all calendar years a minimum of 70% of the gas volumes supplied to industrial users and electricity producers in the market concerned would return to the market, i.e. alternative suppliers can make a competing offer to the customers concerned and that the duration of all contracts covered by the commitments would not exceed 5 years.909 In the Long-term-contracts France case the corresponding percentages were 60% and 65%. In this case the Commission also accepted that if the customer at certain intervals was entitled to opt out of the agreement at no cost or penalty, the effective duration of the agreement was the interval between the opt-outs. The Commission thereby deviated from the approach in Article 5(1) of the Vertical block exemption Regulation whereby a contract that is tacitly renewed unless terminated by the buyer is deemed to be of indefinite duration. It is submitted that in the case of agreements involving industrial buyers this approach is correct. Such entities are large professional buyers and are likely to keep track of the points in time when the opt-out may be exercised. The stricter approach of the Vertical block exemption Regulation is therefore not required to ensure that customers are contestable at regular intervals. 907 It has sometimes been argued that for the assessment of the possible foreclosure effects of an electricity or gas supply contract, only the period of time elapsed since liberalisation became effective should be taken into account. However, EC competition law has always applied to the electricity and gas sectors, at least in the Member States without statutory monopoly suppliers, and not only since the Community-wide market opening in 1999 and 2000 respectively. Non-compete obligations could thus contravene Article 101 before liberalisation unless they also generated countervailing benefits. Previously existing legal monopoly rights of the supplier may have had the result that potential contraventions of Article 101 had no practical effect. However, they cannot justify the violation of Article 11(1), and in particular, they cannot prolong the period of the time for which the exception of Article 101(3) applies. See D. Schnichels, Marktabschottung durch langfristige Gaslieferverträge, EuZW 2003 p.173. 908 See Commission Decision of 11.10.2007 in Case COMP/37.966 – Distrigas and see Commission Decision of 17.3.2010, Case COMP/39.386 – Long-term contracts France. 909 More specifically, no new contract with industrial users and electricity producers can be longer than five years. Existing contracts with a duration of five years or more are to be granted unilateral termination rights with prior notice and without indemnity, which allows Distrigas as a transitional measure to treat them as one year contracts.

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The approach developed by the Commission in the Distrigas and Long-term contracts France cases allows for a certain amount of flexibility and thus avoids imposing an overly rigid regime. Under the commitments, 30 to 35% of the incumbents’ sales could be tied more than one year ahead subject to the 5-year cap. A number of contracts with a duration of up to 5 years can thus be included in the portfolio. At the material time, the 30 to 35% limit was equivalent to 20 to 25% of the relevant market.910 It would thus seem that in cases involving dominant suppliers the Commission does not consider a tied market share of this magnitude to have significant foreclosure effects outweighing the benefits of the long-term contract.911

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The Commission’s approach is arguably particularly well-suited for cases where the competition concerns are caused by non-compete agreements concluded by a single firm. In cumulative effects cases it may be more practical to impose a duration cap and not work with the more complex instrument of a tied market share. This may explain the approach of the German competition authority in a case involving a number of German gas companies. In a decision confirmed by the German supreme court,912 the Bundeskartellamt913 considered that networks of non-compete agreements between incumbent suppliers and resellers (Stadtwerke) foreclosed the market.914 The companies concerned were required to reduce the duration of their contracts to two years. This period could be extended to four years if another supplier effectively supplied at least 20% of the customer’s requirements.

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The foreclosure of rivals is not the only competition concern that may arise from non-compete obligations imposed by energy supplies. The practice may also act as a facilitating device to strengthen collusion among suppliers. Where most buyers on a given market are obliged to exclusively source all of their requirements for a particular good or service from oligopolistic suppliers over a long period of time, this may have the result of stabilising suppliers’ market shares and softening competition.915

910 The Commission used tied share of sales as a proxy for the tied market share since it acknowledged that it was difficult to measure with sufficient accuracy the size of the market. This would be a problem in the context of commitments decisions since undertakings offering commitments are subject to heavy fines if they violate the commitments. 911 These cases are not reflected in the Vertical restraints guidelines, paragraph 140, Appendix 4. Like the previous guidelines, the current guidelines provide that for a dominant company, even a modest tied market share may already lead to significant anti-competitive effects. 912 See judgment of 10.2.2009 in case KVR 67/07 – E.ON. 913 See Decision of 13.01.2006 – Langfristige Lieferverträge (Case B8-113/03) and Discussion Paper, 2005, p. 6, available at http://www.bundeskartellamt.de. 914 Contracts of shorter duration were not considered feasible due to the characteristics of the buyers. 915 See Vertical restraints guidelines, paragraphs 100 and 130, Appendix 4.

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Finally, it is relevant to mention consortia of energy intensive industrial users. In several Member States such consortia have been formed. While some have been created with a view to constructing and running new power plants, others have concluded long-term exclusive supply agreements with suppliers. Such agreements are subject to the normal competition analysis of long-term non-compete agreements and are thus assessed in the overall context in which they occur. This means that they form part of the bundle of contracts that may exist in the market and which may lead competition authorities and courts to conclude that the market is being foreclosed. Hence, in the assessment of likely foreclosure effects the volumes supplied to consortia of buyers are taken into account when assessing the tied market share and contract duration.

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To summarize, foreclosure of new competition and the maintenance or strengthening of preexisting market power is the major competition concern in relation to non-compete obligations. Whether or not Article 101(1) applies depends on a full competition analysis unless the general safe harbour for vertical restraints is applicable to the agreement in question. In other words, non-compete obligations are not hard-core restrictions. They are assessed under the effects standard. This means that they are likely to raise competition concerns when they are concluded by dominant incumbents that have also concluded other similar supply contracts, whereas they are unlikely to give rise to competition concerns when they are concluded with new entrants. In oligopolistic markets non-compete agreements concluded by the main players may give rise to so-called cumulative foreclosure effects.

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2.1.2 Safe harbour: the Vertical block exemption Regulation A legal safe harbour for all vertical non-hard-core restraints facilitates the assessment of non-compete clauses under the EU competition rules. Instead of examining in detail whether an arrangement constitutes a restriction of competition and possibly generates countervailing benefits, it suffices to analyse whether the three conditions of the safe harbour are present. The Vertical block exemption Regulation presumes the legality of non-compete obligations if they are concluded between a supplier and a buyer each with a market share not exceeding the market share threshold of 30%. The relevant market for determining whether the 30% threshold is reached is the geographic and product market on which the supplier directly sells the contract goods or services to its customers and the buyer purchases these contract goods or services. Applied to the energy industry the relevant market can be the electricity wholesale market, where power generators and importers sell to distributors as well as to large industrial consumers, 233

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the gas wholesale market where producers and importers sell to distributors, industrial end-users and power generators or the wholesale markets for petroleum products where crude oil refiners and importers sell to industrial end-users and retailers. In energy sectors with an intermediate distribution level there may be an additional relevant market where regional distributors sell to local distributors and small industrial or commercial consumers.

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As for the safe harbour for horizontal restraints, the market shares are calculated on the basis of value figures relating to the preceding calendar year.916 All sales by companies belonging to the same group as the supplier and the buyer have to be included in the calculation (connected undertakings).917 Where the supplier engages in “ dual distribution” 918 and is not only active at the wholesale but also at the distribution or retail level, all internal sales to integrated intermediaries must be taken into account when calculating its market share on the wholesale market which is the relevant market for the purposes of the safe harbour919. Foreclosure effects caused by sales to final energy consumers would otherwise not be taken into account. Establishing the market share may be difficult in cases where the energy supplier does not know the sales figures of its competitors on the wholesale market. To reduce uncertainty as to whether or not the supplier actually benefits from the safe harbour it can be useful to look at the usually more transparent retail market. The share of the supplier on the downstream energy market usually provides a good indication as to whether the limit of the safe harbour on the relevant wholesale market is exceeded or not.920

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The safe harbour covers non-compete obligations relating to a particular relevant market. It does not automatically give comfort for non-compete obligations imposed on buyers for the purchase of products belonging to other markets in spite of being distributed by the same distribution channel. The safe harbour conditions have to be met for each product forming a relevant market of its own. This is of practical relevance in particular for petrol companies distributing not only fuel but also food and non-food products through service stations. 916 See Article 8(1), Vertical block exemption Regulation. 917 See Article 8(1) Vertical block exemption Regulation. 918 Dual distribution is a frequent feature for instance for refiners of crude oil which sells their products not only at wholesale level but also through vertically integrated retail outlets. An example for the latter is the sale of motor-fuel to dealers as well as to final consumers through refiner-owned service stations. 919 See Article 7(c) Vertical block exemption Regulation. 920 In the Distrigas Case mentioned above this problem has been overcome by using sales data rather than market share data.

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Although the market share threshold is the most prominent condition, there are two additional conditions for the safe harbour to apply. These conditions relate to other aspects of the arrangements between an energy supplier and its re-sellers. Firstly, vertical agreements – like horizontal agreements – must not contain “ directly or indirectly, in isolation or in combination with other factors under the control of the parties” 921 any hard-core restriction. Such restrictions are arrangements that have as their object to allocate territories or customers by territory or customer and resale price maintenance.922 Agreements that contain such restrictions lose the benefit of the block exemption in their entirely.

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Secondly, the duration of the non-compete obligation must not exceed five years. Buyers must be free to choose another energy supplier after this period of time. Non-compete obligations exceeding five years or which provide for tacit renewals beyond a period of five years are not covered by the safe harbour.923 Such clauses are subject to self-assessment. This means that they are prohibited by Article 101 when they are likely to adversely affect competition and do not generate countervailing efficiencies. There is no presumption that this is the case. Conversely, the fact that non-compete obligations contained in agreements, which due to the market share of the supplier is not covered by the block exemption, are shorter than five years does not imply that they are compatible with Article 101(1). If a dominant supplier could tie all its customers for five years only 20% of its sales would be contestable each year. In the case of a dominant firm with 80% market share, 64% of the market would thus be uncontestable in a given year, which under current case law would imply significant foreclosure.924

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There is an important difference between these two additional safe harbour conditions, with respect to the legal consequences that follow if they are not met. When an agreement contains a hard-core restriction it is the agreement as a whole that loses the benefit of the safe harbour.925 When the duration cap of five years for non-compete obligations is exceeded, it is only the non-compete

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921 See Article 4 Vertical block exemption Regulation. 922 See Article 4(a) & (b) Vertical block exemption Regulation. 923 See Article 5(1)(a) Vertical block exemption Regulation, Commission, Vertical restraints guidelines, paragraph 66, Appendix 4. The 5 year limitation does not apply to buyers selling the supplier’s goods from premises and land owned or leased by the supplier. Moreover, in Commission Decision of 17.3.2010, Case COMP/39.386 – Long-term contracts France, tacit renewal was accepted in contract involving large industrial users of electricity. 924 See in this respect Case C-552/03 P, Unilever Bestfoods, ECR 2006, p. I-9091, and Case T65/98, Van den Bergh Foods, ECR 2003, p. II-4653, and Case C-549/10 P, Tomra, 2012 ECR, page I-0000, paragraph 41. 925 See Article 4 Vertical block exemption Regulation.

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obligation that is no longer block exempted. The remaining parts of the agreement continue to benefit from the safe harbour to the extent that they are severable from the non-compete clause in accordance with the applicable civil law.926 Moreover, although the market coverage of the non-compete obligation is an essential factor for determining its potential to foreclose competition, it is not an additional condition for the safe harbour to apply. An energy supplier may thus tie up to 30% of total market demand and still benefit from the safe harbour provided that its overall market share does not exceed the threshold.

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The presumption of legality provided by a block exemption regulation may be removed through a withdrawal procedure. Withdrawal requires a formal decision of a national competition authority or the Commission, which would lift the benefit of the safe harbour and motivate why specified non-compete obligations of a certain supplier or suppliers restrict competition within the meaning of Article 101(1) and generate insufficient efficiencies, for Article 101(3) to apply.927 The decision will then prohibit these non-compete obligations for the future. Withdrawal is always associated with a prohibition procedure.

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Due to the market share threshold a number of gas and electricity companies operating in a relevant market may not be able to benefit from the safe harbour. By contrast, the safe harbour may be of more general importance to refiners, importers and wholesalers of petroleum products. This may be illustrated by one of the first cases to which the Commission applied the vertical block exemption Regulation of 1999. The Finnish company Neste sold motor-fuel through service-stations. It contractually imposed on service station operators buying from it a non-compete clause and exclusive purchasing obligation for a period of 5 years. Operators were bound not only to purchase Neste’s branded fuel directly from Neste but were also prevented from buying any competing fuel. At the time of the examination of the distribution agreements Neste held a market share not exceeding 30% of the Finish fuel retail market. The Commission investigated the competition conditions for the marketing of motor-fuel in Finland. It found that, besides Neste, there were several distribution networks of competing motor-fuel refiners and importers. Almost all of the other suppliers engaged in the same practice as Neste and made the sale of fuel to operators conditional on an exclusivity arrangement. Despite the widespread use of such restraints, the Commission found real opportunities for competitors of Neste to enter and ex926 See Article 5 Vertical block exemption Regulation. 927 See Article 29 of Regulation 1/2003. Member State competition authorities are authorised to withdraw the benefit of a block exemption regulation only where the relevant geographic market does not exceed the territory of their Member State.

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pand in the market. On average 20% of the distribution agreements came up for renewal every year. In addition, a new distribution channel of unmanned fuel stations with great potential was being developed inter alia by new entrants. The Commission did not consider it necessary to withdraw the benefit of the block exemption but insisted that Neste strictly observed the five-year duration limit. Consequently, the firm aligned the duration of land lease agreements, which it had concluded with some operators with that of the fuel distribution agreements.928 This removed an obstacle which potentially hindered operators from effectively terminating the supply contract with Neste at the end of the 5-year period. The case illustrates the fact that the approach to non-compete obligations is substantially less stringent in non-dominated markets.

2.1.3 Analysis in individual cases Non-compete obligations, which do not benefit from the safe harbour, are subject to self-assessment and that there is no presumption that they are prohibited by Article 101.929 An analysis of the likely effect on the market is necessary in order to ascertain whether or not such arrangements are caught by Article 101(1). In case they are caught, the efficiency defence of Article 101(3) may still apply. The burden of proof for demonstrating the restriction of competition and application of Article 101(1) is on the party alleging the infringement, while the burden of proof for demonstrating efficiencies and the application of Article 101(3) is on the parties having concluded the vertical agreement.930 All relevant market and competition-related factors need to be examined in order to assess whether a vertical restraint has likely negative effects on competition in the energy supply market concerned. The following discussion focuses on the most important competition issue relating to non-compete arrangements, i.e. the foreclosure of rivals from an energy market. The analysis of foreclosure is a complex task. The ensuing discussion deals first with the case of a single energy supplier enjoying market power and afterwards with the case of cumulative effects due to parallel networks or non-compete agreements concluded by suppliers collectively possessing market power.

928 See Commission Competition Report 2003, p. 193. 929 See Vertical restraints guidelines, paragraph 62, Appendix 4. 930 See Article 2 of Regulation 1/2003.

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• A single energy supplier with market power For a single energy supplier to substantially influence prices or output and unilaterally exclude competition, it must have substantial market power. Past practice of the competition authorities and the European Courts shows that market share is the key factor in this respect. An energy supplier is unlikely to possess on its own a sufficient degree of market power if it does not hold the highest market share. The higher the market share of the energy supplier compared to the market shares of its competitors, the more likely it is that the firm has substantial market power.931 Non-compete obligations are unlikely to adversely affect competition and consumers as long as the market share of the largest firm is below 30% and the aggregate share of the five largest firms remains below 50%.932

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The Commission furthermore indicates in its Guidelines on Vertical Restraints that foreclosure is more likely to occur where the exclusivity in question concerns contracts with retailers rather than with wholesalers or industrial buyers. Absent cumulative effects, it regards foreclosure at the wholesale level to presuppose a dominant position of the supplier except in the case of wholesale markets with very high entry barriers.933 The reason is that it is generally easier to establish alternative operations at wholesale level than at retail level. It is generally very difficult and costly to establish new retail outlets. Moreover, density of distribution is often important since it lowers costs. The Repsol case would seem to confirm this general approach also for the energy industry.934 In Repsol, the Commission identified significant foreclosure effects on a retail market inter alia because the market leader Repsol with market shares of 35-50% for motor-fuel products935 tied 25-35% or demand (see below, book paragraph 3.257).

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Substantial market power is only one of the conditions for Article 101) to apply to exclusive dealing practices by a single firm. In addition, a certain market coverage and duration of non-compete obligations are necessary. The higher the share of demand that is tied, the more likely it is that smaller rivals are constrained in their possibilities to enter or expand in the market. Moreover, the higher the market share of the supplier, the sooner non-compete obligations will 931 In Case C-413/14 P, Intel, ECLI:EU:C:2017:632, para. 139, the EU Court of Justice referred to the relevance of the extent of of an undertaking s market dominance. 932 See Vertical restraints guidelines, paragraph 135, Appendix 4 933 See Vertical restraints guidelines, paragraph 138, Appendix 4. This general orientation has found some support in the few cases decided by the European Courts, see for example paragraphs 113-118 of Case T65/98, Van den Bergh Foods ECR 2003, II-4653. 934 See Commission Decision of 12.4.2006, Case COMP/38.348 – Repsol. 935 It was left open whether the refiner held a dominant position on the retail market in question.

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be deemed to cover a sufficient share of the market to produce likely foreclosure effects.936 The competitive advantages of the incumbent supplier are already such that competitors need numerous opportunities to compete for customers in order to secure a sufficient customer base. The market position of the incumbent implies that it will in any event win most contracts offered. It seems to follow from the Commission’s case practice that a tied market share of 20 to 25% is unlikely to raise competition concerns provided that the duration of the agreements does not exceed five years.937 Duration affects the share of demand that is contestable at any given moment in time. When the contracts are of very long duration the customers in question will not come back to the market and thus not be contestable for an equally long period of time. For instance, if a firm concludes on a rolling basis non-compete agreements of three years’ duration, covering 60% of demand, 20% of that demand is likely to be contestable in any given year. If the agreements were of 10 years’ duration, only 6% of the tied demand would come back to the market in any given year. There is thus a clear link between contact duration and the share of demand that is contestable in any given year and hence the scope for new entrants to compete for customers. However, the question remains whether duration is an issue independently of the link to the contestable share of demand. According to the Commission’s case practice this question must be answered in the affirmative. In recent cases it has required not only limitations on the non-contestable share of demand. It has also imposed a duration cap of five years.938 In some markets a limited number of customers are of particular strategic significance in the sense that they are the most likely to switch supplier and when they do they provide a significant basis for new entry. By tying such customers a dominant incumbent can thus achieve a high degree of foreclosure at a modest tied market share. The duration cap of five years seeks to ensure that the incumbent is unable to tie the most attractive customers for excessively long periods of time.939 It is submitted that from a foreclosure perspective, the contestable share of the market is the most critical element, since it determines the share of demand that competitors may compete for at any given moment in time. Duration is less significant unless it is really the case that a limited number of customers are considerably more likely to switch. At the same time, the duration cap may deprive certain custom936 See Vertical restraints guidelines, paragraph 133, Appendix 4. 937 See Commission Decision of 11.10.2007, Case COMP/37.966 – Distrigas, paragraph 35, and Commission Decision of 17.3.2010, Case COMP/39.386 – Long-term contracts France. 938 See Commission Decision of 11.10.2007, Case COMP/37.966 – Distrigas. 939 Id., paragraph 36.

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ers with particular needs of the benefits of long-term contracting. Competition authorities should therefore be wary of automatically limiting contract duration in addition to ensuring that a sufficiently high share of the market comes back to market on an annual basis.

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Non-compete contracts lasting for less than 1 year are generally not caught by Article 101(1) unless there it is a real possibility for a customer to have more than one supplier.940 Thus, in the Long-term contracts France case the undertaking concerned committed to offer (in addition to exclusive contracts) nonexclusive contracts that effectively allow the customer to contract for additional supplies with another customer.941 Given that in gas and electricity markets transportation contracts are normally not concluded for less than one year and that transportation is required to supply customers, it may be reasonable to assume that one year contracts are a standard feature of gas and electricity markets. In contrast, exclusivity obligations exceeding one year may raise foreclosure concerns. The one-year-period was largely surpassed in all energy cases dealt with by the Commission so far.942 •

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Agreements concluded by a group of energy suppliers

The Court of Justice has established that not only non-compete agreements concluded by a single supplier may have significant foreclosure effects. The same is true of parallel networks of agreements entered into by several suppliers943. This is the case when collectively such agreements make it difficult to gain access to the relevant market in question. Agreements that make an appreciable contribution to such a cumulative foreclosure effect are caught by Article 101(1). Cumulative foreclosure effects are particularly likely to arise when non-compete obligations are imposed by a small number of leading suppliers. However, given the fact that the principal competition concern is foreclosure of third parties, there is no need to show that the market is conducive to tacit collusion or that undertakings concerned are tacitly colluding. In other words, a cumulative effect may be established without a showing of collective dominance. 940 Commission Decision of 17.3.2010, Case COMP/39.386 – Long-term contracts France. 941 If dual supply is a realistic possibility, exclusivity as such may restrict competition. When due to exclusivity competition is an “all or nothing” game, it may be more difficult for new entrants to establish a foothold in the market. 942 See book paragraphs 3.249 et seq. 943 See Case C-234/89, Delimitis, ECR 1991, p. I-935.

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The Vertical Restraints Guidelines944 contain indications of when foreclosure concerns due to cumulative effects may start to arise. In the case of intermediate products a serious cumulative effect is unlikely to arise as long as less than 50% of the market is tied. For agreements concerning the supply of final products a distinction is made between the wholesale level and the retail level. As regards the latter it is presumed that the creation of new retail outlets such as petrol stations is difficult. As regards the former it first needs to be assessed whether entry at wholesale level is difficult. In its energy sector inquiry the Commission found that there are high barriers to entry into gas and electricity wholesale markets. The guidance provided in the Guidelines for retail markets is therefore considered relevant to gas and electricity wholesale markets. According to the Commission when all companies have a market shares below 30% a cumulative foreclosure effect is unlikely if the total tied market share is below 40%. When not all the undertakings concerned have market shares below 30% but none is dominant, a cumulative foreclosure effect is said to be unlikely if the total tied market share is below 30%. Individual suppliers with a market share not exceeding 5% are in general not considered to contribute significantly to a cumulative foreclosure effect.945

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Given that the supply side is relatively concentrated in many energy markets, substantial use of non-compete obligations in long-term distribution and supply contracts may in many instances give rise to substantial foreclosure effects. This seems to be particularly true in electricity and gas markets. In comparison, in the petroleum sector, foreclosure effects caused by non-compete clauses seem to occur mainly in the downstream segments of the vertical supply chain. Competition problems arise, as the Neste and Repsol cases illustrate, mainly in the relationship between petrol companies and their dealers.

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2.1.4 Efficiency defence – Article 101(3) EC In order to examine whether the economic benefits of a non-compete obligation compensate for its anti-competitive effects, the following four questions have to be answered in the affirmative. These are the same four questions as for horizontal restraints.946

944 See Vertical restraints guidelines, paragraphs 138 140 and 141. 945 See Commission de minimis notice, paragraph 8. 946 See above, book paragraphs 3.76 et seq.

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(1)

Does the non-compete obligation contribute to improving the production or distribution of energy products or contribute to promoting technical or economic progress?

(2)

Is the non-compete obligation indispensable to the attainment of the efficiency gains?

(3)

Do consumers receive a fair share of the economic benefits resulting from the non-compete obligation? The net impact of the anti-competitive and efficiency-enhancing effects of the non-compete obligation has to be at least neutral for energy users.

(4)

Does the non-compete obligation afford the possibility of eliminating competition in respect of a substantial part of the energy products in question? If the non-compete obligation to contribute to the elimination of a very important element of competition such as price competition on an energy market on which competition was already limited, the efficiency defence cannot be invoked.

Vertical agreements (like horizontal agreements) may create efficiencies by allowing the undertakings in question to perform a particular task at lower cost or with higher added value for consumers. Vertical agreements may reduce transaction and distribution costs. They may also be necessary to underpin new investment by either party. For instance a long-term gas supply agreement may be necessary in order to underpin investment in a new gas fired power plant.947 •

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Cost efficiencies

A very common claim is that non-compete clauses allow the energy supplier to better plan production and keep lower inventories. This defence is very often combined with the claim that the vertical restraint leads to savings in logistic costs due to economies of scale in transport and distribution. To qualify as an efficiency gain, the supplier would have to calculate or estimate as accurately as reasonably possible the value of the cost savings and describe in detail how the amount has been computed on the basis of verifiable data948. In addition to the efficiency gain, the supplier must convincingly demonstrate that the three other 947 This is recognised in Commission Decision of 11.10.2007, Case COMP/37.966 – Distrigas. Contracts with electricity producers buying gas for a new installation exceeding 10MW are excluded form the commitments in order to allow for a case-by-case analysis of whether a duration of more than 5 years is required. 948 See Guidelines on the application of Article 101(3), paragraph 56.

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conditions of Article 101(3) are satisfied. In this respect, it may be particularly difficult to establish that consumers receive a fair share of the benefits. To the extent that the non-compete obligation allows the supplier to increase prices or maintain supra-competitive prices because of the foreclosure of rivals or collusion, the costs savings must be passed on to such an extent that consumers are no worse off. This is a difficult test to meet in energy markets where low elasticity of demand means that price reductions will not significantly increase sales.949 Thus, when the restrictive agreements are concluded by a dominant supplier the incentive to pass on cost savings is limited. In more competitive markets the incentive may be greater since the elasticity of demand for each individual supplier’s products is higher than the elasticity of demand of the overall market. Individual suppliers can expand sales by stealing business from their competitors. However, even then the consumer pass-on condition is unlikely to be satisfied when the exclusivity requirement creates significant additional entry barriers and the efficiency gains are modest.950 •

Facilitation of new market entry

The use of non-compete obligations to facilitate market entry of an energy supplier would prima facie constitute a valid efficiency defence, to the extent that such obligations restrict competition in the first place.951 Indeed in such cases it is unlikely that the agreement has any likely negative effects on competition. The Synergen case arguably provides an example of this defence. Statoil concluded an exclusive gas supply contract for 15 years with Synergen, a joint venture created for the purpose of constructing and operating a new power plant in Ireland. This contract was the first large-scale gas supply contract in a market previously dominated by a single incumbent. It immediately gave the new entrant a market share above the de minimis threshold. The non-compete obligation thus possibly fell within the scope of Article 101(1) but was considered to be justified by efficiency considerations in accordance with Article 101(3).952 Arguably, however, the agreement was not caught by Article 101(1) in the first place. The contract paved the way for new entry and in dominated markets it is unlikely that non-compete obligations entered into by new entrants are the source of significant foreclosure problems. It is much more likely that contracts entered 949 See above book paragraph 3.88. 950 See Case T-9/93, Schöller, ECR 1995, p. II-1533, paragraph 143 seq., Case T-65798, Van den Bergh Foods, ECR 2003, p. II-4653, paragraph 139 seq. and Guidelines on the application of Article 101(3), paragraph 91. 951 See Case T-112/99, – Métropole télévision (M6), ECR 2001, p. II- 2459, paragraphs 141 seq. 952 See Commission Competition Report 2002 page 192 seq. and press release IP/02/792 of 31.05.2002 – Synergen.

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into by the incumbent are the real cause of foreclosure concerns. In that case enforcement actions should be targeted at the dominant firm and not new entrants that try to compete with the incumbent. Article 101(1) must be applied in light of the legal and economic context in which the agreement occurs. It is therefore entirely justified and necessary to distinguish between incumbents and new entrants when analysing issues to market foreclosure. •

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Another defence perhaps typical for the petroleum sector is that a non-compete clause serves the purpose of securing the loan that the supplier grants its distributor. The claim appears to be used particularly for distribution agreements between petrol companies and service-station operators as the Repsol case demonstrates953. The Commission shows in its Guidelines some reluctance to accept this efficiency defence. Whenever it is equally possible to arrange the loan agreement through a commercial lender, the Commission does not regard the grant of a loan as efficiency enhancing. However, in a situation where the energy supplier is the only option for the buyer to obtain capital or to obtain it at lower cost for its business at least at the time of the conclusion of the loan agreement, the loan can be regarded as an efficiency gain. A non-compete obligation or a minimum purchase obligation may then be indispensable to secure the loan. However, it is unlikely that the buyer may be tied for the whole duration of the loan agreement. Indeed, the buyer should be allowed to terminate the supply and loan agreement at its discretion and repay the loan. If the non-compete obligations give rise to competition concerns, energy suppliers must not prevent their buyers from terminating the non-compete covenant and repaying the outstanding part of the loan at any point in time and without payment of any penalty.954 •

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Securing loans

Investment

Non-compete arrangements are likely to be viewed favourably when they are necessary to underpin an investment by the supplier (or the buyer, see below). However, the supplier would generally have to show that the investment is relationship-specific, asymmetric and can only be recouped within the time period for which the non-compete clause applies.955 Relationship-specific means that the supplier must make the investment solely for the purpose of carrying out a 953 See Commission Decision of 12.4.2006, Case COMP/38.348 – Repsol. 954 See Vertical restraints guidelines paragraph 156. See also Commission Competition Report 2003 page 194 seq – BP Lubricants and page 191 seq. – Interbrew. 955 See Vertical restraints guidelines, paragraph 107(d), Appendix 4.

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specific contract containing the non-compete clause with an individual customer. The investment cannot be used to supply other customers, or, once made the investment must be such that the assets could only be sold to another supplier at significant loss. In such circumstances the non-compete obligation has the function of lowering the investment risk of the supplier by obliging the customer to procure all of its requirements from the former. Furthermore, it is a condition that the supplier invests more than the customer to implement the contract. Otherwise both parties would be equally locked-in and a non-compete obligation would be superfluous. An asymmetric relationship-specific investment is generally efficiency enhancing for the period of time needed to recoup the investment. Should the investor be able to recoup the investment in the shortterm, the efficiency gain will also only be short-term. The Commission estimates in its Guidelines that most investments do not necessitate exclusivity for more than five years. Only high relationship-specific investments are capable of justifying longer-term exclusivity. Non-compete obligations need thus to be well founded on the basis of accurate and verifiable calculations linking them to specific investments in order to demonstrate their beneficial effects for the duration of the non-compete covenant.956 However, given the fact that the agreement restricts inter-brand competition it is not sufficient to justify the restraint that the parties can show that in the absence of the restraint the agreement would likely not have been concluded. It may be that due to the foreclosure effect consumers are better off without the agreement and the investment that it underpins. It must therefore be shown that consumers receive a fair share of the benefits. Investments by the buyers may also justify long-term supply arrangements. The construction of new power plants, for example, might justify long-term supply contracts containing non-compete obligations. The buyer making the investment may need to conclude a long-term supply agreement with a stable price in order to secure financing.957 The supplier may be unwilling to offer such prices in the absence of a non-compete obligation as it would allow the buyer to engage in cherry-picking, sourcing under the contract when it is commercially interesting and turning to third parties when market prices fall below the contract price. Such relationship-specific investments are unlikely to harm consumers when they lead to an increase in market output. Instead of the exclusivity obligation however, an obligation to purchase minimum quantities (“quantity-forcing”) may be a sufficient and less restrictive means to lower the investment risk. If so, 956 See Vertical restraints guidelines, paragraph 107(d) and 146, Appendix 4. 957 This is the reason why in the Distrigas case investments in new power plants exceeding 10 MW were excluded from the scope of the commitments, see Commission Decision of 11.10.2007, Case COMP/37.966 Distrigas. In such cases the Commission did not consider the five-year duration limitation appropriate.

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the non-compete obligation is not indispensable to achieve the benefit of the investment.

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Given the fact that Article 101(1) only applies in case of significant foreclosure effects and given the conditions for applying Article 101(3) is it likely that the investment argument is capable of justifying non-compete obligations on energy buyers? It is undeniable that especially energy suppliers such as electricity generators, gas or oil producers or petroleum refiners regularly make significant investments in order to satisfy increasing demand or to meet changing consumer preferences. Furthermore, the energy industry is known for the long-term cycles of some of its investments. Likewise, these investments are generally asymmetric. However, they are not necessarily made for the purpose of carrying out specific supply agreements with individual clients. The construction of a new power plant, the development of a new gas or oil field, or the construction of a new refinery are typically meant to serve a large number of non-specific buyers. The same is true for investments in additional production capacity. The energy industry is in this regard hardly different from other sectors producing homogeneous goods. For most investments no direct causal link therefore exists between the non-compete obligation and the investment, and in such circumstances the vertical restraint is not indispensable for the investment958. Most investments of the energy industry are market-specific but not relationship-specific. This does not exclude cases, of course, where, for example, an ownership-unbundled transmission system operator wishes to secure peak power supplies on a long-term basis for balancing959. The power generator which has to invest in its portfolio of power plants to meet such specific demand at lower than average market prices may thus ask for the acceptance of a non-compete obligation by the network operator until the client-specific investment is recouped. Even in such a case the supplier may however have to consider whether a sweeping non-compete clause is indispensable. The less restrictive alternative of quantity forcing may serve the same goal as a non-compete obligation. The parties could thus agree to only oblige the network operator to purchase certain minimum quantities of peak power within a pre-determined period of time in case there exists a risk that an exclusivity arrangement is caught by Article 101).

958 See Guidelines on the application of Article 101(3), paragraph 54. 959 This consideration may also be taken up as a security of supply defence; see the Commission proposal for a Directive of the European Parliament and of the Council concerning measures to safeguard security of electricity supply and infrastructure development of 10.12.2003, COM(2003) 740 final, available on DG TREN’s website: http://europa.eu.int/comm/energy/electricity/infrastructure/com_proposal_2003_en.htm.

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Long-term supply obligations are more likely to be viewed favourably when they protect the buyer rather than the seller. While such contracts may give rise to input foreclosure if they tie a large share of available supplies.960 They may be requited to underpin investments in new capacity961. In such cases long-term supply obligations and volume commitments on the supplier may be justified, since in their absence the buyer may be subject to opportunistic behaviour once the investment is made962. For instance, due inter alia to transport costs there are clear efficiency gains from constructing lignite fired power plants close to the mine from which the fuel is supplied.963 Once the plant is built the buyer becomes highly dependent on the operator of the mine and a long-term supply contract is likely to be necessary to underpin the investment. Absent such agreement the buyer would be exposed to opportunistic behaviour by the seller. On the other hand, it is unlikely that it would be justified for the buyer to impose a non-compete obligation on the seller. Such obligations may deny third party access to a scarce resource without being necessary to protect the buyer’s legitimate interests. These interests will generally be sufficiently protected by longterm volume commitments. •

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Security of energy supply

The enhancement of security of energy supply qualifies as an efficiency gain. The Commission confirmed in the Electrabel case that it regards supply security as a potential efficiency stemming from agreements containing non-compete obligation.964 An energy supplier invoking the defence would, generally speaking, have to show that the practice of imposing non-compete obligations in downstream supply contracts with consumers and resellers enhances upstream security of supply. The supplier would have to clarify, as a first step, which concrete risks threaten energy supplies. Examples might include commercial risks such as, for instance, imbalance of electricity supply and demand and the dependency of European suppliers on external sources of energy. The supplier would then, as a second step, have to demonstrate how non-compete obligations mitigate the identified risk. 960 See in this regard Commission Decision of 5.3.2008 on the granting or maintaining in force by the Hellenic republic of rights in favour of Public Power Corporation for extraction of lignite. 961 See Commission Decision of 11.10.2007, Case COMP//37966 – Distrigas, paragraph 37. 962 See Vertical restraints guidelines, paragraph 107(d), Appendix 4, on the so-called “ hold-up” problem. 963 See Commission Decision of 5.3.2008 on the granting or maintaining in force by the Hellenic republic of rights in favour of Public Power Corporation for extraction of lignite, paragraph 13. 964 See book paragraph 3.259.

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The existence of commercial risk has in the past most forcefully been made in relation to the European Union’s dependency on external gas sources. While the 2017 Regulation concerning measures to safeguard the security of gas supply does not refer explicitly to the benefits of long-term supply contracts, gas supply contracts remain key to the assessment of security of supply.965 Moreover, the fact remains that long-term contracts may contribute to secure supplies e.g. by underpinning large scale investments of producers in the search, exploration and production of gas as well as investments in the construction of links between upstream pipelines and the downstream trans-European network. Such investments may open up new sources of supply and secure existing ones. The volume commitments made by the parties to long-term supply agreements may also promote security of supply and market liquidity since they create an expectation that these minimum volumes will be marketed. Certain vertical restraints such as a long-term purchase and supply commitments may thus prima facie be justifiable under Article 101(3). However, this does not mean that such longterm non-compete obligations are always justified. The justification will have to be provided for each individual contract.

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The security of supply arguments in favour of non-compete obligations in downstream supply and distributor contracts are less obvious. In order to benefit from Article 101(3) in such circumstances, a number of questions must be considered and answered convincingly in order to justify non-compete obligations that significantly foreclose the market. These questions are particularly relevant in relation to non-compete obligations imposed by gas importers on their customers. The first question relates to the causal link between the non-compete obligation and the claimed benefits. Why is it necessary to require downstream customers to purchase all or almost all of their requirements from the importer in order to enhance supply of security? In general, the fact that a supplier has committed to purchase a certain input long-term does not justify the imposition of noncompete obligation on downstream customers to guarantee that the input can subsequently be sold. Investing in capacity forms part of normal business risks. Any firm that buys an input must find customers willing to buy that input. The more markets integrate the greater the scope for finding the required number of customers. Moreover, the import contracts generally provide a certain degree of flexibility for the importer to adjust the off take. It is therefore not clear that there is a causal link between security of supply and non-compete obligations. The second and related question addresses the indispensability condition of the efficiency defence. Why is it indispensable for security of supply that customers 965 See Regulation 2017/1938 concerning measures to safeguard security of natural gas supply (“Gas Security Regulation”), OJ L280/1 of 28.10.2017.

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of importers have to accept exclusivity obligations irrespective of whether and to which extent the latter actually “invest” in purchases from third country sources, keeping in mind that the application of Article 101(3) arises only when the noncompete obligation has market foreclosure effects? The third question refers to the fact that not only importers but also regional and local distributors may impose non-compete obligations on their customers. What is the justification for extending non-compete obligations to this level given the fact that these distributors are not taking risks comparable with those of the importers? Finally, the practice of requiring energy customers to submit to exclusive and long-term purchasing obligations would also not appear to be compatible with the further conditions of Article 101(3), notably that consumers have to be compensated for the negative impact of the competition restrictions and that, at any rate, competition is not eliminated. Consumers may benefit from the conclusion of long-term large volume contracts with gas producers active in third countries. However, after the liberalisation of gas markets, consumers also benefit from competition in the internal market and a mix of contractual arrangements is arguably the most appropriate means of reconciling different needs and objectives and ultimately ensuring supply security. In conclusion, efficiency gains on the grounds of cost efficiencies, new market entry, loan agreements, investments and security of energy supply may satisfy the conditions of Article 101(3). However, none of these efficiency defences offer a ‘carte blanche’ for imposing non-compete obligation. When such agreements have significant foreclosure effects, which is required for Article 101(1) to apply in the first place, careful scrutiny of all four conditions of Article 101(3) is required and it is unlikely that the defence will apply in great many cases. The most promising case is new investment by the buyer. In particular when such investment paves the way for new entry. In such cases the likely negative effects are limited and the pro-competitive effects are likely to be significant.966 Indeed, long-term contracts concluded with new entrants or small incumbents are unlikely to be caught by Article 101(1).

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2.2 Individual cases dealt with by the Commission The following cases dealt with by the Commission all concern long-term noncompete obligations. The Distrigas case concerns long-term gas supply agreements with industrial users and power producers, while the Repsol case concerns distribution agreements with motor-fuel retailers. The subject of the Gas Natural/Endesa proceeding was a long-term de facto exclusive gas supply agree966 See Guidelines on the application of Article 101(3), paragraph 90.

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ment with a power generator. The Electrabel case concerned a supply relationship between an electricity generator and local distribution companies. 2.2.1 Distrigas

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This case, in which the Commission adopted a decision pursuant to Article 9 of Regulation 1/2003,967 concerns Distrigas, the incumbent gas supplier in Belgium.968 Article 9 decisions do not make any finding of whether there was or still is an infringement.969 They only conclude that in light of the commitments, which are rendered binding, there are no longer grounds for action. This means that Article 9 decisions are rather succinct in terms of analysing the identified competition problems. However, they provide valuable guidance on the action required to remedy such problems. While Article 9 decisions cannot create a legitimate expectation in respect of the undertakings concerned as to whether their conduct complies with Article 101 TFEU, the EU Court of Justice has made clear that nonetheless, national courts cannot ignore such decision. Such acts are Commission decisions. In addition, both the principle of sincere cooperation laid down in Article 4(3) TEU and the objective of applying EU competition law effectively and uniformly require the national court to take into account the preliminary assessment carried out by the Commission and regard it as an indication, if not prima facie evidence, of the anticompetitive nature of the agreement at issue in the light of Article 101(1).970 According to the Commission’s preliminary assessments in this case, Distrigas is dominant on the market for the supply of gas to large customers in Belgium (possibly sub-divided into separate markets for different types of customer such as industrial customers, electricity producers and resellers). With very few exceptions, customers only had one gas supplier and therefore competition in the gas supply market only took place when a contract expired and a new contract was concluded. The Commission expressed concern that Distrigas’ long-term gas supply contracts would prevent customers from switching and thereby limit the scope for other gas suppliers to conclude contracts with customers and so foreclose their access to the market.

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See Commission Decision of 11.10.2007, Case COMP/37.966 – Distrigas. See also Commission Decision of 17.3.2010, Case COMP/39.386 – Long-term contracts France. See recital 13 of Regulation 1/2003 Case C-547/16, Gasorba, ECLI:EU:C:2017:891, paras. 28 and 29.

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To address these concerns Distrigas offered the commitments set out below. –

Distrigas undertook to ensure that for each calendar year a minimum of 65% and on average for all calendar years a minimum of 70% of the gas volumes supplied by itself and connected undertakings to industrial users and electricity producers in Belgium returned to the market, i.e. alternative suppliers could make a competing offer to the customers concerned.971 The volumes were calculated on the basis of Distrigas’ annual contract quantities (including existing contracts) and Distrigas had some flexibility to account for fluctuations over the years. If Distrigas’ total sales decrease from their 2007 level, then Distrigas was not be deemed to have violated the commitments if the volume that did not return to the market was not more than a certain fixed volume of gas sales which represented at most 20% of the total market(s) concerned. The tied market share is the most relevant measure of the likely foreclosure effect of the agreements. However, since the application of this measure presupposes knowledge of the size of the market, the tied share of the undertaking’s own sales may be used as a proxy.972 This measure is easy to apply since the undertaking concerned will know its own sales. Moreover, as long as the parties have a fairly good understanding of what these sales represent in terms of market share, they are able to estimate with a sufficient degree of certainty how much of overall demand the undertaking concerned is permitted to tie. The commitments reflect the so-called foreclosure model which seeks to ensure that a substantial part of demand is contestable every year rather than impose a fixed maximum contract duration. This approach addresses directly the issue of foreclosure and allows at the same time more freedom for the undertaking concerned to organise its overall portfolio of contracts. By accepting that Distrigas could have a tied market share of approximately 20%, the Commission signalled that this level of tied market share does not significantly foreclose the market (at least in this case). Moreover, within the limits of the commitments Distrigas could conclude contracts of varying duration to suit the business needs of its customers. This flexibility is illustrated by the following combinations which would all be possible under the commitments:

971 In Commission Decision of 17.3.2010, Case COMP/39.386 – Long-term contracts France the thresholds are slightly lower, namely 60% and 65%, which in that case the Commission considered sufficient. The reasons for this difference in assessment are not spelled out. However, it may be that due to the much larger size of the French market the Commission took the view that a lower percentage share of sales ensured competitors sufficient opportunities to compete. The Commission may also have taken the view that the long-term contracts generated greater benefits for consumers of electricity than gas because of the greater scope for linking pricing mechanisms to low cost production sources. 972 Clarity is important. If commitments are breached the Commission may impose very significant fines, see Article 23(2)(c) of Regulation 1/2003.

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–

37.5% supplied under 5 year contracts and 62.5% supplied under 1 year contracts

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40% supplied under 4 year contracts and 60% supplied under 1 year contracts

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45% supplied under 3 year contracts and 55% supplied under 1 year contracts

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60% supplied under 2 year contracts and 40% supplied under 1 year contracts

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No new contract with industrial users and electricity producers would be longer than five years. Existing contracts with a duration of five years or more were granted unilateral termination rights with prior notice and without indemnity, which allowed Distrigas as a transitional measure to treat them as one year contracts.973 Distrigas would not conclude any gas supply agreements with resellers with a duration of over two years and Distrigas would not include any use, resale or destination clauses or any tacit renewal clauses in future gas supply agreements and would remove (or not enforce) any such clauses from existing gas supply agreements. The five-year duration limit reflects the limits contained in the Vertical Restraints block exemption, which was also applied in the Repsol case (see below). The two-year limitation applied vis-à-vis resellers is the same as that imposed by the Bundeskartellamt in its decision concerning the supply of gas to Stadtwerke.974

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The following sales were not covered by the commitments: (i) volumes supplied to industrial customers with a consumption of less than 12 GWh, (ii) electricity producers buying gas for a new installation exceeding 10MW, (iii) intra-group sales, (iv) Distrigas’ trading activities and (v) sales outside Belgium. The exclusion of supplies to new electricity generation installations is due to the fact that for such customers the 5-year duration limitation may not be appropriate. Longer duration may be required to underpin an efficiency enhancing investment. Case-by-case analysis is therefore required.

973 In Commission Decision of 17.3.2010, Case COMP/39.386 – Long-term contracts France unilateral termination rights were also accepted for new contracts. It is submitted that this greater measure of flexibility is justified. It benefits the customer and in the case of large industrial users there is no reason to believe that an opt-out renders the customer less contestable that contract expiry at the same point in time at which the customer can exercise the opt-out. 974 See Decision of 13.01.2006 – Langfristige Lieferverträge (Case B8-113/03).

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The commitments had a duration of four years. During this period the commitments applies as long as Distrigas held a share of more than 40 percent of the market and at least 20 percent more than the share of its nearest competitor.975 The decision is based on the premise that Distrigas holds a dominant position on the relevant market. The market share thresholds contained in this release clause was intended to be a proxy for dominance. It follows that the Commission assumes that Distrigas was unlikely to be dominant when its market share fell below 40% as well as when the gap between Distrigas and its nearest competitor was less than 20%.

2.2.2 Repsol This was one of the first Commission cases in which it accepted commitments under Article 9 of Regulation 1/2003.976 Repsol, the Spanish refiner and distributor of fuel for motor vehicles held, at the time of the Commission’s investigation, market shares of 35-50% on the Spanish wholesale and retail markets for motor-fuel.977 The company distributed its products through service stations, which were contractually obliged to source all of their fuel requirements from Repsol. More specifically these non-compete obligations were imposed in 1,430 agreements with operators of stations owned by Repsol, 770 stations owned by the operator and 460 stations for which the owner had granted Repsol a right in rem to the usufruct. As usufructuary, Repsol made an investment in the station and leased it back to the owner or a third party linked to the owner. The Commission considered that the latter two categories of agreements, which allowed Repsol to tie 25-35% of the market to itself for 5 to 40 years, depending on the type of distribution agreement, might significantly foreclose the market. The Commission took the view that competitors of Repsol would not be able to attain within a reasonable period of time the minimum number of outlets necessary for the economic operation of a distribution system and thus make an effective entry into the Spanish market. As Repsol proposed commitments to meet the foreclosure concerns, which were accepted by the Commission. The main commitments provide that Repsol: –

Offered the operators of service stations in which it had made investments (the usufruct stations) the possibility to buy back the stations (i.e. repay the loan) at market value. The commitments set out a complex for-

975 In Commission Decision of 17.3.2010, Case COMP/39.386 – Long-term contracts France the commitments are made binding for 10 years and EDF is released from the commitments if its market share falls below 40% for two consecutive years. 976 See Commission Decision of 12.4.2006, Case COMP/38.348 – Repsol. 977 Only on a niche market Repsol held slightly lower shares of approximately 30-45%.

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mula for compensating Repsol for early termination while maintaining the incentive for the station operator to terminate the agreement; –

Advertised in advance the expiry of fuel distribution contracts with its service stations and the option for stations to terminate the agreement so as to promote the effective exercise of the right granted under the commitments;

–

Committed not to acquire service stations supplied by competing brands. This obligation applied until 31 December 2006;

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Observes a five-year maximum duration for future fuel distribution agreements with operators of service stations of which Repsol is not the owner.978

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The dominant Spanish gas importer Gas Natural with a market share of approximately 90% entered into a long-term gas supply contract with the leading electricity generator Endesa. The agreement was one of the first of its kind to supply new generation CCGT power plants in Spain. Both parties agreed that Endesa would de facto exclusively cover its gas requirements for the foreseeable future from Gas Natural. This had the effect, according to the Commission, that potential entrants into the Spanish gas market, which had only recently been liberalised, would lose one of the most attractive clients for a long period of time. The Commission terminated the procedure after the companies agreed to reduce the contracted gas volumes after an initial phase. The freed-up volumes were sufficiently large to allow new market entry on the basis of Liquefied Natural Gas, which was one of the most important supply sources of the Spanish market. This undertaking by the parties effectively removed the exclusivity arrangement. Moreover, the duration of the gas contract was reduced by one third. In spite of this reduction the duration remained relatively long, approximately twelve years. It would seem that the Commission considered the agreement partly procompetitive due to the fact that it allowed Endesa to secure a stable and predictable price for gas supplies to at least some of the power stations it intended to build.979 Thus, it illustrates the balancing of foreclosure effects and efficiency gains in terms of new investments. 978 See Commission Decision of 12.4.2006, Case COMP/38.348 – Repsol. 979 See Commission Competition Report 2000 p. 154 seq.; Press Release IP/00/297 of 27.03.2000; Mariano Fernandez Salas, “Long-term supply agreements in the context of gas market liberalisation: Commission closes investigation of Gas Natural”, Newsletter 2000 (2) p. 55 seq.

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2.2.4 Electrabel/Mixed intercommunal electricity distribution companies The Belgian electricity company Electrabel was the traditional supplier of electricity to 17 communal distribution companies. These distributors sold the power through their grid to Belgian consumers. Each of the 17 distributors held a legal monopoly for the supply of electricity in their commune. The distributors were called “mixed intercommunal companies”. This means that the commune they supplied electricity to shared the ownership of the local electricity supply company with a private partner. This partner was in all cases Electrabel, which in addition carried out the day-to-day distribution functions. The statutes of the companies granted Electrabel the exclusive right to supply the electricity required for resale to their customers. In 1996 new statutes were adopted simultaneously by all companies having the effect of prolonging the non-compete obligation in favour of Electrabel by 20 to 30 years depending on the distribution company concerned.

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The Commission found that Electrabel accounted for 90% of all electricity produced and the 17 distributors for 82% of all electricity distributed in Belgium. It concluded that the renewed statutes would foreclose a significant part of the Belgian wholesale electricity market as well as the market for the supply of distribution services for a long period of time. In response to the Commission’s invitation to modify the statutes in order to avoid the initiation of proceedings and a prohibition on the basis of Articles 101 and 102, the parties undertook that Electrabel would cease to supply electricity to the distributors under the contracts in 2011 and lift the exclusivity for 25% of the requirements of base load from 2006. The 25% figure represents the capacity of 5 medium-sized gas turbine stations or 1 nuclear power station. In addition, Electrabel committed not to oppose the dissolution of the distribution companies after 2011, if the communal shareholder wished to have a different partner for the supply of distribution services. The Commission accepted the commitment of the parties in view of the fact that the principles of security and regularity of supply were of particular importance to the communes.980

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This case and the solution found for the competition issues it raised must be seen against the background of 1997 when the case was settled. At that time the Electricity Liberalisation Directive of 1996 had just been adopted. It foresaw a market opening from February 1999, commencing with large industrial consumers. It did not provide a date for full market opening. Moreover, it left it

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980 See Commission Competition Report 1997, p. 150 seq. and press release IP/97/351 of 25.04.1997.

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to the discretion of each Member State whether or not to grant distributors surpassing a certain purchasing volume the right to freely choose their supplier.981 Only 6 years after the settlement in this case, in 2003, the Council and Parliament decided in favour of full market opening. All non-household customers, including distributors, have been free to select their electricity supplier since July 2004. Household customers have been in the same position since 1 July 2007.

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Taking these historical facts into account the settlement gave the communal distributors the right to freely choose their supplier well before this right was generally granted at Community level, as well as the right to choose in future an alternative partner for carrying out the day-to-day distribution business. This complementary measure appears to be essential for communal distribution companies to arrive at truly independent procurement decisions, as examples in other Member States shows.982 The reference to security and regularity of supply made in the published case report by the Commission has to be seen in the light of the strong market position of Electrabel and the transmission constraints importers faced when they wanted to enter the Belgian market.983

3.

Partitioning of energy markets by territory or by customer

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Vertical restraints determining where the buyer may resell the goods or services covered by the agreement are common in distribution or sales agreements. In the energy industry such arrangements may also be part of transport, service or other contracts. Resale restrictions constitute the second major category of vertical restraints of particular relevance to the energy sector.

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Markets can be partitioned through vertical arrangements in very much the same way as through horizontal agreements. Accordingly, firms may seek to restrict customers in the resale of energy products by obliging them to observe certain limits regarding the territory into which or the class of customers to whom they sell. Such vertical restraints aim at allowing energy suppliers to determine to which degree their customers, as resellers, may enter into intra-brand competition with the supplier as well as with other re-sellers served by the supplier. Moreover, vertically integrated energy suppliers may impose market-partitioning restraints on rivals when providing transport services to them, in order to eliminate or reduce the competitive constraint imposed by such rivals. From a com981 See Article 19(3) Electricity Liberalisation Directive 1996. 982 See Commission decision of 17.12.2002, Case COMP/M.2822 – EnBW/ENI/GVS, paragraphs 54 seq. 983 See Commission decision of 23.12.2002, Case COMP/M.2857 – ECS/IEH, paragraph 13 seq.

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petition policy perspective, resale restrictions in vertical agreements may give rise to serious competition concerns. It follows from Article 4(b) of the vertical restraints block exemption that the restriction of the territory into which or the customers to whom the buyer may sell the contract goods are considered hardcore restrictions of competition. Such restraints have as their object and effect the partitioning of the internal market.984 Resale restrictions are thus likely to be caught by Article 101(1) and unlikely to benefit from the exception rule of Article 101(3).985 The main exception is where the restraint is objectively necessary for the distributor to enter a new market. In such cases where in the absence of the restraint the agreement would likely not have been concluded, the agreement does not restrict (intra-brand) competition that would otherwise have occurred and is therefore not caught by Article 101(1).986 A limited exception to this general ban on market partitioning arrangements applies to exclusive distribution agreements. Through such an agreement the supplier undertakes to sell its goods and services only to the other party and not to any other reseller for distribution in a certain territory or to particular customers987. EU competition law allows the supplier to protect exclusive distributors against intra-brand competition through “active selling” to the reserved territory or customers. However, exclusive distributors cannot be shielded against intra-brand competition through “passive selling” by rival distributors. Exclusive distribution agreements are dealt with in some detail below. However, before doing so, the general approach to resale restrictions is addressed first.

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3.1 Direct market partitioning by territory Direct market partitioning is usually accomplished by an express obligation on the purchaser to resell certain goods only to customers in specific contractually defined territories. Such arrangements generally fall into the category of hardcore restrictions.

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3.1.1 The Commission proceedings against destination clauses The Commission has intervened over the years against gas producers inserting so-called “ destination clauses” in their gas supply contracts with European im984 See e.g. Case C-551/03 P, Opel Nederland, ECR 2006, p. I-3173, paragraph 67. 985 See Vertical restraints guidelines, paragraph 47, Appendix 4. 986 See Commission Guidelines on the application of Article 101(3), OJ 2004 C101/ 97 of 27.04.2004, paragraph 18(b). 987 See Vertical restraints guidelines, paragraphs 50, 109, 161, 178, Appendix 4.

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porters and such clauses remain an enforcement priority.988 The clause would stipulate, for example, that “the natural gas to be supplied under this contract shall be used only in … (Member State of destination) … and shall not be reexported”. Such territorial sales restrictions had the object of limiting the importer’s marketing activity to the Member State in which it was traditionally established and usually controlled the gas grid. Since most producers applying the destination clause sell their gas via several importers within the European Union, the destination clause prevented competition amongst importers, certainly for the sale of the gas originating from the same source (intra-brand competition). The territorial sales restrictions applied by these producers significantly contributed to the effective vertical demarcation of the historical sales territories of many gas importers within the EU. Moreover, the destination clause may also have affected the prices charged to the different importers. Gas producers usually price their product in view of the importer’s specific market conditions such as competing fuels and regulation, (“market value principle”). This price is then adjusted taking into account transport costs between the agreed delivery point and the point where the gas enters the importer’s traditional sales territory. The netback principle generally has the effect of significantly lowering gas prices for those importers whose sales area is further away from the delivery point (“netback principle”).989 The destination clause thus protected price differentiation across buyers by preventing arbitrage.

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Destination clauses conflict with the fundamental goal of the European Union to create an internal market for gas. Destination clauses are therefore not compatible with Article 101(1). Being a hard-core restraint, the efficiency defence of Article 101(3) is unlikely to apply.

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In the early 2000s, the Commission investigated the practice notably of the Russian, Algerian and Nigerian gas producers, Gazprom, Sonatrach and NLNG to impose territorial sales restrictions. However, contrary to normal practice in the case of hard-core restrictions the Commission did not adopt a prohibition decision with fines. Instead, it invited as a first step Gazprom, Sonatrach and NLNG to commit to the Commission not to insert destination clauses or any substitute territorial sales restrictions in new gas supply contracts which they did.990 With 988 See Commission Decision of 24.5.2018 in Case COMP/.39816 – Upstream gas supplies in Central and Eastern Europe. 989 See H. Nyssens, (I. Osborne, Profit splitting in a liberalised gas market: the devil lies in the detail, Competition Newsletter 2005 (1) p. 25 990 See Commission press releases IP/02/1869 – NLNG of 12.12.2002 and IP/03/1345 of 6.10.2003 Gazprom/Sonatrach. The Commission had also invited other gas producers to state that they are not using, nor intending to use, territorial sales restrictions in their contracts while the case against the destination

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respect to existing long-term gas supply contracts, the Commission did not immediately initiate formal proceedings against the producers, which would have been the normal course of action, but invited them to remove the destination clause and, if necessary, amend their contracts. The producers were therefore given the opportunity to find a commercial solution to the competition problem. This meant that the legal validity of the existing long-term contracts was not put into question. One of these Commission cases against territorial sales restrictions is particularly noteworthy. In this case Gazprom and ENI agreed not only to delete the destination clause from all their supply contracts and refrain from inserting the contested clause in new agreements. The amended contracts also provide for two delivery points for the gas as opposed to only one in the past. ENI is free to take (or re-deliver) the gas to any destination of its choice from these two delivery points. The addition of another delivery point appears to serve the purpose of facilitating cross-border sales. In order to ensure the effectiveness of the remedy, ENI entered into a firm commitment towards the Commission to offer “significant” gas volumes to interested customers outside its home market over a period of five years. Should ENI be unable to sell sufficient volumes through bilateral contracts, it committed to organising an auction for the delivery of gas at one of the hand-over points.991

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More recently in Upstream Gas Supplies in Central and Eastern Europe the Commission intervened against destination clauses implemented by Gazprom in long-term gas supply contracts concluded with importers in eight Member States.992 Gazprom committed to eliminate a variety of clauses that according to the Commission made the free flow of gas impossible or financially less attractive including profit-splitting mechanisms,993 expansion clauses and monitoring and metering provisions that restricted the re-sale of gas. Expansion clauses provide a right for the seller to increase the minimum annual quantities of gas (the take-or-pay obligation) in case a customer was to re-export some of the annual gas quantity. In Gazprom’s contracts the increase of the minimum annual quantity matched the amount of gas re-exported by a customer. These clauses were also accompanied by an obligation to inform Gazprom about all export quantities. The Commission took the preliminary view that – much like desti-

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clause was running, see press release IP/02/1084 of 17.07.2002. This was apparently intended, as this press statement and the previously mentioned statement IP/02/1869 indicated, to persuade the producers concerned that these devices are not necessary to market gas at profitable terms inside the European Union. 991 See Commission press release IP/03/1345 of 6.10.2003 – Gazprom/ENI. 992 Commission decision of 24.5.2018, Case 39.816 – Upstream Gas Supplies in Central and Eastern Europe. 993 See section 3.2. below.

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nation clauses – the expansion clauses reduced or even eliminated the customer’s economic incentive to export gas purchased from Gazprom. The customer was unable to meet its take-or-pay obligations by selling outside the designated territory. It might be argued that the customer would still have an incentive to do so if there was unmet demand in another territory. However, by linking takeor-pay volumes to a particular territory the clause was not in line with the EU’s objective of creating an integrated energy market with free flow of gas.

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The series of proceedings relating to the destination clause is an illustration of how competition policy complements internal market policy. Without removing all major obstacles to cross-border gas competition, the creation of the internal energy market cannot be completed. Destination clauses interfere with the free flow of energy within the EU.

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The Commission investigation into these cases concerned two contracts concluded by GDF in 1997, one with the gas importer ENI and the other with the electricity generator ENEL. The former contract related to the transportation of natural gas purchased by ENI in northern Europe. GDF transported the gas on behalf of ENI from the north-western border of France across the country to the border with Switzerland. The contract provided that the objective of the contract was transit and therefore the gas in question was intended to be sold downstream from the delivery point (i.e. in Italy). The other contract with ENEL concerned the swap of liquefied natural gas purchased by ENEL in Nigeria. This contract stated that, “GDF’s natural gas volumes … are … offtaken by ENEL … . ENEL … is in charge of transporting them to ENEL power plants in Italy”. In other words, it required ENEL to use the gas only in Italy.

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The Commission concluded that the two clauses restricted the territory in which ENI and ENEL could resell or use the gas and were designed to partition national markets by preventing consumers of natural gas established in France from obtaining supplies from these competitors of GDF. They therefore constituted a hard-core restriction of competition. The Commission found in a formal decision that the territorial sales restrictions infringed Article 101(1). Although the two territorial sales restrictions had been removed in the meantime, a formal decision was considered to be necessary in order to clarify the law for the benefit not only of the parties but of all the other firms operating in the sector. In view of the fact that the liberalisation process has involved a profound change in the commercial practices of energy suppliers the Commission did not impose fines. 260

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It announced, however, that it will show much less clemency should it find restrictions of the same type in other gas contracts.994

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In Upstream Gas Supplies in Central and Eastern Europe the Commission took action against the long-term gas supply contracts that Gazprom had concluded with importers in eight Central and Eastern European Member States.995 The contracts which were concluded before these countries joined the EU, contained clauses that prevented the importers from re-selling the gas outside their country (re-export bans or re-sale restrictions) as well as destination clauses that obliged the importers to use the gas only in their own country. The Commission explained that clauses requiring a buyer to sell goods only outside a given territory or outside a Member State (that is to say, an ‘obligation to export’) has as its object the partitioning of markets along national lines by protecting that territory from the competition that would result from that buyer’s sales into the territory or from resales into the territory by third parties re-importing the goods996. Similarly, according to the Commission clauses prohibiting exports (namely, an obligation to sell on the domestic market), by their very nature, constitute a restriction on competition because it is designed to prevent a buyer from exporting goods to other Member States and therefor is liable to partition markets within the Union, contrary to Article 101 of TFEU.997

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3.2 Indirect market partitioning by territory Territorial sales restrictions may also result from indirect measures taken by energy suppliers. Indirect measures are typically designed such that they induce customers not to enter the market of the supplier or the other distributors and/ or only to commercialise the purchased good in their “traditional” market or the territory allocated to them. This latter objective can be pursued in a variety of ways, for example through the reduction of discounts or the charging of additional fees in the event of sales outside the allocated territory.998 The result may be “dual pricing”: one price for the territory in which the supplier wants its customer to market the good, another price for exports or sale in an area in which the supplier does not wish the customer to operate.999 These practices are even 994 See Commission press release IP/04/1310 of 26.10.2004 and decisions of 26.10.2004, COMP/38662 GDF/ENI and COMP/38662 – GDF/ENEL. 995 Commission decision of 24.5.2018, Case 39.816 – Upstream Gas Supplies in Central and Eastern Europe. 996 See Commission Decision of 24.5.2018 in Case COMP/.39816 – Upstream gas supplies in Central and Eastern Europe, para. 45. 997 See Commission Decision of 24.5.2018 in Case COMP/.39816 – Upstream gas supplies in Central and Eastern Europe, para. 46. 998 For a recent example see Case T-450/05, Peugeot, ECR 2009, page II-2533. 999 Dual pricing systems normally constitute a restriction by object, see Joined Cases C-501/06 P and others,

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more likely to be viewed as hard-core sales restrictions when used in conjunction with methods or systems allowing the supplier to monitor or verify the effective destination of the goods or services in question.1000 However, not every measure affecting sales outside the “traditional” market infringes the competition rules. It may for instance be justified to grant rebates to distributors when they sell inside the territory if the rebate is granted in return for special efforts to sell the product within the territory or to compensate a dealer for services rendered to a customer of another dealer.1001 In such cases the object of the measure is not to restrict parallel trade, provided that there is a reasonable relationship between the rebate and the value of the service. Before it is concluded that a restraint is a hard-core restriction, it is necessary to analyse the restraint in light of the underlying facts in order to determine its objective purpose.1002

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Profit pass-over obligations in the form of a so-called “profit-splitting mechanism” are an example of a possible indirect measure to restrict re-sale by the purchaser.1003 A profit-splitting mechanism obliges the importer to pass over to the producer a share of the profits made when reselling gas outside the “traditional” market.1004 Profit-splitting mechanisms may be applied to pipeline gas sales. They seem, however, to be particularly common with regard to liquefied natural gas (LNG) sales. LNG is transported by ships and permits greater flexibility as regards the point of delivery than pipeline gas. Moreover, it is easy to monitor the destination of the cargo. For pipeline gas it is often impossible to monitor the final destination once the gas has been delivered.

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Sometimes a profit-splitting mechanism may have the same object as a destination clause. This may be clear from the detailed rules that govern its application, for instance because all incremental profits accrue to the seller and therefore eliminate the buyer’s incentive to change the destination. In such cases the profit-splitting mechanism would constitute a hard-core restriction. In other situations, however, profit pass-over obligations require a more detailed analysis.1005

GlaxoSmithKline, ECR 2009, p. I-9291. 1000 See Vertical restraints guidelines paragraph 50, Appendix 4. 1001 See implicitly Case T-450/05, Peugeot, ECR 2009, page II-2533, as well as Case T-67/01, JCB, ECR 2004, p. II-49, and Commission Decision of 15.05.1991, IV/32186 – Gosme/Martell, paragraph 34. 1002 See Commission Guidelines on the application of Article 101(3), OJ 2004 C101/ 97 of 27.04.2004, paragraph 22. 1003 See Vertical restraints guidelines, paragraph 50, Appendix 4, which mentions profit pass-over obligations as an example of indirect measures to restrict sales by the buyer. 1004 See Commission Competition Report 2002, p. 208; IP/02/1869 of 12.12.2002 – NLNG. 1005 See also H. Nyssens, I. Osborne, Profit splitting in a liberalised gas market: the devil lies in the detail, Competition Newsletter 2005

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Profit-splitting mechanisms take two basic forms. The parties either agree to split the entire difference between the lower price usually obtained in the home market of the importer and the higher price actually obtained from a buyer in another market (“price-splitting”). Or, alternatively, the parties agree to split the incremental profit obtained from the sale in the other market after deducting all costs incurred with the marketing and delivery of the gas in that market (“profitsplitting”). Only in the latter case the importer can be sure to retain part of the profits resulting from arbitrage, assuming that there are no hidden costs which are not taken into account.

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The first method (“price-splitting”), which only splits prices and not profits, does not ensure that the importer benefits from cross-border sales. Depending on the costs, it may even incur a lower profit than from sales in its traditional sales area. Price-splitting is thus very likely to have a stronger adverse effect on incentives to engage in parallel trade than the second method. The second method (“profit-splitting”) in principle preserves the incentives to engage in parallel trade because splitting takes only place as long as an incremental profit is made. However, this conclusion presupposes that all costs are taken into account and are accurately calculated. If not, parallel trade will be discouraged. Given this risk, the Commission is likely to be sceptical of profit-splitting mechanisms. In Upstream gas supplies in Central and Eastern Europe Gazprom committed to no longer apply profit-splitting mechanisms.1006 Similarly, under the settlement concluded between the Commission and Sonatrach, Sonatrach committed to abstain from including any profit-splitting mechanisms in LNG and pipeline contracts that apply after title and risk have passed to the buyer.1007 Prior to reaching this settlement the parties apparently engaged in protracted negotiations to find a formula that would satisfy the Commission that the incentive for buyers to engage in arbitrage was preserved. In the end a clear-cut but more crude solution was found, namely to ban such mechanisms all together when title and risk have passed to the buyer.1008 This means that under the settlement the delivery clause contained in the agreement plays an important role in the assessment.1009 If the parties conclude a FOB (free on board) or a CIF (cost in-

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1006 See Commission Decision of 24.5.2018 in Case COMP/.39816 – Upstream gas supplies in Central and Eastern Europe, para. 166. 1007 See press release IP/07/1074 of 11.07.2007. 1008 The settlement would not seem to imply that all profit sharing mechanisms are considered contrary to Article 101(1). The fact that the clauses proposed by Sonatrach did not pass muster does not exclude that there may be other clauses that are compatible with Article 101(1) because they are drafted and applied in such a way that they do not create disincentives for the buyer to engage in arbitrage. 1009 The Commission may be revisiting this approach based on the passing of title and risk in its pending investigation of Qatar Petroleum. The Commission’s press release provides that “certain clauses contained in these agreements appear to, directly or indirectly, restrict the EEA importers’ freedom to sell the LNG in alterna-

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surance freight) delivery occurs in the port of departure in which case a priceor profit-splitting mechanism may be caught by Article 101(1). If the parties conclude a DES (delivery ex ship) contract, delivery takes place at the port of destination in which case a price- or profit-splitting mechanism does not constitute a resale restriction.

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The second consideration to be taken into account concerns the fact that the seller would arguably interfere with the buyer’s business when introducing a profit-splitting mechanism into a supply contract. It presupposes that the buyer communicates the selling price to the supplier, who may be an actual or potential competitor of the buyer for such sales. However, it may be possibly to address these concerns by involving an independent third party in the process thereby avoiding that sensitive information be exchanged between the parties.

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It follows that the Commission is sceptical of profit-splitting mechanisms and that it may often consider that they have as their object the restriction of competition within the meaning of Article 101(1).1010 It is important to note, however, that this severe treatment of resale restrictions only applies to intra-EU sales. Restrictions on resale between a third country and the EU are only caught by Article 101(1) when they have appreciable restrictive effects on competition inside the European Union.1011

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Vertical supply agreements may also contain delivery clauses that stipulate that the energy, for instance gas, is delivered at a certain location such as the customer’s production site. Once the gas is delivered it may be difficult to reverse the flow and resell the gas to a third party. That raises the question whether such delivery points and refusals to agree on alternative delivery points may be challenged under Article 101 as being an indirect resale restriction. It is submitted that this is not the case. The agreement does not impose on or incentivise the buyer not to resell the products. It may be that reselling is difficult, but this is a consequence on the unilateral conduct engaged in by the seller and its refusal to engage in alternative conduct. Since the implementation of this conduct requires no participation by the other party, no agreement within the meaning of Article tive destinations within the EEA. For example, some contractual clauses prevent any diversion of cargoes to another destination or restrict the territories to which diversion can take place or the volumes that can be diverted. As a result, these clauses may unduly limit the free flow of LNG sold by Qatar Petroleum in the EEA, segmenting the EU’s internal gas market.” Since LNG contracts commonly provide that title and risk pass upon delivery at the port of destination, the Commission will need to consider the implications of the Sonatrach settlement on its analysis under EU competition law. 1010 See Vertical restraints guidelines, paragraph 50, Appendix 4. 1011 See Case C-306/96, Javico, ECR 1998, p. I-1983.

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101 arises.1012 However, such conduct may be caught by Article 102 if the aim is to restrict exports.1013 In Long-term contracts France a dominant generator offered commitments whereby the customer would be entitled to reroute electricity to one or more other power withdrawal points.1014 This obligation made resale possible. Similarly, in Upstream gas supplies in Central and Eastern Europe the Commission intervened against Gazprom’s refusal to change gas delivery points or the location where the gas was metered.1015 By making clear that the infringement related to a refusal to change delivery and metering points the Commission signals that the conduct engaged in by Gazprom was unilateral in nature.

3.3 Customer and use restrictions Vertical agreements may also impose restrictions on the customers to whom the energy products may be resold. It may for instance be provided that the products may only be resold to a particular predefined class of customers such as power generators or industrial end-users as opposed to household customers. Like for territorial restrictions, customer restrictions may flow from direct and indirect restraints. As already mentioned profit pass-over mechanisms are likely to belong to the latter category.

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In one case the importer was contractually obliged to share any additional revenue with the producer when the gas was resold to a customer using the gas for a different purpose than originally agreed upon. DONG, the Danish gas wholesaler, was buying gas from a Danish group of producers. The wholesaler had to report to the producers the volumes sold to certain defined classes of customers in order to benefit from special price formulae. The Commission concluded that the pricing method and the reporting obligations effectively amounted to a ‘use restriction’, as DONG could not sell the gas to whichever customer it wished without losing the benefit of the specific price formula. Such restrictions imposed a resale restriction on the buyer contrary to Article 101(1). The Commission proceedings were closed after the parties committed to deleting the clause from their contracts.1016

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1012 See in this respect Joined cases C-2/01 P and C-3/01 P, Bundesverband der Arzneimittel-Importeure, ECR 2004, p. I-23. It is a condition that de facto there is no agreement between the parties to restrict parallel trade. 1013 See in this respect Joined cases C-468/06 to C-478/06, Sot. Lélos kai Sia, ECR 2008, p. I-7139. 1014 See Commission Decision of 17.3.2010, Case COMP/39.386 – Long-term contracts France, paragraph 93. The commitments also contained an obligation to take all volumes purchased into account for the purposes of calculating discounts. 1015 See Commission Decision of 24.5.2018 in Case COMP/.39816 – Upstream gas supplies in Central and Eastern Europe. 1016 See Commission Competition report 2003, paragraph 144; press release IP/03/566 of 24.04.2003; D.

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3.290

These restrictions were also an issue in the Distrigas case.1017 The long-term supply contracts concluded with industrial users originally contained clauses whereby the buyers committed to use the gas as a input for their purposes and not resell it. Such obligations are often referred to as captive use restrictions. As a result of the Commission’s intervention Distrigas committed to remove these restrictions from the agreements and to refrain from concluding new contracts containing such restrictions. In the Long-term contracts France case the dominant firm made commitments to remove resale restrictions from its contracts, to refrain from introducing such restrictions in new contracts and to facilitate the resale of electricity by its customers by allowing them to choose alternative delivery points.1018 The Commission thus treats in the same way resale restrictions imposed on buyers that have reselling as their main business and buyers that mainly use the product as an input. It is submitted that there is less reason to intervene against resale restrictions in the latter context. While reselling by industrial users may have beneficial effects such as increased wholesale market liquidity,1019 the link with the policy objective of the EU to create an internal energy market is less obvious. There is a significant difference between imposing a resale restriction on a gas importer or distributor and an industrial user, who does not function as an intermediary in the market. Moreover, resale restrictions may allow in particular energy intensive users to obtain prices that enable them to remain competitive. Therefore, treating captive use restrictions as hard-core resale restrictions does not seem warranted. It is submitted that such restrictions should be treated in the same way as non-compete obligations and thus be prohibited only when they are likely to have adverse effects on competition.

4. 3.291

Exclusive energy distribution agreements

Energy may be distributed to industrial, commercial and household consumers by way of intermediaries acting as exclusive dealers or distributors for a producer, generator, wholesaler or importer. Exclusivity implies that a supplier sells its products only to one dealer or distributor for resale in a particular territory. Thus, the supplier refrains from selling to other distributors or directly to cusSchnichels/F. Valli, Vertical and horizontal restraints in the European gas sector – lessons learnt from the DUC/DONG case in: Competition Newsletter 2003 (2) p. 60 seq. 1017 See Commission Decision of 11.10.2007, Case COMP//37966 – Distrigas, paragraph 17. 1018 See Commission Decision of 17.3.2010, Case COMP/39.386 – Long-term contracts France, paragraph 93. According to the Commission the commitment to facilitate resale was required to remedy the effects of restricting resale. The Commission has the power to impose remedies to eliminate the continuing effects of past infringements, see e.g. Case C-62/86, AKZO, ECR 1991, p. 3359, paragraph 155. 1019 See Commission Decision of 17.3.2010, Case COMP/39.386 – Long-term contracts France, paragraph 38.

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tomers within a given territory. The territory usually encompasses a town, a region or a whole Member State. Moreover, exclusivity generally also implies that the supplier protects the distributor against “active selling” by other appointed intermediaries in other areas into the allotted territory.1020 Exclusivity as defined is covered by the vertical restraints block exemption.1021 Instead of allocating a particular territory, a supplier can also attribute a particular class of customers to a distributor. Since the competition analysis of exclusive customer allocation is comparable to that of allocating exclusive territories,1022 this issue is not treated separately here. In considering exclusive distribution agreements, it is important to determine from the outset whether the parties are competitors or not. The exclusivity arrangements raise different competition issues and lead to different outcomes depending on whether they are of a horizontal or vertical nature. Exclusive distribution arrangements between competitors are normally more harmful to competition than those between non-competitors and are therefore more likely to be incompatible with competition law. The discussion in this section deals only with distribution agreements concluded between non-competitors.1023

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Gas and electricity intermediaries holding an exclusive distribution right are regularly also the owners of the downstream network. Distributors have traditionally carried out two functions – energy sales as well as the operation of the distribution network. Thus, a distributor, when it purchases electricity or gas for resale, may conclude an exclusive distribution agreement with its supplier, corresponding to the territory for which it is the operator of the distribution network. Furthermore, the grant of an exclusive distributorship may be the counterpart to a non-compete clause obliging the re-seller to procure all electricity and gas requirements from the supplier.

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Exclusive distribution arrangements are normally explicitly agreed between the parties in order to clearly delineate the boundaries of the reserved territory. Exclusivity may, however, also result from indirect obligations or a concerted practice between the parties. Evidence of a concerted practice could, for instance, be the systematic refusal of a supplier to enter into negotiations for sales, instead referring interested customers to the distributor active in the area. An example of an indirect obligation protecting a distributor against competition is the

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1020 1021 1022 1023

See Vertical restraints guidelines, paragraphs 51, 151, Appendix 4. See Article 4(b) Vertical block exemption Regulation. See Vertical restraints guidelines, paragraphs 168 seq, Appendix 4. For distribution agreements concluded between competitors see above, book paragraphs 3.104 et seq.

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contractual stipulation that the supplier has to obtain the distributor’s consent before selling to rivals or customers of the distributor situated in his traditional sales territory.1024 Other examples are a “right of first refusal” for the reseller to be the first potential buyer of the goods of the supplier due for its sales area1025 and, possibly, “most favoured customer” provisions entitling the buyer to claim identical terms to any other importer who would have received better commercial terms than itself.1026

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Arrangements called “necessary adjustment mechanisms”, “reduction clauses” or “parallel sales clauses” may also give rise to de facto exclusivity. Such provisions are regularly found in long-term gas supply contracts, not only between gas producers and importers, but also between downstream importers and distributors. The mechanism or clause entitles the buying party to reduce volumes bought from the supplier should the latter start to market its gas in the sales area of the reseller.1027 The right to reduce contract volumes may de facto have an effect similar to an exclusive distribution right and effectively hinder the gas supplier from entering the downstream market of the importer or wholesaler.1028 The concrete circumstances of the individual case determine to which extent this is true. An important element of the analysis is whether the supplier has in view of the possible loss of volumes already “sold” to the reseller any real economic incentive to engage in additional sales. Presumably, this is only the case if the supplier can sell additional volumes, or if it could obtain higher margins for all volumes sold including those already contracted to the reseller.1029

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It has been argued that a gas reseller’s right to reduce its contract volume in the event that the supplier sells in “its” territory does not infringe competition law irrespective of its market impact, because it is a necessary counterpart to the take-or-pay obligation which is usually inserted in these gas supply contracts. A take-or-pay-provision obliges the buyer to pay for a defined quantity of gas even if it is not taken.1030 The reduction right is claimed to be objectively justified because the supplier could otherwise sell its gas twice, namely to the buyer 1024 1025 1026 1027

See Commission press release IP/03/1345 of 6.10.2003 – Gazprom/ENI. See Commission press release IP/05/195 of 17.02.2005 – Gazprom/OMV. See Commission press release IP/05/710 of 10.6.2005 – Gazprom/E.ON Ruhrgas. See Competition Report 2003, 33 146 seq., Commission press release IP/03/566 of 24.04.2003 – DONG/ DUC case; Competition Report 2002 p. 196 – Wingas/EDF Trading. 1028 Selling restrictions on the seller are not hard-core restrictions under Article 4(b) Vertical block exemption Regulation. Reduction clauses are therefore treated differently than expansion clauses, see section 3.1 above. 1029 See Commission Decision of 29.09.1999, IV/M.1383 – Exxon/Mobil, OJ L103/1 of 7.04.2004, paragraph 91. 1030 See footnote 1 of D. Schnichels/F. Valli, Vertical and horizontal restraints in the European gas sector – lessons learnt from the DONG/DUC case, Competition Newsletter 2003 (2).

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and to actual or potential customers of the buyer. It is submitted, however, that this reasoning is only correct in some circumstances. This might for instance be the case where the buyer is the only re-seller in a geographically closed or isolated market1031 and where it procures gas exclusively from a single supplier. When resale into neighbouring territories is restricted due to obligations not to sell actively into the exclusive territories of other distributors the argument may also have some force, provided that the bans on active selling are compatible with Article 101. Where, however, the reseller obtains its requirements from several suppliers, and might sell the gas it purchases to customers of competing re-sellers or into new geographical markets, it is not necessary to shield it against direct sales by the supplier since it is just one of several sources of competition in a given market that a re-seller will face.

4.1 Competition issues of exclusive energy distribution agreements The allocation of an exclusive territory leads (indirectly) to market sharing between distributors of the same brand and thus to a restriction of intra-brand competition between them. Due to the existence of the contract they are legally obliged not to compete with one another regarding the goods in question. The impact on competition depends mainly on two factors; namely the number of appointed resellers of the same brand and whether appointed resellers involve non-appointed resellers in the sale of the product.1032 When the supplier appoints only one distributor for each relevant geographic market and the appointed distributors do not involve other, non-appointed resellers in the sale of the product or brand in question, there will be only a single distributor selling the product of the supplier in every geographic market, which severely restrict intra-brand competition.

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For consumers, exclusive distribution agreements diminish the choice between resellers of the same product or brand and, possibly, the choice of marketing methods. Moreover, depending on the circumstances, exclusive distribution agreements may allow the supplier and the appointed resellers to charge consumers different prices in the different sales territories and as a result engage in price discrimination.1033

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1031 See the definition of isolated markets in Article 49 Gas Liberalisation Directive 2009. 1032 See Vertical restraints guidelines, paragraph 156, Appendix 4. 1033 See Vertical restraints guidelines, paragraph 151, Appendix 4.

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3.299

The establishment of an exclusive distribution system for the sale of a product normally has only a negative effect on “ intra-brand competition” between the sellers of the same product. However, by making distribution more effective (for example, by enabling the appointed distributor to focus its efforts on selling the contracted product), it may also increase “inter-brand competition”. Exclusive distribution is therefore mainly a concern when inter-brand competition is limited or when very far-reaching forms of territorial or customer restrictions are imposed. Competition concerns are particularly likely to arise when: –

the appointing supplier grants its distributors “absolute protection” against intra-brand competition from other appointed distributors,1034

–

the establishment of an exclusive distribution system has the effect of foreclosing access to energy supplies, by competitors of the appointed distributor (“ foreclosure”), or

–

the existence of parallel exclusive distribution systems causes, or strengthens, collusion amongst energy suppliers and/or distributors.1035

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Given that Community law treats the grant of absolute territorial protection as a hard-core restriction, this competition issue will be addressed first.

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To grant absolute protection means that the supplier bans “active sales” as well as “passive sales” by appointed distributors into the territory, or to customers reserved for other appointed resellers. The prohibition of “passive sales” constitutes a hard-core restraint also in exclusive distribution agreements. A distributor must be permitted to respond to unsolicited requests from individual customers established in another distributor’s territory, including the delivery of goods to such customers.1036 It would otherwise be possible for suppliers to compartmentalise the European Union into separate national markets through exclusive distribution systems. To prohibit passive selling would imply that exclusive distributors could never sell to customers located in territories of other exclusive distributors located in other Member States. The objective of the TFEU to create and protect an area without internal frontiers could in this way be thwarted by vertical restraints agreed between energy companies. 1034 See Vertical restraints guidelines, paragraph 50, Appendix 4. 1035 See Vertical restraints guidelines, paragraphs 151, 156, Appendix 4. 1036 See Vertical restraints guidelines, paragraph 51, Appendix 4.

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However, in order not to forego the potential efficiency benefits of exclusive distribution agreements, EU competition law permits in many cases restrictions on active selling. Such restrictions are permitted as long as any appreciable negative effects are outweighed by efficiency gains. Under the Vertical Restraints block exemption active sales restrictions are presumed to be pro-competitive below the market share threshold of 30%.1037 A supplier can thus often oblige distributors not to actively approach individual customers inside another distributor’s exclusive territory by, say, direct mail, visits, specifically targeted promotion or the establishment of a distribution outlet in another distributor’s exclusive territory.1038 The principle is therefore that active selling may be prohibited by the energy supplier, while passive selling may not. This principle applies, however, with further qualifications. This is true for both active and passive selling.

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Passive selling does not always constitute a hard-core restriction. There exist a limited number of exceptions.1039 Firstly, vertical restraints linked to opening up new product or geographic markets in general do not restrict competition. This rule holds, irrespective of the market share of the supplier, for two years after the first putting on the market of the product and applies in the case of a new geographic market to restrictions on active and passive sales imposed on the direct buyer.1040 This rule reflects the fact that intra-brand restraints may not be caught by Article 101(1) when the restraint is objectively necessary for the existence of an agreement of that type or that nature.1041 If absent a restraint the agreement would not have been concluded, there is no intra-brand competition to be restricted and Article 101(1) does not apply.

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A further exception relates to the prohibition on a wholesaler from engaging in passive sales to end-users.1042 A supplier commercialising its energy products through distributors may contractually prohibit its wholesalers from selling energy directly to end-users. It may again do so as long as the contractual prohibition does not lead to an appreciable restriction of competition, which is not outweighed by countervailing benefits and therefore prohibited by Article 101. It is submitted that this is normally the case.1043 It is difficult to maintain a distribution system in which wholesalers that necessarily have different cost structures compete directly with retailers.

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1037 Article 4(b) Vertical block exemption Regulation. 1038 See Vertical restraints guidelines, paragraph 51, Appendix 4. 1039 See Article 4(b) Vertical block exemption Regulation and paragraph 61 of the Commission’s Vertical restraints guidelines, Appendix 4. 1040 See Vertical restraints guidelines, paragraph 61, Appendix 4 1041 See in this respect Case 56/65, Société Technique Minière, ECR 1966, p. 337, and Case 258/78, Nungesser, ECR 1982, p. 2015, and Commission Guidelines on the application of Article 101(3), paragraph 18(b). 1042 See Article 4(b)(ii) Vertical block exemption Regulation. 1043 See Case 26/76, Metro(I), ECR 1977, p. 1975.

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3.305

As already stated, the prohibition of active selling may be compatible with EU competition law. This does not imply, however, that energy suppliers may require their distributors to pass on the prohibition to their customers.1044 Indeed, such an obligation is a hard-core restriction of competition. Customers of exclusive distributors must be free to re-sell the acquired good to whomever and wherever they wish, including purchasers located in other Member States. Customers of exclusive distributors may therefore engage in arbitrage across borders, should price differences between Member States make it attractive.

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The requirement that resale restrictions are not passed on to the next level of the vertical chain does not however prevent the appointed exclusive distributors from establishing within its exclusive territory their own distribution system within which active selling is prohibited. Thus, at the end of the day the only customer of an exclusive distributor, which may be entirely free to engage in arbitrage between different exclusive territories, is the final commercial and industrial consumer. Resale restrictions at the level of such users remain hardcore restrictions.1045

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Exclusive distribution agreements may in principle also give rise to foreclosure concerns. Exclusive distribution prevents competing resellers at least temporarily from distributing its goods. However, as long as competition between distributors each representing a different brand (inter-brand competition) is vigorous and effective, the dampening of intra-brand competition among distributors of the same brand through exclusive distribution agreements is not an issue for competition policy. Where, however, inter-brand competition at the distributor’s level is restricted and other resellers find it difficult to profitably enter the market and expand, Article 101(1) may in principle apply to the exclusivity covenants. However, in assessing the consequences thereof it needs to be taken into account that it is a general principle of competition law that a supplier is normally entitled to determine with whom to deal. The fact that a supplier chooses to deal with some distributors and not with others does not in itself give rise to competition concerns. The prohibition of exclusivity does not imply that the supplier is obliged to serve other distributors. It merely means that it is free to do so. Moreover, the risk of anti-competitive foreclosure stemming from exclusivity on the seller is considerably less than non-compete obligations imposed on the buyer. When buyers are tied, it may be difficult for competing suppliers to enter the

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1044 See Article 4(b)(i) Vertical block exemption Regulation. 1045 See Article 4(b) Vertical block exemption Regulation and Commission Decision of 11.10.2007, Case COMP/37.966 – Distrigas, paragraph 17.

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market in which case inter-brand competition is restricted. When re-sellers are granted exclusivity, other re-sellers are excluded from selling the brand in question, which may affect intra-brand competition, but as resellers are free to sell competing brands inter-brand competition is unlikely to be affected. Competition concerns are only likely to arise when upstream supply sources are scarce. Exclusivity is only likely to be caught by Article 101(1) due to foreclosure concerns when three conditions are met:

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First, the buyer must have substantial market power (dominance) and therefore the ability to use exclusivity obligations to exclude competition at the distribution level.1046

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Secondly, competing resellers will only be foreclosed if a substantial part of total supply to the market is covered by exclusivity obligations. The condition is likely to be satisfied when all leading suppliers sell their energy through exclusive distributors. It is also possible that all or the most important suppliers have appointed the same dominant reseller as exclusive distributor in the geographic market (“multiple exclusive dealership”). Finally, it may be that there is only one dominant or quasi-dominant supplier active on the upstream supply market distributing its products through a reseller with market power on the downstream market.

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Thirdly, exclusive distribution agreements will not appreciably foreclose rivals unless they have certain duration. Short-term exclusive dealing will in general not harm competition.

3.312

In addition to the issues of absolute territorial protection and foreclosure, exclusive distribution agreements may finally facilitate collusion at either supplier or distributor level or both. In markets with only few leading resellers the parallel imposition of exclusive distribution rights on suppliers may have the effect of facilitating the collective exercise of market power.1047 The introduction of exclusive distribution agreements may also facilitate collusion at the supplier level, for example, if in a concentrated market each oligopolistic company appoints

3.313

1046 A stricter standard may apply in cases where suppliers create a production joint venture and jointly agree to supply their output to the same exclusive distributor, see Case T-112/99, Métropole télévision (M6), ECR 2001, p. II-2459, paragraphs 55 et seq. It is submitted however that the analysis of foreclosure in this case did not sufficiently take into account the fact that the real cause of market foreclosure was contracts concluded by a dominant incumbent. It is far from clear that the exclusivity agreement concluded by the joint venture, a new entrant, had any appreciable foreclosure effects. 1047 See Vertical restraints guidelines, paragraph 157, Appendix 4.

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the same reseller as its exclusive distributor. The higher the cumulative market share of the brands distributed by the multiple distributors, the greater the risk of collusion.1048

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Of the three competition issues raised by exclusive distribution agreements, the most important is the grant of absolute territorial protection, which is caught by Article 101(1) without any need for an analysis of its market effects, because it constitutes a hard-core vertical restraint. Moreover, as for all other hard-core restraints, the application of the efficiency defence is unlikely to be successful. The application of Article 101(3) is not excluded, but there is a presumption that the conditions are unlikely to be satisfied.1049 For the two other competition concerns, i.e. foreclosure and collusion, a full analysis of the competition effects is required. If there are indications that the agreement may be caught by Article 101(1), it should be examined whether the safe harbour of the Vertical restraints block exemption Regulation applies.

4.2 Safe harbour: Vertical block exemption Regulation 3.315

The general safe harbour for all non-hard-core vertical restraints also applies to exclusive distribution agreements. All exclusive distribution agreements concluded by an energy supplier and an energy buyer with market shares not exceeding 30% are thus presumed to be legal under the EU competition rules.1050 Since the safe harbour applies to exclusive distribution and non-compete obligations alike, the rules for the identification of the relevant market as well as for the calculation of the market share are the same. The relevant market shares are seller’s shares on the markets on which he sells the contract products and buyer’s shares on the markets on which he buys the contract products. Hence, unlike under the previous block exemption regulation, the safe harbour does not apply if the buyer’s market share exceeds 30%.

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The block exemption covers all vertical restraints necessary to grant an exclusive territory to a distributor. This includes the prohibition of active selling by a vendor into the territory. In contrast, as mentioned above, it neither includes the prohibition of passive selling nor other hard-core restrictions that are “black1048 See Vertical restraints guidelines, paragraph 154, Appendix 4. 1049 See Vertical restraints guidelines, paragraph 47, Appendix 4. The language used in paragraph 47 of the 2010 Vertical restraints guidelines is slightly more permissive than that used in the corresponding paragraph 46 of the 1999 Vertical restraints guidelines. 1050 Certain “grace periods” exist as in the case of non-compete obligations, see Article 7(d) and (e), to the effect that a safe harbour still applies for 2 years following the year the supplier’s market share rise above 30% but does not exceed 35% and for 1 year if it rises above 35%.

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listed” in the Vertical block exemption Regulation.1051 Moreover, the safe harbour does not cover horizontal restrictions should the supplier and the distributor be actual or potential competitors for the supply of energy to the reserved territory or class of customers unless the exceptions created for the “small buyer” and “ dual distribution groups” apply.1052 If the supplier makes the grant of an exclusive distribution right conditional on the acceptance of a non-compete obligation by the reseller, the safe harbour applies to both vertical restraints. However, the duration limit of 5 years for the non-compete obligation has to be respected. A duration of more than five years falls outside the safe harbour and may be caught by Article 101(1).

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4.3 Analysis outside the safe harbour The analysis of an exclusive distribution agreement in individual cases would primarily have to address the two main competition concerns, namely foreclosure (limiting competition on the relevant market between the distributor and other re-sellers that would wish to act as a distributor for the products of the supplier) and collusion. Only the former issue has arisen so far in energy cases dealt with by the Commission.

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These cases concern contracts between gas producers and importers or wholesalers. Provisions were included in the purchase agreements in question providing for a “right of first refusal” or an “adjustment mechanism” causing competition effects similar to an exclusive distribution agreement. In other words, the distributor had a right of first refusal to purchase any additional volumes the gas producer might be considering selling into the territory in question. The importers or wholesalers (i.e. the national gas companies) held strong, if not dominant positions on the relevant market as gas resellers in their traditional sales territories. However, neither the share of total gas sales marketed in these territories covered by exclusive rights nor the duration of the contracts emerge from the published case reports. However, presumably the duration was very long, as at the time this was normal in gas supply contracts with producers from third countries and Member States alike. The Commission considered in each case that foreclosure would disadvantage actual as well as potential competitors of the importer or wholesaler: other potential entrants into the market would be unable to buy gas from the upstream producers in question for resale on the

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1051 See the “black list” in Article 4 Vertical block exemption Regulation. 1052 See above, book paragraph 3.105 et seq. for the treatment of unilateral distribution agreements between competitors.

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relevant market in competition with the incumbent. Each of the reported cases was informally settled after the beneficiaries of the exclusive right had committed to the Commission to waive the “right of first refusal” or “adjustment mechanism”.1053

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A full competition analysis would also have to deal with other possible restrictions of competition contained in or caused by an exclusive distribution agreement. Two other possible restrictions would seem to be particularly pertinent in this context. One is of a vertical and the other is of a horizontal nature. A restriction of a vertical nature may occur when the grant of an exclusive distribution right to the reseller is combined with a non-compete obligation in favour of the supplier. This combination may lead to double foreclosure, namely foreclosure of competing resellers and competing energy suppliers. Exclusive distribution tends to reduce the number of distributors commercialising a particular product and, as a result excludes competing resellers from the retail markets. Non-compete obligations affect the opposite side of the same market and may exclude competing suppliers from access to resellers. Each of the exclusivity obligations may therefore create or increase barriers to entry. When market power exists on both sides of the purchasing market, the exclusivity obligations may aggravate the restriction of competition already caused by the other vertical restraint. A further restriction which may flow from exclusive distribution agreements is a horizontal restriction of competition. If absent the agreement the supplier and the exclusive distributor were actual or potential competitors in the territory reserved for the appointed distributor the agreement must be assessed according to the standards set out in chapter 2 on horizontal agreements.

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The Wingas/EDFT case is an example of a case raising vertical as well as horizontal competition concerns. EDFT is a gas trader, Wingas a wholesaler in Germany. Wingas and EDFT were parties to a long-term gas supply contract, which allowed Wingas to reduce the volumes bought from EDFT in the event that the latter were to sell gas into Wingas’ main supply territory. The mechanism would not apply to sales of EDFT to incumbent German operators such as Ruhrgas operating in Wingas’ supply area, although it did apply if EDFT wished to sell to new market participants in the German market. The Commission does not explain in its published case report whether it identified foreclosure concerns 1053 See Commission Competition Report 2003, p. 146 et seq., Commission press releases IP/03/566 of 24.04.2003 – DONG/DUC; IP/03/1345 of 6.10.2003 – Gazprom/ENI and IP/05/195 of 17.02.2005 Gazprom/OMV and IP/05/710 of 10.06.2005 – Gazprom/E.ON Rurhgas.

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(the agreement may have increased entry barriers to new market entrants in Wingas’ supply market) as a consequence of the reduction clause in view of the high concentration on the purchasing side of the German gas wholesale market and the wide-spread contractual practice to grant wholesalers reduction rights.1054 Although Wingas is not one of the largest German gas companies, its market share might be sufficient to significantly contribute to foreclosure1055. The Commission may alternatively have regarded the limitation of the scope of the reduction clause as a horizontal restriction of competition because Wingas and EDFT are presumably at least potential competitors for the sale of gas to traders or to very large industrial customers in the liberalised gas markets. Such customers have the size and resources to purchase directly from traders and wholesalers. In any event, the case was closed after a modification of the reduction clause to the effect that EDFT was free to sell to all wholesalers in Wingas’ main supply territory in Germany.1056

4.4 Efficiency defences – Art. 101(3) TFEU The principal efficiency defences for exclusive distribution agreements will in most cases be the same as or similar to those that can be invoked for non-compete obligations.1057 These defences will therefore only be re-examined in the following section insofar as it is necessary to outline the typical differences between non-compete obligations and exclusive distribution agreements. •

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Cost efficiencies

The concentration of the resale of products in the hands of a limited number of exclusive distributors may lead to efficiency gains in transportation and distribution.1058 Such claimed cost efficiencies have to be described, calculated/estimated and verifiable.1059

1054 See Commission decision of 29.09.1999, IV/M.1383-Exxon/Mobil, OJ L103/1 of 7.04.2004, paragraphs 89, 232 seq. 1055 See Commission decision of 29.09.1999, IV/M.1383-Exxon/Mobil, OJ L103/1 of 7.04.2004, paragraph 239. 1056 See Commission Competition Report 2002, p.196; press release IP/02/1293 of 12.09.2002 – Wingas/ EDFT. 1057 See above, book paragraphs 3.237 et seq. 1058 See Vertical restraints guidelines paragraphs 107(g), 164, Appendix 4. 1059 See Guidelines on the application of Article 101(3), paragraph 56.

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•

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Exclusive distribution rights may make new entry into an energy market, in particular a new geographic market, easier and therefore be a valid efficiency defence.1060 However, for such a defence to succeed, it needs to concern a contract where the supplier will be a market entrant and where the distributor will have to make promotions or other investments on which other distributors would free ride. Such a case is likely to be rare in the electricity and gas sectors. •

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Loan agreements

An exclusive distributor may wish to secure a loan that it agrees to grant to the supplier through an exclusive distribution right. This is probably a rare occurrence. If it does occur, the same conditions have to be satisfied as outlined for loans given by a supplier, which are secured by a non-compete arrangement. •

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New market entry

Investment to implement an energy supply contract

The grant of an exclusive distribution right may stimulate investment by the distributor with respect to the sale of the goods or services in question. Whether the investment will be in equipment, training of personnel, advertising, or all three, depends on the product and the market. However, to qualify as an efficiency gain within the meaning of Article 101(3) the investment must either be prone to free riding (e.g. promotions), or be relationship-specific. In addition, the investment has to be as long-term as the exclusivity arrangement. Relationshipspecificity signifies that the investment must lose its commercial value should the distributor decide to switch to another supplier. Investment in equipment, e.g. in a petrol storage tank in the case of petrol retailing or in the distribution network of a vertically integrated gas reseller in an emerging market, will very often be market but not relationship-specific. Investments in the training of personnel may be relationship-specific, if the products to be marketed are new or complex, which is normally not the case for energy products. In any event, such investments can generally be recouped short-term. Investments of an exclusive distributor may thus qualify as an efficiency gain, albeit in most instances only for a short period of time. In such cases the anti-competitive effects of the exclusivity arrangement have to be carefully balanced with the countervailing economic benefits. Only in the case of high relationship-specific investments can long-term exclusive distribution agreements be justified.1061 1060 See Case T-112/99, Métropole télévision (M6), ECR 2001, p. II-2459, paragraphs 141 et seq. 1061 See Vertical restraints guidelines, paragraph 146, Appendix 4.

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• Security of energy supply Security of supply would prima facie not appear to be a valid efficiency defence for the grant of an exclusive distribution right. The dependency of the European Union on external gas sources might justify long-term purchase commitments or possibly quantity forcing. However, it is difficult to see how this could justify exclusive distribution rights. It is difficult to determine a direct causal link between the exclusive right and the enhancement of supply security, or that the vertical restraint is indispensable to improve external supply. For network industries such as electricity or gas, it might be argued that an exclusive distribution right ensures the connection of every interested consumer to the grid, even those located in remote geographic areas. The operation of an energy grid is, however, an activity distinct from energy supply. Since the electricity and gas sectors have been opened up to competition, a link between energy supply and the connection of consumers to a grid no longer exists. An exclusive right to supply electricity or gas in a certain territory can therefore not guarantee the network connection. With respect to electricity, this issue has in any event already been taken care of through the legal obligation of distribution network operators to connect all interested consumers to the grid.1062

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In conclusion, cost efficiencies, new market entry, loan agreements and investments may allow the parties to an exclusive distribution agreement to invoke the efficiency defence of Article 101(3). As in the case of non-compete obligations, the defence needs to be properly evaluated for each individual agreement. However, this defence does not offer the parties unrestricted discretion for the conclusion of distribution agreements or the organization of a whole exclusive distribution system. Whether the benefits derived from cost efficiencies and investments also outweigh additional anti-competitive effects caused, for example, by the combination of an exclusive distribution right with a non-compete obligation depends on the factual circumstances of the case. This would be all the more true for distribution agreements also restricting horizontal competition between the parties. One needs only to recall what has been stated in the beginning of this chapter, namely that horizontal restrictions are in general more harmful for competition than vertical restraints.

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The practical application of these principles is illustrated by the DONG case,1063 where the Commission found that the wholesaler and its suppliers had agreed on a so-called “adjustment mechanism” in their gas supply contracts. The Commis-

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1062 See Article 3(3) Electricity Liberalisation Directive 2009. 1063 See above, book paragraph 3.155.

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sion interpreted the mechanism as a reduction clause granting DONG the right to reduce the volumes bought from its suppliers should they start selling into the Danish market. The “adjustment mechanism” was considered to have the same effect as an exclusivity clause. It served the purpose of reserving a certain territory for the wholesaler and de facto prevented its suppliers from entering the downstream markets of their buyers or, at least, reduced their incentives to engage in direct sales on the Danish markets. The Commission rejected the argument that the dominant wholesaler DONG needed to protect its sales markets against competition from the suppliers in view of the fact that the transmission network was sufficiently interconnected with other markets in adjacent Member States. The proceeding was terminated after the Danish wholesaler had committed to waive the adjustment mechanism after a transitional period of six months when a new pipeline was expected to be commissioned which would link the Danish gas fields from where DONG obtained its gas with other continental European gas markets.1064

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For companies selling electricity and gas, capacity rights for the transmission of energy on the network are essential for the procurement as well as the supply of energy. In order to ensure that a supplier always disposes of sufficient capacity rights, it has been common even before liberalisation to conclude capacity reservation agreements for networks with their operators. Such agreements are in particular typical for the reservation of upstream pipeline capacity in the gas sector and for interconnectors linking networks of neighbouring Member States in the electricity sector. Reservation agreements ensure its beneficiary transmission capacity and exclude others from the use of that capacity. The exclusion of other suppliers is not a problem as long as sufficient transmission capacity is available for all. However, where transmission capacity becomes scarce, the exclusion of other suppliers may have an effect on competition not only on the transmission markets but also on the related energy supply markets. This is particularly relevant in the context of liberalisation where new entrants wish to enter the opened-up electricity and gas markets in order to compete with the incumbents for the benefit of the energy consumers. It is thus not surprising that the Commission has already been dealing with reservation agreements concerning the electricity grids linking the United Kingdom and France, France and Spain, the Netherlands and Germany as well as Germany and Norway via Denmark.1065 1064 See Commission Competition Report 2003 p. 209 seq.; press release IP/03/566 of 24.04.2003 – DUC/ DONG; D. Schnichels/F. Valli, Vertical and horizontal restraints in the European gas sector – lessons learnt from the DONG/DUC case, Newsletter 2003 (2), page 61 seq. 1065 See Commission Competition Report 2000 page 155 seq. – Statkraft/Elsam – interconnector capacity; Competition Report 2001 page 208 seq. – UK/France interconnector; Competition Report 2003 page 202

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Capacity reservation agreements may be caught by Article 101 EC, if they cause foreclosure effects similar to non-compete obligations or exclusive distribution agreements. If the reservations are made by a vertically integrated firm Article 101(1) is not applicable given the fact that the agreement is not concluded between undertakings. In such cases the essential facilities doctrine developed under Article 102 may be relevant.1066 Vertical integration of networks and supply gives the integrated firm the means and incentive to distort competition on supply markets in its favour. In its energy sector inquiry the Commission concluded that the requirements of legal and functional unbundling imposed by the current directives have not been sufficiently effective. Moreover, the Commission has accepted commitments whereby dominant gas incumbents undertaken to release a significant share of the entry capacity in their own pipeline systems that they had reserved for their own supply business and actually used for that purpose.1067

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Under Article 101 two scenarios would seem to be relevant for the analysis of foreclosure effects. The first scenario is where smaller actual and potential competitors cannot profitably penetrate or enter a downstream energy retail market because of reservation agreements for a bottleneck piece of network (e.g. an interconnector), that they objectively need to use for procuring supplies from an upstream wholesale energy market (e.g. in a neighbouring Member State). The competition concern is foreclosure of inter-brand competition. Secondly, where smaller suppliers or newcomers active on an upstream wholesale market are prevented from selling their energy products to retailers downstream because of reservation agreements for the only interconnector providing a transmission link between wholesalers and retailers. In this scenario the concern is also foreclosure of inter-brand competition.

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As has been discussed above, the foreclosure of rivals becomes a competition law issue if three conditions are satisfied. One or several suppliers jointly must possess some degree of market power either on the energy market downstream to the bottleneck facility or on the wholesale energy market upstream to the facility. Furthermore, the vertical arrangement, e.g. an exclusive right, has to cover a significant part of the market, here the transmission market comprising the bottleneck facility, and, finally, the vertical arrangement has to be of a sufficient duration to cause appreciable foreclosure. These three conditions are likely to

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Corus Nederland/ Pechiney Nederland. 1066 See in this respect Case C-7/97 Oscar Bronner ECR 1998, I-7791. 1067 See Commission Decisions of 3.12.2009, Case COMP/39.316 – Gaz de France, and og 4.5.2010, Case COMP/39.317 – E.ON Gas. These cases represent a far-reaching application of the essential facility doctrine since the gas undertakings concerned actually used the capacity that they committed to release.

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be satisfied in a situation where a dominant supplier active on the downstream retail market benefits from a long-term exclusive right for the use of the only interconnector(s) linking the Member State in which it is active with neighbouring Member States within the European Union. Newcomers wishing to offer their products on the downstream market are prevented from entering unless it is viable to build competing infrastructure. The outcome of the analysis is the same irrespective of whether the dominant supplier holds an express exclusive right or de facto reserved all of the marketable capacity of the bottleneck facility. A special case is the capacity reservation agreements concluded before the adoption of the Electricity and Gas Liberalisation Directives in 1996 and 1998. Do the EU competition rules apply to such agreements? The Commission appear to have been of the opinion that pre-liberalisation agreements are valid, even if they raise competition concerns.1068 This position seems to be inspired by the principles of legal certainty and legitimate expectations of the contracting parties. However, the Court of Justice rejected this argument in a preliminary ruling on the decision of the system operator of a national electricity transmission system to grant priority access to the parties of a long-term electricity import contract concluded before liberalisation. Although the Court did not have to decide on the applicability of competition law to such contracts, it certainly has opened the door for it.1069

1068 See Commission Competition Report 2003 page 202. 1069 See Case C-17/03, Vereniging voor Energie, Milieu en Water/Amsterdam Power Exchange Spotmarket/ Eneco, ECR 2005, p. I-4983.

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CHAPTER 4 Article 102 TFEU Abuse of a dominant position1070 1.

Introduction

Article 102 TFEU is a difficult provision, because it deals with firms, which individually or collectively enjoy considerable market power, or, to put it differently, because it deals with situations in which the market mechanism does not optimally work. The term used by Article 102 TFEU to indicate this degree of market power is “dominant position”, which notion has been interpreted by the Court of Justice of the European Union (both the Court of Justice and the General Court) as a situation in which a firm can determine its market conduct independently, irrespective of the attitude of its suppliers, competitors and customers, i.e. a situation in which firms do not face significant competitive constraints.1071

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Although European and national merger control rules have as their object to prevent the creation of new dominant positions, they do not necessarily catch all situations in which dominance can occur, especially not in the energy sector, where the dominant positions of many electricity and gas companies can be explained by historical reasons, such as the grant of exclusive rights to public utility companies. There is thus a need to ensure ex post control of dominant firms’ competitive behaviour.

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1070 This chapter is a revised version of the chapter written by Marc van der Woude in the third edition of this book published in 2011, and revised by the author for the period 2011-2014 in the last edition. This chapter only reflects the views of the author. 1071 Judgment of 14 February 1978, United Brands and United Brands Continentaal v Commission, 27/76, EU:C:1978:22.

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Monopolies are likely to give rise to dominant positions, but not necessarily so. Even a 100% market share does not procure market power or independence, if the firm in question acts under the constraint of immediate market entry by competing firms. However, in most cases, market entry will take time or is made difficult by barriers to entry. This leaves the firm with a high market share some time to act independently.

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Article 102 TFEU and comparable provisions under national law do not forbid dominant positions. They prohibit an abuse of such positions. The notion of abuse is a relatively woolly open-ended concept that considerably reduces the commercial freedom of dominant firms. It covers two broad categories of conduct: behaviour that purports to consolidate or enhance the dominant position and behaviour that consists of exploiting the dominant position to the detriment of suppliers and/or customers. Whereas the prohibition of the first category of so-called exclusionary practices can be justified on economic grounds, the prohibition of exploitative practices has a strong normative element: dominant firms should not “rip off ” others by charging excessively high prices or imposing inequitable terms.1072

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The study of Article 102 TFEU is further complicated by the, real or perceived, difference between the Commission’s policy and the case law of the Union Courts. Following an intensive internal debate within the Commission’s services and external consultations, the Commission decided to reorient its enforcement policy. On 24 February 2009, it published a Notice on the ‘guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings’ (thereafter the “Notice”).1073 Rather than focussing on the legal form of the conduct under scrutiny, the Commission focuses on exclusionary conduct that is likely to harm consumers. Article 102 TFEU should be applied only if it can be shown that it causes or that it is likely to cause effective harm to competition. “[T]he aim of the Commission’s enforcement activity […] is to ensure that dominant undertakings do not impair effective competition by foreclosing their competitors in an anti-competitive way, thus having an adverse impact on consumer welfare, whether in the form of higher price levels than would have otherwise prevailed or in some other form such as limiting quality or reducing consumer choice’.

1072 See generally on this Akman, The Concept of Abuse in EU Competition Law: Law and Economic Approaches, (Hart Publishing, 2012). 1073 OJ 2009, C 45/8.

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Also, the Commission is reluctant to curtail the commercial freedom of dominant firms. As a rule, it will intervene only if the conduct forecloses market access by a firm that is just as efficient as the dominant undertaking.1074 Since the Notice imposes a higher standard of proof on the enforcer, these firms should logically enjoy some more commercial freedom than under the old regime. By contrast, the application of the new rules is harder to predict, because the existence or absence of exclusionary effects will depend on extensive factfinding. This could be seen as a reduction of legal certainty. The uncertain gains in terms of efficiency should therefore not be offset by the inevitable welfare loss arising from less predictability.1075 In the energy sector, a policy development which affects the interpretation of Article 102 TFEU was the publication on 10 January 2007 of the Commission’s report on the energy sector inquiry.1076 This report summarizes the findings of an industry wide study and consultation process into the functioning of gas and electricity markets. The report not only identifies structural shortcomings, such as a high degree of concentration and insufficient interconnection capacity, but also reflects the existence of possible anticompetitive practices reducing liquidity of wholesale markets or obstructing an efficient and objective use of networks. The Commission has relied upon this inventory to roll out an impressive enforcement programme that already started in 2006. The part of this enforcement action that relates to Article 102 TFEU will be discussed in this chapter.

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We can schematically see three periods in the enforcement of Article 102 TFEU in the energy sector after the Sector Inquiry. In the first phase, the Commission mainly focused on long-term supply contracts raising foreclosure effects.1077 In

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1074 This development must be analysed in the context of the modernization of the EU competition law regime, in particular with the implementation of the so-called ‘more economic’ approach. On this, see generally Ehlermann, “The Modernization of EC Antitrust Policy: a Legal and Cultural Revolution”, 37(3) Common Market Law Review (2000), 537-590 and Wesseling, The Modernization of EC Antitrust Law (Hart Publishing, 2000). On the ‘more economic’ approach, see Bishop and Ridyard, “EC Vertical Restraints Guidelines: Effects-based or Per Se Policy?”, 23(1) European Competition Law Review (2002), 35-38; Röller, “Economic Analysis and Competition Policy Enforcement in Europe” in van Bergeijk and Kloosterhuis (eds.), Modeling European Mergers. Theory, Competition Policy and Case Studies (Cheltenham: Edward, Elgar, 2005), 11-24 and Verouden, “Vertical Agreements and Article 81(1) EC: The Evolving Role of Economic Analysis”, 71(2) Antitrust Law Journal (2003), 525-576. 1075 See generally on this Hauteclocque, Market Building through Antitrust: Long-term Contract Regulation in EU Electricity Markets (Cheltenham: Edward Elgar, 2013). 1076 Note that national competition authorities have also conducted sector inquiries in energy markets. See for instance the state of the market assessment conducted in UK. 1077 Case COMP/37.966, Distrigaz, OJ 2008, C 9/8; Case COMP/39.387, Long term electricity contracts in Belgium, proceeding was closed on 28 January 2011; and Case COMP/39.386, Long term electricity

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the second phase, the Commission tackled more complex issues. Following the RWE1078 and E.ON1079 cases, enforcement was more and more concerned with issues traditionally addressed through sector-specific regulation, in particular infringements linked to national networks, cross-border infrastructure and price manipulation on wholesale and balancing markets. Not surprisingly, these complex cases resulted in regulatory-like remedies. Whereas in the RWE case the Commission was tackling under the antitrust rules a fairly straightforward case of discriminatory (or inefficient) access to the network for competitors, the Commission then went on in subsequent cases to impose on dominant companies to more effectively market test demand (ENI)1080 or even release capacity it was effectively using for itself (GDF).1081 In the Svenska Krafnät case,1082 the Commission went as far as classifying congestion shifting by the Swedish TSO as an abuse of a dominant position, and imposing market splitting in Sweden, thereby changing the whole market design. In the third phase, we see that EU enforcement has largely decreased in intensity, compensated by an increase in antitrust activity of national competition authorities. The Commission and NCAs coordinate within the European Competition Network. The Commission now tends to focus on the most complex issues, such as power exchanges and interconnectors, and on more political cases, looking eastward (see for instance the enforcement actions against Gazprom).

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As an introductory note, we can also mention that the role of the Commission in the promotion of competition in the liberalised energy markets has evolved over time. Increasingly, it has been resorting to quasi-regulatory measures to foster competition by way of antitrust enforcement under Article 102 TFEU. Accepting unilateral commitments by the firms involved in antitrust proceedings have also become means to restructure the market and promote competition. The commitment procedure under Article 9 of Regulation 1/20031083 allows the Commission to accept and make legally binding commitments offered by defendants in the course of antitrust proceedings when it considers them sufficient to address the underlying competition problem.1084 This procedure has been created in order to accentuate procedural economy and speed. The discrecontracts in France. 1078 Case COMP/39.402, RWE gas foreclosure, OJ 2008, C 310/23. 1079 Cases COMP/39317, E.On gas foreclosure, COMP/39.388, German electricity wholesale market, COMP/39.389, German electricity balancing market, OJ 2009, C 36/8. 1080 Case COMP/39.315, ENI, OJ 2010, C 352/8. 1081 Case COMP/39.316, GDF foreclosure, OJ 2010, C 57/13. 1082 Case COMP/39.351, Swedish Interconnectors, OJ 2010, C 142/28. 1083 Regulation 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in article 81 and 82 of the Treaty, OJ 2003, L 1/1. 1084 Similar procedures exist at national level.

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tion of the Commission when negotiating commitments is limited in theory by the suitability, necessity and proportionality tests defined in Regulation 1/2003. They are intended to make sure that the Commission only addresses the underlying anticompetitive concerns, and does it effectively. The commitment procedure allows the Commission to bargain liberalisation outcomes directly with the incumbents, without going through the interface of national regulatory authorities and Member States. The tendency to use commitments instead of formal decisions has been largely criticised for its inability to clarify ‘the rules of the game’ in a newly opened sector with huge capital needs. The legitimacy of the Commission when it pushes forward the EU liberalisation agenda through the antitrust rules has also been questioned, as well as the suitability of the antitrust tool for this purpose.1085 In this regard, it is worth mentioning the recent Gasorba case1086 where the Court of justice clearly said that the existence of a commitment decision adopted on the basis of Article 9 of Regulation 1/2003 does not preclude national courts from examining whether those agreements comply with the competition rules and, if necessary, declaring those agreements void. It remains to be seen whether it can have an impact on the strategy of the Commission in the energy sector. Last, an important development concerned the enactment and beginning of implementation of the Regulation on Energy Market Integrity and Transparency (thereafter “REMIT”),1087 which introduces a market monitoring framework at the EU level. REMIT came into force in December 2011, and provides for an explicit prohibition of market manipulation, attempted market manipulation and insider trading, together with alternative (to antitrust) enforcement tools. Member States were required under REMIT to endow energy regulators with sufficient investigatory and prosecutorial powers to act upon these prohibitions. The first enforcement actions took place in 2018, for instance in Italy.

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In a first section, this chapter will deal with the general conditions for the ap‑ plication of Article 102 TFEU. The second section concerns dominance: when are firms supposed to enjoy the degree of independence which trig‑ gers Article 102 TFEU? The third and last section relates to the various types of abuses which are or can be prohibited under this provision.

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1085 Hauteclocque, Market Building through Antitrust: Long-term Contract Regulation in EU Electricity Markets (Cheltenham: Edward Elgar, 2013). 1086 Judgment of 23 November 2017, Gasorba and Others, C‑547/16, EU:C:2017:891. 1087 Regulation 1227/2011 of the European Parliament and of the Council of 25 October 2011 on wholesale energy market integrity and transparency, OJ 2011, L 326/1.

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2.

Structure and context of Article 102 TFEU

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The text of Article 102 TFEU is composed of a rule and of a non-exhaustive list of examples of conduct which can be caught by that rule. The rule states that: “abuses by one or more undertakings with a dominant position within the common market or a substantial part thereof shall be prohibited as incompatible with the common market in so far as it may affect trade between Member States”.

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In order to assess whether this rule applies, several analytical steps have to be made: –

First, one has to define the conduct under scrutiny.

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The next step concerns the nature of the authors of that conduct: does this firm or do these firms have a dominant position in respect of the goods or services concerned by that conduct? This question implies that a relevant market for these goods or services has to be defined and that the power of the firm or firms on that market is measured.

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If the degree of market power on the market thus defined suffices to establish dominance, the question arises whether the geographic scope of the market corresponds to the common market or a substantial part thereof. If not, the conduct can be assessed under national rules on dominant positions, but not under Article 102 TFEU.

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The next question concerns the conduct as such: is it abusive? In order to answer this question, the examples listed under Article 102 TFEU may be helpful. It should be noted, however, that conduct that is at first sight caught by this prohibition, may nevertheless be acceptable, if the conduct in question is objectively justified by special circumstances, such as external constraints, or if it is needed to bring about certain efficiencies that will ultimately benefit consumers.1088 The ‘objective justification’ test was clarified in Post Denmark (para. 41, emphasis added): “It is for the dominant undertaking to show that the efficiency gains likely to result from the conduct under consideration counteract any likely negative effects on

1088 See for instance on this Loewenthal, “The Defense of Objective Justification in the Application of Article 82 EC”, 28(4) World Competition (2005), 461-463.

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competition and consumer welfare in the affected markets, that those gains have been, or are likely to be, brought about as a result of that conduct, that such conduct is necessary for the achievement of those gains in efficiency and that it does not eliminate effective competition, by removing all or most sources of actual or potential competition.”1089 –

The last check concerns the effect on trade of that conduct. As will be discussed below, this check does not have much practical relevance when the other conditions and in particular the geographic impact criterion are already fulfilled.

From a practical point of view, it is not always necessary to go through all the analytical steps identified above. It often suffices to focus on the condition which is unlikely to be fulfilled. For example, if the conduct is clearly not abusive, there is no need to define the relevant market. Conversely, if the firm in question is manifestly not dominant, an examination of the contested conduct becomes redundant. Of course, the enforcement of Article 102 TFEU does not have to wait until after the full effects of the abusive conduct have realized.

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2.2 Public measures and conduct by firms Article 102 TFEU pursues together with the other competition rules discussed in this book the same Treaty objective of undistorted competition. Although Article 102 TFEU also applies to conduct of publicly owned companies, it does not apply to State conduct and public measures. Public conduct that distorts competition may be caught by the Treaty rules on state aid, laid down in Articles 107 and 108 TFEU, or by Article 106 TFEU. These provisions are examined under Parts 5 and 6 below. It should be noted, however, that Article 106 TFEU can be applied in conjunction with Article 102 TFEU, in particular where public measures reinforce dominant positions held by publicly owned firms or by firms enjoying certain exclusive rights or where these rules lead such firms to abuse their dominance.1090 Article 106 TFEU is also relevant where a dominant firm has been entrusted with a mission of general economic interest. As will be discussed in Part 6, Article 106(2) TFEU provides for a general exception excluding the application of Union competition rules in situations where such application would jeopardize the proper fulfilment of that mission.1091

1089 Judgment of 27 March 2012, Post Denmark, C‑209/10, EU:C:2012:172. 1090 See judgment of 17 July 2014, Commission v DEI, C‑553/12 P, EU:C:2014:2083.. 1091 Judgment of 27 April 1994, Almelo, C‑393/92, EU:C:1994:171.

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2.3 Structural control and conduct control 3.350

Although the Merger Regulation and Article 102 TFEU both deal with dominance, they do not apply this concept in the same manner.1092 Regulation 139/2004 imposes a system of a priori or ex ante control of concentrations, i.e. mergers, take-overs and certain joint ventures. It is prospective in nature. It aims to protect the structure of the market and applies before the parties to the concentration actually act together on the market. By contrast, Article 102 TFEU applies to past or ongoing market conduct. It is therefore retrospective in nature. These differences explain why the finding of dominance by the Commission under the Merger Regulation does not necessarily bind the Commission or other administrative or judicial authorities in the context of Article 102 TFEU.1093

2.4 Conduct control and the merger test 3.351

A question which has arisen since the adoption of the new rules on merger control concerns the scope of the concept of dominance. Until 1 May 2004, European merger control prohibited mergers which would create or reinforce a dominant position. It was generally assumed that, although applied differently, the concept of dominance was identical under the merger control rules and under Article 102 TFEU. Since 1 May 2004 the Merger Regulation prohibits mergers which significantly impede effective competition in the common market, in particular as result of the creation or reinforcement of a dominant position. Recital 25 of that Regulation states that this new test was already embodied in the old dominance test and that the modification was made for reasons of legal certainty only. If this is true, logic commands that the significant impediment of effective competition test is also included in the dominance concept of Article 102 TFEU. As will be shown below, this finding could considerably extend the scope of Article 102 TFEU to oligopolies of a non-collusive nature.

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This leads us to focus on the similarities and differences between Articles 101 and 102 TFEU. The provisions are similar in that they both deal with past or ongoing market conduct. They also share some common concepts, such as the concept of undertaking, the notion of internal market and, to a lesser extent, the concept of effect on trade (see Chapter 1). The differences are twofold: the nature of the conduct and the nature of the firms in question. Article 101 EC 1092 Council Regulation 139/2004 on the control of concentrations between undertakings, OJ 2004, L 24/1. 1093 Judgment of 22 March 2000, Coca-Cola v Commission, T‑125/97 and T‑127/97, EU:T:2000:84.

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TFEU concerns collusion between two or more firms. By contrast, Article 102 TFEU regards the conduct, including unilateral conduct, of dominant firms. These differences imply that compliance with Article 101 TFEU does not necessarily shield a firm from the application of Article 102 TFEU and that the inapplicability of Article 102 TFEU does not automatically protect a firm against the application of Article 101 TFEU. It should be noted however that the Notice (paragraph 30) foresees that conduct that is objectively required to achieve certain efficiencies is not considered abusive, if this conduct meets conditions identical to those listed in Article 101(3) TFEU. This means that abusive conduct, in the form of collusive practices within the meaning of Article 101(1) TFEU, that meet the conditions of Article 101(3) TFEU, should no longer be caught by Article 102 TFEU. Paragraph 31 of the Notice recalls the principle of Article 2 of Regulation 1/2003 that the burden to prove that these conditions are fulfilled lies with the dominant firm that invokes the objective justification.

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In the recent CEAHR/Commission case (T-712/14),1094 the General Court clarified that “the Commission did not err in evaluating the likelihood that the refusal to supply at issue would produce anticompetitive effects constituting an abuse within the meaning of Article 102 TFEU by relying, inter alia, on the conditions set out in the case-law relating to Article 101(1) TFEU, which serve to verify that selective distribution or repair systems do not give rise to a restriction of competition which is incompatible with that provision, in particular since it based that evaluation on other factors capable of demonstrating the absence of a risk that all effective competition would be eliminated” (ground 98).

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2.6 Union law and national law: geographic impact Most if not all Member States have adopted competition provisions comparable to Article 102 TFEU. The main difference between the Union text and its national counter-parts concerns the geographic impact of the dominant position and the intra-community effects of the contested conduct. Article 102 TFEU requires that the dominant position is held in the internal market or in a substantial part thereof and that the abusive conduct affects trade between Member States. Since the conduct of a dominant company is likely to have an automatic effect on interstate trade, the concept of effect on interstate trade does not have much practical importance to distinguish dominant positions which are caught by Article 102 TFEU from those governed by comparable provisions of national 1094 Judgment of 23 October 2017, CEAHR v Commission, T‑712/14, EU:T:2017:748.

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law. The condition that the dominant position must be situated on the internal market or a substantial part thereof has more practical relevance. The “substantial part” criterion implies that the dominant position should be significant from a European-wide perspective and therefore excludes purely local situations from the scope of Article 102 TFEU. The Court has held that a dominant position covering a whole Member State necessarily has such significance.1095 Infrastructure which plays an important role in intra-community traffic is also likely to fulfil this condition: e.g. large airports, such as Frankfurt and Paris, ports important for intra-community trade, such as Holyhead, Roscoff, Rölby, or ports which have an important hinterland, such as the port of Genova.1096 When applied to the energy sector, the “substantial part” criterion implies that companies controlling the high voltage grids and/or the gas transport network may be dominant within the meaning of Article 102 TFEU, whereas the conduct of operators of local distribution networks is more likely to be assessed under national law.

2.7 Union law and national law: effect on trade 3.357

Even if a firm is dominant on a substantial part of the internal market, its (abusive) conduct will only be caught by Article 102 TFEU when it affects trade between Member States. Generally speaking, this condition will be met relatively easily: the conduct of dominant firm takes place in an increasingly integrated internal market and will therefore have a nearly automatic effect on trade. This applies in particular to exclusionary practices which are intended to keep competitors out of (national or regional) markets and hence to obstruct further market integration. By contrast, if the dominant firm exploits its dominant position to the detriment of customers on a national market or part thereof, the effect on trade criterion may have some practical relevance. In its Notice on the concept of the effect on trade, the Commission considers that purely local abuses do not have such an effect.1097

1095 Case BRT/SABAM II, 127/73, ECR 1974, p. 51; Case Alsatel, 247/86, ECR 1988, p. 5987. 1096 Case Rodby, OJ 1994, L 55/52; Case Holyhead, 22 Comp. Rep. paragraph 219; Case Morlaix, 25 Comp. Rep., paragraph 43; Case Frankfurt Airport, OJ 1998, L 72/30; Judgment of 12 December 2000, Aéroports de Paris v Commission, T-128/98, ECLI:EU:T:2000:290. 1097 OJ 2004, C 101/81.

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2.8 Union law and national law: substantive differences From a substantive point of view, it should not make much difference if conduct is assessed under Article 102 TFEU or under comparable national law. Article 3 of Regulation 1/2003 which lays down the procedural principles governing both sets of rules ensures consistency in their application and interpretation. If certain conduct is caught by Article 102 TFEU, national courts and authorities must apply Article 102 TFEU when they apply comparable national rules. In addition, the general principles of Union law require that the application of national rules does not lead to approving conduct that is prohibited by Article 102 TFEU.1098 However, Article 3 explicitly authorizes Member States to adopt stricter national rules. In other words, conduct that is not prohibited by Article 102 TFEU may still be caught by national law. This can be useful to tackle abuses by firms which might not be considered dominant under Union law. It follows from recital 8 of Regulation 1/2003 that the authorization for Member States to adopt stricter national provisions concerns in particular rules on the abuse by dominant firms of that position on undertakings dependant on them. Such rules, for example, exist in France.

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2.9 Competition law and sector specific law Article 102 TFEU is Treaty law; i.e. primary law. This means that, in the hierarchy of norms, it will prevail over secondary legislation, such as the Directives adopted by the Council and the European Parliament in the energy field. Although the internal market directives for electricity and gas both require Member States to install regulatory authorities that shall, inter alia, be responsible for ensuring effective competition in the energy markets through a system of ex ante control, Article 102 TFEU will continue to apply alongside the sector specific measures taken by these regulators. In other words, a refusal to give access to a certain infrastructure or the application of non-authorized tariffs may not only be an issue under national rules for the implementation of the two Directives, but also under Article 102 TFEU.

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Similarly, compliance with sector specific rules or instructions does not necessarily shield the network operators from the application of Article 102 TFEU. Article 102 TFEU obviously continues to apply to conduct that is not governed by sector specific rules. Such principles were at the basis of the ruling of the General Court, confirmed by the Court of Justice, in the Deutsche Telekom case. That case concerned a margin squeeze in the telecommunications sector.

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1098 Judgment of 13 February 1969, Wilhelm and Others, 14/68, EU:C:1969:4.

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The fact that the wholesale price charged by Deutsche Telekom was regulated did not prevent it from increasing the retail price and hence from squeezing the margins of its competitors. The General Court considered that Deutsche Telekom could only rely on sector specific rules if these rules had actually imposed both tariffs.1099 It should be noted, however, that the Commission may rely on sector specific rules to assess the expediency of enforcement action in a regulated sector. For example, it follows from paragraph 83 of the Notice that the Commission is unlikely to apply Article 102 TFEU in a refusal to supply case, where sector specific rules already impose such an obligation.

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The Deutsche Telekom saga evidenced the risks of jurisdictional confusion arising from the concurrent application of sector-specific rules and the antitrust laws. This may create legal uncertainty and an increased regulatory burden for firms as it opens new prospects for inconsistent decisions, especially if claimants start to sue competitors before several jurisdictions. On the contrary, consistency in enforcement limits legal uncertainty by reducing the risk of litigation and the resulting costs and delays. This also protects an operator against competitors’ strategic use of the Court system. This is crucial when it comes to sink large investments and thus largely relates to security of supply in energy. The judgment also once again raised the question of the allocation of regulatory powers in liberalized industries as a comparative perspective shows that sector-specific regulation and antitrust policy have their respective strength and weaknesses. Sector-specific regulators tend to have more discretionary powers and courts more easily defer to their decisions due to their expertise. The ex ante nature of their actions also increases legal certainty, which tend to make new entrants favour regulatory over antitrust oversight. The level of industry expertise, a priori superior in regulatory authorities, is also an important factor of differentiation. National regulators nonetheless tend to face more pressure from political powers and industry.

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Finally, the relation between sector specific rules and competition rules may be different in a purely national context, in which Article 102 TFEU does not apply. If the Treaty does not apply, the question of the hierarchy of norms is determined by national law. Or, to put it differently, the application of sector specific rules in a purely national context may imply that national competition rules cease to apply.1100 1099 Judgment of 10 April 2008, Deutsche Telekom v Commission, T‑271/03, EU:T:2008:101, grounds 85 to 90, confirmed on appeal in judgment of 14 October 2010, Deutsche Telekom v Commission, C‑280/08 P, EU:C:2010:603. 1100 In Trinko, the US Supreme Court considered that a refusal to grant access to telecommunications infrastructure was not contrary to Section 2 of the Sherman Act, although the same refusal had been declared

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3.

The existence of a dominant position

3.1 Concept As indicated above, the concept of dominant position within the meaning of Article 102 TFEU points to such a degree of market power that the firms in question can act without taking into account their competitors, purchasers or suppliers. Ever since the Court’s judgment in United Brands, the concept has been defined as “a position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by giving it the power to behave to an appreciable extent independently of its competitors”.1101

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The concept of independence suggests that the firm in question has the ability to price above the competitive level or reduce output without losing turnover. However, the Court notes that the existence of fierce price competition, which normally prevents a firm from charging higher prices, is not necessarily incompatible with the concept of independence underlying Article 102 TFEU. Nor are short run losses incompatible with the concept of dominance.

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3.1.1 Dominance, a special responsibility It should be repeated that Article 102 TFEU does not prohibit dominance, but regulates the conduct of dominant firms. The finding of dominance nevertheless implies a considerable burden for the firm in question. According to the Court of Justice, dominant firms bear a “special responsibility, not to allow its conduct to impair undistorted competition on the common market”.1102 This responsibility considerably limits their commercial freedom: commercial conduct that is allowed for non-dominant firms is not tolerated for dominant firms. In particular, the special responsibility of a dominant undertaking considerably curtails its possibilities to price discriminate and to maintain exclusive business relations. contrary to sector specific telecommunications rules. Verizon Communication v. Trinko, 13.01.2004, No. 02/682, 540 US 2004. For more on this see Hauteclocque, Marty and Pillot, ‘The Essential Facilities Doctrine in European Competition Policy: The Case of the Energy Markets’, in Glachant, Finon and Hauteclocque (eds.), Competition, Contracts and Electricity Markets: A New Perspective, Cheltenham: Edward Elgar, 2011, 259-291. 1101 Judgment of 14 February 1978, United Brands and United Brands Continentaal v Commission, 27/76, EU:C:1978:22. 1102 Judgment of 9 November 1983, Nederlandsche Banden-Industrie-Michelin v Commission, 322/81, EU:C:1983:313.

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3.1.2 Dominant position and relevant market 3.367

Whatever its duration, dominance necessarily concerns a market: Article 102 TFEU requires a firm to hold, individually or together with other firms, a dominant position on a given market, the geographical dimension of which should at least cover a substantial part of the internal market. This means that the definition of the relevant market is a necessary analytical step in any abuse of dominance case. For this purpose, the 1997 Notice on the definition of the relevant market lays down the tools which focus on the cross-elasticity of demand of the products or services under scrutiny.1103 The relevant product market roughly corresponds to the circle of products or services, which from the consumer’s point of view satisfy the same or similar demand and, hence, for which the prices interact. In order to define the relevant geographical market, the same exercise of measuring price interaction has to be carried out from a geographical point of view. For a detailed examination of the relevant market, see Part 2 above.

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Even so, the price interaction or cross elasticity of demand test used to determine the relevant market may be flawed where the prevailing prices used to carry out that test have already been affected by the supra-competitive prices of the dominant firm. In other words, where a dominant firm has already increased its prices above competitive levels, those prices do not offer the proper benchmark for market definition purposes. The appropriate benchmark to measure crosselasticity of demand should be the competitive price. Otherwise, the market may be defined too widely, as it might include products or geographic areas, which only impose a competitive constraint due to the fact that prices have already been elevated above competitive levels.1104

3.2 Horizontal dominance 3.369

Although the concept of dominance is identical in all circumstances, the factual situations to which it applies can differ. Several types of dominance can be distinguished. Firstly, one can distinguish horizontal from vertical dominance. Horizontal dominance implies that a firm is dominant in respect of its competitors on the same relevant market. Horizontal cases often raise complicated issues: the relevant market needs to be properly defined and the relative strength of the players on that market needs to be measured.

1103 Notice on definition of relevant market, OJ 1997, C 372/5. 1104 See Elsam case, Danish Competition Appeals Court, 15 November 2006, discussed below.

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These difficulties do not arise, however, if the firm or firms under scrutiny hold exclusive rights or statutory monopolies for certain activities, such as the supply of electricity or gas to non-eligible customers or non-liberalized mail delivery.

3.3 Vertical dominance Vertical dominance is easier to establish than horizontal dominance. Vertical dominance essentially concerns the after-markets or downstream markets of the market dominated by the firm in question. For example, a firm which makes a unique type of equipment is likely to have a dominant position for the market for spare parts of that equipment.1105 Similarly in many cases a firm supplying the main equipment is likely to be dominant on the market for consumables used in that equipment.1106 The relative ease to define narrow vertical markets and the fact that in vertical cases the narrowly defined market is nearly always dominated by the firm in question explain why the majority of abuse of dominance cases concern vertical dominance.

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3.3.1 Essential facilities Vertical dominance, or the ability to control downstream markets, is likely to arise in situations where the firm in question controls a so-called “essential facility”. These are mostly infrastructures, which cannot be duplicated for technical, environmental or economic reasons and to which access is required for those wanting to compete on downstream markets. High voltage electricity grids or gas transport networks are usually considered as essential facilities. Outside the energy sector, various examples can be found, such as airports (Frankfurt), maritime ports (Genova) or the so-called local loop in the telecommunications business.1107

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Originally coming from the US case law and scholarship, the essential facilities doctrine has proven to be a controversial concept. Under certain circumstances, the essential facilities doctrine holds, as a first approximation, that a dominant firm may incur antitrust liability if it does not provide access to competitors on a non-discriminatory basis to one of its assets (tangible or intangible), especially when sharing is feasible and when the proof is provided that competitors cannot

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1105 Judgment of 20 February 1979, Buitoni, 122/78, EU:C:1979:43. 1106 Judgment of 20 February 1979, Buitoni, 122/78, EU:C:1979:43, judgment of 12 December 1991, Hilti v Commission, T‑30/89, EU:T:1991:70. 1107 Case IV/34.801 FAG – Flughafen Frankfurt/Main AG, OJ 1998, L 72/30; judgment of 10 December 1991, Merci convenzionali Porto di Genova, C‑179/90, EU:C:1991:464; Case COMP/C-1/37.451, 37.578, 37.579, Deutsche Telekom AG, OJ 2003, L 263/9.

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obtain or create an alternative facility on their own.1108 Its application may thus lead to compel a dominant firm to grant access to one of its assets if necessary to ensure effective competition.1109

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As in the US, the Commission and Union Courts also used essential facilities principles without clearly acknowledging them,1110 especially in cases involving intellectual properties and network industries. Indeed, both for physical infrastructures and intellectual property rights, the essential facilities doctrine was used as a means to stimulate (or even create) an effective competition between firms. The European acceptance of the essential facilities doctrine is coherent with most of the case law on unilateral refusal to deal. For example, the Commercial Solvent judgment showed that, in some circumstances, the refusal to supply a competitor with an essential input could be considered a violation of Article 102 TFEU. The essential facilities doctrine and refusal to deal cases in general do not have an autonomous legal basis in the EU Treaty. These cases will therefore have to be qualified according to the traditional case law under Art 102 TFEU.1111

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An interesting dimension of this line of case law is the underlying theory of competition it results from, namely what is the antitrust authority’s conception of what competition is deemed to achieve and what is the responsibility of the dominant firm vis à vis the competitive process. The debates surrounding the application of the essential facilities doctrine are characteristic of a classical trade-off in antitrust policy between static and dynamic efficiency. An extensive application of the essential facilities doctrine may indeed be analyzed as a preference given to access-based policies, which may enhance consumer welfare in the short term by facilitating entry, over policies supporting infrastructure investment and thus longer-term efficiency criteria. However, a well-balanced competition policy must also consider that the monopolistic position of an infrastructure owner is, in a Schumpeterian perspective, its first incentive to invest. Even if it then charges supra-competitive prices, the initial investment might still be favourable to long term welfare. Besides, by refraining to mandate access, a competition authority increases incentives to invest for both the asset owner and its competitors. 1108 Waller and Frischmann, “Revitalizing Essential Facilities”, 75(1) The Antitrust Law Journal (2008), 1-65. 1109 Cotter, Essential Facilities Doctrine, Legal Studies Research Paper 08-18 (2008), University of Minnesota Law School. 1110 Géradin, ‘Limiting the Scope of Article 82 of the EC Treaty: What can the EU Learn from the US Supreme Court’s Judgment in Trinko in the Wake of Microsoft, IMS and Deutsche Telekom?’, 41(6) Common Market Law Review (2004), 1519-1553. 1111 Cowen, “The Essential Facilities Doctrine in EC Competition Law: Towards a “Matrix Infrastructure”, in Hawk (ed.), Annual Proceedings of the Fordham Corporate Law Institute 1995, (Sweet & Maxwell, 1996); Doherty, “Just What Are Essential Facilities?”, 38 Common Market Law Review (2001), 397-436.

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US authorities tend to define competition in terms of market performance and contestable competition. In the later sense, a market would be considered competitive as long as prices approach marginal costs. Consequently, a competitive market is not automatically characterized by a large number of competing firms as long as it remains contestable, i.e. that there is no undue barrier to entry and exit. In some specific markets, artificially creating a large number of firms may even harm consumer welfare and worsen economic performance. For instance, in technological markets, a first-mover may serve for a period of time the whole market and need to charge supra-competitive prices in order to recoup its previous investment. Therefore, the competitive process can lead to a market structure in which only one firm can serve all the market.

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On the contrary, the Union Courts has long recognized that a dominant firm has the special responsibility for not impairing a genuine and undistorted competition in the common market. Because of its particular position on the market, a dominant firm is not allowed to adopt some strategies considered acceptable from other competitors as their implementation could irremediably compromise the chances of competitors to succeed. Here, the benefits from competition flow directly from the atomistic structure of the market. In this framework, a dominant firm controlling an essential facility may thus be considered as a “critical operator” 1112 whose strategy could definitively alter the market structure and thus limit the gains of a competitive process. Such a view of the competitive process naturally justifies restricting the strategic autonomy of dominant firms. According to the Hoffmann-Laroche decision for instance, a dominant firm must refrain from doing anything that would hinder “the maintenance of the degree of competition still existing in the market”. European antitrust authorities thus impose a special responsibility to preserve the competitive structure of the market on dominant firms.

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This traditional position on dominant firms seems to apply in full when it comes to essential facilities. In addition, the fact that sector-specific regulation already applies does not restrain the use of the antitrust laws. In the current context of European energy markets, the imperfect unbundling achieved by the liberalization Directives, the enduring collective dominance of historical incumbents and the increasing use of the commitment procedure seem to create the perfect conditions for a particularly strong application of the essential facilities doctrine under the EU antitrust rules in the energy sector.

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1112 Frison-Roche, “Proposition pour une Notion: l’Opérateur Crucial”, Recueil Dalloz (2006).

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3.3.1.1 Essential facilities: infrastructure The GVG decision, for instance, is particularly interesting here. The Georg Verkehrsorganisation GmbH is a German railways firm, which wanted to provide international passenger freight from Germany to Milan. It was thus necessary for GVG to access the Ferrovie dello Stato network and to obtain traction to move the train (e.g. locomotives and staff ) on the Italian network. As the Ferrovie dello Stato refused to contract with GVG, the latter lodged a complaint before the Commission under Article 102 EC. The Commission found that: (i) GVG had no alternative than using the Ferrovie dello Stato network; (ii) the Ferrovie dello Stato refusal to grant access was not justified by objective reasons; (iii) the consequence of the FS refusal was to eliminate all competition. It is also worth noticing that the Commission even went on to apply the essential facilities doctrine to locomotives and staff, thereby going beyond the application of the concept to the non duplicable infrastructure. 3.3.1.2 Essential facilities: information

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The concept of essential facility does not always relate to infrastructure. It can also relate to certain information, which is necessary to be active on downstream markets, such as television listings or telephone subscriber data for companies wanting to publish, respectively, television guides or telephone directories. The issue of subscriber data can affect all industries, including the energy sector. Customer information may be an essential input for those who want to make studies about market trends in that sector. Similarly, information held by grid operators concerning connections, customer switching and customer profiles also has a chance of being considered as essential information for companies active downstream.

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This was for instance the position of the French competition authority in its interim decision of 9 September 2014 (Décision n°14-MC-02) where it ordered GDF to grant access on fair and non-discriminatory terms to its regulated customer database within 3 months. Direct Energie, a new entrant in the French electricity and gas markets was complaining about several anti-competitive abuses by GDF, in particular anti-competitive tying, confusion between regulated and non-regulated activities, unfair commercial practices and anticompetitive use of its regulated customer database.1113 The French competi1113 In another case, the French competition authority also found that EDF had given a non-replicable competitive advantage to its subsidiary providing solar panels by letting that subsidiary use its brand image, thereby creating confusion for the consumer (Decision n° 13 D20 of 17 december 2013).

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tion authority considered that this database was used by GDF to target past and existing regulated customers and offer them free market offers. GDF was also using different ‘win back’ strategies to regain former customers. The French competition authorities considered that this database could not be replicated at reasonable costs and under a reasonable timeframe. Given the state of market opening, characterised by a very low rate of customer switching, the use of this database was likely to grant GDF an unfair advantage and create exclusionary effects.1114 At the time, there are only few cases relating to how data can confer an unfair advantage and how its use can amount to a breach of competition rules. These cases mostly relate to how a subsidiary could use the contact details of the mother company’s customers, which is, in the end, follow a fairly standard competition law approach. Cases concerning data driven tech companies such as Amazon or manufacturers that bundle product and energy like car manufacturers are yet to come.

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3.3.1.3 The Bronner case It should be noted, however, that mere economic dependence or the inability to invest does not automatically give rise to an essential facility.

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In the European Union, the Bronner1115 case is the landmark decision. In that case, a small Austrian newspaper publisher requested access to the newspaper distribution system of its main competitor, Mediaprint. Bronner argued that its small output did not justify the putting into place of its own delivery system and that access to Mediaprint’s network was therefore indispensable. The Court did not accept this argument. It held that Bronner had alternative means to distribute its newspapers, such as mail delivery, shops and kiosks and that the absence of an economic justification for Bronner to invest in its own distribution network did not constitute an objective obstacle for the creation of a parallel network. It results from this case that networks or other inputs can be regarded as essential only if they cannot be duplicated for objective reasons. The case law therefore defined three main conditions for the essential facilities doctrine to apply: (i) access must be essential for carrying out the applicant’s business; (ii)

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1114 Generally, dominant companies should not abuse their privileged position towards end customers on regulated segments to create distortions on non-regulated markets. See for instance on this the decision of the Spanish Competition Commission of 20 September 2011 in Case n° S/0089/08 concerning Union Fenosa and Hidrocantabrico. 1115 Judgment of 26 November 1998, Bronner, C‑7/97, EU:C:1998:569.

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access must be denied without objective justification; (iii) the refusal must prevent any competition in related markets.

3.3.2 Essential facilities in the energy sector 3.384

In the energy sector and in network industries in general, the essential facilities doctrine has rarely been used explicitly but a broad range of legislative acts and antitrust decisions have been inspired by related concepts. The development of the essential facilities doctrine in Europe has largely coincided with the liberalization of network industries and there is indeed no doubt that, due to their asserted natural monopoly characteristics, the Commission and its officials consider energy networks, including interconnectors, as essential facilities whose access is required to allow effective competition in related markets. In general, it is not economical to duplicate these installations. Still, gas pipelines are not necessarily natural monopolies. Unlike electricity streams which can not be directed, gas shipments can be steered. For long distance international gas transports, shippers can choose between various transport routes. Recital 7 of Regulation 1775/2005 on conditions for access to the natural gas transmission networks, explicitly acknowledges the existence of this pipe-to-pipe competition and the need to take account of this competition when determining access tariffs. Firms owning non-competing networks control access to the downstream market for the supply of electricity or gas in the areas covered by these networks. It follows from the Commission’s decisional practice that electricity and gas networks, as well as interconnectors, can be qualified as essential facilities, which fall within the scope of Article 102 TFEU.1116

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The principles of the essential facilities doctrine in the European legislation are reflected in the concept of third-party access, which refers to a cluster of issues that encompass provisions on unbundling, non-discriminatory access to transmission and distribution grids as well as balancing services. Mandating access to networks has been one of the most important competition issues in energy since the beginning of liberalization and the commitments of E.ON and RWE to divest their transmission networks showed that the Commission was putting pressure through antitrust to support the objectives of the sector-specific legislation. 1116 See COMP/39.402, RWE gas foreclosure, OJ 2008, C 310/23; Case COMP/39.351, Swedish Interconnectors, OJ 2010, C 142/28; Case COMP/39.315, ENI, OJ 2010, C 352/8. See also Marathon settlements, latest press release IP/04/573, 30 April 2004; Gas and electricity interconnectors UK/Belgium, IP/02/401, 13 March 2002 and UK/France, IP/01/341, 12 March 2001.

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Furthermore, official precedents can be found in national competition policy, for instance in German law, where the Federal Cartel Office has an important role to play in supervising access and pricing conditions applied by operators of distribution and transport grids.1117 In a certain sense the Cartel Office has filled the regulatory lacuna before a sector-specific regulator was created. Similarly, the Dutch competition agency (NMa) intervened in 1998 to fine the then Dutch high voltage grid operator for refusing to grant access to Norsk Hydro.1118 At that time no sector specific regulator existed. The complementary role of competition law is also illustrated by an intervention of the NMa in an area not covered by sector specific regulation: the purchase prices paid by Essent to small local producers.1119 Another example is offered by the intervention of OFGEM against the anti-competitive conditions of electricity connection services imposed by SP Manweb, a wholly owned subsidiary of Scottish Power. SP Manweb discriminated between Scottish Power and other suppliers as regards the timing and accuracy of connection information.1120

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Although the Commission and national authorities have held that gas storage facilities constitute separate relevant markets, gas storage facilities do not necessarily constitute essential facilities.1121 It is submitted that a gas storage facility only gives rise to dominance within the meaning of Article 102 TFEU if the storage facility is the only facility or largest facility in its service area. This area roughly corresponds to a geographical circle with a radius of 200 to 250 km around that facility. If the facility under scrutiny faces competition in this service area and if it is therefore compelled to price competitively, it cannot be considered dominant for the purposes of Article 102 TFEU.

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3.4 Individual and collective dominance Article 102 TFEU not only concerns dominant positions held by a single undertaking, such as the position held by the owner of an essential facility, but also dominant positions which one firm holds together with other firms. This implies that Article 102 TFEU can be applied to unilateral conduct of each of the collectively dominant firms. One of the first cases in which the Court of Justice 1117 See e.g. for distribution Stadwerke Mainz, FCO 9.10.2003, procedure against RWE Net, press release 21.02.2003. The Bundesgerichtshof further specified the conditions for ex post price control in its ruling of 7 February 2006, Strom II plus, KZR 8/05. 1118 SEP v. NMa, 03/76, CBB, 21 June 2004. 1119 Press release NMa, 30 September 2004. 1120 OFGEM, 27 October 2005, 234/05a, SP Manweb. 1121 Case COMP/M.3410, Total/Gaz de France, OJ 2005, C 4/3.

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dealt with the issue of collective dominance was the Almelo case, in the electricity sector. The Court ruled in that case that “Article 86 [now Article 102 TFEU] of the Treaty precludes the application, by a regional electricity distributor where it belongs to a group of undertakings occupying a collective dominant position in a substantial part of the common market, of an exclusive purchasing clause contained in the general conditions of sale which prohibits a local distributor from importing electricity for public supply purposes and which, in view of its economic and legal context, affects trade between Member States”. For such collective dominance to exist the Court considered that “the undertakings in the group must be linked in such a way that they adopt the same conduct on the market”.1122

3.4.1 Collective dominance: groups of undertakings 3.389

The case law has gradually specified what should be understood as a group of undertakings to which the concept of collective dominance can apply. Before explaining this concept, it is important to recall the concept of “undertaking” itself, which refers to any entity exercising an economic activity and controlled by the same shareholders. This notion implies that the concept of undertaking also encompasses holdings, concerns or groups of undertakings. A group of companies is considered to be one undertaking for the purposes of Article 102 TFEU if these undertakings are ultimately controlled by the same shareholders. In Almelo, however, the Court of Justice used the term “group” to refer to a different situation, i.e. a scenario where several independent undertakings act together, even if they are not controlled by the same shareholders. In other words, the concept of collective dominance includes situations where several independent groups act as a group.

3.4.2 Collective dominance: economic and legal links 3.390

Such a situation may arise if the undertakings in question have economic or legal relations which make it plausible that they will act in a similar manner. In the maritime sector, for example, conference or consortia agreements may imply that the parties to that agreement act in common vis-à-vis third parties.1123 The General Court specified in this respect that competition between the members of the conference or the consortium is not necessarily incompatible with collective dominance.1124 A close knit of minority shareholdings and/or various li1122 Judgment of 27 April 1994, Almelo, C‑393/92, EU:C:1994:171, ground 42. 1123 Judgment of 8 October 1996, Compagnie maritime belge transports and Others v Commission, T‑24/93 to T‑26/93 and T‑28/93, EU:T:1996:139. 1124 Judgment of 30 September 2003, Atlantic Container Line and Others v Commission, T‑191/98 and T‑212/98 to T‑214/98, EU:T:2003:245, grounds 653, 695 and 753.

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cense and/or supply agreements may also give rise to a situation in which legally independent undertakings will make a common front.1125 However, collective dominance can also arise when the undertakings in question do not have such bonds and do not contact each other. Indeed, the structure of the relevant market may be such that some or all undertakings operating on that market each have an individual interest to align their market conduct with one another.1126 This scenario of tacit collusion is likely to occur in tight oligopolies with a limited amount of players selling homogenous products or services in a relatively transparent market which can not easily be entered by newcomers. In its horizontal merger guidelines, the Commission has clarified the conditions for such tacit collusion. One important element to underline concerns the probability of immediate retaliation, if one of the oligopolists decides to capture market share by lowering prices. A situation of collective dominance can only prevail in case of collective deterrence and collective deterrence implies the possibility of immediate retaliation.

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Electricity and gas markets appear at first sight likely candidates for collective dominance of the collusive type: the products are homogeneous, the markets are relatively concentrated and transparent for suppliers. For example, in case Grupo Vilar/ENBW/Hidroelectrica del Cantabrico1127 the Commission considered that the Spanish electricity suppliers were collectively dominant. Similarly, the Commission considered in RWE/Essent1128 that the German electricity generation and wholesale market are characterized by a collective dominant position of RWE and E.ON.

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3.4.3 Collective dominance and the significant impediment to effective competition test It follows from the previous paragraph that oligopolies characterized by tacit collusion can give rise to collective dominance and, hence, that the conduct of each of the oligopolists can be caught by Article 102 TFEU.1129 Since the entry into force of the second Merger Regulation, in May 2004, it can be argued that 1125 Judgment of 10 March 1992, SIV and Others v Commission, T‑68/89, T‑77/89 and T‑78/89, EU:T:1992:38; judgment of 7 October 1999, Irish Sugar v Commission, T‑228/97, EU:T:1999:246. 1126 Judgment of 25 March 1999, Gencor v Commission, T‑102/96, EU:T:1999:65; judgment of 8 October 1996, Compagnie maritime belge transports and Others v Commission, T‑24/93 to T‑26/93 and T‑28/93, EU:T:1996:139. 1127 Case COMP/M.2434, Grupo Villar Mir/EnBW/Hidroeléctrica del Cantábrico, OJ 2004, L 48/86. 1128 Case COMP/M.5467, RWE/Essent, OJ 2009, C 222/1. 1129 Judgment of 7 October 1999, Irish Sugar v Commission, T‑228/97, EU:T:1999:246.

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the concept of collective dominance also includes other types of oligopolies, in which the market power of the oligopolists does not result from its collusive nature, but from other circumstances. Reference is made in this respect to Recital 25 and Article 2 of the Merger Regulation, which suggest that the concept of dominance encompasses non-collusive oligopolies. The Commission’s horizontal merger guidelines indicate that undertakings in those oligopolies can have market power through product differentiation in the sense that customers appreciate the products or services of these undertakings in a different manner. Although the goods and services belong technically speaking to the same relevant market, customer preference for differentiated goods grants the oligopolist a certain power over price. In 2003 the NMa seems to have applied such an oligopoly test when conditionally clearing the acquisition of Reliant’s Dutch activities by Nuon. Although the decision does not refer to the issue of close substitutes, the analysis directly focuses on the ability of the merged entity and other players in the electricity wholesale markets to increase prices above pre-merger levels. This decision was annulled on appeal, because the appeal courts did not consider that the quantitative evidence put forward by the NMa sufficed to show that the acquisition would create or reinforce non-collusive oligopolies.1130 This outcome could be interpreted in a sense that non-collusive oligopolies do not constitute collective dominant positions within the meaning of Article 102 TFEU. In 2008 the Commission also assessed possible capacity withdrawal strategies in the context of the EDF/BE merger.1131 The merger could enable the new entity to embark in customer (EDF disappearing as a customer) and input foreclosure (BE disappearing as a supplier) tactics, hence reducing liquidity on the British wholesale market. More generally, the Commission was concerned about the liquidity reducing effects of the internalisation of BE sales within the new EDF/ BE group. The theory of harm underlying these concerns is not entirely clear. It seems a mix of vertical and horizontal concerns. One thing is clear however: the combined market share of the new BE/EDF (max. 30%) remained below any dominance threshold. Nor where there any indications of collusive oligopolies on the British wholesale market. It must therefore be concluded that the conduct in which the BE/EDF entity could have embarked, absent the remedies, would not have been caught by Article 102 TFEU.

1130 NMa, 8 December 2003, 3386. See also CBB, 29 November 2006, AZ3274. 1131 Case COMP/M.5224, EDF/British Energy, OJ 2009, C 38/8.

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This finding also raises the question as to the theory of harm upon which the Commission relied when it intervened against E.ON’s conduct on the German wholesale market.1132 In that case the Commission accused E.ON of withdrawing short-term capacity so as to let the market switch for more expensive generation capacity along the merit curve to meet demand. This led to higher prices on the spot market and was seen as a price abuse. Now, the application of Article 102 TFEU requires the existence of a dominant position. This condition was apparently met since E.ON is supposed to be collectively dominant with RWE. Is this collective dominance of the collusive type? If so, E.ON’s capacity withdrawing strategy could only work if RWE decided not to obstruct by releasing additional capacity. Yet, the Commission did not bring a case against RWE. One can only speculate as to the reasons for this selective enforcement. It can be that the Commission considered that the active capacity withdrawal by E.ON was abusive, but that this was not the case for RWE’s passive reaction to that withdrawal. It can also be that the Commission case was relying on new theories of harm along the lines of those underlying its assessment in the EDF/BE case.

3.5 Indicators of dominance The legally required proof to establish dominance will vary in function of the type of dominance. Whereas establishing horizontal dominance can be a difficult exercise, especially if the dominance in question is collective in nature, vertical dominance is easier to demonstrate, in particular where essential facilities are at stake. The firm controlling that facility is by its very essence dominant. Dominance is also easy to establish when the firm under scrutiny enjoys exclusive rights, such as a legal monopoly to supply energy to captive customers. The firm holding such rights has a statutory monopoly and is automatically dominant for the activities covered by that monopoly. It should be noted, however, that intellectual property rights do not by themselves constitute proof of dominance: an exclusive right for a certain good does not grant the holder of that right market power if there are many other goods which are able to satisfy the same customer demand.1133

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The Notice highlights three factors which the Commission will take into consideration when assessing dominance. These factors refer to the constraints under which the firm under scrutiny must operate. The first category of constraints relates to the pressure exerted by existing suppliers and is reflected prima facie in the market shares of the firms concerned. The second constraint refers to po-

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1132 Case COMP/39.388, German electricity wholesale market, OJ 2009, C 36/8. 1133 Judgment of 29 February 1968, Parke, Davis and Co., 24/67, EU:C:1968:11.

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tential competition, i.e. the competition that could occur if new firms enter the market or existing firms expand their output. The third and last constraint refers to the countervailing or bargaining power of the purchasers facing the investigated firm.

3.5.1 Market share 3.398

In the absence of special scenarios, such as the presence of essential facilities or statutory monopolies, market share remains by far the most important tool in assessing whether a firm is dominant. The Court of Justice has systematically held that very large market shares constitute by themselves proof of dominance.1134 The Court’s position on market shares as evidence of dominance has recently been summarized by the Commission in paragraph 435 of its Microsoft decision: “Very large market shares, of over 50%, are considered in themselves, and but for exceptional circumstances, evidence of the existence of a dominant position. Market shares between 70% and 80% have been held to warrant such a presumption of dominance. Microsoft, with its market shares of over 90%, occupies almost the whole market. It therefore approaches a position of complete monopoly, and can be said to hold an overwhelmingly dominant position”.1135 In its TeliaSonera ruling,1136 the Court of Justice stated that “the [...] application of [competition rules] cannot depend on whether the market concerned has already reached a certain level of maturity. Particularly in a rapidly growing market, Article 102 TFEU requires action as quickly as possible, to prevent the formation and consolidation in that market of a competitive structure distorted by the abusive strategy of an undertaking”.

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These percentages are rough indications of both individual and collective dominance.1137 It is not possible to indicate with mathematical precision at which level a market share becomes proof of dominance.1138 Everything will depend on the specific circumstances of the case. As a rule of thumb it can be said that a market share below 25% is clearly insufficient to conclude that a firm is dominant. In United Brands, the Court of Justice also seemed to suggest that no dominance is likely to arise below 40%.1139 The Notice also states dominance is 1134 Judgment of 13 February 1979, Hoffmann-La Roche v Commission, 85/76, EU:C:1979:36; judgment of 3 July 1991, AKZO v Commission, C‑62/86, EU:C:1991:286. 1135 Case COMP/C-3/37.792, Microsoft, OJ 2007, L 32/23. 1136 Judgment of 17 February 2011, TeliaSonera, C‑52/09, EU:C:2011:83. 1137 Judgment of 30 September 2003, Atlantic Container Line and Others v Commission, T‑191/98 and T‑212/98 to T‑214/98, EU:T:2003:245, grounds 932 and 931. 1138 Market shares can be calculated in volume or value terms. The Commission attaches more importance to the latter. See Notice on relevant market, OJ 1997, C 372/5. 1139 Judgment of 14 February 1978, United Brands and United Brands Continentaal v Commission, 27/76,

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unlikely to occur below that percentage. However, In Akzo, the Court referred to 50%, which, as the Commission stated in Microsoft, can by itself be seen as evidence of dominance.1140

3.5.2 Size and importance of competitors One obvious element to take into account when relying on these percentages concerns the position of competing firms. A firm with a 40% market share will not be in a position to act independently of its competitors, if these competitors have market shares of comparable magnitude or if they otherwise exert pressure on the larger firm. If such countervailing competitive forces exclude individual dominance, they are not necessarily incompatible with collective dominance. Nor will a firm with a market share of 40% be in a position to behave independently of its customers, if demand consists of only a few customers.1141 It should be noted in this context that dominance can also occur on the purchasing side of the market and that purchasing power can occur at market share levels lower than 40%.1142

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3.5.3 Stability of market share and price wars It can generally be said that the capability of a firm to maintain high market shares during a prolonged duration is an important indication of its dominance, even if the dominant firm has had to face occasional price wars. Nor is a temporary decline in market shares, which are large in themselves, incompatible with the concept of dominance.1143 The ability to sustain high market shares and to keep potential competition out may indeed be indicative of a firm’s strength, although it would be paradoxical, to say the least, to condemn a firm which is involved in price wars, of imposing excessive prices on its customers.1144 Predatory pricing practices are more likely to occur in such a scenario.1145

3.401

3.6 Temporary dominance Even so, dominance can also occur for a relatively short duration, especially in electricity markets. The inability to store electricity and the inelasticity of deEU:C:1978:22. Judgment of 3 July 1991, AKZO v Commission, C‑62/86, EU:C:1991:286. Judgment of 13 February 1979, Hoffmann-La Roche v Commission, 85/76, EU:C:1979:36, ground 35. See Case No IV/M.1221, Rewe/Meinl (OJ 1999, L 274/1), where dominance was found at 35%. Judgment of 30 January 2007, France Télécom v Commission, T‑340/03, EU:T:2007:22, ground 104. See Judgment of 14 February 1978, United Brands and United Brands Continentaal v Commission, 27/76, EU:C:1978:22. 1145 Judgment of 3 July 1991, AKZO v Commission, C‑62/86, EU:C:1991:286.

1140 1141 1142 1143 1144

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mand, can grant generators temporary dominance in peak periods. For example, on 7 July 2004, the Spanish Competition Tribunal ruled that three Spanish generators had charged excessive prices and, hence, abused the dominant position which each of them temporarily held in its main area of activities, because of exceptional congestion problems on the Spanish high voltage grid, which lasted only three days.1146

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It is uncertain whether other authorities and in particular the Commission shares the view that such momentary positions suffice to trigger the application of Article 102 TFEU. Price hikes are not an uncommon feature in the electricity industry. Even smaller players may try to exploit momentary situations. This does not imply however that they have the ability to behave independently or price above the competitive level if longer periods are considered. In the future, it is likely that such cases will be pursued under the REMIT framework.

3.7 Potential competition and barriers to entry 3.404

The above mentioned Spanish case is illustrative of the method of dealing with potential competition and market entry. In general, firms can be considered to be dominant under Article 102 TFEU or comparable provisions of national law, if they act without competitive constraints during a certain period and if this time span is sufficiently long to allow them to abuse this position without, as a result being disciplined by customers, suppliers or competitors. Potential competition is not taken into consideration if it comes too late to sanction the conduct of the firm under scrutiny.1147

3.405

Market entry arguments are therefore not easy to uphold in dominance cases, unless it can be shown that market entry is immediate or that it can cause, at a later stage, irreparable harm to the firm that is supposed to have abused its dominant position.1148

1146 Empresas electricas, Tribunal de Defensa de la Competencia, 552/02, 7 July 2004. 1147 See an indication in that sense, judgment of 6 October 1994, Tetra Pak v Commission, T‑83/91, EU:T:1994:246, ground 69 and judgment of 30 January 2007, France Télécom v Commission, T‑340/03, EU:T:2007:22, ground 111. 1148 See also judgment of 30 September 2003, Atlantic Container Line and Others v Commission, T‑191/98 and T‑212/98 to T‑214/98, EU:T:2003:245.

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3.8 Barriers to entry In fact, the absence of potential competition is considered to be an additional indicator of a firm’s dominance. Such an absence will usually result from the difficulties for other companies to enter the market in question. The case law on Article 102 TFEU is not very developed in this respect.

3.406

The Notice lists a series of factors that can be considered as entry barriers: economies of scale, privileged access to essential inputs or natural resources, access to distribution networks, network effects and switching costs. Importantly, it also confirms that the contested conduct itself can create a barrier to entry. This is the case for example where the firm has concluded long term (exclusivity) contracts with large customers or with suppliers of essential inputs. It can be assumed that barriers to entry to power generation and gas exploration are high, but that access to supply markets is fairly easy.1149 The question of barriers to entry is to a large extent academic for network operations, because they are generally considered to be natural monopolies or rephrased in competition law terms as essential facilities (see above).

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3.9 Goodwill, trade marks and vertical integration In its case law, the Court of Justice has listed all sorts of other factors that can be used as additional indicators of dominance. Most of these factors relate to the performance, such as its technological lead or its well developed distribution network, or organization of the firm under scrutiny, such as its vertical integration. A few of these indicators are worth mentioning.

3.409

The first indicator concerns trade marks and goodwill. In recently liberalized markets trade marks and goodwill may have an important influence on switching behaviour. Competition authorities are therefore likely to pay attention to recently unbundled entities. For example, one of the conditions imposed by the Belgian Competition Council on Electrabel for the approval of its acquisition of municipal supply business concerned a clear separation between the logos, trade marks, business premises and call centres of grid and supply operations.1150 The sector inquiry report also lists similar issues, including integrated IT sys-

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1149 Compare Case COMP/M.1853, EDF/EnBW, OJ 2002, L 59/1 and Eneco/Remu, NMa 3282 of 25 February 2003. 1150 Decisions of Competition Council of 4 July 2003 in ECS. See also the EDF Solar Panel case of 2018 where EDF was found to abuse its dominant position by, inter alia, allowing its subsidiary to use the EDF logo, creating confusion in the minds of consumers.

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tems and joint personal policies, as elements that may reinforce the position of established players.

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The second indicator concerns vertical integration. In United Brands the Court of Justice held that the vertical integration of United Brands, in particular the possession of its own banana fleet, gave it a competitive advantage over its competitors. As spelt out in great detail in the sector inquiry report, vertical integration plays an important role in the energy sector, where integration of various activities throughout the production and distribution chain can reduce risk, offer privileged access to generation capacity or to customers, or grant preferential access to networks or to information on customer switching and/or profiles.

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The existence of so called “Chinese walls” within the vertically integrated company may not always suffice to offset these advantages. The Georg/FS case concerning access to railway infrastructure offers a example of conflicts of interests in vertically integrated undertakings. Despite the restructuring of the Italian railways, the rail infrastructure, the traction operation and passenger transport services were all part of the same holding. The Commission noted in this respect that “as the holding company and its subsidiaries are all owned by one and the same shareholder, the latter has an interest in ensuring that behaviour within the FS holding company is sufficiently coordinated” (paragraph 76, see also paragraph 77) and that by virtue of their common interests the subsidiaries could not be seen as legally, administratively and structurally unrelated to each other (paragraph 78).

3.413

This precedent justifies the conclusion that compliance with the ITO/ISO unbundling options foreseen in the Third Liberalisation Package do not necessarily protect the dominant gas or electricity undertaking from enforcement action under Article 102 TFUE.1151 In addition, an ownership unbundled TSO remains the operator of an essential facility, implying that its conduct may fall foul of Article 102 TFEU, as shown by the Commission’s intervention against the discriminatory practice of the Swedish TSO, Kraftnet.1152

1151 DESFA, the non-vertically integrated gas transmission network operator, was fined by the Greek competition authority for failure to provide ALUMINIUM SA with access to the network, which prevented this company from being supplied with LNG by an alternative supplier 20th December 2012, 555/VII/2012). 1152 Case COMP/39.351, Swedish Interconnectors, OJ 2010, C 142/28. See on this Bert Willems and Malgorzata Sadowska, “Power Markets Shaped by Antitrust”, European Competition Journal 9(1), April 2013; “Market Integration and Economic Efficiency at Conflict? Commitments in the Swedish Interconnectors Case”, World Competition: Law and Economics Review 36 (1), March 2013.

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4.

Abuse

4.1 Concept The text of Article 102 TFEU suggests that the abuse must have a direct causal relation with the dominant position. The Court considers however that the question whether or not certain conduct is abusive can be answered independently from the possible link with the dominant position. It states in this respect that the concept of abuse is an objective one that concerns the behaviour of the undertaking rather than its dominant position.

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“The concept of abuse is an objective concept relating to the behaviour of an undertaking in a dominant position which is such as to influence the structure of a market where, as a result of the very presence of the undertaking in question, the degree of competition is weakened and which, through recourse to other methods different from those which condition normal competition in products or services on the basis of the transactions of commercial operators, has the effect of hindering the maintenance of the degree of competition still existing in the market or the growth of that competition”.1153

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The open ended character of the concept of abuse considerably limits the freedom of a dominant firm to determine its commercial policy. However, Article 102 TFEU does not have as its object to push firms to irrational behaviour. Conduct that at first sight may appear abusive can under certain circumstances be justified, in particular if the dominant firm can show that this conduct makes business sense in itself, that it is justified on commercial grounds and that it is proportionate to achieve this legitimate goal.

3.416

It should be noted, however, that the Courts are reluctant to accept such objective justifications: “It is true that, according to the case-law, the fact that an undertaking is in a dominant position cannot disentitle it from protecting its own commercial interests if they are attacked, and that such an undertaking must be conceded the right to take such reasonable steps as it deems appropriate to protect its interests, provided however that the purpose of such behaviour is not to strengthen this dominant position and abuse it (see, for example, United Brands, cited at paragraph 853 above, paragraph 189; CEWAL I, cited at paragraph 568 above, paragraphs 107 and 146; and Irish Sugar, cited at paragraph 152 above, paragraph 112). It follows therefore that a dominant undertaking may seek to rely on grounds to justify the practices it adopts. However, the justifications permitted

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1153 Judgment of 13 February 1979, Hoffmann-La Roche v Commission, 85/76, EU:C:1979:36, ground 21.

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by the case-law in respect of Article 86 of the Treaty (now 82) cannot result in creating exemptions from the application of that provision. The sole purpose of those grounds of justification is to enable a dominant undertaking to show not that the practices in question should be permitted because they confer certain advantages, but only that the purpose of those practices is reasonably to protect its commercial interests in the face of action taken by certain third parties and that they do not therefore in fact constitute an abuse.” 1154

3.418

Still, the concept of objective justification gradually finds its way in the interpretation of Article 102 TFEU. For example, in British Airways/Commission & Virgin Atlantic, the Court specified that actual or likely restrictive effects can be offset by “advantages in terms of efficiency which also benefit the consumer”; i.e. objective advantages for the consumer and not subjective advantages for the dominant firm.1155

3.419

The Notice develops the concept of objective justification along the lines of Article 101(3) TFEU (see above). If the dominant firm succeeds in showing that its conduct produces substantial efficiencies which outweigh any anti-competitive effects and that this conduct is indispensable and proportionate to pursue that goal, Article 102 TFEU may not apply (see paragraphs 28 to 31).

4.2 Abuse on connected markets 3.420

The objective abuse concept captures conduct by the dominant firm on other markets than the dominated market. For example, in Akzo I, the Court considered that predatory pricing in another market than the dominated market constituted an abuse within the meaning of Article 102 TFEU.1156 In Tetra Pak the General Court took this reasoning one step further: “... in the circumstances of this case, Tetra Pak’ s practices on the non-aseptic markets are liable to be caught by Article 86 of the Treaty (now 82) without its being necessary to establish the existence of a dominant position on those markets taken in isolation, since that undertaking’s leading position on the non-aseptic markets, combined with the close associative links between those markets and 1154 Judgment of 30 September 2003, Atlantic Container Line and Others v Commission, T‑191/98 and T‑212/98 to T‑214/98, EU:T:2003:245. 1155 Judgment of 15 March 2007, British Airways v Commission, C‑95/04 P, EU:C:2007:166, ground 86. The 2005 discussion paper refers to an objective necessity defence to protect certain overriding interests, such as product safety or health protection. It also puts the meeting competition defence under the heading of objective justification (paragraphs 81 to 83). 1156 Judgment of 3 July 1991, AKZO v Commission, C‑62/86, EU:C:1991:286, ground 45.

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the aseptic markets, gave Tetra Pak freedom of conduct compared with the other economic operators on the non-aseptic markets, such as to impose on it a special responsibility under Article 86 to maintain genuine undistorted competition on those markets.” 1157 The Court of Justice confirmed this ruling, but limited its scope to special circumstances: “It is true that application of Article 86 presupposes a link between the dominant position and the alleged abusive conduct, which is normally not present where conduct on a market distinct from the dominated market produces effects on that distinct market. In the case of distinct, but associated, markets, as in the present case, application of Article 86 to conduct found on the associated, non-dominated, market and having effects on that associated market can only be justified by special circumstances.” 1158

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4.3 Abuse and collective dominance These special circumstances are more likely to be found in cases involving sole dominance than in cases of collective dominance. Indeed, in Irish Sugar, the General Court stated that an abuse of a collective dominant position presupposed a causal link between that position and the conduct under scrutiny, without it being required that all collectively dominant firms have followed that conduct.

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“Whilst the existence of a joint dominant position may be deduced from the position which the economic entities concerned together hold on the market in question, the abuse does not necessarily have to be the action of all the undertakings in question. It only has to be capable of being identified as one of the manifestations of such a joint dominant position being held. Therefore, undertakings occupying a joint dominant position may engage in joint or individual abusive conduct. It is enough for that abusive conduct to relate to the exploitation of the joint dominant position which the undertakings hold in the market. In this case, the Commission maintains that the exploitation of that joint dominant position formed part of a continuous overall policy of maintaining and strengthening that position, and that conduct adopted by both SDL and the applicant between 1985 and February 1990 fell within that policy. Point 117 of the contested decision states: “The actions taken by Irish Sugar before 1990 with regard to the transport restriction, by both companies with respect to border rebates, export rebates and the fidelity rebate and by SDL with respect to the product swap and selective pricing, were

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1157 Judgment of 6 October 1994, Tetra Pak v Commission, T‑83/91, EU:T:1994:246. 1158 Judgment of 14 November 1996, Tetra Pak v Commission, C‑333/94 P, EU:C:1996:436, ground 27.

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undertaken from a position of joint dominance. The Commission was therefore entitled to take the view that the individual conduct of one of the undertakings together holding a joint dominant position constituted the abusive exploitation of that position.” 1159

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This wording – that dominance must be exploited – suggests a clear causal link between the abuse and the dominant position. As discussed above, one may wonder whether that causal link was present when the Commission accused E.ON of withdrawing capacity on the German wholesale market. Since this intervention did not lead to a formal prohibition decision, but to a commitment decision, the exact theory of harm relied on by the Commission in this case will remain unknown to the public.1160

5.

Types of abuses

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As already mentioned above, it is difficult to put the various types of abusive behaviour into categories. Article 102 TFEU includes a non-exhaustive list of examples of abusive conduct, but does not impose clear categories.1161

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In practice, one can broadly distinguish two categories. A first category concerns abuses which purport to protect or expand the dominant position. They focus mostly on competitors which the dominant firm wants to exclude from the market. These abuses are called exclusionary practices and include practices such as predatory pricing, long term exclusive purchasing agreements, fidelity rebates and tying practices. In the short term these practices often benefit the customers of the dominant firm, since they are frequently accompanied by attractive conditions offered by the dominant firm in order to keep competitors out. The second category concerns situations in which the dominant firm can reap the benefits of its dominance by exploiting its customers or suppliers. The imposition of excessive prices or unfair trading conditions offers typical examples of this type of exploitation.

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The Notice deals with the first category of abuses. It proposes a general analytical framework for those abuses and then applies that analysis to various sorts of exclusionary practices: exclusive purchasing, conditional rebates, tying and bun1159 Judgment of 7 October 1999, Irish Sugar v Commission, T‑228/97, EU:T:1999:246,ground 66. 1160 COMP/39.388, German electricity wholesale market, OJ 2009, C 36/8. 1161 Judgment of 15 March 2007, British Airways v Commission, C‑95/04 P, EU:C:2007:166, grounds 57 and 58.

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dling, predatory pricing, refusal to supply and margin squeezes. As stated above, the main concern with these exclusionary practices is foreclosure: i.e. a situation where actual or potential competitors are completely or partially denied profitable access to the market. Moreover, this is not any foreclosure. As regards price related conduct, the Notice specifies that the Commission will intervene only when that conduct affects competitors which are at least as efficient as the dominant firm, suggesting that denying market access to less efficient firms does not raise antitrust or welfare reducing issues. This test, that does not necessarily apply to non-price related abuses, boils down to the question as to whether the dominant company itself would be able to survive the exclusionary conduct in the event it would be the target. In the Post Denmark case, the Court of Justice confirmed that Article 102 TFEU does not seek to ensure that competitors less efficient than the undertaking with the dominant position should remain on the market.1162

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It should be noted, however, that the distinction between the exclusionary and exploitative practices is often blurred. For example, excessive prices charged by a vertically integrated grid operator can be seen as a way to deny competitors access to the grid and hence to exclude them from downstream supply markets. Tying practices can also be both exclusionary and exploitative in nature. Making the supply of electricity conditional on gas sales can complicate market entry for suppliers which only supply one of these two products, but can also be a means to compel customers to buy a product they do not really want. This chapter will therefore not attempt to put the various types of abuses in separate categories. It will present, in a non-exhaustive manner, various abuses on a sliding scale, starting with practices which are essentially exclusionary in nature and progressing to conduct which has a more exploitative character.

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5.1 The Sector Inquiry On 10 January 2007 the Commission published a report on the outcome of the sector inquiry held in the energy sector from June to November 2005. The report is mainly structural in nature. It explains the regulatory framework and the functioning of the gas and electricity markets. However, it also identified a series of practices which could possibly be caught by Article 102 TFEU. The table below lists the main finding of the reports.

1162 Judgment of 27 March 2012, Post Danmark, C‑209/10, EU:C:2012:172.

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1.

Market concentration – long term gas import contracts by incumbents – dependency on vertically integrated gas incumbents – high concentration ratio in electricity sector

2.

Vertical foreclosure – discriminatory network access conditions – postponement of network investments – vertical integration of generation and supply businesses, including through long term contractual arrangements

3.

Market integration – insufficient interconnecting infrastructure – interconnectors controlled by incumbents – inefficient congestion management – long term capacity reservation arrangements – insufficient infrastructure investments

4.

Transparency – insufficient data on network capacity – asymmetrical access to market data

5.

Price formation – gas prices indexed to oil price – effects of CO2 emission rights – price control measures – purchasing consortia

6.

Downstream markets – long term supply contracts – territorial restrictions in gas supply contracts

7.

Balancing markets – complex and burdensome rules – discriminatory capacity policy

8.

LNG Markets

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It follows from this overview that a substantial part of the problems identified in the report can possibly be examined under Article 102 TFEU and that these reviewable matters basically concern three matters: 1. Non-transparent use of network infrastructure, sometimes leading to congestion problems. 2.

Long term contracts concluded by incumbents with gas and electricity producers, foreclosing access to essential inputs.

3.

Long term contracts concluded by incumbents with major customers foreclosing access to downstream markets.

3.431

In other words where dominant incumbents hamper access to networks, input and customers, Article 102 TFEU could possibly apply. These scenarios have been guiding the Commission in its enforcement practice since the publication of the Sector Inquiry Report.

3.432

It intervened against abusive use of infrastructure in the RWE,1163 E.ON,1164 ENI,1165 CEZ1166 and Svenska Kraftnet1167 cases. Long term capacity reservation agreements that could also lead to network foreclosure were addressed in the GDF1168 and E.ON1169 cases. Input foreclosure was the reason why the Commission prohibited the exclusive rights for lignite extraction granted by the Greek State to the local incumbent PPC.1170 Finally, customer foreclosure lead to a series of innovating commitment decisions against long term agreements concluded, in particular, by Distrigaz and EDF.1171

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1163 Case COMP/39.402, RWE gas foreclosure, OJ 2008, C 310/23. 1164 COMP/39.389, German electricity balancing market, OJ 2009, C 36/8. 1165 Case COMP/39.315, ENI, OJ 2010, C 352/8. 1166 Case COMP/AT.39727, CEZ, OJ 2013, C 251/4. 1167 Case COMP/39.351, Swedish Interconnectors, OJ 2010, C 142/28. 1168 Case COMP/39.316, GDF foreclosure, OJ 2010, C 57/13. 1169 Cases COMP/39317, E.ON gas foreclosure, 15 December 2010. 1170 Case COMP/B-1/38.700, Greek Lignite, OJ 2008, C 93/3. 1171 Case COMP/37.966, Distrigaz, OJ 2008, C 9/8; Case COMP/39.386, Long term electricity contracts in France, Decision of 17 mars 2010.

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5.2 Exclusive dealing 5.2.1 Customer foreclosure 3.434

3.435

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Prohibiting customers to do business with competing firms is probably one of the most effective means to prevent market entry and to protect a dominant position. Such exclusive dealing obligations can take various forms.1172 They can consist in straightforward non-compete clauses, prohibiting a customer from doing business with competitors. A non-compete obligation can also be phrased in positive terms: i.e. as an obligation imposed on the customer to buy all its requirements from the dominant supplier. In Hoffman La Roche the Court of Justice ruled that: “an undertaking which is in a dominant position on the market and ties purchasers – even if does so at their request – by an obligation or promise on their part to obtain all or most of their requirements exclusively from the said undertaking abuses its dominant position within the meaning of Article 86 of the Treaty, whether the obligation in question is stipulated without further qualifica‑ tion or whether it is undertaking in consideration of the grant of a rebate.” The application of this rule in the energy sector was confirmed in the Almelo case, concerning exclusive purchasing obligations imposed by the regional distributors on local distributors. The Court of Justice considered that such an obligation could constitute an abuse of the collective dominant position which these regional distributors could possibly have on the Dutch electricity market. The rationale behind the prohibition of exclusive dealing agreements is obviously foreclosure; competitors of the dominant firm cannot expand their market shares and successfully challenge the position of the dominant firm. The questions as to whether or not such foreclosure occurs and, if so, to which extent, is a factual matter. It is conceivable that an exclusive purchasing obligation or a non-compete clause does not give rise to real foreclosure problems, because the obligations cover limited quantities, because they are of only short duration or because the purchasers can terminate the supply agreements on short notice.1173 In such circumstances, competitors have a possibility to convince those purchasers to buy from them. 1172 In Judgment of 23 October 2003, Van den Bergh Foods v Commission, T-65/98, ECLI:EU:T:2003:281, the Court found that so called freezer exclusivity condition imposed by Unilever on users of its ice cream freezers had foreclosure for competitors wanting to sell ice cream in the Irish market, because Irish outlets were reluctant to install two freezers in one outlet. 1173 The sector inquiry contains two sections in which these principles are spelt out in more detail: one for gas (page 232 e.s.) and another for electricity (page 283 e.s.).

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However, exclusive purchasing agreements must always be assessed in their economic context. Exclusive purchasing agreements may be a means to protect investments in new capacity. Like any other firm, a dominant firm has a legitimate interest in protecting its investments. For example, if an electricity producer invests in new production capacity together with large users, it may want to have the certainty that the output of this new plant will actually be sold. In such an output expanding context, exclusive purchasing agreements accepted by these large users may be a means to ensure that the plant will actually be able to sell its energy and that the investors obtain a return on their investment.1174

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The Notice mentions another important factor for the assessment of exclusive purchasing obligations. Foreclosure effects must be feared in particular where the competitors exercise an important constraint on the dominant firm, even if they are not always in a position to satisfy the entire customer demand. Customers can refer to the offers of the alternative suppliers in their negotiations with the dominant firm, including for the business that they must unavoidably procure from the dominant firm. By contrast, if competitors can compete on equal terms for each individual customer’s entire demand, exclusive purchasing obligations are generally unlikely to hamper effective competition, unless switching is rendered difficult by the duration of the exclusive purchasing obligation.

3.438

5.2.1.1 The Gas Natural case In 2000 the Commission intervened against a long term gas supply agreement concluded between the dominant Spanish gas supplier, Gas Natural and Endesa, one of the leading electricity producers.1175 Under this agreement, which offered Endesa favourable conditions, Endesa was obliged to cover nearly all its gas requirements with Gas Natural. In addition, Endesa was not allowed to resell the contracted quantities. Since Endesa was one of the largest gas users, the Commission considered that the agreement had a significant foreclosure effect, which could substantially hinder the on-going liberalization of the European gas market to the benefit of the incumbent. The resale prohibition hindered Endesa in developing itself as a competing gas supplier. In order to meet these objections, Endesa and Gas Natural changed their agreement by reducing the contractual quantities to 75% of Endesa’s requirements and by limiting its dura1174 Case IV/E-3/35.698, Isab Energy, OJ 1996, C 138/3; Case IV/E-3/35.485, REN/Turbogas, OJ 1996, C 118/7. 1175 Case COMP/37542, Gas Natural/Endesa, Report on Competition Policy 2000, p.154 and IP/00/297 of 27 March 2000. In the Thyssengas/STAWAG case, the German Federal Cartel Office considered that long term purchase agreements could also be problematic if they cover more than 50% of total requirements. Press release FCO of 7 November 2003.

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tion to twelve years. Moreover, Endesa became free to resell the gas purchased from Gas Natural. In the light of these modifications, the Commission decided not to pursue action against Gas Natural.

5.2.1.2 The E.ON-Ruhrgas case 3.440

On 17 January 2006 the German Federal Cartel Office (FCO) prohibited long term supply agreements concluded by E.ON-Ruhrgas with regional and local gas distributors. The authority noted that access to the German market for the supply of gas to these distributors was difficult as a result of networks of such agreements. Firstly, within the area serviced by E.ON’s network, 70% were bound to purchase exclusively from this company and an additional 6% were bound by purchasing obligations covering more than 80% of their requirements. Access conditions for the whole of Germany were not much better as a result of the existence of parallel agreements: 75% of all supply agreements concluded by regional and local distribution companies are long term and cover more than 80% of their requirements. The FCO considered that E.ON’s contracts considerably contributed to this foreclosed market access, because of its dominant position corresponding to 75% of gas sales to regional and local distributors connected to its network. The FCO therefore held that E.ON’s contracts infringed both Article 102 TFEU and Article 102 TFEU and ordered E.ON to terminate them before 30 September 2006.

3.441

The decision also contains interesting indications as the legality of future contracts. In order to ensure future market access, E.ON possibilities to conclude new contracts were limited as follows: the duration of contracts covering between 80 and 100% of a distributor’s requirements must not exceed two years. Contracts covering between 50% to 80% may not last longer than four years.1176

5.2.1.3 The Distrigaz settlement 3.442

The approach followed by the FCO in the E.ON case described above has the advantage of clarity. It does not guarantee however that in a given year, E.ON’s competitors can effectively compete for the business of the regional and local distributors. The German intervention focuses on the nature of the individual contracts, but does not identify which share of the market E.ON’s competitors 1176 Case B.8-113/03-1 of 13.1.2006. Similarly, the Danish Competition Council also intervened against a six year exclusive purchasing contract imposed by local incumbent DONG (accounting 65% of retail sales) and one large distribution companies. DONG modified the contract by reducing its duration to two years and by suppressing the exclusivity clause. Decision of 21 December 2005.

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can actually contest. By contrast, the Commission focussed on this latter aspect when assessing the compatibility of Distrigaz’ supply contracts with a variety of customers (industrial users, electricity producers and resellers). The Commission considered that Distrigaz occupied a dominant position on the Belgian market for the supply of gas to large customers. These customers usually have only one gas supplier. This means that competition takes place only on expiry of their supply contracts. The conclusion of long term contracts therefore limits the occasions at which this competition can take place. The Commission therefore objected to Distrigaz long term arrangements. This intervention did not lead to a formal decision, because Distrigaz agreed to modify its contracts. On 11 November 2007 the Commission accepted these commitments, which will last from 2007 until 2010 and which will be binding for as long Distrigaz holds a market share exceeding 40% and at least 20% higher than the share of its nearest competitor.1177

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According to these commitments, Distrigaz will ensure that every year 65% to 70% of contracted volumes will return to the market, hence allowing other suppliers to make competing bids. In addition, the duration of new contracts with industrial users or electricity producers will not exceed five years. This rule does not apply to contracts concluded for the supply of gas to new power plants. For existing contracts with a duration exceeding five years, Distrigaz grants its contract partners unilateral termination rights. As regards contracts with gas resellers, the maximum duration is limited to two years. Finally, no contract will contain tacit renewal or destination clauses.

3.444

5.2.1.4 The EDF settlement In the EDF case the Commission followed a similar approach when assessing long term contracts concluded between EDF and large industrial users. The concerns were the same as in Distrigaz: the contracts bound large customers to the dominant player and prohibited these customers from reselling the electricity. This lead to customer foreclosure and reduced liquidity on the French wholesale market.

3.445

In order to avoid a formal decision EDF committed that from 1 January 2010 until 31 December 2019 it will ensure that at least 60% to 65% of its contracted volume will return to market per year.1178 It shall not conclude new contracts for

3.446

1177 Case COMP/37.966, Distrigaz, OJ 2008, C 9/8. 1178 OJ 2009, C 262/32.

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a duration exceeding five years. Nor shall it impose any resale restrictions. When proposing new contracts to its customers, EDF must propose two choices, one of which being non-exclusive in nature. The commitments will no longer apply if EDF’s market share drops below 40% in two consecutive years. If this drop occurs in only one year, the commitments will cease to apply in the following year, but will enter into force again the year thereafter.

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These commitments differ slightly from the Distrigaz commitments. Their duration is longer, but the percentage that returns to market is smaller. These differences can be explained to a large extent by the need to accommodate the needs of a purchasing group of large industrial users called Exeltium.1179 Exeltium was a consortium of energy intensive users to whom EDF was to supply base load electricity over more than 20 years. Alleged efficiency gains mainly included security of fuel supply and hedging for the buyers. The Commission finally cleared this contract, after almost three years of analysis, provided that resale restrictions would be cancelled and an opt-out clause would be introduced to mitigate anticompetitive effects. In addition, the Commission explicitly stated that the Exeltium agreement would be included in the analysis of the cumulative foreclosure effect of the contract portfolio of EDF being conducted. Cases

Distrigaz (2007)

EDF (2009)

Max. contract duration

5y

5y

% of sales to come back on the market every year

70%

65% (large consumers buying directly or through a consortia)

Contract clauses

No use restraint, no tacit renewal clauses

No use restraint

Duration of Commitments

4y or Distrigaz under 40% market shares

10y or EDF under 40% market shares

Monitoring of Commitments

Annual Report

Annual Report + third party auditor

Other

Contract with new power plant not included

effective right to contract with alternative supplier

Commitments may be reopened if material changes in national law or the market context

1179 Commission MEMO/08/533 of 31 July 2008.

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5.2.2 Input foreclosure Successful market entry not only depends from access to customers, but also from the availability of primary energy. If incumbents have exclusive access to all gas production and electricity generation, market entry is bound to fail. As a rule, market entry will depend to a large extent on the existence of liquid wholesale markets.

3.448

Here again, the sector inquiry report referred to the existence of long term gas import contracts, which bind foreign gas producers to local incumbents. Even if these contracts typically impose take or pay obligations, these obligations are rarely enforced. This means that the local incumbents can just lift the quantities required for their own usage, without having to sell surpluses on wholesale markets. Similarly, long term power purchasing agreements affect the liquidity of electricity wholesale markets.

3.449

Although the principles concerning the assessment of long term downstream agreements apply mutatis mutandis to long term upstream agreements, there are no precedents concerning the assessment of input foreclosure under Article 102 TFEU.1180 There are various factors complicating that assessment. Firstly, long term import or power purchasing agreements will often be linked to the construction of new infrastructure or generation capacity (see above). They are often an integral part of the financial package relating to that transport or generation capacity. Secondly, even in the absence of related new transport infrastructure, security of supply considerations will often require the conclusion of long term gas import contracts. Thirdly and finally, enforcing Article 102 TFEU against foreign gas suppliers is not always obvious policy choice.

3.450

Even so, the Commission intervened against one input foreclosure case, albeit a peculiar one.1181 The foreclosure effect did not result from market conduct, but from a quasi-exclusive right granted by the Greek State to the local electricity incumbent PPC, which accounts for approximately 81% of Greek electricity generation. The Commission considered that lignite is an important primary energy source in Greece and that PPC’s exploitation rights prevented its competitors from setting up competing capacity. After having found that the grant of the lignite exploitation rights violated Article 106(1) TFEU read in conjunction with Article 102 TFEU, it ordered the Greek State to terminate these rights on the basis of Article 106(3) TFEU.

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1180 See Chapter 3 regarding the application of Article 101 TFEU to destination clauses in gas import agreements. 1181 Case COMP/B-1/38.700, Greek Lignite, OJ 2008, C 93/3.

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3.452

On 6 August 2009 Greece proposed a revised exploitation scheme pursuant to which the lignite would be tendered. The winners of these tenders are not supposed to resale the lignite to PPC. This new scheme will ensure that approximately 40% of Greek lignite deposits becomes accessible for PPC’s competitors.

3.453

The Greek lignite case was interesting as it allowed clarifying the case law on the combined application of Articles 102 and 106(1) TFEU. The decision of the Commission was first annulled by the General Court, who found that the Commission had failed to show evidence of an abuse. This judgment was then overturned by the Court of Justice. The crux of the matter was to define whether the Commission had to establish the existence of an actual or potential abuse of DEI’s dominant position on the markets concerned or whether it was sufficient for it to establish that the State measures in question distorted competition in favour of DEI by creating inequality of opportunity between economic operators.

3.454

The Court of Justice stated the following, at paragraphs 46 and 47: “ infringement of Article 86(1) EC in conjunction with Article 82 EC may be established irrespective of whether any abuse actually exists. All that is necessary is for the Commission to identify a potential or actual anticompetitive consequence liable to result from the State measure at issue. Such an infringement may thus be established where the State measures at issue affect the structure of the market by creating unequal conditions of competition between companies, by allowing the public undertaking or the undertaking which was granted special or exclusive rights to maintain (for example by hindering new entrants to the market), strengthen or extend its dominant position over another market, thereby restricting competition, without it being necessary to prove the existence of actual abuse.”

3.455

“In those circumstances, it follows that, contrary to the General Court’s analysis in paragraphs 105 and 118 of the judgment under appeal, it is sufficient to show that potential or actual anti-competitive consequence is liable to result from the State measure at issue; it is not necessary to identify an abuse other than that which results from the situation brought about by the State measure at issue. It also follows that the General Court erred in law in holding that the Commission, by finding that DEI, a former monopolistic undertaking, continued to maintain a dominant position on the wholesale electricity market by virtue of the advantage conferred upon it by its privileged access to lignite and that that situation created inequality of opportunity on that market between the applicant and other undertakings, had neither identified nor established to a sufficient legal standard the abuse to which, within the meaning of Article 82 EC, the State measure in question had led or could have led DEI.” 326

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Identifying a potential or actual anticompetitive consequence, and not a potential or actual abuse, is thus sufficient. The mere creation of entry barriers, benefiting an incumbent, may lead to an infringement of Article 102 combined with Article 106(2) TFEU. This arguably creates a new tool in the enforcement box of the Commission.

3.456

5.2.3 Network foreclosure agreements Foreclosure effects not only arise if customers or essential inputs are tied, but also when the incumbent players prevent market access by preventing competitors to have access to transport or distribution infrastructure. Conduct by grid operators that hamper such access will be discussed below under the heading “refusal to supply”. Access restrictions can also result from capacity reservation agreements concluded by incumbent operators. The sector inquiry report referred at various instances to agreements relating to the use of capacity gas transit infrastructure. It appears that capacity is not only reserved by incumbent gas suppliers for long durations – in some cases up to twenty years –, but also that the reserved capacity is not used.1182

3.457

This type of capacity reservation agreements will be discussed in this section. They can lead to various competition law issues. Long term reservation in favour of one (incumbent) company prevents competition in the downstream markets. They can be seen as a form a foreclosure practice of the incumbent supplier, which could be caught either by Article 101 or Article 102 TFEU. If one focuses on the TSO, long term capacity reservation agreements in favour of one particular company can also be qualified as discriminatory practices hampering competition on the downstream electricity or gas supply markets.1183

3.458

5.2.3.1 The UK-French Interconnector In 2001, the British and French transmission system operators changed the regime applying to the UK-French interconnector. EDF’s exclusivity was terminated and capacity was made available to the market without any reserve being made in favour of any particular company. An auction regime now governs capacity allocation. The Commission considered in this case that reserving capacity rights in favour of certain undertakings was discriminatory in nature and was 1182 See in particular paragraph 228. 1183 See also judgment of 7 June 2005, VEMW and Others, C‑17/03, EU:C:2005:362. as regards the compatibility of priority access rights to interconnectors in favour of old long term import agreements. These rights were held to be contrary to the non discrimination rules laid down in Directive 96/62.

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tantamount to an abuse of the dominant position held by the two transmission system operator’s in question. In order to ensure that other players than EDF would effectively benefit from the new equitable capacity allocation rules, the Commission also made sure that these players had fair access to the French high voltage grid.1184

5.2.3.2 The GDF and E.ON cases 3.460

In 2009 the Commission’s objected against the long term agreements concluded by GDF on most of French import capacity, as well as its refusal to approve investments in additional import capacity. The Commission felt that these reservations prevented competition to take place on the French gas wholesale market and that they could be seen as an abuse by GDF acting as a shipper of gas. GDF reacted to these objections by offering a substantive remedy package on the basis of Article 9 of Regulation 1/2003. Under these commitments GDF will release a large share of its long term reservations of gas import capacity, freeing immediately approximately 10% of total capacity and bringing its share gradually down to less than 50% of these reservations in 2014.1185

3.461

E.ON offered similar commitments in a comparable case.1186 The 50% maximum must be reached by E.ON in 2015 for H-gas. For L-Gas an even lower threshold is set of 64%.

3.462

In both cases, E.ON and GDF disagreed with the Commission’s analysis. They felt that they had booked the capacity they needed and that no competitors had manifested an interest for the reservations. It is difficult to comment these arguments in the absence of a published decision that explains both the Commission’s objections and the parties’ defence. The question remains whether similar long term capacity reservation agreements concluded by non-dominant shippers would raise similar objections.

5.2.3.3 The CEZ case 3.463

In an another case,1187 the Commission found that CEZ, by pre-emptively booking capacities in the Czech electricity transmission network with the aim of hin1184 Press release IP/01/341. See also IP/01/30 concerning a capacity reservation agreement concluded between E.On, Statkraft and Elsam for an interconnector under the Skaegerar between Norway and Western Denmark. This intervention was based on Article 101 TFEU. 1185 Case COMP/39.316, GDF foreclosure, OJ 2009, C 156/25. 1186 Cases COMP/39317, E.On gas foreclosure, OJ 2010, C 16/43. 1187 Case COMP/AT.39727, CEZ, OJ 2013, C 251/4.

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dering the entry of competitors into the market, may have abused its dominant position within the meaning of Article 102 TFEU. CEZ had made reservations which did not correspond to genuine generation projects. As a consequence, the local TSO refused to connect a new competing lignite-fired generation project to a specific network substation because there would not be sufficient capacity at that substation in view of the previous reservations made by CEZ. CEZ therefore offered to divest generation capacities and not acquire direct or indirect influence over the divested generation asset for a period of ten years.

5.3 Tying Tying means that the sale of one product or service is made conditional upon the sale of another product or service. Tying is a normal feature of many sales agreements. The classic example is the combination of shoes and laces: a customer buying shoes generally expects that they have laces as well. Similarly, customers are annoyed if they buy an electronic device, such as a photo camera, that does not contain a battery which allows that camera to work. In addition, some products are by there very essence tied products; newspapers cover many different topics and usually consist of general political news, sports coverage and cultural events. Readers buy newspapers precisely because they bundle news from various sources.

3.464

Even so, tying can also be a means for a firm to project its market power from one market in which it is dominant, the tying market, into another market, the tied market. If a dominant electricity supplier makes the sale of electricity dependant on gas sales, for example, by making dual offers more attractive than the combination of individual gas and electricity sales, it can be accused under Article 102 TFEU as trying to extend its dominance from the electricity market into the gas market. Unlike laces and shoes, there is no obvious reason to jointly sell gas and electricity. This is why Article 102 TFEU only prohibits tying if the tying and tied products are not naturally connected. Article 102(d) TFEU characterizes tying as “making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their very nature or according to commercial usage, have no connection with the subject of such contracts”.

3.465

The question whether or not the tied products are naturally connected is at the core of most tying cases. The prosecuting authority normally argues that the products are separate whereas the defendant usually pleads that they are two constituent elements of one and the same product or service. The Microsoft case offered perhaps the most striking example of such a debate. The Commission

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considers that Microsoft unduly projected its dominance on the market of PC operating systems in adjacent, but separate markets, such as the market for media players, which Microsoft sells together with Windows. By contrast, Microsoft sees this intervention as undue interference in its business policy which has always consisted of adding features to its operating system so as to make it even more attractive for its many customers. Windows’s success is indeed due to a large extent to the combination of many functionalities, such as the internet browser Explorer and Windows Movie Maker.

5.3.1 Tying and market power 3.467

The Commission’s intervention in Microsoft indeed implies that this firm has to revise its commercial policy. Commercial practices which were legitimate when a product was launched and which were at the origin of its success can become an impediment to effective competition once that success is so overwhelming that it leads to monopoly power. Microsoft perceives this view as a sanction of its efficiency. This is true, but understandable in the light of the objectives which Article 102 TFEU pursues. As mentioned above, competition can be a self-destructing or Darwinian process, where the most efficient or fittest firm survives at the expense of others. Article 102 TFEU is a legal instrument which corrects the consequences of this process which are considered to be economically undesirable. Even if such correction possibly undermines single firm efficiency, markets may have to be kept open to offer other firms the possibility to contest that firm’s dominant position in the tying market or to sell their products in the tied markets.

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Hence, tying practices offer a good example of commercial practices which are not illegal in the absence of market power, but which become abusive in the presence of such power. The Notice therefore explicitly requires dominance in the tying market. However, the fact that a dominant firm embarks upon a tying or bundling practice does not suffice to trigger Article 102 TFEU. As mentioned above, the tying and the tied products must be distinct and the tie must lead to anticompetitive foreclosure.

5.3.2 Contractual and economic tying 3.469

The most straightforward example of tying is contractual tying. The sales or rental conditions of the tying product impose, directly or indirectly, the use of another product. The Court of Justice case law contains several examples of such tying. Télémarketing concerned the obligatory use of CLT’s telemarketing services for commercials broadcasted on a dominant French speaking television 330

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channel in Belgium.1188 In Tetrapak II the objections related to the rental conditions of Tetra Pak’s packaging machines which imposed the use of Tetra Pak cartons in those machines.1189 However, tying can also take place in the absence of specific contractual provisions. Dominant firms can find all sorts of other means to make customers buy the tied product in addition to the tying product by offering them a financial incentive, such as special discounts, or by discouraging the sale of competing products in the tied product market. The Belgian postal case offers a good example of the first scenario: De Post, the incumbent Belgian postal operator, offered its customers preferential conditions for general mail delivery services if they also used its express mail delivery services.1190 By doing so, De Post was using its statutory monopoly on general mail delivery services to lever its activities in the liberalized market for express services. The second scenario can be illustrated by one of the practices applied by Hilti to compel its customers which buy nail guns to also purchase the consumables (cartridges and nails) for these guns from Hilti. Hilti refused to guarantee nail guns if its customers decided to use other consumables than those supplied by Hilti.1191

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5.3.3 De facto tying The most effective means of tying is offering the tying and tied product as one sole product or service. In the Frankfurt airport case, the airport authority considered that it offered one single airport service which comprised all air transport related services. Air carriers using Frankfurt airport were compelled to pay an all-in price which also encompassed ground handling services. The Commission considered that by doing so Frankfurt airport was abusing its dominant position in the market for traditional airport services (taking off and landing) to monopolize the distinct, but adjacent, market for ground-handling services.1192 The Microsoft case offered another striking example of where two or more products are offered as one single package. Windows was always sold together with Microsoft’s media player as one PC operating system. The Commission considered that this practice purported to project Microsoft’s dominance in the market for PC operating systems in the adjacent market for media playing devices. Obviously, the shoe and laces debate referred to above is most likely to arise in cases where two products are sold as one. 1188 1189 1190 1191 1192

Judgment of 3 October 1985, CBEM, 311/84, EU:C:1985:394. Judgment of 14 November 1996, Tetra Pak v Commission, C‑333/94 P, EU:C:1996:436. Case COMP/37.859, De Post-La Poste, OJ 2002, L 61/32. Judgment of 12 December 1991, Hilti v Commission, T‑30/89, EU:T:1991:70. Case IV/34.801, FAG Flughafen Frankfurt/Main AG, OJ 1998, L 72/30.

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5.3.4 Tying scenarios in the energy sector 3.472

Until now the Commission has not yet intervened against bundling or tying practices in the energy sector. Such issues could arise in various ways. Dominant incumbents in one market, e.g. the market for electricity supply, could be tempted to boost their sales in another market, e.g. the market for gas supply, by making electricity supplies conditional on gas sales. Dual offer practices are indeed likely to raise the regulator’s eyebrows. This also holds true for the relation between grid operations and other commercial activities. Although sector specific unbundling requirements should ensure that vertically integrated undertakings do not abuse their network related activities to promote their commercial operations, any attempt by grid operators to boost the commercial operations of other affiliates of the vertically integrated group is likely to run foul under Article 102 TFEU. Finally, obligations to purchase certain indispensable services, such as balancing services, from a dominant firm may also be regarded with suspicion.

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It is worth mentioning a peculiar form of tying to be found in the recent Gazprom case.1193 In the early 2000s, the Commission had already investigated into territorial restrictions included in Gazprom’s gas contracts with several European firms. Inspections were carried out in ten Member States, mainly in Central and Eastern Europe, in September 2011. The Commission opened formal proceeding in August 2012. The case is obviously complicated by the political context. The Commission suspected three sorts of anti-competitive practices. First, it seems Gazprom would continue to impose re-export bans in its gas contracts, reinforced by take-or-pay obligations, thereby creating territorial restrictions (see below). Second, by linking the price of gas to oil prices, Gazprom would have imposed unfair prices on some of its customers (see below). Third, Gazprom may have hindered gas supply diversification in several Member States. In particular, Gazprom would have conditioned the supply of gas (and the level of gas prices) to BEH in Bulgaria upon its commitment to participate in the South Stream project. In essence, this third theory of harm could amount to a form of tying. Indeed, according to the Commission.

1193 Case AT.39816, Upstream gas supplies in Central and Eastern Europe.

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5.4 Refusal to supply 5.4.1 General considerations As a rule, firms should be free to decide with whom they want to do business. Contractual freedom is an essential feature of all market economies. Like any other rule, this principle has exceptions, of which Article 102 TFEU is one. Because of their overwhelming position on the market, dominant firms are sometimes unavoidable trading partners. If access to the goods or services of the dominant firm is a necessity for other companies to remain active on their markets, dominance may imply a duty to contract. A refusal to supply those goods or services may lead to the disappearance of competitors on the downstream market and hence to a weakening of competition. Such refusals can take place in various forms. They may consist of straightforward and blunt refusals to do business with a certain firm. They may also be disguised, for example by charging unaffordable prices for the requested good or service or by imposing other unacceptable or discriminatory trading conditions. In this sense, the Commission has talked about ‘constructive’ refusal to deal, for instance in the Deutsche Post AG – Interception of cross border mail case.1194

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A dominant firm may have various reasons for refusing to supply a good or a service. The majority of cases in the Commission’s decision-making practice and the Court’s case law concern situations where the dominant firm seeks to protect its activities, either in the dominated market or in adjacent markets. In United Brands for example the dominant firm ceased to supply a distributor with whom it had long standing business relations, because this distributor had started selling bananas of a competing brand. This refusal to supply could be seen as a sanction for selling competing brands.

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The Notice suggests that the Commission will be more cautious in applying Article 102 TFEU to refusal to supply cases. Imposing an obligation to supply on the basis of this provision could undermine the incentives of the dominant firm to invest and innovate. Similarly, competitors may be tempted to seek a free ride on the efforts on the efforts of the dominant firm. However, as will be discussed below in the sections dealing with network related abuses, a refusal to supply may consist in a refusal to invest. A vertically integrated energy firm, may not be interested in investing in new interconnection or transport capacity, because this new capacity facilitates access by competitors on downstream supply markets.

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1194 Case COMP/36.915, Deutsche Post AG – Interception of cross border mail, OJ 2001, L 331/40.

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5.4.2 Refusal to supply and tying 3.477

The protection of the dominant firm’s activities in adjacent markets mostly concern vertically integrated firms, which are active on both the dominated and adjacent market. In CSC for example, the dominant firm ceased to supply raw materials to one of its customers after it had decided to compete with the customer on the downstream market for the goods incorporating these raw materials. The Court of Justice saw this refusal to supply an essential input as a means to extend the monopoly from the dominated market to the downstream market. Seen like this, refusals to supply cases are often akin to tying cases. In Télémarketing the dominant firm refused to supply certain services in the dominated market if the customers did not purchase activities in the adjacent market.1195 This not only leads to tying the dominated market to the adjacent market but also means that the dominant firm refuses to sell the dominant product in isolation. The Microsoft case also offers an example of a case where tying and refusal to supply practices converge. By refusing to sell a version of Windows without a media player, Microsoft in effect tied the market for PC operating systems to the market for media players.

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Refusal to supply considerations are also at the core of the Commission’s assessment of vertical mergers. For example, in EDP/ENI/GDP, the Commission feared that the combination of Portugal’s dominant gas supplier and leading electricity supplier would lead to a situation where the new entity would not have an interest in supplying gas to its competitors on equal terms and, hence, to the consolidation of its dominant position on the downstream electricity market.

5.4.3 Refusal to license 3.479

The Microsoft case dealt with two abuses of Microsoft’s dominant position. It not only concerns the tying abuse referred to above, but also a refusal to grant a license for certain information which is required to ensure that group servers and PC’s properly interact. The Commission considered that Microsoft’s refusal to license this data constitutes an abusive attempt by Microsoft to project its dominant position in the market for PC operating systems in the market for group servers. Indeed, without compatibility information, Microsoft’s competitors will not be in a position to supply servers which can “speak” with Windows operated PC’s. Microsoft considers by contrast that it is not obliged to license its intellectual property rights. It is indeed the very essence of IP rights to confer exclusive rights. An obligation to license leads to the negation of this right. 1195 Judgment of 3 October 1985, CBEM, 311/84, EU:C:1985:394.

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Even so, the General Court considered that Microsoft had abused its dominant position by refusing to license the compatibility information.1196 In doing so, the General Court relied on the Magill and IMS precedents.1197 This is surprising since both cases concerned relatively weak IP rights, while Microsoft relied on IP rights directly protected by the EU software directive. In addition, the facts are difficult to compare.

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Magill concerned a refusal by the Irish television broadcasting companies to grant licenses for the publication of listings of television programs to an independent publisher of television guides. In doing so, the television companies were in effect preventing the publication of a comprehensive TV guides and compelling Irish television watchers to buy a guide for each television channel. The Court of Justice upheld the Commission’s decision by ruling that the refusal to license prevented the development of a new product and artificially limited output to the detriment of consumers. Paradoxically, the innovation which the Court of Justice sought to protect in Magill consists of a bundle of existing products; i.e. an innovative practice to which the Commission objects in Microsoft.

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The IMS case takes the principles of Magill a step further. It concerns a refusal by IMS to license to its competitors certain geographical data which is used to make quantitative studies on the sales of pharmaceutical products. These competitors argued that IMS’s presentation of these data had been developed in close cooperation with the pharmaceutical industry. The data were a de facto industrial standard for all companies wanting to supply quantitative pharmaceutical studies. Without taking a position on the facts of the case, the Court considered that the refusal to license an essential input could indeed constitute an abuse. This ruling implies in effect that dominant companies may be obliged to license intellectual property to their competitors in order to enable them to compete in the dominated market.

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Although the case law on refusals to license deals with IP rights, it is also relevant for firms operating in the energy sector for two reasons. Firstly, the case law is relevant because it makes it clear that a refusal to license an essential input can be abusive. As will be discussed in the next section, infrastructure can also be seen as essential for market entry. This means that the principles of the Magill and IMS case law are also relevant to assess a refusal to grant access to gas pipelines or electricity grids. Secondly, this case law can be relevant in respect of access to

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1196 Judgment of 17 September 2007, Microsoft v Commission, T‑201/04, EU:T:2007:289. 1197 Judgment of 6 April 1995, RTE and ITP v Commission, C‑241/91 P and C‑242/91 P, EU:C:1995:98 and judgment of 29 April 2004, IMS Health, C‑418/01, EU:C:2004:257.

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data held by energy companies. A refusal by an energy supplier to hand over certain customer data can under certain circumstances unduly delay or complicate customer switching from the dominant company to a newcomer (see the GDF case in France mentioned above). Similarly a refusal to supply such data may also be abusive if it prevents companies from making studies on the functioning of energy markets, for example studies on customer switching.

5.4.4 Refusals to supply and essential facilities 5.4.4.1 The principle 3.484

Firms operating essential infrastructures, such as high voltage grids or gas transmission networks, command access to downstream supply markets and are therefore under a duty to grant such access on transparent and non-discriminatory conditions to firms wanting to operate on these downstream markets. The Commission has never prohibited a refusal to supply network access. All cases brought against network operators have led to commitment decisions on the basis of Article 9 of Regulation 1/2003. Even if the very far reaching nature of these commitments suggests that the Commission’s objections must have been very serious, there are no official text which make these concerns public.1198

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By contrast, national competition authorities have taken repressive action against network abuses. For example, in 1998 the Dutch competition agency fined SEP, which at that time still generated and sold electricity as well as operating the Dutch high voltage grid, for having refused network access to Norsk Hydro which wanted to import electricity into the Dutch market. SEP considered that Norsk Hydro did not import electricity for its own use, but that it intended to resell that electricity on the Dutch market. Although the Dutch electricity act of 1998 still conferred some exclusive import rights to SEP, the Dutch agency decided that SEP’s conduct was contrary to Article 24 of the Dutch competition act, a provision comparable to Article 102 TFEU.1199

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Another interesting precedent, already mentioned above, is the Commission’s prohibition of a network abuse in the railway sector.

1198 Confidentiality is obviously one of the main drivers for the energy companies concerned to settle the cases by proposing commitments. Formal prohibition decision would not only have led to very heavy fines, but could also have triggered private law suits. The excluded competitors as well as their customers could have relied on the findings in the prohibition decision when bring private law claims against the network operators. 1199 SEP v. NMa, 03/76, CBB 21.06.2004.

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In a press release dealing with interconnectors, the Commission reiterated its position in Georg that management and legal unbundling are no guarantee that grid operators offer equal and equitable access to all market players:

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“... an economic incentive for the Network Operators to discriminate in favour of the producer/supplier with which it is vertically integrated remains. The existence of this incentive creates a risk of discrimination actually taking place. Such a situation is addressed by EC competition rules.”1200

5.4.4.2 The sector inquiry report The possibility to apply Article 102 TFEU to the conduct of network operators and their affiliated companies was confirmed again in the Commission’s sector inquiry report, in particular as regards refusals to grant access on equal terms to unrelated companies.

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Paragraph 150 of the report reads as follows:

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“Incomplete legal and management unbundling is as such contrary to the Second Gas Directive and in addition lays the ground for discriminatory behaviour of ver‑ tically integrated operators in favour of their own upstream or downstream operat‑ ing arm, to the detriment of new entrants. Such conduct could also amount to an abuse of the TSO’s dominant position under Article 82 of the Treaty” The report lists many network related issues which could be caught by Article 102 TFEU, either as overt or disguised refusals to supply within the meaning of this section or as straightforward infringements of Article 102(c) TFEU. For the sake of clarity these issues will be discussed in the present section of this chapter.

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According to the report, blatant refusals to supply are rare, but the list of issues illustrating unequal access conditions is long, as will be shown below.

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Firstly, vertically integrated grid operators may be tempted to grant priority access to their affiliated companies. Paragraph 168 of the report cites the example of a German gas incumbent that was in a position to offer a gas delivery contract for a new power plant, because it was able to offer the necessary capacity to ship the large gas volumes to that plant. At the same time, new entrants were not granted firm capacity on an almost identical pipeline path. In the same vein, integrated network operators may delay grid connections to the detriment of

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1200 Press release, MEMO/01/76, 12 March 2001.

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new entrants. Paragraph 493 of the report refers to excessive documentation requirements and to connecting delays of up to 18 months. In general, grid users complained about discriminatory nomination procedures. Sometimes, access to transit capacities is made conditional on the prior existence of gas purchase or supply contracts.

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Secondly, the network operator may charge prices or payment conditions that differ from the terms applied to affiliated companies. Usually ex ante tariff regulation will prevent that tariffs differ. Even so, tariff regulation does not necessarily catch all services supplied by TSO’s to grid users. For example, the Commission gathered indications that one TSO grants its affiliates substantive rebates. And, even if equal prices are guaranteed, payment terms may differ. Paragraph 196 of the sector inquiry report refers for example to the requirement that the independent shippers must offer a bank guarantees or a bank deposit for an amount equivalent to several monthly invoices before receiving access to capacity reservations.

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Thirdly, the services offered by network operators to unrelated customers appear to be less performing than the services offered to its affiliates. Data required to allow customer switching can either be wrong or be provided too late. As regards balancing, the report also refers to the fact that TSOs procure those balancing services from their integrated affiliates, offering them a secured outlet and, hence, a competitive advantage (paragraph 156).

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Fourthly, network users generally complain about a lack of transparency about access conditions. These complaints not only concern the availability of capacity. Integrated companies also appear to have a systematic information advantages: “Repeatedly, respondents complain that affiliated supply companies approach customers with improved offers when their intention to switch is reported to the network branch” (paragraph 510).

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Fifthly, integrated network operators do not have the same incentives to invest in additional transport or distribution capacity as non-integrated operators. This is because increased capacity facilitates market entry and leads to increased competition for the affiliated supply businesses. The report refers in particular to the TCCP decision of the Italian competition authority as an example of incumbents failing to invest and wanting to meet market demand for additional transport capacity (see case comment below). Failing to meet demand can give rise to a situation where the dominant firm reduces output within the meaning of Article 102 (b) TFEU. The report is relatively outspoken as regards the causes 338

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of these five sorts of abusive conduct: the absence of ownership unbundling. It is indeed interesting to note that all network related abuse cases initiated in the context of the sector inquiry concern vertically integrated companies.

5.4.4.3 The Marathon commitments Although the Commission did not act officially against refusal to deal in the energy sector, it intervened several times informally. A significant part of these interventions concerns the access possibilities for newcomers. One of the most important access cases concerns the complaints filed by the American company Marathon against the incumbent gas operators in Germany (Thyssengas, BEB and Ruhrgas), France (Gaz de France) and the Netherlands (Gasunie). All these cases lead to settlements between the Commission and the companies concerned.1201 These settlements include arrangements as regards the transparency of access conditions. The gas companies concerned agreed to publish on their websites the contracted and available capacity at all entry and exit points, both for internal and internal connections. In addition, the gas operators are supposed to assist shippers to avoid imbalances by informing them online of their positions and allowing them to bundle their balancing needs. Some of the commitments include transparent and non-discriminatory access to the storage facilities of an incumbent company (BEB) or to installations which can convert H to L gas (Gaz de France). BEB also undertook to impose a “use it or lose it” obligation on its own trading branch. Unused capacity will be made available upon request to third parties. The Gaz de France undertakings go yet a step further by offering gas release programs in parts of the country where the infrastructure does not allow additional access by third parties.

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In order to avoid the impression of implicit access refusals, the incumbents also undertook to improve the handling of access requests, for example by introducing online screen-based booking procedures, which will lead to the elimination of the, at times lengthy, response times. Online bookings are particularly relevant for short term trading.

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Finally, the commitments concern a change to the pricing system. Instead of paying for contractual transport routes, which do not always reflect the actual flows of the transported molecules, the gas companies offered a system whereby shippers are only obliged to book capacity at the relevant entry and exit points. The system implies that capacity has to be reserved only at the relevant points

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1201 Marathon commitments, Press Release IP/04/573, 30.04.2004; IP/03/1129, 29.07.2003; IP/03/547, 16.04.2003; IP/01/1641, 23.11.2001.

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and not for each pipeline section. In addition to this commitment, Gaz de France also agreed to limit the number of tariff and balancing zones on which the French entry and exit transport system is based.

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These interventions of the competition authorities shows that access to essential infrastructure can be tackled under competition law. They also show that this can be done in conjunction with the national regulators which can impose more detailed access rules. For example, in respect of the Dutch commitments Gasunie worked in close cooperation with the Dutch regulator.

5.4.4.4 The TTPC case 3.501

Eni Spa is an Italian energy conglomerate which has various gas related activities. It not only is the incumbent gas supplier on Italian wholesale and distribution markets, but also controls the Italian transport network and has stakes in various transit pipelines. One of these pipelines is the fully controlled Trans Tunisian Pipeline Company, which it transports gas from Northern Africa, mainly from Algeria, to the Italian peninsula.

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In 2002 TTPC started to consult the shippers for an increase of the capacity of the pipeline for additional shipments of 6.5 billion m3 of Algerian gas per annum as of 2008. The additional capacity would be shared pro rata by the shippers in question. In 2003 it signed ship or pay contracts with four of them. The contracts required Eni’s approval. In the summer of 2003, Eni considered that market conditions had radically changed, because of the envisaged construction of LNG terminals. This and the extension of TTPC’s capacity would create a situation of oversupply. Eni therefore refused to approve the contracts.

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The Italian competition authority held that Eni cancelled the project in order to avoid increased competition on the Italian gas markets and hence to protect its dominant downstream operations. This conduct was held to be a serious violation of Article 102 TFEU. The authority imposed a fine of € 290 million. In addition, it ordered Eni to cease the infringement. In that context, it ordered Eni to resume the contract activities and the construction activities according to a detailed investment and construction plan which Eni presented as an undertaking.1202 The fine was considerably reduced in the subsequent appeal procedures.

1202 Case 15174, Eni-Trans Tunisian Pipeline, 15 February 2006, Bolletino n5 of 20 February 2006.

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5.4.4.5 The E.ON case One of the first case brought after the sector inquiry concerns E.ON and in particular the purchasing behaviour of E.ON Netz, the vertically integrated transmission company.1203 This TSO was accused of having favoured E.ON’s generation and wholesale activities by purchasing balancing services from its sister company. Selling electricity to the TSO for balancing purposes procured E.ON’s generation affiliate a stable outlet. In addition, the vertically integrated TSO was also accused of having actively sought to prevent newcomers supplying balancing services. This conduct thus raised the cost of balancing services and indirectly of network access to the detriment of E.ON’s competitors and ultimately of German consumers.

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In order to avoid being fined for this practice, E.ON offered a very far reaching commitment which basically consisted in divesting its TSO. In the meantime, the independent Dutch TSO, TenneT, acquired its German counterpart. The Commission thus achieved ownership unbundling of one of the largest German TSO’s via an Article 102 procedure.1204

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5.4.4.6 The RWE case In its intervention against RWE, the Commission followed a similar approach for the unbundling of one of the largest gas TSOs. The network abuse consisted of two practices.1205

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First, RWE was accused of keeping capacity for its own downstream supply businesses, especially on bottlenecks. It reserved long term capacity on this TSO for its own supply business, whereas there was considerable demand from third parties. It also concealed the existence of available capacity to third party suppliers which could have competed with RWE on downstream markets. Moreover the capacity that was available was allocated in a manner that prevented competitors gaining access.

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The second practice consisted of a margin squeeze. By applying relatively high transportation tariffs and by relatively low tariffs on the downstream supply markets, margins of competitors were squeezed. This prevented competitors,

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1203 COMP/39.389, German electricity balancing market, OJ 2009, C 36/8. 1204 See on this Rosenberg, “Unbundling through the back Door... The Case of Network Divestiture as a Remedy in the Energy Sector”, 30(5) European Competition Law Review (2009), 237-254. 1205 Case COMP/39.402, RWE gas foreclosure, OJ 2008, C 310/23.

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which were just as efficient as RWE, from competing effectively on the downstream supply markets. The effects of this margin squeeze were reinforced by the rebates which the TSO granted to large users, which turned out to be RWE in practice. Also, RWE was exempted to pay the balancing services, which it essentially supplied itself.

3.509

Rather than undergoing the repressive effects of an ongoing prohibition procedure, RWE proactively offered to sell its gas transport network.

5.4.4.7 The ENI case 3.510

The intervention of the Commission against ENI rests on the same principles as the Italian authority in the TTPC case. ENI was accused of refusing to grant capacity on transit pipelines from Germany and Austria or refusing such capacity on less favourable conditions. The Commission also objected to strategic underinvestment by ENI in these pipelines.

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Here again, the notice announcing the proposed commitments is very succinct and does not allow the reader to obtain greater clarity as to the exact charges brought against ENI1206. It is clear however that the charges must have been very serious. They were sufficiently compelling to convince ENI to offer the divestment of its Swiss, Austrian and German transit businesses.

5.4.4.8 The BEH Electricity case1207 3.512

The case concerns clauses amounting to territorial restrictions BEH would have included in its wholesale supply contracts with traders and certain large industrial users on the non-regulated Bulgarian wholesale electricity market. These restrictions would hinder electricity purchasers from exporting energy sourced from BEH (‘destination clauses’). These contracts would include sanctioning mechanisms (penalty or early termination). For different reasons, buyers and competing producers are unable to exert pressure on BEH. This is probably why the Commission took the Article 102 TFEU route and not the Article 101 TFEU route, more traditional for this kind of restriction. Interestingly, the Commission considers that restrictions on exports have an internal consequence in the sense that it limits the development of wholesale market liquidity (see para 65-67). Most interesting are probably the commitments negotiated. As often, the Commission achieves far-reaching market design improvements 1206 OJ 2010, C 55/13. 1207 Case AT.39767, BEH Electricity, Commission decision of 10 December 2015.

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through antitrust enforcement. This time, it extracted from the state-owned incumbent the commitment to build an independent power exchange in Bulgaria through an agreement with a third party (Nord Pool Spot). Within six months, BEH will “unbundle” the trading platform by transferring capital to the Ministry of finance and will not acquire direct or indirect influence over the divested asset. A second commitment concerns market liquidity, as BEH commits to offer volume on the new day-ahead trading platform. Of course, territorial restrictions on the contracts will have to be removed.

5.4.4.9 The BEH Gas1208 and Romanian gas interconnector1209 cases Next are the BEH Gas and the Romanian gas interconnector cases. They follow what has become a fairly standard approach.

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In the BEH Gas case, the Commission imposed a EUR 77 Mns fine on the (vertically-integrated) Bulgarian dominant transport operator for restricting access to the gas transportation infrastructure (import pipeline, transportation network and the only storage facility in Bulgaria). The Commission qualified the infrastructure as an “essential facility”, whose access was essential to enter into wholesale gas supply. This enforcement action comes along support granted to opening of a gas interconnector between Bulgaria and Greece, as well as a more structured cooperation between neighbouring member states (Hungary, Romania, Austria and Bulgaria) to diversify gas supply.

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In the Romanian gas interconnector case (still pending), the Commission considers that Transgaz’s behaviour may amount to partitioning the internal market and endangering security of supply. In particular, Transgaz may have abused its dominant position by i) making gas exports commercially unviable through high export fees, ii) delaying strategically the building of relevant export infrastructure and iii) using “unfunded” technical arguments to limit exports. The Commission is therefore using again the controversial argument that a company is strategically under-investing in a piece of infrastructure (see ENI case above). Commitments are essentially composed of an alignment of export tariffs on domestic tariffs, the offer of maximum firm export capacities to Hungary and Bulgaria, allocated in a transparent and non-discriminatory manner, as well as a broad commitment to stop any behaviour deterring exports.

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1208 Case AT.39849, BEH Gas, Commission decision of 17/12/2018, no public version available at the time of writing. 1209 Case AT.40335, Romanian gas interconnectors, in the market test phase at the time of writing.

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5.4.4.10 Upstream gas supplies in Central and Eastern Europe 3.516

In the recent Gazprom case, the Commission considered that the company, which holds a dominant position in the upstream wholesale gas supply markets of eight Member States (Estonia, Latvia, Lithuania, Poland, the Czech Republic, Slovakia, Hungary and Bulgaria) may have implemented a strategy of market segmentation by preventing the free flow of gas. Gazprom’s position would be protected by a number of barrier to entry, in particular the lack of available gas infrastructure.

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The Commission’s view was that restrictions on the free flow of gas were implemented by explicit contractual export bans or destination closes and other contractual or non-contractual restrictions with an effect equivalent to territorial restrictions. Gazprom’s gas supply contracts would contain (or have contained) clauses that prevent the wholesalers from re-selling the gas outside their country (re-export bans or re-sale restrictions) as well as destination clauses that oblige the wholesalers to use the gas only in their own country or, in some instances, to only sell to certain customers within their own country. Market segmentation may have also been achieved by Gazprom’ refusal to change gas delivery points or the location where the gas is metered. The Commission decision gives a few examples of restrictions with an effect equivalent to territorial restrictions. For instance, one of Gazprom’s gas supply contract contained an expansion clause whereby Gazprom has a right to increase the minimum annual quantities of gas (the take-or-pay obligation) in case a customer was to re-export some of the annual gas quantity. The increase of the minimum annual quantity matches the amount of gas re-exported by a customer. This clause is also accompanied by an obligation to inform Gazprom about all export quantities.

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As a first commitment, Gazprom generally accepted to ban all direct and indirect restrictions to the cross-border sale of gas. Specifically to the Bulgarian gas transport system, Gazprom committed that it would make changes to the relevant gas supply and gas transport contracts in order to enable the conclusion of interconnection agreements at the interconnection points between the Republic of Bulgaria and other EU Member States and to enable the adjustment of the current gas allocation method. The change of gas allocation methods and the conclusion of interconnection agreements aim to put the Bulgarian TSO in full control of gas flows in Bulgaria and to enable the free flow of gas across the Bulgarian borders. To overcome the infrastructure isolation of the Baltic States and Bulgaria, Gazprom committed to offer to its relevant CEE customers the possibility to request that all or parts of their contractual gas volumes 344

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delivered at certain delivery points in the CEE could be delivered to Bulgaria or the Baltic States (the selection of delivery points being broad enough to ensure effectiveness). Gazprom committed to offer this swap-like operation for as long as the customer is unable to arrange itself for the transport of gas from the relevant contractual delivery point to Bulgaria or the Baltic States. In order to enable customer to flow gas in both directions across borders as if infrastructure already existed, Gazprom committed to offer the change of delivery points on a bi-directional basis enabling gas to be shifted in both directions between, on the one hand, the Baltic States and Bulgaria and, on the other hand, a number of delivery points in the rest of Central and Eastern Europe.

5.5 Discrimination It results from Article 102(c) TFEU that dominant firms are not allowed to discriminate between their customers, if a difference in treatment causes these customers competitive harm on the markets in which they operate. Comparable customers must be treated in a comparable manner and different situations must be treated differently in function of their differences. For example, where economies of scale are important, a dominant firm may offer customers buying large volumes better conditions than customers buying small quantities, provided that these discounts reflect the efficiencies.

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5.5.1 Discrimination and competition on downstream markets The price discrimination prohibition suggests that dominant firms have a special responsibility to protect a fair competitive process on downstream markets, the underlying idea being that dominance should not lead to additional distortions of competition. Seen from this perspective Article 102 TFEU has as its object to protect downstream competition against the possible effects of the dominant position on the upstream market. For this reason the Commission condemned the discriminatory rental conditions applied by Aéroports de Paris for the lease of business premises connected to the airport.1210 The case was started by a complaint from Alpha Fly Services, a British provider of airport services, which had to pay more rent than its French competitors. The protection of downstream competition is particularly relevant if the dominant firm also operates on the downstream market. In those circumstances, the dominant firm may be tempted to favour its activities on the downstream market by offering its own business units better conditions than those applied to 1210 Judgment of 12 December 2000, Aéroports de Paris v Commission, T‑128/98, EU:T:2000:290.

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the firms competing with these units. If this price discrimination concerns an important cost component of the goods or services offered on the downstream markets, the conduct in question may ultimately lead to the monopolization of the downstream market. In order to avoid those situations, Article 102 TFEU could require dominant firms to treat their business operations on downstream markets at arms length conditions. This could mean for example that a dominant electricity producer must sell electricity to its own supply business at the same terms and conditions as those applied to equivalent non-integrated entities.

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The Czech Office for the Protection of Competition confirmed these principles when imposing a fine of € 13.2 million on RWE subsidiary Transgas. The authority held that this company was dominant on the market for wholesale supply of natural gas and that in selling to local distribution companies it discriminated against non-affiliated subsidiaries. Transgas also prohibited its customers from reselling outside their territories. Moreover the Office considered as an abuse of dominant position RWE Transgas’s conduct consisting in setting prices of gas for eligible customers at the same level as the regulating body did for protected customers whereas the costs for eligible and protected customers are different.1211

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The French competition authority adopted a similar approach in the Direct Energie case.1212 This retail supply company bought its electricity on the wholesale market from EDF. It found out that the purchasing prices did not allow it to compete effectively against EDF on the downstream markets, where EDF applied very aggressive prices. Direct Energie filed a complaint against this margin squeeze with the French authorities. The case ultimately led to a commitment by EDF to release 1500 MW electricity in 2008 and 2009 under an auction scheme.

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Although the Czech and French interventions find support in precedents under Union law, it is uncertain whether the Commission would be willing to follow a similar approach. According to the Notice, the Commission will not intervene to support competitors. It will intervene only if there are (cost related) reasons to believe that the excluded competitors are just as efficient as the dominant firm and if the elimination of these competitors negatively affects consumers. Neither the French nor the Czech authority carried out such a test. Even so, there are good arguments to support their interventions as a means to kick start competition in markets dominated by incumbent suppliers.

1211 Office for the Protection of Competition, 11 August 2006, www.compet.cz 1212 Case Direct Energie, Decision 07-MC-04 and Decision 07-D-43.

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5.5.2 Discrimination without competition on downstream markets Conversely, Article 102 TFEU does in principle not prohibit price discrimination between non-competing customers. If those customers do not compete, there is no downstream competition requiring protection. Such a scenario may arise if customers buy the same raw material from the dominant supplier for use in different product or service markets or for use in different geographical markets. This could imply for example that a dominant electricity supplier is not necessarily expected to offer its customers in the aluminium sector the same conditions as those applied to greenhouse farmers. However, as all rules, this principle may have exceptions.

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The first exception concerns geographical price discrimination; i.e. applying different prices to customers in different geographical areas. Since market integration is one of the objectives of the EU Treaty, all state or firm conduct that has its object or effect of dividing markets is likely to be caught by the rules of the Treaty. This also applies to Article 102 TFEU. In United Brands the Court of justice ruled that a dominant firm should not seek to exploit differences between the geographical markets where it operates. Although the Court acknowledged that dominant firms do not have a duty to create a common market for the goods they sell, it may not necessarily charge different prices which the various geographical markets can bear. In United Brands the Court considered that the company was selling an identical product from one supply point to banana distributors located in various territories. The Court felt that operating distinctions between those customers was discriminatory, even if these distributors did not compete which each other in their respective home markets. It held, for reasons more akin to income distribution than market functioning, that it was not up to the dominant firm to benefit from differences between geographical markets, hence implying that the benefit should accrue to the distributors.1213

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The second possible exception which is also normative in nature concerns emergency or shortage situations where the dominant firm has to allocate its goods between its customers. Although the Court acknowledged that a dominant firm may give priority to long standing customers and is not obliged to sell to other customers, it is probably under a duty to treat all long standing customers in a comparable manner.1214 In those exceptional scenarios dominant firms also face special responsibilities.

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1213 Judgment of 14 February 1978, United Brands and United Brands Continentaal v Commission, 27/76, EU:C:1978:22. 1214 Judgment of 29 June 1978, Benzine en Petroleum Handelsmaatschappij and Others v Commission, 77/77, EU:C:1978:141.

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5.5.3 Discrimination and price retaliation 3.528

One of the most difficult price discrimination issues concerns the reaction that a dominant firm can give to aggressive price competition by one of its competitors. These competitors are likely to focus their competitive strategy by offering specific customers advantageous terms and conditions. If the dominant firm wants to keep its customers, it will have to react by matching its rival’s offer. The question then arises whether the dominant firm is entitled to limit this counterproposal to the limited group of solicited customers or whether the dominant firm is supposed to extend this offer to all its customers, including those who were not approached by the competitor. The case law does not give an unequivocal answer to this question. In United Brands the Court suggested that a dominant firm has the right to defend its position and hence that it may respond selectively to a selective threat.

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In Irish Sugar, however, the General Court did not leave much room of discretion to the dominant firm which had granted special rebates to customers established in a border region. Only they were exposed to imports from another Member State.

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“In this case, the applicant has been unable to establish an objective economic justi‑ fication for the rebates. They were given to certain customers in the retail sugar mar‑ ket by reference solely to their exposure to competition resulting from cheap imports from another Member State and, in this case, by reference to their being established along the border with Northern Ireland. It also appears, according to the applicant’s own statements, that it was able to practice such price rebates owing to the particular position it held on the Irish market. Thus it states that it was unable to practice such rebates over the whole of Irish territory owing to the financial losses it was making at the time. It follows that, by the applicant’s own admission, its economic capacity to offer rebates in the region along the border with Northern Ireland depended on the stability of its prices in other regions, which amounts to recognition that it financed those rebates by means of its sales in the rest of Irish territory. By conducting itself in that way, the applicant abused its dominant position in the retail sugar market in Ireland, by preventing the development of free competition on that market and dis‑ torting its structures, in relation to both purchasers and consumers. The latter were not able to benefit, outside the region along the border with Northern Ireland, from the price reductions caused by the imports of sugar from Northern Ireland.

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“Thus, even if the existence of a dominant position does not deprive an undertaking placed in that position of the right to protect its own commercial interests when they are threatened (see paragraph 112 above), the protection of the commercial position of an undertaking in a dominant position with the characteristics of that of the ap‑ plicant at the time in question must, at the very least, in order to be lawful, be based on criteria of economic efficiency and consistent with the interests of consumers. In this case, the applicant has not shown that those conditions were fulfilled”.

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Behind this reasoning could lay a policy objective. The limitation of the possibility of a dominant firm to respond to competitive attacks selectively does not purport to protect downstream competition, but concerns the very existence of the dominant position. Firstly, if the dominant firm must extend its offer to all its customers, all customers benefit from competition in the dominated market. The selectivity prohibition thus re-introduces a competitive price level. Secondly, this prohibition contributes to the erosion of the dominant position, because it prevents the dominant firm from financing its lower prices to the solicited customers by revenues obtained from the higher (monopoly) prices charged to the unthreatened customers. It compels the dominant firm to be just as efficient as the challenging competitors.

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However, the wind is turning. The Notice may mark the beginning of a more liberal trend. Minimizing short run losses resulting directly from competitors’ actions can be a legitimate aim. The key issue remains however to define the proportionality of the response by the dominant firm. The response should not involve additional investments and should be indispensable to minimize losses. The test also implies a balancing test between the interests of competitors to expand their market share and the dominant firm’s interest to minimize losses.1215

3.533

This generally worded proportionality test shows that the selective retaliation issue remains a woolly issue. Two factors seem relevant in this context. Firstly, there is a fundamental difference between a selective price response and selective price attack or, to put it differently, between the defence of an established position against competition and the willingness to extend that position at the expense of such competition. It is submitted that a passive response is more likely to be tolerated than aggressive action. If the dominant firm invests to retaliate, one could argue that its response ceases to be purely passive. Secondly, there should be somewhere a limit to the circle of customers to which the dominant firm has to extend its competitive response. This limit is set in the first place by

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1215 See the Discussion Paper published by the Commission’s services in 2005. This paper opened the debate leading to the adoption of the Guidance Notice.

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the relevant market: there is in any event no obligation to extend the counter offer to customers outside that market. The proportionality principle may justify a further limitation of the circle.1216 If the attack by the competitor is limited to a specific region or if it focuses a specific category of customers, it can be argued that the counter offer of the dominant firm can be limited to all customers in that region or belonging to that category.

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There are no reasons why the price discrimination rules discussed above should be applied differently in the energy sector. On the contrary, in a market recently exposed to competition, incumbent firms may naturally be inclined to lower prices only to customers which are effectively exposed to competition by keeping prices at a higher level for those who have not yet been solicited by competing suppliers. Such a pricing practice is likely to raise problems under Article 102(c) TFEU.

5.5.4 Discrimination according to nationality: the Svenska Kraftnet, OPCOM and DE/DK interconnector cases 3.536

The Court of Justice has repeatedly ruled that a dominant firm may not discriminate between its customers on the basis of nationality. Such discrimination does not necessarily cause consumer harm, but are manifestly contrary to the fundamental principles of Union law. Three interesting cases concerned the energy sector.

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Although official documents do not specify the nature of the competition concerns used in the Svenska Kraftnet case, the plausible explanation is that this TSO favoured Swedish electricity users to Danish users. The facts of the case are relatively complex. Acting on the basis of a complaint of Danish users, the Commission considered that Svenska Kraftnet had abused its dominant position as a TSO by limiting capacity on the Swedish-Danish interconnector. The Swedish TSO did not deny this fact, but argued that it had to do so to relieve constraints on the internal Swedish grid. To put it simply the openness of the interconnector implied that additional power had to flow from the northern part of Sweden, where most of the (hydro) generation occurs to the more populated zones in the South. The TSO therefore decided to relieve the internal pressure on its grid, by reducing capacity on the interconnector. The Commission did not agree with this

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1216 Judgment of 14 February 1978, United Brands and United Brands Continentaal v Commission, 27/76, EU:C:1978:22, grounds 189 and 190.

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analysis. In its view, the TSO could have managed the constraints by organizing counter-trade. Svenska Kraftnet decided to avoid a conflict with the Commission on these technical issues by offering commitments. The TSO offered to split Sweden into two or more pricing zones per 1 July 2011 and reinforcing its internal grid by November 2011. During the interim period, it will do its best to relieve congestion by counter-trade and by re-arranging dispatching priorities.

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Two important lessons can be drawn from the Swedish TSO case. First, the fact that a TSO is ownership unbundled does not set Article 102 TFEU aside. Even an independent TSO can abuse its dominant position. Second, the theory of harm upon which the Commission relies is not necessarily linked to consumer welfare. EU competition law also applies if market conduct affects fundamental principles of Union law, such as market integration and non-discrimination rules.

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Then, by its decision of 5th of March 2014, the Commission found that OPCOM, the only power exchange in Romania, together with its parent company Transelectrica, abused its dominant position by requiring all participants on the day-ahead and intra-day markets to have a Romanian VAT registration and consequently to establish business premises in Romania, even when they hold VAT registration somewhere else. The Commission showed that the VAT registration requirement did not derive from any legal obligation under national law and that no efficiencies could be demonstrated. A fine of about 1 million euros was therefore imposed on the companies1217.

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A more recent case is the DE/DK interconnector case.1218 The DE/DK interconnector case accounts for 40% of total transmission capacity between Scandinavia and continental Europe, and happened to be one of the most curtailed in Europe.

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According to the Commission, the Germany network operator TenneT may have limited cross-border capacity in the southbound direction (from Western Denmark to Germany), whereas wholesale prices are generally lower in the Nordic countries than in Continental Europe. TenneT would have limited the commercial capacity, in particular, when the domestic wind-based electricity production (mostly located in the north of the country) is high, creating

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1217 Case AT.39984, OPCOM/Romanian Power exchange, OJ 2014, C 314/7. 1218 Case AT.40461, DE/DK Interconnector.

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congestions. Allegedly, TenneT would be dominant in the market for electricity transmission within its control area.

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The theory of harm is that it would lead to internal market partitioning and discrimination against producers in Scandinavia. It would of course limit competition in the German wholesale supply market. As a result, relatively more expensive plants would have been running to meet demand. TenneT put forward as objective justification the fact that, during hours of high wind-based electricity production, allowing additional electricity flow via interconnectors to an already congested network could endanger the safety of the network. The Commission considered in this regard that TenneT had various other means to manage congestions, in particular redispatch and counter-trading.

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As commitments, TenneT proposed to offer maximum interconnectors’ capacity and in any event to guarantee minimum hourly capacity of 1300 MW to provide predictability to market players. Two exemptions are possible: first, in case of severe outage to the line, TenneT would have to offer at least 500 MW; second, no minimum capacity would have to be offered in emergency situations, even though TenneT is still due to maximise interconnector capacity. Emergency situations are deemed to be caused by (i) insufficient countertrading or redispatch potential or (ii) a request for assistance by other network operator to maintain security of supply. The propositions were only amended slightly after market testing, in particular to take into account forthcoming grid reinforcement projects. Commitments will be in force for nine years.

5.6 Exclusionary pricing practices 3.546

One of the reasons why the question of selective price responses by dominant firms has never been answered in unequivocal terms may be that the Commission and the Courts have rarely dealt with price discrimination issues in isolation. In most, if not all, cases the discrimination issue was part of a wider policy aimed at driving competitors out of the market. The Irish Sugar case for example concerned a wide range of abusive pricing practices, ranging from price discrimination to fidelity and target rebates.1219 A dominant firm can indeed use its dominant position in several ways to drive competitors out of the market.

1219 Judgment of 7 October 1999, Irish Sugar v Commission, T‑228/97, EU:T:1999:246.

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In many respects these pricing practices are advantageous for customers on the short term. They often concern the application of artificially low prices which the competitors of the dominant firm are unable to sustain on the longer term. Obviously, customers cease to benefit from the effects of this temporary competition once the dominant firm has succeeded in expelling its competitors. The advantages which the dominant firm seeks to exploit often concern the selectivity of the response and the dominant firm’s capability of financing the lower prices by revenues or “subsidies” obtained by virtue of its dominant position.

5.6.1 Predatory pricing Predatory pricing offers a classic example of such an exclusionary pricing practice. The practice consists of undercutting the prices of competitors by offering prices which do not cover the costs of the dominant firm. Such a pricing practice is obviously a costly affair and only makes rational sense if the dominant firm has the prospect of recovering the losses made as a result of below cost pricing. This can occur if barriers to entry make renewed market entry unlikely. For example, if market entry requires high sunk costs, the expelled undertaking may think twice before re-entering the market and re-incurring these costs, after have been successfully expelled as a result of the dominant firm’s predatory pricing policy.

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Predatory pricing can also be rational behaviour if the dominant firm has the ability to draw on resources which are not at the disposal of its competitors. This is where the element of selectivity, as described above, often plays a role. The dominant firm limits its price undercutting operation to customers solicited by competition and maintains the higher – above cost – price level for its remaining customers. In the absence of alternative financial resources, the competitor will have to sustain losses on its entire customer base, whereas the dominant firm only does so for a part of its customers.

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5.6.1.1 The AKZO case This scenario occurred in the AKZO case concerning the British market for organic peroxides.1220 This product can be used both in the plastics industry and as a bleaching agent for flour production. AKZO, which was dominant in this market, competed with ECS in the segment for flour additives. When ECS decided to enter the plastics part of the market, AKZO reacted by targeting ECS’s customers in the flour segment by offering them substantially lower prices than to customers in the plastics sector. Since price competition and low prices are 1220 Judgment of 3 July 1991, AKZO v Commission, C‑62/86, EU:C:1991:286.

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normal features of the competitive process the Court applied a test which enabled it to distinguish predatory prices from competitive prices. According to this test, developed by the American professors Areeda and Turner, prices are supposed to be predatory in nature, if they do not cover marginal costs. Since marginal cost is primarily an academic concept, the Court relied on average variable costs as a proxy.

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“70 It follows that Article 86 (now Article 82) prohibits a dominant undertak‑ ing from eliminating a competitor and thereby strengthening its position by using methods other than those which come within the scope of competition on the basis of quality. From that point of view, however, not all competition by means of price can be regarded as legitimate.

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71 Prices below average variable costs (that is to say, those which vary depending on the quantities produced) by means of which a dominant undertaking seeks to eliminate a competitor must be regarded as abusive. A dominant undertaking has no interest in applying such prices except that of eliminating competitors so as to enable it subsequently to raise its prices by taking advantage of its monopolistic posi‑ tion, since each sale generates a loss, namely the total amount of the fixed costs (that is to say, those which remain constant regardless of the quantities produced) and, at least, part of the variable costs relating to the unit produced.

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72 Moreover, prices below average total costs, that is to say, fixed costs plus variable costs, but above average variable costs, must be regarded as abusive if they are deter‑ mined as part of a plan for eliminating a competitor. Such prices can drive from the market undertakings which are perhaps as efficient as the dominant undertaking but which, because of their smaller financial resources, are incapable of withstand‑ ing the competition waged against them”. This test implies that sales below average variable average costs are considered to be abusive and that prices below average total costs are abusive only if these prices are applied with the intent to exclude a competitor from the market. The Notice is based on the same principles, but adds some important qualifications (see paragraphs 64-74.)

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5.6.1.2 After AKZO 3.554

Predatory pricing remains a rare phenomenon. Such a pricing policy remains a risky and costly affair that can be effective only if the company already enjoys substantial market power. After AKZO, Article 102 TFEU applied to preda354

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tory pricing practices in very few instances and never in cases where it was the alone abusive practice. In Tetra Pak II, for example, the prices in question were considered to be predatory in nature, not only for cost related reasons but also because they were applied selectively.1221 In CMB the predation was not such much cost related. The action to systematically undercut newcomers on certain shipping routes was more an emanation of a cartel that decided to collectively finance so called “fighting ships”.1222 On 16 July 2003 however the Commission applied a purely cost related test in the Wanadoo case.1223 The facts concerned the prices charged by France Télécom’s subsidiary Wanadoo for high speed internet services. Pursuant to this pricing policy, which enabled the already dominant internet provider to increase its market share from 46% to 72% of the French market for high speed internet access in less than two years, Wanadoo offered ADSL services below their average variable costs for a certain period and below average total costs for another period. For that latter period the Commission established that the price policy was part of an overall plan to pre-empt a new competitive market.

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On 30 January 2007 the General Court dismissed France Télécom’s appeal against the 2003 decision.1224 The part of the judgment dealing with the pricing practice relates to a large extent to the costs which the Commission should have taken into account as a benchmark for the application of the AKZO test. One of the issues concerned the period for which the costs should be calculated. The General Court validated the Commission’s choice of a 48 months period, which was the average minimum duration of subscriptions Obviously cost related questions are complex economic issues. According to established case law, the Commission’s enjoys a wide margin of discretion in these matters, judicial control being limited in nature.

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The General Court also held that dominant firms may align their prices to those of their competitors, provided, however, that the dominant firm continues to cover its costs. Nor can below cost pricing be justified by the fact that the strategy did not produce the desired effects: “where an undertaking with a dominant position actually implements a practice whose object is to oust a competitor, the fact that the result hoped for is not achieved is not sufficient to prevent that being an abuse.” Finally, the General Court confirmed the Commission’s position

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1221 Judgment of 14 November 1996, Tetra Pak v Commission, C‑333/94 P, EU:C:1996:436. 1222 Judgment of 8 October 1996, Compagnie maritime belge transports and Others v Commission, T‑24/93 to T‑26/93 and T‑28/93, EU:T:1996:139. 1223 Case COMP/38.233, Wanadoo Interactive, Decision of 16 July 2003. 1224 Judgment of 30 January 2007, France Télécom v Commission, T‑340/03, EU:T:2007:22.

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that proof of recoupment of losses was not a precondition to making a finding of predatory pricing. All these findings have been confirmed by the Court of Justice upon appeal.1225

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In Post Denmark, the Court of Justice judged that low prices offered to a competitor’s customer does not amount to an exclusionary practice merely for the fact that this price is lower than the average total costs attributed to the activity concerned, but higher than the average incremental costs pertaining to that activity (as defined in this particularly case). The Court endorsed an effect-based approach by stating that it was necessary to consider whether that pricing policy, without objective justification, produced an actual or likely exclusionary effect, to the detriment of competition and, thereby, of consumers’ interests. The Court interestingly noted, in paragraph 38, that (emphasis added): “to the extent that a dominant undertaking sets its prices at a level covering the great bulk of the costs attributable to the supply of the goods or services in question, it will, as a general rule, be possible for a competitor as efficient as that undertaking to compete with those prices without suffering losses that are unsustainable in the long term”.

5.6.1.3 Predatory prices and cross subsidies 3.559

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As mentioned above, predatory prices are a costly affair. A dominant firm is only likely to embark in these practices if it can recover the costs. This possibility of recovery (recoupment) can exist as a consequence of high entry barriers but also as a result of spreading the costs over a wider market, in particular when the predatory prices are limited to a few customers only. The costs of the operation are then borne by the customers paying the usual higher prices. This possibility of cross-financing predatory pricing practices is facilitated considerably when the dominant firm is certain of its monopoly in one market where it can generate the necessary revenues to undertake predation elsewhere without being exposed to competitive challenges. This can happen where the dominant firm enjoys statutory dominance in one market, for example the market of electricity supply to non-eligible customers, and where the revenues obtained in that market are used to finance pricing operations in a related market opened to competition, for example the market for electricity supply to eligible customers. The Deutsche Post case of 2001 offers a good example of the interaction between such cross-subsidies and predatory pricing.1226 Deutsche Post financed advanta1225 Judgment of 2 April 2009, France Télécom v Commission, C‑202/07 P, EU:C:2009:214. 1226 Case COMP/36.915, Deutsche Post AG – Interception of cross border mail, OJ 2001, L 331/40.

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geous fidelity rebates and below-cost prices in the competitive market for parcel services via revenues from its monopoly in the letter market. Since both the letter and parcel services were integrated in one and the same undertaking and because variable and total costs concerned both markets, the Commission had to determine which costs were relevant for assessing the predatory nature of the parcel prices. In order to decide whether or not the prices in the parcel market were below cost, it focused on incremental costs, i.e. the additional costs of providing the parcel service. The Commission established that Deutsche Post had been offering parcel services below these incremental costs for a period of five years. The Deutsche Post case is not only interesting because of the introduction of the incremental cost test in cross-subsidy cases, but also because of the remedies imposed by the Commission. In order to avoid any confusion between the competitive and monopolized operations, the Commission ordered Deutsche Post to ensure full transparency in the financial relations between the two activities. In order to meet this transparency requirement, Deutsche Post decided to set up a separate company for the supply of parcel services. This company is free to buy its input from third parties or from Deutsche Post at market prices.

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5.6.2 Exclusionary pricing practices and the energy sector It is submitted that the Deutsche Post is highly relevant for any regulated industry which is in a phase of transition to a full liberalization. As long as customers are not free to choose, reserved monopolies will continue to exist. So does the risk of cross-subsidies between those reserved markets and abusive conduct in adjacent markets. It should be noted, however, that cross-subsidies in themselves are not illegal under Article 102 TFEU. They only become illegal if the conduct in the market open to competition is abusive in nature.1227

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The risk that prices of (incumbent and dominant) electricity companies be considered abusive is not remote. In a phase of transition and in a political climate opposed to high prices, the industry is compelled to compete on marginal costs. In many cases, prices cover average variable costs (AVC), but do not suffice to cover average total costs (ATC). Prices in the grey zone between AVC and ATC can be considered abusive if the complainant or prosecuting authority is able to show that the dominant firm intended to eliminate a competitor. Since the

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1227 It should however be noted that such conduct can be contrary to Articles 107-108 TFEU. See judgment of 3 July 2003, Chronopost and Others v Ufex and Others, C‑83/01 P, C‑93/01 P and C‑94/01 P, EU:C:2003:388.

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elimination of competitors is the aim of most companies, the intent test can be met relatively easily. Dominant electricity firms therefore have a keen interest in ensuring that they are not trapped by the AKZO test as applied in Deutsche Post.

5.6.3 The price squeeze 3.564

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Another type of predatory pricing concerns the possibility of the dominant firm attempting to raise its rival’s costs. This situation can arise if the dominant firm is active on the upstream market of raw materials as well as on the downstream market for the products incorporating these materials. If it is dominant on the upstream market, its rivals on the downstream market will depend on their competitor for the supply of raw materials. The dominant firm may want to exploit that possibility by simultaneously increasing the price of the raw material and decreasing its prices on the downstream market. This phenomenon obviously affects the margins which the competitors can achieve on the downstream market and is therefore called price or margin squeeze.1228 The Commission’s intervention against Deutsche Telekom’s (DT) pricing practice offers a good example of the prohibition of such a pricing practice.1229 The Commission found that DT charged new entrants high prices for wholesale access to the local loop. Competitors depend on access to these local networks if they want to reach customers on the downstream retail markets for internet broadband and narrowband access. DT dominated both the wholesale market and the retail markets. By charging high prices at the wholesale level and by competing aggressively at the retail level, DT did not enable its competitors to make a margin on their sales on the retail market. It is worth mentioning that in the Spain/Commission1230 and TeliaSionera1231 judgments, the General Court and the Court of Justice clarified that the margin squeeze abuse is autonomous from pure refusal to supply cases à la Bronner. In particular, there is no need to establish the indispensability of the essential input in margin squeeze cases. It also stated that abusive margin squeeze can exist even when competitors’ margin remains positive despite the dominant firm conduct. In this case, “ it must then be demonstrated that the application of that pricing 1228 Notice on the application of the competition rules to access agreements in the telecommunications sector – framework, relevant markets and principles, OJ 1998, C 265/02, paragraph 117; Case No IV/30.178, Napier Brown - British Sugar, OJ 1988, L 284/41; judgment of 7 October 1999, Irish Sugar v Commission, T‑228/97, EU:T:1999:246. 1229 Case COMP/C-1/37.451, 37.578, 37.579, Deutsche Telekom AG, OJ 2003 L 263/9.. 1230 Judgment of 29 March 2012, Spain v Commission, T‑398/07, EU:T:2012:173. 1231 Judgment of 17 February 2011, TeliaSonera, C‑52/09, EU:C:2011:83.

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practice was, by reason, for example, of reduced profitability, likely to have the consequence that it would be at least more difficult for the operators concerned to trade on the market concerned.” 1232 Such a scenario can also occur in energy markets, as demonstrated by the case discussed above. Vertically integrated network operators may be inclined to charge high transmission or distribution fees whilst applying relatively low prices on the downstream supply markets. The profits made on the network market serve to finance the lower prices on the supply market.1233 Unbundling requirements and ex ante tariff regulation have significantly reduced the scope for such pricing practices. However, they can also occur in unregulated situations, for example when a dominant electricity producer charges high prices on the upstream wholesale market and relatively low prices on the downstream supply market.

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In the Deutsche Bahn case,1234 the Commission looked at the pricing system for the supply of traction current, which the subsidiary DB Energie, the de facto sole supplier, applies to railway undertakings operating in Germany. It found that this pricing system was creating a margin squeeze on the rail long distance passenger and freight transport markets, without objective justifications. Deutsche Bahn committed to offer access to the grid for third-party suppliers, and separate prices for access to the transmission grid and for traction current.1235 The prices offered by DB Energie would not contain volume or duration rebates and contracts would be limited to 1 year with easier conditions to terminate contracts. Also, existing customers would receive a 4% payback for their traction current bill in the year leading up to the Commission’s decision, since the Commission considered that a price reduction of 4% would most likely have prevented margin squeeze over the entire period of the (alleged) infringement. We note that Deutsche Bahn introduced an appeal against the inspection decisions themselves. The General Court confirmed the decisions of the Commission,1236 but the Court of Justice annulled the General Court’s judgment as well as the Commission decision for a problem with due process.1237

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1232 Judgment of 17 February 2011, TeliaSonera, C‑52/09, EU:C:2011:83. 1233 If the prices on the downstream market are not below (incremental or marginal) costs, they are not abusive by themselves. This means that, contrary to the Deutsche Post case described above. The case does not give rise to illegal cross subsidization. 1234 Case COMP/AT.39678-39731, Deutsche Bahn I/II, OJ 2014, C 86/04. 1235 DB energie was both the sole supplier of traction current and the operator of the specific electrical network necessary for the distribution of traction current. 1236 Judgment of 6 September 2013, Deutsche Bahn and Others v Commission, T‑289/11, T‑290/11 and T‑521/11, EU:T:2013:404. 1237 Judgment of 18 June 2015, Deutsche Bahn and Others v Commission, C‑583/13 P, EU:C:2015:404.

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5.6.4 Loyalty rebates 3.569

The granting of rebates is a normal feature of price competition. In many industries, rebate policies are at the core of effective price competition. Rebates can however become a problematic issue for dominant firms, as Article 102 TFEU considerably limits their freedom to grant rebates, even if these rebates make perfect commercial sense. This is because rebates may have a foreclosure effect on smaller competitors. Such effects are most likely to occur where the dominant firm subjects the grant of the rebate to the condition that the customer buys exclusively from the dominant firm.

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It results from the case law that any fidelity or loyalty rebate granted by a dominant firm conflicts with Article 102 TFEU. This follows from grounds 89 to 92 of the judgment of the Court of Justice in Hoffman La Roche: “The same applies if the said undertaking, without tying the purchasers by a formal obligation, applies, either under the terms of agreements concluded with these pur‑ chasers or unilaterally, a system of fidelity rebates, that is to say discounts condition‑ al on the customer’s obtaining all or most of its requirements – whether the quantity of its purchases be large of small – from the undertaking in a dominant position”.

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Obligations of this kind to obtain supplies exclusively from a particular undertaking, whether of not they are in consideration of rebates or of the grinding of fidelity rebates intended to give the purchaser an incentive to obtain his supplies exclusively from the undertaking in a dominant position, are incompatible with the objective of undistorted competition within the common market, because - unless there are exceptional circumstances which may make an agreement between undertakings in the contact of article 85 and in particular of paragraph (3) of that article, permissible - they are not based on an economic transaction witch justifies this border for benefit but are designed o to deprive the purchaser off or restrict his possible choices of sources of supply and to deny other producers access to the market.

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The fidelity rebate, unlike quantity rebates exclusively linked with the volume of purchases from the producer concerned, is designed through the grant of a financial advantage to prevent customers from obtaining their supplies from competing producers.”1238

1238 Judgment of 13 February 1979, Hoffmann-La Roche v Commission, 85/76, EU:C:1979:36.

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As will be seen below, these considerations have to be interpreted in a broad manner.1239 All rebate systems which intrinsically favour the dominant firm by complicating the possibilities for competitors to match the offer of the dominant firm are likely to raise problems under Article 102 TFEU. The problems arise because the dominant firm can spread the financial consequences of its advantageous offer over a wider range of products or services than its smaller competitors. The Notice questioned the validity of this case law, which relies more heavily on the legal form of the rebate scheme than on its actual exclusionary effects. Conditional rebates are condemned only where they lead to actual or potential exclusion of a competitor that is just as efficient as the dominant firm.

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It is worth mentioning that the General Court stated in its Intel judgment that a finding of abuse in these cases does not depend on an analysis of the circumstances of the case at hand as such rebates are by their very nature capable of restricting competition, except in the presence of an objective justification. No actual effects and causal link between conduct and effect or damage to consumers would need to be shown. However, the Court of Justice in a much-waited judgment did not endorse this approach and annulled the judgment of the General Court. It considered, in particular, that “where the undertaking concerned submits, during the administrative procedure, on the basis of supporting evidence, that its conduct was not capable of restricting competition and, in particular, of producing the alleged foreclosure effects […] the Commission is not only required to analyse, first, the extent of the undertaking’s dominant position on the relevant market and, secondly, the share of the market covered by the challenged practice, as well as the conditions and arrangements for granting the rebates in question, their duration and their amount; it is also required to assess the possible existence of a strategy aiming to exclude competitors that are at least as efficient as the dominant undertaking from the market” (grounds 138 and 139).1240

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5.6.5 Target rebates A category of rebates that tends to favour the dominant firm, concerns targets which the customer must achieve to get his rebate. If these targets are linked to past performance, the customer has an incentive to buy the same quantities from the dominant firm as those bought during the reference period.1241 Target 1239 Judgment of 1 April 1993, BPB Industries and British Gypsum v Commission, T‑65/89, EU:T:1993:31. 1240 See also judgment of 25 July 2018, Orange Polska v Commission, C‑123/16 P, EU:C:2018:590. 1241 Judgment of 17 December 2003, British Airways v Commission, T‑219/99, EU:T:2003:343; Coca Cola, 19 October 2004, IP 04/1247.

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rebates are generally not granted in the form of lump sum payments but as a percentage applied to all goods or services bought during the reference period. A small percentage rebate granted over a large quantity of goods gives rise to a large rebate in absolute terms. The customer knows that by not achieving the target he or she will forgo that amount. In addition, competitors of the dominant firm will face serious difficulties to match that amount, because they will have to impute that amount on a quantity of goods or services which is necessarily smaller than the quantity sold by the dominant firm.

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The exclusionary effect of such target rebates is increased even further if the reference period chosen by the dominant player is long: the longer the period, the larger the quantities on which the rebate will be applied and the bigger the amount of the target rebate in absolute terms. In addition, the abusive nature of such target rebates can be increased if the dominant firm leaves the customer in the dark about the exact percentage of the target rebate.1242 This uncertainty complicates the possibility for competing firms to make matching offers.

5.6.6 Quantitative rebates 3.578

Until the Court’s judgment in the Michelin II case, it was generally assumed that dominant firms were free to operate quantitative rebate schemes. The difficulty consists in distinguishing target rebates from quantity rebates. An important element to bear in mind in this respect concerns the linear (progressive) or nonlinear (non-progressive) nature of the system. Linear systems imply a progression in the rebate scheme which is in line with volumes sold, whereas non-linear systems concern the grant of a fixed volume rebate irrespective of volumes sold. Until now non-linear systems have never been condemned by the Commission. Nor is there any reason to do so, because they do not produce any foreclosure effect. This is because a standard volume rebate can be matched by any competitor: e.g. a 3% volume rebate granted on all units sold above 100 units, leads to a 3% volume rebate per unit above the 100 units threshold. Competitors can match the effect of this rebate by lowering the price of each unit by 3%.

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The leading case on linear systems is the Michelin II case in which the Court limited the possibility for retroactive rebates. It is submitted that retroactive rebates can be granted only under schemes comparable to systems for income taxation: the percentage should be applied per slice or tier and not over the whole quantity. 1242 Judgment of 9 November 1983, Nederlandsche Banden-Industrie-Michelin v Commission, 322/81, EU:C:1983:313. See also judgment of 25 June 2010, Imperial Chemical Industries v Commission, T‑66/01, EU:T:2010:255.

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For example, the customer can get 3% on the first hundred units, 4% on the second tier of hundred units and 5% on the third tier of hundred units. By contrast, a system ceases to be quantitative if it is devised in a manner pursuant to which the customer gets 3% if he buys he hundred units, 4 % over the whole quantity purchased if he buys two hundred units and 5 % over the whole quantity purchased if he buys three hundred units. In that latter system, the 5% percentage applies to all three hundred units leading to a total rebate sum which is difficult to match for competitors selling significantly less than the dominant firm.1243

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In British Airways, in which the judgment of the General Court was upheld, the Court of Justice formulated the test as follows:

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“It follows that in determining whether, on the part of an undertaking in a dominant position, a system of discounts or bonuses which constitute neither quantity discounts or bonuses nor fidelity discounts or bonuses within the meaning of the judgment in Hoffmann-La Roche constitutes an abuse, it first has to be determined whether those discounts or bonuses can produce an exclusionary effect, that is to say whether they are capable, first, of making market entry very difficult or impossible for competitors of the undertaking in a dominant position and, secondly, of making it more difficult or impossible for its co-contractors to choose between various sources of supply or commercial partners. It then needs to be examined whether there is an objective economic justification for the discounts and bonuses granted. In accordance with the analysis carried out by the Court of First Instance in paragraphs 279 to 291 of the judgment under appeal, an undertaking is at liberty to demonstrate that its bonus system producing an exclusionary effect is economically justified.” 1244 It should be noted that actual proof of the exclusionary effect is not required: the theoretical possibility seems to suffice. In addition, the possibility to justify the rebate scheme should concern, according to ground 86 of the judgment, efficiencies which also benefit the consumer. The mere fact that the rebate scheme is efficient for the dominant firm itself, will not suffice as to prove the existence of an objective justification. 1243 The cumulative effect of the non-slice systems may imply that firms challenging the dominant firm may have to sell at a loss. If a customer s demand is 350 units and the price per unit charged by the dominant firm is E 10, the application of the linear system implies that the customer can get a total rebate of E 150 if he buys 300 units from the dominant firm. The competitors will have to match that amount on a smaller quantity. It is likely that any sale below 15 units entails a loss. 1244 Judgment of 15 March 2007, British Airways v Commission, C‑95/04 P, EU:C:2007:166, grounds 68 and 69.

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Unlike the case law discussed above, the Notice requires such effects. In order to do so, the Commission will define the relevant range on which competition between the dominant firm and its rivals will focus. This relevant range is the amount that customers are willing or able to buy from this rivals. In so far as the dominant firm is an obligatory trading partner, customers will generally not be in a position to switch all their sales to these rivals. They will always depend on the dominant firm for the non-contestable part of their demand.

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Now, a dominant firm may use that non contestable part as leverage to decrease the price for the contestable portion of demand. If the price for that relevant range falls below the average variable costs (as a proxy of average avoidable costs), the Notice assumes that a competitor that is just as efficient as the dominant firm will be foreclosed.

5.7 Unfair prices 5.7.1 The test 5.7.1.1 Introductory observations 3.585

One of the most puzzling elements of Article 102 TFEU concerns the prohibition listed in Article 102 (a) TFEU on directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions. The idea underlying this prohibition is that customers and suppliers of the dominant firm should be protected against practices which seek to exploit their dependence. The difficulty consists in finding the benchmark or criterion to determine when such exploitation or unfairness takes place. When does a dominant firm apply unfair prices and what is unfair? There are two conceptual problems complicating the answer to this question.

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First, prices reflect the functioning of the market mechanism. They are indicators of the well being of the competitive process and can be compared to a patient’s body temperature. Although fever can be problematic as such and may require urgent intervention, a patients’ temperature is a symptom and not the cause of an underlying disease. Similarly, unfair prices may signal the existence of problems, which may be structural or behavioural in nature.

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This leads us to the second problem. Unfair prices may be the outcome of a firm’s very dominance. Dominant firms are supposed to act independently. Indeed, as seen above, the Court defines dominance as the ability of the firm to 364

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behave itself independently from its customers, suppliers and competitors. This independence implies that the dominant firm can set its prices as it thinks fit or at least subject to the very limited pressure offered by any marginal competition that exists. This usually means that it will set prices at the level where it can make the largest profits. The prices of the dominant firm are not determined by external factors, but are set as a function of its cost curve. Monopoly or dominance profits are an intrinsic feature of dominance.

5.7.1.2 Excessive and unfair prices The notion of unfair prices entered Union competition law in the Court’s case law of the sixties and early seventies which dealt with the level of royalties for IP rights.1245 In Sirena v. Eda, the Court held that: “As regards the abuse of a dominant position, although the price level of the product may not of itself necessarily suffice to disclose such an abuse, it may however, if unjustified by any objective criteria, and if it is particularly high, be a determining factor.” 1246

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In General Motors the Commission used the wording of excessive prices for the first time, suggesting that an excessive price would be unfair.1247 Although the decision was annulled by the Court, it upheld the principle ruling that “Such an abuse might lie, inter alia, in the imposition of a price which is excessive in relation to the economic value of the service provided […].” 1248 It reiterated and specified this principle in United Brands by ruling that “charging a price which is excessive because it has no reasonable relation to the economic value of the product supplied would be such an abuse” In United Brands the Court did not specifically set out how the economic value of a product should be determined but it did introduce a two-stage test for determining whether a price is reasonably related to the economic value of the product supplied:

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“[t]his excess could inter alia, be determined objectively […] by making a comparison between the selling price of the product in question and its cost of pro1245 In judgment of 29 February 1968, Parke, Davis and Co., 24/67, EU:C:1968:11, the Court of Justice paved the way for this reasoning by determining that “although the sale price of the protected product may be regarded as a factor to be taken into account in determining the possible existence of an abuse, a higher price for the patented product as compared with the unpatented product does not necessarily constitute an abuse.” 1246 Judgment of 18 February 1971, Sirena, 40/70, EU:C:1971:18. 1247 Case IV/28.851, General Motors Continental, Commission Decision of 19 December 1974, p. 8. 1248 Judgment of 13 November 1975, General Motors Continental v Commission, 26/75, EU:C:1975:150.

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duction, which would disclose the amount of the profit margin. The questions therefore to be determined are whether the difference between the costs actually incurred and the price actually charged is excessive, and, if the answer to this question is in the affirmative, whether a price has been imposed which is either unfair in itself or when compared to competing products.”

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Hence the Court of Justice introduced a two-stage test to assess the Commission’s findings on excessive prices. The test first requires that the actual costs and prices are compared, i.e. a cost/price analysis.1249 The second test than assesses whether the price is unfair in itself or by comparison to competitor’s products.

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This test has ever since been applied in various ways: Price-cost margin analysis,1250 price comparisons across markets or competitors,1251 geographic price comparisons;1252 and comparisons over time. With respect to these methods, price comparisons should be consistent. In Francois Lucazeau v Sacem the Court of Justice held that: “When an undertaking holding a dominant position imposes scales of fees which are appreciably higher than those charged in other Member States and where a comparison of the fee levels has been made on a consistent basis, that difference must be regarded as indicative of an abuse of a dominant position. In such a case it is for the undertaking in question to justify the difference by reference to objective similarities between the situation in the Member State concerned and the situation prevailing in all the other Member States.” 1253

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Similar wording is used in Bodson v Pompes Funèbres.1254 In Euromax v IMAX the Commission also underlined the importance of a consistent approach. It held that the comparison with competitors was not the adequate mean of comparison in this case as: “The differences in type of contracts and performances compared are therefore too great to allow a sufficiently qualified and appropriate comparison.” 1255 Moreover, Euromax had not provided a consistent comparison 1249 Case COMP/C-2/37.761, Euromax v/IMAX, Commission decision of 25 March 2004, p. 5.4.2. 1250 Judgment of 14 February 1978, United Brands and United Brands Continentaal v Commission, 27/76, EU:C:1978:22; judgment of 13 July 1989, Lucazeau and Others, 110/88, 241/88 and 242/88, EU:C:1989:326. 1251 Case IV/28.851, General Motors Continental, Commission Decision of 19 December 1974, p. 8; judgment of 13 July 1989, Lucazeau and Others, 110/88, 241/88 and 242/88, EU:C:1989:326. 1252 Judgment of 14 February 1978, United Brands and United Brands Continentaal v Commission, 27/76, EU:C:1978:22and judgment of 13 July 1989, Tournier, 395/87, EU:C:1989:319. 1253 Judgment of 13 July 1989, Lucazeau and Others, 110/88, 241/88 and 242/88, EU:C:1989:326. 1254 Judgment of 13 July 1989, Lucazeau and Others, 110/88, 241/88 and 242/88, EU:C:1989:326. 1255 Case COMP/C-2/37.761, Euromax v/ IMAX, Commission decision of 25 March 2004, p. 5.4.1.1.

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with other products, that is to say: “a comparison that involves the same products with similar quality and functionality and subject to the same terms and conditions. This is the standard, which is required by the Court of Justice.” 1256

5.7.1.3 A difficult test to apply The difficulties in finding the right benchmark to determine whether or not prices are excessive explains why there are relatively few precedents in European law dealing with excessive pricing. A comparison between costs and prices will often be flawed by the independence of the dominant firm. This independence vis-à-vis external competition implies that the dominant firm does not have any incentive to cut costs or to behave in an efficient manner. It can determine its own cost level. So, even if the dominant firm breaks even or makes losses, its prices can still be too high because it decided to inflate its costs. Similarly, a comparison in time, in space or with competitors will almost unavoidably be affected by the “apple and oranges dilemma”; comparisons are indicative only when the benchmark is reliable.

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Moreover, precedents generally deal with relatively minor issues; i.e. the price which a car manufacturer is entitled to charge for a certificate confirming that a car complies with certain technical standards. Both in General Motors and British Leyland, the Court of Justice considered that the car manufacturers in question had charged excessively high prices for the delivery of such certificates. In addition, the cases did not really deal with excessive prices as a means to exploit customers, but served different purposes; by charging excessively high prices for the certificates, the car manufacturers were trying to discourage parallel imports.

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The Deutsche Post case also dealt with trade related issues rather than a excessive pricing as a clear exploitation of a dominant position.1257 In Deutsche Post, the very high prices charged by the incumbent German mail company for the onward transmission of cross-border mail sought to prevent the use of Deutsche Post facilities for (re)mailing practices. In that case the Commission compared the tariff for cross border mail with that for standard domestic mail as a benchmark.

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In a case dealing with port charges of the port of Helsingborg, the Commission came to the conclusion that the unfair prices test is too cumbersome to apply. In a relatively long decision it rejected the complaint filed by Scandlines that the

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1256 Case COMP/C-2/37.761, Euromax v/ IMAX, Commission decision of 25 March 2004, p. 5.4.1.2. 1257 Case COMP/36.915, Deutsche Post AG – Interception of cross border mail, OJ 2001, L 331/40.

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harbour fees were excessive.1258 First, the Commission faced great difficulties in finding out which costs of Helsingborg’s integrated port activities could be allocated to the accommodation required for the ferry line to Denmark.

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Second, once it had identified the relevant costs, the Commission specified that “[t]he fact that the port charges would be non-cost based or the pricing non transparent do not constitute as such abuses under Article 82 of the EC Treaty.”: More is required, “It is important to note that the decisive test in United Brands focuses on the price charged, and its relation to the economic value of the product. While a comparison of prices and costs, which reveals the profit margin, of a particular company may serve as a first step in the analysis (if at all possible to calculate), this in itself cannot be conclusive as regards the existence of an abuse under Article 102 TFEU Treaty.” and, “even if it were to be assumed that the profit margin […] is high or even excessive, this would not be sufficient to conclude that the price charged bears no reasonable relation to the economic value of the services provided. The Commission would have to proceed to the second question as set out by the Court in United Brands, in order to determine whether the prices charged to […] are unfair, either in themselves or when compared to other ports.”

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Third, the Commission stressed in Scandlines that demand-side considerations should also be considered in the assessment of the economic value of the product or service. Customers may be prepared to pay a premium for the unique service offered by the Helsingborg port. Fourth, when assessing the economic value, due consideration should also be given to the need to recover large initial investments, the intangible value of the product itself and any opportunity costs. Based on all of the above considerations the Commission concluded that: “[i]n the present case, the economic value of the product/service cannot simply be determined by adding to the approximate costs incurred in the provision of this product/service as assessed by the Commission, a profit margin which would be a pre-determined percentage of the production costs. The economic value must be determined with regards to the particular circumstances of the case and take into 1258 Case COMP/A.36.568/D3, Scandlines Sverige AB v Port of Helsingborg, Commission decision of 23 July 2004.

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account also non-cost related factors such as the demand for the product/service, [(i.e. the valuation by the customers and consumers of the product/service)] [or e.g. costs of capital]. As a consequence, finding a positive difference between the price and the approximate production costs exceeding what Scandlines claims as being a reasonable margin, would not necessarily lead to the conclusion that the price is unfair, provided that this price has a reasonable relation to the economic value of the product/service supplied.” An interesting Court case in this regard is the judgment in C-177/161259 where the Court stated that there are several methods to define whether a price is unfair. In particular, “a method based on a comparison of prices applied in the Member State concerned with those applied in other Member States must be considered valid. In that regard, it should first be noted that a comparison cannot be considered to be insufficiently representative merely because it takes a limited number of Member States into account [as long ag as] the reference Member States are selected in accordance with objective, appropriate and verifiable criteria. Therefore, there can be no minimum number of markets to compare and the choice of appropriate analogue markets depends on the circumstances specific to each case.” (grounds 35 to 50)

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5.7.2 Unfair pricing in the energy sector 5.7.2.1 The sector inquiry Complaints from large industrial users about high energy prices were one of the reasons that triggered the sector inquiry. The report essentially concerns the causes of these high prices, but does not focus on the question as to whether the high prices are abusive as such. This is in line with the comment made above: a diagnosis limited to measuring the patient’s temperature will rarely contribute to cure him. If prices are too high, the Commission should fight the causes, such as market concentration, insufficiently liquid wholesale markets, insufficient market integration and foreclosed access to customers. The report does not deal with price evolution as such. The section on gas mostly deals with the pricing patterns and the indexation of gas prices to oil prices. The electricity chapter also reports about interaction of electricity prices and pri1259 Judgment of 14 September 2017, Autortiesību un komunicēšanās konsultāciju aģentūra/Latvijas Autoru apvienība, C‑177/16, EU:C:2017:689.

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mary fuel prices. The only reference to possibly unfair pricing conduct refers to the so called windfall profit issue; i.e. the practice according to which electricity producers include the market prices of freely obtained CO2 certificates in their electricity sales prices. The report refers in this respect to the intervention of the German FCO in the RWE case.1260

5.7.2.2 National networks 3.603

In contrast with European case law, national competition authorities have been relatively active in fighting excessive pricing practices. This applies in particular to the German Federal Cartel Office (FCO). In the absence of ex ante tariff regulation in the electricity and gas sectors by an energy specific regulator at the time, the FCO has dealt with tariff regulation on an ex-post basis.1261 It intervened in several instances against excessive transmission and distribution charges.1262 In the Stadwerke Mainz case, it compared the tariffs of the Stadwerke Mainz to the tariffs of a comparable city distribution company, RWE Net and assessed whether any differences could be explained by objective factors, such as differences in costs, the structure of the grid, geographical features, number of connected customers, economies of scale and reliability. On the basis of this comparison, the FCO found that the tariffs of Stadwerke needed to be lowered by 19.9% to suppress their abusive nature.1263

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On 7 February 2006, the Germany’s Supreme Civil Court confirmed the legality of this type of ex post tariff regulation in the Strom II plus case. It noted that a voluntary framework agreement, called Strom II Plus, which lays down the cost calculation for network access pricing, did not exclude the possibility that the prices charged were excessive. It referred the case back to a lower court requiring it to applying German sector specific legislation and competition law. It also referred to Article 102 TFEU as a provision which that court should take into consideration.1264

1260 Press release Bundeskartellamt 20.12.2006 concerning a possible abuse of a collective dominant position by incumbents E.ON and RWE. 1261 See on this Glachant, Dubois and Perez, ‘Deregulating With No Regulator: Is the German Electricity Transmission Regime Institutionally Correct?’ , 36(5) Energy Policy (2008), p. 1600-1610. 1262 TEAG, FCO 19 February 2003. 1263 Stadwerke Mainz AG, 21 March 2003. 1264 Bundesgerichtshof, 7 February 2006; Strom II plus, KZR 8/05.

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The FCO intervened in a similar manner against network operators on other aspects of their business, such as metering conditions and prices of balancing power.1265 The Dutch authorities (NMa) intervened informally against the compensation for transformation losses applied by Essent in respect of windmill procedures.1266 Since the Dutch system has a detailed system of tariff regulation, the intervention of the NMa can be seen as complementary in nature.

5.7.2.3 The Spanish temporary congestion case Electricity customers are price insensitive on the short term; they expect lights to go on when they switch the button. This feature offers an excellent opportunity for generators to charge high prices on the short term. The Spanish competition authorities decided that four electricity producers had abused the monopolistic positions which each of them held in their respective service areas during three consecutive days when congestion problems prevented a normal functioning of the Spanish electricity market.1267 During these three days, each vertically integrated producer applied unusually high prices. These prices considerably exceeded variable costs, were significantly higher than the prices charged in comparable situations of technical constraints and exceeded peak prices during the past twelve months. Even if the Tribunal implicitly admitted that the prices corresponded to rational commercial conduct, it considered that each producer had abused its individual dominant position and imposed a fine of € 0.9 million on each of them.

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The ruling of the Tribunal primarily reflects a normative point of view; the four producers unduly took advantage of the temporary congestion problem on the Spanish grid. The producers should have prices as if they would have done in the absence of that problem.

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5.7.2.4 The Elsam case On 30 November 2005 the Danish Competition Council also took a decision against unfair prices charged by Elsam A/S.1268 The reference period was considerably longer than the period examined by the Spanish authorities; i.e. 1 July 2003 until 31 December 2004. During this period Elsam is supposed to have abused its position on wholesale OTC market in Western Denmark. The Coun1265 1266 1267 1268

FCO 21 February2003 RWE Net and FCO 21 February 2003 RWE Net. Press release NMc, 30 September 2004. Empresas Electricas, Tribunal de Defensa de la Competencia, 552/02, 7 July 2004. Danish Competition Council, 30 November 2005, Elsam A/S.

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cil found that this market constituted the relevant market despite price interaction on the spot market between Western Denmark and other parts of the Nord Pool area. This is because the available price data were already affected by the fact that Elsam’s excessive prices (see section 3 above). Bottle necks on the electricity grid isolate Western Denmark from the rest of the country. Within this area Elsam enjoyed a dominant position with a 90% market share. Decentralized production and will mills did not constrain its market power.

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As regards the assessment of Elsam’s prices, the Council applied the United Brands test, described above. It held that these prices exceeded average total costs plus a mark up which was calculated in function of the average rate of return in the industry. This part of the test revealed that prices were excessive. As regards the second part of the test, the Council compared the prices charged during the relevant period with prices charged during other periods. This showed that Elsam had been charging unfair prices during 900 hours.

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Elsam appealed against this decision before the Competition Appeals Court. On 14 November 2006, this jurisdiction confirmed the Council’s substantive assessment, but annulled the price control order which the Council had imposed as a remedy.1269

5.7.2.5 Upstream gas supplies in Central and Eastern Europe1270 3.610

In the recent Gazprom case, the Commission stated that Gazprom may have pursued an unfair pricing policy by charging prices to some wholesalers in CEE (Bulgaria, Estonia, Latvia, Lithuania and Poland) that may have been excessive when compared with Gazprom’s costs1271 or to benchmark prices, while using price formulae based on oil indexation in these countries that may have contributed to the excessive prices. Furthermore, the Commission’s preliminary assessment indicated that the absence in price revision clauses of a well-defined, competitive and publicly available price benchmark such as prices at competitive gas hubs was one of the main factors that may have resulted in unfair prices in the five CEE countries. As commitment, Gazprom finally committed to offer price revision clauses to all its customers (old and new) in the five countries tied with long term contracts (of at least three years) whereby price review can be requested if price deviates from competitive western benchmarks (including liquid hubs). 1269 Danish Competition Appeals Court, 15 November 2006, Elsam A/S. 1270 Case AT.39816. 1271 The comparison for the years 2009-2013 shows that Gazprom’s average prices net of the export duties in the five CEE countries exceeded its costs by a large margin, the weighted average mark-up above costs being 170%.

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5.7.3 Capacity withdrawals: the E.ON wholesale market case Monopolists have two means to increase prices. They may either directly set a higher price and face reduced customer demand or they can indirectly achieve higher prices by reducing output themselves. A monopolist wanting to implement output reducing strategies in the electricity sector benefits from an additional advantage. In this sector the price that the customer is prepared to pay will correspond to the price of the marginal plant that is dispatched to meet (inelastic) demand. Dispatching takes place according to the merit curve, implying that the price of the last (often more expensive) plant will set the market price at which all electricity is sold. This allows the producer to make significant margins on the electricity produced by the plants operating at lower costs.

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In the E.ON wholesale case, the Commission considered that E.ON had pursued a strategy by which it would withhold capacity of the less expensive generation units so as to steer the market to the more expensive units which would set a higher market price and would thus allow E.ON to achieve higher prices1272. The Commission found in particular that E.ON refrained from bidding on the German power market EEX even though that capacity was available and could have been used profitably. The breath of E.ON’s generation portfolio implied however that the losses on the withheld capacity were compensated by far by the high margins achieved on the entirety of its portfolio. This finding corresponded to the conclusions of the sector inquiry according to which some German plants were less used than others.

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In addition, E.ON discouraged several customers from building capacity themselves by offering them long-term contracts or shares in E.ON generation projects.

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In order to avoid further proceedings, E.ON offered to divest a substantial part of its production capacity. This 5000 MW capacity corresponds to approximately 20% of total German capacity. The package involved a wide variety of assets ranging from drawing rights on nuclear plants, to gas fired plants, as well as pump storage, lignite, and coal plants, thus allowing the buyer to cover the whole merit curve1273. It would have been interesting to have a formal prohibition deci-

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1272 Case COMP/39.388, German electricity wholesale market, OJ 2009, C 36/8. 1273 The Italian competition authority also intervened against comparable price manipulation practices by ENEL. The Italian Competition authority suspected that ENEL, owner of 50% of capacities in Sicily, engaged in economic or physical withholding of electricity to create shortages and raise prices when it was in a pivotal position in the merit order. This dominant supplier managed to avoid further proceedings by auctioning 1000 MW. See also the decision of the Belgian competition authority which found that Elec-

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sion in this case so that the theory of harm used by the Commission be tested in court. A decision by the Spanich competition authority against Union Fenosa for excessive pricing in an anscillary market was for instance quashed by the Spanish Supreme Court ( Judgment of 27 January 2010, Case n° 5569/2007).

6.

Conclusion

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This Chapter gave an overview of the main principles underlying Article 102 TFEU. It also highlighted some precedents concerning the application of this provision in the energy sector. It will be concluded by the following observations.

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First, enforcement action on the basis of Article 102 TFEU has become one of the main policy tools of the Commission’s policy in the energy sector. Whereas this policy used to be limited to occasional interventions against destination clauses and network abuse cases in relation to upstream gas supplies, its direction, scope and intensity have changed completely after the adoption of the sector inquiry report. The Commission has put in place a systematic enforcement action plan to ensure a neutral use of transport networks and to prevent input and customer foreclosure via long term contracts. De iure or de facto exclusivity arrangements concluded by incumbents that tie customers, dry up wholesale markets or reserve network capacity are likely to fall foul of Article 102 TFEU.

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Second, the Commission’s enforcement action in the energy sector is rigorous and pragmatic. So is the application of Article 102 TFEU. Fearsome or respectful of the Commission’s enforcement powers, the incumbent energy companies that are the object of antitrust procedures prefer to avoid high fines and subsequent civil proceedings by offering commitments on the basis of Article 9 of Regulation 1/2003. The incumbent players have either sold their transport networks, divested significant amounts of production capacity or released their customers from purchasing obligations under long term contracts. Enforcement of Article 102 TFEU in the energy sector has been innovative with the prosecution of new types of infringements such as withholding of capacity and constructive refusal to deal.

trabel had abused its dominant position by withholding some of its capacities and thus imposed unfair prices (Decision ABC-2014-I/O-15, 18 July 2014).

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Third, the enforcement of Article 102 TFEU will evolve with the evolution of market designs. In this regard, the anarchic implementation of so-called capacity remuneration mechanism at national level is likely to create severe competition issues which could be tackled under Article 102 TFEU.

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Fourth, the enforcement of Article 102 TFEU can be instrumental, especially if it is not used in isolation. Despite asymmetries of information and high sector specificity, antitrust authorities have a considerably strong history of tackling network abuses, both at Union and national levels. There are obvious benefits in searching for better synchronisation between sector regulation and antitrust enforcement in this case. The sector regulator remains better placed to analyse certain technical characteristics of the industry. At the same time, an antitrust policy has a strong deterrence potential and can always be used as a regulatory patch after the first intervention of a sector regulator. Having a more integrated approach to competition policy, by harnessing the shared interests between sector regulation and antitrust powers, appears to be a suitable way forward. This is most likely to include financial regulators in the framework of REMIT.

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CHAPTER 5 Procedure 1.

Introduction

In the particular sphere of competition law, the European Commission is entrusted with the task of applying and enforcing Articles 101 and 102 of the Treaty on the Functioning of the European Union (“TFEU”) (ex-Articles 81 and 82 of the EC Treaty). It is responsible (at the Community level) for fact-finding, taking actions against infringements of competition rules and imposing penalties. Regulation 1/2003 sets outs the basic rules of implementation of Articles 101 and 102.1274 This Regulation applicable since 1st May 2004 has repealed Regulation 17, adopted forty years ago and thus in dire need of modification in response to changes in the economic and institutional environment.

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The core features of the reform was the shifting of a system of authorisation under which all restrictive agreements had to be notified to the Commission in order to obtain antitrust approval toward a directly applicable exception system in which the competition authorities1275 and courts of the Member States have the power to apply both Articles 101 and 102 in full (see Chapter I, Section I “Competition rules and the energy sector”). The purpose of the present section is not to make an exhaustive description of the procedural system set up with Regulation 1/2003 but to deal with the procedure before the European Commission.

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1274 Council Regulation 1/2003 of 16.12.2002, OJ L1/1, 4.01.2003, Appendix 2. 1275 See Directive (EU) 2019/1 of the European Parliament and of the Council of 11 December 2018 to empower the competition authorities of the Member States to be more effective enforcers and to ensure the proper functioning of the internal market (OJ 2019 L 11/3). The directive aims to put in place fundamental guarantees of independence, adequate financial, human, technical and technological resources and minimum enforcement and fining powers for applying Articles 101 and 102 TFEU and for applying national competition law in parallel to those Articles so that national administrative competition authorities can be fully effective.

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In the legislative framework set up since 2003, the Commission focuses its enforcement resources on cases for which it is best placed to act and on the most serious infringements. It also handles cases in relation to which it acts with a view to define Community competition policy or ensure coherent application of Articles 101 or 102.

2.

The procedure before the Commission

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There are several ways in which antitrust issues may come to the Commission’s attention and trigger an investigation.1276 Companies which consider themselves victims of anti-competitive practices in breach of Article 101 or 102 may complain to the Commission. The Commission may also begin an investigation of an alleged infringement ex-officio by relying on information obtained from the press, national authorities, questions of the European Parliament or anonymous informants.

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Because Regulation 1/2003 is based on a system of parallel competences in which the Commission and the national competition authorities have the power to apply Articles 101 or 102 of the Treaty, the allocation of cases is a very important issue. The principles of allocation are detailed in the Commission Notice on cooperation within the Network of Competition Authorities.1277

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Faced with more cases than it has the resources to investigate, the Commission concentrates on cases having particular economic or legal significance for the Community. The Commission is particularly well placed to handle cases which have effects on competition in more than three Member States.1278 Where these features are absent in a particular case, cases should, as a rule, be handled by national courts or competition authorities.

1276 See also DG Competition’s Best Practices on the conduct of proceedings concerning Article 101 and 102 TFEU, available on DG Comp’s web site. 1277 OJ C 101/43, 27.4.2004. The Notice also describes the mechanisms of cooperation between the Commission and the National Competition Authorities necessary to ensure consistency within the system of concurring powers. 1278 Paragraphs 14 and 15 of the Notice on cooperation within the Network of Competition Authorities.

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2.1 Origin of cases 2.1.1 Complaints The Commission encourages undertakings to inform the public enforcers about suspected infringements of competition rules. To this end, the Commission has published an explanatory Notice on the handling of complaints which provides guidance to undertakings on the various possibilities open to them (action to the competition authorities or to the national courts) and explains the procedure for the Commission’s handling of complaints.1279

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Complainants: Those entitled to lodge a complaint before the European Commission are natural or legal persons who can “show a legitimate interest”.1280 Member States are also entitled to lodge complaints.1281

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The Commission interprets the concept of legitimate interest broadly: any person who could plausibly claim to have suffered as a result of an infringement.1282 This includes the parties to an agreement and third parties who suffered from the effects of an agreement or an anticompetitive practice, such as competitors, undertakings excluded from a distribution system or potential customers to whom a company refuses to sell or sells at excessive prices.1283

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The Commission accepts complaints from trade associations if they are entitled to represent the interests of its members and if the conduct complained of is liable to adversely affect the interests of its members.1284 Complaints have also been accepted from consumer associations. In addition, the Commission

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1279 OJ C101/65, 27.04.2004. 1280 Article 7(2) of Regulation 1/2003. See the cases Marathon, initiated following a complaint by the Norwegian gas producer Marathon concerning the alleged joint refusal to grant access to continental European pipelines by some European gas companies, including Thyssengas. Although the complaint against Thyssengas was later withdrawn following a commercial settlement between the parties, the Commission decided, however, that it was in the Community interest to continue the investigation; see Commission’s Competition Report, 2001, p. 207. 1281 Article 7(2) of Regulation 1/2003. See the case concerning the UK/Belgium gas interconnector (IP/02/401, 13.03.2002). This case was prompted by a complaint of the British authorities expressing concerns about the responsiveness of the only gas interconnector linking the UK with the European Continent to demand/ supply flows. The examination of the contracts governing the functioning of the interconnector revealed certain rigidities relating, in particular, to flow reversals and short-term capacity transfers. These concerns were addressed in a new agreement signed by the shippers of gas and the investigation was closed. 1282 See paragraph 36 of the Commission Notice on the handling of complaints. 1283 See Commission’s decision of 13.12.1985, Roses, OJ 1985 L 369/9; Commission’s decision ECS/Akzo, OJ 1985 L 374/1; decision British Sugar/Napier Brown, OJ 1998 L 284/41. 1284 Case T-114/92 BENIM v Commission [1995] ECR II-147, paragraph 28. See also paragraph 38 of the Commission Notice on the handling of complaints.

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holds the view that individual consumers whose economic interests are directly affected insofar as they are the customers of products and services that are the object of an infringement can be in a position to show a legitimate interest (pro bono publico).1285

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Form of the complaint: Complaints lodged by natural or legal persons must contain the information required by Form C.1286 This Form includes inter alia (i) details about the complainant and about the firm(s) complained of; (ii) about the alleged infringement; (iii) supporting documents such as minutes of negotiations or meetings, terms of transaction, business documents; (iv) evidence as to why the complainant has a legitimate interest; (v) a statement of which remedies are sought from the Commission; and (vi) details of whether a similar complaint has been made to any other authority or is the subject of proceedings in a national court.

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Correspondence that does not comply with these requirements does not constitute a complaint within the meaning of Article 7(2) of Regulation 1/2003. It will be considered by the Commission as general information that, where it is useful, may lead to an own-initiative investigation.

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Confidential information: Confidential information which the complainant does not wish the Commission to disclose should be properly identified. In most cases, the Commission will ask the complainant to submit a non-confidential version of its complaint which will be transmitted to the undertaking(s) complained of.

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Anonymous complaints: In the case of informal or anonymous1287 complaints made to the Commission suggesting the initiation of ex-officio proceedings, the Commission must respect the confidentiality of informants as well as the confidentiality of supporting documents which may reveal their identity and expose them to retaliation.1288 1285 See paragraph 37 of the Commission Notice on the handling of complaints. 1286 Article 5(1) of Commission Regulation 773/2004 on the conduct of proceedings pursuant to Articles 81 and 82; OJ L 123/18, 27.04.2004. Form C is annexed to Regulation 773/2004 and to the Commission Notice on the handling of complaints. Form C is also available at http://europa.eu.int/dgcomp/complaintsform. 1287 The Commission has set up a tool to make it easier for individuals to alert it about anti-competitive behaviour while maintaining their anonymity. The new tool protects whistleblowers’ anonymity through a specifically-designed encrypted messaging system that allows two way communications. The tool is accessible on DG COMP web site. 1288 See Case 145/83 Adams v Commission [1985] ECR 3539. See also paragraph 81 of the Notice on the handling of complaints.

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Commission’s rights and obligations in handling a complaint: Given its finite resources and the relatively large number of new cases each year, the Commission is entitled to accord different degrees of priority to examining the complaints it receives and to reject a complaint where it finds that the case does not display sufficient Community interest to justify further investigation of it1289. Investigations are initially informal and in the majority of cases are closed without reaching a formal decision. However, this does not mean that the Commission has no obligation at all regarding complaints. The Commission must examine complaints but is not obliged to take the decision that the complainant expects, i.e. the initiation of the proceedings and subsequently the adoption of a decision.

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It is a general principle of Community law that the Commission must act within a reasonable time1290. If there is no Community interest, complainants should be able to turn quickly to the national competition authority or law court that may be able to deal with the matter. Paragraph 61 of the Commission Notice on the handling of complaints stipulates that the Commission will in principle inform the complainant within four months whether or not it intends to investigate the case further. This time-limit does not however constitute a binding statutory term.

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Procedural rights of the complainants: Complainants are entitled to a Commission’s decision explaining its position (either negative or positive) regarding the follow-up to be given to their complaint.

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1289 The Commission published principles to help identify situations where complaints may lack sufficient Community interest; See paragraph 44 of the Notice on the handling of complaints. The Commission is entitled to reject a complaint if, inter alia, (i) the complainant does not provide specific evidence; (ii) it would require disproportionate means of investigation; (iii) a national competition authority is already dealing with the case; (iv) the plaintiff is able to secure adequate protection of his rights a the national court. See case C-373/17 Agria Polska v Commission ECLI:EU:C:2018:756 dismissing the appeal concerning the Commission’s decision of 19.06.2015 in case AT.39864- BASF in which the Commission explained, first, that the likelihood of establishing an infringement of Article 101 and/or 102 TFEU was limited because of insufficient evidence in support of the complaint and also the difficulty of establishing, in the present case, the existence of a dominant position of RWA or of a collective dominant position and, consequently, demonstrating an abuse of such a position. Secondly, the Commission considered that the resources necessary for the investigation requested would probably be disproportionate in view of the limited likelihood of establishing the existence of an infringement. Thirdly, the Commission considered that the national authorities and courts could be better placed to deal with the issues raised in the complaint. 1290 If the Commission fails either to initiate proceedings against the subject of the complaint or to adopt a definitive decision within a reasonable time, the complainant may rely on Article 265 TFEU in order to bring an action for failure to act; see Case C-282/95 P Guérin automobiles v Commission [1997] ECR I-1503, paragraphs 37 and 38.

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The rejection of complaints can be based on ‘insufficient grounds for acting’ (also known as ‘lack of European Union interest’), lack of competence or lack of evidence to establish the existence of an infringement. The Commission may also reject a complaint on the ground that a competition authority of a Member State is dealing with the case.1291 If the Commission does not envisage pursuing the complaint, it must inform the complainant of the reasons for which it considers that there are insufficient grounds for granting the application. The reasons must be sufficiently precise and detailed to enable the General Court to review the Commission’s reasons and in particular its use of discretion to define priorities.1292 The applicant is given the opportunity to submit any further comments within a certain time-limit (at least four weeks) before the Commission takes a final decision.1293 In 2011, in the context of the adoption of its best practices for the conduct of proceedings concerning Articles 101 and 102 TFEU, the Commission decided to publish its decisions (or at least a summary thereof ) rejecting complaints.1294 Proceedings may be brought under Article 263 TFEU against the Commission’s final decision rejecting the complaint.1295

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A decision rejecting a complaint prevents complainants from requiring the reopening of the investigation unless they put forward significant new evidence. Likewise, the closing of a file does not prevent the Commission from re-opening it if circumstances have changed. A Commission’s decision to reject a complaint does not definitively rule on the question whether or not there is an infringement of Article 101 or 102. Therefore, Member State courts or competition authorities are not prevented from applying Articles 101 and 102 to agreements and practices brought before them.1296 1291 As regards the meaning to be given to the term “deal with” referred to in Article 13(1) of Regulation 1/2003, this term cannot simply mean that another authority has received a complaint or has taken up a case ex officio, but that it is investigating or has investigated the case on its behalf. Thus, when the Commission rejects a complaint pursuant to Article 13(1) of that Regulation, it must, on the basis of the information available to it at the date on which it issues its decision, ensure, in particular, that the competition authority of a Member State investigates the case (see case T-201/11 Si.mobil v Commission, EU:T:2014:1096, paragraphs 48-50; case T-355/13, easyJet Airline v Commission, EU:T:2015:36, paragraph 29; case T-431/16, VIMC v Commission ECLI:EU:T:2017:755, paragraph 22. 1292 Case C-119/97 P Ufex and Others v Commission [1999] ECR I-1341, paragraphs 89 to 95; Case T-62/99 Société de distribution de mécaniques et d’automobiles (Sodima) [2001] ECR II-655, paragraph 42. 1293 The complainant may request access to the information on which the Commission bases its provisional assessment except business secrets; see Article 8 of Commission Regulation 773/2004 on the conduct of proceedings. See section III.A of the Commission Notice on the rules for access to the Commission file: Provision of documents to complainants in antitrust proceedings (consolidated version of the Notice integrating the amendments adopted in 2015 available on DG Comp’s web site). 1294 See, inter alia, the Commission’s decision of 17.07.2014 rejecting a complaint against EDF (case AT.39594 — “EDF wholesale spot electricity market”). 1295 Commission notice on best practices for the conduct of proceedings concerning Articles 101 and 102 TFEU, paragraph 150. 1296 Paragraphs 78 and 79 of the Notice on the handling of complaints.

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If the Commission decides to carry out the investigation, the procedural rights of a complainant are not as extensive as those of companies which are the object of the investigation. Complainants cannot claim a right of access to the file compiled by the Commission on the same basis as the undertakings under investigation.1297 Complainants have access to a non confidential version of the statement of objections and are given the opportunity to make comments on it. The Commission may also, where appropriate, afford them the opportunity of expressing their views at the oral hearing of the parties to which a statement of objections has been addressed, if the complainants so request in their written comments.1298

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2.1.2 Own-initiative proceedings Article 7 of Regulation 1/2003 allows the Commission to initiate proceedings on its own initiative. In cartel cases, the trigger may be the cartel members’ application for leniency. Another trigger is often the information received from “informal” complainants. The Commission recognises the importance of information transmitted by undertakings who wish to inform it about suspected infringements without fulfilling the formal requirements for such information to be considered as a complaint.1299 For this purpose, the Commission has created a special email address ([email protected]) to which information about suspected infringement may be supplied.

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The energy sector is a good illustration of the significant role that sector inquiries can play in fostering the enforcement of competition rules. Since the 2005-2007 sector inquiry (see below), most of the Commission’s cases leading to decisions began at the Commission’s own initiative and did not depend on complainants or market informants bringing a competition issue to its attention.1300

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2.1.3 Investigations into sectors of the economy and into types of agreements The Commission may conduct a broad investigation covering one sector or one type of agreements across various sectors if the trend of trade between Member States, the rigidity of prices or other circumstances suggest that competition 1297 1298 1299 1300

Case 53/85 Akzo v Commission [1986] ECR 1965. Article 6 of Regulation 773/2004 relating to the conduct of proceedings. Paragraph 4 of the Commission Notice on the handling of complaints. See Commission Staff Working Document, Ten Years of Antitrust Enforcement under Regulation 1/2003, Com(2014)453, paragraph 102.

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may be restricted.1301 The investigation which has to be carried out in the same way as other investigations may confirm the suspicion of infringement.

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On 13 June 2005, the European Commission launched an inquiry concerning the competition in gas and electricity markets. The energy inquiry responded to concerns voiced by consumers and new entrants in the sector about the development of wholesale gas and electricity markets and limited choice for consumers.

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Initial results were presented in the form of an Issues Paper in November 2005. This was followed by a preliminary report in February 2006 which launched a public consultation.1302 The Commission adopted the Final Report of the inquiry on 10 January 2007, concluding that consumers and businesses are losing out because of inefficient and expensive gas and electricity markets. The sector inquiry found that gas and electricity wholesale markets had remained largely national in scope and had maintained the high level of market concentration of the pre-liberalisation period. The level of unbundling was also found to be insufficient. Market integration was hampered inter alia by the fact that incumbents rarely entered other national markets as competitors, by insufficient or unavailable cross-border pipeline capacity or interconnector capacity, by underinvestment and by ineffective congestion management.1303

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To tackle these problems, the Commission is pursuing follow up action in individual cases under the competition rules (anti-trust, merger control and state aids) and acts to improve the regulatory framework for energy liberalisation.

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Regulation 1/2003 abolishes the notification and the ex ante authorisation system of Article 101(3). It is no longer possible for parties to an agreement to notify their agreement to the European Commission in order to obtain an individual exemption. Nor will applications for negative clearance (declarations that Articles 101 or 102 do not apply) be possible. Assessment of the legality of agreements or practices is left to the undertakings themselves with the help of their legal counsels.

1301 Article 17 of Regulation 1/2003. 1302 These documents are available on DG Comp web site. 1303 See Commission Staff Working Document, Ten Years of Antitrust Enforcement under Regulation 1/2003, paragraph 99.

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However, the Commission will remain open to discuss specific cases with undertakings and issue informal guidance where cases give rise to genuine uncertainty because they present novel or unresolved questions. To that effect, the Commission has published a notice1304 in which it sets out the conditions under which it may issue reasoned opinions. Any such system of opinions must not, however, lead to companies being entitled to obtain an opinion, as this would reintroduce a kind of notification system.

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Undertakings wishing to receive informal guidance must send a reasoned request to the Commission with a detailed reasoning why the request presents novel question(s). If the Commission decides to issue a guidance letter, this letter will set out a summary description of the facts on which it is based and the reasoning underlying the understanding of the Commission on novel questions relating to Articles 101 and/or 102 raised by the request.1305 The letter may be limited to part of the questions or include additional aspects. Guidance letters are published on the Commission’s web-site.

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Guidance letters are intended to help undertakings carry out an assessment themselves of their agreements or practices. They cannot prejudge the assessment by the Community courts nor bind Member States’ courts or competition authorities. A guidance letter does not bind the subsequent assessment of the same issues by the Commission or preclude the Commission from examining a subsequent complaint. However, the Commission will normally take the previous guidance letter into account if it receives a complaint concerning the same facts which does not raise any new aspects.1306

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So far, no guidance letters have been issued by the Commission. To date only a few approaches have been made to the Commission and none of them fulfilled the conditions for a request for a guidance letter set out in the Notice.1307

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1304 Commission Notice on informal guidance relating to novel questions concerning Articles 81 and 82 of the EC Treaty that arise in individual cases (guidance letters), OJ C 101/78, 27.04.2004. 1305 Paragraphs 20 and 21 of the Notice on informal guidance. Where the Commission decides not to issue a guidance letter, it informs the applicant(s) accordingly (paragraph 19 of the Notice). 1306 Paragraphs 23 and 24 of the Notice on informal guidance. 1307 See Commission Staff Working Document, Ten Years of Antitrust Enforcement under Regulation 1/2003, footnote 274.

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2.2 Initial assessment 3.651

All cases, irrespective of their origin, are subject to an initial assessment phase. During this phase the Commission examines whether the case merits further investigation and, if so, provisionally defines its focus, in particular with regard to the parties, the markets and the conduct to be investigated. During this phase, the Commission may make use of investigative measures such as requests for information or inspections.

3.652

The system of initial assessment means that some cases will be discarded at an early stage because they are not deemed to merit further investigation. The Commission focuses its enforcement resources on cases where it appears likely that an infringement may be found, in particular on cases with the most significant impact on the functioning of competition in the internal market and risk of consumer harm, as well as on cases which are likely to contribute to defining EU competition policy and/or to ensuring the coherent application of Articles 101 and/or 102 TFEU.1308

3.653

This initial assessment phase also attempts to address, at an early stage, the allocation of cases within the ECN. Regulation 1/2003 introduced the possibility of reallocating cases to other network members if they are well placed to deal with them. Accordingly, the Commission may reallocate a case to a national competition authority and vice versa.

3.654

When the first investigative measure is addressed to them (normally a request for information or an inspection), addressees are informed of the fact that they are subject to a preliminary investigation and about the subject matter and purpose of such investigation. In the context of requests for information, they are reminded that if the behaviour under investigation confirmed to have taken place this might constitute an infringement of Articles 101 and/or 102 TFEU.

3.655

After having received a request for information or being subject to an inspection, parties may at any time inquire with the Directorate-General for Competition about the status of the investigation, including before the opening of proceedings. If such an undertaking considers that it has not been properly informed by the Directorate-General for Competition of its procedural status, it may refer the matter to the hearing officer for resolution, after having raised the matter with the Directorate-General for Competition. The hearing officer 1308 Commission notice on best practices for the conduct of proceedings concerning Articles 101 and 102 TFEU, paragraph 13.

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takes a decision – which is communicated to the undertaking that has made the request – that the Directorate-General for Competition must inform it about the status.1309 Before 2011, the role of the hearing officer was restricted to the stages of the procedure that follow the sending of the statement of objections. The revised hearing officer’s mandate1310 extends the role of the hearing officer to the entire procedure, and specially in the investigation phase of antitrust cases. If at any stage during the initial assessment phase, the Commission decides not to investigate the case further (and thus not to open proceedings), the Commission will, at its own initiative, inform the party subject to the preliminary investigation thereof.

3.656

Investigation of a case The purpose of an investigation is to obtain the information which the Commission needs to perform its duty of applying and enforcing Articles 101 and 102. Without adequate evidence, the decision could not stand the scrutiny of the European Courts. The Commission has two main investigatory powers: the power to collect information and the power to conduct inspections. A new power has been introduced by Regulation 1/2003: the power to take statements.

3.657

2.2.1 Requests for information Requests for information can be made at any stage of the procedure. This means that firstly, a single firm may receive several requests in the course of an investigation.

3.658

Under Article 18 of Regulation 1/2003, the Commission now has the choice to issue either a simple request for information or to proceed immediately to a decision requiring the information to be provided (whereas Regulation 17 foresaw a two-stage procedure whereby failure to respond to a simple request was a prerequisite to a request by decision, which obliges the addressees to provide the information under the penalty of fines or period penalty payments). Secondly, the Commission is not requested to use the prerogative of issuing a request for information before it makes an inspection.

3.659

1309 Commission notice on best practices for the conduct of proceedings concerning Articles 101 and 102 TFEU, paragraph 15. 1310 Decision of the President of the European Commission of 13 October 2011 on the function and terms of reference of the hearing officer in certain competition proceedings, OJ L 275/29 of 20.10.2011, Article 4.2.d).

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3.660

When sending a simple request for information, the Commission shall state the legal basis and the purpose of the request, specify what information is required and fix the time-limit within which the information is to be provided, and the penalties for supplying incorrect or misleading information1311. Where the Commission requires undertakings and associations of undertakings to supply information by decision, in addition to the elements set out above, it shall also indicate the penalties provided for in Article 23, indicate or impose the penalties provided for in Article 24 (periodic penalty payment) and indicate the right to have the decision reviewed by the Court of Justice1312.

3.661

That obligation to state specific reasons is a fundamental requirement, designed not merely to show that the request for information is justified but also to enable the undertakings concerned to assess the scope of their duty to cooperate whilst at the same time safeguarding their rights of defence1313.

3.662

The reasons for the request of information cannot be expressed in a vague and generic manner. This lead to the annulment, by the Court of Justice, of the Commission’s requests for information sent to cement manufacturers. Those infringements consisted, as indicated by the Commission, in “restrictions on trade flows in the European Economic Area (EEA), including restrictions on imports in the EEA coming from countries outside the EEA, market-sharing, price coordination and related anti-competitive practices in the cement market and related product markets”. Several cement manufacturers criticised the Commission for not having adequately explained the alleged infringements and for having imposed on them a disproportionate burden having regard to the volume of information requested and to the particularly burdensome format of the response that had been imposed on them.

3.663

The Court of Justice found that the General Court erred in law in finding that the Commission decisions were adequately reasoned. In its decision requesting the information, the Commission asked the appellant to answer the questionnaire in Annex I to that decision. The Court of Justice noted that the matters referred to in that annex were extremely numerous and covered very different types of information (in particular, the questionnaire required the disclosure of extremely extensive and detailed information relating to a considerable number 1311 Article 18(2) of Regulation 1/2003. 1312 Article 18(3) of Regulation 1/2003. 1313 Case C-247/14 P, Heidelberg Cement v Commission, ECLI:EU:C:2016:149, paragraph 19 and, by analogy, with respect to inspection decisions, case C-94/00 Roquette Frères, EU:C:2002:603, paragraph 47; case C-37/13 P Nexans and Nexans France v Commission, EU:C:2014:2030, paragraph 34; case C-583/13 P Deutsche Bahn a.o. v Commission, EU:C:2015:404, paragraph 56.

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of transactions, both domestic and international, in relation to twelve Member States over a period of ten years). The Court held that the decision at issue did not disclose, clearly and unequivocally, the suspicions of infringement which justified the adoption of that decision and did not make it possible to determine whether the requested information was necessary for the purposes of the investigation1314. The Court of Justice qualified the statement of reasons as “excessively succinct, vague and generic – and in some respects, ambiguous”1315 and concluded that it did not fulfil the requirements of the obligation to state reasons laid down in Article 18(3) of Regulation 1/2003 in order to justify a request for information which occurred more than two years after the first inspections, and even though the Commission had already sent a number of requests for information to undertakings suspected of involvement in an infringement and several months after the decision to initiate proceedings. Given those factors, the Court considered that the decision at issue was adopted at a time when the Commission already had information that would have allowed it to present more precisely the suspicions of infringement by the companies involved.

3.664

Addressees: There are no restrictions on the category of companies which might be investigated by the Commission. This includes undertakings which are suspected of being involved in an infringement of competition law, complainants, competitors, suppliers or clients of those undertakings. However, the Commission has limited powers to obtain information from companies located outside the EU. In such cases, the Commission sends out requests for information but cannot impose sanctions for failure to answer the questions. To avoid jurisdictional difficulties, the request is normally served on a business establishment (branch, sales office subsidiary) located within the EU.1316

3.665

Extent of the inquiry: Article 18 of Regulation 1/2003 does not define the concept of information. It merely states that the information must be necessary for the Commission to carry out the duties assigned to it by the Regulation.1317

3.666

1314 See inter alia case C-247/14 P Heidelberg v Commission, op cit, paragraphs 27-40. 1315 C-247/14 P Heidelberg v Commission, op cit, paragraph 39. 1316 The situation is different for companies based in Norway, Iceland and Liechtenstein, all three parties to the Agreement on the European Economic Area. These three states have expressly agreed that the Commission can send requests for information to companies established in their territories, provided that copies are sent to the EFTA Surveillance Authority; Article 28(1) of Protocol 23 of the EEA Agreement. 1317 The purpose of the request must be indicated with reasonable precision otherwise it will be impossible to determine whether the information is necessary.

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3.667

The question arose as to whether the Commission was entitled to obtain copies of documents as opposed to being informed merely as to their contents. In Orkem,1318 the Court of Justice made it clear that the Commission can request the disclosure of documents of which it was unable to take a copy or extract when carrying out a previous investigation.

3.668

Due to the increasing importance of economics in complex cases, the Commission often requests substantial economic data and parties often submit arguments based on complex economic theories or provide empirical analysis. In order to streamline the submission and assessment of such evidence, the Commission has published Best Practices for the submission of economic evidence and data collection in cases concerning the application of Articles 101 and 102 TFEU or merger cases.1319

3.669

In the context of the procedure opened against several cement undertakings, the question arose as to whether the Commission imposed a disproportionate workload on the undertakings concerned in relation to the volume of information requested and the binding format in which the undertakings had to respond to a questionnaire. The General Court observed that the size of the workload caused by the volume of information and the very high degree of precision in the response format imposed by the Commission could not be reasonably disputed. However, the Court concluded that this workload was not disproportionate in the light of the necessities of the enquiry and the extent of the presumed infringements.1320

3.670

Time limit: The request for information specifies which information is required and fixes the time limit within which the information is to be provided. Addressees should be given a reasonable time limit to reply to the request, according to the length and complexity of the request taking into account the requirements of the investigation. In its Best Practices for the conduct of proceedings concerning Articles 101 and 102 TFEU,1321 the Commission indicates that, in general, this time limit is at least two weeks from the receipt of the request. If from the outset, it is considered that a longer period is required, the time limit to reply to the request will be set accordingly. When the scope of the request is 1318 Case 374/87 Orkem v Commission [1989] ECR 3283, paragraph 14. 1319 Staff Working Paper, available on DG Comp’s web site. 1320 Cases T-292/11 Cemex and Others, EU:T:2014:125, T-293/11 Holcim (Deutschland) and Holcim, EU:T:2014:127, T-296/11 Cementos Portland Valderrivas, EU:T:2014:121, T-297/11 Buzzi Unicem, EU:T:2014:122, T-302/11 Heidelberg Cement, EU:T:2014:128, T-305/11 Italmobiliare, EU:T:2014:126, and T-306/11 Schwenk Zement v Commission, EU:T:2014:123. 1321 Paragraph 38.

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limited, for example if it only covers a short clarification of information previously provided or information readily available to the addressee of the request, the time limit can be shorter (one week or less). If they have difficulties responding within the time limit set, addressees may ask for it to be extended. Additional time can be granted if the Commission considers the request to be justified. The Commission may also agree with the addressee of the request that certain parts of the requested information that are of particular importance or easily available for the addressee will be supplied within a shorter time limit, whereas additional time will be granted for supplying the remaining information. Where the addressee of a decision requesting information pursuant to Article 18(3) Regulation 1/2003 is unable to resolve its concerns about the time limit through the procedure outlined above, it may refer the matter to the hearing officer.1322

3.671

In their appeal against the Commission’s requests for information, one of the companies operating in the cement sector argued that the time-limit of two weeks granted for the response to a given series of questions was not sufficient. The Court noted that the assessment of the sufficient nature of the time-limit for responding entails taking into account the risk of a fine or of a periodic penalty payment incurred by the addressee of the request not only where that addressee fails to provide information or provides incomplete or late information, but also where the information provided is considered by the Commission to be inaccurate or distorted. The time-limit granted must, therefore, allow the addressee to give a substantive response, but also to ensure the complete, accurate and non-distorted nature of the information provided. Noting that the 11th series of questions entailed the identification of all the contacts established over several years by the employees of Schwenk Zement with the producers of cement and of related products or their representatives, the Court observed that the collection and verification of the information were not necessarily easy and inferred from this that the time-limit of two weeks granted by the Commission was insufficient.1323

3.672

There is no legal obligation on an undertaking to comply with a simple request for information. Instead, the Commission may decide to proceed immediately to a decision compelling the undertaking to provide the information required.

3.673

1322 Best Practices for the conduct of proceedings concerning Articles 101 and 102 TFEU, paragraphs 39 and 40. See also function and terms of reference of the hearing officer in certain competition proceedings, Article 4.2.c). 1323 T-306/11 Schwenk Zement v Commission, EU:T:2014:123, paragraphs 80 to 86.

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This decision also fixes the time limit within which the information is to be provided, and the penalties for supplying incorrect or misleading information. Periodic penalty payments may also be imposed. Undertakings may appeal such decision to the General Court.

3.674

3.675

Fines for breaches of procedural rules: Article 23(1) of Regulation 1/2003 provides for fines of up to 1% of the total annual turnover for the following kinds of intentional or negligent infringements: –

supply of incorrect or misleading information in response to a simple request;

–

supply of incorrect, incomplete or misleading information or do not supply information within the required time-limit in response to a request made by decision.

The Commission may also, by decision, impose on undertakings or associations of undertakings periodic penalty payments not exceeding 5 % of the average daily turnover in the preceding business year per day and calculated from the date appointed by the decision, in order to compel them to supply complete and correct information which it has requested by decision.

2.2.2 Inspections 3.676

Types of inspection: There are two types of inspections: inspections which may be carried out upon production of an authorisation in writing and inspections which are ordered by a decision requiring undertakings to submit to the investigation.1324 Inspections carried out upon production of an authorisation are voluntary. Inspections ordered by a decision are mandatory.

3.677

There is another distinction: investigations (either carried out upon authorisation or ordered by decision) may be announced or announced. Unannounced investigations are more effective. In contrast to requests for information, there is no two-stage procedure. The Commission does not have to attempt to conduct a voluntary inspection before it can proceed to take a decision ordering the inspection. The choice between an investigation by authorisation or ordered by a decision depends on the need for an appropriate inquiry. For example, the Commission might decide to under-

3.678

1324 Articles 20(3) and 20(4) of Regulation 1/2003.

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take a mandatory inspection when the Commission has encountered resistance from the company (refusal to cooperate or to respond to requests for information, false statements …) or when it suspects the existence of particularly serious infringement and is concerned that documents or other evidence might disappear. Companies have the duty to co-operate with the inspectors and to produce the documents required. However, an inspection carried out upon production of an authorisation does not authorise the inspectors to enter by force nor to conduct the inspection without the consent of the undertakings concerned. If an undertaking refuses the investigation, the Commission’s officials minute this refusal. In contrast, refusal to submit to inspections ordered by a decision may lead to fines of up to 1 % of the undertaking’s turnover.

3.679

The national authorities must afford the Commission the necessary assistance. The officials and other accompanying persons authorised or appointed by the competition authority of the Member State in whose territory the inspection is conducted are entitled to actively assist the Commission’s inspectors in carrying out their duties. They can request, where appropriate, the assistance of the police or an equivalent enforcement authority to enforce inspection ordered by a decision where the firm resists the inspection.

3.680

Although the Commission may impose pecuniary sanctions for a refusal to co-operate, these sanctions do not ensure immediate access and therefore do not offer a guarantee that the Commission will be able to find possible inculpatory evidence at the premises of the undertaking in question. Article 20(6) of Regulation 1/2003 fills the lacuna in the Commission’s enforcement powers by relying upon the assistance of the Member State. In practice, in most Member States, it is necessary to obtain an order from a court in order to call upon enforcement authorities, such as the police. Article 20(7) provides that if the assistance provided for in Article 20(6) requires authorisation from a judicial authority according to national rules, such authorisation must be applied for. This assistance may also be requested as a precautionary measure, in order to overcome any opposition on the part of the undertaking.1325 However, assistance on a precautionary basis may be requested only insofar as there are grounds for apprehending opposition to the investigation and/or attempts at concealing or disposing evidence.1326

3.681

1325 Joined cases 46/87 and 227/88, Hoechst AG v Commission, [1989] ECR 2859, paragraphs 30 to 32. 1326 Case C-94/00, Roquette Frères SA v. DGCCRF, [2002] ECR I-9011, paragraph 74.

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3.682

3.683

Scope of the Commission’s powers of inspection: The Commission’s powers of inspection have been increased to strengthen their effectiveness.1327 Inspectors (who are officials and other accompanying persons authorised by the Commission, including computer experts) are empowered to: –

to enter any premises, land and means of transport of undertakings and associations of undertakings;

–

to examine the books and other records related to the business,1328 irrespective of the medium on which they are stored;

–

to take or obtain in any form copies of or extracts from such books or records;

–

to seal any business premises and books or records for the period and to the extent necessary for the inspection;1329

–

to ask any representative or member of staff of the undertaking or association of undertakings for explanations on facts or documents relating to the subject-matter and purpose of the inspection and to record the answers.1330

The inspectors may search the IT-environment (e.g. servers, desktop computers, laptops, tablets and other mobile devices) and all storage media (e.g. CDROMs, DVDs, USBkeys, external hard disks, backup tapes, cloud services) of the undertaking. The revised Explanatory note on Commission inspections 1327 Recital 25 and Article 20 of Regulation 1/2003. 1328 As to the characteristics of the document, it includes not only sales, financial or other business documents but also travel records, address books, diaries, personal memoranda including telephone numbers and fax numbers used during particular periods, records of electronic mail, records of telephone calls and more generally information stored on computers. On a number of occasions, the Commission has used e-mails as evidence of infringements. 1329 See Commission decision of 30.1.2008 in COMP/39.326 - E.On et al. by which the Commission imposed a fine of E 38 million on E.ON for the breach of a seal during inspection, OJ 2008 C 240/6, upheld by the General Court and the Court of Justice (Case C-89/11 P, E.ON Energie AG v Commission, EU:C:2012:375). 1330 Answers can be recorded. A copy of recording is made available to the undertaking concerned after the inspection. In cases where a member of staff of an undertaking who is not or was not authorised by the undertaking to provide explanations on behalf of the undertaking has been asked for explanations, the Commission shall set a time-limit within which the undertaking may communicate to the Commission any rectification, amendment or supplement to the explanations given by such member of staff (see Commission Explanatory note on Commission inspections – pursuant to Article 20(4) of Regulation 1/2003, dated 11.09.2015, paragraphs 7- 8, available on DG Comp’s web site).

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published in 2015 indicates that this now applies also to private devices and media that are used for professional reasons (Bring Your Own Device-BYOD) when they are found on the premises.1331 For this purpose, the inspectors may not only use any built-in (keyword) search tool, but may also make use of their own dedicated software and/or hardware (“Forensic IT tools”). In addition, the 2015 version of the Explanatory note now indicates that if the selection of documents relevant for the investigation is not yet finished at the envisaged end of the on-site inspection at the undertaking’s premises, the copy of the data set still to be searched may be collected to continue the inspection at a later time. This copy will be secured by placing it in a sealed envelope. The undertaking may request a duplicate. The Commission will invite the undertaking to be present when the sealed envelope is opened and during the continued inspection process at the Commission’s premises. Alternatively, the Commission may decide to return the sealed envelope to the undertaking without opening it. The Commission may also ask the undertaking to keep the sealed envelope in a safe place to allow the Commission to continue the search process at the premises of the undertaking in the course of a further announced visit.1332

3.684

As regards the final data selected by the inspectors during the inspection on the spot (or following a continued inspection) which are added to the Commission’s case file, the undertaking will receive a data carrier (e.g. a DVD) on which all these data are stored. The undertaking will be requested to sign the printed list(s) of data items selected. Two identical copies of these data stored on data carriers will be taken along by the inspectors.1333

3.685

In addition, Regulation 1/2003 provides for the extension of the powers of search to private homes if there is reason to suspect that professional documents are kept there. This extension appears to be based on experience gained in recent cases where it appeared that company employees kept relevant documents in their private homes.1334 The exercise of this power is subject to authorisation by a national court.

3.686

Fines: Fines of up to 1% of the total annual turnover can be imposed if undertakings:

3.687

1331 1332 1333 1334

Commission Explanatory note, paragraph 10. Commission Explanatory note, paragraph 14. Commission Explanatory note, paragraph 15. Recital 26 and Article 21 of Regulation 1/2003.

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–

produce documents in incomplete form during inspections carried out upon authorisation or refuse to submit to inspections ordered by a decision;

–

give an incorrect or misleading answer to oral questions during inspections, fail to rectify within a time-limit set by the Commission an incorrect, incomplete or misleading answer given by a member of staff, or fail or refuse to provide a complete answer on facts relating to the subjectmatter and purpose of an inspection ordered by a decision.1335

3.688

The same sanction can be imposed if seals affixed by officials or other accompanying persons authorised by the Commission have been broken.

3.689

The Commission may, by decision, impose on undertakings or associations of undertakings periodic penalty payments not exceeding 5 % of the average daily turnover in the preceding business year per day and calculated from the date appointed by the decision, in order to compel them to submit to an inspection which it has ordered by decision taken pursuant to Article 20(4).

3.690

Undertakings’ obligations: duty to cooperate. Undertakings are under a duty not to submit passively but to cooperate actively with the investigation.1336 The undertaking’s representative must tell the inspectors where certain offices or archives are located, explain the filing system, identify the writers of letters, etc. If some documents are temporarily off the premises, the inspectors can order that they be fetched and produced.1337

3.691

The undertaking may be required to assist the inspectors, not only for explanations on the organisation of the undertaking and its IT environment, but also for specific tasks such as the temporary blocking of individual email accounts, temporarily disconnecting running computers from the network, removing and re-installing hard drives from computers and providing ‘administrator access rights’-support. When such actions are taken, the undertaking must not interfere in any way with these measures and it is the undertaking’s responsibility to inform the employees affected accordingly.1338

1335 Article 23(1) of Regulation 1/2003. 1336 Case 142/88 Hoescht v Commission [1989] ECR 2859, paragraphs 31 and 63-64; Case 97/87, Dow Iberica v Commission [1989] ECR 3165, paragraph 28; Case T-305/94 PVC II [1999] II-931, paragraph 444. 1337 Stahlwercke Röchling Burbach, OJ 1977 L 243/20. 1338 See Commission Explanatory note on Commission inspections, dated 11.09.2015, paragraph 11.

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In 2012, the Commission imposed a fine of €2.5 million on Energetický a průmyslový holding (EPH) and its subsidiary EP Investment Advisors (EPIA) for obstructing a Commission inspection in an antitrust investigation, by failing to block an email account and diverting incoming emails.1339 Since the Commission may demand production of the documents whose disclosure it considers “necessary” in order that it may bring to light an infringement of competition rules, it is for the Commission to decide whether a document must be produced to it.1340 The Commission’s right of access on business premises would serve no useful purpose if the Commission’s officials could do no more than ask for documents or files which they could identify precisely in advance. Therefore, the Commission has the power to search for various items of information which are not already known or fully identified.1341

3.692

Undertakings’ rights: explanations from inspectors. The Inspectors may explain procedural matters, particularly with regard to confidentiality, and the possible consequences of a refusal to submit to the inspection. However, they cannot be required to expand upon the subject matter as set out in the decision or to justify the decision in any way.1342 Undertakings’ rights: presence of a legal advisor. The undertaking may consult a legal advisor during the investigation. However, the presence of a lawyer is not a legal condition for the validity of the investigation, nor must it unduly delay or impede it. Any delay pending a lawyer’s arrival must be kept to the strict minimum,1343 and is allowed only where the management of the undertaking simultaneously undertakes to ensure that the business records will remain in the place and state they were in when the Commission officials arrived. The official’s acceptance of delay is also conditional upon their not being hindered from entering into and remaining in occupation of offices of their choice.

3.693

1339 The General Court dismissed their appeal considering both the failure to block an e-mail account and the diversion of incoming emails as serious breaches of EPH and EPIA’s obligation to cooperate with the Commission during the inspection (see Case T-272/12 Energetický a promyslový and EP Investment Advisors v Commission, EU:T:2014:995). 1340 Case 155/79 AM & S Europe v Commission [1982] ECR 1575, paragraph 17. 1341 Joined cases 46/87 and 227/88 Hoechst AG v Commission [1989] ECR 2859, paragraph 27. 1342 See Commission Explanatory note on Commission inspections, paragraph 2. 1343 In Case 136/79 National Panasonic [1980] ECR 2033, the Court tacitly rejected the claim by the plaintiff that failure to await the arrival of its lawyer breached its fundamental rights.

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2.2.3 Power to take statements 3.695

Article 19 of Regulation 1/2003 fills a gap in the Commission’s powers by allowing the Commission to interview any natural or legal person who consents to be interviewed for the purpose of collecting information relating to the subject matter of an investigation.

3.696

Interviews under Article 19 are voluntary. They are to be distinguished from the possibility to ask oral questions during an inspection pursuant to Article 20(2) (e).

3.697

If the interview is conducted in the premises of an undertaking, the Commission must inform the competition authority of the Member State in whose territory the interview takes place. If so requested by the competition authority of that Member State, its officials may assist the officials and other accompanying persons authorised by the Commission to conduct the interview.

3.698

The interview may be conducted by any means, including telephone or electronic means. At the beginning of the interview, the Commission must inform the person interviewed of its intention to record the statement. In any event, in order to guarantee the trustworthy character of the statement, a copy of the recording must be made available to the person interviewed so that this person can make corrections1344.

3.699

In its appeal against the Commission’s decision imposing a fine of € 1.06 billion for abuse of a dominant position, Intel submitted, inter alia, that its rights of defence had been breached because of the absence of a record transcribing the 5-hour discussion the Commission had with a customer. The General Court considered that the Commission was not required to organise the meeting with Intel’s customer as a formal interview for the purposes of Article 19(1) of Regulation 1/2003, read in conjunction with Article 3 of Regulation 773/2004. On appeal, the Court of Justice1345 held that it is apparent from the wording of Article 19(1) of Regulation 1/2003 that this provision is intended to apply to any interview1346 conducted for the purpose of collecting information relating to the subject matter of an investigation. There is nothing in the wording of that provision or in the objective that it pursues to suggest that the legislature intended 1344 Article 3(2) of Regulation 773/2004 relating to the conduct of proceedings. 1345 Case C-413/14 P Intel Corporation Inc. v Commission, ECLI:EU:C:2017:632, paragraphs 83-93. 1346 The General Court distinguished, in its judgment (case T-286/09, ECLI:EU:T:2014:547) between informal and formal interviews. No such distinction exists in the legislative framework laid down by Regulation 1/2003.

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to establish a distinction between two categories of interview relating to the subject matter of an investigation or to exclude certain of those interviews from the scope of that provision. The Court of Justice concluded that the General Court erred in law, first, by making a distinction, among interviews relating to the subject matter of a Commission investigation, between formal interviews, subject to Article 19(1) of Regulation 1/2003 in conjunction with Article 3 of Regulation 773/2004, and informal interviews, falling outside the scope of those provisions, secondly, by considering that the meeting between the Commission’s services and Intel’s customer did not fall within the scope of those provisions, on the ground that it did not constitute a formal interview and, thirdly, by considering, in the alternative, that the disclosure, during the administrative procedure, of a non-confidential version of the internal note drawn up by the Commission in relation to that meeting had remedied the lack of a record of that meeting.

2.2.4 Meetings and other contacts with the parties and third parties During the investigative phase, DG Competition may hold informal meetings (or conduct phone calls) with the parties subject to the proceedings, complainants, or third parties. Similarly, it will hold State of Play meetings with the parties or may hold (exceptionally and if the parties agree to do so) triangular meetings i.e. meetings involving all parties.

3.700

The Directorate-General for Competition offers State of Play meetings at several key stages of the case (shortly after the opening of proceedings, at a sufficiently advanced stage in the investigation, where a statement of objections is issued, after their reply to the statement of objections or after the oral hearing). In the context of cartel proceedings one State of Play meeting will be offered after the oral hearing. Furthermore, two specific State of Play Meetings will be offered in the context of procedures leading to commitment decisions and to complainants where the Commission has opened proceedings and intends to inform the complainant that it will reject its complaint by formal letter.

3.701

Information regarding these meetings and contacts as well as meetings with the Commissioner or the Director General is provided in the Best Practices on the conduct of proceedings concerning Articles 101 and 102 TFEU.1347

3.702

1347 OJ C 308/16, 20.10.2011, paragraphs 60 to 70.

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2.3 Infringement proceedings 2.3.1 The opening of formal proceedings 3.703

When its initial assessment leads to the conclusion that the case merits further investigation and where the scope of the investigation has been sufficiently defined, the Commission will open proceedings under Article 11(6) of Regulation 1/2003.1348 The opening of formal proceedings signals a commitment on the part of the Commission to further investigate the case. Article 2(2) of Regulation 773/2004 on the conduct of proceedings stipulates that the Commission may make public the initiation of proceedings, in any appropriate way. Indeed, in a system of concurring competences, it is important that courts and competition authorities are aware of the initiation of proceedings by the Commission.

3.704

The initiation of proceedings by the Commission relieves the competition authorities of the Member States of their competence to apply Articles 101 and 102.1349 Therefore, once the Commission has opened proceedings, national competition authorities cannot act under the same legal basis against the same agreement(s) or practice(s) by the same undertaking(s) on the same relevant geographic and product market.1350 If a competition authority is already acting on a case, the Commission shall only initiate proceedings after consulting with that national competition authority. National courts do not lose jurisdiction to apply Articles 101 and/or 102 when the Commission opens proceedings in the same case.1351 However, in order to respect the requirements of Article 16, they may have to take the necessary measures to avoid conflicting decisions.1352

3.705

Review of key submissions: In 2011,1353 in the spirit of encouraging an open exchange of views the Commission decided, in cases based on formal com1348 The decision to open proceedings identifies the parties subject to the proceedings and briefly describes the scope of the investigation. In particular, it sets out the behaviour constituting the alleged infringement of Articles 101 and/or 102 TFEU to be covered by the investigation and normally identifies the territory and sector(s) where that behaviour takes place (see paragraph 19 of the Commission notice on best practices for the conduct of proceedings concerning Articles 101 and 102 TFEU). 1349 Article 11(6) of Regulation 1/2003. 1350 See paragraph 53 of the Commission Notice on co-operation within the Network of Competition Authorities. 1351 Paragraphs 11 et seq. of the Commission Notice on the co-operation between the Commission and the courts of the EU Member States in the application of Articles 81 and 82, OJ C 101/54, 27.04.2004 (consolidated version of the Notice integrating the amendments adopted in 2015 available on DG Comp’s web site). 1352 Article 16(2) of Regulation 1/2003. See Case C-344/98 Masterfoods [2000] ECR I-11369. 1353 Commission notice on best practices for the conduct of proceedings concerning Articles 101 and 102 TFEU, paragraphs 71 to 73.

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plaints, to provide the parties subject to the proceedings, at an early stage (unless such is considered to likely prejudice the investigation) and at the latest shortly after the opening of proceedings, with the opportunity of commenting on a non-confidential version of the complaint.1354 In the same spirit, the Commission provides the parties subject to the proceedings shortly after the opening of proceedings with the opportunity to review non-confidential versions of other ‘key submissions’ already submitted to the Commission. This includes significant submissions of the complainant or interested third parties, but not, for example, replies to requests for information. After this early stage, other such submissions will only be shared with the parties if this is in the interest of the investigation and would not risk unduly slowing down the investigative phase. The Commission has indicated that it will respect justified requests by the complainant or interested third parties for non-disclosure of their submissions prior to the issuing of a statement of objections where they have genuine concerns regarding confidentiality, including fears of retaliation and the protection of business.

3.706

The review of key submissions cannot be offered in the context of cartel proceedings.

3.707

The Commission’s policy is to publish the opening of proceedings on the website of the Directorate-General for Competition and issue a press release, unless such publication may harm the investigation. The parties subject to the investigation are informed of the opening of proceedings sufficiently in advance before the opening of proceedings is made public so as to enable them to prepare their own communication (in particular in relation to shareholders, the financial institutions and the press).1355

3.708

However, in certain cases, the Commission has chosen not to initiate proceedings, as would have been the normal course of action, but allowed the companies concerned to find a commercial solution for the competition problem the Commission had identified. The Commission did so in the case Gazprom/ENI. The two companies removed a number of territorial restrictions clauses in their contracts. ENI also committed to offer significant gas volumes to customers outside Italy and increase capacity on the pipeline that transports Russian gas to Italy

3.709

1354 This may not be the case where the complaint is rejected at an early stage without further in-depth investigation (e.g. based on “insufficient grounds for acting”). 1355 Commission notice on best practices for the conduct of proceedings concerning Articles 101 and 102 TFEU, paragraphs 20 and 21.

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via Austria. As stated by former Commissioner Monti, this case shows that during the initial delicate transition phase from monopolised to liberalised energy markets, the focus should lie, in some occasions, on Commission’s interventions improving effectively the market structure, rather than on formal procedures imposing fines.1356

2.3.2 The statement of objections 3.710

The statement of objections opens the adversarial phase of the proceedings1357. The Commission’s obligation to send a statement of objections is based on the fundamental principle of Community law that the rights of the defence must be respected in all proceedings in which sanctions may be imposed. The proper observance of that general principle requires that the undertakings be afforded the opportunity during the administrative procedure to make known their views on the truth and relevance of the facts, charges and circumstances relied on by the Commission.

3.711

Contents: The statement of objections must give the undertakings and associations of undertakings concerned all the information necessary to enable them to defend themselves properly before the Commission adopts a final decision1358. It must be drafted in terms that, albeit succinct, are sufficiently clear to enable the parties concerned to properly identify the conduct to which the Commission objects.

3.712

The statement of objections is usually divided into two parts. The first part is factual and contains a summary of the infringement, a presentation of the products and market characteristics, the undertakings involved and their position in the market and the details of the infringement. The second part is the legal assessment. It deals with the application of Article 101 or 102 of the Treaty, the nature of the infringement, the restriction on competition, the duration of the infringement and the liability of the respective participants.

1356 See Mario Monti’s speech of 6.10.2003 Applying EU competition law to the newly liberalized energy markets available on DG Comp’s website. See also IP/03/1345; 6.10.2003. 1357 See for instance the statement of objections sent to Statoil and Norsk Hydro in the context of the GFU agreements; IP/01/830, 13.06.2001. 1358 See, inter alia, Joined Cases C-89/85 a.o., Ahlström Osakeyhtiö and Others v Commission [1993] ECR I-1307, paragraph 42, referred to as Woodpulp II; Case T-352/94 Mo och Domsjö v Commission [1998] ECR II-1989, paragraph 63. Joined cases T-25/95, a.o. Cimenteries CBR SA and others, [2000] ECR II491, paragraph 476.

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Characteristics: The statement of objections is a preparatory measure1359 setting out the Commission’s provisional findings, which it may revisit in the final decision. The Commission is therefore entitled, in order in particular to take account of the arguments or other evidence put forward by the undertakings concerned, to continue with its fact-finding after the adoption of the statement of objections with a view to withdrawing certain complaints or adding others as appropriate.

3.713

The Commission is entitled to send to the parties after the statement of objections fresh documents which it considers support its argument, subject to giving the undertakings the necessary time to submit their views on the subject.1360 If, the objections already raised against the undertakings in the statement of objections are corroborated by new evidence that the Commission intends to rely on, it will bring this to the attention of the parties concerned by a simple letter (letter of facts).1361 The letter of facts gives undertakings the opportunity to provide written comments on the new evidence within a fixed time limit.

3.714

However, fresh objections will necessitate the issuance of a supplementary statement of objections.1362 The procedural rights which are triggered by the sending of the statement of objections apply mutatis mutandis where a supplementary statement of objections is issued.

3.715

The Commission is not entitled to impose a fine on an undertaking or an association of undertakings without its having previously informed the party concerned, in the statement of objections that it intends to do so, should the objections be upheld. However, the Commission is under no obligation to determine the level of the fine.1363 The Commission indicates the essential facts and matters of law which may result in the imposition of a fine, such as the duration and gravity of the infringement and that the infringement was committed intention-

3.716

1359 The statement of objections may not in any case be the subject of an action for annulment; see Case 60/81 IBM v Commission [1981] ECR 2639, paragraph 21. 1360 Case 107/82 AEG v Commission [1983] ECR 3151, paragraph 29; Case T-23/99 LR AF 1998 A/S [2002] ECR II-1705, paragraph 190. 1361 Letters of facts have been sent in a number of cases, see Case COMP/39.942 - Freight forwarding (2012). 1362 Case T-275/94 Eurochèques [1995] ECR II-2169. If the final decision alleges that the undertakings concerned have committed infringements other than those referred to in the statement of objections or takes into consideration different facts, there will be an infringement of the rights of the defence; Case 41/69 ACF Chemiefarma, paragraphs 26 and 94; Joined Cases T-39/92 and T-40/92 CB and Europay v Commission [1994] ECR II-49, paragraphs 49 to 52. 1363 To give indications as regards the level of the fines envisaged, before the undertaking has been invited to submit its observations on the allegations against it, is to anticipate the Commission s decision and is thus considered by the Court of Justice as inappropriate; Case T-23/99 LR AF 1998 A/S [2002] ECR II-1705, paragraphs 199 and 206.

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ally or by negligence. The statement of objections also mentions in a sufficiently precise manner that certain facts may give rise to aggravating circumstances and, to the extent possible, to attenuating circumstances.

3.717

Although under no legal obligation in this respect, in order to increase transparency, the Commission has decided1364 that it will endeavour to include in the statement of objections (using information available) further matters relevant to any subsequent calculation of fines, including the relevant sales figures to be taken into account and the year(s) that will be considered for the value of such sales. Such information may also be provided to the parties after the Statement of Objections. In both cases, the parties will be provided with an opportunity to comment.

3.718

If the Commission intends to impose remedies on the parties, in accordance with Article 7(1) of Regulation 1/2003, the statement of objections will indicate the remedies envisaged that may be necessary to bring the suspected infringement to an end. The information given should be sufficiently detailed to allow the parties to defend themselves as to the necessity and proportionality of the remedies envisaged. If structural remedies are envisaged, in accordance with Article 7(1) of Regulation, the statement of objections will spell out why there is no equally effective behavioural remedy or why the Commission considers any equally effective behavioural remedy would be more burdensome for the undertaking concerned than the structural remedy.1365

3.719

Service of the statement of objections: The statement of objections is addressed to the undertakings concerned with a letter signed by the Director-General of DG COMP or by the Deputy Director-General of DG COMP on behalf of the Director-General. Where undertakings are established outside the European Union, the statement of objections is sent to their headquarters1366 or to a subsidiary located within Europe.1367

1364 Commission notice on best practices for the conduct of proceedings concerning Articles 101 and 102 TFEU, paragraphs 85 and 86. 1365 Commission notice on best practices for the conduct of proceedings concerning Articles 101 and 102 TFEU, paragraph 83. 1366 See cases 52 and 55/69 Geigy v. Commission [1972] 787, paragraphs 10 to 12. 1367 Case 6/72 Continental Can v Commission [1973] 215.

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2.3.3 Access to the Commission’s file Access to the file – guaranteed by Article 27(2) of Regulation 1/2003 and Article 15 of Regulation 773/2004 – is the consequence of the recognisance by the Court of Justice of the fundamental right for undertakings to be afforded the opportunity to exercise their right of the defence.

3.720

The practicalities of access to the file are covered by the Commission notice on access to file,1368 the notice on best practices for the conduct of proceedings concerning Articles 101 and 102 TFEU.1369

3.721

Amendments to Article 15 of Regulation 773/2004 were introduced in 2015 by Regulation 2015/1348 of 3 August 20151370 to align it with Directive 2014/104/EU on antitrust damages actions.

3.722

Article 15 has been amended to provide specific rules for access to leniency and settlement documents since their disclosure would affect the effectiveness of the Commission’s enforcement of Articles 101 and 102.1371 Article 15 now explicitly indicates that access to a leniency corporate statement or to a settlement submission shall only be granted at the premises of the Commission and that parties and their representatives shall not copy them by any mechanical or electronic means1372. In addition, Article 15 states that where settlement discussions have been discontinued with one or more of the parties, such party shall be granted access to the file when a statement of objections has been addressed to it1373.

3.723

1368 Commission Notice on the rules for access to the Commission file, OJ 2005 C 325/7. See also the Amendments to the Commission Notice on the rules for access to the Commission file adopted in 2015, OJ 2015 C 256/3. 1369 See the Commission notice on best practices for the conduct of proceedings concerning Articles 101 and 102 TFEU, paragraphs 92 to 98. 1370 OJ 2015 L 208/3. 1371 Undertakings might be deterred from cooperating with competition authorities under leniency programmes and settlement procedures if self-incriminating statements such as leniency statements and settlement submissions, which are produced for the sole purpose of cooperating with the competition authorities, were to be disclosed. Such disclosure would pose a risk of exposing cooperating undertakings or their managing staff to civil or criminal liability under conditions worse than those of co-infringers not cooperating with the competition authorities. To ensure undertakings’ continued willingness to approach competition authorities voluntarily with leniency statements or settlement submissions, such documents should be exempted from the disclosure of evidence (see recital 26 of Directive 2014/104/EU). 1372 Article 15 (1) b of Regulation 773/2004. 1373 Article 15 (1) a of Regulation 773/2004.

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3.724

Usually, the Commission gives access to the file by means of DVD and CDROM(s).1374 In certain cases, especially those with a very voluminous file, the Directorate-General for Competition may accept that the parties agree voluntarily to use a negotiated disclosure procedure. Under this procedure, the party entitled to access to file agrees bilaterally with the information providers claiming confidentiality to receive all or some of the information which the latter have provided to the Commission, including confidential information. The party being granted access to file limits access to the information to a restricted circle of persons (to be decided by the parties on a case-by-case basis, if requested, under the supervision of the Directorate-General for Competition).1375

3.725

For the disclosure of quantitative data relevant for econometric analysis, a data room procedure may be organised. Under this procedure, part of the file, including confidential information, is gathered in a room, at the Commission’s premises. Access to the data room is granted to a restricted group of persons, i.e. the external legal counsel and/or the economic advisers of the party (collectively known as the ‘advisers’), under the supervision of a Commission official. The advisers may make use of the information contained in the data room for the purpose of defending their client but may not disclose any confidential information to their client. The data room is equipped with several PC workstations and the necessary software. There is no network connection and no external communication is allowed.

3.726

Communicable and non-communicable documents: In order to allow undertakings to defend themselves properly, the Commission has an obligation to make available to the undertakings all documents, whether in their favour or otherwise, which it has obtained during the course of the investigation, with the exception of:

1374 See, for example, Case COMP/39.482 - Exotic Fruit: the parties received access to the file through a DVD containing the index of all documents in the file and all documents accessible for both of them. Each of the parties received furthermore a CD-ROM with documents used only against them in the liability part of the statement of objections and confidential for the other party. They were, finally, granted access to the submissions under the Leniency Notice at the Commission’s premises (Final Report of the Hearing Officer OJ C 64/7 of 3.3.2012). 1375 See the execution by Chiquita and Pacific of a Non-Disclosure Agreement ( NDA), as a time-effective and viable alternative to the traditional access to file exercise, in Case COMP/39.482 – Exotic Fruit (Final Report of the Hearing Officer, op. cit.).

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–

confidential information

The Commission file may include documents containing two categories of information, namely business secrets and other confidential information, to which access may be partially or totally restricted.

3.727

The term “business secret” is construed in its broader sense: the non-communicability of such information is intended to protect the legitimate interest of firms in preventing third parties from obtaining strategic information (such as costs, production secrets and processes, quantities produced, etc.) on their essential interests and on the operation or development of their business.1376 However, the undertakings’ right to the protection of their business secrets must be weighed against safeguarding the rights of the defence. In those circumstances, the Commission cannot use a general reference to confidentiality to justify a total refusal to divulge documents on its file. There are intermediate methods between full access and a total refusal. In PVC II, the Court held that the Commission would have been able to prepare (or have prepared) a non-confidential version of the documents in question or, should that prove difficult, to have drawn up a sufficiently precise list of the documents concerned so as to allow the undertaking to determine whether the documents described could be relevant to its defence.1377

3.728

In order to facilitate access to the file at a later stage in proceedings, the undertakings concerned are asked to detail the information (documents or parts of documents) which they regard as business secrets and the confidential documents whose disclosure would injure them. Article 16(3) of Regulation 773/2004 on the conduct of proceedings codifies the past practice by stipulating that undertakings must substantiate their claim for confidentiality in writing1378 and give the Commission a non confidential version of their confidential documents (deleting confidential passages) and provide a concise description of each piece of information. They must do so within the time limit fixed by the Commission.1379 If undertakings fail to comply with this obligation, the documents concerned are deemed not to contain confidential information.1380

3.729

1376 Case T-7/89 Hercules v Commission [1991] ECR II-1711, paragraph 54. 1377 Case T- 305/94, Limburgse Vinyl Maatschappij NV v Commission [1999] ECR II-931, paragraph 1017. 1378 See DG Comp’s informal guidance paper on confidentiality claims, March 2012, available on DG Comp’s website. This document sets informal guidance for the recipient of a request for information, on how to claim confidentiality for information contained in their submission. 1379 Article 17(1) of Regulation 773/2004 relating to the conduct of proceedings. 1380 Article 16(4) of Regulation 773/2004.

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3.730

3.731

The category “other confidential information” includes information other than business secrets, which may be considered as confidential, insofar as its disclosure would significantly harm a person or undertaking. This can be the case of information provided by third parties about undertakings which are able to place very considerable economic or commercial pressure on their competitors or on their trading partners, customers or suppliers. The Community Courts have acknowledged that it is legitimate to refuse to reveal to such undertakings certain letters received from their customers, since their disclosure might easily expose the authors to the risk of retaliatory measures.1381 Therefore the notion of other confidential information may include information that would enable the parties to identify complainants or other third parties where those have a justified wish to remain anonymous. – internal documents For the most part these documents consist of drafts, opinions or memos from the departments concerned and relate to ongoing procedures. The Commission’s departments must be able to express themselves freely within their institution concerning ongoing cases. The disclosure of such documents could also jeopardise the secrecy of the Commission’s deliberations. These considerations justify the nondisclosure of this category of documents.

3.732

A particular case of internal documents is the Commission’s correspondence with other public authorities and the internal documents received from such authorities (whether from EC Member States or non-member countries). As a general rule, these documents are not accessible.1382

3.733

Settlement of disagreement on confidential information: Where the Commission intends to disclose information which the undertaking and/or association considers to be confidential, it informs them in writing of its intention and

1381 The Community Courts have pronounced upon this question in cases of alleged abuse of a dominant position; see Case T-65/89, BPB Industries and British Gypsum [1993] ECR II-389; and Case C-310/93P, BPB Industries and British Gypsum [1995] ECR I-865. 1382 The Commission Notice on the rules for access to the Commission file provides that in certain exceptional circumstances, access can be granted to documents originating from Member States, the EFTA Surveillance Authority or EFTA States, after deletion of any business secrets or other confidential information. This is the case where the documents originating from Member States contain allegations brought against the parties, which the Commission must examine, or form part of the evidence in the investigative process, in a way similar to documents obtained from private parties. Access is also granted to documents originating from Member States or the EFTA Surveillance Authority in so far as they are relevant to the parties defence with regard to the exercise of competence by the Commission.

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its reasons.1383 The Commission sets a time limit within which the undertaking may inform it in writing of its views. If the undertaking and/or association continues to object to the disclosure, the Commission adopts a decision on the disclosure of the given document which is notified to the undertaking concerned. This decision can be challenged before the General Court.1384 Use of non-disclosed documents: The failure to communicate a document constitutes a breach of the rights of the defence only if the undertaking concerned shows that the Commission relied on that document to support its objection concerning the existence of an infringement1385 and that the objection could be proved only by reference to that document.1386 On the other hand, where an exculpatory document has not been communicated, the undertaking concerned must only establish that its non-disclosure was able to influence, to its disadvantage, the course of the proceedings and the content of the decision of the Commission.1387

3.734

Judicial control: When, in the context of an action seeking annulment of the Commission’s final decision, an applicant challenges the Commission’s refusal to disclose documents in the file, the General Court requires production of the documents and examines them. The Court’s examination is directed at the question of whether there is an objective link between the documents which were not made accessible during the administrative procedure and an objection adopted against the applicant concerned in the contested decision. If there is no such link, the documents in question could not be of use in the defence of the applicant invoking them. If, on the other hand, there is such a link, the General Court must first examine whether the failure to disclose them could have impaired the defence of that applicant during the administrative procedure.1388 It should be noted that undertakings cannot use Regulation 1049/2001 regarding public access to European Parliament, Council and Commission documents (i.e. the Transparency Regulation) to obtain access to the Commission’s file.1389

3.735

1383 1384 1385 1386

Article 16 of Regulation 773/2004. See Case C-62/86 AKZO Chemie BV v Commission [1991] ECR I-3359. Case 322/81 Michelin v Commission [1983] ECR 3461, paragraphs 7 and 9. Case 107/82 AEG v Commission [1983] ECR 3151, paras 24 to 30, and Case T-30/91 Solvay v Commission [1995] ECR II-1775, paragraph 58. 1387 Case T-30/91, Solvay v Commission, paragraph 68; joined Cases C-204/00 P a. o., Aalborg Portland A/S a.o. [2004] ECR I-123, paragraphs 68 to 75. 1388 Joined cases T-25/95 a.o., Cement, [2000] ECR II-491, paragraphs 240 and 241. 1389 OJ 2001 L 145, p. 43.

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3.736

Regulation 1049/2001 is designed to confer on the public as wide a right of access as possible to documents of the institutions concerned. For their part, Articles 27(2) and 28 of Regulation 1/2003 and Articles 6, 8, 15 and 16 of Regulation 773/2004 lay down restrictive rules for the use of documents in the file relating to a proceeding under Articles 101 or 102 TFEU. It follows from these articles that the parties to a proceeding under Article 101 or 102 do not enjoy unlimited right of access to the documents in the Commission’s file and that third parties, with the exception of complainants, do not, under such a proceeding, have any right of access to the documents in the Commission’s file.1390 As the Court of Justice stated,1391 if persons other than those with a right of access under Regulations 1/2003 and 773/2004, or those who enjoy such a right in principle but have not used it or have been refused access, were able to obtain access to documents on the basis of the Transparency Regulation (Regulation 1049/2001), the access system introduced by Regulations 1/2003 and 773/2004 would be undermined.

3.737

The right to consult the file in antitrust proceedings and the right of access to documents pursuant to the Transparency Regulation are legally distinct. However, the Court held that they lead to a comparable situation from a functional point of view. Whatever the legal basis on which it is granted, access to the file enables the interested parties to obtain the observations and documents submitted to the Commission by the undertakings concerned and by third parties. The Court of Justice stated that in those circumstances, generalised access, on the basis of Regulation 1049/2001, to the documents in a file relating to a proceeding under Article 101 would jeopardise the balance which the EU legislature sought to ensure in Regulations 1/2003 and 773/2004 between the obligation on the undertakings concerned to submit to the Commission possibly sensitive commercial information to enable it to ascertain whether a concerted practice was in existence and to determine whether that practice was compatible with Article 101, on the one hand, and the guarantee of increased protection, by virtue of the requirement of professional secrecy and business secrecy, for the information so provided to the Commission, on the other.

3.738

Documents in the Commission’s files relating to Article 101/102 proceedings are covered by a general presumption that their disclosure will, in principle, undermine the protection of one of the interests listed in Article 4 of Regula1390 This extends to the table of contents of the Commission’s file (see case T-611/15 Edeka-Handelsgesellschaft Hessenring mbH v Commission, ECLI:EU:T:2018:63). 1391 Case C-365/12 P, Commission v EnBW Energie Baden-Württemberg AG, EU:C:2014:112, paragraphs 88 to 90.

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tion 1049/2001 (Article 4(2) states that the institutions shall refuse access to a document where disclosure would undermine the protection of: (i) commercial interests of a natural or legal person, including intellectual property, (ii) court proceedings and legal advice, (iii) the purpose of inspections, investigations and audits; unless there is an overriding public interest in disclosure). The Court of Justice held that, for the purposes of the application of the exceptions provided for in the first and third indents1392 of Article 4(2) of Regulation 1049/2001, the Commission is entitled to presume, without carrying out a specific, individual examination of each of the documents, that disclosure of such documents will, in principle, undermine the protection of the commercial interests of the undertakings involved in such a proceeding and the protection of the purpose of the investigations relating to the proceeding.1393

3.739

However, the general presumption referred to above does not rule out the possibility of demonstrating that a specific document disclosure of which has been requested is not covered by that presumption, or that there is an overriding public interest in disclosure of the document by virtue of Article 4(2) of Regulation 1049/2001.

3.740

The question then arose as to whether the intention of seeking compensation for the loss caused by the cartel can be considered as an overriding public interest in disclosure. The Court held that in order to ensure effective protection of the right to compensation enjoyed by a claimant, there is no need for every document relating to a proceeding under Article 101 to be disclosed to the claimant on the ground that this party is intending to bring an action for damages, as it is highly unlikely that the action for damages will need to be based on all the evidence in the file relating to that proceeding. Any person seeking compensation for the loss caused by a breach of Article 101 must establish that it is necessary for that person to be granted access to documents in the Commission’s file, in order to enable the latter to weigh up, on a case-by-case basis, the respective interests in favour of disclosure of such documents and in favour of the protection of those documents, taking into account all the relevant factors in the case. In the absence of any such necessity, the interest in obtaining compensation for the loss suffered as a result of a breach of Article 101 cannot constitute an overriding public interest, within the meaning of Article 4(2) of Regulation 1049/2001.1394

3.741

1392 I.e. commercial interests of a natural or legal person and the purpose of inspections, investigations and audits. 1393 Case C-365/12 P, Commission v EnBW, ECLI:EU:C:2014:112, paragraph 93. 1394 Case C-365/12 P, Commission v EnBW, op. cit., paragraphs 100-108. Moreover, the interest which is represented only by the loss suffered by a private undertaking in the context of an infringement of Article 101

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3.742

Limitations to the use of information obtained in the course of Commission proceedings: Information obtained pursuant to Regulation 773/2004 can only be used for the purposes of judicial or administrative proceedings for the application of Articles 101 and 102. Information obtained through access to the file should not be used in proceedings before national courts where this could unduly affect the effectiveness of the Commission’s enforcement of Articles 101 and 102 of the Treaty. A new Article 16(a) was inserted in 2015 to clarify the scope of this obligation.1395

3.743

In order to ensure that undertakings are not discouraged from voluntarily acknowledging their participation in infringements of Union competition law in the context of the Commission’s leniency programme or settlement procedure (see below), access to leniency corporate statements or to settlement submissions will be granted only for the purposes of exercising the rights of defence in proceedings before the Commission. Information taken from such statements and submissions should be used by the party having obtained access to the file only where necessary for the exercise of its rights of defence in proceedings before the European Union courts reviewing Commission decisions or before the courts of the Member States in cases that are directly related to the case in which access has been granted, and which concern either the allocation between cartel participants of a fine imposed jointly and severally on them by the Commission; or the review of an infringement decision adopted by a national competition authority.1396

3.744

Moreover, the use of information obtained pursuant to Regulation 773/2004 in proceedings before national courts should not unduly interfere with a pending Commission investigation of an infringement of Union competition law. Where such information was prepared by the Commission in the course of its proceedings for the enforcement of Union competition law (such as a statement of objections) or by a party to those proceedings (such as replies to requests for information of the Commission), a party should not be able to use such information in proceedings before national courts until the Commission has closed its proceedings against all parties under investigation by adopting a decision under Article 7, 9 or 10 of Regulation 1/2003 or has otherwise terminated its administrative procedure.1397 TFEU cannot be classified as “public” ( case T-611/15 Edeka-Handelsgesellschaft Hessenring mbH v Commission, op. cit, paragraph 99). 1395 Regulation 2015/1348 of 3 August 2015, OJ 2015 L 208/3. 1396 Article 16 a of Regulation 773/2004. 1397 Ibid.

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2.3.4 The reply to the statement of objections Although there is no legal obligation to reply to the statement of objections,1398 in every case the accused undertakings defend themselves against the Commission’s objections.

3.745

Extent of the reply: Parties are allowed in their written comments to set out all matters relevant to their defence and to attach any relevant documents as proof of the facts set out.1399

3.746

Time limit: The Commission, when giving notice of objections, must set a date by which the parties may inform it in writing of their views. In setting that date, the Commission shall have regard both to the time required for preparation of the submission and to the urgency of the case. The time allowed in each case shall be at least four weeks.1400 In cases such as United Brands or Suiker Unie, the Commission granted a 2-month period for the reply to the statement of objections. This period was considered sufficient by the Court of Justice.1401 In Pre-insulated pipes, the Commission granted a period of 14 weeks.

3.747

2.3.5 Oral hearings Overview: The purpose of the hearing is primarily to enable the parties who are the subject of an infringement procedure – if they so request – to develop orally the arguments they have set out in their written response to the statement of objections. It is also an opportunity for the Commission to ask questions and, hence, get a better understanding of the case. The hearing is held under the responsibility of the hearing officer. The hearing officer ensures that the hearing is properly conducted “in full independence”.1402

1398 1399 1400 1401

Case T-30/89, Hilti v Commision, [1991] II-1439, paragraphs 37 and 38. Article 10(3) of Regulation 773/2004 relating to the conduct of proceedings. Articles 10(2) and 17(2) of Regulation 773/2004. Case 27/76 United Brands v Commission [1978] ECR 207, paras. 272 and 273; Case 40/73 Suiker Unie v Commission [1975] ECR 1663, paragraphs 94 to 99. 1402 Article 14(1) of Regulation 773/2004 relating to the conduct of proceedings. See also Decision of the President of the European Commission of 13 October 2011 on the function and terms of reference of the hearing officer in certain competition proceedings, OJ L 275/29 of 20.10.2011, the objective of which is to provide guidance for interested parties on the contribution of the hearing officer to the Commission s proceedings relating to Articles 101 and 102 TFEU. The revised mandate strengthens the role of the hearing officer as the guardian of procedural rights.

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Representation at the hearing: Undertakings to which a statement of objections has been issued either appear in person or are represented by legal representatives. Undertakings and associations of undertakings may also be represented by a duly authorised agent appointed from among their permanent staff.1403 In addition to these undertakings, the Commission may, where appropriate, afford complainants the opportunity of expressing their views at the oral hearing.1404 If the Commission considers it necessary, it may also hear other natural or legal persons.1405

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Conduct of the hearing: Although the procedure at the oral hearing is not formally set, it is usually held as follows: (i) the hearing officer opens the hearing and invites the case handler(s) to summarise the facts and reasoning of the Commission; (ii) the complainant (if present) and the parties are invited to make their comments on the case;1406 (iii) the hearing officer successively invites the Member States representatives and the officials of the Commission to ask questions to the parties (the hearing officer may also ask questions); (iv) the hearing officer may invite the parties to submit concluding observations before closing the hearing. Where appropriate, in view of the need to ensure the right to be heard, the hearing officer may afford the undertakings the opportunity of submitting further written comments after the oral hearing.

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Oral hearings are not public. The statements made by each person heard are recorded on tape. The recording is made available to such persons on request, by means of a copy from which business secrets and other confidential information are deleted.1407

2.3.6 Consultation of the advisory committee 3.752

The consultation of the Advisory Committee – composed of representatives of the competition authorities of the Member States – is an essential procedural requirement, the breach of which affects the legality of the Commission’s final decision. This sanction also applies if it is proved that failure to forward certain material information did not allow the Advisory Committee to deliver its Opinion in full knowledge of the facts, that is to say without being misled in 1403 1404 1405 1406

Article 14(4) of Regulation 773/2004. Article 6(2) of Regulation 773/2004. Article 27(1) of Regulation 1/2003 and Article 13 of Regulation 773/2004. Comments may be heard In Camera when they concern business secrets and other confidential information. Regarding the principles of In Camera hearing, please see case C-154/14 P, SKW Stahl-Metallurgie v Commission, ECLI:EU:C:2016:445. 1407 Article 14(8) of Regulation 773/2004.

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a material respect by inaccuracies or omissions.1408 The Advisory Committee has to be consulted prior to the taking of any decision finding an infringement, imposing interim measures, decision accepting commitment decision imposing fines fixing the definitive amount of the periodic penalty payment or withdrawing the benefit of a block exemption regulation in individual cases. Article 14 of Regulation 1/2003 describes the procedure of the consultation.

2.4 Procedural safeguards In all proceedings in which sanctions, especially fines or periodic penalty payments, may be imposed, observance of the rights of the defence is a fundamental principle of Community law, which must be complied with. The procedural safeguards granted to undertakings ensure that the Commission can collect evidence, while guaranteeing that the rights of undertakings under investigation to a fair trial are not compromised by events which occur during the fact finding process.

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Privilege against self-incrimination: The undertakings cannot be forced to admit that they have committed an infringement. In other words, the Commission may not compel an undertaking to provide it with answers which might involve an admission on its part of the existence of an infringement which it is incumbent upon the Commission to prove.1409 However, the undertaking is obliged to answer factual questions and to provide documents, even if this information may be used to establish against it the existence of an infringement.

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Where the addressee of a request for information refuses to reply to a question in such a request invoking the privilege against self-incrimination, it may refer the matter in due time following the receipt of the request to the hearing officer, after having raised the matter with the Directorate-General for Competition before the expiry of the original time limit set.1410 In appropriate cases, and having regard to the need to avoid undue delay in proceedings, the hearing officer may make a reasoned recommendation as to whether the privilege against selfincrimination applies and inform the director responsible of the conclusions drawn, to be taken into account in case of any decision taken subsequently pursuant to Article 18(3) of Regulation 1/2003. The addressee of the request shall

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1408 Case T-69/89 RTE v Commission [1991] ECR II-485, paragraph 23, Joined cases T-25/95 a.o. (Cement) [2000] ECR II-491, paragraph 742. 1409 See Case 374/87 Orkem v Commission [1989] ECR 3283, taken over by Recital 23 of Regulation 1/2003. 1410 See also decision of the President of the European Commission of 13 October 2011 on the function and terms of reference of the hearing officer in certain competition proceedings, OJ L 275/29 of 20.10.2011, Article 4.2; b).

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receive a copy of the reasoned recommendation. The addressee of an Article 18(3) decision is reminded of the privilege against self-incrimination as defined by case law of the Court of Justice of the European Union.1411

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Attorney/client privilege: Written communications between lawyers and clients are protected if (i) they are made for the purposes and in the interests of the client’s rights of defence (they must have a relationship to the subject-matter of that procedure) and, (ii) they emanate from independent lawyers, that is to say, lawyers who are not bound to the client by a relationship of employment and are registered with the bar of one of the Member States of the European Union.1412 By contrast, the correspondence exchanged between a lawyer bound to a company by a relationship of employment and a manager of the same company is not covered by legal professional privilege.1413

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The principle of protection of written communications between lawyer and client extends also to the internal notes which are confined to reporting the text or the content of those communications.1414 Preparatory documents, even if they were not exchanged with a lawyer or were not created for the purpose of being sent physically to a lawyer, may none the less be covered by legal professional privilege, provided that they were drawn up exclusively for the purpose of seeking legal advice from a lawyer in exercise of the rights of the defence. On the other hand, the mere fact that a document has been discussed with a lawyer is not sufficient to give it such protection.1415

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It is for the undertaking claiming the protection of legal professional privilege with regard to a given document to provide the Commission with appropriate justification, while not being bound to disclose the contents of such document. In many cases, a mere cursory look by Commission officials, normally during an inspection, at the general layout, heading, title or other superficial features of a document will enable them to confirm or not the accuracy of the reasons invoked by the undertaking. However, an undertaking is entitled to refuse to allow the Commission officials to take even a cursory look, provided that it gives appropriate reasons to justify why such a cursory look would be impossible 1411 Commission notice on best practices for the conduct of proceedings concerning Articles 101 and 102 TFEU, paragraph 36. 1412 Case 155/79 AM & S Europe Limited v Commission, [1982] ECR 1575, paragraph 21. 1413 Joined cases T-125/03 and T-253/03, Akzo Nobel Chemicals Ltd and Akcros Chemicals Ltd v Commission, [2007] ECR II-3523, paragraph 169. See also case C-550/07 P, Akzo Nobel Chemicals Ltd, and Akcros Chemicals Ltd, [2010] ECR I-8301. 1414 Order in case T-30/89 Hilti v Commission [1990] ECR II-163, paragraph 18. 1415 Joined cases T-125/03 and T-253/03, Akzo Nobel Chemicals Ltd and Akcros Chemicals Ltd v Commission, paragraph 123.

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without revealing the content of the document. However, where, in the course of an inspection, the Commission officials consider that the material presented by the undertaking is not of such a nature as to prove that the document in question is protected by legal professional privilege, but where it cannot be excluded that the document may be protected, the officials may place a copy of the contested document in a sealed envelope and bring it to the Commission’s premises, with a view to a subsequent resolution of the dispute. Since 2011, issues of legal privilege may be referred to the hearing officer.1416 A party that claims legal privilege can ask the hearing officer to review the document and express a view on whether the document is privileged.

2.5 Commission decisions The Commission’s investigation can be terminated by different ways: (i) the Commission can close an investigation because it has not found any evidence of anticompetitive practice,1417 or take an inapplicability decision. If Article 101 or 102 has been infringed, the Commission may take interim measures. It may also settle a case or take a decision requiring the undertakings concerned to bring such infringement to an end with or without remedies, and impose fines.

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The number of formal decisions requiring undertakings to bring infringement to an end adopted each year is relatively limited. So far, in the energy sector, the Commission’s investigations have usually lead to commitments.

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2.5.1 Common requirements Reasoning: The purpose of the obligation to give reasons for an individual decision is to enable the Community judicature to review the legality of the decision and to provide the party concerned with an adequate indication as to whether the decision is well founded or whether it may be vitiated by some defect enabling its validity to be challenged.1418 The requirements to be satisfied by the statement of reasons depend on the circumstances of each case, in particular the content of the measure in question, the nature of the reasons given and the interest which the addressees of the measure, or other parties to 1416 Commission notice on best practices for the conduct of proceedings concerning Articles 101 and 102 TFEU, paragraphs 55 and 56. Function and terms of reference of the hearing officer in certain competition proceedings, Article 4.2.a). 1417 See the investigation into the UK/Belgian gas interconnector closed in 2002, IP/02/401, 13.02.2002. 1418 See, inter alia, case C-521/09 P Elf Aquitaine/Commission, EU:C:2011:620, paragraphs 146-148; case C-439/11 P Ziegler/Commission, EU:C:2013:513, paragraphs 114-115 ; case C-455/11 P Solvay/Commission, EU:C:2013:796, paragraphs 89-90.

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whom it is of direct and individual concern, may have in obtaining explanations.1419 It is not necessary for the reasoning to go into all the relevant facts and points of law. However the Commission must set out in its decision in a concise but clear and relevant manner the principles of law and fact upon which the decision is based and which are necessary in order that the reasoning which led the Commission to its decision may be understood.

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Language and service: The language in which the decision is served must be that of the addressee’s country of residence. Decisions must be served on the addressee’s address. A decision is duly served within the meaning of the Treaty if it is communicated to its addressee (the company’s registered office) and the addressee has been able to take notice of it.1420 The usual method is registered mail. The date of receipt is critical for example for computing the time-limit for an action for annulment under Article 263 TFEU.

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Publication: Decisions finding and requiring termination of an infringement as well as decisions adopting interim measures, commitments, finding inapplicability or imposing fines or periodic penalty payment must be published.1421 The requirement of publication is important for third parties who want to initiate legal action.

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A press release is published after the adoption of the decision by the Commission. It describes the scope of the case and the nature of the infringement. It also indicates (where appropriate) the amount of fines for each undertaking concerned and/or the remedies imposed or, in decisions Article 9 decisions, the commitments rendered binding.

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The summary of the decision, the hearing officer’s final report as well as the opinion of the advisory committee will be published shortly after the adoption 1419 See, for example, case T-95/15, Printeos e.o. v Commission, ECLI:EU:T:2016:722, i.e. the General Court first judgement on an appeal against a settlement decision. The applicants argued that the Commission’s decision did not identify specific reasons which led it to adjust the basic amount of the fines, by way of exception pursuant to paragraph 37 of the Guidelines on fines, and to apply different rates of reduction to each undertaking. The General Court held that when the Commission decides to depart from the general methodology set out in the Guidelines, the requirements relating to the duty to state reasons must be complied with all the more rigorously. Those reasons must be all the more specific because paragraph 37 of the Guidelines simply makes a vague reference to ‘the particularities of a given case’ and thus leaves the Commission a broad discretion where it decides to make an exceptional adjustment of basic amount of the fines to be imposed on the undertakings. The General Court considered that the Commission’s decision was vitiated by failure to explain with sufficient clarity and precision the way in which it intended to use its discretion. 1420 Case 6/72, Continental Can v Commission [1973] ECR 215. 1421 Article 30 of Regulation 1/2003.

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of the decision in the OJ. The Directorate-General for Competition endeavours to publish as soon as possible on its website a full non-confidential version of the decision1422 in the authentic languages as well as in additional languages, if such versions are available.1423

2.5.2 Finding of inapplicability In the new directly applicable exception system, the main functions of the Commission is to take action against infringements and to promote consistent application of the competition rules by means of general measures such as block exemption regulations and guidelines. However, Article 10 of Regulation 1/2003 empowers the Commission to adopt decisions finding that Article 101 is inapplicable, either because the conditions of Article 101(1) are not fulfilled or because the conditions of Article 101(3) are satisfied. The Commission may likewise make such a finding of inapplicability with reference to Article 102 TFEU.

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Conditions for adoption: Such decisions can be adopted only at the Commission’s own initiative and in the Community public interest. These conditions ensure that decisions making a finding of inapplicability cannot be obtained on demand by companies. Such a possibility would seriously undermine the principal aim of the reform, which is to focus the activities of all competition authorities on what is prohibited. Inapplicability decisions can only be taken “ in exceptional cases where the public interest of the Community so requires”.1424

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1422 Several cases have raised questions regarding requests for confidentiality of information submitted by leniency applicants and the scope of the competences of the Hearing Officer in reviewing these requests for confidentiality (see case C-162/15 P Evonik Degussa GmbH v Commission, ECLI:EU:C:2017:205; case C-517/15 P AGC Glass Europe SA a.o. v Commission, ECLI:EU:C:2017:598,). In Evonik, the Court de Justice pointed out that the publication, in the form of verbatim quotations, of information from the documents provided by an undertaking to the Commission in support of a statement made in order to obtain leniency differs from the publication of verbatim quotations from that statement itself. Whereas the first type of publication should be authorised, subject to compliance with the protection owed, in particular, to business secrets, professional secrecy and other confidential information, the second type of publication is not permitted in any circumstances (paragraph 87 of the Evonik judgment). However, those rules have neither the object nor the effect of prohibiting the Commission from publishing the information relating to the elements constituting the infringement of Article 101 TFEU which was submitted to it in the context of the leniency programme and which does not enjoy protection against publication on another ground. Consequently, the only protection available to an undertaking which has cooperated with the Commission in the context of a proceeding under Article 101 TFEU is the protection concerning (i) the immunity from or reduction in the fine in return for providing the Commission with evidence of the suspected infringement which represents significant added value with respect to the information already in its possession and (ii) the non-disclosure by the Commission of the documents and written statements received by it in accordance with the Leniency Notice (paragraphs 96-97 of the Evonik judgment).. 1423 Commission notice on best practices for the conduct of proceedings concerning Articles 101 and 102 TFEU, paragraph 149. 1424 Recital 14 of Regulation 1/2003.

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3.768

The objective of these decisions is to clarify the law and ensure its consistent application throughout the Community, “ in particular with regard to new types of agreements or practices that have not been settled in the existing case-law and administrative practice”.

3.769

Consequences: Inapplicability decisions do not immunise against later findings of infringements by national competition authorities or national courts as they are only of a declaratory nature. However, Article 16 of Regulation 1/2003 creates a general obligation for national competition authorities and national courts to make every effort to avoid decisions conflicting with decisions adopted by the Commission. A finding of inapplicability by the Commission pursuant to Article 10 can therefore make an important contribution to the uniform application of Community competition law.

2.5.3 Interim measures 3.770

Article 8 of Regulation 1/2003 makes explicit provision for the Commission’s power to adapt decisions ordering interim measures.

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Conditions for interim measures: interim measures can only be taken if (i) the practices prima facie, constitute an infringement of competition rules and (ii) are likely to cause serious and irreparable damage.1425 Damage is considered irreparable if it cannot be remedied by a subsequent decision of the Commission.

3.772

Procedure for the adoption of interim measures: Interim measures can be requested when accompanied by a formal complaint alleging a breach of Articles 101 or/and 102 or when a formal proceeding has been initiated by the Commission. The Commission may also order interim measures ex officio.1426 Following an application for interim measures, the Commission must respect the fundamental rights of the defence (right to reply to the statement of objections, and right to be heard) of the undertaking concerned. The time limit for replying to the statement of objections of at least one month may be shortened to one week.1427 The advisory committee is also consulted by an expedited pro-

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1425 Case T-44/90 La Cinq SA v. Commission [1992] ECR II-1, paragraph 28. 1426 Distribution system of Ford Werke, OJ 1982 L256/20. 1427 Article 17(2) of Regulation 773/2004 relating to the conduct of proceedings.

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cedure.1428 The Commission’s decision must be reasoned albeit concisely.1429 It applies for a specified period of time and may be renewed or withdrew1430 in so far it is necessary and appropriate. It may be appealed before the General Court. Type of interim measures: Only a few decisions have been adopted by the Commission granting interim relief. Interim measures consisted of obligations (i) to supply;1431 (ii) to cease abusive conditions;1432 (iii) to grant access;1433 (iv) to licence.1434 In certain circumstances, the Commission has rejected the application for interim measures since the companies concerned offered commitments which were deemed sufficient to re-establish a harmless situation.1435 The Commission may by decision impose fines or periodic penalty payments on undertakings and associations of undertakings where they contravene a decision ordering interim measures.1436

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2.5.4 Commitments decisions The possibility to settle a case has been used by the Commission before the adoption of Regulation 1/2003. It is now explicitly set out in Article 9 of Regulation 1/2003.1437 The main novelty as compared to the previous regime is that sanctions are attached in case of non-respect of the commitment. Guidance about commitment procedure is provided in the 2011 notice on best practices for the conduct of proceedings concerning Articles 101 and 102 TFEU. The notice contains paragraphs about the initiation of commitment discussions, the Commission’s preliminary assessment, the submission of the commitments, the market test of the commitments and subsequent discussions with the parties.

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The Commission is never obliged under Article 9(1) of Regulation 1/2003 to decide to make commitments binding instead of opting for an Article 7 prohibition decision.

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1428 1429 1430 1431 1432 1433 1434 1435 1436 1437

Articles 14(3) and 14(4) of Regulation 1/2003. Case C-792/79 R Camera Care Ltd v. Commission, [1980] ECR 119, NDC Health/IMS Health, OJ 2003 L 268/69. Ford Verke, OJ 1982 L 256/20; BI/Boosey &Hawkes, OJ 1987 L 286/36. ECS/Akzo, OJ 1983 L 252/13. Mars Langnese Iglo and Schoeller Lenbensmittel, OJ 1993 L183/1 and 19. Magill, OJ 1989 L 78/43. See Eurofix/Beauco, OJ 1988 L 65/19 and Sea Containers/Stena, OJ 1994 L 15/8. Article 23(2)(b) and Article 24(1)(b) of Regulation 1/2003. See also DG Competition’s Best Practices on the conduct of proceedings concerning Article 101 and 102 TFEU, OJ C308/6, 20.10.2011.

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3.777

The choice between a prohibition decision and commitments decision depends on the main objectives pursued and the specific features of the case. The Commission will adopt an Article 7 prohibition decision when the primary goal is to punish for past behaviour. The 2011 notice on best practices indicates that the Commission does not apply the Article 9 procedure to secret cartels that fall under the Notice on immunity from fines and reduction of fines in cartel cases. In practice, however, it can be seen that the Commission takes a pragmatic approach and does not hesitate to apply the commitment procedure to horizontal practices.1438 The Commission is also more likely to opt for a prohibition decision if it is important to set a legal precedent (prohibition decisions are usually reasoned in greater detail and explain the Commission’s theory of harm more exhaustively). The Commission will also opt for a prohibition decision when the only commitment that can be offered is to cease the anti-competitive behaviour.1439

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Commitment decisions have several advantages over prohibition decisions, generally resulting from the more cooperative nature of the procedure. They have a quicker impact on the market and resolution of the competition concerns than would have been possible for the same case under Article 7. Commitments under Article 9 are forward-looking: a company commits to a specific behaviour – beyond merely respecting the law – over a specific duration, or to structural measures such as divestitures, with long-lasting effects on the market. Commitments may therefore prevent competition concerns from returning in the future, while Article 7 decisions tend to rely on the deterrent effect of the fine. Furthermore, the threat of fines for violations of commitments provides companies with an incentive to implement them properly.

3.779

In an Article 7 decision, the Commission must establish an infringement, which requires an in-depth investigation. By contrast, in an Article 9 decision, the Commission does not establish an infringement. The Commission formally communicates to the company a summary of the main facts of the case, identifying the competition concerns. This serves as a basis for the parties to put forward appropriate commitments to address these concerns.

1438 See Commission decision of 23 May 2013 that renders legally binding commitments from Star alliance members Air Canada, United and Lufthansa on transatlantic air transport passenger (case AT.39595, Continental/United/Lufthansa/Air Canada) and decision of 7 July 2016 that renders legally binding the commitments - aiming to increase price transparency for customers and to reduce the likelihood of coordinating prices - offered by fourteen container liner shipping companies (case AT.39850, Container Shipping).. 1439 “To commit or not to commit? Deciding between prohibition and commitments”, Commission Competition policy brief, March 2014.

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Article 7 and Article 9 do have different requirements regarding the level of necessary qualitative and quantitative analysis and evidence. These different demands derive from the distinction between identifying concerns about a possible infringement versus the finding of an actual infringement. Even so, the competition concerns in an Article 9 decision must also be based on a coherent theory of harm and supported by evidence for such concerns.1440

3.780

Decisions accepting commitments establish the material facts of the case and the prima facie evidence of the suspected infringement, and incorporate the accepted commitments.1441 The addressee of the Commission decision is bound by the decision.1442 Article 9(2) of Regulation 1/2003 stipulates that the Commission is entitled to reopen the procedure only if the facts on the basis of which the Commission accepted the commitments have materially changed, if the undertaking offering the commitments has supplied incorrect, incomplete or misleading information, or if the undertaking violates the commitments.

3.781

In a request for a preliminary ruling, a national court asked whether Article 16(1) of Regulation 1/2003 – which requires national courts not to take decisions running counter to the decision adopted by the Commission in a proceeding initiated under Regulation 1/2003 – must be interpreted as precluding a national court from declaring an agreement between undertakings void on the basis of Article 101(2) TFEU, when the Commission has accepted beforehand commitments concerning that agreement and made them binding in a decision taken under Article 9(1) of that regulation.

3.782

The Court highlighted that, as provided for in Article 9(1) of Regulation 1/2003, read in the light of recital 13 of that regulation, the Commission may carry out a mere ‘preliminary assessment’ of the competition situation, without

3.783

1440 “To commit or not to commit? Deciding between prohibition and commitments”, Commission Competition policy brief, op. cit. 1441 See, inter alia, Commission’s decision of 10.12.2015 that renders legally binding the commitments offered by Bulgarian Energy Holding (BEH) to end competition restrictions on Bulgaria’s wholesale electricity market (case AT.39767 BEH Electricity). 1442 Various issues regarding commitment decisions have been raised in the application for the annulment of Commission Decision 2006/520/EC of 22 February 2006 relating to a proceeding pursuant to Article 102 making binding the commitments given by De Beers. By judgment of 11 July 2007 in Case T-170/06 (ECR [2007] II-2601), the General Court annulled the Commission’s decision, on the ground that the Commission had not complied with the principle of proportionality and had not respected Alrosa s right to be heard on the individual commitments offered by De Beers. The General Court considered that the Commission had been required to examine the proportionality of the new commitments offered by De Beers. It took the view in the present case that the complete prohibition of all commercial relations between the two parties with effect from 2009 was manifestly disproportionate. This judgment was set aside by the Court of Justice on 29 June 2010 (Case C-441/07 P, ECR [2010] I-0000).

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the commitment decision taken on the basis of that article subsequently establishing whether there has been or still is an infringement. Under these conditions, a national court may conclude that the practice which is the subject of the commitment decision infringes Article 101 TFEU and that, in so doing, it proposes, unlike the Commission, finding that an infringement of that article has been committed.1443

3.784

In addition, recitals 13 and 22 of Regulation 1/2003, read together, expressly state that commitment decisions are without prejudice to the powers of competition authorities and courts of the Member States to decide on the case, and do not affect the power of the courts and the competition authorities of the Member States to apply Articles 101 and 102. It follows that a decision taken on the basis of Article 9(1) of Regulation 1/2003 cannot create a legitimate expectation in respect of the undertakings concerned as to whether their conduct complies with Article 101. The commitment decision cannot ‘legalise’ the market behaviour of the undertaking concerned, and certainly not retroactively.

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The Court adds that nonetheless, national courts cannot overlook that type of decision; such acts being, in any event, in the nature of a decision. In addition, both the principle of sincere cooperation laid down in the TFEU and the objective of applying EU competition law effectively and uniformly require the national court to take into account the preliminary assessment carried out by the Commission and regard it as an indication, if not prima facie evidence, of the anticompetitive nature of the agreement at issue in the light of Article 101(1).

3.786

The Court concluded that a commitment decision adopted by the Commission under Article 9(1) of Regulation 1/2003, does not preclude national courts from examining whether those agreements comply with the competition rules and, if necessary, declaring those agreements void pursuant to Article 101(2).

3.787

Commitments are offered by undertakings on a voluntary basis. The 2011 notice1444 indicates that undertakings may contact the Directorate-General for Competition at any time to explore the Commission’s readiness to pursue the case with the aim of reaching a commitment decision. Undertakings are encouraged to signal at the earliest possible stage their interest in discussing commitments. 1443 Case C-547/16 Gasorba SL, Josefa Rico Gil, Antonio Ferrándiz González v Repsol, ECLI:EU:C:2017:891, paragraphs 25-30.. 1444 Notice on best practices for the conduct of proceedings concerning Articles 101 and 102 TFEU, paragraph 118.

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A State of Play meeting is offered to the parties at that point. The DirectorateGeneral for Competition indicates to the undertaking the timeframe within which the discussions on potential commitments should be concluded and presents to them the preliminary competition concerns arising from the investigation.

3.788

Once the Commission is convinced of the undertakings’ genuine willingness to propose commitments which will effectively address the competition concerns, it issues a preliminary assessment. This document summarises the main facts of the case and identifies the competition concerns that would warrant a decision requiring that the infringement is brought to an end. If a statement of objections has already been sent to the parties, commitments may nevertheless still be accepted, in appropriate cases. In these circumstances, the statement of objections fulfils the requirements of a preliminary assessment, as it contains a summary of the main facts as well as an assessment of the competition concerns identified.

3.789

After receiving the Preliminary Assessment, the parties will normally have one month to formally submit their commitments. Commitments can be of a behavioural or structural nature. In any event, they must be unambiguous and selfexecuting. When commitments cannot be implemented without the agreement of third parties (e.g. where a third party that would not be a suitable buyer under the commitments holds a pre-emption right), the undertaking should submit evidence of the third party’s agreement. If need be, a trustee can be appointed to assist the Commission in their implementation (monitoring and/or divestiture trustee).

3.790

If the Commission considers that the commitments offered prima facie address the competition concerns identified, the Commission must, in accordance with Article 27(4) of Regulation 1/2003, conduct a market test of the commitments before making them binding by decision. A notice (market test notice) containing a concise summary of the case and the main content of the commitments is published in the Official Journal. The full text of the commitments is also published on DG COMP’s web site.

3.791

If the case is based on a complaint, the Commission will at this stage also inform the complainant about the market test and invite the complainant to submit comments.

3.792

Similarly, third parties admitted to the procedure are informed and invited to submit comments. Interested third parties are invited to submit their observa-

3.793

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tions within a fixed time limit of not less than one month in accordance with Article 27(4) of Regulation 1/2003. After receipt of the replies to the market test, the Commission informs the parties of the substance of the replies; a state of play meeting is organised with the parties.

3.794

Where the Commission is of the view, on the basis of the results of the market test (and any other information available) that the competition concerns identified have not been addressed or that changes in the text of the commitments are necessary to make them effective, the undertakings offering the commitments are informed accordingly. If the latter are willing to address the problems identified by the Commission, they must submit an amended version of the commitments. If the amended version of the commitments alters the very nature or scope of the commitments, a new market test is conducted. If the undertakings are unwilling to submit an amended version of the commitments, where this is required by the Commission’s assessment of the result of the market test, the Commission can revert to the Article 7 procedure.1445

3.795

Commitment decisions provide for the establishment of a suitable mechanism to assist the Commission in monitoring the undertaking’s compliance with its decision. The monitoring of commitments may take the form of a report, most often submitted annually to the Commission at a date set by it.1446 Instead, it may be external and include the appointment of an independent monitoring trustee.1447 If the undertaking does not respect the commitment decision, the Commission can re-open proceedings on the basis of Article 9, paragraph 2, of Regulation 1/2003 and impose fines or periodic penalty payment by virtue of Articles 23 and 24 of said Regulation.1448

3.796

Commitments are usually behavioural.1449 Article 9 allows the Commission to accept commitments for a fixed or indefinite period. In practice, there is a clear preference on the part of the Commission for fixed-term commitments. 1445 For examples of failure of commitment negotiations, see press release of 15.04.2015 in the Google Search (Shopping) case (case AT.39740), press release of 27.01. 2012 in the Skyteam case (case AT.37984).. 1446 See for example, Commission decision of 11.10.2007 in case COMP/B-1/37966 (Distrigaz). 1447 See for example, Commission decision of 12.04.2006 in case COMP/B-1/38.348 (Repsol). 1448 In Case T-342/11, Confederación Española de Empresarios de Estaciones de Servicio (CEEES) and Asociación de Gestores de Estaciones de Servicio v Commission, EU:T:2014:60, the General court rejected the appeal lodged by two associations of Spanish service station operators against a Commission s decision refusing to re-open proceedings against Repsol for allegedly breaching its 2006 commitments. 1449 See case AT.40153 of 4.05.2017 (Amazon’s commitments: E-books MFNs and related matters); case AT.39850 of 7.11.2016 (Container Shipping); case AT.40023 of 26.07.2016 (Cross-border access to paytv). Structural commitments are less common (see case AT.39767 of 10.12.2015 (BEH Electricity); case COMP/39.402 of 18.03.2009 (RWE).

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The standard duration of the commitments adopted by the Commission is 5 years.1450 This trend does not, however, exclude the possibility of commitments being adopted for a shorter or a longer period of time.1451 By way of illustration, Gazprom commitments to enable free flow of gas at competitive prices in Central and Eastern European gas markets will be in place for eight years.1452

3.797

The Article 9 procedure is often used in the Energy sector. A number of investigations opened by the Commission in this sector have been settled.1453

3.798

2.5.5 Finding and termination of infringement Cease and desist orders: Where the Commission finds that there is an infringement of Article 101 or of Article 102 TFEU, it may by decision require the undertakings and associations of undertakings concerned to bring such infringement to an end1454.

3.799

As already emphasized, the number of formal decisions taken by the Commission is relatively limited. In the energy sector, the Commission has taken such a decision in the case IJsselcentrale.1455 This case which dates back to 1991, concerned the agreements entered into by the electricity generation companies in the Netherlands and the SEP, a public limited company intended to serve as a vehicle for cooperation between the electricity generators. The agreements prohibited the importation and exportation of electricity by undertakings other than SEP. They did so horizontally, by prohibiting generators from exporting or importing and, vertically, by requiring generators to impose the same ban on distributors in their supply agreements. In its decision, the Commission ordered the companies to take all necessary steps to bring the infringement to an end. They had to submit the Commission proposals for the ending of the infringement within three months of reception of the. No fines were imposed.

3.800

1450 See, inter alia, Amazon’s commitments in case AT.40153, op. cit, Paramount’s commitments on crossborder pay-TV services of 26.07.2016 in case /AT.40023; Samsung Electronics’ commitment on standard essential patent injunctions of 29.04.2014 in case AT.39939; Penguin’s commitments in e-books market of 25.07.2013 in case AT.39847. 1451 Three years in case AT.39850 (Container Shipping); 10 years while providing for a review clause that allows commitments to be reviewed after 5 years in case AT.39964 (Air France/KLM/Alitalia/Delta). 1452 Gazprom’s commitments of 24.05.2018 in case AT.39816 – Upstream gas supplies in Central and Eastern Europe; Bulgarian Energy Holding’s commitments to open up Bulgarian wholesale electricity market in case AT. 39767 - BEH Electricity. 1453 See part 3, chapter 4, above. 1454 Article 7(1) of Regulation 1/2003. 1455 IJsselcentrale (IJC) and others; OJ L 28/32, 2.02.1991.

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3.801

However, on 8 July 2009, the Commission adopted a decision finding that E.ON, jointly and severally with its wholly owned subsidiary E.ON Ruhrgas and GDF Suez have infringed Article 101(1) TFEU by participating in a market sharing agreement and concerted practices in the natural gas sector and imposed a fine on these companies1456.

3.802

Behavioural or structural remedies: The Commission may impose on the undertakings any behavioural or structural remedies which are proportionate to the infringement committed and necessary to bring the infringement effectively to an end. Structural remedies can only be imposed either where there is no equally effective behavioural remedy or where any equally effective behavioural remedy would be more burdensome for the undertaking concerned than the structural remedy.1457

3.803

For example, in Continental Can, having found the take-over to be contrary to Article 102, the Commission ordered a scheme for divestiture to be submitted within six months. In Gillette, the Commission found that Gillette had abused its dominant position by participating in the buy-out of the Wilkinson Sword business in the Community, thereby creating links between a dominant undertaking and its most important competitor. In order to terminate the infringement of Article 102, the Commission ordered Gillette to withdraw from Eemland, disposing of both its equity interest and its interest as a creditor of Eemland.1458

3.804

The Commission is constrained by the principle of proportionality. A remedy cannot exceed what is necessary in order to bring the conduct in question into line with what is lawful.1459

2.5.6 Decisions imposing fines 3.805

Basic principles: Fines may be imposed on undertakings and associations of undertakings where, either intentionally or negligently: (a) they infringe Article 101 or Article 102; or (b) they contravene a decision ordering interim measures; or (c) they fail to comply with a commitment made binding by a decision.

1456 1457 1458 1459

E.ON/GDF (case M.39.401), OJ 2009 C 248/5. Article 7 of Regulation 1/2003. Gillette, OJ 1993 L 116/21. Case C-291/91 P and C-292/91 P RTE and ITP v Commission [1995] ECR I-743, paragraph 93; Case T-25/95 a.o. Cement [2000] ECR II-491, paragraph 4706.

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For each undertaking and association of undertakings participating in the infringement, the fine shall not exceed 10 % of its total turnover in the preceding business year.1460

3.806

Addressees: Undertakings and associations of undertakings are the subject of EC competition law.1461 Only undertakings, not their directors or employees can be fined for infringing competition law.1462

3.807

The fining policy: The Commission enjoys a certain margin of discretion when fixing fines. The fact that in the past the Commission imposed fines of a certain level for certain types of infringement does not mean that it is estopped from raising that level (within the limits laid down by Regulation 1/2003) if that is necessary to ensure the implementation of Community competition policy.1463

3.808

Responding to admonitions of the General Court in Trefilunion1464 for greater transparency in the setting of fines, the Commission adopted its Guidelines on the method of setting fines. New Guidelines were adopted in 2006 with a view to increasing the deterrent effect of fines.1465 The rationale behind these Guidelines is that the discretion which the Commission is granted to set fines within the limit of 10% of overall turnover must follow a coherent and non-discriminatory policy consistent with the objectives pursued in penalising infringements of the competition rules.

3.809

The Commission’s method of setting fines: In accordance with Article 23(3) of Regulation 1/2003, the Commission starts from a basic amount determined on the basis of the gravity of the infringement and its duration.

3.810

1460 1461 1462 1463

Article 23(2) of Regulation 1/2003. Specific rules apply to associations of undertakings; see Article 23(4) of Regulation 1/2003. The Commission imputes to the employer all actions undertaken by employees. Joined cases 100/80 to 103/80 Musique diffusion française and Others v Commission [1983] ECR 1825, paragraph 109; Case T-12/89 Solvay v Commission, [1992] ECR 907, paragraph 309; and Case T-304/94 Europa Carton v Commission [1998] ECR II-869, paragraph 89; Case T-203/01 Michelin v. Commission [2003] ECR II-4071, paragraph 254; Case C-510/06, Archer Midland Co v Commission, [2009] I-1843, paragraph 59. 1464 Case T-148/89 Tréfilunion v Commission [1995] ECR II-1063, paragraph 142. 1465 Commission Guidelines on the method of setting fines imposed pursuant to Article 23(2)(a) of Regulation 1/2003, OJ 2006 C 210/2. Decisions adopted pursuant to these guidelines include, inter alia, Commission decision of 20.11.2007 in COMP/38.432 - Professional video tapes; Commission decision of 28.11.2007 in COMP/39.165 - Flat Glass; Commission decision of 5.12.2007 in COMP/38.629 - Chloroprene Rubber; Commission decision of 1.08.2008 in COMP/39.181 - Candle waxes; Commission decision of 12.11.2008 in COMP/39.125 - Carglass.

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3.811

The basic amount is now set by reference to the value of the undertaking’s sales of goods or services to which the infringement directly or indirectly relates in the relevant geographic area within the EEA.1466 Where the geographic scope of an infringement extends beyond the EEA (e.g. worldwide cartels), the Commission may apply the worldwide market shares of each player to the total EEA sales. In this respect, the 2006 Guidelines codify the Commission’s past practice, which has been confirmed by the Court of Justice, for worldwide price-fixing cartels and market sharing arrangements.1467

3.812

The Commission will normally take the sales made by the undertaking during the last full business year of its participation in the infringement.

3.813

In their appeal against the Commission’s decision, several participants in the air freight forwarding services cartel argued that the Commission could not use the value of sales of international air freight forwarding services taken as a whole, since the infringements related solely to some services. The Court held1468 that the claimants confused the infringements in question with the definition of the relevant market affected by those infringements. By the decision at issue, the Commission found four distinct infringements, corresponding to four agreements relating to four items intended to be incorporated in the price of international air freight forwarding services. Whilst those agreements each had their own particular characteristics (be it their substantive or geographical content, the period for which they were in effect or the undertakings which participated in them), they all concerned the market for international air freight forwarding services as a package of services. Having regard to the objective pursued by the Guidelines, which consists in adopting as the starting point for the calculation of the fine imposed on an undertaking an amount which reflects the economic significance of the infringement and the size of the undertaking’s contribution to it, the concept of the “value of sales” must be understood as referring to sales on the market concerned by the infringement.1469 Consequently, in order to determine the basic amount of the fine to be imposed, it was appropriate to take account of the value of the sales on the market for international air freight for1466 Guidelines, paragraph 13. 1467 See joined cases T-71/03 a.o. Tokai Carbon a.o. v Commission [2005] ECR II-10, paragraphs 180-189 and joined cases T-236/01 a.o. Tokai Carbon a.o. v Commission [2004] ECR II-1181, paragraphs 196-204. 1468 See, inter alia, Case C-264/16 P Deutsche Bahn AG a. o. v Commission, ECLI:EU:C:2018:60, paragraphs 48-52. 1469 See also judgment in case C-227/14 P, LG Display v Commission, ECLI:EU:C:2015:258, paragraphs 5657 stating that the General Court was correct to hold that the Commission’s ability to include sales for the calculation of fines does not depend on whether those sales were made at prices influenced by the cartel but merely on the fact that the sales were made on a market affected by a cartel in which the appellants were participating.

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warding services, since the sales falling within the sphere of the infringements at issue were made on that market. Where the infringement of an association of undertakings relates to the activities of its members, the value of sales will generally correspond to the sum of the value of sales by its members.

3.814

The basic amount of the fine will be related to a proportion of the value of sales, depending on the degree of gravity of the infringement multiplied by the number of years of infringement.

3.815

The assessment of gravity will be made on a case-by-case basis for all types of infringement, taking account of all the relevant circumstances of the case. The proportion of the value of sales taken into account cannot be set up at a level that exceeds 30% of the value of sales. In order to decide whether the proportion of the value of sales to be considered in a given case should be at the lower end or at the higher end of that scale, the Commission will have regard to a number of factors, such as the nature of the infringement, the combined market share of all the undertakings concerned, the geographic scope of the infringement and whether or not the infringement has been implemented. The proportion of the value of sales will generally be set at the higher end of the scale for horizontal price-fixing, market-sharing and output-limitation agreements, since these are among the most harmful restrictions of competition.1470

3.816

The 2006 Guidelines introduce a new mechanism: the entry fee.1471 In order to deter undertakings from entering into horizontal price-fixing, market-sharing and output-limitation agreements, the Commission will include in the basic amount a sum of between 15 % and 25% of the value of sales.1472

3.817

As a result, undertakings participating in a cartel during, for example, six years may face a basic amount of more than two years of their respective relevant revenues: up to 25% for the entry fee and up to 180% (30% multiplied by six years) for the other components.

3.818

1470 Guidelines, paragraphs 19-23. See for example, in Commission decision of 30.6.2010, COMP/38.344 – Prestressing Steel, point 953, the proportion of the value of sales that was taken into account was 16%, 18% or 19% depending on the undertakings. In Commission decisions of 12.10.2011, COMP/39.482 - Exotic Fruit and 29.01.2014, COMP/39.801 – Polyurethane Foam, the proportion of the value of sales that was taken into account was 15%. 1471 See for example, in Commission decision of 30.6.2010, COMP/38.344 – Prestressing Steel, points 957 to 962 (entry fee of 16%, 18% and 19% depending on the undertakings). In decision of 12.10.2011, COMP/39.482- Exotic Fruit, the entry fee was 15%. 1472 The Commission may also apply the entry fee in the case of other infringements.

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3.819

This basic amount is then increased to take account of aggravating circumstances or reduced to take account of attenuating circumstances.1473 The final amount calculated according to this method may not in any case exceed 10%1474 of the world-wide turnover of the undertakings, as laid down by Article 23(2) of Regulation 1/2003.

3.820

Aggravating circumstances include, inter alia, (i) repeated infringement of the same type by the same undertaking(s);1475 (ii) a refusal to cooperate with or attempts to obstruct the Commission in carrying out its investigations;1476 (iii) a role of leader in or instigator of the infringement (special attention is now paid to the steps taken to coerce other undertakings to participate in the infringement and/or any retaliatory measures taken against other undertakings with a view to enforcing the practices constituting the infringement).

3.821

The main change concerns the situation of repeated infringement: (i) the Commission now takes into account not only its own previous decisions but also those of the national competition authorities; and (ii) the increase of the fine may now be up to 100%.

3.822

Attenuating circumstances can be found if the undertaking (i) provides evidence that its involvement in the infringement is substantially limited and thus dem1473 Guidelines, paragraphs 28 and 29. 1474 The 10% ceiling must be calculated solely on the basis of the turnover of the undertakings liable for the infringement (see judgment in case C-637/13 P, Laufen Austria v Commission, ECLI:EU:C:2017:51 in which the Court of Justice set aside the judgment of the General Court in so far as the General Court held that the Commission had not made an error in taking the turnover of the Roca Group into account for the purpose of applying the 10% ceiling in respect of the period for which Laufen Austria was held solely responsible for the infringement. The Court of Justice observed in that regard that, inasmuch as a parent company cannot be held responsible for an infringement committed by its subsidiary prior to the acquisition of that subsidiary, the Commission must, for the purpose of calculating the 10% ceiling, take account of the subsidiary’s own turnover in the business year preceding the year in which the decision penalising the infringement was adopted). 1475 In joined cases C-93/13 P and C-123/13 P, Versalis and Eni v Commission, ECLI:EU:C:2015:150, the Court of Justice stated that in order to establish the aggravating circumstance of repeated infringement on the part of the parent company, it is not necessary for that company to have been the subject of previous legal proceedings giving rise to a statement of objections and a decision. For that purpose, what matters is an earlier finding of a first infringement resulting from the conduct of a subsidiary with which the parent company involved in the second infringement formed, already at the time of the first infringement, a single undertaking for the purpose of Article 101. The objective of suppressing conduct that infringes the competition rules and preventing its reoccurrence by means of deterrent penalties would be jeopardised if an undertaking encompassing a subsidiary concerned by a first infringement were able, by altering its legal structure through the creation of new subsidiaries against which proceedings could not be brought on the basis of the first infringement, but which are involved in the commission of the new infringement, to make impossible or particularly difficult, and therefore avoid, a penalty for repeated infringement (paragraphs 91-92). 1476 See Commission decision of 20.11.2007 in COMP/38.432 – Professional video tapes, point 227.

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onstrates that it actually avoided applying it by adopting competitive conduct in the market;1477 (ii) has terminated of the infringement as soon as the Commission intervened (this does not apply to secret agreements or practices such as cartels);1478 (iii); (iv) committed the infringement as a result of negligence; (v) cooperated in the proceedings with the Commission outside the scope of the leniency notice and beyond its legal obligation to do so;1479 or (vi) where the anticompetitive conduct of the undertaking has been authorized or encouraged by public authorities. Finally, in a number of cases, the Commission has applied a so-called “multiplier” to ensure a sufficient deterrent effect.1480 The possibility of applying a multiplier is now explicitly stated in the 2006 Guidelines. The Guidelines also provide that Commission will also take into account the need to increase the fine in order to exceed the amount of gains improperly made as a result of the infringement where it is possible to estimate that amount.

3.823

In exceptional cases, the Commission may upon request, take account of the undertaking’s inability to pay (ITP) in a specific social and economic context.1481 The undertaking will have to show that the fine would irretrievably jeopardise its economic viability and cause its assets to loose all their value.

3.824

The Commission has issued an information note about ITP.1482 In its note, the Commission indicates that any type of reductions in the fine, either in the nominal amount or through favourable payment conditions, in view of a company’s alleged critical financial situation has to be treated with great caution. Granting such favourable treatment to one company may give rise to concerns of equal treatment with regard to those companies that do not obtain such treatment. In addition, taking into account the distressed financial situation of a company can carry the inherent risk of favouring those companies that are inefficient, badly

3.825

1477 See joined cases T-109/02 a.o. Bolloré SA a.o. v Commission [2007] ECR II-947, paragraphs 625-629; Case T-73/04, Le Carbone-Lorraine v Commission, [2008] ECR II-2661, paragraph 223. 1478 Case C-510/06 P, Archer Daniels Midland Co. v Commission, [2009] ECR I-1843, paragraphs 144-150. 1479 With regard to the reduction of fines for cooperation in other antitrust cases than cartels, see the explanations in book below (Settlement). 1480 See, regarding the multiplier, Case T-12/03, Itochu v Commission, [2009] II-909; case T-13/03, Nintendo v Commission, [2009] ECR I-975. See regarding the breach of the principles of equal treatment and proportionality in the use of the multiplier: Case T-395/09, Gigaset AG, formerly Arques Industries AG v Commission, EU:T:2014:23. 1481 See 2006 Fining Guidelines, paragraph 35. 1482 “Inability to pay under paragraph 35 of the 2006 fining guidelines and payment conditions pre-and postdecision finding an infringement and imposing fines”, 12.10.2010, available on DG Comp s web site. See also model application “Application for inability to pay and Standard questionnaire for inability to pay”, available on DG Comp’s web site.

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managed or over-leveraged at the expense of well managed and financially prudent companies.

3.826

The information note provides explanations of the interpretation of the ITP conditions under paragraph 35 of the 2006 fining guidelines and addresses the question of how to adjust the fine for successful ITP applicants. It also deals with the issue of how to address requests by companies which have appealed the fine and/or asked for interim relief to provide a bank guarantee as security instead of provisionally paying the fine and if, and to what extent, companies may be granted financial, relief post-decision, in view of their financial situation that deteriorated following the adoption of a Commission fining decision. It should be noted that the number of cases in which the Commission accepted to take into account the economic difficulties of the sector has risen significantly in recent years.1483

3.827

In their appeal against the Commission’s decision regarding the pre-stressing steel cartel, some of the participants argued that the Commission should have examined the second request they made for a reduction of their fines under paragraph 35 of the Guidelines which provides for the possibility of submitting a new application on the grounds of inability to pay after a decision imposing a fine has been adopted. The applicants submitted that they were unable to pay the fine, irrespective of whether they had, in the meantime, improved financially. They argued that the Commission should have examined whether their resources were sufficient to pay the fine, regardless of whether their financial situation had improved since the rejection of their first request.

3.828

The Court of Justice held that it is only in the case of new facts likely to substantially change the applicant’s financial situation that the submission of a request for a review of a previous decision on the applicant’s ability to pay which has become final can be justified.1484 The Court concluded that the General Court did not err in law in finding that the Commission was under no obligation to carry out a new examination of the applicants’ ability to pay, since the facts relied on by the applicants were not likely to substantially alter the assessment of their ability to pay.1485 1483 Applications for inability to pay have been accepted in several cases such as Animal Feed Phosphates, Prestressing Steel, Bathroom Fittings (2010), TV and Computer Monitor Tubes (2012). 1484 Joined cases C454/16 P to C-456/16 P and C-458/16 P, Global Steel Wire SA a.o. v Commission, ECLI:EU:C:2017:818. 1485 In this case, the Commission rejected the first requests for inability to pay by considering that the applicants could meet the payment of the fine by recourse, where appropriate, to credit institutions. The information provided by the applicants in their second requests revealed that their financial situation had improved com-

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Immunity from fines and reduction of fines in cartel cases: Cartels are among the most serious restrictions of competition. In the Commission’s opinion, it is in the Community interest to grant favourable treatment to undertakings which contribute to the detection and prosecution of cartels. These undertakings should not be dissuaded from cooperating with the Commission by the high fines to which they are potentially exposed.

3.829

The first Notice on the non-imposition or reduction of fines in cartel cases was adopted in 1996. As emphasised by Commission’s officials,1486 the leniency policy proved an effective tool to prosecute damaging practices.

3.830

After five years of implementation, the Commission adopted a new notice in 2002 and again a new one in 20061487 aimed at improving the transparency and effectiveness of its policy. The 2006 notice describes the procedural steps and conditions that undertaking must comply with in order to obtain immunity or a reduction of the fines. On 3 August 2015, the Commission adopted amendments to Regulation 773/20041488 and four related notices - including the 2006 leniency notice1489 – aimed at aligning them with Directive 2014/104/EU on antitrust damages actions for damages.1490 Moreover, a new Article 4a is inserted in Regulation 773/2004 which introduces the basic concepts of the Commission’s leniency programme into hard law.

3.831

1486 1487 1488 1489 1490

pared to that which the Commission had taken into account when it considered that they could meet the payment of the fine. The facts relied on by the applicants were not therefore likely to substantially alter the assessment of their ability to pay. See “The Commission’s new notice on immunity and reduction of fines in cartel cases: building on success” F. Arbault and F. Peiró, Competition Policy Newsletter, June 2002. Commission Notice on Immunity from fines and reduction of fines in cartel cases, OJ 2006 C 298/17. Regulation 2015/1348 of 3 August 2015 amending Regulation No 773/2004 relating to the conduct of proceedings by the Commission (OJ 2015 L 208/3). Amendments to the Commission Notice on immunity from fines and reduction of fines in cartel cases, OJ 2015 C 256/1.. As indicated above, to ensure undertakings’ continued willingness to approach competition authorities voluntarily with leniency statements or settlement submissions, such documents should be exempted from the disclosure of evidence. Therefore, the Directive, amongst other things, prohibits the use of leniency corporate statements and settlement submissions before national courts. See point 35 a of the Commission notice on immunity from fines and reduction of fines in cartel cases – inserted in 2015 - which now provides (without prejudice to the situation referred to in Article 6(7) of the Directive on antitrust damages actions) that the Commission will not at any time transmit leniency corporate statements to national courts for use in actions for damages. This provision was also inserted in the Commission notice on the cooperation between the Commission and courts of the EU Member States (see Amendments to the Commission notice on the cooperation between the Commission and courts of the EU Member States, OJ 2015 C 256/5, paragraph 26(a)).

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3.832

Immunity: A company can be immune from a fine if it is the first to submit information and evidence which in the Commission’s view will enable it to carry out a targeted inspection in connection with the alleged cartel (point (8)(a) of the notice), or find an infringement of Article 101 in connection with the alleged cartel (point (8)(b) of the notice). This means that only one company may be granted immunity from fines in any given cartel case.

3.833

For the Commission to be able to carry out a targeted inspection, the undertaking must provide the Commission with a corporate statement and evidence relating to the alleged cartel in possession of the applicant or available to it at the time of the submission, including in particular any evidence contemporaneous to the infringement1491. Immunity pursuant to point (8)(a) of the notice cannot be granted if, at the time of the submission, the Commission has already sufficient evidence to adopt a decision to carry out an inspection or has already carried out such an inspection.

3.834

Immunity pursuant to point (8)(b) can only be granted on the cumulative conditions that the Commission did not have, at the time of the submission, sufficient evidence to find an infringement of Article 101 and that no undertaking had been granted conditional immunity from fines under point (8)(a) in connection with the alleged cartel.

3.835

In addition to the conditions set out above, a number of conditions must be met in any case to qualify for any immunity from a fine. The undertaking must cooperate genuinely, fully, on a continuous basis and expeditiously from the time it submits its application throughout the Commission’s administrative procedure. It must end its involvement in the alleged cartel immediately following its application, except for what would, in the Commission’s view, be reasonably necessary to preserve the integrity of the inspections1492. Moreover, the undertaking must not have destroyed, falsified or concealed evidence nor disclosed the fact or any of the content of its contemplated application, except to other competition authorities.

1491 Commission Notice on Immunity from fines and reduction of fines in cartel cases, point 9. 1492 In its decision on Raw Tobacco Italy, the Commission revoked Deltafina’s immunity from fines on the grounds that the company had disclosed its leniency application to the other cartel members before the Commission carried out inspections. As an aggravating factor, Deltafina had not informed the Commission of the disclosure of its leniency application (Decision of 20.10.2005, COMP/C.38.281/B.2, points. 408460, confirmed by General Court in case T-12/06, Deltafina SpA v Commission, EU:T:2011:441 (paragraphs 102-173) and by the Court of Justice in case C-578/11 P, EU:C:2014:1742).

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An undertaking which took steps to coerce other undertakings to join the cartel or to remain in it is not eligible for immunity from fines. It may still qualify for a reduction of fines if it fulfils the relevant requirements and meets all the conditions therefor. Reduction of a fine: Undertakings which do not qualify for immunity may however obtain a reduction of their fine. In order to qualify for a reduction of fines, the undertaking must provide the Commission with evidence of the suspected infringement “which represents significant added value with respect to the evidence already in the Commission’s possession”. It must also terminate its involvement in the suspected infringement.

3.836

The concept of “added value” refers to the extent to which the evidence strengthens the Commission’s ability to prove the alleged cartel.1493 Written evidence originating from the period of time to which the facts pertain and direct evidence has a greater value than evidence subsequently established and indirect evidence.1494 The first undertaking will be granted a reduction of between 3050%, the second will be granted a reduction of 20-30%, subsequent undertakings will be granted a reduction of up to 20 %. Point 26 of the leniency notice states that where an undertaking provides evidence enabling the Commission to establish additional facts that would increase the gravity1495 or the duration of the infringement,1496 the Commission will not take these facts into account when setting the fine of the company that supplied them. The purpose of this rule is to encourage companies to disclose as much information as possible without increasing their risk of fines.

3.837

1493 See, for an application of this principle, Case T-347/06, Nynas v. Commission, EU:T:2012:480. 1494 In the bathroom fixtures and fittings cartel (case C-613/13 P, Commission v Keramag, EU:C:2017:49), the Court considered, first, that the General Court infringed the obligation to state reasons and the rules applicable to the taking and appraisal of evidence inasmuch as it denied that the statements made by Roca in the context of its leniency application had any probative value (a statement made in connection with a leniency application may corroborate another). Second, the General Court made an error of law in holding that the Commission was required to adduce additional proof because one leniency statement cannot corroborate another. Similarly, in requiring that the chart relating to the meeting of the AFICS (the professional association) should prove, by itself, the existence of the infringement at issue, without taking account of the other evidence and additional explanations, notably those contained in Ideal Standard’s leniency application, the General Court made an error of law. The General Court also erred in failing to consider whether the statements of Ideal Standard and Roca could be corroborated by the monthly tables containing confidential sales figures. 1495 See, for example, Commission decision of 21.02.2018 in case COMP/39.920, Braking systems, paragraphs 115-116. 1496 See, for example, Commission decision of 22.07.2017 in case COMP/39.881, Occupant Safety Systems supplied to Japanese Car Manufacturers, paragraphs 133, 137 and 144.

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3.838

Procedure to protect corporate statements: In order to ensure that applicants that cooperate with the Commission investigation are not impaired in their position in civil proceedings, as compared to companies who do not cooperate, the Commission has developed a procedure to protect corporate statements given under the Leniency Notice from discovery in civil damage procedure. Oral corporate statements are recorded and verbatim written transcripts are made of each statement at the Commission’s premises. Applicants making oral statements do not retain or receive from the Commission any copies of these statements but as soon as the oral statement has been given, it becomes a Commission’s document.

3.839

Amongst the amendments adopted on 3 August 2015, a new Article 4a(3) is inserted in Regulation 773/2004 indicating that the Commission will offer parties appropriate methods of providing settlement submissions other than by written submission, including orally. Oral settlement submissions may be recorded and transcribed at the Commission’s premises. The undertaking shall be granted an opportunity to check the technical accuracy of the recording of its oral submission at the Commission’s premises, and, where necessary, to correct the substance of their submission without delay.

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The Commission has issued guidance on the delivery of corporate oral statements. The guidance note addresses various issues regarding the meeting with DG Competition and the accuracy of audio files and transcripts of oral statements.1497

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Settlement/reduction of fines for cooperation: Where the parties to a cartel case agree with the Commission findings, the Commission may use the settlement procedure to speed up the adoption of a decision. This procedure, which was introduced on 30 June 2008,1498 is not an informal tool for closing infringement procedures, but a simplified procedure leading to the adoption of a decision establishing an infringement and imposing a fine. From the point of view of the general interest, settlements are appropriate where procedural savings can be obtained and resources can be redeployed on other cases.1499

1497 “Delivering oral statements at DG Competition”, 8.10.2013, available on DG Comp’s web site. 1498 Regulation 662/2008 of 30 June 2008 amending Regulation 773/2004 as regards the conduct of settlement procedures in cartel cases, OJ 2008 L 171/3. See also the Commission Notice on the conduct of settlement procedures, OJ 2008 C 167/1. 1499 Cf. para. 5 of the Commission Notice on the conduct of settlement procedures. See also The new settlement procedure in selected cartel cases, Maria Luisa Tierno Centella, Competition Policy Newsletter Number 3 2008, p. 30.

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Fines imposed at the end of settlement procedures will be 10% lower than the fines that would have been imposed otherwise. Any specific increase for deterrence will not exceed a multiplication by two.

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Regulation 662/2008 which governs the settlement procedure applies only to cartel cases.1500 The Commission retains a broad margin of discretion to determine which cases may be suitable to explore the parties’ interest to engage in settlement discussions, as well as to decide to engage in them or discontinue them or to definitely settle.

3.843

Should the Commission consider that a case may be suitable for settlement, it will explore the interest in settlement of all parties to the same proceedings. Should some of the parties request settlement discussions, the Commission may decide to pursue the settlement procedure by means of bilateral contacts with the settlement candidates. Bilateral settlement discussions with the parties take place between the initiation of proceedings and the issuing of the statement of objections. As discussions progress, the Commission informs the parties of the potential objections envisaged against them, discloses the supporting evidence. Parties have the opportunity to express their views on the objections and the evidence and to argue their position. In addition, parties are informed of the range of likely fines that they may face (which does not happen in the ordinary procedure). Once an understanding has been reached on the terms of the settlement submission and similar progress has been made with all parties concerned in the settlement discussions, the Commission may set a time-limit within which the undertakings may lodge their respective settlement submissions (at least 15 working days). These settlement submissions shall be specifically drawn up by the undertakings concerned as a formal request to the Commission to adopt any decision in their case following the settlement procedure.1501 They include, inter

3.844

1500 See for examples of cartels with settlement proceedings: COMP/38.511-DRAMs (2010), COMP/39.579Consumer Detergents (2011), COMP/39.600 – Refrigeration compressors (2011), COMP/39.611 - Water management products (2011), COMP/39.605 – CRT glass bulbs (2011), COMP/39.801 - Polyurethane Foam (2014), COMP/39.922 – Automotive bearings (2014). See, in the energy sector, the Commission’s decision of 5.03.2014 (case AT.39952 – Power Exchanges) which imposed fines on the two European spot power exchanges, EPEX Spot and Nord Pool Spot (NPS). EPEX and NPS engaged in a non-competition arrangement covering all their electricity spot trading services in the EEA and beyond. The Commission noted that the aim of the two undertakings was to restrict competition between them, to protect their traditional strongholds, and agree on expansion to new countries, while maintaining the power balance between them. The parties generally agreed not to compete with one another. The agreement included, in particular, an allocation of territories. As a result of the application of the Settlement Notice, the amount of the fines imposed on EPEX and NPS was reduced by 10 %. 1501 Commission Regulation 2015/1348 of 3.08.2015 amending Regulation (EC) No 773/2004 relating to the conduct of proceedings by the Commission pursuant to Articles 81 and 82 of the EC Treaty, OJ L 208/3, new third subparagraph Article 10a(2).

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alia, an acknowledgment of liability and an indication of the maximum amount of the fines the parties would expect to be imposed.1502

3.845

Amongst the amendments adopted on 3 August 2015 to Regulation 773/2004 aimed at aligning the Regulation with Directive 2014/104/EU on antitrust damages actions,1503 a new Article 10a(2) states that the Commission will offer parties appropriate methods of providing settlement submissions other than by written submission, including orally. Oral settlement submissions may be recorded and transcribed at the Commission’s premises. The undertaking shall be granted an opportunity to check the technical accuracy of the recording of its oral submission at the Commission’s premises, and, where necessary, to correct the substance of their submission without delay.

3.846

Issuing a statement of objections is a mandatory step prior to the adoption of a final Decision in any EU antitrust procedure.1504 If the parties’ settlement submissions correspond to the understanding reached during the settlement discussions, the Commission, in turn, normally adopts a streamlined statement of objections reflecting their content. Consequently, parties committed to settling are expected to reply to the statement of objections by confirming that it reflects their submission. Following this confirmation, there is no further access to the file or oral hearing.1505

3.847

It should also be noted that the Commission retains the right to adopt a statement of objections which does not reflect the parties’ settlement submissions. If so, the procedural rules of Regulation 773/2004 regarding the answer to the statement of objections, the right to be heard and the access to the file will apply. If the Commission intends not to settle in the end, it cannot adopt a decision without issuing a new statement of objections and allowing a new defence following the ordinary procedure.

1502 See para 20 of the Commission Notice on the conduct of settlement procedures. 1503 The Directive on antitrust damages actions, amongst other things, prohibits the disclosure of leniency corporate statements and settlement submissions by national courts. See point 39 of the Commission notice on the conduct of settlement – replaced in 2015 – which now provides that the Commission will not at any time transmit settlement submissions to national courts for use in actions for damages (without prejudice to the situation referred to in Article 6(7) of the Damages Directive). This provision was also inserted in the notice on the cooperation between the Commission and courts of the EU Member States (see Amendments to the Commission Notice on the cooperation between the Commission and courts of the EU Member States, OJ 2015 C 256/15, paragraph 26(a)). 1504 Pursuant to Article 10(1) of Regulation 773/2004. 1505 See new Articles 12(2) and 15(1bis) of Regulation 773/2004 introduced by Regulation 662/208.

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Depending on the decisions of the undertakings and the Commission, the procedure may end up to (i) the adoption of a transaction decision with respect to all parties;1506 (ii) the adoption of an ordinary decision with regard to all parties at the end of a new administrative phase;1507 or (iii) the adoption of a settlement decision with respect to certain parties and an ordinary decision with respect to other parties (the so-called “hybrid” cases).1508

3.848

Where the settlement does not involve all the participants in an infringement, the Commission is entitled to adopt, on the one hand, following a simplified procedure, a decision addressed to the participants in the infringement who have decided to enter into a settlement and reflecting the commitment of each of them and, on the other hand, according to the standard procedure, a decision addressed to participants in the infringement who have decided not to enter into a settlement.1509 The implementation of such a hybrid settlement procedure must be carried out in compliance with the presumption of innocence of the undertaking which has decided not to enter into a settlement. In this regard, the General Court held that in circumstances where the Commission considers that it is not in a position to determine the liability of the undertakings participating in the settlement without also taking a view on the participation in the infringement of the undertaking which has decided not to enter into a settlement, it is for the Commission to take the necessary measures – including possible adoption on the same date of the decisions relating to all the undertakings concerned by the cartel – enabling that presumption of innocence to be safeguarded.1510

3.849

There is no structured framework for settlement in cases of abuse of a dominant position. However, in 2016, Altstoff Recycling Austria (ARA) submitted a formal offer to cooperate with the Commission by acknowledging the infringe-

3.850

1506 See, inter alia, case AT.39920 (Braking systems), case AT.40009 (Maritime Car Carriers), case AT. 40113 (Spark plugs), case AT. 39881 (Occupant Safety Systems), case AT.39960 (Thermal systems), AT. 39904 (Rechargeable batteries). 1507 In the smart card chips cartel (case COMP/39574), the Commission had initially explored the possibility of settling this case with some of the companies involved. However, in 2012, the Commission decided to discontinue the settlement discussions and to revert to the normal procedure because of the lack of progress of these discussions. 1508 The Commission closed its first “hybrid” cartel investigation in the animal feed phosphates cartel, with two separate decisions, one for settling companies and one for Timab, which chose not to settle the case. Timab brought an action for the annulment of the decision relating to it. The Court of Justice rejected Timab’s claim that the Commission had punished the company for not settling and confirmed that Timab had suffered no discrimination for not settling the case (case C-411/15 P of 12.01.2017 ECLI:EU:C:2017:11). Other hybrid cases include, inter alia, case COMP/39824 (Trucks), case COMP/39965 (Mushrooms), case COMP/39792 (Steel abrasives), case COMP/39861 (Yen Interest Rate Derivatives (YIRD)). 1509 Case T-456/10 Timab Industries and CFPR v Commission, EU:T:2015:296, paragraph 71. 1510 Case T-180/15 Icap v Commission ECLI:EU:T:2017:795, paragraph 268.

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ment of refusing potential competitors access to the household collection infrastructure.1511 ARA’s submission contained, inter alia, an acknowledgement in clear and unequivocal terms of its liability for the infringement, an indication of the maximum amount of the fine it anticipated to be imposed by the Commission and which it would accept in the framework of cooperation (€6.1 million), and its agreement to receive the final decision pursuant to Articles 7 and 23 of Regulation 1/2003. ARA also suggested a structural remedy in the form of a divestiture of its own part of the household collection infrastructure and acknowledged it as necessary and proportionate.

3.851

The Commission fined ARA €6 million, a fine reduced by 30%. The Commission indicated that it applied point 37 of the Guidelines on the method of setting fines, which states that the particularities of a given case may justify departing from the methodology specified in the Guidelines. The Commission notes that with its submission, ARA acknowledged the infringement as well as the need for a structural remedy, which it accordingly proposed. The proposed structural remedy further ensures that the legal gap as to the legal obligation to grant shared use is removed. The acknowledgment and the accompanying waiver allowed for administrative efficiencies. In the light of the above, the amount of the fine to be imposed on ARA was reduced by 30%.1512

3.852

This case led the Commission to issue a memo explaining how a reduction of fines can be applied in antitrust cases other than cartels.1513

3.853

The Commission explains that in antitrust cases other than cartels, there is currently limited practice for rewarding cooperation by the parties in a prohibition decision. While parties can cooperate by offering commitments according to Article 9 of Regulation 1/2003, some cases are not suitable for such a solution. This may be because the infringement of competition rules has already finished or the Commission may wish to establish the finding of an infringement and impose a fine. In other antitrust cases leading to a prohibition decision, there is no structured framework to reward cooperation. Nevertheless, the cooperation by parties in such antitrust prohibition decisions can be rewarded within the framework of the Commission’s 2006 Fining Guidelines by applying its point 37.

1511 Decision of 20.09.2016 in AT.39759 ARA Foreclosure, paragraphs 19-20. 1512 Ibid., paragraph 162. 1513 “Antitrust: reduction of fines for cooperation”, available on DG Comp web site.

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With regards to the level of fines reduction, the Commission indicates that this level depends on the extent and timing of the cooperation in the specific case and the resulting benefits in terms of efficient procedure and effective enforcement. For instance, in the ARA case, the company has cooperated with the Commission by acknowledging the infringement and ensuring that the decision could benefit from administrative efficiencies, as well as by providing a structural remedy. Other factors that can be taken into account include cooperation by a company through the disclosure of evidence.

3.854

The Commission made use of point 37 of the Fining Guidelines to reduce the fine imposed in several (separate) cases of vertical restraints. The Commission fined four several consumer electronics manufacturers – Asus, Denon & Marantz, Philips and Pioneer – for imposing fixed or minimum resale prices on their online retailers. Each of them submitted a formal offer to cooperate. As noted in the decisions, their settlement submission contained: (i) an acknowledgement in clear and unequivocal terms of their liability for the infringement summarily described by the Commission; (ii) an indication of the maximum amount of the fine they expected to be imposed and which they would accept in the context of a cooperation procedure; (iii) the confirmation that they have been sufficiently informed of the objections the Commission envisages raising against them and that they have been given sufficient opportunity to make their views known to the Commission; (iv) the confirmation that they do not envisage requesting further access to the file or requesting to be heard again in an oral hearing, unless the Commission does not reflect their settlement submission in the statement of objections and the decision. Each decision indicates that the undertakings have cooperated with the Commission beyond their legal obligation to do so by: (i) providing additional evidence representing significant added value with respect to the evidence already in the Commission’s possession as that evidence strengthened to a very large extent the Commission’s ability to prove the infringement; (ii) acknowledging the infringement of Article 101 of the Treaty; and (iii) waiving certain procedural rights, resulting in administrative efficiencies. The Commission granted reductions to the fines depending on the extent of this cooperation ranging from 40 % (for Asus, Denon & Marantz and Philips) to 50 % (for Pioneer).1514 Payment of fines: The Commission’s decisions specify when and where the fine must be paid. They usually provide that the fines shall be paid, within three months of the date of notification of the decision to a given bank account.

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1514 See case AT. 40465 (Asus), AT. 40469 (Denon & Marantz), AT. 40181 (Philips) and AT. 40182(Pioneer).

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3.857

Decisions also provide that after expiry of that period, interest shall automatically be payable at the interest rate applied by the European Central Bank to its main refinancing operations on the first day of the month in which the decision is adopted plus a premium over the Bank refinancing rate. A premium has consistently been applied by the Commission over many years. The rationale of the premium is to discourage dilatory behaviour to the detriment of competition enforcement. If the Commission did not have the power to charge default interest on fines, undertakings which delayed paying their fines would enjoy an advantage over those which paid their fines within the specified period.1515

3.858

Periodic penalty payments: The Commission may, by decision, impose on undertakings or associations of undertakings periodic penalty payments, in order to compel them: (i) to put an end to an infringement of Article 101 or Article 102; (ii) to comply with a decision ordering interim measures; (iii) to comply with a commitment made binding by a decision; (iv) to supply complete and correct information which it has requested by decision; or (v) to submit to an inspection which it has ordered by decision.1516 The ceiling is set on the basis of the total turnover: namely at 5% of the average daily turnover for each day’s delay.1517

3.859

Limitation periods for the imposition of penalties: The fining power of the Commission is subject to the following limitation periods: three years in the case of infringements of provisions concerning requests for information or the conduct of inspections; five years in the case of all other infringements.1518 Time begins to run on the day on which the infringement is committed. However, in the case of continuing or repeated infringements, time begins to run on the day on which the infringement ceases. The running of the period is interrupted when the Commission takes investigatory measures (written requests for information; written authorisations to

3.860

1515 Case T-275/94 CB v Commission [1995] ECR II-2169, paragraphs 48 and 49. 1516 Article 24(1) of Regulation 1/2003. See the Commission decision of July 2006 that levies a penalty payment of E 280.5 million on Microsoft for continued non compliance with the Commission decision of 24.03.2004. The 2004 decision had ordered Microsoft to supply interoperability information to interested undertakings on reasonable and non-discriminatory terms and to offer a full-functioning version of its Windows PC operating system which did not incorporate Windows Media Player (NB: the 2004 decision also imposed a fine of E 497.2 million on Microsoft for abuse of dominant position). 1517 See the Commission decision of 27.2.2008 in COMP/37.792 – Microsoft imposing penalty payments on Microsoft of E 899 million. 1518 Article 25 of Regulation 1/2003. See also Case T-405/06 ArcelorMittal v Commission, [2009] ECR II-789, paragraphs 151 to 161 in which the General Court annulled the Commission’s decision to impose fines on two subsidiaries of ArcelorMittal, because the decision was time-barred with respect to these companies.

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conduct inspections issued, initiation of proceedings, notification of the statement of objections). The interruption of the limitation period applies for all the undertakings or associations of undertakings which have participated in the infringement. Each interruption starts time running anew for a period of five years with effect from the date of each interruption but the limitation period cannot exceed a period equal to twice the limitation period, that is to say, 10 years as regards the infringements at issue. Furthermore, The limitation period for the imposition of fines or periodic penalty payments shall be suspended for as long as the decision of the Commission is the subject of proceedings pending before the Court of Justice. Limitation period for the enforcement of penalties: The power of the Commission to enforce decisions is subject to a limitation period of five years.1519 Time begins to run on the day on which the decision becomes final.

3.861

2.6 Judicial review One of the most important safeguards for undertakings involved in the enforcement of the competition rules by the Commission, whether as complainants or defendants, is the availability of judicial review by the Court of First Instance and, ultimately on points of law, by the General Court.1520

3.862

The General Court has jurisdiction:

3.863

–

to review the legality of all decisions taken by the Commission; it has unlimited jurisdiction where a fine or a periodic penalty payment is imposed;1521

–

to declare the Commission s failure to act;1522

–

to grant interim relief;1523

–

to address disputes relating to compensation.1524

1519 Article 26 of Regulation 1/2003. 1520 Regarding the obligation to adjudicate on the cases within a reasonable time, see, inter alia, case C-40/12 P Gascogne Sack Deutschland v Commission, EU:C:2013:768; case C-295/12 P Telefónica v Commission, EU:C:2014:2062; case C-604/13 P Aloys F. Dornbracht v Commission, ECLI:EU:C:2017:45. 1521 Articles 261 and 263(2) TFEU. 1522 Article 265(3) TFEU. 1523 Articles 278 and 279 TFEU. 1524 Article 268 TFEU.

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3.864

The Court’s jurisdiction to review the legality: Proceedings may be brought by Member States and by any natural or legal person to whom the decision is addressed. They may also be brought by any natural or legal person against a decision which although addressed to another person, is of indirect and individual concern to the applicant, for example, a complainant having a legitimate interest1525. Competitors are classed as an interested third party.

3.865

Reviewable acts include: decisions finally rejecting complaints, decisions ordering interim measures or refusing to issue interim measures, decisions to disclose documents for which undertakings claim confidentiality, requests for information by decision, inspections ordered by decision, cease and desist orders, acceptance of commitments, orders imposing fines or penalties.

3.866

The grounds on which such legality may be questioned are 1) the lack of competence, 2) the infringement of an essential procedural requirement, 3) misuse of powers and 4) the infringement of the Treaty or any rule of law relating to its application. The latter ground has been invoked to assert that decisions are wrong in law. Arguments have be made concerning the scope of application of Article 101, the wrongful application of a competition regulation, the breach of fundamental principles of law such as the principle of proportionality, equality of treatment, legitimate expectations, double jeopardy, etc. and the misapplication of the law to the facts.

1525 Persons other than those to whom a decision is addressed may only claim to be individually concerned if that decision affects them by reason of certain attributes which are peculiar to them or by reason of circumstances in which they are differentiated from all other persons and by virtue of these factors distinguishes them individually just as in the case of the person addressed; see Case 25/62 Plaumann v Commission [1963] ECR 95, paragraph 107; joined Cases T-447/93, T-448/93 and T-449/93 AITEC and Others v Commission [1995] ECR II-1971, paragraph 34.

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The Court’s unlimited jurisdiction in respect to penalties: In the context of competition law, Article 31 of Regulation 1/2003 provides that the Court of Justice shall have unlimited jurisdiction to review decisions whereby the Commission has fixed a fine or periodic penalty payment. It may cancel, reduce or increase the fine or periodic penalty payment imposed.1526 The General Court has relatively often reduced1527 of annulled fines1528 imposed by the Commission.1529

3.867

The Court’s jurisdiction to declare the Commission’s failure to act: Natural or legal person may complain to the Court of First Instance if the Commission has failed to act, i.e. has failed to address to that person any act other than a recommendation or an opinion. They must be directly and individually concerned by this act.1530 The action is admissible only if the Commission concerned has first been called upon to act. If, within two months of being so called upon, the Commission has not defined its position, the action may be brought to the Court of First Instance within a further period of two months.1531

3.868

In competition cases, this type of action is mostly used by complainants. These are entitled, after a reasonable time has elapsed since the complaint was lodged, to obtain a definition of the Commission’s position. If despite having been called upon to act the Commission has failed to issue such a notification, the complainant’s action for failure to act is admissible.1532 If an action for failure to act is upheld, the Commission will be obliged to take the necessary action.1533

3.869

1526 Article 261 TFEU provides that regulations made by the Council or by the Parliament and the Council pursuant to the provisions of the Treaty may give the Court unlimited jurisdiction in respect to penalties provided in such regulations. Article 31 of Regulation 1/2003 does so in the field of competition law. 1527 See for example, Joined Cases T-305/94 a. o. LVM and Others v Commission (PVC II) [1999] ECR II-931; T-25/95, a.o., Cimenteries CBR SA and others, (Cement) [2000] ECR II-491 (fines cancelled and reduced); Case C-338/00 P Volkswagen v. Commission [2003] ECR I-9189, paragraph 151; Case T-230/00 Daesang Corp & Sewon v Commission [2003] ECR II-2733, paragraphs 155 and 156; Case T-325/01, DaimlerChrysler v Commission [2005] ECR II-3319; T-15/02 & T-26/02, BASF & Daiichi v Commission [2006] ECR II-497. 1528 Joined Cases T-191/98 Atlantic Container and Others v. Commission (TACA) [2003] ECR II-3275; Case T-213/00 CMA-CGM v Commission [2003] ECR II-913. 1529 In its judgement in the case Groupe Danone v Commission, the General Court dismissed the appeal, but slightly reduced the fine since one of the aggravating circumstances used against Danone had not been sufficiently established. However, the General Court also found that, due to a calculation error, the amount of fine imposed was less than what it would have been if the Commission had properly followed the method set out in the Guidelines. The General Court therefore increased the fine on that particular point (Case T-38/02, [2005] ECR II-4407). 1530 With respect to the standing of legal or natural persons, 265(3) refers to the conditions laid down in the preceding paragraphs. 1531 Article 265(2) TFEU. 1532 Case T-38/96 Guérin automobiles v. Commission [1997] II-1223. 1533 Case 792/79 Camera Care v. Commission [1980] ECR 75.

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3.870

If the Commission addresses a letter to the author of a complaint of breach of the competition rules in which it defines its position, such a letter, even if it is sent while the proceedings are in progress, terminates the Commission’s failure to act and deprives the action for failure to act of its subject-matter. Where the definition of position consists of a rejection of the complaint, this refusal may be subject to an action for annulment under Article 230.

3.871

The Court’s jurisdiction to order interim measures: Actions brought before the European Courts do not have suspensive effect. However, under Article 278 TFEU, the Court may, if it considers that circumstances so require, order that application of the contested act be suspended.1534 Article 279 provides that the Court may in any cases before it prescribe any necessary interim measures. An application for interim measures is admissible only if the applicant is challenging the Commission’s decision in main proceedings before the General Court.1535 The application must state the subject-matter of the proceedings, the circumstances giving rise to urgency and the pleas of fact and law establishing a prima facie case for the interim measures applied for.1536

3.872

Urgency means that it is necessary for the measures to be issued and to take effect before the decision of the Court on the substance in order to avoid serious and irreparable damage to the party seeking them1537. In that regard, it is sufficient that the damage, particularly when it depends on the occurrence of a number of factors, should be foreseeable with a sufficient degree of probability.1538

3.873

The Court’s jurisdiction in disputes relating to compensation: The Community cannot be liable under the second paragraph of Article 340 TFEU unless a set of conditions, relating to the existence of actual damage, a causal link between the damage claimed and the conduct alleged against the institutions, and the illegality of such conduct, is satisfied.1539 1534 See for example Case C- 481/01 P (R) NDC Health v Commission [2002] ECR I-3401. See for a recent case, the order of the Vice-President of the Court of Justice that the operation of a Commission decision be suspended in so far as that decision rejected an application for confidential treatment in respect of the material seized from the appellants and another economic operator (the contested material). The Commission was also ordered to refrain from publishing a non-confidential version of its decision containing the contested material (case C-65/18 P(R)-R, Nexans France v Commission, ECLI:EU:C:2018:62). 1535 Article 104(1) of the rules of procedure of the General Court (OJ 2010 C 177/37). 1536 Article 104(2) of the rules of procedure of the General Court. 1537 Cases 60 & 190/81 R International Business Corporation v. Commission [1981] ECR 1857, paragraph 4. 1538 Case T-65/98 R Van den Bergh Foods Ltd v. Commission [1998] ECR II-2641. 1539 Case 4/69 Luetticke v Commission [1971] ECR 325, paragraph 10; Case T-575/93 Koelman v. Commission [1996] ECR II-1, paragraph 89; Case T-38/94 Guérin v Commission [1997] ECR II-1223, paragraphs 41 to 47; Cases T-213/95 and T-18/96 SCK & FNK v Commission [1997] ECR II-1739, paragraph 98.

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An application seeking compensation for damage caused by a Community institution must state the evidence from which the conduct alleged against the institution can be identified, the reasons for which the applicant considers there is a causal link between the conduct, the damage it claims to have suffered, and the nature and extent of that damage.1540 A claim for any unspecified form of damages, however, is not sufficiently concrete and must therefore be regarded as inadmissible.1541

3.874

Appeal to the Court of Justice: Pursuant to Article 256 TFEU and Article 51 of the Statute of the Court of Justice, an appeal is to be limited to points of law and must be based on the grounds of lack of competence of the General Court, breach of procedure before it which adversely affects the interests of the appellant or infringement of Community law by the General Court.

3.875

An appeal must indicate precisely the contested elements of the judgment which the appellant seeks to have set aside, and also the legal arguments specifically advanced in support of the appeal.1542

3.876

The Court of Justice has no jurisdiction to establish the facts or, in principle, to examine the evidence which the General Court accepted in support of those facts. Provided that the evidence has been properly obtained and the general principles of law and the rules of procedure in relation to the burden of proof and the taking of evidence have been observed, it is for the General Court alone to assess the value which should be attached to the evidence produced to it. The appraisal by the General Court of the evidence put before it does not constitute, except where the evidence has been fundamentally misconstrued, a point of law which is subject, as such, to review by the Court of Justice.

3.877

1540 Case T-64/89 Automec v Commission [1990] ECR II-367, paragraph 73. 1541 Case 5/71 Zuckerfabrik Schoeppenstedt v Council [1971] ECR 975. 1542 See the order in Case C-19/95 P San Marco v Commission [1996] ECR I-4435, paragraph 37.

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Part 4 Merger control

CHAPTER 1 Introduction Transactions which are structural in nature – such as mergers, acquisitions of shares or assets or certain joint ventures – which have a Community dimension must be cleared by the European Commission before being put into effect.

4.1

To that end, merging parties are required to notify their transactions to the Commission. Within 25 working days of notification, the Commission must decide whether or not the concentration gives rise to competition concerns. If it does, the Commission must initiate second phase proceedings the duration of which cannot exceed 135 working days. During this period, the Commission must determine whether the concentration would significantly impede effective competition in the common market or in a substantial part of it. If it does, the Commission must declare it incompatible with the common market.

4.2

However, if during either first phase or second phase proceedings the merging parties offer remedies which resolve the competition problems identified by the Commission, the Commission will clear the transaction.

4.3

This part describes the application of the EU merger control system in general terms, Chapters 1, 2, 3 and 5, then goes on to discuss the important decisions in the energy sector in Chapters 4 (substance) and 6 (remedies).

4.4

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4.5

The legal framework for the EU merger control process is provided by Council Regulation 139/20041543 of 20 January 2004 (the EU Merger Regulation), its implementing Regulation and several interpretative notices. Regulation 802/2004,1544 implementing the EU Merger Regulation, governs procedural matters including the content of the notification to the Commission, the calculation of the various time limits, the right to be heard, etc. The interpretative notices and other relevant texts are the following: –

The Consolidated Jurisdictional Notice1545 provides guidance as to jurisdictional issues. It deals with the concepts of concentration and of a fullfunction joint venture, undertakings concerned and the calculation of turnover. This Notice replaces the four notices adopted in 1998 on these various topics.

–

The Notice on a simplified procedure for the treatment of certain concentrations.1546 Certain concentrations which do not raise competition problems can be subject to a simplified procedure. The Notice sets outs the conditions under which this procedure applies and the applicable procedure.

–

The Notice on case referral.1547 This Notice provides practical guidance regarding the mechanics of the referral system between the Commission and the Member States.

–

The Guidelines on the assessment of horizontal mergers.1548 These Guidelines provide guidance regarding the Commission’s substantive approach concerning mergers between companies active in the same markets.

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The Guidelines on the assessment of non-horizontal mergers.1549 These Guidelines provide examples, based on established economic principles, of where vertical and conglomerate mergers may significantly impede effective competition in the markets concerned.

1543 Council Regulation (EC) No 139/2004 of 20.01.2004 on the control of concentrations between undertakings, OJ L 24/1, 29.01.2004, Appendix 5. 1544 Commission’s Regulation (EC) No 802/2004 of 7.04.2004 implementing Council Regulation (EC) No 139/2004 on the control of concentrations between undertakings, OJ L 133/1, 30.04.2004, amended by Commission Implementing Regulation (EU) No 1269/2013 of 5 December 2013, OJ L 336/1 of 14.12.2013. 1545 OJ C 95/1, 16.04.2008. 1546 OJ C 366/5, 14.12.2013 and Corrigendum, OJ C11/6, 15.01.2014. 1547 OJ C 56/2, 5.03.2005. 1548 OJ C 31/5, 5.02.2004. 1549 OJ C 265/6, 18.10.2008.

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The Notice on remedies.1550 The Commission may decide to clear a problematic concentration if the parties propose remedies that eliminate the competition problem(s) in question. The Notice provides guidance on the kind of remedies that may be proposed (divestitures, licensing agreement to give access to a technology, etc), the specific requirements which proposed remedies need to fulfil and the main requirements for their implementation.

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The Commission’s Model Texts for Divestiture Commitments and the Trustee Mandate under the EC Merger Regulation.1551 In relation to the implementation of remedies, the Commission has also drafted two model texts relating to divestiture commitments: the standard model for Divestiture Commitments and the standard model for Trustee Mandate.

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The Notice on restrictions directly related and necessary to concentrations.1552 Decisions clearing mergers also cover restrictions in the absence of which the concentration could not be implemented (such as, for example, non-compete clauses imposed on the vendor in the context of the transfer of an undertaking or on the parents in the context of the creation of a joint venture). The Notice outlines the restrictions which can be considered to be directly related and necessary to the concentration.

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The Commission’s Best Practices on the conduct of EC merger control proceedings which provide guidance for interested parties on the EU investigation process.1553

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The Notice on the rules for access to the Commission’s file.1554 This Notice clarifies the rights opened to the addressees of a statement of objections and recognises a separate right, granting limited access to specific documents on the file to other involved parties in merger cases (the seller and the undertaking which is the target of the concentration) who have been informed of the objections in so far as this is necessary for the purposes of preparing their comments. See also the Best Practices on the disclosure of information in datarooms (2015).

1550 1551 1552 1553 1554

OJ C 267/1, OJ 22.10.2008. Available on DG Comp’s web site. OJ C 56/24, 5.03.2005. Available on DG Comp’s web site. OJ C 325/7, 22.12.2005.

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The Data Room Best Practices (Best Practices on the disclosure of information in data rooms in proceedings under Articles 101 and 102 TFEU and under the EU Merger Regulation) with its two annexes the Standard Data Room Rules and the Standard Non-Disclosure Agreement to be signed by external advisors1555. Data rooms enable the addressees of a statement of objections, through their external advisors, to verify the methodology used by the Commission to collect, check the consistency of, manage and analyse, the quantitative data used in a statement of objections, as well as to replicate and check the robustness of the Commission’s analysis. The Commission’s Data Room Best Practices aim at increasing transparency and predictability of the process within the existing legal and procedural framework.

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The Working Arrangements for the functioning of the Advisory Committee on concentrations: The purpose of these Working Arrangements is to contribute to the proper functioning of the Advisory Committee, and thereby to strengthen the close and constant liaison between the Commission and the competent authorities of the Member States. These Working Arrangements are complemented by the modalities on the organisation of and participation in Advisory Committee meetings by video-link, provided in the Annex.

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The Best Practices for the submission of economic evidence and data collection in cases concerning the application of Articles 101 and 102 TFEU and in merger cases.1556 The document provides recommendations regarding the content and presentation of economic or econometric analysis and guidance to respond to Commission requests for quantitative data to ensure that timely and relevant input for the investigation can be provided.

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The Best Practices on requests for internal documents under the EU Merger Regulation.1557 The document reminds the undertakings of the legal and procedural framework, in particular of the powers the Commission has in the collection of internal documents and present the way in which the Commission intends to use these powers, based on the experience gained from these requests in the past.

1555 Available on DG Comp’s website. 1556 Available on DG Comp’s website. 1557 Available on DG Comp’s website.

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The Guidance on the preparation of public versions of Commission Decisions adopted under the Merger Regulation.1558 This Guidance outlines: a) what undertakings can claim for redaction as business secrets and confidential information and what is not usually considered to be confidential information; b) how confidentiality for business secrets and other confidential information can be claimed; c) what the Commission usually redacts on its own initiative in the public version of a decision; and d) the procedure that should be followed to settle confidentiality claims in the context of publication of the Commission decision.

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The Information Note on the abandonment of concentrations.1559 This Information Note sets out the conditions upon which the Commission can close a merger procedure without a final decision should the parties decide to abandon their envisaged transaction.

All of these notices and guidelines can be found on DG Comp’s website.

1558 Available on DG Comp’s website. 1559 Available on DG Comp’s website.

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CHAPTER 2 Jurisdiction: When does a merger fall under the merger Regulation? 1.

Concept of a concentration

1.1 Introduction Concentrations are defined in Article 3 of the EU Merger Regulation and include: –

mergers,1560

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the acquisition, by one or more persons already controlling at least one undertaking, or by one or more undertakings, whether by purchase of securities or assets,1561 by contract or by any other means, of direct or indirect control of the whole or parts of one or more other undertakings,

1560 Article 3(1)(a) of the EU Merger Regulation. See inter alia the merger between Veba and Viag (case M.1673 of 13.06.2000), the merger between Gaz de France and Suez (case M.4180 of 14.11.2006). 1561 Article (3)(1)(b) of the EU Merger Regulation. See paragraphs 17 and 24 of the Consolidated Jurisdictional Notice. As to the acquisition of assets, the assets in question must constitute a business to which a market turnover can be clearly attributed. See E.On/TXU-Europe Group (case M.3007 of 18.12.2002). See also the ECS / Intercommunales IEH, Iveka, Igao, Intergem, Gaselwest, Imewo, Iverlek and Sibelga (cases M.2857, M.3075 to M.3080, M.3318) where the acquisition of customers who became eligible to choose their supplier but did not express a preference (an arrangement known as “default supply”) constituted an acquisition of assets. See also Vattenfall/Elsam and Energi E2 assets (case M.3867 of 22.12.2005) in which the Commission notes that the proposed transaction brings about a permanent change of control over the assets transferred from Elsam and E2 to Vattenfall and that the transferred assets are mainly power plants and thus constitute a business to which a market turnover can be attributed. See also Electrabel/E.On (case M.5512 of 16.10.2009) and E.On/Electrabel (case M.5519 of 13.10.2009); Baywa/Clean Energy Trading (case M.8758 of 7.12.2017).

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the creation of “full-function” joint-ventures, i.e. joint ventures performing on a lasting basis all the functions of an autonomous economic entity.1562

4.7

The key factor in the concept of “concentration” is whether the transaction will lead to a lasting change in control and therefore in the structure of the market.1563 Internal restructuring within a group of companies, therefore, does not constitute a concentration.1564

4.8

It should be noted that a change in the perimeter of the concentration may require a specific filing. The Enel/Acciona/Endesa case illustrates this issue. On 26 March 2007, Enel and Acciona agreed to acquire joint control of Endesa by launching a joint public bid for the shares in Endesa that they did not already own or control. They agreed with E.ON that they would transfer to E.ON a number of rights and assets. The transaction was notified to, and authorized by, the Commission’s decision on 5 July 2007.1565 However, on 18 March 2008, Enel, E.ON and Acciona concluded another agreement whereby they modified their agreement of 2007 in relation to the assets to be transferred to E.ON. In particular, the new agreement excluded one of the power plants from the portfolio of Endesa assets to be divested to E.ON (the Foix power plant) and substituted one power plant for another one. Given that the perimeter of the concentration had been changed, the Commission’s decision of 5 July 2007 would not cover the final agreement of the parties. The parties submitted a new filing in order to obtain clearance of their final agreement.1566

1.2 Control 4.9

The definition of control is broad. Indications of what will amount to an acquisition or a change of control can be found in the merger Regulation itself1567 and in the Consolidated Jurisdictional Notice. 1562 Article 3(4) of the EU Merger Regulation. 1563 Concentrations do not arise in the following cases: (i) acquisitions of securities by credit or financial institutions held on a temporary basis with a view to reselling them; (ii) certain acquisitions in the context of insolvency proceedings; and (iii) acquisitions made by financial holdings provided that the voting rights only to maintain the full value of the investment and not to determine the competitive conduct of the undertakings. See Article 3(5) of Regulation 139/2004. 1564 Consolidated Jurisdictional Notice, paragraph 51. Where both the acquiring and the acquired undertakings are public companies, whether the operation is to be regarded as an internal restructuring depends on the question whether both undertakings were formerly part of the same economic unit. 1565 Case M.5170. 1566 Case M.5171 of 13.06.2008. 1567 Articles 3(1) to 3(4) of Regulation 139/2004.

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In order to determine whether a change in control exists, it is first necessary to determine the meaning of the term “control”. Control is defined as the possibility of exercising influence over another company. It may arise from the ownership of all or part of the company’s assets or rights, contracts or any other means which confer the possibility of exercising decisive influence on the decision making process of the company in question. Control can be held either solely or jointly.

4.10

Sole control: Sole control is normally acquired where an undertaking acquires a majority of the voting rights of a company.1568 The acquisition of a majority share in a company does not necessarily confer control on it. The example of RWE’s shareholding in Mitgas is a good example.1569 RWE indirectly held a majority share in Mitgas (60.1%) while Kowisa held 15.3% and VNG held 24.6% of the shares in Mitgas. On 6 February 2009, RWE and Kowisa reached an agreement pursuant to which RWE would acquire the 15.3% Kowisa share in Mitgas, and thereby increase its direct and indirect share in Mitgas from 60.1% to 75.4%. RWE considered that it solely controlled Mitgas pre-transaction. However, the Commission considered that RWE and Kowisa had joint control over Mitgas prior to the transaction since Kowisa had, by virtue of its votes in the supervisory council of Mitgas, the right to block certain strategic decisions of the majority shareholder RWE such as the conclusion, amendment or cancellation of major contracts between Mitgas and third parties, the acquisition or sale of stake holdings. In the Commission’s view, the transaction consisted of a change from joint control to sole control. The Commission therefore asked RWE to notify the concentration.

4.11

Sole control may also result from the acquisition of a minority of the share capital.1570 This may be established where specific rights are attached to the shareholding, conferring on the minority shareholder either a majority of the voting rights or the power to appoint more than half the members of the supervisory board or the board of directors.

4.13

1568 Consolidated Jurisdictional Notice, paragraph 54. See, inter alia, for examples of acquisitions of sole control in the energy sector, Edison/Edipower/Eurogen (case M.2792 of 3.05.2002); E.on/TXU Europe Group (case M.3007 of 18.12.2002); Sydkraft/Graninge (case M.3268 of 30.10.2003), Enel/Slovenske Elektrarne (case M.3665 of 26.04.2005), Edison/Eneco Energia (case M.4368 of 19.10.2006) ENI/Distrigaz (case M.5220 of 15.10.2008), EDF/British Energy (case M.5224 of 22.12.2008), EDF/Dalkia en France and Veolia Environnement/Dalkia International (cases M.7137 of 25.06.2014 and M.7145 of 7.05.2014); Petrol/Geoplin (case M.7936 of 10.03.2017). 1569 Case M.5802 of 17.06.2010. 1570 Consolidated Jurisdictional Notice, paragraphs 57 and 59.

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4.14

By way of illustration, in Vattenfall/Nuon Energy,1571 the operation involved the acquisition of sole control by Vattenfall over Nuon Energy by means of a Share purchase Agreement according to which, Vattenfall will acquire 49% of shares in Nuon Energy in a first stage and the remaining shares in three subsequent tranches over a time period of six years.

4.15

Although Vattenfall will initially hold only 49% shares in Nuon Energy, under the contractual arrangements stating the terms of the share purchase agreement, it will have sole control of Nuon Energy since the acquisition of the first tranche of shares due, amongst other reasons, to its casting vote within the supervisory board.

4.16

In this respect, the decision notes that Vattenfall will be entitled to appoint four out of the eight members of the supervisory board, including the chairman, having a casting vote. As a consequence, since decisions will be passed by simple majority, Vattenfall will have the majority of voting rights within the supervisory board even in the event of a tied vote. Vattenfall will also appoint a representative within the management board together with the current CEO and CFO of Nuon Energy at the completion of the envisaged transaction. However, since all managing directors will be subsequently appointed by the supervisory board, Vattenfall will be able to indirectly appoint them by virtue of its majority of voting rights at the board level. As a result, Vattenfall will have sole control over Nuon Energy from the purchase of the first tranche of shares.

4.17

In EPH/Stredoslovenská energetika,1572 EPH acquired sole control over Stredoslovenská energetika, with a 49% shareholding; the remaining 51% being owned by the Slovak State through the National Property Fund (NPF). In its notification, EPH pointed out that, according to the Shareholder Agreement, it will nominate 3 of the 5 members of the Board of Directors of Stredoslovenská energetika (including its Chairman), while NPF will nominate the remaining 2 members (including its Vice Chairman). The Board of Directors appoints all senior executives of Stredoslovenská energetika by simple majority of votes and approves the annual budgets and the annual business plan by simple majority of votes. Moreover, investment decisions require a special majority of 4 members of the Board of Directors if they exceed EUR […]1573 million for core investments (such as investments in the distribution, supply, purchase and sale of electricity construction-lines infrastructure engineering and metrology business) and EUR […] for non-core investments. 1571 Case M.5496 of 22.06.2009. 1572 Case M.6984 of 19.11.2013. 1573 The amounts have been removed in the non-confidential version of the decision.

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EPH indicated that in the last five years Stredoslovenská energetika has made only […] investments above EUR […] in non-core business areas (i.e. […]) and has not made any investments above EUR […] million in its core business areas. In view of the above, the Commission concluded that EPH will exercise sole control over Stredoslovenská energetika.

4.18

Sole control may also be established on a de facto basis where the minority shareholder is de facto certain to obtain a majority of the votes at the shareholders’ meeting because the remaining shares are widely dispersed and it is thus highly improbable that all the smaller shareholders will attend the meeting.1574

4.19

This was the case in Fortum/Uniper.1575 Fortum announced an agreement with E.ON whereby E.ON could tender its 46.65% stake in Uniper in a public takeover offer for Uniper initiated by Fortum. While opposed by Uniper’s management, Fortum’s public offer eventually resulted in acceptances by shareholders – including E.ON – representing 47.12% of Uniper’s share capital. The Commission considered that the ownership by Fortum of a 47.12% interest and associated voting rights in Uniper was sufficient to confer Fortum sole control over Uniper. The Commission noted that given the dispersed shareholding structure of Uniper,1576 and the attendance rate in Uniper’s previous (and only) General Meeting of Shareholders of 72-73%, the ownership of a 47.12% interest was highly likely to enable Fortum to achieve a majority at Uniper shareholders’ meetings going forward. Attendance rate would have to be in excess of 94.23% for Fortum not to be able to achieve the majority of votes at the shareholders’ meeting. According to Uniper’s Articles of Association, Fortum will then be able to secure the appointment of the six shareholder representatives at Uniper’s Supervisory Board, as they are elected by a simple majority vote of the General Meeting, including the chairman who holds a casting vote. In turn, Fortum will be able to exercise decisive influence over Uniper because the Supervisory Board is required to approve Uniper’s annual budget and business plan, as well as other material decisions, by a simple majority vote. Likewise, the Supervisory Board appoints (and dismisses) Uniper’s Board of Management by simple majority vote; the latter having overall responsibility for Uniper’s commercial decisionmaking. In view of the foregoing, the Commission concluded that Fortum acquired sole control over Uniper.

4.20

1574 See Electrabel/CNR (case M.4994 of 29.04.2008). 1575 Fortum/Uniper (case M.8660 of 15.06.2018). 1576 Uniper reported that its largest shareholders after E.ON was Cornwall with 8%, Knight Vinke Asset Management with 5% and BlackRock Inc. with 4%, while other institutional investors together accounted for 23% and retail investors for 8% (unidentified: 5%).

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4.21

Sole control may also arise where a minority shareholder has acquired the right to manage the activities of the company and to determine its business policy.

4.22

A change from joint to sole control of an undertaking is also a concentration because decisive influence exercised alone is substantially different from decisive influence exercised jointly.1577

4.23

Finally, an option to purchase or convert shares cannot confer sole control on its own, unless the option is be exercised in the near future according to legally binding agreements. Joint control: Joint control exists where two or more undertakings must agree on the strategic decisions concerning the controlled undertaking1578 because, for example, they both own 50 % of the shares.

4.24

1577 Consolidated Jurisdictional Notice, paragraph 62. See in the energy sector, Tractebel/Distrigaz (II), (case M.493 of 1.09.1994), (Distrigaz previously jointly controlled by the Belgian State and Tractebel falls under the sole control of Tractebel), Fortum/Birka Energi (case M.2659 of 10.1.2002); EDF/EDFT (case M. 3210 of 26.08.2003); See also Gazprom/Wintershall/Target Companies (case M.6910 of 3.12.2013): by virtue of the transaction, Wingas and WIEH will be solely controlled by Gazprom, as opposed to the pre-merger situation, in which both companies were jointly controlled by Gazprom and Wintershall. WINZ and Wintershall Services will be jointly controlled by Gazprom and Wintershall, as opposed to the pre-merger situation in which sole control was exerted over these companies by Wintershall. Both the acquisition by Gazprom of sole control of Wingas and WIEH as well as the acquisition by Gazprom and Wintershall of joint control of WINZ and Wintershall Services were legally interdependent (all the acquisitions of control were linked by mutual conditionality). All transactions form part of the same swap agreement that underpins the proposed transaction and which was signed between the parties, therefore constituting a single concentration within the meaning of the EU Merger Regulation. 1578 Consolidated Jurisdictional Notice, paragraphs 62 to 82. See in the energy sector, the creation of a new joint venture between RWE and Iberdrola (case 2000 M.1952 of 21.08.2000); the creation of a new joint venture between Canal de Isabel II and Hidroeléctrica del Cantábrico (case M.2819 of 14.06.2002); the acquisition of joint control of GVS by EnBW and ENI (case M.2822 of 17.12.2002); the acquisition of joint control by Red Eléctrica and CVC over the transmission electricity assets of Iberdrola (case M.3057 of 7.01.2003); the acquisition of joint control of Verbund and EnergieAllianz over E&S and APT (case M.2947 of 11.06.2003), the acquisition by GDF and Centrica of joint control over New SPE consisting of SPE and the contributing activities of Centrica and GDF (case M.3883 of 7.09.2005), the acquisition of Edison by EDF and AEM (case M.3729 of 12.08.2005), the acquisition of joint control of Enia Energia by Centrex, ZMB and Enia (case M.5183 of 15.09.2008), the creation of a new joint venture between Energinet.dk, E.ON Netz, Vattenfall Europe Transmission, Nord Pool Spot and European Energy Exchange (case M.4922 of 22.08.2008), the acquisition by the management company F2i and three investment funds indirectly managed by AXA Private Equity of joint control on G6 Rete Gas, which holds gas distribution concessions in Italian municipalities (case M.6302 of 24.08.2011), the acquisition by Boston of a joint controlling interest in an existing wind farm project, Borkum Riffgrund I, which was previously solely controlled by Dong Energy (case M.6540 of 10.05.2012), the creation by KGHM and Tauron of a JV for the purpose of construction and operation of a new 850 MW gas power plant (case M.5979 of 23.07.2012), the acquisition of joint control (50/50) by EPH and PPF on Vattenfall-G and Vattenfall-M (case M.8056 of 22.09.2016).

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As well as in 50/50 joint ventures, joint control may exist were there is no equality between the two parent companies or where there are more than two parent companies. If in both cases the minority shareholders have the right to veto essential strategic decisions, then joint control may exist. The most important veto rights are those concerning the appointment of management, the budget and the business plan.1579

4.25

In contrast, veto rights concerning the decisions on the essence of the joint venture, such as changes in the statute, an increase or decrease in the capital, or liquidation, do not confer joint control because they do not go beyond the veto rights normally accorded to minority shareholders in order to protect their financial interests as investors in the joint venture.

4.26

For example, the acquisition by RWEPlus of 49% of the shares in KEH with the remainder of 51% being kept by LandKärnten did amount to a concentration.1580 According to the provisions of the shareholder agreement, RWEPlus and LandKärnten had to decide on strategic business matters, such as the business plan and investments by unanimous vote. This led the Commission to consider that RWEPlus and LandKärnten had joint control over KEH.

4.27

In the same vein, the acquisition by GDFI and Ruhrgas of 24,49 % each of SPP, a company previously fully-owned by the Slovak Republic, led to the acquisition of joint control over SPP. Under the shareholders agreement, GDFI and Ruhrgas had agreed to exercise their rights, jointly including a right of veto and nomination. They jointly nominated and appointed a majority of the seven members of the board of directors which decides on the business plan and other issues of strategic nature.1581

4.28

1579 In order to acquire joint control, it is not necessary for a minority shareholder to have all the veto rights listed by the Notice. It may be sufficient that only some, or even one such right, exists. See Mytilineos/Motor Oil/ Corinthos Power (case M.5445 of 30.03.2009) and IPO/EnbW/Praha/PT (case M.5365 of 6. 10.2009). 1580 RWE/Kärntner Energi Holding (case M.2513 of 2.08.2001). See also CEZ/Javys/Jess JV (case M.5591 of 4.11.2009. 1581 Case M.2791 of 6.06.2002. See also RWE Gas/Lattice International/JV (case M.2744 of 7.08.2002). In this case, each parent company appoints one of the two Managing Directors of the joint venture. All actions to be taken on behalf of the joint venture need the consent of both Managing Directors. The issues decided by the supervisory board include, inter alia, changes in the joint venture s business plan (including budget). The supervisory board of the joint venture consists of five members, three appointed by RWE Gas and two by Lattice International. As resolutions of the supervisory board require four supporting votes to be passed, the agreement of both parties is therefore required for strategic decisions. The joint venture is jointly controlled. See also EDFI/Graninge (case M.1169 of 15.05.1998), in which EDFI and Skandrenkraft, both subsidiaries of EDF, acquired joint control of the Swedish company Graninge by means of shareholders agreements with a large number of individual shareholders, all descendants of the founder of the target company. These shareholders agreements set out general guidelines concerning Graninge s strategy and commercial policy

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4.29

In E.ON/Prazská plynárenská,1582 the Commission noted that E.ON Czech Holding AG belonging to the group E.ON acquired joint control (together with the City of Prague) of the undertaking Prazská plynárenská by way of purchase of 49 % of the shares in the holding company Prazská plynárenská Holding (PPH being a pure holding company with no other business activities than holding the interest in Prazská plynárenská).

4.30

The Board of Directors of Prazská plynárenská is elected by simple majority by its Supervisory Board which consists of nine members. While three of these members are elected by the employees of Prazská plynárenská, the remaining six members are elected by the Shareholders Assembly by simple majority. PPH is thus able to fill all the remaining six seats in the Supervisory Board and thus have simple majority necessary for election of the Board of Directors. The management of Prazská plynárenská is then fully in the hands of the Board of Directors, which has an obligation to ask the Supervisory Board for comments on various key issues including the long-term strategy and annual financial plan. However, the opinion of the Supervisory Board on these matters is not legally binding for the Board of Directors. Therefore, through its power to determine the management of Prazská plynárenská, PPH has sole control over Prazská plynárenská. RREEF Fund/BP/Eve/Repsol/BBG1583 provides an illustration of a substitution of shareholders. RREEF Fund has replaced Iberdrola as a joint controlling shareholder of BBG, the transaction leading to RREEF Fund (as the new controlling shareholder), BP, Eve and Repsol (the existing controlling shareholders) holding each a 25% joint controlling shareholding over BBG.

4.31

4.32

In F2i/Axa Funds/G6 Rete Gas,1584 the Commission cleared the acquisition of joint control of the Italian company G6 Rete Gas by Fondi Italiani per le Infrastrutture (“F2i”) and three investment funds indirectly managed by AXA Private Equity.

in the electricity and forestry sectors, as well as a common policy in major issues and a joint decision making procedure. Through these legally binding agreements the EDF group and the descendants of the founders undertake to act in the same way to exercise their voting rights. EDFI and Skandrenkraft together represented 30.1 % of the votes in Graninge and the descendants of the founders represented 15.8 %, which gave them a combined 45.9 % of the voting power. Based on the number of shareholders represented at the shareholders meetings in the last two years, the Commission found that this percentage was sufficient for EDF and the descendants to control a majority of the votes present at any shareholders meeting. 1582 Case M.4328 of 11.07.2006. 1583 Case M.5602 of 9.10.2009. 1584 Case M.6302 of 24.08.2011.

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The Commission noted that G6 Rete Gas’ initial business plan (prepared by F2i in agreement with AXA PE) will cover a 3-year period and will be updated each year. For a five-year period, AXA PE will be able to veto any material change to G6 Rete Gas’ initial business plan as updated/revised on an annual basis and G6 Rete Gas’s annual budget, should the latter materially differ from what was agreed in the initial business plan as revised on a rolling basis, unless such difference is due to external factors (such as general market conditions). AXA PE will also be able to veto decisions concerning G6 Rete Gas’s strategic investments. After the initial five year period if certain financial criteria have not been met (rate of return, dividend) AXA PE will have a veto right over any new business plans and budgets designed to rectify the situation. Based on the above, the Commission concluded that F2i and AXA PE will exercise joint control over G6 Rete Gas for a period long enough to bring about a lasting change in the structure of the undertakings concerned. According to the Articles of Association of PPH, management of PPH lies with a Board of Directors composed of four members elected unanimously by the shareholders. The shareholders do not have any direct influence over strategic decisions regarding PPH beyond election of the Board of Directors, as all decisions (including for example decisions concerning budget or business plan) are taken by the Board of Directors with simple majority (i.e. at least three members). E.ON will be in a position to submit candidates for two members of the Board of Directors of PPH while candidates for the two other members are submitted by the City of Prague. Decisions of the Board of Directors (including budget and business plan of PPH) can be taken only if at least three members of the Board of Directors give their approval. Against this background, the Commission concluded that as a result of the transaction, E.ON acquires joint control together with the City of Prague of PPH, and indirectly of Prazská plynárenská.

4.33

In Fortum Corporation/OAO Gazprom/AS Eesti Gaas/AS Vörguteenus Valdus,1585 Fortum and OAO Gazprom acquired joint control of the undertakings AS Eesti Gaas and AS Vörguteenus Valdus. By way of the transaction, the corporate structure of the targets became the following: Gazprom 37.03%, Fortum 51.38%, Itera Latvija 10% and others 1.6 %. The supervisory board of the targets is responsible for approving the business plan, annual budget and investment plan, and for supervising and appointing the board of directors/management board of the targets. Decisions in the supervisory board of the targets can be adopted only if 75% of members are present and the quorum for decisions is

4.35

1585 Case M.7272 of 7.08.2014.

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75% of the votes. The supervisory board is composed of 11 members: Gazprom 4 members (37.03% of total votes); Fortum 5 members (51.38% of total votes); Itera Latvija 1 member (10 % of total votes) and others 1 member (1.6 % of total votes). Accordingly Gazprom and Fortum are capable of blocking strategic commercial decisions. By way of this transaction Fortum and Gazprom have acquired joint control over the targets.

4.36

In Fortum Corporation/OAO Gazprom/AS Eesti Gaas/AS Vörguteenus Valdus,1586 Fortum and Gazprom notified the acquisition of joint control over two targets EG and Valdus. Prior to the transaction, the targets’ shareholders were Gazprom (37.03%), E.ON (33.66%), Fortum (17.72%), Itera Latvija (10%) and others (1.6%). The two targets were under the joint control of E.ON and Gazprom. E.ON and Fortum entered into a share purchase agreement by which E.ON intended to sell its shares in EG and Valdus. After the transaction the corporate structure of the targets was the following: Gazprom 37.03%, Fortum 51.38%, Itera Latvija 10% and others 1.6%. Gazprom and Fortum agreed that the Supervisory Board of the targets will be responsible for approving the business plan, annual budget and investment plan of the targets and for supervising and appointing their Board of Directors/Management Board. Decisions in the Supervisory Board of the Targets can be adopted only if 75% of members are present and the quorum for decisions is 75% of the votes. The Supervisory Board is composed of 11 members: Gazprom 4 members (37.03% of total votes); Fortum 5 members (51.38% of total votes); Itera Latvija 1 member (10 % of total votes) and others 1 member (1.6 % of total votes). Accordingly Gazprom and Fortum are capable of blocking strategic commercial decisions. By way of this transaction Fortum and Gazprom acquired joint control over the targets.

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In Macquarie/National Grid/Gas Ditribution Business of National Grid,1587 the target – four regulated gas distribution networks (GDNs) in the UK – was initially solely controlled by National Grid. Pursuant to the acquisition agreement, Macquarie would indirectly acquire negative sole control over 61% of the issued share capital of a newly established holding company (“GasD Holdco”) that would ultimately control the four GDNs. The remaining 39% of the shares in GasD Holdco would be held by National Grid.

1586 Case M.7272 of 07.08.2014. 1587 Case M.8358 of 16.03.2017.

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For the purpose of the proposed transaction Macquarie together with other investors formed a consortium. The consortium members entered into an agreement, whereby each Consortium member would subscribe to different proportions of the debt and share capital of Tellsid Holdings Limited (“Topco”) and its wholly owned subsidiary, Tellsid Investment Limited (“TIL”), created as an investment vehicle for the Consortium and as a holding company for GasD Holdco. TIL would ultimately acquire shares in GasD Holdco.

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Firstly, with regards to TIL, the Commission noted that Macquarie will be able to exercise sole control over TIL via its parent company Topco. Macquarie will be the only Consortium member who would be in a position to exercise negative sole control over TIL by virtue of its right to veto certain strategic decisions in Topco’s Board related to the four GDNs’ business plan, financing plan and budget.

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Secondly, with regards to the four GDNs, the Commission found that National Grid and Macquarie will exercise decisive influence over certain strategic decisions of the GDNs and, consequently, they will jointly control them. In particular, National Grid and Macquarie will have veto rights on, among other things, the approval of the initial business plan for GasD Holdco. The GDNs are licensed gas transporter under the GB Gas Act 1986 and are regulated by the Office of Gas and Electricity Markets (OFGEM). The gas distribution business is a regulated activity subject to price controls by OFGEM. The Commission noted that the current price control framework - referred to as RIIO-GD1 – covers the period from 1 April 2013 to 31 March 2021. The initial business plan must be set in line with RIIO-GD1 and submitted to OFGEM for approval. Once approved by OFGEM the initial plan becomes the prevailing business plan for the price control period. With any future price control period, National Grid and Macquarie will have to agree on a new business plan before submitting it to OFGEM for approval. The initial financing plan as well as the budget must also be agreed by both National Grid and Macquarie. National Grid’s and Macquarie’s veto rights will also apply to any changes which are “materially adverse” to the prevailing business, financing or budget plans. The parties submitted that, as they have not agreed on the exhaustive list of what changes would be considered as ‘materially adverse’, each of National Grid and Macquarie will have, in practice, discretion in deciding when to exercise their veto right. In view of the above, the Commission concluded that the four GDNs will be jointly controlled by Macquarie and National Grid.

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Changes in the quality of control: A concentration may also occur where an operation leads to a change in the quality of control. This includes an increase in the number of existing controlling shareholders and the substitution of shareholders.1588

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In Statoil/BP/Sonatrach/In Salah JV, the transaction consisted of the sale of a half of BP’s 49% interest in the In Salah JV to Statoil as a result of which Statoil and BP on the one side acquired joint control of the In Salah JV together with Sonatrach on the other side. Each of BP, Sonatrach and Statoil control the JV which was previously jointly owned and controlled by BP and Sonatrach.1589 Changing coalitions: Finally, it should be noted that there is no control in the case of changing coalitions between minority shareholders. Where there is no stable majority in the decision-making procedure and the majority can on each occasion be any of the various combinations possible amongst the minority shareholders, it cannot be assumed that the minority shareholders (or a certain group thereof ) will jointly control the undertaking.1590

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1.3 Full-function joint ventures 4.44

Full-function joint ventures: Full-function joint ventures are subject to EU merger control because they bring about a lasting change in the structure of the undertakings concerned.

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On 7 September 2017, the European Court of Justice issued a preliminary ruling in Austria Asphalt,1591 clarifying that a change from sole to joint control over an existing undertaking is a notifiable concentration under the Merger Regulation only if the resulting joint venture will be a “full function” joint venture post-transaction. Article 3(1)(b) of the Merger Regulation defines a concentration as an operation leading to the acquisition on a lasting basis of sole or joint control of an undertaking or part of an undertaking. The point of contention arises when that provision is combined with Article 3(4) of the Merger Regulation which includes within the concept of concentration the “creation of a joint venture”, on condition that such a joint venture “perform[s] on a lasting basis all the functions of an autonomous economic entity”, in other words that it is full-function. 1588 1589 1590 1591

Consolidated Jurisdictional Notice, paragraphs 83-90. Case M.3230 of 19.12.2003. Consolidated Jurisdictional Notice, paragraph 80. Case C-248/16 Austria Asphalt, ECLI:EU:C:2017:643.

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In the light of that wording, it was unclear for the referring court whether joint ventures are subject to EU merger control only where they are “autonomous economic entities” (i.e. full-function undertakings). Article 3(4) of the Merger Regulation might also be understood as meaning that the restrictive reference it makes to full functionality applies only to the creation of new joint ventures, but not to the change of an existing undertaking into a joint venture controlled by two companies. By its question, the referring court wished to ascertain whether a change in the control of an existing undertaking - in the present case, a change from sole to joint control of an asphalt plant - is to be regarded as a concentration even where the joint venture resulting from that transaction is not a fullfunction undertaking. On that reading, all operations involving a lasting change in the control of existing joint ventures, within the meaning of Article 3(1)(b) of the Merger Regulation, would be subject to the merger control regime, irrespective of whether the entities in question are full-function undertakings or – as in the case of the asphalt plant – merely production facilities with no autonomous market presence.

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The Court answered the question in the negative holding that a change from sole to joint control is a concentration only if the joint venture created by such a transaction performs on a lasting basis all the functions of an autonomous economic entity.

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The Court reminds that when a textual interpretation of a provision of EU law does not permit its precise scope to be assessed, the provision in question must be interpreted by reference to its purpose and general structure. As regards the objectives pursued by Regulation 139/2004, it appears from its recitals that the regulation seeks to ensure that the process of reorganisation of undertakings does not result in lasting damage to competition. Therefore, according to the Court, as is apparent from recital 20 of the Regulation, the concept of concentration must be defined in such a manner as to cover operations bringing about a lasting change in the control of the undertakings concerned and therefore in the structure of the market. Thus, as regards joint ventures, these must be included within the ambit of the regulation if they perform on a lasting basis all the functions of an autonomous economic entity.1592

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A joint venture is full-function where (i) it is jointly controlled (see book paragraph 4.24 above) and (ii) it performs, on a lasting basis, all the functions of an autonomous economic entity.

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1592 Paragraphs 20 to 22.

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To qualify as full-function, a joint venture must: –

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A duration of six or seven years has been considered to be sufficiently long to bring about a lasting change in the structure of the undertakings concerned, in particular in sectors which face rapid and important legal and economic change.1593 –

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not be of a limited duration;

have a management dedicated to its day-to-day operations and access to sufficient resources (finance, staff, and tangible and intangible assets);1594

For example, the Commission considered that Compass, a 50/50 joint venture between ENW and Eastern, two large energy groups, was not a full-function joint venture in view of its limited financial autonomy. The Commission also took into account the fact that its staff was mainly seconded from the parents and that the latter provided of a number of services to the joint venture, such as marketing, tendering, information technology, metering and financial support.1595 By contrast, in Deutsche Telekom Group/MET Holding/JV,1596 Magyar Telekom and MET Holding will transfer to the joint venture – which was created to be active in the retail supply of natural gas and electricity in Hungary – customer contacts, sales related databases, contractual rights and obligations. The Commission concluded that the joint venture will have access to sufficient resources including finance and assets in order to conduct on a lasting basis its business activities. –

not be limited to taking over only one specific function within the parent companies’ business activities without access to the market (R&D or production joint ventures, distribution or sales of parent companies’ products).1597

1593 Consolidated Jurisdictional Notice, paragraphs 103-105. See BSN-Nestlé/ Cokoladovny (case M.90 of 27.12.1992). 1594 Consolidated Jurisdictional Notice, paragraph 94. 1595 Case M.1315 of 15.10.1998. 1596 Case M.7602 of 19.08.2015. 1597 Consolidated Jurisdictional Notice, paragraphs 95-96. However, the fact that a joint venture makes use of the distribution network or outlet of one or more of its parent companies normally will not disqualify it as full-function` as long as the parent companies are acting only as agents of the joint venture.

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not depend on its parent companies in the medium or long term.1598

The fact that the joint venture relies almost entirely on sales to its parent companies or purchases from them only for an initial start-up period does not normally affect the full-function character of the joint venture. Such a start-up period may be necessary in order to establish the joint venture on a market. This will, however, normally not exceed a period of three years, depending on the specific conditions of the market in question.1599

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In TXU Europe/EDF London Investment,1600 for example, the fact that the parent companies would be the first customers of the JV company did not put into question its full-function character, because the JV would deal with its parents on normal commercial terms and would in due course broaden its customer base.

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In Casc JV 1601 (a joint venture founded in order to provide cross-border capacity allocation services with respect to the interconnectors within the Central Western Europe region), the Commission notes that the JV will be full-functional as it will perform capacity auctioning activities on a longlasting and autonomous basis for its shareholders and any traders willing to sell or buy the transmission rights on the secondary market. The business plan foresees that around [20-40]% of the JV’s revenue will be derived from third parties, mainly from fees linked to the secondary capacity trading. However, in the long run, CASC aims to provide other related services, such as intra-day capacity trading, which would further increase the share of the revenue obtained from third parties. In its decision approving the restructuring of ownership over two offshore windfarms in the Belgian waters, through the creation of a joint venture between Otary, Eneco and Electrabel,1602 the Commission notes, in the assessment of its full-function character, that the JV will not have any dependency on sales to its parents, as all its sales will be done through competitive tenders and, therefore, no production has been committed from the outset to the benefit of the parent companies.

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1598 In Case M.7253, of 25.07.2014, the Commission decided for this reason that the notified joint venture between Groupe Lagardère and SNCF Participations, did not constitute a full-function joint venture within the meaning of Article 3 of the EU Merger Regulation. 1599 Consolidated Jurisdictional Notice, paragraphs 97-102. 1600 Case JV.36 of 3.02.2000. 1601 Case M.5154 of 14.08.2008. 1602 Otary/Eneco/Electrabel/JV in case M.8855 of 05.07.2018.

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In EDF/CGN/NNB Group of companies,1603 the concentration consisted in the acquisition of joint control by EDF and China General Nuclear Power Corporation (CGN) over three joint ventures responsible for the development, construction and operation of three nuclear power plants in the UK. In order to participate in the market for electricity generation and wholesale supply, the three joint ventures need to appoint a service provider to take the power from their nuclear plants to market. One of the JVs will enter into an agreement with EDF to provide this service. The Commission noted that this service will be provided on commercial terms. The JV will pay fees to EDF for its services and retain full control of the market strategy relating to the wholesale trading of electricity generated by the plant. The JV will therefore retain the risk associated with its activities in the generation and wholesale supply of electricity. The Commission concluded that this relationship with EDF did not disqualify the JV as full-function. By contrast, with regards to a fourth JV – GDA JVCo – the Commission noted that this JV was not full-function. This is because GDA JVCo was established in order to complete the day-to-day management and coordination of the general design assessment process necessary for the Chinese reactor technology to be qualified for operation in the UK. The Commission held that GDA JVCo will not have activities beyond a single function for its parents and will not have its own access to, or presence on, the market. In addition, it will only rely on secondees from its parents.

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In Electrabel/Energia Italiana/Interpower,1604 the Commission decided that the proposed joint acquisition of Interpower S.p.A. by Electrabel S.A. and Italy’s Energia S.p.A. could not be considered as a full-function joint venture. Interpower would sell the electricity it produces mostly to Electrabel and Energia, its new parent companies. Only a fraction would be sold to the Italian electricity pool and Interpower would have no customers or commercial strategy of its own. On this basis, the Commission concluded that the joint venture would not perform on a lasting basis the normal functions of an autonomous economic entity.

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The case of PremiumGas (a JV between GazProm Germania and the Italian company A2A) is also worth noting.1605 The parent companies consulted the Commission in December 2008 about the full functionality of PremiumGas and the notifiability of the transaction this company. At the time, the Commission considered that PremiumGas was not a full-function JV on the ground that it was planning to purchase the gas it was going to sell from Gazprom only and 1603 Case M.7850 of 10.03.2016. 1604 Case M.3003 of 23.12.2002. 1605 Case M.5740 of 16.06.2010.

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sell it to A2A. The Commission advised the parent companies to revert to it when a new Business Plan would be established which could change the operation’s scope. A new business plan was established in October 2009 which aimed to increase PremiumGas’s third-party activities significantly. The business plan also involved a significant increase in the JV’s own infrastructure personnel and resources, i.e. the creation of an independent company structure, which so far was largely reliant on resources from its parent companies. The General Business Plan foresaw a diversification of PremiumGas’ purchase and sale relations. It was planned that PremiumGas (i) will procure by 2011/2012 a significant proportion of its needs from other suppliers than Gazprom;and (ii) will sell all the gas on the market at the best possible conditions and, as far as sales to the parent companies were concerned, at arm’s length. The Commission therefore considered that, after the adoption of the business plan, PremiumGas constituted a full functional joint venture, leading to merger notification. A concentration arises if a change in the activity of an existing non-full-function joint venture occurs so that a full-function joint venture within the meaning of Article 3(4) of the Merger Regulation is created. Hence, a joint venture that used to supply only the parent companies, which subsequently starts a significant activity on the market, is a concentration and must be cleared before being implemented.1606

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On 16 May 2012, the Commission cleared the change in the activities of the Angolan company Angola LNG, a company jointly controlled by BP, Chevron Global Energy, Eni, Sociedade Nacional de Combustíveis de Angola (Sonangol) and Total.1607 In 2002, the parents created the JV, which was active in the production of LNG based on gas supplied from off-shore exploration blocks in Angola. It was originally intended that the LNG would be re-gasified in the USA and be sold only to affiliates of the parents in proportion to their equity shareholdings for re-sale in the USA. In 2012, the parents decided to extend the activities of the JV to also include the marketing of LNG to third parties, such that the JV will in the future act as a full-function entity on the market.

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The Commission noted that the JV will be fully functional in nature given that:

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–

It owns or has access to all assets required for the production and transportation of LNG to re-gasification plants globally;

1606 Consolidated Juridictional Notice, paragraph 109. 1607 Case M.6477 of 16.05.2012.

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It has the ability to retain profits from its operations to finance its activities;

–

It will liquefy the surplus gas that is made available to Sonangol in accordance with the oil exploration licences granted by the Angolan Government. By liquefying the surplus gas, the JV adds considerable value to the gas enabling the surplus gas to be marketed worldwide as LNG;

–

No volumes of LNG will be reserved for the parents, all LNG cargoes will be competitively tendered or bilaterally negotiated on an arm’s-length basis and, like other market players, affiliates of the parents will be able to purchase these cargoes only if they win the tender or the contract;

–

Any LNG sales by the JV to its parents will be carried out at arm’s length;

–

It will have its own dedicated management and personnel, although the board members of ALNG Ltd are employed by respective shareholders but will owe fiduciary duties to the JV. The JV also employs its own staff to carry out liquefaction and other activities, while certain functions will be carried on by personnel seconded by the parents during a start-up period;

–

The JV has no envisaged end date and it is anticipated that it will be active on a long-term basis.

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It should also be noted that an acquisition of joint control will lead to a structural change in the market (and therefore constitutes a concentration) even if, according to the plans of the acquiring undertakings, the acquired undertaking would no longer be considered full-function after the transaction (e.g. because it will sell exclusively to the parent undertakings in future).1608

4.65

That was the case in Gazprom/Wintershall/Target Companies.1609 The transaction consisted of the acquisition by Gazprom of sole control of Wingas and WIEH, as well as of the acquisition of joint control by Gazprom and Wintershall of WINZ and Wintershall Services. Prior to the transaction, WINZ and Wintershall Services were solely controlled by Wintershall. The Commission noted that even if WINZ and Winthershall Services would no longer be considered full-function after the transaction, the acquisition of joint control of these 1608 Consolidated Juridictional Notice, paragraph 91. 1609 Case M.6910 of 3.12.2013.

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by Gazprom will in any case lead to a structural change in the market and constitutes a concentration. Full-function joint ventures may have as their object or effect the co-ordination of the competitive behaviour of the parent companies. Such joint ventures fall under the merger regulation with respect to the competitive consequences of the structural change. However, in addition to the structural change, the coordination aspects between the parents are assessed under Articles 101(1) and 101(3) TFEU applicable to anticompetitive agreements.1610

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1.4 Non-controlling minority shareholdings In July 2014, the Commission launched a public consultation on proposals to improve merger control at EU level.1611 The most important change was a proposal of a review procedure for acquisition of non-controlling minority shareholdings. This proposal had its origins in the dispute between Ryanair and Aer Lingus following Ryanair’s attempt to acquire Aer Lingus. The Commission prohibited the concentration in June 2007 on the basis that it would cause serious competition harm. In the meantime, Ryanair had made several share acquisitions, leading to a 29.4% stake in Aer Lingus’ share capital. Both during the procedure which led to the prohibition decision and following that decision, Aer Lingus requested the Commission to order Ryanair to divest all of these shares. The Commission did not order this divestiture, stating that it was not in its power under the Merger Regulation to order Ryanair to divest its shareholding in Aer Lingus since the planned takeover had not been implemented and Ryanair only held a minority shareholding which did not enable it to exercise either de jure or de facto control over Aer Lingus.1612

1610 Article 2(4) of Regulation 139/2004. In making this appraisal, the Commission takes into account in particular whether the two parent companies retain to a significant extent activities in the same market as the joint venture or in a market which is downstream or upstream or neighbouring from that of the joint venture. Additionally, the Commission must check whether the co-ordination is the direct consequence of the creation of the joint venture and affords the undertakings concerned the possibility of eliminating competition in respect of a substantial part of the products or services in question. See TXU Europe/EDF-London Investment (case JV.36 of 3.02.2000). 1611 See Commission White Paper “Towards more effective EU merger control”, COM (2014) 449 final of 9.07.2014. 1612 In two judgments handed down on 6 July 2010, the General Court upheld the Commission’s June 2007 decision to prohibit the planned merger between Ryanair and Aer Lingus (Case T-342/07) and dismissed Aer Lingus’s appeal against the Commission’s decision not to order Ryanair to sell its minority share in Aer Lingus (Case T-411/07).

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As outlined in its consultation, the Commission was considering including minority shareholdings acquisitions that create a “competitively significant link” i.e. acquisitions by a company in a competitor or a vertically related company in its merger control review.

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The White Paper proposed to establish a light system where the parties would only have to provide basic information about a proposed operation in an information notice, so that the Commission can determine which cases involving minority shareholdings could be problematic and should be reviewed. All other transactions could go ahead quickly, possibly after a short waiting period.

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The parties would only be required to submit a full notification if the Commission decided to initiate an investigation and the Commission would only issue a decision if it had initiated an investigation. In order to provide parties with legal certainty, they should also be able to voluntarily submit a full notification.

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In 2016, Commissioner Vestager indicated1613 that it was too early to say where the reflections would lead the Commission. She stressed that the Commission would need to see compelling evidence that the system could work at EU level without creating a lot of complexity, before the Commission took any more steps in this direction.

2.

Turnover thresholds

2.1 Notification thresholds 4.72

Through the use of the notion of “concentration with a Community dimension”, the Regulation determines the scope of the respective jurisdiction of the Commission and the national authorities in the field of merger control. The Commission has almost exclusive jurisdiction1614 to review concentrations having such a dimension, whilst Member States’ competition authorities are free to exercise their jurisdiction over concentrations which fall below the EU thresholds.

1613 https://ec.europa.eu/commission/commissioners/2014-2019/vestager/announcements/refining-eu-merger-control-system_en 1614 Subject to possibilities for referral to Member States.

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Basic thresholds: notification is required to the European Commission where: (a)

the combined aggregate worldwide turnover of all the undertakings concerned is more than € 5 billion; and

(b)

the aggregate Community-wide turnover of each of at least two of the undertakings concerned is more than € 250 million,

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unless each of the undertakings concerned achieves more than two-thirds of its aggregate Community-wide turnover within one and the same Member State. Lower thresholds: in 1998, in an attempt to bring more mergers with crossborder elements into the one-stop shop represented by EU merger control, a new Article 1(3) introduced lower thresholds. As a result, transactions are also subject to EU Merger control where: (a)

the combined aggregate worldwide turnover of all the undertakings concerned is more than € 2.5 billion; and

(b)

in each of at least three Member States the combined aggregate turnover of all the undertakings is more than € 100 million; and

(c)

in each of at least three Member States included for the purpose of point (b), the aggregate turnover of each of at least two of the undertakings concerned is more than € 25 million; and

(d)

the aggregate Community-wide turnover of each of at least two of the undertakings concerned is more than €100 million, unless each of the undertakings concerned achieves more than two-thirds of its aggregate Community-wide turnover within one and the same Member State.

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2.2 Turnover calculation Undertakings concerned: In order to check whether these thresholds are met, it has to be determined who are the “undertakings concerned” by the concentration. The undertakings concerned for the purpose of turnover calculation are the merging companies in the case of a merger, the buyer and the target in the case of an acquisition of sole control and the bidder and the target in the case of a public bid.1615 1615 See the Commission Consolidated Jurisdictional Notice, paragraphs 129 to 153.

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In the case of a newly created joint venture, the undertakings concerned are the controlling parent companies. If the joint venture is already in existence (as opposed to being newly created), its turnover will also be taken into account.

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As regards the calculation of turnover of State-owned undertakings (SOEs), in order to avoid discrimination between the public and private sectors, calculation must take account of undertakings making up an economic unit with an independent power of decision, irrespective of the way in which their capital is held or of the rules of administrative supervision applicable to them.1616 Where several SOEs are under the same independent centre of commercial decisionmaking, then the turnover of those businesses should be considered part of the group of the undertaking concerned for the purposes of turnover calculation. This issue was discussed in a number of cases mainly involving Chinese SOEs.1617

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The acquisition of joint control by EDF and China General Nuclear Power Corporation (CGN) over three joint ventures responsible for the development, construction and operation of three nuclear power plants in the UK, illustrates this issue in the energy sector.1618

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The parties submitted that CGN was independent from Central SASAC (the commission administering Chinese SOEs that are supervised by the central Chinese government) and that the transaction was therefore not notifiable under the Merger Regulation as CGN had a turnover in the EEA below the EUR 250 million threshold. After examining the texts applicable to SOEs, the Commission concluded that Central SASAC has influence on CGN’s major decision making and therefore CGN does not enjoy autonomy from the State in deciding major matters like strategy, business plan or budget. The Commission noted that Central SASAC appoints and removes the top management of these wholly state-owned companies (president, vice-presidents, person in charge of finance and other senior managers, chairman and vice-chairmen of the board of directors, directors, chairman of the board of supervisors, supervisors). Central SASAC conducts annual and office term assessments of the enterprise managers appointed by it. Moreover, SOEs that report to Central SASAC must submit their annual investment plan to Central SASAC as well as any project beyond the annual investment plan. Central SASAC supervises the investment activities of these enterprises. 1616 Article 5(4) and recital 22 of Regulation 139/2004. 1617 See, for example, China National Bluestar/Elkem in case M.6082 of 31.03.2011; DSM/Sinochem/JV in case M.6113 of 19.05.2011; CNRC/Pirelli in case M.7643 of 01.07.2015. 1618 EDF/CGN/NNB Group of companies in case M.7850 of 10.03.2016.

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In light of the above, the Commission concluded that Central SASAC participates in major decision making, in the selection and supervision of senior management of SOEs and can interfere with strategic investment decisions. Contrary to the parties, the Commission considers that the absence of crossdirectorships between CGN and Central SASAC or other Chinese SOEs does not preclude Central SASAC from influencing CGN’s commercial strategy in light of the different powers mentioned above. In addition, the Commission identified a number of elements supporting the fact that Central SASAC can impose or facilitate coordination between SOEs active in the energy industry. As a result, the Commission aggregated the turnover of the companies controlled by Central SASAC active in the energy sector. Since the EU turnover exceeded EUR 250 million, the transaction was notifiable to the Commission.

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Another illustration is the acquisition of OKD by Priska.1619 With revenues of EUR 168  715 both worldwide and in the EEA, Priska did not meet the EU merger control thresholds. However, as Priska is a SOE whose shares are wholly owned by the Czech Republic via its Ministry of Finance (MoF), the question arose as to whether other SOEs owned by the Czech State should also be taken into consideration for the purpose of turnover calculation. In its precedents, the Commission has analysed several factors to determine the scope of the single economic unit to be taken into account such as the presence of specific holding arrangements, governance provisions and other safeguards ensuring that the entity retains its independent power of decision regarding its strategy, business plan and budget, the legal ability of the State to take decisions for the SOE, the State’s right to give instructions to the SOE, its powers of supervision, the possibility of approving amendments of the SOE’s by-laws, its ability to appoint board members so as to have the majority of voting rights, etc.

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Applying these criteria to the present case, the Commission found that Prisko does not take its strategic decisions independently from the Czech State.1620 The Commission noted that, in addition to Prisko, the MoF also owns nearly 70% of the shares in ČEZ, a company primarily active in the generation of electricity. The Commission held that the MoF, through this majority shareholding and exercising its voting rights, has the ability to appoint two thirds of the members of the Supervisory Board, which in turn appoint, and remove, the members of the Board of Directors, giving the MoF the ability to exercise decisive influence

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1619 Case M.8687 of 6.12.2017. 1620 In particular, the Commission noted that Prisko’s Board of Directors ultimately requires approval of its business plan and budget by the General Meeting of Shareholders, where only the Czech Ministry of Finance sits.

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over ČEZ’s strategic decisions. The Commission also noted that there was no concrete safeguards to prevent sharing commercially sensitive information between Czech SOEs and that by being present through representatives or by appointing certain Board members, the MoF has access to all relevant information discussed within both Prisko and ČEZ. In addition, provisions in the Articles of Association of ČEZ show that the boards of ČEZ are not independent from the General Meeting (the company’s supreme body), where the MoF has a majority. The Commission concluded that the Czech State has the ability to exercise decisive influence over ČEZ and that ČEZ’s turnover should therefore be considered together with the turnover of Prisko. Taking into account ČEZ’s turnover, the EU merger thresholds were met.

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Components of turnover: The relevant turnover is a “net” turnover figure, i.e. the amount derived during the last financial year from the sales of products or the provision of services after deduction of sales rebates, VAT and other taxes related to turnover as well as intragroup sales.1621 When an undertaking concerned belongs to a group, the turnover of the group as a whole has to be taken into account.1622 However, in the case of an acquisition of a part of an undertaking, only the turnover relating to the part acquired is to take into account.1623 As a general rule, the turnover is attributed to the place where the customer is located.

1621 Article 5(1) of Regulation 139/2004 and paragraphs 157 to 168 of the Commission Consolidated Jurisdictional Notice. The judgment of the General Court of 16.7.2006 in Case T-417/05, Endesa SA v Commission of the European Communities, [2006] ECR II-2533 gives some hint regarding the calculation of the revenues of companies active in the energy sector. The question arose as to whether a pass through adjustment relating to distribution operations could be taken into account. Endesa considered that only that part of revenue linked to distribution activity should have been taken into consideration when determining the turnover of distribution companies, to the exclusion of any sums received for the account of other operators, such as electricity producers and network operators. In this regard, the Court recalled first that the notion of turnover contained in the Merger Regulation explicitly refers to the amounts derived [& ] from the sale of products and the provision of services and that sales, reflected in the activity of the company, were therefore an essential criteria in the calculation of turnover. The Court found that Endesa could not be considered as an intermediary acting in the name of and on behalf of producers and operators and that, therefore, the European Commission had not committed an error by not carrying out the pass through adjustment requested by Endesa. 1622 Consolidated Jurisdictional Notice, paragraphs 175-184. As to the allocation of the turnover of a joint venture held by an undertaking concerned by a concentration and a third party, see paragraph 187 of the Consolidated Jurisdictional Notice. 1623 Article 5(1) of Regulation 139/2004.

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Reference period: The reference period used to calculate turnover is the preceding financial year.1624

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Successive or “salami” operations: Article 5(2) of the EU Merger Regulation provides that two or more transactions taking place within a two-year period between the same undertakings are treated as one concentration arising on the date of the last transaction. This provision is aimed at avoiding circumvention of the EU Merger Regulation through a number of transactions that, taken separately, do not meet the EU turnover thresholds.1625

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3.

Referrals

3.1 Introduction The EU Merger Regulation establishes a clear division of competences. Concentrations with a Community dimension fall within the exclusive jurisdiction of the Commission and Member States are precluded from applying national merger control to such transactions. Concentrations falling below the EU thresholds remain the sole competence of the Member States. However, the EU Merger Regulation provides a certain degree of flexibility in this respect through its referral system and the possibility for Member States to take measures to protect legitimate interests.

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3.2 Referral from the Commission to the Member States Pre-notification referrals: Article 4(4) of the EU Merger Regulation provides for pre-notification referral of concentrations from the Commission to the Member States at the initiative of the merging parties.1626

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In order for a referral to be made by the Commission to one (or more) Member State(s) pursuant to Article 4(4), two legal requirements must be fulfilled: (i) there must be indications that the concentration may significantly affect competition in a market or markets; (ii) the market(s) in question must be within a Member State and present all the characteristics of a distinct market.

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1624 An adjustment must always be made to account for acquisitions or divestments subsequent to the date of the audited accounts. Other factors that may affect the turnover on a temporary basis such as a decrease in orders or a slow-down in the production process within the period prior to the transaction do not lead to any adjustment. See Consolidated Jurisdictional Notice, paragraphs 172-174. 1625 See Consolidated Jurisdictional Notice, paragraph 37. 1626 See also Commission Notice on case referral, paragraphs 16-23 and 49.

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It should be noted that in its 2014 White Paper outlining proposals to improve merger control, the Commission has proposed removing the first requirement so that parties are no longer required to claim that the transaction may “significantly affect competition in a market” in order for a case to qualify for a referral.

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When making a reasoned submission for a pre-notification referral, the undertakings must use the Form RS. The Commission transmits this submission to all Member States without delay. The Commission and national competition authorities must decide within clearly defined time limits whether the referral ought to be made: (i) within 15 working days from receipt of the submission, the Member State(s) must express its(their) position as regards the request to refer the case; (ii) within 25 working days starting from the receipt of the request for referral, the Commission must decide whether or not to refer the case, in whole or in part.

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If the Commission decides to refer the whole of the case, no notification must be made and national competition law applies.

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Post-notification referrals: Article 9 provides for post-notification referral of concentrations from the Commission to the Member State(s) at the initiative of the Member State(s).1627

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A Member State can request that a concentration that has been notified to the Commission be referred to it if the concentration (i) threatens to significantly affect competition in a market within that Member State presenting all the characteristics of a distinct market1628 or (ii) affects competition in a market within that Member State, which presents all the characteristics of a distinct market and which does not constitute a substantial part of the common market.1629

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Member States have 15 working days from receipt of the copy of the notification to make their request for referral. If a request for referral is made under article 9, the Commission must decide whether or not to make the referral within 35 working days after notification of the transaction or, if the Commission has initiated a phase II investigation, within 65 working days after notification.

1627 See also Commission Notice on case referral, paragraphs 33-41 and 50. 1628 Article 9(2)(a) of the EU Merger Regulation. 1629 Article 9(2)(b) of the EU Merger Regulation.

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If the referral request has been made on the ground that the concentration affects competition in a market that is not a significant part of the common market, the Commission must make the referral if it considers that such a distinct market is affected.

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For example, the Commission accepted the request of the Belgian Ministry of Economic Affairs to refer to the Belgian authorities the examination of several mergers arising from the agreements between Electrabel and local electricity distributors. To comply with the Belgian Act liberalising the electricity and gas market, the joint public/private local authority energy organizations had to divest their supply business. A number of them concluded an agreement with Electrabel under which they agreed to transfer their “default” customers (customers which had not expressed a preference for any supplier when becoming eligible) to Electrabel and in return acquired a financial stake in Electrabel. This legal obligation resulted in a number of different transactions as Electrabel made such agreements with numerous different distributors. The Belgian authorities ruled on seven transactions which did not have a Community dimension and fell, therefore, within their jurisdiction. Eight other transactions were notified to the Commission because they met the turnover thresholds of the Merger Regulation due to the significant size of the local authority supplier. The impact of the transaction being national or local, the Commission accepted to refer all the cases notified to it to the Belgian authorities.1630

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In contrast, in the case of the acquisition of joint control over Spanish utility Hidrocantábrico by Grupo Villar Mir and EnBW,1631 the Commission considered that the proposed operation raised serious doubts about its compatibility with the common market and kept the case despite the request for referral presented by the Spanish government.

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The Commission rejected the request of the Belgian authorities for the partial referral of a transaction whereby EDF would acquire exclusive control of Segebel, a Belgian holding company, whose only asset is a 51% stake in SPE, the second biggest electricity operator in Belgium, after the incumbent operator GDF Suez (Electrabel).1632

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1630 ECS/Intercommunales IEH, Iveka, Igao, Intergem, Gaselwest, Imewo, Iverlek and Sibelga (Cases M.2857, M.3075 to 3080, M.3318). 1631 Case M.2434 of 26.09.2001, paragraphs 4-5. See also the Commission’s refusal to refer the case to the UK authorities in EDF/London Electricity, Case No. M.1346 of 27.01.1999. 1632 Case M.5549 of 12.11.2009, EDF/Segebel.

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The Commission found that there were serious doubts with regard to the incentives of the post-merger entity to further develop EDF’s Combined Cycle Gas Turbine Plant (CCGT) projects which threatened to affect significantly competition on a number of relevant electricity markets in Belgium, Therefore the criteria provided for by the Merger Regulation (i.e. existence of a distinct market and threat) were fulfilled. Nevertheless, the Commission had to analyse whether it was appropriate to refer the case to Belgium.

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According to the case-law, the “referral conditions laid down in Article 9(2)(a) and (b) of Regulation [139/2004] should be interpreted restrictively so that referrals to national authorities of concentrations with a Community dimension are limited to exceptional circumstances”.1633 Relying on this case law, the Commission held that it was the authority best placed to review the transaction since (i) it had developed over the last years significant expertise in the Belgian electricity markets and there were no compelling reasons to refer the transaction; and (ii) the competition concerns highlighted by the Belgian authorities went beyond the Belgian national markets thus requiring a cross border analysis.

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The referral would have raised another important issue: under Belgian national merger law, in case a notified operation does not lead to market shares higher than 25% of any of the markets concerned, the operation is automatically cleared. A referral would have entailed the risk of an automatic clearance under Belgian national law, i.e. without the Belgian competition authority being in a position to require any remedies, including those that were secured by the Commission to tackle the competition concerns raised by the transaction. For all these reasons, the transaction was not referred to Belgium.

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The Belgian Competition Authority requested, on 20 December 2010, a partial referral of GDF Suez/International Power1634 in relation to the parts of the case that concerned the Belgian markets, with a view to assessing them under the Belgian competition law. However, in light of the remedies offered by the parties, the Belgian Competition Authority withdrew its referral request on 19 January 2011, one week before the adoption of the clearance decision.

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The Commission’s investigation showed the absence of competition concerns on most of the relevant markets due to the minor horizontal overlaps between the parties’ activities. The only exception was the two companies’ operations on the Belgian market for the generation and wholesale of electricity. There, the 1633 Case T-119/02, Royal Philips Electronics NV v Commission, [2003] ECR II-1433, point 354. 1634 Case M.5978 of 26.01.2011.

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Commission found that the proposed transaction would have raised concerns since it could have enabled GDF Suez to use sensitive information regarding the T-Power plant (a Belgian power plant due to start production in 2011), and its discretion over the operation of the plant to raise electricity prices in the Belgian wholesale market and to put its competitor, RWE Essent, at a competitive disadvantage on this market. The owners of T-Power had concluded a Tolling Agreement with RWE-Essent. By virtue of this Tolling Agreement, the entire capacity of T-Power was to be made available to RWE Essent which in turn would be responsible for the decisions on the volumes of electricity produced by the TPower plant and for the gas sourcing of the plant. As a reaction to the Commission’s concerns, the parties proposed to divest International Power’s shareholding of T-Power and to transfer to third parties the operation and maintenance agreement of the T-Power plant.

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3.3 Referral from the Member States to the Commission Pre-notification referrals: Article 4(5) of the EU Merger Regulation provides for pre-notification referral of concentrations from Member States to the Commission at the initiative of the merging parties.1635

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Multiple notifications of the same transaction increase effort and cost for undertakings and may lead to conflicting assessments. To avoid multiple filings (this procedure is available if the transaction must be notified in at least 3 Member States), the merging undertakings can, at the pre-notification stage, ask that the notification be examined by the Commission rather than by the various Member States.

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The merging parties must, before any notification to the competent authorities, inform the Commission by means of a reasoned submission (using Form RS) that the concentration should be examined by the Commission. The Commission transmits this submission to all Member States without delay. Any Member State competent to examine the concentration under its national competition law may, within 15 working days of receiving the reasoned submission, express its disagreement as regards the request to refer the case. Where at least one such Member State has expressed its disagreement, the case is not referred. If there is no expression of disagreement by any such competent Member State, the case is deemed to acquire a Community dimension and is thus referred to the Commission which has exclusive jurisdiction over it. It is then for the parties to notify the case to the Commission, using the Form CO.

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1635 See also Commission Notice on case referral, paragraphs 24-32 and 49.

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Given the low number of Article 4(5) requests that were vetoed by a Member State, the Commission proposes – in its 2014 White Paper outlining proposals to improve merger control – abolishing the requirement for two separate submissions (a referral request and a subsequent notification) to make the process quicker and less burdensome while maintaining the ability of Member States to veto a request in the rare event that they consider it necessary.

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Accordingly, parties would notify a transaction directly to the Commission. The Commission would then forward the notification to the Member States immediately, giving those Member States that are prima facie competent to review the transaction under national law the opportunity to oppose the referral request within 15 working days. Unless a competent Member State opposes the request, the Commission would have jurisdiction to review the whole transaction. In the event that at least one competent Member State opposes the jurisdiction of the Commission, the Commission would renounce jurisdiction entirely and Member States would retain jurisdiction.

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In order to facilitate the information exchange between the Member States and the Commission, the Commission proposes sending the parties’ initial briefing paper or the case allocation request to the Member States to alert them about the transaction during the pre-notification contacts. Post-notification referrals: Article 22 of the EU Merger Regulation provides for post-notification referral of concentrations from Member States to the Commission at the initiative of the Member State(s).

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The request must be made within 15 working days from the date of national notification or, where no notification is required, the date when the concentration was ‘made known’ to the Member State concerned. All the other Member States (which have been informed by the Commission of the request) have 15 working days to decide whether to join the initial request. After the expiry of such period, the Commission has 10 working days to decide whether to take the case. However, a decision of the Commission to take the case does not confer exclusive jurisdiction to the Commission: only the Member States that joined the request for referral abandon their jurisdiction. The Member States that did not join the referral are allowed to assess the concentration under their national law.1636

1636 See Commission Notice on case referral, paragraphs 42-45 and 50.

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As it is written, Article 22 only grants the Commission jurisdiction for the Member States which have made or joined a referral request. In some cases, this has led to parallel investigations by the Commission and NCAs contrary to the one-stopshop principle. In its 2014 White Paper, the Commission proposes streamlining Article 22 referrals so as to give the Commission EEA-wide jurisdiction in cases referred to it and better implement the one-stop-shop principle. The procedure under Article 22 is proposed to be amended as follows: –

One or more Member State(s) that are competent to review a transaction under their national law could request a referral to the Commission within 15 working days of the date it was notified to them (or made known to them).

–

The Commission would be able to decide whether or not to accept a referral request. For example, the Commission may decide not to accept the request if the transaction has no cross-border effects. If the Commission decided to accept a referral request, it would have jurisdiction for the whole of the EEA.1637

–

However, if one (or more) competent Member State(s) opposed the referral, the Commission would renounce jurisdiction for the whole of the EEA, and the Member States would retain their jurisdiction. The Member State would not need to give reasons for opposing the referral.

4.

Legitimate interests

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Although the Commission has exclusive jurisdiction to investigate concentrations having a Community dimension, Article 21(4) of the Merger Regulation entitles Member States to carry out a parallel investigation and to take appropriate measures to protect legitimate interests other than competition.

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In other words, Member States cannot apply their national competition law to concentrations with a Community dimension as defined in Articles 1 and 3 of the Merger Regulation. However, they can adopt measures which could prohibit, submit to conditions or in any way prejudice such operations if (i) the measures in question protect interests other than those taken into account by

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1637 A timing problem could arise if the referral request is made after another Member State has already cleared the transaction in its territory. In this case the Commission would no longer be able to take EEA-wide jurisdiction.

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the Merger Regulation, and (ii) these measure are necessary and proportionate for the protection of interests compatible with EC law and do not constitute a means of arbitrary discrimination or a disguised restriction to the freedom of establishment or of the free movement of capital or, in any other respect, a breach of general principles or other provisions of Community law.

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Public security, plurality of media and prudential rules are interests recognised as being legitimate (“recognised interests”) by Article 21(4). Measures genuinely aiming to protect one of these recognised interests and clearly in compliance with the principles of proportionality and non-discrimination, which are liable to prohibit, submit to conditions or prejudice a concentration with a Community dimension can be adopted and enter into force without prior communication to (and approval by) the Commission.

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Any other public interest must be communicated to the Commission by the Member State concerned and shall be recognised by the Commission after an assessment of its compatibility with the general principles and other provisions of Community law before the measures may be taken. The Commission informs the Member State concerned of its decision within 25 working days of that communication.

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In order to ensure the “effet utile” of Article 21(4) of the Merger Regulation, read in conjunction with Article 10 EC (obligation of loyal cooperation), the Commission considers that the same applies apply in case of serious doubts as to whether national measures liable to prohibit, submit to conditions or prejudice a concentration with a Community dimension genuinely aim to protect a “recognised interest” and/or comply with the principles of proportionality and non-discrimination.1638

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In EDF/London Electricity,1639 the United Kingdom submitted a request to take several measures regarding the ongoing regulation of the electricity industry (such as securing a regulatory “ring fence” around the electricity supply business of London Electricity and the placing of generation outside it). After examining the request, the Commission concluded that the measures described in the request were being taken pursuant to ongoing regulatory activity and that it was not necessary for the Commission to recognise a legitimate interest before the United Kingdom authorities could take the measures in question.

1638 See Case M.1616 – BSCH/Champalimaud (interim measures), of 20.07.1999, paragraphs 65-67. 1639 Case M.1346 of 27.01.1999.

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The landmark cases relate to the bids launched by E.ON (in February 2006) and Enel and Acciona jointly (in March 2007) for the acquisition of the Spanish energy company Endesa. In the two cases, the Commission approved the proposed acquisitions of Endesa under the Merger Regulation as they would not significantly impede effective competition in the European Economic Area (EEA) or any substantial part of it.1640

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However, a few days after the announcement of E.ON’s bid over Endesa, the Spanish Council of Ministers adopted the Royal Decree-Law 4/2006, a legislative measure increasing the supervisory powers of the Energy Regulator CNE (Comisión Nacional de Energía).

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On 27 July 2006, the CNE adopted a decision submitting to a number of conditions the proposed acquisition of Endesa by E.ON. These conditions included: (i) corporate requirements, i.e. the obligation to maintain Endesa as the parent company of its group for a period of 10 years and the companies of Endesa group as they stand and Endesa’s headquarters in Spain, (ii) financial and investment requirements, in particular the obligation to keep Endesa duly capitalised and to not exceed a certain debt ratio, and (iii) requirements concerning the disposal of assets and the transfer of management, including the obligation to divest Endesa’s non-mainland assets.

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E.ON introduced an administrative appeal against the CNE’s decision before the Spanish Minister of Industry, Tourism and Trade, whose decision modified the CNE’s decision in some respects.

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Spain indicated to the Commission that the communication and stand-still obligations provided for by Article 21(4) of the Merger Regulation were inapplicable insofar as CNE’s decision was justified on public security grounds (security of supply). Moreover, Spain considered that the conditions imposed by CNE were proportionate and non-discriminatory and did not hinder the free movement of capital and freedom of establishment.

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The Commission examined the CNE conditions in the light of the strict interpretation of the notion of public security by the case law. The Commission stated that security may be relied on only if there is a genuine and sufficiently serious threat to a fundamental interest of society. Having recalled that measures necessary to ensure a minimum level of energy supplies in the event of a crisis may fall under the notion of public security, the Commission notes that, in gen-

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1640 Case M.4197 of 25.04.2006, E.ON/Endesa; Case M.4685 of 5.07.2007, Enel/Acciona/Endesa.

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eral, either appropriate regulation of general application or measures permitting an adequate specific reaction by the public authorities to forestall a given threat to public security will be sufficient to safeguard this interest and will, if such measures are proportionate and non-discriminatory, be less restrictive than the establishment of prior conditions as to ownership of relevant undertakings.1641

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In a first decision dated 26 September 2006,1642 the Commission considered that Spain had violated Article 21 of the Merger Regulation by submitting the proposed acquisition of control over Endesa to conditions incompatible with EC law and therefore illegal. It held that most of the conditions imposed by CNE limited E.ON’s freedom to decide the structure of its group after the acquisition of control over Endesa and/or represented a restriction of the freedom of establishment and the free movement of capital, which were not necessary and proportionate for the protection of the declared public interest to ensure public security and security of energy supply and gave rise to a discriminatory treatment.

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In a second decision dated 20 December 2006,1643 the Commission considers incompatible with EC law the conditions imposed by the Spanish Minister of Industry, Tourism and Trade, requiring that: (i) Endesa maintains its brand for a five years period; (ii) the companies owning electricity assets outside mainland Spain are kept within the Endesa Group for a period of 5 years; (iii) Endesa’s power plants using domestic coal continue to use such an energy source as foreseen in the national mining plans; (iv) E.ON does not adopt strategic decisions, regarding Endesa and affecting security of supply, contrary to the Spanish legal order.

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Again, the Commission considered that these conditions were incompatible the Treaty’s rules on free movement of capital (Article 56, now Article 63) and on freedom of establishment (Article 43, now Article 49). The condition on the use of domestic coal was considered also incompatible with the EC Treaty’s rules on free movement of goods (Article 28, now Article 34).

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Taking the view that Spain had not complied with the two decisions, the Commission used the Article 226 EC (now Article 258 TFEU) procedure and brought an action for failure to fulfil obligations before the Court of Justice. The Court found that, by not withdrawing within the period prescribed the 1641 Case M.4197 of 26.09.2006, paragraphs 39-41. 1642 Case M.4197 of 26.09.2006. 1643 Case M.4197 of 20.12.2006.

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conditions imposed by the decisions of the CNE and the Minister, which were found to be incompatible with Community law, Spain had failed to fulfil its obligations under Community law.1644 The conditions, imposed by CNE and the modifications made by the Spanish Minister of Industry, Tourism and Trade to the proposed acquisition of Endesa by Enel and Acciona were broadly comparable to a number of conditions imposed in the case of E.ON/Endesa. Again, the Commission adopted a decision stating that Spain had violated Article 21 of the Merger Regulation in that such conditions were incompatible with EC law and requesting their withdrawal by 10 January 2008.1645 Spain has decided to challenge this decision before the General Court.1646

1644 Case C-196/2007, Commission v. Kingdom of Spain [2007] ECR I-41. 1645 Case M.4685, 5.12.2007. 1646 See the order of the President of the General Court of 30.04.2008 in Case T-65/08 R, Spain v Commission, [2008] ECR II-69, dismissing the application for stay of execution of the Commission decision of 5.12.2007.

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CHAPTER 3 Substantive assessment of concentrations 1.

Introduction

In establishing whether or not concentrations are compatible with the common market, the Commission must (i) define the relevant product and geographic markets; and (ii) assess whether the concentration would impede effective competition in these markets.

2.

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The relevant market

Identification of the market(s) in which the transaction may have effects is a necessary precondition for the assessment of concentrations.1647 The main purpose of this exercise is to identify the market power of the merging parties and their competitors.

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The Commission typically commences an investigation by defining the various possible alternative relevant market definitions.1648 If it is then satisfied that the transaction does not raise competition concerns under these alternative market definitions, it will not seek to arrive at a precise market definition before clearing the concentration. If, on the contrary, the identification of the markets is important to assess the compatibility of the concentration, the Commission will seek to reach a definitive conclusion on the precise product and geographic markets.

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1647 Cases C-68/94 and C-30/95, France v Commission (Kali & Salz), [1998] ECR I-1375, paragraph 143. 1648 See for a relatively difficult assessment the decision of 23.05.2003 in case M.3108, Office Depot/Guilbert.

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The Commission’s Notice on the definition of the relevant market lists the basic principles upon which the Commission relies in the process of defining a relevant market.1649 Demand substitution is the main yardstick regarding the relevant product market. It is necessary to define the products which are sufficiently interchangeable with the undertaking’s own products, both as regards their objective characteristics and the competitive conditions and the structure of supply and demand on the market.

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As to the geographic market, the assessment of the competitive impact of a proposed concentration takes into consideration all suppliers which can supply in the area no matter where their production facilities are located. If customers can purchase products at the same price from suppliers located in other areas, such areas are included in the geographic market definition. Transport costs are an important element in this respect as they may limit the scope for competition from other areas. For a detailed examination of the relevant markets with respect to energy, see above, Chapter 2.

3.

The substantive test

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Until 2004, the assessment under the former EU Merger Regulation was based on the concept of dominance: a merger had to be blocked if it created or strengthened a dominant position, and therefore would be likely to result in higher prices, less choice and innovation.1650 Since 2004, the substantive test is whether the concentration significantly impedes effective competition in the internal market or in a substantial part of it, in particular as a result of the creation or strengthening of a dominant position.

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Substantive test: Concerns had been raised as to whether the dominance test could provide effective control in some specific situations of oligopoly, in particular in cases where the merging firms would be in a position to raise prices without necessarily holding the largest market share in the market and without tacitly coordinating with the other members of the oligopoly. The new test adopted by the EU Merger Regulation addresses this issue by stating that a merger may be blocked if it would “significantly impede effective competition... in particular 1649 Notice on the definition of the relevant market, OJ C 372/5, 9.12.1997. 1650 The concept of dominance was defined in the context of the former EC Merger Regulation as a situation where one or more undertakings wield economic power which would enable them to prevent effective competition from being maintained in the relevant market by giving them the opportunity to act to a considerable extent independently of their competitors, their customers and, ultimately, of consumers. Case T-102/96, Gencor v Commission, [1999] ECR II-753, paragraph 200.

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as a result of the creation or strengthening of a dominant position.”1651 The central question is whether sufficient competition remains after the merger to provide consumers with sufficient choice. Dominance, in its different forms, remains the main scenario. But the test also now clearly encompasses anticompetitive effects in oligopolistic markets where the merged company would not be dominant. As emphasized by recital 25 of the EU Merger Regulation, the concept of significant impediment to effective competition should be interpreted as extending, beyond the concept of dominance, “only to the anti-competitive effects of a concentration resulting from the non-coordinated behaviour of undertakings which would not have a dominant position on the market concerned”.

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Examples of cases include T-Mobile’s acquisition of Austrian mobile phone operator tele.ring, subject to conditions.1652 The market investigation lead the Commission to conclude that the elimination of tele.ring as an independent network operator and the emergence of a market structure with two large network operators of similar size (Mobilkom and T-Mobile), a far smaller operator and a very small operator would give rise to non-coordinated effects, even though T-Mobile would not have the largest market share after the merger.

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In 2013, the Commission prohibited the proposed acquisition of TNT Express by UPS because the merger would have lead to a significant impediment of effective competition in the intra-EEA express markets of 15 Member States even though the merged entity would not have had the largest market share (DHL being the leading player). The transaction would have eliminated an important competitive force on the market, and significantly limited possibilities for customers to switch to alternative suppliers, which would have been prone to price increases.1653

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EU merger control has been subject to significant evolution over the last years, the Commission focusing more and more on formulating a theory of harm (i.e. ways in which the merger might lead to a harmful outcome) behind its competition concerns, using the tools and methods (econometrics, simulation models...)1654 of industrial economic thinking.

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1651 Article 2(2) of Regulation 139/2004. 1652 T-Mobile Austria/Tele.ring (case M.3916 of 26.04.2006). See also Orange/Jazztel (case M.7421 of 19.05.2015). 1653 UPS/TNT (case M.6570 of 30.01.201, annulled by the General Court for procedural grounds in Case T-194/13 United Parcel Service v Commission, ECLI:EU:T:2017:144). 1654 For the use of specific demand simulation models, see decisions Friesland Foods/Campina (case M.5048 of

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The antitrust analysis has evolved from a situation in which the most important element was the market shares of the merging parties to a situation in which the Commission assesses the loss of rivalry between companies and the ability of the merged entity to increase prices (in horizontal mergers) or the ability to effectively foreclose competitors (in vertical or conglomerate mergers). For a number of years, the Commission has been using a number of techniques to assess the effects of a proposed merger on competition such as customers switching analysis,1655 analysis of bids or tenders,1656 analysis of excess capacity of fringe firms,1657 Upward Pricing Pressure (UPP) analysis.1658

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Types of concentration: It is common practice to distinguish concentrations according to their kind – horizontal, vertical or conglomerate, raising uncoordinated or coordinated effects between the players. These issues are fully addressed in Chapter 4 below Categories of mergers and acquisitions common to the energy sector.

4. 4.143

Efficiencies

The Commission is reluctant to give weight to arguments that the net efficiencies resulting from the merger (for example economies of scale) outweigh potential competition disadvantages.1659 It has been criticized for using efficiencies against, rather than in favour, of concentrations. The EU Merger Regulation and the Guidelines on horizontal mergers acknowledge that efficiencies brought by the concentration may counteract the effects on competition, and in particular the potential harm to consumers that it might otherwise have and that, as a consequence, the concentration would not significantly impede competition.1660 For the Commission to take account of efficiency gains in its assessment of the merger and be in a position to reach the conclusion that as a consequence of efficiencies there are no grounds for declaring the merger to be incompatible with the common market, the efficiencies have to benefit consumers, be mergerspecific and be verifiable. These conditions are cumulative.1661 17.12. 2008) and Unilever/Sara Lee Body Care (case M.5658 of 17.11.2010). See, for example, decision T-Mobile Austria/Tele.ring (case M.3916 of 26.04.2006). See, for example, decision Syniverse/BSG (case M.4662 of 4.12.2007). See, for example, decision Outokumpu/Inoxum (case M.6471 of 7.11.2012). See decision Hutchinson 3G Austria / Orange Austria (case M.6497 of 12.12.2012). See the treatment of efficiencies in decisions Western Digital Ireland/Viviti Technologies (case M.6203 of 23.11.2011), Deutsche Börse/NYSE Euronext (case M.6166 of 1.02.2012), Hutchison 3 G Austria/Orange Austria (case M.6497, of 12.12.2012) and UPS/TNT (case M.6570 of 31.01.2013). 1660 See recital 29 of Regulation 139/2004. 1661 See Guidelines on horizontal mergers, paragraphs 76 to 88.

1655 1656 1657 1658 1659

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5.

Remedies

General principles: When the envisaged transaction raises antitrust concerns, the merging parties may try to avoid a negative decision by offering remedies. The issue of remedies acceptable under the Merger Regulation is an important aspect of merger control. The Commission is increasingly faced with complex sets of remedies. A number of mergers have been aborted or prohibited because the parties were unable to provide adequate remedies.

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In order to provide guidance on the important substantial and procedural considerations that merging parties must deal with when proposing remedies, the Commission adopted a revised Notice on the acceptable remedies in October 2008.1662 In addition, in order to ensure that the Commission is in a position to carry out a proper assessment of commitments offered by the notifying parties, Commission Regulation 1033/2008 (amending Regulation 802/2004) requires the notifying parties to submit detailed information using a special form (i.e. form RM attached to the Regulation) concerning the commitments offered.1663

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Time limits for submission of remedies: Remedies offered in the course of phase-I proceedings must be submitted within not more than 20 working days from the date of receipt of the notification.1664 When remedies are submitted, the deadline for a Commission decision is extended from 25 working days to 35 working days.

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As a general rule, phase-II remedies must be submitted within not more than 65 working days from the date on which phase-II proceedings were initiated.1665 Only in exceptional circumstances, the Commission may accept that remedies are submitted for the first time after working day 65. Where the parties submit remedies within less than 55 working days after the initiation of proceedings, the Commission has to take a final decision within not more than 90 working days of the date of initiation of proceedings. Where the parties submit remedies on working day 55 or afterwards, the period for the Commission to take a final de-

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1662 1663 1664 1665

OJ C 267/1 of 22.10.2008. OJ L 279/3 of 22.10.2008. Article 19 of Regulation 802/2004. If the phase-II period has been extended at the request of parties or by the Commission pursuant to Article 10(3) of the EU Merger Regulation, the period of 65 working days for the submission of remedies is automatically extended by the same number of working days. Only in exceptional circumstances, the Commission may accept remedies offered after the expiry of phase-II remedies.

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cision is increased to 105 working days according to Article 10(3), subparagraph 2 of the Merger Regulation. Where the parties submit commitments within less than 55 working days, but submit a modified version on day 55 or thereafter, the period to take a final decision is also be extended to 105 working days.1666

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Procedure applicable to phase-I remedies: Proposals submitted by the parties are assessed by the Commission. The Commission then consults the authorities of the Member States on the proposed remedies and also third parties in the form of a market test. Where the assessment confirms that the proposed commitments remove the grounds for serious doubts, the Commission clears the merger in phase I. Where the assessment shows that the commitments offered are not sufficient to remove the competitive concerns raised by the merger, the parties are informed accordingly. Given that phase-I remedies are designed to provide a straightforward answer to a readily identifiable competition concern, only limited modifications can be accepted to the proposed commitments. Such modifications must provide an immediate answer to the result of the consultations. If the parties have not removed the serious doubts, the Commission will open phase-II proceedings.1667

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Procedure applicable to phase-II remedies: The same consultation occurs. If the assessment confirms that the proposed remedies remove the competition concerns, the Commission clears the transaction. If they do not remove the competition concerns, the Commission prohibits the transaction.1668

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Implementation of remedies: The text of the remedy also sets out the specific details and procedures relating to the Commission s oversight of the implementation of the remedy. As the Commission cannot, on a daily basis, be directly involved in overseeing the implementation of remedies, a trustee is effectively always appointed with the responsibility for overseeing the implementation of the remedies and, in certain cases, for carrying out divestments.1669 The Notice on available remedies lays down the major elements for implementing remedies, including the provisions for the appointment of the trustees for oversight, preservation of the assets and/or activities to be divested, and Commission approval of the potential purchaser in the case of divestiture. 1666 See new Article 19 (2) first subparagraph of the Implementing Regulation replaced by Regulation 1269/2013. 1667 See Commission Notice on remedies, paragraphs 77-86. 1668 See Commission Notice on remedies, paragraphs 87-94. 1669 In relation to the implementation of remedies, the Commission has also drafted two model texts relating to divestiture commitments: the Standard Model for Divestiture Commitments and the Standard Model for Trustee Mandates. Available on DG Comp’s website.

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Type of remedies: With respect to the nature of the remedies, the Commission strongly prefers structural remedies to behavioural remedies, because the former do not require monitoring. For a description of the remedies accepted in the energy merger decisions (see below, Chapter 5, book paragraphs 4.3804.566).

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4.151

Acquisition of a failing company

The Commission may decide that an otherwise problematic merger is nevertheless compatible with the common market if one of the merging parties is a failing firm. The basic requirement is that the deterioration of the competitive structure that follows the merger cannot be said to be caused by the merger.1670 This will arise where the competitive structure of the market would in any event deteriorate to at least the same extent in the absence of the merger.1671

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It is for the notifying parties to provide all the relevant information necessary to demonstrate that the deterioration of the competitive structure that follows the merger is not caused by the merger. The Commission considers the following three criteria to be especially relevant: (i) the allegedly failing firm would in the near future be forced out of the market because of financial difficulties if not taken over by another undertaking; (ii) there is no less anti-competitive alternative purchase than the notified merger and (iii) in the absence of a merger, the assets of the failing firm would inevitably exit the market.1672

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1670 See Guidelines on the assessment of horizontal mergers, paragraphs 89-91. 1671 Joined Cases C-68/94 and C-30/95, Kali and Salz, [1998] ECR I-1375. See also Commission decision in case No. M.2314 - BASF/Pantochim/Eurodiol, OJ L 132/45, 17.05.2002. 1672 The Commission decision of 10.05.2007 in case M.4381 ( JCI/Fiamm), approving conditionally the acquisition of the automotive starter battery business of the Fiamm group by VB, demonstrates the difficulties companies encounter in invoking the failing firm defence successfully. In this case, the Commission found that the third criterion had not been met since the assets of the SBB division would not inevitably exit the market but could be purchased by smaller producers (or by VB) in the course of the liquidation process. However in 2013, the European Commission cleared the acquisition of Olympic Air by Aegean Airlines (decision of 9.10.2013 in case M.6796). The Commission’s in-depth investigation has shown that Olympic Air would be forced to exit the market in the near future due to financial difficulties if not acquired by Aegean. See also decision of 2.09.2013 in case M.6360 (Nynas/Shell/Harburg refinery assets).

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7.

Ancillary restraints

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The successful implementation of a concentration frequently requires the undertakings concerned to accept certain obligations or restrictions on their freedom of action in the market. Common examples are non-compete clauses, licence agreements, and purchase or supply obligations.

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The EU Merger Regulation provides that a decision of the Commission declaring a concentration compatible with the common market also covers such restrictions in so far as they are directly related and necessary to the implementation of the concentration.1673 By contrast, where the restrictions in question cannot be regarded as being directly related and necessary to the implementation of the concentration, such agreements or arrangements are to be assessed in accordance with Article 101 and 102 TFEU.1674

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In order to provide legal certainty, the Commission has adopted a notice which provides guidance on the interpretation of the notion of ancillary restraints.1675 This notice sets out the principles for assessing whether and to what extent the most common types of restrictions are deemed to be ancillary. It is only in exceptional circumstances, i.e. if a case presents a novel and unresolved question giving rise to genuine uncertainty which is not addressed by the notice and which has not been previously addressed by the Commission in its published decisions, that the Commission will assess the ancillary character of the restriction.

1673 See, for example, the supply agreement in case M.5793 of 12.05.2010 (Dalkia CZ/NWR Energy) which scope and duration were considered beyond what would be reasonably necessary to ensure a transitory period of continuity of supply. 1674 See decision of 23.01.2013 in Case COMP/39.839 – Telefónica/Portugal Telecom (OJ C140/11 of 18.05.2013). In 2013, the Commission imposed fines of € 66.9 million on Telefónica and of € 12.3 million on Portugal Telecom for agreeing not to compete with each other on the Iberian telecommunications markets, in breach of Article 101 of the Treaty. In July 2010, in the context of the acquisition by Telefónica of the Brazilian mobile operator Vivo, which was until then jointly owned by both parties, the parties inserted a clause in the contract indicating they would not compete with each other in Spain and Portugal as from the end of September 2010.The parties terminated the non-compete agreement in early February 2011, after the Commission opened antitrust proceedings. The Commission held that the non-compete clause cannot be considered as a restraint ancillary to the Vivo transaction, as a non-compete obligation covering the entire Iberian Peninsula cannot, in any manner, be considered as being directly related to or necessary for the implementation of the stock purchase agreement for Vivo in Brazil. On June 28, 2016, the General Court confirmed the unlawfulness of the non-compete clause (case T-208/13 Portugal Telecom SGPS v Commission, ECLI:EU:T:2016:368). 1675 OJ C 56/24, 5.03.2005.

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The Commission assessed ancillary restraints in EDF/CGN/NNB Group of companies.1676 The concentration consisted in the acquisition of joint control between EDF and China General Nuclear Power Corporation (CGN) over three joint ventures responsible for the development, construction and operation of three nuclear power plants in the UK. As part of their overall strategic partnership, EDF and CGN intended to enter into (i) exclusivity arrangements in the UK, (ii) cooperation arrangements, and (iii) licence agreements for which they submitted that they should be cleared as part of the Commission’s decision clearing the transaction.

4.157

With respect to the exclusivity arrangements,1677 the parties submitted that the rationale behind them was to protect the significant financial, intellectual property and know-how investments being made by the parties in order to realise the transaction and enable efficiencies. These efficiencies include the generation of low carbon electricity (therefore contribution to the reduction of the overall cost of decarbonisation) and the introduction of the new Chinese technology (which the parties consider as a procompetitive factor).

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In order for restrictions to be considered directly related and necessary for the implementation of a concentration, the Notice on ancillary restrictions requires that “[i]n the absence of those agreements, the concentration could not be implemented or could only be implemented under considerably more uncertain conditions, at substantially higher cost, over an appreciably longer period or with considerably greater difficulty.” 1678 In addition, “[a]greements necessary to the implementation of a concentration are typically aimed at protecting the value transferred”.1679

4.159

The Commission noted that the exclusivity arrangements related to the activities of the JV (building new nuclear plants and developing or supporting nuclear technology to go through the approval process in the UK) and protect the intellectual property brought by the parties. The Commission concluded that they were therefore directly economically related to the main transaction as defined in the Notice on ancillary restrictions.

4.160

1676 Case M.7850 of 10.03.2016. 1677 For confidentiality reasons, the description of the exclusivity arrangements has been removed from the nonconfidential version of the Commission’s decision. 1678 Notice on ancillary restrictions, paragraph 13. 1679 Ibid.

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4.161

The Commission added that as the development and life cycle in the nuclear industry is particularly long and the investment costs required to build a new plant significant, the absence of exclusivity arrangements would lead to considerably more uncertain conditions and increase the risk of free-riding by the parties. The Commission held that these agreements will therefore protect the value transferred. The Commission also found that the duration (kept confidential) of the exclusivity arrangements, their subject matter (fields where the JV will be active) and their geographic scope (the UK) were appropriate.

4.162

Examining the licence agreements,1680 the Commission made a distinction between the IP arrangements entered into by the parties with regards to the creation of GDA JVco (the JV established in order to complete the day-to-day management and coordination of process necessary for the Chinese reactor technology to be qualified in the UK) and other licence mechanisms between EDF and CGN. As the Commission considered the creation of GDA JVCo as an inherent part of the setting up of the three joint ventures, the IP licence mechanisms related to it could be considered ancillary. However, any other licence mechanism between the parents was not considered as ancillary.

4.163

The commercial arrangements between the parties were not considered as ancillary. They seemed1681 to concern other plants than the three nuclear power plants to be built in the UK. The Commission indicates that even if the parties had the intention to build other nuclear plants together in the future, there is no concrete step planned as part of the transaction, as the three JVs will be solely active in the UK. The Commission also notes that design approvals are conducted nationally by independent nuclear safety authorities and concludes that the commercial arrangements are not necessary for (and therefore not ancillary to) the transaction.

1680 For confidentiality reasons, the description of the IP arrangements have been removed from the non-confidential version of the Commission’s decision. 1681 As the paragraphs describing the agreements have been removed from the non-confidential version decision, it is difficult to determine what their content might be.

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8.

Judicial Review

Although the Commission is the key player in the merger control procedure, its decisions under the Regulation are subject to review by the General Court under Article 263 TFEU. The judgment of the General Court may be appealed, on points of law to the European Court of Justice.

4.164

Appeals are relatively rare mostly because the number of prohibition decisions is limited and merging parties do not appeal against conditional clearance decisions. By contrast, cases have been brought by third parties against clearance decisions.1682 In addition, important decisions prohibiting concentrations have been challenged to the General Court by the undertakings concerned by the prohibition decisions. Cases which have been brought to the General Court also include claims for damages by MyTravel (ex-Airtours) and Schneider Electric against the Commission in relation to the annulled decisions prohibiting the acquisition of First Choice and Legrand, respectively.1683

4.165

A number of judgments strongly criticized the Commission in its appreciation of the facts and treatment of evidence in individual cases,1684 leading the Commission to commit itself to increase its economic expertise and capabilities for a more rigorous testing of the economic models applied in the investigation. A high standard of proof is imposed on the Commission.

4.166

1682 Case T-145/03 Festival Crociere v Commission; case T-269/03, Socratec v Commission; case T-350/03, Wirtschaftskammer Kärten v Commission case T-282/06 Sun Chemical Group v Commission; case T-48/04, Qualcom v Commission. 1683 See judgment of 9.09.2008 in case T-212/03 My Travel v Commission, [2008] II-1967; judgment of 11.07. 2007, in case T-351/03, Schneider Electric v Commission, [2007] ECR II2237 and judgment of 16.07.2009 in case C-440/07 P Commission v Schneider Electric, [2009] ECR I-6413. In the latter judgment, the Court upholds the judgment of the General Court in so far as it ordered the Community to make good the loss represented by the expenses incurred by Schneider Electric in respect of its participation in the merger control procedure which was started again by the Commission after its two decisions had been annulled. However, with regard to the loss sustained by Schneider as a result of the reduction it conceded in the sale price of Legrand, the Court rules that the General Court was incorrect in holding there to be a direct causal link between the Commission’s wrongful act and that loss. 1684 See the judgements in Airtours/First Choice, Tetra Laval/Sidel and Schneider/Legrand.

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4.167

The accelerated procedure in the General Court introduced in 20011685 has been used in several merger cases.1686 It is a special procedure designed for cases which have a particularly urgent character. Merger control decisions were specifically envisaged as being of the type of cases where application for the expedited procedure might be appropriate. The most important features are that only one written pleading is submitted by the undertaking requesting the annulment of the Commission’s decision and one by the Commission. Intervening parties are permitted only to submit oral submissions. The expedited procedure is suitable to merger cases where the parties have a small number of straightforward and strong arguments against the Commission’s decision.

1685 Article 76 bis of the rules of procedure of the General Court, available on the Court of Justice’s web site. 1686 This procedure has been used in various appeals against the Commission’s decisions: see Tetra Laval/ Sidel, Schneider/Legrand, Royal Philips Electronic BV, Cableurropa, Energias de Portugal, Sun Chemical Group. In Case T-704/14, Marine Harvest v European Commission (ECLI:EU:T:2017:753), seeking, principally, annulment of Commission’s decision imposing a fine for gun jumping, the applicant requested that the Court adjudicate under an expedited procedure. This request was rejected by the General Court.

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CHAPTER 4 Merger control in the electricity and gas sectors 1.

Introduction

The creation of the internal electricity and gas markets has inevitably made the management of merger control in these sectors difficult and controversial. This has been seen both at Community and at national level. The movement from monopoly supplier to competition – a process inherent to the liberalisation process – has inevitably given rise to difficult issues. In particular, the question arises: how quickly will the dominant position that the ex-incumbent company enjoys on a national market, following liberalisation, be eroded? This issue is difficult enough when only one country opens its market to competition (as happened in the UK in the 1980’s) or when a region does so (such as occurred in Scandinavia). It gets even more complicated when a whole continent liberalises, but at differing speeds and with differing levels of physical interconnection. In such circumstances, trying to predict the speed with which markets really integrate is, still in our days, a very difficult task indeed.

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This picture gets even more complicated when one considers the many different reasons why mergers and acquisitions have taken place in the electricity and gas sectors over the last two decades; some legitimate, some anti-competitive:

4.169

–

A concentration may take place with the objective of creating a European or regional company active in more than one Member State. It is central to the concept of a single European electricity and gas market that previously national companies seek to be able to sell throughout Europe, and develop into pan-utility suppliers.

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Indeed, the creation of cross-border suppliers is an underlying objective of the internal market and many multinational corporations have – as major electricity/gas consumers – been seeking regional or Europeanwide electricity and/or gas supply deals. –

A concentration may take place with the objective of securing domestic market share by making market access or network access by new competitors difficult. No company wishes to lose market share. Whatever action the dominant supplier can take within the limits of the legal and regulatory constraints imposed upon it to limit the number of customers actively looking for alternative competitive supplies – or, before effective unbundling was embedded in EU legislation, limit effective third party access to networks-, will therefore be taken. Such a companies have traditionally acquired transmission or more particularly distribution networks in the hope that this will give it an advantage either in terms of beneficial network access, information regarding the operation/maintenance/development of the network, or through the quasi-guaranteed market share that results from the acquisition of a distributor, which will (almost) inevitably purchase the electricity it re-sells at retail level from its parent company.

–

A concentration may take place with the objective of securing both domestic market share and (high) prices by deterring market entry by companies active in neighbouring geographic markets. A company dominant in one Member State does not wish the large ex-incumbent(s) in neighbouring countries to begin actively competing on “its” market, lowering prices and reducing its market share. One excellent way to achieve this is to acquire a relatively small company in a neighbouring market (for example with a 10-20% market share), so that the ex-incumbent in that market is aware of the threat of “retaliation”. If that neighbouring company enters its adjoining market, pushing down prices, it can expect reciprocal action on its own home market. In this way, companies in neighbouring markets can be “disciplined”. If such a policy is pursued by a number of companies, each dominant in their respective relevant (national) geographic markets – so that all the large EU undertakings situated in different Member States have an interest not to compete with one another, a risk exists that large parts of the European market will become characterised by a non-competitive oligopoly. Electricity and gas are products prone to the development of oligopolistic market conditions. If significant entry barriers exist, a merger in these sectors can relatively easily lead to a market structure characterised by such a non-competitive oligopoly. Where this 506

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occurs, the market conditions will lead all the large companies to charge supra-competitive prices without even actively colluding with one-another. In such circumstances, the small remaining market participants have a greater interest in reaping the benefits of these high prices (“price following”) than they have in lowering prices in an attempt to gain market share. The price followers are aware that any price reduction that they initiate will be matched by the other larger companies, making such action pointless from a competitive/profit viewpoint. This picture gets even more complicated when one realises quite how concentrated the EU gas and electricity industry is at national level. At present, many relevant geographic markets are national in scope.1687 The gradual movement of markets from being national in scope to becoming regional and then eventually Community-wide is a logical consequence of the internal market process in the energy sector. This movement is still best illustrated by considering the Scandinavian electricity market. Liberalisation in the region commenced in the 1990’s. In early Commission merger decisions concerning the electricity market in Scandinavia, the market was viewed as national in scope, despite the fact that trade was possible and customers were free to choose a supplier from abroad. This can be seen for example in Neste/Ivo ( June 1998)1688 where the largest Finnish electricity company acquired the largest Finnish gas company and the market was viewed as being national in scope. Similarly in Ivo/Stockholm Energi (August 1998)1689 the relevant market was considered to be Sweden. However, as time went on and the markets further integrated, the Commission decisions gradually acknowledged that the market was becoming regional, and in Sydkraft/Graninge (October 2003)1690 the relevant market was (without reaching definite conclusions) viewed as being wider than Sweden. In its recent Fortum/ Uniper decision ( June 2018),1691 the Commission considered (without reaching a firm conclusion) that the most plausible geographic market for the generation and wholesale supply of electricity in Sweden included the four bidding zones in the country, but it also recognised that such market would be subject to external constraints in the form of flows into Sweden from other bidding zones in the Nordics. Similarly in Vattenfall/Nuon (2009),1692 the Commission examined the argument that there was a single Benelux wholesale electricity market, without however reaching any definitive conclusion. 1687 1688 1689 1690 1691 1692

See book paragraphs 2.108-2.119 and 3.309-3.322. Case M.931. Case M.1231. Case M.3268. Case M.8660. Case M.5496 of 22.06.2009.

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4.171

Alongside traditional drivers of mergers in gas and electricity, the transition towards a decarbonized and decentralized energy model is increasingly prompting new types of transactions. These are aimed to ensure that historical players remain at the forefront of energy markets, which requires them to: (a) have access to a diversified portfolio of energy sources, including renewables and clean energy (wind, solar, clean gas, hydrogen, etc.), (b) comply with climate-related regulatory obligations and targets (including ETS obligations) and (c) adopt structures suitable to manage the risks of dwindling demand (and shrinking margins) of energy based on fossil fuels. The clearest example of these strategies is a complex swap agreed in March 2018 between E.ON and RWE, two major European energy companies previously active throughout the electricity (and gas) value chain. As part of the planned, overall deal (which involves several individual transactions reviewed by the European Commission and the UK and German national competition authorities), RWE will acquire the majority of E.ON’s renewable and nuclear generation assets,1693 whereas RWE will acquire RWE’s distribution and retail business.1694 Therefore, following completion, RWE will be primarily active in upstream electricity generation and wholesale markets, whereas E.ON will focus on the distribution and retail of electricity and gas. The deal has been seen as part of a wider attempt of the companies to respond, through cost-cutting and restructuring measures, to the more challenging business conditions they face after Germany’s aggressive move away from fossil fuels and nuclear energy (through energy transition – Energiewende – measures, and the accelerated phase-out of nuclear plants). Prior to the planned asset swap with RWE, E.ON had spun-off its conventional power operations to a newly created company (Uniper), and sold its interest in such business to Fortum, of Finland.1695

4.172

The restructuring of energy business portfolios could lead to a new wave of mergers taking place in the EU, as the Union moves towards meeting its environmental goals (including goals for renewable energy, greenhouse gas emissions and energy efficiency, as set out in the EU’s 2030 climate & energy framework). Next to these, transactions focusing on the acquisition or development of new energy infrastructure and technologies and green sources of energy is already taking place and is likely to continue into the 2020s. A majority of the latter type of deals are likely to be unproblematic from a competition policy perspective, as they will relate to highly fragmented markets (such as wind or 1693 Case M.8871. Phase I clearance decision adopted on February 26, 2019. The text of the decision was not published as of May 17, 2019 (last update of this Chapter). 1694 Case M. 8870. Decision opening Phase II adopted on March 7, 2019. Final decision pending as of May 17, 2019 (last update of this Chapter). 1695 See paragraphs 4.170 and 4.211.

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solar energy markets), or they will largely contribute to create competition in segments where a market does not yet exist or is in its infancy (e.g., clean gas). Moreover, some of those transactions involve the participation of several investors in order to spread the risk of the venture, which makes it less likely that they lead to unduly high levels of concentration in any market.

2.

Categories of mergers and acquisitions common to the energy sector

The fact that geographic markets in the electricity and gas sectors are almost always still defined as being national in scope does not, however, indicate that companies in these markets may not undertake any mergers and acquisitions without incurring the disagreement of the relevant competition authority. Indeed, any impression that might be given by the above that most mergers and acquisitions in this sector are inherently anti-competitive is false. Most mergers and acquisitions in the energy sector since liberalization of the energy markets have been undertaken by companies to develop a European or regional presence or to strengthen a company’s competitive position on an already competitive market or on a market that will clearly be competitive in the short to medium term. The difficulty for the Commission or for national competition authorities is therefore to identify the relatively few anti-competitive concentrations, not in order to discover the intention behind the concentration (which is irrelevant), but its foreseeable effect. This difficulty is compounded by the fact that many mergers are carried out in increasingly integrated and competitive EU markets. It took a decade or more from the time that liberalisation started in earnest in the UK and Scandinavia before it could be said that a truly competitive market existed. Liberalisation in continental Europe only really began in 1998, with the first electricity and gas Directives. Thus, mergers that may significantly impede effective competition in small parts of the EU are often carried out with the aim of creating a pan-European company capable of competing at EU level.

4.173

In order to reflect these different types of concentration, dominance and the significant impediment of effective competition is examined below under the following categories:

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Horizontal mergers and acquisitions, between companies operating in the same product markets;

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Vertical mergers and acquisitions: between companies operating at different levels within the same sector (e.g., a merger between an electricity generator/seller and a transmission/distribution company; mergers between gas or electricity suppliers and transmission operators are no longer a possibility, following the introduction of ownership unbundling through the third liberalisation package); and

–

Conglomerate mergers and acquisitions: where an electricity company merges with a gas company.

In addition to these categories a separate section will examine the question of coordinated effects arising from oligopolistic market structures. This issue is of equal relevance to all of the three abovementioned categories. Given the specific nature of gas and electricity markets, and their inherent tendency to evolve towards oligopolistic structures, this merits separate consideration.

3. 4.176

Factors relevant to the assessment of market power in the gas and electricity sectors

Before analysing the four different categories of concentrations mentioned above, it is useful to consider the factors and evidence that have been identified by the Commission as being particularly relevant to the assessment of market power in the gas and electricity sectors. These factors are of equal relevance to all of the four abovementioned categories of concentration.

3.1 Relevant factors 3.1.1 Market share 4.177

In the Commission’s horizontal merger Guidelines the Commission has identified this factor as being of primary importance. For example, paragraph 17 of the Guidelines states: “According to well-established case law, very large market shares – 50 % or more – may in themselves be evidence of the existence of a dominant market posi‑ tion. However, smaller competitors may act as a sufficient constraining influ‑ ence if, for example, they have the ability and incentive to increase their sup‑ plies. A merger involving a firm whose market share will remain below 50% after the merger may also raise competition concerns in view of other factors such 510

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as the strength and number of competitors, the presence of capacity constraints or the extent to which the products of the merging parties are close substitutes. The Commission has thus in several cases considered mergers resulting in firms holding market shares between 40% and 50%, and in some cases below 40% to lead to the creation or the strengthening of a dominant position”. Given the very high market shares in these sectors and the Commission’s continuing practice of defining markets as being national in scope, this factor will be particularly important in relation to gas and electricity. This has proven to be the case in individual decisions in the past. For example, in EnBW/ENI/GVS,1696 the Commission, after noting that GVS has a 75% share of the relevant market (wholesale gas at regional level), stated that, largely on this basis, it can be “assumed” that GVS enjoys a dominant position. Other cases of note are ECS/ Sibelga1697 and Verbund/Allianz.1698

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However, whilst this factor has traditionally been viewed as particularly important in many past cases, and always the first indicator of market power to be looked at, such an examination will be far from cursory or automatic. The practice of the European Commission (and, in fact, most competition agencies around the world) has tended to rely less on market share analysis, and observe instead a combination of factors, including the closeness of competition between the merging parties and the extent to which the merging parties will continue to face competitive constraints after the merger, be those in the same market where they overlap (actual competition) or those from adjacent markets or new entry (potential competition). Therefore, even where very high market shares are found the Commission will examine a number of additional factors to confirm that these shares are indeed a correct indicator of market power. The ultimate goal of merger assessment is to evaluate whether the merger may remove the competitive constraints faced by the parties prior to the transaction, resulting in a deterioration of the competitive process and therefore harm to consumers, which is not outweighed by other constraints or the pro-competitive effects of the merger. Hence, the need for competition authorities to understand the parameters of competition and discuss specific theories of harm resulting from the merger, before reaching a conclusion on whether intervention (in the form of a prohibition or remedies) is required. This calls for an appropriately thorough economic analysis, which goes beyond the mere computation of market shares.

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1696 Case M.2822 of 17.12.2003. See book paragraphs 4.307-4.312. 1697 Case M.3318 of 19.12.2003. See book paragraphs 4.295-4.302. 1698 Case M.2947 of 11.06.2003. See book paragraphs 4.303-4.306.

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The European Commission Report on the Energy Sector Inquiry1699 provided a fertile source of industry intelligence and an invaluable analytical framework to identify and address competition concerns in gas and electricity markets. The context and main conclusions of the Report are referred to later in this Chapter and have been covered extensively in previous editions of this book. While energy markets have evolved vastly since the publication of the Report (to a large extent due to the impact of antitrust enforcement and the legislative measures adopted in the aftermath of the Report), the Report continues to be of great relevance today as a guide to the specific issues that may make energy markets less competitive (e.g., concentration, transparency, vertical integration, etc.), and how such issues manifest themselves in practice. Consideration as to whether a merger may raise the type of issues documented in the Energy Sector Inquiry is still necessary today. The following list of factors focuses primarily on considerations relevant to mergers, but these are, inevitably, a reflection of some of the issues flagged in the Report on the Energy Sector Inquiry.

3.1.2 The size and importance of competitors 4.181

This will always be a key issue in any merger review. In particular as markets evolve from national to regional in scope, and it is necessary to assess whether joint dominance exists or if the market structure is conducive to coordination, this factor will be important. In the Commission’s horizontal Merger Guidelines, this issue is discussed in terms of HHI levels.

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The HHI index is a measure of the level of concentration of industry on a given relevant product and geographic market.1700 The Guidelines at paragraphs 19-21 provide the following:

1699 Communication from the Commission Inquiry pursuant to Article 17 of Regulation (EC) No 1/2003 into the European gas and electricity sectors. COM(2006)851 final. 1700 The horizontal merger Guidelines provide the following explanation of how to calculate the HHI index: “(18) For example, a market containing five firms with market shares of 40%, 20%, 15%, 15%, and 10%, respectively, has an HHI of 2 550 (402 + 202 + 152 + 152 + 102 = 2 550). The HHI ranges from close to zero (in an atomistic market) to 10 000 (in the case of a pure monopoly). (19) The increase in concentration as measured by the HHI can be calculated independently of the overall market concentration by doubling the product of the market shares of the merging firms. For example, a merger of two firms with market shares of 30 % and 15 % respectively would increase the HHI by 900 (30 × 15 × 2 = 900). The explanation for this technique is as follows: Before the merger, the market shares of the merging firms contribute to the HHI by their squares individually: (a)2 + (b)2. After the merger, the contribution is the square of their sum: (a + b)2, which equals (a)2 + (b)2 + 2ab. The increase in the HHI is therefore represented by 2ab.”

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“The Commission is unlikely to identify horizontal competition concerns in a mar‑ ket with a post-merger HHI below 1 000. Such markets normally do not require extensive analysis. The Commission is also unlikely to identify horizontal competition concerns in a merger with a post-merger HHI between 1 000 and 2 000 and a delta below 250, or a merger with a post-merger HHI above 2 000 and a delta below 150, except where special circumstances such as, for instance, one or more of the following factors are present: –

a merger involves a potential entrant or a recent entrant with a small mar‑ ket share;

–

one or more merging parties are important innovators in ways not reflected in market shares;

–

there are significant cross-shareholdings among the market participants;

–

one of the merging firms is a maverick firm with a high likelihood of disrupt‑ ing coordinated conduct;

–

indications of past or ongoing co-ordination, or facilitating practices, are present;

–

one of the merging parties has a pre-merger market share of 50% or more.



Each of these HHI levels, in combination with the relevant deltas, may be used as an initial indicator of the absence of competition concerns. However, they do not give rise to a presumption of either the existence or the absence of such concerns.”

3.1.3 Closeness of competition between merging parties The Commission’s horizontal merger Guidelines refer to the possibility that merging firms are close competitors, as one of the factors that may influence whether significant non-coordinated effects are likely to result from a merger. Specifically, paragraph 28 of the guidelines notes that “the higher the degree of substitutability between the merging firms’ products, the more likely it is that the merging firms will raise prices significantly”. The same paragraph goes on to indicate that “the fact that rivalry between the parties has been an important source 513

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of competition on the market may be a central factor in the analysis”. Closeness describes the relationship between two merging companies’ products: if as a result of a price increase, customers of Company A are more likely to switch purchases to Company B (than another player), then Companies A and B are ‘close’ competitors.

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While products in gas and electricity markets are generally homogenous, the Commission could in theory look into the characteristics of the supply portfolio of two energy companies and conclude that they are close competitors. For instance, at wholesale level, the fact that two merging parties are generators capable of producing certain types of flexible power (e.g., hydro power), could lead the Commission to see them as close competitors and raise greater concerns than their combined market share may suggest. Similarly, at retail level, the fact that two merging companies are amongst the few offering “dual fuel” (i.e., gas and electricity), or have a similar reputation for offering low-cost energy contracts to consumers, could also make them close competitors in the eyes of the Commission.

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The fundamental concern about closeness is that the merger would remove a competitive constraint on the merging parties that is bigger than their market shares may suggest. Conversely, the lack of closeness between the merging parties may suggest that a high combined share is not as problematic as it would appear to be. Again, closeness is generally less of an issue in energy (where products are homogeneous) than in other sectors (e.g., consumer goods), where competition is based on the product qualitative features. However, the persistent, increasing use by the Commission of closeness arguments to raise competition concerns (or rule out any issues) makes it even more important to consider this factor also in the context of energy mergers.

3.1.4 Commercial advantages of the company in question 4.186

In a number of cases, particularly those where the issue of oligopolistic dominance or the risk of coordinated effects arose, an examination of the commercial advantages of the ex-incumbent over existing competitors and future market entrants has proven important. In many respects these considerations are both factors indicating dominance (or quasi-dominance) and entry barriers. They not only give an advantage to the alleged dominant firm – as they reinforce the competitive effect of its market share vis-à-vis existing competitors on the relevant market – but where these commercial advantages are not available to potential market entrants they also make it more difficult for them to enter 514

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the market and gain market share. Thus, depending on the facts of the specific case, they may be considered under the assessment of the market position of the company in question and/or as entry barriers. In the electricity and gas sectors, the principal commercial advantages identified have been:

3.1.4.1 Vertical integration: ownership of transmission and distribution facilities This provides a number of advantages to a vertically integrated company: (i) the information that the ownership of distribution facilities gives on final customers, (ii) a largely guaranteed minimum market share accruing to the owner of the distribution company because the latter will always purchase the electricity/ gas it resells from its parent company, and (iii) the possibility of using the infrastructure to discriminate against competitors cannot be excluded, particularly at the distribution level. These issues were particularly acute prior to the implementation of the third liberalization package (which imposed stricter unbundling requirements), in spite of the “ legal unbundling” requirements of the previous gas and electricity Directives. With respect to these advantages, see EDF/ EnBW (February 2001),1701 and ECS/Sibelga (December 2003).1702 In addition to transmission and distribution, a number of other essential facilities – notably storage and balancing – have also raised similar issues in the past, see for example EDP/GDP (December 2004).1703 Another good example of this can be found in In RWE/Essent (2009),1704 where the issue of the competitive constraint played by a company on a neighbouring horizontal market was examined in detail, with reference to the control of vital infrastructure. Essent held 20-30% of the Dutch wholesale electricity market;1705 RWE held limited generation assets in the Netherlands, small scale CHP totalling 20MW, resulting in an increase in market share of less than 0.5%. This, in se, would not lead to a significant impediment of effective competition.

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However, the transmission company owned by RWE in Germany cooperated with the Dutch company Tennet 3 of the 5 interconnectors on the German-Dutch border, which was viewed to be a distinct relevant market. As such, the combined entity would have both the ability and incentive to withhold and reduce capacity of electricity supplies at the border to raise prices on the Dutch market.

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1701 1702 1703 1704 1705

Case M.1853 of 7.02.2001. See book paragraphs 4.248-4.253. Case M.3318 of 19.12.2003. See book paragraphs 4.295-4.302. Case M.3440 of 9.12.2004. See book paragraphs 4.336-4.345. Case M.5467 of 23.06.2009. It was arged that the market should be consdiered to be Benelux in scope, but this was left open.

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In order to examine the likelihood and ability to do so, an economic model was provided by the parties “at the request of the Commission”, which demonstrated that a strategy of withholding capacity would be possible 5-10% of the time. However, on further examination the Commission determined that no real ability to withhold capacity would exist, as both TSOs on either side of the border would have to agree to do so, and Tennet had no interest in so doing, and any reduction in available capacity would result in an immediate enquiry by competition authorities. Equally, RWE had neither the real ability nor interest in delaying further investments to upgrade the capacity of the interconnector, as such delay would be obvious and visible, and other companies would then undertake the project anyway.

3.1.4.2 Economies of scale, balancing1706 4.191

Where a company has a large customer portfolio it has many economies of scale, from administration to advertising. Furthermore, and possibly most importantly, it gains a considerable advantage in terms of the cost of energy balancing. Where a large customer portfolio exists, the imbalances of many customers will to a large extent cancel one-another out, reducing the cost of balancing per customer. See EDF/EnBW (February 2001)1707 and ECS/Sibelga (December 2003).1708

3.1.4.3 Advantageous generation portfolio 4.192

In some countries the incumbent will have built up a particularly beneficial generation portfolio that new market entrants will never be able to match, either through acquisition or through organic growth. This concerns in particular companies holding nuclear and/or large hydro assets. See in particular EDP/ GDP (December 2004).1709

1706 Whilst a supplier can estimate rather precisely the amount of electricity or gas, a consumer will use over a given period, this will never be exact. Thus, a supplier will always be to a greater or lesser extent out of balance. In other words, it will always put too much (or too little) electricity or gas into the network compared to the amount that its customer has taken out (or put in). This imbalance is taken up by the transmission/ distribution system operator in question which charges the cost of this service to suppliers. 1707 Case M.1853 of 7.02.2001. See book paragraphs 4.248-4.453. 1708 Case M.3318 of 19.12.2003. See book paragraphs 4.295-4.302. 1709 Case M.3440 of 9.12.2004, at paragraphs 292-293 and 302-304. See book paragraphs 4.336-4.345.

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3.1.4.4 Horizontal integration Where a company sells both electricity and gas, this can give it a significant advantage over rivals not able to make a dual product offer. See in particular Verbund/Allianz.1710

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3.1.4.5 Existence of long-term retail/industrial supply contracts Such contracts give their holder a protected market share for their duration, representing not only a commercial advantage over its rivals, but also a very significant entry barrier. See EnBW/ENI/GVS.1711

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3.1.4.6 Supplier of last resort/regulated tariff supplier Where a company has been appointed as the official supplier of last resort or as the officially appointed regulated tariff supplier, this gives it a significant commercial advantage. First, it provides a minimum guaranteed market share as some customers will always purchase from an “officially recognised” supplier, believing that this implies a greater level of security of supply. Second the supplier of last resort often acts as the supplier to customers not choosing to switch. Third the “official” status provides an important marketing advantage. See ECS/ Sibelga (December 2003).1712

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3.1.5 Entry barriers Whilst, as mentioned above, many commercial advantages also represent entry barriers, there are a number of additional elements that contribute to the foreclosure of markets and the maintenance of national relevant geographic markets:

1710 Case M.2947 of 11.06.2003. See book paragraphs 4.303-4.306. 1711 Case M.2822 of 17.12.2003. See book paragraphs 4.307-4.312. 1712 Case M.3318 of 19.12.2003. See book paragraphs 4.295-4.302.

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3.1.5.1 Regulatory barriers 4.197

This may concern, for example, the need to acquire numerous administrative licenses. See ECS/Sibelga (December 2003). This factor is particularly relevant with respect to the construction of new generation capacity or competing transmission/distribution infrastructure due to the need to acquire commercial environmental/planning permission, which is both time-consuming and very difficult. See for example EDF/EnBW (February 2001).1713

3.1.5.2 Interconnection capacity 4.198

In many Member States the level of competition from neighbouring countries is an essential factor in determining whether market power exists. However, many interconnectors are congested, and much of their capacity is reserved to ex-incumbents through long-term capacity reservation agreements. See ECS/Sibelga (December 2003).1714 This issue was examined in depth in the Report on the Energy Sector Inquiry on competition in energy markets, where a detailed overview of the current situation for electricity markets can be found at paragraphs 526-562 of the Report.1715

3.1.5.3 Customer loyalty 4.199

Particularly in the early stages of liberalisation, many smaller customers do not change their supplier, even if they can save money by doing so. Whilst, as can be seen in the UK, where over 50% of small and domestic customers have by now changed supplier, this changes over time, such a development is only gradual. The importance of this factor will depend partly on the effectiveness of the measures taken by the national regulator to promote the ease of customer switching, and the notice period that must be given by customers wishing to change supplier. See for example, ECS/Sibelga.

3.1.5.4 Maturity of the market 4.200

In Exxon/Mobil,1716 it was stated that given the maturity of the market, it was more difficult for market entrants to gain customers and market share. 1713 Case M.1853 of 7.02.2001. See book paragraphs 4.248-4.453. 1714 Case M.3318 of 19.12.2003. See book paragraphs 4.295-4.302. 1715 The full text of the Report is available at: http://ec.europa.eu/competition/sectors/energy/2005_inquiry/ index_en.html 1716 Case M.1383 of 29.09.1999. See book paragraphs 4.370-4.372.

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3.1.5.5 Stranded costs Where state aid has been granted to a company on the grounds of compensating it for its stranded costs, this is likely to – depending on the manner in which the state aid scheme is designed – result in the creation of an important entry barrier. If the scheme compensates a company when the market price goes below its production cost, the company will always be able to meet or undercut any lower price offered by its competitors. This will reduce or eliminate the incentive for new competitors to enter the market. See in particular EDP/GDP (December 2004).1717

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3.1.5.6 Availability of wholesale capacity Where a competitive wholesale market has not yet developed, it will be more difficult for new entrants to enter it. Even if they can import or generate most of their requirements for resale themselves, there will be times when they need to purchase from others for resale. Where a firm with market power therefore controls a non-liquid wholesale market, enabling it to manipulate the price level, this will be an important entry barrier. See in particular ECS/Sibelga (December 2003).1718

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3.1.6 Relevant evidence In the past, when examining market power and the likelihood of a significant impediment of effective competition in energy cases, the Commission has often taken particular account of the following evidence:

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3.1.6.1 Changes in market share Where the market share of a company allegedly holding market power, or a sole or joint dominant position has changed significantly over the previous years, as well as that of other market actors, this is a clear indication that competition exists. Where, however, market shares show little movement, this is an indication to the contrary. See for example, E.ON/TXU (2002).1719

1717 Case M.3440 of 9.12.2004, at paragraphs 294-298. See book paragraphs 4.336-4.345. 1718 Case M.3318 of 19.12.2003. See book paragraphs 4.295-4.302. 1719 Case M.3007 of 18.12.2002. See book paragraphs 4.367-4.368.

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3.1.6.2 Market surveys 4.205

In all mergers raising potential competition concerns, the Commission will undertake a market survey of those companies most likely to be affected by the concentration. This will include both the competitors of the companies concerned as well as a representative sample of their customers. In addition to the overall opinion of the companies contacted regarding the likely effects on competition of the operation, information will typically be sought on the offers received by customers. For example, if in response to tenders or requests for future supplies initiated by customers, few offers are received, and/or all of those offers are materially identical, this is an indication that the market is not competitive. If, on the other hand, numerous different offers are received, this is an indication that the market is competitive. See, for example, E.ON/TXU (December 2002)1720 and TotalFinaElf/Mobil (August 2003).1721 The Commission’s practice to extensively seek views from market participants has only grown over the years. A relatively recent case showing the importance of customer and competitor views in the assessment of a merger is the Shell/BG Group decision (September 2015).1722 There, the Commission relied primarily on market commentary and intelligence to confirm its view that LNG and pipeline gas belong to different product markets. Concerns raised by third parties were also the reason that made the Commission look particularly closely at potential competition issues in the market for liquefaction capacity in the so-called Atlantic basin. Finally, the Commission relied on third party views and insights to conclude that the merger would not lead to a change in the way in which long and short-term LNG contracts are priced, which was determinative to clear the deal.

3.1.6.3 Price levels 4.206

In Exxon/Mobil (September 1999),1723 the Commission indicated that the fact that gas price levels in Germany had been continuously amongst the highest of its neighbouring countries was an indication of the existence of oligopolistic dominance. Whilst this is not unusual, and can also be seen in other non-energy cases,1724 such information needs to be used with caution. The fact that prices are higher or lower in different areas may be explained by many reasons other than the lack of competition. Examples include differences in labour and social costs 1720 1721 1722 1723 1724

Case M.3007 of 18.12.2002. See book paragraphs 4.367-4.368. Case M.3096 of 28.02.2003. Case M. 7631, of 02.09.2015. Case M.1383 of 29.09.1999. See book paragraphs 4.370-4.372. See, for example Kali-Salz/MDK/Treuhand, Case n° M.179 of 14.12.1993, OJ [1994] L186/30 at paragraph 47 and Orkla/Volvo, Case n° M.844 of 20.09.1995, OJ [1996] L66/4, at paragraphs 67 and 100-101.

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and different stages in the investment cycle. For this factor to be considered as anything more than an indicator, helpful to confirm conclusions based on other evidence, would require an economic analysis of a level of detail and sophistication unlikely to be carried out during a merger procedure.

3.1.7 The Energy Sector Inquiry and merger review ever since: a more sophisticated approach to defining market power Whilst the Energy Sector Inquiry focused very largely on the likely future application of the prohibitions of anti-competitive conduct (at the time Articles 81 and 82 TEC) to the energy sector, the analysis of gas and electricity markets (which concluded that many markets suffered from structural inadequacies in terms of the existence of effective competition), had important consequences for merger control analysis in these sectors.

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Prior to the Energy Sector Inquiry, the Commission had largely relied on what might be termed the “traditional” indicators of market power that are used by the Commission in merger and dominance cases irrespective of the sector concerned. These are notably the market shares of the merging firms, the size and importance of competitors, and the evolution of market shares. In addition, particular attention had been given to the existence of entry barriers. In this respect the Commission had focused on the type of entry barriers that result from the specificity of electricity and gas markets, notably the existence of regulatory barriers such as price caps or regulatory difficulties, the existence of vertical integration making network access by new competitors more difficult, the adequacy of interconnection capacity, the existence of long-term agreements on the market which will reduce liquidity and the availability of storage, to name but a few.

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In the Sector Inquiry, the Commission identified these issues as highly relevant in determining the existence or absence of effective competition. However, it is interesting that in addition to these “traditional” factors, the Commission also gave considerable attention to “newer”, more nuanced considerations, as to how market power may manifest itself or lead to market inefficiency and consumer harm. Three notable areas of attention were price-setting, capacity withdrawals and transparency.

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Price setting During the Sector Inquiry, the Commission reviewed very detailed information on the behaviour of potentially dominant companies in terms of their ability to 521

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determine or manipulate prices because of their role as strong “price-leader”. The Sector Inquiry gives a number of indications as to how the Commission would go about this analysis. However, this was not meant to be in any way exhaustive; the manner in which an undertaking with market power may be demonstrated to be a price setter in detailed evidential terms will depend on the characteristics of the market in question. For example, in markets where an obligatory electricity pool exists, an analysis of the bidding patterns, notably determining when (and how often) the potentially dominant firm places the last bids and thus sets the pool price, will be of prime importance. In other markets, where the electricity exchange accounts for only a limited part of the market, an analysis of other evidence such as success in winning tenders for new supply will be very significant.

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In the wake of the Sector Inquiry, the Commission engaged in empirical modelling of the price effects of some mergers. This was done mostly in cases where the Commission considered it necessary to quantify the likelihood and impact of its preliminary competition concerns, and it represented a significant innovation in the Commission’s methodologies for the assessment of energy mergers. Empirical modelling has been used to assess potential unilateral effects of merger several times since then. Empirical modelling of unilateral effects was undertaken by the Commission in EDF/British Energy (2008)1725 and in EDF/Segebel (2009)1726 during the years immediately after the Sector Inquiry. More recently, the Commission undertook empirical modelling of price effects in Fortum/Uniper (2018).1727 In that case, the Commission modelled a withholding strategy of the parties consisting of daily “flattening” of their hydro production (see below commentary on capacity withdrawal issues). In order to model any strategies of the parties post-merger, it is first necessary to have some information on the elasticity of market prices to changes in output during different hours of the day. Modelling usually requires the assistance of third parties who have the necessary data and technical knowledge of markets. In Fortum/Uniper, the Commission asked Nord Pool (the power market operator) to simulate the effects of reductions of capacity in certain bidding zones within Sweden. Overall, the Nord Pool simulation showed some (moderate) potential ability for the merging parties to affect electricity prices in Sweden. The results of the simulation were also used to measure the incentives of the parties to engage in anti-competitive withdrawal strategies (i.e., by computing the gains and costs of the modelled flattening strategy). Bearing in mind the results of the price simulation, as well 1725 Case M.5224. 1726 Case M.5549. 1727 Case M. 8660.

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as the expected countervailing factors on the behaviour of the parties, the Commission concluded that it was highly implausible that a withholding strategy could be profitable in Fortum/Uniper. Capacity withdrawals Another “additional” factor identified in the Sector Inquiry was evidence of a company’s ability, solely or jointly with other oligopolistic players, to withdraw capacity from the market in order to create shortage, push up marginal cost and thereby rapidly increase profits. As a possible example of such evidence, the Sectoral Inquiry quoted the situation that had taken place in Germany during years leading to the Inquiry, where the total generation capacity of the four man German generators decreased between 2000 and 2005 by 2149MW.

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The possibility that merging parties gain the ability and incentive to increase prices by withdrawing generation capacity has been routinely analysed by the Commission ever since the Sector Inquiry, in any case where such strategy seemed plausible. The EDF/British Energy case (2008), discussed below, is one example. More recently, the Commission looked into the prospect of anticompetitive generation witholding in Fortum/Uniper (2018).1728 As in EDF/British Energy, in this case the Commission paid particular to the combination of flexible (e.g., hydropower) and non-flexible “baseload” (e.g., nuclear) electricity production assets. In particular, the Commission assessed whether the concentration in question was likely to give the merged entity the ability and incentive to withhold flexible generation capacity in order to increase the market price of electricity applicable to all (so-called “infra-marginal”) production units, thus including baseload production. Withdrawals may be “physical” (reduction in output) or “economical” (unit price increases while keeping output constant), but the outcome is the same: less production is available at the pre-merger competitive price level. The premise of such a theory of harm is that a combination of flexible and baseload generation may give the merged entity additional opportunities to withdraw flexible capacity, and benefit from the resulting higher prices (as the cost of electricity tends to be determined by the marginal unit price) on a larger base of baseload production units. There was a higher risk of this happening in Fortum/Uniper, as most of the peak generation of the merged entity was hydropower, which is particularly flexible, as water reserves can easily be shifted between different periods. However, as discussed above, after a thorough modelling exercise, the Commission concluded that, on balance, the merged entity would only have a limited ability and incentive to engage in such

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1728 Case M. 8660. See paragraph 4.211 above.

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strategy. Some countervailing factors considered by the Commission included: the fact that hydro plants do face physical constraints within their respective rivers; and the fact that, given the visibility of water reserves and wholesale prices, a strategy to withdraw hydro power would have been easily detected by competitors (including those outside Sweden and selling electricity into the country through interconnectors), who would have eroded the supra-competitive rents of the withholding strategy. Transparency and data

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A further issue given more prominence in the Sector Inquiry than in previous Commission decisions is that of transparency. The Commission noted that the need for greater transparency was widely recognised and had been identified as the key non-structural measure that could improve competition in EU electricity markets. At the time, lack of transparency was considered to amount to an entry barrier, undermining the level playing field between market participants and adversely affects trust in the functioning of the wholesale markets.

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Market transparency can have diverging implications in competition law analysis. In most competitive markets, authorities will be guarded against the possibility that competitors share too much information about, for example, their expected output and capacity utilisation, let alone current and future prices, as this will in most cases crystallise collusion or, at the very least, facilitate a future collusive outcome.

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However, in markets characterized by the presence of large, historic incumbents, with privileged access to inputs (e.g., generation) or network assets required to compete along the supply chain, transparency plays a major role in creating a level play field for smaller competitors and new entrants. In this regard, the Sector Inquiry Report established that network users required more information to compete, especially data on network availability (e.g., at electricity interconnections and gas transit pipelines), the operation of generation capacity and gas storage. At the time, there was very limited harmonisation of transparency requirements at EU level, and market conduct and supervision rules did not provide a sufficient restraint on incumbents abusing their information advantage. Generally, there was a significant information asymmetry between vertically integrated incumbents and their competitors, which distorted market signals, raised risks for new players and deterred market entry.

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Significant reforms have since then improved transparency in energy markets, including through the third liberalisation package (e.g., transparency is at the core of effective network congestion management) and through the EU Regulation on Wholesale Energy Market Integrity and Transparency (REMIT). However, the principle established in the Sector Inquiry on the importance of fair and undistorted access to data underpinning the efficient operation of markets remains as important as then, and the Commission will likely take into account undue information asymmetries when considering mergers. Attention to data and transparency will if anything grow, as so-called Big Data (the use of large datasets collected from customers and system users) becomes an increasingly relevant competitive asset in energy markets, both at wholesale and retail level. For instance, exclusive access to ample consumption data by an incumbent energy provider, which may be used to target consumers with tailored, more competitive offers, could be regarded as a barrier to entry for smaller competitors, and as such be factored in the assessment of any concentration the incumbent may enter into.

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In conclusion, it is widely accepted that the Energy Sector Inquiry marked a trend in both antitrust enforcement and merger control towards a more sophisticated or market specific analysis of the existence of market power. The very first merger cases that followed the launch of the Sector Inquiry were already testimony of that. Indeed, a perfected approach to assessing potential competitive harm was seen in the Gaz de France/Suez (2006)1729 case where, in order to establish the reinforcement of dominance on the Belgian electricity markets, the Commission examined in detail issues such as the availability and price of base and peak load, contracts with different durations and delivery periods, the number of bids/offers at a given moment, the number of companies making offers/bids and the nature of the companies concerned (financial or commercial) and finally the number of parties making offers.

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Shortly afterwards, in EDF/British Energy (2008),1730 the Commission relied on a remarkably sophisticated economic model. In that case, concerning the wholesale electricity market of Great Britain, a combined market share resulted from the merger of 20-30%, an increase of 5-10%, with 3 other competitors holding 10-20% and a number of other smaller companies. The Commission highlighted the concern that the combined entity would have the capacity to withdraw capacity to benefit from increased prices, particularly as British Energy’s capacity was mainly focused on baseload, and EDF’s on flexible capacity. The Commis-

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1729 Case M.4180 of 19.06.06. 1730 Case M.5224 of 22.12.2008.

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sion undertook both detailed analysis of the supply curve and a “sensitivity analysis” that lead to the conclusion that the proposed transaction raised significant doubts as to the ability of the merged firm to act in such a manner.

4. 4.220

Horizontal mergers

Horizontal mergers raising competition issues can be divided into two categories: –

The acquisition of a competitor on the same relevant product and geographic markets (usually within the same Member State), resulting in a significant impediment of effective competition, through the creation of unilateral or coordinated anti-competitive effects.

–

The acquisition of a company active on the same relevant product market but in a neighbouring relevant geographic market (usually two neighbouring Member States) where one or more of the companies in question has market power. This can have two different anti-competitive effects; (i) limiting the willingness of the acquiring company to compete effectively in the neighbouring market, and (ii) providing a “disciplining” mechanism, ensuring that the companies on the neighbouring markets do not move into the home market of the acquiring company.

4.1 Horizontal mergers within the same relevant geographic market 4.221

The Commission continues to consider that in the electricity and gas sectors most EU Member States constitute a relevant geographic market. In many of these markets a finding of market power or the identification of a market structure prone to coordination is still plausible. A merger limited to a single Member State involving one or more companies with market power or collectively dominant is likely to give rise to competition concerns.

4.222

In fact, over the years, there have been relatively few mergers examined by the Commission within the same product market or sector and within the same national market, involving the ex-incumbent or incumbents. Most concentrations involving such companies have been cross-border acquisitions. However, in the cases where companies holding significant market shares of national relevant geographic markets have merged, clear competition issues were systematically identified. 526

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VEBA/VIAG ( June 2000)1731 concerned the proposed merger between VEBA, the owner of Preussenelektra, one of the largest German electricity companies and VIAG, operating in the gas and electricity sectors through its subsidiary Bayenwerk. Preussenelektra was traditionally active in lower Saxony and Bayenwerk was active in lower Bavaria.

4.223

The relevant product market affected by the operation was considered to be the sale of wholesale power. In Germany, power was then sold through a “wholesale market” to regional supply companies, large municipal electricity companies, electricity traders and very large industrial companies. This market definition reflected the specificities of the German market, where three tiers of supply exist. The relevant geographic market was defined as Germany.1732

4.224

The market shares of VEBA and VIAG on this market were 17,6% and 11,1% respectively, giving a post-merger share of 28,7%. Whilst this in itself was insufficient to indicate dominance, the structure of the German electricity industry and the existence of cross-shareholdings between the major electricity companies led to the conclusion that oligopolistic dominance – or in the terms of the new Merger Regulation a significant impediment of effective competition – would be created or strengthened. This was concluded on the basis of the following main factors:

4.225

–

The market shares on the German wholesale power market (VEBA (17,6%), VIAG (11,1%), RWE (19,9%), BEWAG (2,9%), VEAG (9,5%) VEW (4,2%), EnBW (7.8%) and HEW (3,8%)).

–

The existence of cross-shareholdings between the major German electricity companies, which meant that, following the merger, VEBA/VIAG and RWE would between them control some 60% of the market. This is particularly high given that 23% of the overall generation market was made up by Stadwerke (local municipally owned companies), which produce electricity solely for their own use and do not really compete with the abovementioned companies for sales on the relevant market.

–

Vertical integration with transmission networks (VEBA/VIAG and RWE together owned 93% of the transmission network in Germany).

1731 Case M.1673 of 13.06.2000. 1732 See book paragraphs 2.119-2.235.

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–

VEBA/VIAG and RWE would be unlikely to compete with one another given the structure of the market and their positions upon it. This conclusion was reached due to: (i)

The fact that electricity is a homogenous product,

(ii)

The market is subject to far-reaching transparency of production costs and selling prices,

(iii) The two groups would have comparable cost structures with similar generation portfolios, (iv) Both groups had similar corporate structures, (v)

Most of the base-load in Germany, particularly nuclear power stations, is owned by the two companies,

(vi) The market was expected to grow only slowly and predictably by about 1% p.a. This stable demand, together with the other abovementioned factors, “make it easier to implement parallel supply strategies”, (vii) The electricity market is characterised by low price elasticity: “ low price elasticity encourages parallel behaviour in an oligopoly; for it can then happen that an appreciable price increase to above the competitive level leads to a growth in income despite a decline in sales”, (viii) There was low buying power as the demand side is fragmented. “Thus, given the concentrated nature of the market and the mutual interest in maintaining or raising prices, it is unlikely that customers will be able to gain improved offers by threatening to change supplier”, (ix) VEBA/VIAG and RWE had significant shareholdings in downstream distribution companies which, due to this ownership, were considered unlikely to change supplier even when faced with a price increase,

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(x)

The parties had significant shareholdings in the lignite mining company LAUBAG. This gave them a further degree of control over VEAG, which produces electricity on the basis of lignite,

(xi) Through the ownership of the vast majority of the German transmission grid, VEBA/VIAG and RWE obtained important information unavailable to their competitors, (xii) The free capacity on interconnectors was “extremely limited” due to the existence of long-term capacity reservation agreements, (xiii) Entry through the construction of new generating capacity was (and remains) very expensive and difficult, and had not previously been significantly achieved, (xiv) The balancing arrangements in place in Germany at the time gave significant advantages to VEBA/VIAG and RWE and made new entry difficult. With respect to balancing, a significant effect of economies of scale exists. The larger the customer portfolio of a company, the less balancing is needed. Thus, the average cost of balancing per customer will be smaller for a company with many clients than for a new market entrant with few customers. Thus, in Germany, where effective non-discriminatory and cost-reflective balancing rules were not in place, this represented a significant entry barrier, (xv) VEBA/VIAG and RWE controlled a high percentage of existing generation overcapacity in Germany, making it easy for them to ensure that this does not lead to active price competition, and to prevent liquidity from developing on the market. The Commission therefore concluded that the merger would lead to the creation of a dominant oligopoly. The merger was however allowed to go ahead on the basis of commitments1733 aimed (i) principally at separating VEAG from VEBA/VIAG and establishing it as a viable stand-alone company1734 and (ii) improving the effectiveness of third party network access in Germany.

1733 See book Part 4, Chapter 5. 1734 VEAG was subsequently sold to the Swedish electricity company Vattenfall.

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4.227

A similar strict line was taken in Exxon/Mobil (1999).1735 Exxon owned significant interests in Gasunie in the Netherlands, which held a dominant position on the Dutch gas market. It also held shares in two German gas companies, BEB and Thyssengen, which formed part of an oligopolistic dominant market structure. Thus, prior to the merger Exxon enjoyed a sole dominant position in the Netherlands and a joint dominant position in Germany. The acquisition of Mobil would strengthen these positions, as Mobil owned one of the few competitors to Gasunie in the Netherlands and a small German gas company. Despite the fact that the Mobil assets were relatively small (its German subsidy had only a 1,5 % market share of the German gas market for example) the Commission raised objections, but permitted the merger to proceed on the basis of remedies, in this case the divestiture of the gas business in question.

4.228

In a similar vein is Vattenfall/Nuon (2009),1736 where Vattenfall, the Swedish electricity company, sought to acquire NuonEnergy, a Dutch electricity company active across the entire energy chain, mostly in the Netherlands, but also with smaller interests in Belgium and Germany. On the basis of national market definitions, the only possible overlaps were found to be in Germany, where both companies were active at local (Stadtwerke) level. In particular, in Berlin, Vattenvall had a 80-90% interest and Nuon 5-10% and in Hamburg the picture was Vattenfall 80-90% and Nuon 0-5%.

4.229

The Commission accepted the local geographic market definition used by the German federal Cartel Office in such issues, on the grounds of the strong influence of Stadtwerke, the switching rates between companies active within a given local area, but limited switching outside the areas, the energy fees charged to households that differ between different areas and the market shares retained by Stadtwerke.

4.230

The Commission rejected the arguments that other competitors existed and represented valid choices, (7 competitors existed in both areas with market shares similar to those of Nuon), notably on the grounds of a detailed examination of switching data, which demonstrated that “Nuon is an important competitive constraint… and in many respects a unique player on the German electricity market”. The merger was permitted to proceed on the basis of undertakings to divest Nuon Deutschland GmbH.

1735 Case M.1383 of 29.09.1999. For a more detailed explanation of this case, see book paragraph 4.370-4.372. 1736 Case M.5496 of 22.06.2009.

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Similarly, in RWE/Essent (2009),1737 regarding the German wholesale electricity market, RWE held 30-40%, similar to E.ON. Other main competitors, Vattenfall and EnBW held jointly 50-60%. The Commission recognised that this was “already an oligopolistic market, with” RWE and E.ON … part of a dominant duopoly”, and that the German competition authority had “ long considered that any strengthening of their position would further strengthen dominance and thus be prohibited”.

4.231

Essent held a 51% interest in two Stadtwerke, which had 1000-15000 MW coal based generation plant, and other minor interests, as well as a specialist energy supplier company active in the wholesale market. The Commission this concluded that a strengthening of RWE’s joint dominance would be strengthened. Furthermore, the Commission concluded that the merger would have important vertical effect: “ independent suppliers will lose one of the very few remaining independent Stadtwerke in Germany, and thus endanger their entry plans in the highly concentrated German generation market”.

4.232

In order to resolve the issue, RWE proposed to divest the interest in the Stadtwerke owned by Essent and the merger was permitted to proceed.

4.233

As can be seen from these cases, one can expect the Commission to take a strong line against horizontal mergers by ex-incumbents within the same relevant product and geographic markets, whether the company or companies in question hold a sole or an oligopolistic dominant position, grounding the finding of a significant impediment of effective competition on non-coordinated or on coordinated effects. In addition to the cases mentioned above, this strict approach was confirmed by the Gaz de France/Suez case, which is examined in detail at book paragraphs 4.261-4.266 below, as the most interesting aspects of the case concerned the effects of the concentration between neighbouring relevant markets. Following a prolonged period of price decreases for both gas and in particular electricity in the European Union, due at least in part to efficiency increases resulting from the progressive introduction of competition, prices had been rising – significantly so on wholesale electricity markets. Whilst there were a number of underlying reasons for this, such as increasing fuel costs and environmental charges, there was concern that these are at least in part due to oligopolistic or dominant pricing. One should always expect that the Commission will take a strict approach to horizontal mergers which take place within the same (concentrated) geographic market.

4.234

1737 Case M.5467 of 23.06.2009.

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4.235

However, in exceptional cases, the purchase by a dominant company of a company operating on the same market may not result in a significant impediment of effective competition. For example, in EDF/Dalkia en France (2015).1738 EDF purchased Dalkia, which had a small generation presence. The decision notes that EDF, with 70-80% of capacity and 80-90% of production, clearly occupies a dominant position, and that “the case law of the Commission has not systematically considered that an increase of market share of a dominant operator constitutes in itself a reinforcement of that dominant position. In certain cases, the Commission considered that an addition of market share even inferior to 5% was of a nature to raise competition problems. In other cases, such an addition was not considered problematic, notably where the acquired company did not exercise, before the operation, a significant competitive constraint on the purchaser, or when other competitors could continue to exercise such a competitive constraint after the operation.

4.236

In this case, a very high proportion of the (very limited) production capacity was already contracted to be sold to EDF on long-term purchase contracts, such that in any event before the operation Dalkia was not in a position to exercise any competitive constraint on EDF.

4.2 Horizontal mergers between companies active on neighbouring geographic markets 4.237

As already mentioned, the obvious strategy of a large electricity or gas company to meet the changes brought about by the internal electricity and gas markets is to move outside its traditional “home” area, giving it a regional presence, or even a pan-European one. There are three main ways to move into a new geographic market: –

export, using capacity available at interconnectors;

–

establish a sales subsidiary in the new geographic area and construct new generation facilities or sign new gas import contracts; or

–

purchase existing assets, usually in the form of an electricity or gas company already active in the area.

1738 Case M.7137.

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In practice, the third of these options has been more or less universally pursued. The “export” approach may not be available when interconnector capacity is limited or remains congested (and is therefore expensive). The new build/gas import approach has rarely been pursued because of the time lines involved and the high level of risk associated with such an approach. Thus, all the large electricity and, to a lesser extent gas companies, have pursued the option of expansion abroad through acquisition. Buying an existing electricity/gas producer not only instantly provides electricity production/gas import capacity in the area in question, it also establishes an existing customer base and a recognised brand name – particularly important for household customers.

4.238

In the overwhelming majority of cases such concentrations do not give rise to competition issues. On the contrary, they are generally fully in line with the objective of creating an EU market: the operation is characterised by market entry, and thus the introduction of new competition. However, in a minority of cases difficult issues have arisen.

4.239

Indeed, given the fact that almost all relevant geographic markets in the electricity and gas sectors are generally viewed by the Commission to be national in scope, mergers where one company, dominant or quasi-dominant in its home market, seeks to acquire a potential competitor which is active in a neighbouring country, present extremely difficult issues for a competition authority. As mentioned in the introduction to this chapter, tenable arguments can be raised in favour and against such mergers:

4.240

–

As the market becomes increasingly competitive and regional in nature, the acquiring company needs to be able to develop a presence in neighbouring countries in order to effectively compete on the wider market. Although interconnection capacity may increase, it is widely acknowledged that having locally-based generating capacity and/or gas supply contracts, a brand name and distribution and service assets already in place, is the best method of competing in a new market. Thus, the acquisition can represent a legitimate effort to prepare for a wider market and, indeed, should be viewed as pro-competitive in nature;

–

Where a company holds a dominant or quasi-dominant position on one market, it may take steps to prevent or inhibit the large potential competitors in neighbouring countries from actively trying to enter “its” market. The most effective (and from a competition viewpoint problematic) way of doing this is to acquire the largest company in that neighbouring 533

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market. Alternatively, it might acquire the number two or three company in that neighbouring area. This has the effect of eliminating that company as a potential competitor. Furthermore, if the other companies on that market then attempt to actively gain market share in the purchasers’ market, the latter can use the newly purchased company to “retaliate” on the neighbouring market. By gaining an interest in that market, it may largely neutralise any interest it has to otherwise compete in the neighbouring market through exports.

4.241

The difficulty for a competition authority is to distinguish between these two effects of two superficially similar mergers. In both cases a company acquires a smaller potential competitor in a neighbouring geographic area. In one scenario, the consequences are pro-competitive, in another they are anti-competitive. In order to make this distinction it is necessary to carefully examine the state of the market of both the acquiring and the acquired company. Three types of situation may be distinguished here: –

4.242

Clear anti-competitive effects; where the market of both the acquiring and the target company is characterised by dominance or an oligopolistic structure and at least one of the companies involved holds a sole or joint position of market power on its national market. In such circumstances, the acquisition is likely to reinforce the existing tendency of all the major companies in each respective market not to aggressively compete in one– another’s “territory”, because this would simply lead to the loss of existing (or potential) supra-competitive prices for both of them. These anticompetitive effects may be further reinforced if the company acquired is a “maverick” company with a particular commercial interest in gaining market share abroad and this interest is not shared by other companies active on the relevant geographic market in question.

One may expect the Commission to take a strict approach to such mergers, particularly given the need to ensure that theconstant transformation of the European electricity and gas industry does not reinforce or perpetuate the existence of national geographic markets rather than evolve towards regional markets and possibly, a pan-European one. This may occur, for example, if the merger has the effect of reinforcing the interest of an ex-incumbent in not actively competing in neighbouring markets through fear of retaliation. It should be noted that such an approach only applies to mergers between companies situated on geographically neighbouring or close markets. It is unlikely, for example that the Commission will object to a merger between a dominant Portuguese company and a 534

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Czech company on such grounds. Furthermore, if the company to be acquired is very small, it is unlikely that it will enable a company dominant in one market to “discipline” its neighbours. In such cases the possible anti-competitive effects outlined above would be unlikely to result. However, there is another element that needs to be considered. As mentioned above, most EU electricity and gas markets are arguably still characterised by dominant or oligopoly positions on national relevant geographic markets. If these large companies are not permitted to purchase assets in neighbouring countries, how can regional or European-wide competition be expected to develop? For example, if companies such as EDF had only been permitted to grow organically in other European countries, it is limited to organic growth in these areas, it is difficult to see how a wider regional or European market could have possibly evolved.

4.243

One might therefore expect the Commission to struggle between these apparently conflicting objectives, trying to permit such operations to proceed, but searching for remedies where appropriate. Such remedies need to be adequate to at least largely eliminate the anti-competitive effects of the operation and most importantly to ensure that the merger does not enable the acquiring company to use the newly purchased company to prevent or limit effective competition between the two geographic markets.

4.244

–

Questionable anti-competitive effects; where a company in position of sole or joint market power in one relevant geographic market acquires an undertaking in a neighbouring market, and that neighbouring market is competitive in nature. In such circumstances, it is unlikely that the “ disciplining” effects mentioned above will result. Assume, for example, that a dominant company in Member State A acquires a company with a 10% share of its neighbouring market B. Assume further that the neighbouring market has a competitive structure with its main competitors holding 20%, 15%, 15%, 10%, 8%, with others holding 3-5%. The market is not characterised by supra-competitive prices. For the dominant company to use the new acquisition to “ discipline” others not to enter its home market would require it to sell at predatory prices – thus selling at a loss. Whilst such a strategy might make sense if the prices on its home market are so high that they result in greater profits than the losses resulting from disciplining actions in the neighbouring country, it is questionable whether such an approach would be sustainable in the medium-term.

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Therefore, unless the company that has been acquired by the dominant company represents in some way a more effective or a more likely market entrant into its home market than the remaining companies (for example if it owned much of the interconnection capacity between the areas), the acquisition would not be likely to be objected to on the grounds of the elimination of a potential competitor.

–

No anti-competitive effects; where the market in both countries can be characterised as being competitive in nature (and none of the parties enjoy too much market power) the operation will be approved. It can only be pro-competitive in nature.

4.245

The cases dealt with by the Commission to-date largely follow this distinction. Furthermore, they show that the Commission not only takes account of anticompetitive effects of mergers where the market of both the target and bidding company are characterised by dominance or oligopoly, but also of the possible pro-competitive effects of such concentrations, notably the need for such mergers to take place to enable a regional or European market to gradually develop. Thus, in all cases where objections have been raised, the operation has been permitted to proceed on the basis of (often very significant) commitments given by the undertakings concerned.

4.246

The only real exception to the distinction set out above between the likely pro and anti-competitive effects of such mergers was one of the first such cases dealt with by the Commission. In Electrabel/EPON (February 2000),1739 the Commission failed to undertake the analysis set out above and took a much more simplistic approach. Electrabel, the Belgian vertically integrated electricity company, sought to acquire EPON, an electricity producer in the Netherlands with a 25% share of the Dutch market, jointly controlled by EDON and Nuon (two Dutch electricity distributors, holding each 50% of EPON). Both markets were considered to be, at most, national in scope.1740 In particular this was viewed to be due to the fact that the available interconnection capacity between the two countries, although significant (being 14% of Dutch electricity consumption) was largely reserved to long term contracts.

4.247

The Belgian wholesale electricity market was characterised as “monopolistic” in the Decision, given that Electrabel was the (quasi) sole operator. The Decision then goes on simply to conclude that the two parties are not competitors, as they 1739 Case M.1803 of 7.02.2000. 1740 See paragraph 23 of the Decision.

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operate on separate geographic markets, and that as a consequence the merger does not restrict competition. No analysis is made as to whether the Dutch market is oligopolistic and whether the merger would inhibit Electrabel in terms of its interest to increase available interconnection capacity between the two areas.1741 Neither is any analysis made as to whether the acquisition of EPON by Electrabel will inhibit Electrabel from aggressively competing in the Netherlands given its now very significant interest in maintaining (possibly) high prices in Holland due to the (possibly and unexamined) oligopolistic market structure. Finally, no examination is made as to whether, by acquiring EPON, Electrabel acquires an effective way of disciplining other Dutch generators from competing in Belgium – which at least superficially seems highly plausible. This lack of detailed analysis is difficult to understand. If such a merger occurred today, on the basis of the cases examined below, it may be considered likely that a far less superficial analysis would take place. In EDF/EnBW (February 2001),1742 this rather superficial approach changed. Electricité de France (EDF) sought to acquire joint control of EnBW, a vertically integrated electricity company active mainly in South-West Germany. The other joint owner of EnBW was to be OEW, an association of nine regional governments which held an 84% majority stake in EnBW prior to the operation.

4.248

The relevant product market was considered to be the supply of electricity to eligible customers. The relevant geographic market was taken to be France. EDF was considered to be dominant in France, with a market share exceeding 80% and the ownership of all transmission and distribution assets. Entry barriers were viewed to be high, with newcomers having “only marginal chances to gain access to generation in France”. EDF effectively controlled all available free capacity. This was exacerbated by the balancing rules presently in place in France.1743 As a consequence, imports did not represent a viable source of supply. Finally, EDF’s economies of scale made it difficult for others to compete.

4.249

In acquiring EnBW, EDF was considered to have eliminated one of its main potential competitors. EnBW has a common border with France, and has two of the four interconnectors between France and Germany in its area. Through these interconnectors, EnBW had the possibility of exporting to France up to 5-15% of the demand of eligible French customers. Furthermore, EnBW already purchased electricity from EDF, which, instead of importing into Germany, it

4.250

1741 See, in contrast, EDF/EnBW. 1742 Case M.1853 of 7.02.2001. 1743 Which constituted an important entry barrier. See above, book paragraph 4.191.

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could use to sell in France. EnBW was thus considered to be the German company most likely to actively compete in France. Furthermore, in the absence of the merger, EnBW was expected to have a strong incentive to enter the French market: it had established a clear strategy of developing a pan-European supply capacity, with subsidiaries in Austria, The Netherlands, Italy, Poland and Spain, and had already signed some supply deals with multinational electricity consumers covering a number of countries.

4.251

In addition to the elimination of a potential competitor, the decision concludes that the merger would lead to a reinforcement of EDF’s dominant position, because it would enable it to discipline other German companies from entering the French market:1744

4.252

Before the transaction, EDF was less able to counter market entry by German companies into France by launching retaliation campaigns in Germany, since it was not present on the German market. After the transaction, however, EDF would be in a position to use its presence in Germany, at least to a certain extent, in order to deter actual competitors such as RWE, E.ON and HEW from pursuing aggressive competition on “its” market. Since those competitors did not have a similar potential for retaliation in France, they would be further discouraged from aggressively challenging EDF’s position in its domestic market.

4.253

However, the merger was allowed to proceed on the basis of commitments, notably the sale of power by EDF to competitors through virtual power plant auctions.1745

4.254

Grupo Villar Mir/EnBW/Hidroeléctrica del Cantábrico (September 2001),1746 seven months later, considered similar issues. EnBW, now jointly owned by EDF, was to acquire joint control of the Spanish electricity company Hidroeléctrica del Cantábrico. Thus, EDF, having acquired a significant interest in Germany was now pursuing a similar strategy in Spain. EDF’s partner in the operation was an investment company which was not active in the electricity sector.

4.255

The relevant product market was considered to be the sale of electricity at the wholesale level. The relevant geographic market was considered to be Spain. On that market, the Commission considered that a duopolistic dominant position existed for the following reasons: 1744 At paragraphs 69-74 of the Decision. 1745 See book Part 4, Chapter 5. 1746 Case M.2434 of 26.09.2001.

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–

Two large companies with 47% and 27% market shares;

–

Other competitors held much smaller market shares, had less competitive generation portfolios and had a limited ability to increase their market share, making them likely to act as price followers;

–

Structural links existed between companies on the Spanish market.

This dominant position was considered to have been strengthened, because EDF would no longer have the incentive to actively seek to increase its exports to Spain through the expansion of interconnection capacity between the two countries, which was presently limited to some 3% of Spanish consumption. As a consequence this would eliminate the existing Spanish generating companies’ main potential independent competitor and maintain the isolation of the Spanish electricity market from other European electrical systems outside the Iberian Peninsula.

4.256

EDF would therefore no longer have an interest in vigorously competing in Spain. Instead, it would acquire a company with a market share in Spain exceeding 5% and would henceforth have an interest in benefiting from relatively high prices in that country, rather than vigorously competing for market share, driving down prices.1747 Together with the existing interconnection capacity available to EDF, following the acquisition it would hold a 9-12% market share in Spain. Thus, once EDF would own this company, its interest in building new interconnection capacity would considerably diminish: such capacity could be used by third parties to bring more competition to Spain, which would be contrary to EDF’s new interests on that market. In the absence of the merger, if EDF wanted to enter the Spanish market it would have to do so through organic growth – i.e. gain market share from existing market players through active price competition.

4.257

The acquisition was nonetheless permitted to go ahead on the basis of commitments, notably by EDF to significantly increase the existing interconnection capacity between France and Spain.

4.258

It is interesting that in these two decisions, concerning a similar issue, two different approaches are taken. In the EDF/EnBW case, the relevant market concerned was France (the country of the acquirer). The company to be acquired was in Germany. The problem identified was the elimination of EnBW as a po-

4.259

1747 See paragraphs 116-117 of the decision.

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tential competitor in France. No detailed examination was made whether the acquisition would inhibit EDF from actively exporting to Germany (the country of the target company). In the Hidrocantábrico case where EDF acquired a Spanish company, the problem was addressed entirely differently: the relevant market concerned was Spain (the country of the target company). No detailed examination was made of the elimination of the Spanish company as a potential competitor to EDF in France (the country of the acquiring company). This difference is explained by the facts of the two cases: Hidrocantábrico was apparently too small to be considered a realistic competitor in France. However, the failure to consider the effect of acquisition of EnBW on EDF’s willingness to actively compete in Germany is surprising given the fact that in VEBA/VIAG1748 the Commission determined the German market to be oligopolistic in nature.

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In any event, all these cases fall within category 1, as set out in book paragraph 4.196 above: cases producing clear anti-competitive effects, because, the Commission has, in previous decisions, considered that the Spanish, French and German markets are characterised by either sole or oligopolistic dominance. Any difference between the approaches taken by the Commission in these two cases should therefore be explained by the Commission concentrating on the main issues arising in each specific case.

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Indeed, the strict approach taken in EDF/EnBW was continued by the Commission in Gaz de France/Suez (2006), another “category 1” case. This concentration concerned the proposed merger between the French gas incumbent and the Belgian gas and electricity incumbent.

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In France, Gaz de France (GDF) had market shares in the different gas markets as defined by the Commission1749 in the order of 90-100%, with some minor exceptions where markets were defined as regional. GDF is vertically integrated, owning import facilities, transmission, storage and distribution facilities.

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In Belgium, Suez, through its subsidiary Electrabel, had market shares on the different relevant electricity markets as defined in the decision1750 of between 70-80% or more. In addition to these very high market shares, GDF owned a 50% stake in SPE, the largest competitor to Electrabel and Suez in the Belgian electricity markets. Depending on the relevant electricity market in question SPE typically had market shares of 5-15%. 1748 See book paragraphs 4.223-4.226. 1749 For further details on market definition, see book Part 2. 1750 For further details on market definition, see book Part 2.

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Regarding gas in Belgium, Suez (either via Distrigaz or through the retail subsidiary of Electrabel (ECS) that was active on both gas and electricity markets) had market shares of around 80-90% in the different gas markets as defined by the Commission. It also controlled the whole gas chain in Belgium, including import facilities, transmission and storage. The distribution of gas and electricity in Belgium is largely undertaken through a number of local governments owned “Intercommunales”, over which the decision concludes “Suez is actually in a position to exercise at least an important influence, and eventually control.”1751 SPE, the JV of which GDF owned a 50% stake was also the second largest company active on the Belgian gas markets, again with market shares typically in the region of 5-15%. Thus, regarding gas, the merger not only involved the elimination of a major potential cross-border competitor into the Belgian and French markets respectively, it also involved the elimination of the most important actual competitor of Distrigaz already active in Belgium. Given these facts, it is not surprising that the Commission identified the following competition problems: –

The existing dominant position of GDF in France would have been strengthened through the elimination of Distrigaz, one of its best-placed competitors that had every possibility and interest to become, over time, much more active in France. In reaching this conclusion, despite the very high market shares, the decision examines in considerable detail why, in the absence of the merger, Suez would be the best placed company to grow as an independent force on the French gas market. This, the Commission concludes, is (i) due to the fact that Distrigaz has gas available in Belgium, (ii) has experience in selling to customers and is already well implanted in France, and (iii) is already selling to companies and households in water and waste markets.1752 In addition, the decision examines in considerable detail the entry barriers facing other companies wishing to penetrate the market.1753

–

The existing dominant position of Electrabel on Belgian electricity markets would have been reinforced through the removal (or very significant limitation – SPE was a 50/50 joint venture) of its largest actual competitor, which GDF would, absent the merger, have every interest in developing into a major competitor in Belgium or indeed also entering the

1751 Para 55 of the decision, own translation. 1752 See paras 478-500 of the decision. 1753 See paras 500-615 of the decision.

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Belgian market in its own right. In reaching this conclusion, the Commission examines in detail the nature of the Belgian electricity markets, in a level of detail not yet seen in a Commission merger decision in the energy sector. For example, regarding the nature of the Belgian wholesale market, where Electrabel had lost (some) market share in recent years it compared the Belgian and neighbouring markets (Germany, France, the Netherlands, the United Kingdom) on the basis of a number of very technical and detailed standards that have been identified in the Energy Sector Inquiry as relevant in the identification of market power.1754 –

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The removal of GDF as a competitor on the Belgian gas market would have had repercussions on the Belgian electricity market because it would remove one of the main alternative suppliers to gas-fired generators competing with Electrabel. In reaching this conclusion the Commission examines in great detail the ability and incentive that the merged group would have to raise the costs for gas that rival generators might have, discussing issues such as access to storage, balancing and ancillary services.1755

Thus, in this case the main issues were not the existence of dominance and/or a significant restriction of competition, but the remedies necessary.1756 The restrictions of competition resulting from the merger were at least as significant as the EDP/GDP case.1757 The remedies accepted were considerable, requiring the divestiture of very valuable assets, notably Distrigaz, Suez’s dominant gas company in Belgium. This shows that the Commission continues to take a very strong line against neighbouring market mergers. However, it once again demonstrates that the Commission can only require that the post-merger situation is no worse than pre-merger. It cannot use the Merger Regulation as a tool to turn an uncompetitive market structure pre-merger into a competitive one. Post merger, GDF would still hold a dominant position in France and Electrabel will hold a dominant position on the Belgian electricity market. The acquirer of Distrigaz will still hold a dominant position on the Belgian gas market. However, GDF will now have a real interest to enter the Belgian gas market in its own right (subject to possible retaliation by the acquirer of Distrigaz), and the separation of Fluxys from Distrigaz will make this easier for GDF and other new entrants. 1754 These factors included the availability and price of base and peak, contracts with different durations and delivery periods, the number of bids/offers at a given moment, the number of companies making offers/ bids and the nature of the companies concerned (financial or commercial) and finally the number of parties making offers. 1755 See paras 840-854 of the decision. 1756 For details of the remedies accepted by the Commission, see book Part 4, Chapter 5. 1757 See below, book paragraphs 4.296-4.314.

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In a later case GDF Suez/International Power (2011),1758 the French company that had acquired a dominant position in the Belgium electricity markets through its previous acquisition of Electrabel (holding 60-70% of the production capacity and 70-80% of the electricity produced in 2009), acquired Intenational Power with assets in North America, Europe, Middle East, Australia and Asia. The only market where significant overlaps resulted was Belgium, where International Power had a 33.3% JV stake in T-Power, owner of a 420 MW gasfired generation plant, planned to start operations in mid-2011.

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However, under a tolling agreement entered into with RWE Essent, one of GDF Suez’s competitors on the Belgian electricity markets, International Power had agreed to sell all its power allocated through the JV agreement for 15 years. Under this agreement, RWE Essent would be responsible “ for the decisions on the volumes of electricity produced by the T-Power plant and the gas sourcing of the plant.”

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Thus, superficially at least, the acquisition would not lead to a strengthening of the market position of GDF Suez.

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However, through the tolling agreement, GDF Suez would henceforth indirectly acquire “specific knowledge of the price and the volume of electricity produced by the T-Power plant” and “to predict the future dispatch patterns of the T-Power plant”.

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In the light of this the Commission examined the effects of this knowledge. By considering previous data on the Belgian power exchange market (Belpex), it concluded that as GDF Suez would know when the 500 MW from the T-Power plant would not be available “ it would be possible for GDF Suez to increase the price of the electricity that it offers on the Belgian electricity wholesale market”, and that such a strategy would be credible as it would have both the ability and incentives to do so given its market power and the high increase in its profits resulting from the increased process.

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In addition, the decision finds that through the specific provisions of the tolling agreement, GDF Suez would be able to “vary and limit the capacity available to RWE Essent”, thus putting it at a competitive disadvantage, although the precise reasons for this under the agreement are limited due to business secrets.

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1758 CaseM.5978.

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Following a commitment to divest the interest in T-Power, the merger was allowed to proceed.

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These cases can be contrasted with decisions where at least one of the companies concerned is based in a competitive market or where a “ de minimis” market situation exists. A “ de minimis situation” occurs either because the acquired company is so small that it would not have a significant effect in competition terms or because the markets of the acquirer and target company are not sufficiently close in geographic terms to permit the threat of potential competition that is being eliminated to be considered to be sufficiently immediate. In such circumstances, it is safe to conclude that any potential negative consequences of the merger are outweighed by the positive ones. In E.ON/Powergen (November 2001)1759 for example, one of the largest German electricity producers acquired one of the largest UK generators. No analysis whatsoever is made of the potential “ disciplining” effects of the merger, nor whether it would prevent Powergen from competing henceforth in Germany. In the UK, the market was not at the time characterised by a clear dominant or oligopolistic market structure and given the fact that the UK network company was already unbundled in ownership terms, no issues of interconnection (whether the merger would deter the construction of additional capacity – as in Grupo Villar Mir/EnBW/Hidroelectrica del Cantábrico) 1760 existed.

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A similar approach was taken by the Commission in EDP/Cajastur/Hidroelectrica del Cantábrico (March 2001).1761 EDP, the ex-incumbent Portuguese electricity company, sought to jointly acquire Hidroelectrica del Cantábrico, which held 6,6% of the Spanish market. Portugal and Spain were defined as national geographic markets.

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EDP was considered to hold a dominant position in Portugal. Spain was characterised as a market with an oligopolistic dominant structure. The approach taken in the EnBW/Hidroelectrica and EDF/EnBW cases was not followed given the “very limited importance of Hidrocantábrico”. The proposed concentration was not considered to increase to a significant degree EDP’s potential for retaliation in Spain where Hidrocantábrico is a minor actor:

1759 Case M.2443 of 23.11.2001. 1760 See book paragraphs 4.254-4.260. 1761 Case M.2340 of 5.03.2001.

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“Nothing suggests that a relatively small operator such as Hidrocantábrico could be in a position to prevent companies such as Endesa (42,7% generation capacity 47,7% sales to eligible customers and 40% to non-eligible customers) and Iberdrola (35,1% generation capacity 27,1% sales to eligible customers and 40,6% to noneligible customers) to enter the Portuguese market for eligible customers by threaten‑ ing to compete aggressively with them.” As far as Hidrocantábrico might have been considered as a potential competitive entrant in the Portuguese market, as it has been mentioned before, the interconnec‑ tion limitations are very limited. Furthermore, Hidrocantábrico has no access to generation capacity situated in Por‑ tugal, not even under contractual agreements with Portuguese generators. Hidro‑ cantábrico would thus not be one of the strategically best-placed companies to enter the Portuguese market in contrast with other electricity producers such as the Ger‑ man RWE and the Spanish Endesa that control production facilities in Portugal such as Tejo Energia and Turbogás. Finally, even if the merger will imply the disappearance of one potential “ex novo” entrant (installation of new capacities) able to compete with the existing players in each of the countries where EDP and Hidrocantábrico operate, given the number of potential competitors existing at EEA1762 and world level who are in a position to install new capacities in Portugal and Spain the impact of the merger, in this respect, will be negligible. In these circumstances, the concentration will not lead to the creation or strengthen‑ ing of a dominant position”. With respect to the role that Hidrocantábrico could play in Portugal, this approach of the Commission is understandable and consistent with previous decisions, based on the de minimis approach mentioned above. There is no way that this company could realistically be viewed as a major potential threat to EDP in Portugal. However, the failure to examine the possibility that EDP could use Hidrocantábrico to discipline other Spanish producers, preventing them from entering the Portuguese market, is somewhat more difficult to explain. Hidrocantábrico held some 6,6% market share in Spain. In the EDF/EnBW case, which was at least partly based on the argument that EDF, in acquiring EnBW, would be able to discipline other German companies from entering the French 1762 Such as Iberdrola and Endesa in Portugal or EDF and the German electricity companies in both Portugal and Spain.

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market, EnBW had a 7,8% share of the German market.1763 Equally in another case not concerning a cross-border acquisition, Exxon-Mobil, the purchase of a company with only a 1,5% market share (of the German gas market) was considered likely to significantly reinforce existing dominance.1764 In E.ON/Sydkraft (April 2001),1765 E.ON acquired Sydkraft, a Swedish generator/distributor with a 19% market share. Other operators in Sweden were Vattenfall with a 53% market share and Birka with 16%. Two smaller producers had less than 5%. Both Sweden and Germany were viewed as separate markets. With respect to the possibility that E.ON might use this acquisition to discipline other Swedish producers (notably Vattenfall) from entering the German market or that the merger eliminates a potential competitor of E.ON in Germany, it is simply noted that the interconnection levels between Sweden and Germany are still “very limited”.1766 However, since then, Vattenfall has acquired a major German electricity company VEAG,1767 so the argument could be raised (with the benefit of hindsight) that the effect of these mergers has been to allow E.ON to ensure that Vattenfall does not use VEAG to bring aggressive competition to the German market (see VEBA/VIAG above, book paragraphs 4.223-4.226) due to the “ disciplining” possibility that it has acquired via its acquisition of Sydkraft. In other words, if Vattenfall would initiate aggressive competition in Germany through VEAG, E.ON could retaliate through Sydkraft. However, it should be noted that it is widely considered that the Swedish market is largely competitive, and that although in this case a national market definition is taken for Sweden, this geographic market was rapidly integrating with its neighbours and probably already has become regional in nature (see Sydkraft/Graninge (2003), book paragraph 4.361). Thus, this operation almost certainly falls under category II of the types of neighbouring market merger set out at book paragraph 4.244 above – “questionable anti-competitive effects”. In practice, the acquisition of Sydkraft by E.ON would almost certainly not permit E.ON to use Sydkraft to discipline other Swedish producers from aggressively competing in Germany, because the market in Sweden is already at competitive price levels. Nonetheless, a little more analysis of this in the decision would have been helpful to clearly distinguish it from some of the cases discussed above. 1763 1764 1765 1766 1767

Source: Commission Decision in VEBA/VIAG. Case M.1673 of 13.06.2000. Case M.1383 of 29.09.1999. See book paragraphs 4.370-4.372. Case M.2349 of 9.04.2001. Paragraph 17. No specific figures are given. See book paragraphs 4.223-4.226. This followed undertakings given in the VEBA/VIAG case.

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A further example of a “ de minimis” approach can be found in In Enel/Slovenske Elektrarne (2005). Enel planned to acquire the principle producer and supplier of electricity in Slovakia, with 83% of national generation capacity. It was the main supplier to the three regional electricity distribution companies and supplier to four larger industrial customers. Enel was not active either in Slovakia, or in any neighbouring (CENTREL) country. The operation was thus cleared during the first phase.

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In conclusion, the Commission’s decisions in this area have largely followed the approach explained at book paragraphs 4.241-4.245 above, adding a “ de minimis” test when a company with only a very small market share is concerned, and being reticent to interfere unless mergers between companies in neighbouring geographic markets are concerned.

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However, it must be acknowledged that this is not universally the case. The level of reasoning in some cases, explaining why they are distinguished from EDF/ EnBW and Grupo Villar Mir/EnBW/ Hidroelectrica del Cantábrico, could have been more detailed. This is particularly so with respect to Electrabel/EPON and EDP/Cajastur/Hidroelectrica del Cantábrico. The Electrabel case can be explained by the fact that it was decided before these “mainstream” cases (and the “potential competitor/disciplining” doctrine had not yet been developed). The EDP case is, however, less easy to interpret.

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A final case that merits consideration within this category of cases concerns RWE/Essent (2009),1768 mentioned above, where the issue of the competitive constraint played by a company on a neighbouring horizontal market was examined in detail, with reference to the control of vital infrastructure. Essent held 20-30% of the Dutch wholesale electricity market;1769 RWE held limited generation assets in the Netherlands, small scale CHP totalling 20MW, resulting in an increase in market share of less than 0.5%. This, in se, would lead to a significant impediment of effective competition.

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However, the transmission company owned by RWE in Germany cooperated with the Dutch company Tennet 3 of the 5 interconnectors on the GermanDutch border, which was viewed to be a distinct relevant market. As such, the combined entity may have both the ability and incentive to withhold and reduce capacity of electricity supplies at the border to raise prices on the Dutch market. However, on detailed examination the Commission determined that

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1768 Case M.5467 of 23.06.2009. 1769 It was arged that the market should be consdiered to be Benelux in scope, but this was left open.

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no real ability to withhold capacity would exist, as both TSOs on either side of the border would have to agree to do so, and Tennet had no interest in so doing, and any reduction in available capacity would result in an immediate enquiry by competition authorities. Equally, RWE had neither the real ability nor interest in delaying further investments to upgrade the capacity of the interconnector, as such delay would be obvious and visible, and other companies would then undertake the project anyway.

5.

Vertical mergers

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As mentioned above, there have been relatively few cases of one company acquiring another within the same relevant product market and in the same Member State, probably due to the fact that this would often raise self-evident competition problems, and because the priority for most companies has been the acquisition of a generation/sales presence abroad. However, there have been cases where a (dominant) company has endeavoured to purchase assets at a different level of the supply chain within its own relevant geographic market and in particular distribution companies. Such cases concerned both purchasers within the same Member State and between neighbouring countries. In particular, such cases have concerned efforts by a generator to acquire regional or local distribution companies. There are good business reasons for the acquisition of a distribution company by a wholesaler/generator. The overwhelming majority of customers – with the exception of large industrial customers – have traditionally been obliged to purchase from their local distributor. Acquiring this distributor provides three, possibly four, important benefits to a generator or supply company.

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First, when a company in the wholesale market acquires distribution companies that purchase electricity or gas on that market, the wholesaler automatically acquires a quasi-guaranteed minimum market share on the retail market. Following the merger the newly acquired distribution companies will evidently purchase from their parent company even if they are legally free to do otherwise. Distribution companies tend to retain much of their original market share at retail level even after liberalisation, and therefore the “guaranteed market share” mentioned above tends to last for some time. Many customers, at least during the initial phase of market opening, do not as a matter of fact change supplier. This may be due to inaction or positive choice, because they prefer the continuity and perceived lack of risk of remaining with their traditional supplier to a small price reduction and the “fear” of the unknown. Thus, by acquiring a dis548

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tributor, a generator or supply company will – at least for a number of years, until the switching of electricity/gas supplier becomes a “normal” thing to do for household customers – acquire a minimum effectively “guaranteed market share”. Secondly, distribution companies usually have an excellent information record on large pool of customers, including their past demand patterns. This was especially useful at the time of liberalization, as distribution would have access to exclusive data of customers in their area from the monopoly times. Customer data is of considerable use in predicting, for example, balancing patterns and in targeting advertising etc. In the era of Big Data and smart energy, access to data is even more important, both to compete effectively for customers, and, given the increasing decentralization of energy sources, to achieve efficient operation and balancing of gas and electricity networks. Although regulatory regimes are evolving towards ensuring that data is managed and accessed in a manner that enables effective competition in energy markets, “buying” access to data is likely to remain a driver of merger activity.

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Thirdly, in a number of countries, a regulated tariff supplier is nominated by the government or the regulatory authority. The traditional distributor in an area has an inherent advantage when bidding for such a function, and in some Member States or regions they have often been allocated this task, sometimes even without holding any form of tender.1770 It is self-evident that this “official” status confers an advantage on the company in question.

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Fourthly, in order to supply a final customer (with the exception of large industrial companies supplied directly from the transmission grid) a competitor will always need third party access to the distribution network. Under the third gas and electricity Directives only legal, functional and operational (staff ) unbundling is required for distribution companies. In these circumstances, and given the potential difficulties for regulatory authorities to enforce such unbundling requirements effectively, the risk cannot be fully excluded that a generator/supplier will use its control over a distributor to make network access for its competitor as difficult as possible.

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As with respect to horizontal mergers, vertical concentrations can be distinguished between those taking place between companies active on the same relevant geographic market and between those on neighbouring or more distant markets. Only with respect to the first category of vertical merger has the Com-

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1770 See, for example ECS/Sibelga, Case M.3318 of 19.12.2003, book paragraphs 4.295-4.302.

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mission shown any tendency to oppose concentrations. Where a company in one market purchases a distributor in a neighbouring geographic market, significant anti-competitive effects are unlikely. Such a distributor will have a small market share at national level and this will almost certainly be insufficient to permit the acquirer to use it to “discipline” other companies on the market, preventing them from competing with the acquirer on its home territory.1771

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Equally, given the small market share of distributors, and the fact that few distribution companies act as exporters, any appreciable elimination of potential competition to the acquirer on its home market as a result of the acquisition is almost certainly likely to be “ de minimis” in nature. Thus, unless the distributor to be acquired is a very major company with a really significant market share of an oligopolistic market (which might be the case for a regional distributor) such a concentration is only likely to have pro-competitive effects – allowing a company to get a foothold on a new market, developing the seeds of EU-wide competition.

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The situation is entirely different, however, when a company enjoying a sole or joint position of market power on a relevant geographic market acquires distribution assets within its own relevant geographic market. It is difficult to see any effects of such a concentration other than anti-competitive ones: it is clear that such mergers can only raise entry barriers for new competitors attempting to enter the national relevant geographic markets. The only obvious argument in favour of permitting such acquisitions to proceed is that vertically-integrated companies in other Member States such as France and Germany have always owned distribution companies and that to prevent companies in other Member States from acquiring similar advantages to “protect themselves” would somehow be unfair. This argument is, however, wholly unconvincing.

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It is submitted, therefore, that one can expect the Commission to take a strong line against vertical mergers by companies within the same relevant product and geographic markets if the company or companies in question hold a position of market power (solely or jointly with others). Gas and electricity prices have been on the rise over the last years – and significantly so on wholesale electricity markets. There is concern that these price rises are at least in part due to non-competitive pricing. In this light, one can expect that the Commission will maintain or even strengthen its strict approach to vertical mergers in the future, notwithstanding the fact that in a relatively recent case, EDF/Dalkia en France 1771 See above, book paragraph 4.239.

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(2014),1772 with respect to vertical mergers, the Commission noted that “It is important to note that non-horizontal concentrations are generally less likely to create competition problems that horizontal ones. Non-horizontal concentrations do not create a threat to effective competition unless the undertakings concerned do not possess a significant degree of market power (which is not necessarily however a dominant position) on at least one of the concerned markets”. The fact that the Commission views such mergers with concern can be seen in ECS/Sibelga (December 2003).1773 ECS, the Electrabel subsidiary responsible for sales to final customers, was to acquire some of the assets of Sibelga, a semipublic distribution company supplying gas and electricity to customers in Brussels.

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The operation took place in the context of the Belgian law introducing competition, requiring a certain level of unbundling and the appointment of a supplier of last resort. It was intended that Sibelga would retain ownership of the network assets, but sell its supply activities to Electrabel. As such, Electrabel would take over the retail client base of Sibelga and would also be appointed as the official supplier of last resort. Electrabel would pay a fixed price for the sales activities of Sibelga, plus a share of its turnover from sales to customers in Brussels for a specific period.

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The relevant geographic market for all the gas and electricity markets concerned was considered to be no larger than Belgium. Electrabel was considered to be dominant on both markets for the following reasons:

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–

Market share: Electrabel held 80-90% of Belgian electricity production, reducing to 75-85% following virtual power auctions ordered by the Belgian competition authorities in previous (similar) cases. With respect to supply, it held 75-85% of the market with few competitors, the only ones of real importance being SPE and Luminus, together accounting for 1524% of the market.

–

The competitive effect of these market shares was considered to be reinforced by the fact that Electrabel had now been appointed as supplier of last resort by most Belgian regional distribution companies, meaning that it maintained a temporary monopoly over non-eligible customers, and would continue to benefit from customers choosing not to actively switch supplier.

1772 Case M.7137. 1773 Case M.3318 of 19.12.2003. See book paragraphs 4.295-302.

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–

The virtual power plant auctions ordered by the Belgian authorities following other acquisitions of certain assets of Belgian distributors by Electrabel were not considered likely to eliminate this dominance for two reasons. First, according to the way in which the auctions were designed, a single competitor could not obtain more than 4% of Electrabel’s capacity. Second, there was the likelihood that much of the power purchased under these auctions would in any event be exported to the Netherlands, where prices were higher.

–

Electrabel benefits from significant economies of scale, with a large client base. This means it will always be difficult for new market entrants to compete with Electrabel on price.

–

Furthermore, such significant entry barriers were found to exist that this dominant position was unlikely to be appreciably eroded in the short-tomedium term.

–

In order to enter a new geographic market, the Decision notes that it is necessary to have access to reliable and competitive supplies in both the short and medium term. However, such supplies were not available as no wholesale market existed in Belgium. The construction and operation of new competing generation facilities was not considered to be a reasonable proposition, particularly given the fact that Electrabel had also a dominant position for gas supply in Belgium. Furthermore, the interconnection with France was congested and likely to remain so and, finally, access to capacity in France, even if interconnection capacity would be available, was viewed as “uncertain” (“the capacities being allocated on a weekly basis on “first-come-first-served” system”). The lack of transparency regarding existing and future transmission and distribution tariffs, meaning that it is difficult for a new market entrant to propose a medium-term net tariff to its customers, exacerbated these factors.

–

Finally, the Decision highlights a number of regulatory obstacles facing a new market entrant; the need to gain numerous licenses at both federal and regional level.

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of the market. By gaining “official” status Electrabel would acquire a valuable marketing advantage, both in terms of being viewed as a secure supplier and in terms of guaranteed market share (those customers not wishing to switch or neglecting their opportunity to do so). Furthermore, household customers were not expected to be eligible to change supplier in Brussels before 2007. This advantage was viewed as being strengthened by the legislation in force in Brussels, which did not envisage any obligation to inform eligible customers of their right to switch supplier, and which imposed long notice periods where the right to switch was exercised.

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Finally the decision examines the effect of the maintenance or reinforcement of the existing links between Electrabel and the regional companies. A profitsharing clause between Electrabel and Sibelga, which was an integral part of the consideration that Electrabel was to pay for the retail assets, would – the decision concludes – mean that the regional companies would want Electrabel to retain market share. This may incite the regional companies – now network owners – to discriminate against competitors in terms of network access.

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As a consequence, the Commission clearly identified competition concerns. The Belgian authority had requested that the merger be referred back to them, pursuant to Article 9 of the Merger Regulation, which permits the Commission to refer cases back to a Member State were (i) the relevant market in question is limited to a single country and (ii) the operation threatens to create or strengthen a dominant position (or significantly impede competition) on the market in question. The Belgian authorities requested that the case be referred to them because they had already dealt with five similar cases and they wished “to avoid contradictory decisions, or decisions difficult to reconcile with one another taken by different authorities in question”.

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On these grounds the Commission agreed to the referral, notwithstanding the argument by some interveners that in the previous similar cases the Belgian competition authorities had approved the mergers while providing inadequate remedies. The Commission considered that it was consistent with the “principle of good administration” that the different cases be treated in the same manner and by the same authority. The Commission argued that no proof existed that the remedies imposed by the Belgian authorities in previous cases were inadequate – their objective was to ensure that the merger did not lead to Electrabel increasing its existing dominant position. They could not go so far as to try to attempt to eliminate that dominant position; they only could aim to maintain

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the status quo ante. According to the Commission, the remedies ordered in previous cases could not be demonstrated to have been ineffective. It could not be shown that Electrabel was “more” dominant following its acquisition of certain interests of the regional companies, taking into account the requirement that had been imposed by the Belgian competition authorities in these previous cases to auction some of its generation capacity. The Belgian competition authority later approved the merger, on the basis of undertakings.

4.303

In Verbund/Energie Allianz ( June 2003),1774 a strict approach was retained. Verbund, the largest generator in Austria, which sold predominantly at the wholesale level (to large industrial and distribution companies), proposed to merge with Energie Allianz, a group of five regional distributors, selling electricity to end consumers. All of these distributors produce some electricity, but are not self-sufficient and also purchase electricity, notably from Verbund. Prior to the merger Verbund already exercised joint control over an important regional distribution company, Steweag, and had a minority shareholding in another smaller distributor. It also owned two small electricity retail companies “Unsere Wasserkraft” and “My Electric”.

4.304

The affected product markets (supply to large industrial customers, to small distributors and to small customers) were viewed as national in scope.1775

4.305

It was considered that the merger would create or reinforce a dominant position on the following grounds: –

Market share. On the wholesale market, the new company would have a 55-85% share, including Steweag’s 5-15%. On the market for supplies to small customers, the combined group would have 55-65% (again including Steweag). Thus, as a connection now existed between generation and supply, in future the distribution companies owned by Allianz would purchase only from Verbund, thus effectively excluding some 55-65% of the small customer market to new market entrants or existing competitors of Verbund. In the past, distributors belonging to Allianz would have purchased the electricity from the most competitive wholesale supplier. In future, unless the final customer connected to their distribution grids would change supplier, they would be effectively closed to other competitors.

1774 Case M.2947 of 11.06.2003. 1775 See book Part 2, Chapter 3.

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–

The joint company would have a particularly advantageous generation portfolio, notably being based on large hydro. Competitors and new market entrants could not build new hydro-based facilities due to the lack of available development sites. This would give advantages to the merged group over remaining and potential competitors, particularly as the Hydro-based facilities are particularly suited to providing balancing energy.

–

Small customers have in the past been reluctant to switch supplier. As a result, the merged group will have a largely guaranteed minimum market share. This will also make market entry by other companies more difficult.

–

The joint company is able to supply both gas and electricity, considered by the Commission to be a significant advantage compared to its rivals.

The merger was however permitted to go ahead on the basis of commitments, notably the divestment of Verbund’s sales’ company through which it sells to large customers, as well as Verbund’s interest in Steweag.1776

4.306

The Commission has taken a similar strict line in cases concerning natural gas. In EnBW/ENI/GVS (December 2003)1777, EnBW and ENI sought to jointly acquire GVS, a regional gas company owning transmission (but not distribution) pipelines in the region of Baden-Württemberg in Germany. GVS sold gas at the wholesale level but not at the retail level. It therefore sold to distribution companies and to two industrial plants. Although EnBW already owned a minority shareholding in GVS, the latter was controlled by local municipal interests.

4.307

EnBW held a controlling interest in a number of the Stadtwerke (which purchase gas on the wholesale market in Baden-Württemberg). These companies accounted for 20% of the purchases of gas on the regional wholesale market and had a ± 20% market share of the retail sales market. In addition, ENBW held a non-controlling interest in other Stadtwerke accounting for a further 10% of purchases on the relevant market.

4.308

The relevant product market was defined as wholesale gas sales, the relevant geographic market was considered to be regional in nature.

4.309

1776 See book Part 4, Chapter 5. 1777 Case M.2822 of 17.12.2003.

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4.310

GVS had a 75% market share of this regional wholesale market, with long-term sales contracts to a number of the local distribution companies making up the majority of this market. On this basis, the decision states that “it can be assumed that GVS enjoys a dominant position”.

4.311

The decision finds that the result – by merging GVS’s wholesale activities and EnBW’s distribution assets, the merged group would have a guaranteed customer base on the retail market of 20-30% – significantly strengthening GVS’ existing dominant position on the wholesale market.

4.312

In addition, as EnBW would after the merger fully control GVS, which was dominant on the regional wholesale market, it would no longer have any interest itself in developing as a competitor on that upstream market. Due to the building of a new pipeline by a competitor, Wingas, which could supply the region, in the absence of the merger there would be every expectation that EnBW would attempt to develop itself as a real competitor to GVS on the regional wholesale market. The operation was however permitted to proceed on the basis of undertakings; notably providing existing GVS customers with the opportunity to terminate existing contracts early.1778

4.313

In EON/MOL (2005) the Commission continued to take a strict line to cases where the two parties have significant shares in markets upstream or downstream of one another. E.ON, the German pan-European utility proposed to acquire the Hungarian gas incumbent, MOL.

4.314

Prior to the merger MOL was overwhelmingly dominant on gas wholesale markets with complete control over gas wholesale, transmission and storage. It was also the holder of long-term supply contracts covering more or less all Hungarian domestic gas production to 2015 and import contracts covering the remainder of expected needs in Hungary for the coming years. However, it was only marginally active on retail markets, limiting its sales to large customers, where it had a 30-35% market share. MOL was not active on electricity markets.

4.315

E.ON was already active in Hungary, on both gas and electricity retail markets. Thus, although the merger did not give rise to a significant immediate strengthening on the wholesale markets where MOL was already dominant, it clearly raised issues in downstream retail markets where E.ON (and with respect to large gas customers, MOL) had significant market shares. 1778 See book Part 4, Chapter 5.

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Thus on the gas markets,1779 the Commission found that: –

The merger would lead to the creation of a dominant position on the market for gas supply to large customers, where E.ON had a 10-15% market share, with a minority shareholding in other companies accounting for a further 10-20%. MOL had a 30-35% market share, making for a combined share of 50-70%. The Commission reached this conclusion on the grounds of (i) the merged company’s high market share, (ii) the fact that the remainder of the market was divided between a number of relatively small regional distribution companies, and (iii) the merged group would have almost complete control over gas wholesale and transmission as well as full control over existing gas storage facilities. The decision analyses in some detail whether, on a factual basis, it would be reasonably possible for competitors to acquire additional imported gas other than that already contracted by MOL. It concludes that this would be very difficult indeed.1780 In the light of this the Commission finds a creation of a dominant position that would lead to a significant impediment of competition: the acquisition of these assets would have given E.ON the ability and incentive to raise rivals’ costs for gas. In effect, the merged company would have complete control over all gas available in Hungary and, following the merger, it would be in the interests of the new group to make it difficult for rivals at the gas retail level to get access to this gas. If successful, this would inevitably increase the group’s retail market share and profits.

–

On other gas relevant retail markets,1781 the merger would not lead to the acquisition of a dominant position; MOL was not active on these markets and E.ON had market shares of 15-20% plus a minority shareholding in other companies with a market share of 20-30%. However, the Commission still raised objections to this on the grounds of a significant impediment of competition. Because of its clear dominance in the gas wholesale markets, and its control of storage and transmission,1782 the merged group would acquire the ability and incentive to discriminate against its competitors on these downstream retail markets. Before the

1779 The decision also found competition concerns regarding electricity. These are examined below in the section regarding conglomerate mergers at book paragraphs 4.285-4.290. 1780 See paragraphs 333-396 of the decision. 1781 See book paragraphs 4.287-4.290 for further analysis of the relevant market in this respect. 1782 In fact under the agreement E.ON would not necessarily acquire the transmission assets, MOL would have a put option whereby they could subsequently oblige E.ON to acquire them. The Commission examined the concentration on the assumption that the option would be exercised.

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merger it never had any incentive to discriminate against these companies because it simply did not operate on these markets.

4.317

A final case that merits consideration here is EDF/British Energy (2008),1783 which is a horizontal merger, that gave rise to vertical concerns. On the wholesale electricity market of Great Britain, a combined market share resulted from the merger of 20-30%, an increase of 5-10%, with 3 other competitors holding 10-20% and a number of other smaller companies.

4.318

The Commission found that the merged firm would have the capacity and incentive to reduce liquidity on the market. Prior to the merger British Energy had always had excess capacity compared to its own needs for retail sale, whereas EDF always held a short position. The resultant harm to independent generators (losing a major customer) and retail suppliers (losing an upstream supplier), gave rise to serious competition concerns.

4.319

In addition, the Commission investigated the issue regarding the fact that postmerger, the combined company would have some influence over 7 out of 9 potential sites for the establishment of new nuclear generation sites. A separate market was defined of the “real estate market for sites considered suitable for building new nuclear power stations, and concluded that the merged entity would be dominant on this market, having the incentive and ability to delay or prevent competitors using these sites to develop generation.

4.320

In conclusion, it is clear that the Commission is pursuing a strict line regarding vertical mergers between companies on the same geographic market. It is notable, however, that all cases where competition concerns were established have been resolved on the basis of remedies. In relation to some of the early cases, in particular the GVS case, it might be argued that these remedies are not particularly onerous (the remedies in the GVS case were probably accepted because even with the elimination of EnBW as a potential competitor, the new Wingas pipeline was in any event likely to bring a certain level of additional competition to the region). Given the concern over the increasingly concentrated nature of the EU electricity and gas markets, the Commission could not take a less exigent with respect to such mergers. The strict approach to vertical cases is best represented by the E.ON/MOL case, where significant remedies were required for the transaction to be cleared.1784

1783 Case M.5224 of 22.12.2008. 1784 See book Part 4, Chapter 5.

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However, it is clear that the Commission is not likely to object to vertical mergers where the merged company will have a low market share in all relevant markets. This can be seen, for example, in E.ON/TXU Europe,1785 where E.ON’s UK subsidiary Powergen acquired the UK assets of the trading company TXU, which consisted notably of a portfolio of 5 million gas customers. Notwithstanding the fact that Powergen had a significant share of the market, given the market’s competitive nature, no objections were raised.

6.

4.321

Conglomerate mergers between electricity and gas companies

6.1 Introduction From a commercial viewpoint, there are three good reasons for a merger between a gas and an electricity company: –

Ability to offer a combined service

–

Economies of scale

It is widely recognised that there is no longer such thing as a “pure” electricity or gas company, but that they have evolved into multi-utility undertakings, offering a range of services; for example gas, electricity, telecoms, water, etc. Most major EU gas or electricity companies already offer a range of services. This is attractive to customers, particularly at retail level, as it offers reduced administration and, often, a saving compared to purchasing the services separately.

Given the fact that almost all electricity customers also purchase gas, and vice-versa, the potential savings of a joint company – again particularly at retail level – are significant. Such economies of scale are particularly prominent at the administration/billing level (one bill instead of two) and at the customer service maintenance level. This can enable a company providing a joint service to offer a lower price than one offering only gas or electricity.

1785 For a further description of this case see below, book paragraphs 4.367-4.368.

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–

Secure and competitive supplies of gas for electricity production Most new electricity generation over the last decade has been constructed on the basis of gas. Gas will continue to play a significant role in electricity production in the transition towards a decarbonized energy system, either to ensure that sufficient generation capacity is available while renewable capacity is built up and other types of generation (such as coal or nuclear) are phased out, or to address the renewables’ intermittency problem, or as a basis for the production of decarbonized gas (i.e., through the extraction and storage of CO2 from natural gas). Thus, if an electricity company purchases a major gas importer/supplier which is active in the geographic market in which it sells electricity, it secures guaranteed supplies of gas at competitive prices for its future generation requirements.

6.2 Merger between a dominant and a non-dominant undertaking, or between two non-dominant firms 4.323

It is precisely the advantages mentioned above that lead to difficult competition problems when either or both of the gas or electricity companies in question already holds a dominant position or too much market power (both referred to as “dominance” for the purposes of this discussion). In the event that a dominant electricity or gas company acquires a non-dominant rival, three main issues arise, that may lead to a strengthening of that dominant position, or to a significant impediment of effective competition: –

Eliminating an actual or potential competitor



Given that basically all EU gas and electricity companies of any size have commenced offering joint gas/electricity packages or are preparing to do so, the acquisition of a non-dominant gas company by a dominant electricity undertaking (or vice-versa) will inevitably eliminate actual or potential competition, thus reinforcing existing dominance or impeding competition. The extent of that reinforcement of dominance or impediment of effective competition will depend on the size and commercial strength of the acquired company and the extent to which other competitors – actual or potential – really exist.

–

Commercial advantages to the dominant firm: ability to offer a joint product and gaining economies of scale



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Through the acquisition, the new company will henceforth be in an ideal position to offer a joint electricity/gas product and will benefit from economies of scale. It will be a question of fact whether this will give it significant advantages over its actual and potential rivals. In particular, this will depend on whether other significant companies exist on the neighbouring product market that might in future be acquired by their competitors.

–

Commercial advantages to the dominant firm: acquisition of secure and competitive gas supplies for electricity generation



By acquiring secure gas supplies for future generation, a dominant electricity company can gain significant commercial advantages over its rivals, which have to negotiate with other gas companies (or the gas arm of the new joint undertaking) for future supplies. The extent of this advantage will depend on the commercial importance of the gas company in question. Unless other gas companies of significant commercial importance exist on the relevant geographic market, this will de-facto mean that, henceforth, competing electricity companies will have to negotiate for gas supplies from a rival electricity supplier.

–

Possibility to raise rivals’ costs for acquiring gas

Where the gas company acquired owns the transmission, storage, LNG and import capacity, this gives the joint company the real possibility and incentive to raise the costs of their rivals on the electricity market for the acquisition of gas for power generation. It is therefore clear that where a merger takes place between a dominant firm and a non-dominant one, a reinforcement of that existing dominance and/or a significant impediment of effecive competition will take place. However, where real rivals exist to the acquired company, this reinforcement of dominance or impediment of effective competition is likely to be limited. For example, assume a dominant electricity company acquires a gas company with a 20% market share of the gas market on its relevant geographic market. Actual and potential competitors of the dominant electricity company can also acquire a gas company on the same market or enter into looser forms of collaboration with them, enabling them to gain the same commercial advantages. Equally, the elimination of actual/potential competition on the electricity market would be limited. Where however the gas company in question owns a number of essential facilities, such as transmission, 561

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storage or LNG terminals, and other gas companies cannot offer these, this will be an important element making intervention by the Commission more likely.

4.325

Finally, it seems unreasonable to prevent a dominant electricity company from actively seeking to offer a joint electricity/gas service, particularly in the light of the progressive widening of the geographic market and the need for it to prepare to meet real competition from rivals in neighbouring geographic markets which are also preparing joint offer capabilities. Exactly such issues arose in E.ON/MOL (2005).

4.326

In E.ON/MOL, the case concerned primarily the reinforcement of MOLs dominant position on gas wholesale markets in Hungary, where both E.ON and MOL were also present on retail gas markets.1786 In addition, it gave rise to a significant impediment of competition on electricity markets. On these markets MOL was not present, and given the market shares as follows, there was no issue of creation or reinforcement of dominance: MVM

4.327

E.ON

RWE

EDF

Electrabel

Generation

30-40%

0-5%

10-20%

0-10%

0-10%

Retail

0-10%

40-45%

30-40%

10-20%

0-10%

However, the Commission found that the merger would lead to a significant impediment of competition on relevant retail markets1787 for the following reasons: –

As owner of MOL, the essential supplier of gas in Hungary, the new group would be in a position to raise rivals’ input costs for gas to their gas-fired power stations and to deter new entry. The decision finds that it would be able to discriminate against rivals by (i) altering gas delivery conditions without even having to renegotiate the gas supply contracts (ii) increasing prices on existing contracts (iii) deteriorating supply conditions and prices at the expiry of existing supply contracts and (iv) refusing to offer competitive conditions on the open segment of the market.1788

1786 See above, book paragraphs 4.313-4.316. 1787 See book Part 2 for further analysis of the relevant market in this respect. 1788 See paras 632-644 of the decision.

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–



The new group could choose “provide competitive gas supply conditions only to the power plants that would sell electricity to E.ON’s trading arms”. Such arrangements are known as “tolling arrangements”.1789 In other words, where gas generation plants exist that sell to distributors (rather than directly to the retail market themselves), the new group could give better conditions to those generators that agree to sell exclusively to the merged group’s own retail companies. This effect would be particularly important, because it was expected that 58% of new generation plans would be using gas and for a variety reasons there was limited potential for additional non-gas generation in the region.

–

Furthermore, the potential effect was further exacerbated by the fact that there were limited possibilities to import electricity into Hungary and that E.ON planned to significantly expand its electricity generation capacities in Hungary.

–

The merger would also give an advantage to E.ON in being able to make dual (gas and electricity) offers, and having “the ability and incentive to prevent any other company active in electricity retail from developing dual offers”.

The Commission summarised these concerns as follows: “In view of the merged entity’s near monopoly in the access to competitive gas resources and its strategic focus on building new power generation capacities, the merged entity would have, already in the current regulatory scenario […] the ability and the incentive to foreclose access to gas to its competitors’ new gas-fired power plants and/ or to discriminate in its supply to competitors’ new gas-fired plants […]. EON’s strategy would lead to a slower and less competitive development of new generation capacity in Hungary starting immediately after the transaction […] and ultimately lead to higher electricity wholesale prices […] As a result […] the new entity would reduce its electricity retail competitors’ ability to source competitive electricity and would increase its already strong market power in electricity retail, thereby significantly impeding competition.” 1790

1789 See paras 673-680 of the decision. 1790 See paras 729-732 of the decision.

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6.3 Merger between a dominant gas and a dominant electricity company 4.329

Where such a merger takes place the consequent restrictions of competition are likely to be very important. Firstly, the main actual or potential rival of the dominant electricity company in the electricity market will have been eliminated (and vice-versa). Secondly, not only will the dominant electricity (and gas) firm acquire the numerous and important commercial advantages over its rivals, but also rivals will be unable to take similar action: there is no company of comparable importance to the one acquired remaining on the market with which to merge. Thirdly, as potential competitors in the electricity market will henceforth often be dependent on their dominant rival for access to essential gas facilities such as import capacity, transmission and storage facilities, this provides an effective way for the merged group to discriminate against rivals. Fourthly, if rival electricity companies purchase their gas from the merged group, this will give the latter an important advantage in terms of information regarding its rivals input costs and nominations of gas actually consumed at any given moment (and therefore electricity output).

4.330

Such mergers between dominant firms will therefore not only eliminate the main source of actual competition, but they will also raise very significant entry barriers. They are therefore likely to prevent the market entry by companies in neighbouring geographic markets, consolidate existing dominance and obstruct the creation of a regional or European market.

4.331

It is submitted that such mergers will therefore be refused by the Commission, or will only be accepted on the basis of very significant commitments involving divestiture, creating a viable electricity/gas rival to the merged company on the relevant market. It might be expected that such commitments may even make the commercial value of the transaction questionable.

6.4 Cases dealt with by the Commission 4.332

The Commission has dealt with three important such cases. The first (Tractebel/ Distrigaz) completely fails to follow the abovementioned argumentation. The second and third (EDP/GDP and DONG/Elsam/Energy E2) fully complies with it. The remainder of this section focuses on the latter two, but a note of caution on the limited precedent value of the first case needs to be made at the outset.

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In Tractebel/Distrigaz (February 2001),1791 Tractebel sought to acquire sole control of Distrigaz, in the context of a process to privatize the Belgian State’s stake in Distrigaz. Until then, Tractebel probably had joint control over Distrigaz, together with the Belgian State. Tractebel was (and remains) a subsidiary of Suez (now Engie), the owner of Electrabel. There is no doubt that at the time of the merger both Electrabel and Distrigaz were dominant on the Belgian electricity and gas market respectively. However, the decision – which approves the merger unconditionally – examines none of the potential threats to competition outlined above. It simply notes that the companies are active in separate product markets and concludes that no significant reinforcement of dominance results. It should be emphasized, however, that this was a case of passage from joint to sole control (rather than from no influence to sole control), with some of the activities of Distrigaz (gas sales for electricity production purposes) remaining under joint control, all of which was arguably an important overall factor in reaching the conclusion that the transaction did not raise competition concerns. The reasoning in the decision is therefore rather limited and this decision should not be taken as a sign that a merger between dominant companies in each of gas and electricity are not problematic (just as rather early decision – Electrabel/Epon (February),1792 discussed earlier in this Chapter – was not a reliable indicator of the Commission’s approach on horizontal mergers).1793

4.333

4.334

4.335

6.4.1 EDP/GDP Indeed, in the next significant case on this issue, EDP/GDP (2004),1794 a landmark prohibition decision, the analysis set out above was confirmed.

4.336

EDP/GDP concerned the acquisition of the ex-incumbent gas company in Portugal by the ex-incumbent electricity company from the same country. Both companies were considered to be dominant on their markets, which were defined as national in scope. The reasons for the finding of dominance upon the markets in question were as follows:

4.337

1791 1792 1793 1794

Case M.493 of 1.09.1994. Case M.1803 of 7.02.2000. See book paragraphs 4.246-4.247. Case M.3440 of 9.12.2004.

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4.338

EDP was considered to be dominant on the wholesale electricity market1795 in the light of: 1.

Its market share (approximately 70%);

2.

Its “unmatched” generation portfolio which was to be strengthened in the near future by a new gas-fired CCGT plant; and

3.

The fact that a stranded cost regime to be introduced by Portugal favours the incumbents1796. This scheme in essence subsidizes the non-competitive generation plants of EDP in the future, effectively permitting them to meet prices of new competitors, irrespective of their own real costs. This scheme was accepted by the Commission in a state aid decision of 22.09.2004, in which the Commission acknowledges the potential effects of such a scheme on competition:



“The producers will receive compensation that will enable them, despite the opening of the market, to maintain the volume of their sales (and thus limit the risks they would face otherwise) even if the related plants are intrinsically less efficient than the plants that potential entrants may be willing to build in future.”1797



It is therefore clear that the stranded cost scheme represented an important entry barrier to new entrants into the Portuguese market;

4.

5.

A subsidiary of EDP, the national electricity distribution company, sold electricity at regulated tariffs. The decision notes that this subsidiary will almost certainly continue to source its electricity from EDP even after eventual legal unbundling (which need not take place until 2007); With respect to potential competition, whilst three new gas-fired generation plants were under planning, no decisions had been definitively taken. It was far from certain that they would be constructed. Furthermore, for a variety of reasons, EDP was in a position to delay the construction of these plants.

1795 See paragraphs 280-334 of the decision. 1796 See book paragraph 5.337 regarding the state aid elements of this stranded cost scheme. 1797 Paragraph 204 of the Decision.

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In retail electricity, given EDP’s 90-100% market share, its status as sole supplier at regulated tariffs, its ownership of the distribution grid and its knowledge of the Portuguese customer base, a finding of dominance on this market was not contested by the parties concerned.

4.339

As for gas, four separate product markets were identified; the supply of gas to (i) power producers, (ii) local distribution companies, (iii) large industrial customers, and (iv) small industrial, commercial and retail customers. Whilst no market-by-market examination of EDP’s position was carried out, it was concluded that EDP was clearly dominant on all of these markets. At the time of the Decision, EDP maintained a legal monopoly over supply to all customers as Portugal had an exemption from the requirements of the gas Directives until 2007, being an emergent market.1798 Even when the market would open, it was expected to retain this position for a significant period: it owned the transmission and distribution network as well as 5 of the 6 local distribution companies. The other distributor, Portgás, was owned by EDP. Given its present very high (80+%) market share on all these markets, dominance was evident.

4.340

Potential competition from Spanish supplies was examined and found not likely to rapidly erode this dominance once the market would open in 2007 for the following reasons:1799

4.341

(i)

EDP’s knowledge and experience of the Portuguese market;

(ii)

its large customer base;

(iii) its well-known brands; (iv) its control over local distribution companies; (v)

the slow initial level of customer switching;

(vi) its ownership of the transmission system and notably all existing available impact capacity; (vii) its ownership of the only storage facility in the country and the only LNG terminal;

1798 See EU Energy Law, Volume I, at Chapter 11. 1799 See paragraphs 474-501 of the Decision.

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4.342

(viii) the need for new market entrants to gain a minimum critical size to merit entry. On both the electricity and gas markets in question it was concluded that the merger would strengthen the existing dominant position of EDP and GDP for the following reasons: 1.

The merger would eliminate EDP’s biggest potential competitor in the electricity markets, and GDP’s most important potential competitor in the gas markets.1800 This was particularly likely as a dual gas and electricity offer was an obvious development for both companies and because both companies owned recognised brands which could be used for “dual fuel” offers. This was confirmed by a market survey.

2.

The merger would strengthen EDP’s dominant position in the wholesale electricity market. Through the merger with GDP it would gain preferential access to future gas supplies for generation purposes, it would gain access to “proprietary information” about its competitors on the electricity market, and it would have both the “ability and incentive” to raise its rivals costs regarding access to gas and with respect to access to pipeline, LNG and storage capacity. The issue of access to “proprietary information” merits particular attention. EDF would know, in future, the price paid for gas by its competitors and their gas nominations. It would therefore know their planned electricity output at any given time.



Whilst the issue of the knowledge of the nominations1801 for gas supply by rival electricity companies is not examined in detail in the decision,1802 it would have had important competitive consequences. As the integrated dominant firm would have known its rivals’ intended gas consumption, it would also have known their intended electricity output for a significant (and increasing) part of their overall generation portfolio, making it easier for the integrated, dominant company to manipulate market prices, and reinforcing any existing tendency by rivals to price follow the dominant firm. Since effective network unbundling had not yet been achieved through legislation at the time of this merger, there were no regulatory obligations mitigating this risk.

1800 See paragraphs 450-473. 1801 I.e. the actual quantity of gas actually to be consumed by the rival electricity company on a day-ahead, weekahead etc, basis. 1802 See paragraphs 368-372 of the decision.

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Although the competitors of the new group could – once the gas market is opened in 2007 – in theory purchase elsewhere, given that the new group would own all essential gas facilities in Portugal, it was uncertain whether this would be a realistic possibility.

3.

The merger would strengthen GDP’s existing dominant position on the gas market. When the gas market opens to competition, in the absence of the merger EDP would have an interest to seek alternative offers for gas supply for its gas-fired electricity plants. Following the merger, this incentive would disappear, marking market entry far more difficult for new gas suppliers. Furthermore, at present, GDP owned 5 of the 6 gas distribution companies. As EDP owned the other, the merger would further foreclose the Portuguese market once the gas market is opened to new competitors.



In addition to this, the decision notes1803 that the merger would provide GDP a number of advantages that will not be available to future potential competitors on the gas market. Firstly, as it would always have the gas demand from the power stations operated by EDP, it would have a guaranteed minimum gas turnover, giving it advantages in procurement. Secondly, it would have the advantage of being able to offer dual-fuel offers with two well-known national brands. Thirdly, it would benefit from the information it has regarding customers which, with the acquisition of Portgás would now cover the whole country – Portgás being the only gas distribution company not presently owned by GDP.

The Commission thus objected to the merger. Whilst important undertakings were put forward,1804 including the lease of electricity capacity – a type of virtual auction, as well as a commitment to sell as gas distributor, the concentration was prohibited. It is notable that these commitments were at least as important as those accepted in other cases. On appeal, the Court of First Instance upheld the Commission’s decision,1805 most importantly rejecting the parties’ arguments that the Commission had manifestly failed to establish that the merger would have strengthened an existing dominant position and/or significantly impeding effective competition. It also rejected the arguments that the Commission had erred in concluding that the commitments offered would be insufficient to remedy the competition concerns as identified. 1803 At paragraphs 564-608. 1804 See book Part 4, Chapter 5. 1805 Judgment of the Court in case T-87/05, 21 September 2005.

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4.344

However, the Court did annul a part of the Commission’s decision concerning the period prior to the obligatory opening of the Portuguese gas market to competition pursuant to the second gas Directive. The reasoning of the Court is difficult to follow, but appears to indicate that, when concluding that a concentration will have future anti-competitive consequences on a market after it is opened to competition in a few years time, the Commission must make a specific and separate analysis of the effects on competition both before market opening (there will by definition be none) and after market opening. It is submitted that the Court’s Judgment should not be interpreted to mean that in markets where competition does not yet exist due to a specific exemption to the country or region in question under the Electricity or Gas Directives the Commission can never conclude that a significant impediment of competition exists. However, in such circumstances the Commission must specifically analyse the situation following market opening, and these circumstances must be clearly foreseeable at the time of the merger, as must be the expected anti-competitive effects. However the Judgment does not clearly identify any maximum timeframe within such an analysis of the clearly foreseeable effects of the merger in future will be normally possible.

4.345

Notwithstanding this issue of detail, it is clear that the Court agreed with the Commission’s strong line against such ‘conglomerate’ mergers between incumbents in the same relevant or neighbouring geographic markets.

6.4.2 DONG/Elsam/Energy E2 4.346

The second landmark conglomerate case, Dong/Elsam/Energi E2 (2006), concerned the purchase by DONG, the “Danish State-owned gas incumbent” 1806 of two Danish electricity companies, Elsam and E2, described in the decision1807 as “the Danish electricity generation incumbents in West Denmark (Elsam) and East Denmark (E2), respectively”.

4.347

The parallels to the EDP/GDP case are self-evident. However, there were a number of differences. Firstly, obviously realising the difficulty that any such concentration would have in securing approval from the Commission, prior to launching the deal DONG organised some “pre-merger remedies”,1808 notably an agreement for the sale of about 25% of the acquired electricity generation capacity to Vattenfall in the event that the concentration was permitted to pro1806 Para 3 of the decision. 1807 Para 4 of the decision. 1808 Para 668 of the decision.

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ceed. Secondly, ownership unbundling for transmission had already taken place in both the gas and electricity sectors in Denmark. Notwithstanding these important differences, the Commission required important undertakings regarding the gas sector before permitting the operation to proceed. In relation to gas the Commission identified a number of different markets on which it identified problems, notably gas storage/flexibility, wholesale gas supply, supply to industrial customers and decentralised Combined Heat and Power (CHP) plants and retail gas markets at regional and/or national level. Regarding gas storage/flexibility, the decision noted that it is irrelevant whether storage is a separate relevant market or should include other flexibility instruments (line pack, contract flexibility) as in any event DONG would be viewed as being dominant; it controlled basically the entire supply flexibility of gas entering Denmark (being the sole importer of gas from Danish fields). The Commission rejected the argument raised by DONG that the conditions for access to storage/flexibility were carefully regulated and subject to competition policy and that this effectively eliminated dominance or at least rendered its abuse impossible. Interestingly, rather than rejecting this argument out of hand as might be expected,1809 the Commission examines these arguments in detail over some 5 pages,1810 concluding that on the facts the current regulatory regime regarding storage “seems to constitute a competitive advantage to the company”.1811

4.348

The concentration is then found to increase this dominance and also lead to a significant impediment of competition in the following ways:

4.349

–

The concentration would eliminate one of the most important independent sources of alternative flexibility to DONG’s storage facilities, because Elsam and E2 control the main central CHP plants in Denmark. These can provide flexibility to potential alternative gas suppliers that could enter the Danish market by varying their output or fuel switching (the companies owned 5 blocks in 4 central CHP facilities that can switch from gas to alternatives, notably oil). Indeed, in the past, E2 was already providing flexibility (in the form of seasonal flexibility) to third parties. As such it would eliminate 2 major potential rivals in supplying flexibility and thus increase its existing dominant position.

1809 If regulation/competition policy could ever be sufficient to perfectly regulate dominance, then merger control would simply be unnecessary. The fact that regulatory control can never adequate regulate dominance is the preconception behind the need for merger control in the first place. 1810 Paras 318-335 of the decision. 1811 Para 317 of the decision.

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–

4.350

A significant impediment to competition was found to exist as DONG would acquire or reinforce its incentive and ability to raise the storage costs of its actual and potential competitors on the gas market. By acquiring the CHP plants it would gain the ability to significantly reduce its own storage needs, using the flexibility offered by the CHP plants that it would now own. It would then have the possibility of raising its storage tariffs to all users, but because its own needs would be significantly reduced, this would impact mainly on its competitors whilst maintaining its profits on storage operation despite reduced overall usage.

The second area where dominance and a significant impediment of competition was found concerned the market for wholesale gas supply in Denmark, where prior to the merger DONG had a market share of between 75-90%, depending on the calculation method. DONG alone imported gas from the Danish gas fields.1812 The actual and potential competition was found to be very limited. This dominance is found to be strengthened by the concentration: –

It would remove two of the most important actual and potential competitors on the wholesale gas market. E2 was the largest consumer of gas in Denmark, Elsam also very important. As such they would have every interest in the future to independently acquire and sell natural gas in the future, in competition with DONG. In particular Elsam, which has a retail sales arm, would have the interest to acquire gas to sell as a joint gas/ electricity offer to its retail customers. The Commission found that “[g] iven DONG’s entrenched dominant position on such a market, this is likely to lead to a significant impediment to effective competition, in particular through the strengthening of DONG’s dominant position.” 1813



By removing E2 and Elsam from the market as possible customers for other actual and potential gas wholesale suppliers the “concentration would also create “ further disincentives to third parties entering this market on a significant scale […].nearly all independent (non-captive) third party demand in Denmark has so far come from E2”.1814

1812 Dominance was also considered for Sweden, but as any consequences on that market due to the merger would have been only a by-product of the effects in Denmark, this is only considered shortly in the decision. 1813 Para 502 of the decision. 1814 Para 520 of the decision.

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With respect to the retail gas supplies to industrial customers and decentralised CHP facilities, DONG was considered to be dominant and this dominance was viewed as likely to be strengthened for reasons similar to those set out in the paragraph above. DONG had a market share of 60-70% of this market. Despite the fact that this share had reduced by approximately 15% in just 3 years, dominance was found mainly because of (i) DONG’s control of the illiquid wholesale market (where competing retailers have to source much if not all of their gas), (ii) competitors with small market shares, and (iii) the very low switching rate of DONG’s customers.

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This dominant position was viewed as being strengthened because DONG would remove the two largest gas purchasers from this market, making it more difficult for other players to achieve the critical mass to enter the market. In addition, the merger would remove Elsam and E2 as two major potential competitors of DONG on this market as they would both have the ability and the incentive to independently purchase gas for their own needs and, in addition, sell on volumes to these customers.

4.352

Finally, the Commission found that either sole dominance would be reinforced on two regional retail gas markets to households and SMEs, or joint dominance would be strengthened on the national Danish retail gas market. If the market were to be considered regional in nature, DONG would clearly be dominant in two of the regional areas where it has a 90-100% market share, there being practically no competition between suppliers in the different areas. If the market were to be viewed as national in scope, DONG would have a 25-35% market share and HNG/MN would have 55-65%. In this scenario joint dominance was considered to exist due to (i) the limited competition to the two main players, (ii) the fact that DONG supplied gas to HNG/MN and thus knew considerable details regarding its ability to compete with DONG, and (iii) the fact that market is highly transparent and the existence of effective retaliation mechanisms should either of the companies adopt an aggressive marketing strategy to the detriment of the other. The elimination of Elsam and E2 as potential competitors on these markets and their removal from the market as gas purchasers (making it more difficult for a new entrant to gain a balanced portfolio and gain the critical mass to enter the retail market) was viewed as reinforcing this dominance leading to a significant impediment of competition.

4.353

With respect to electricity, prior to the merger E2 has 60-80% of the East Denmark area and Elsam had 70-80% of the West Denmark area. The main competitors were municipally or cooperatively owned decentralised CHP plants and

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third party wind producers, which principally sold their electricity output on the Nord Pool spot market. In these circumstances a finding of dominance and its strengthening by bringing these two companies together with the incumbent gas company would have been highly likely. However, prior to the merger DONG had agreed to sell 25% of the acquired generation capacity, evenly split between the two areas, to Vattenfall if the merger were be permitted to proceed. On this basis the Commission did not raise objections regarding electricity. Post merger and divestiture DONG would hold 35-45% of the West Danish market, Vattenfall 20-25% and other competitors 35-45% The position was similar for East Denmark. The Commission concluded that “the competitive loss in potential competition and in (the very small actual competition) is indeed likely to be substantially lower than the competitive gain by the additional competitor Vattenfall”.

4.355

The willingness of the Commission to object to mergers in such circumstances will therefore depend on the commercial importance of the company acquired. Where this is limited and real alternatives to the acquired undertaking exist, it is submitted that it is likely that the concentration will be approved or will be accepted subject to limited undertakings – such as behavioural requirements to ensure that an acquired gas company continues to supply rival electricity producers on non-discriminatory conditions for a given period.

6.5 Cases dealt with by national competition authorities 4.356

The most famous – probably infamous – conglomerate case dealt with by national competition authorities was E.ON-Ruhrgas, dealt with in competition terms by the Bundeskartellamt. This concerned the merger between the largest German gas and electricity companies. The competition authority proposed – on very similar grounds to those in the EDP/GDP case – to prohibit the merger, again despite important undertakings being offered. However, this decision was overturned by the German government, which has the legal right of veto over decisions of the Bundeskartellamt. Whilst this political decision was, it was stated, taken on competition grounds (the Minister in question secured additional undertakings from the merged group), some commentators have argued that it was at least partly motivated by the desire to ensure a German “national champion” in the energy sector, capable of playing a major role on any eventual European market. In the light of the EDP-GDP case, it is very difficult to conclude otherwise than that if this case had fallen under Community jurisdiction, it would have been prohibited. 574

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6.6 Conclusions In the light of the above, the following may be inferred with respect to the Commission’s approach to gas and electricity conglomerate mergers in practice: –

Where two non-dominant firms merge in markets characterised by effective competition, the Commission is unlikely to raise objections. A possible exception to this may occur if the gas company in question is not dominant regarding sales, but owns essential infrastructure such as storage/import capacity1815 (an increasingly rare case following the introduction of effective unbundling obligations through the third liberalisation package) or where rival electricity companies have long-term purchase contracts with the gas company in question. In such circumstances a significant impediment of competition may be found by the Commission, and measures may need to be taken to guarantee non-discriminatory access to gas supplies and to prevent the use by the electricity arm of the merged group of proprietary information of gas purchasers. Examples of such undertakings might be giving competitors the right to renounce the long-term contracts early, or establishing effective and verified Chinese walls.

–

Where a firm with considerable market power and one in a comparatively weaker market position merge, a significant impediment of competition may be found. This will be most important where either (i) the level of market power is so great that no real possibilities exist for rivals to team up with other companies to offer a joint electricity/gas product or (ii) the gas company in question owns essential facilities (again, an increasingly unlikely scenario under the current unbundling regime) or represents an “essential” gas supplier for rivals on the electricity market. In such circumstances, it is likely that the merger will only be allowed with important undertakings. However, arguments do exist in favour of permitting such mergers to proceed – allowing a leading firm in a national market to prepare for regional or European-wide competition. Thus, in most cases, whilst important undertakings would be necessary, a solution is likely to be found.

–

Where a dominant or quasi-dominant gas and a dominant or quasi-dominant electricity firm merge, the operation is very likely to raise competition concerns. If a joint electricity/gas firm with significant market power

1815 See, in this respect, Dong/Elsam/Energie E2 (2006) at book paragraph 4.346-4.349 regarding storage.

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in both gas and electricity exists in all EU Member States, this is likely to hamper, not promote, the integration of national markets. Such operations can raise barriers to entry or expansion that are possibly insurmountable in the medium term. Such concentrations are therefore likely to be permitted to proceed on the basis of very important undertakings; possibly so important that they may even undermine the economic rationale for proceeding with the merger, as happened in the EDP/GDP case. Similarly, the DONG case demonstrates that in the rare cases that such mergers may be permitted to proceed, they will need to provide remedies that demonstrably restore the ex-ante competitive position on the market.

7.

Coordinated effects and oligopolistic dominance

4.358

As can be seen from the cases examined in the sections above, many of the decisions dealt with by the Commission to-date concern “oligopolistic dominance” – or, in current mergers parlance, the creation of a significant impediment to effective competition on the basis of coordinated effects.

4.359

An oligopolistic market structure is one in which the most logical profit-maximising market strategy of the companies concerned will be, rather than competing vigorously with one another in an attempt to gain market share, that of paralleling one-another’s pricing policy with the result that supra-competitive prices are achieved. In a truly anti-competitive oligopolistic market structure, such behaviour need not result from any collusion between the companies concerned; it is simply the most logical business strategy that they can follow. As such, insofar as the companies concerned refrain from any form of collusion or contact on the issue of their pricing policy, their price parallelism is difficult1816 to attack under the other instruments of competition policy, notably Articles 101 and 102 TFEU.

4.360

For this reason, it is vital that in markets which are prone to coordination, merger policy is vigorously enforced. Once an oligopolistic structure develops, aside from breaking up companies through a specific legislative act, it is very difficult to address the high prices that are inherently likely to result other than through price caps. Such instruments create risks in terms of security of supply and will always be inefficient.1817 1816 But not impossible. In theory an action is possible under Article 102 TFEU, an abuse of a joint dominant position through excessive pricing. However, in practice, this is almost impossible to prove. 1817 See Volume I of EU Energy Law, Chapter 10.

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The fact that electricity markets are, by their very nature, conducive to coordination and the establishment of oligopolistic dominance, was recognised by the Commission already in the Sydkraft/Graninge case (October 2003).1818 Whilst the Commission concluded that oligopolistic dominance would not be reinforced in the specific circumstances of the case, the decision states the following: “The electricity market has a number of features that prima facia indicates that competition could potentially be significantly impeded through co-ordinated behav‑ iour. In general three conditions are necessary for a finding of collective dominance based on tacit co-ordination:1819 –

each member of the dominant oligopoly must have the ability to know how the other members are behaving. There must be sufficient market transpar‑ ency for all members of the dominant oligopoly to be aware, sufficiently pre‑ cisely and quickly, of the way in which the other members’ market conduct is evolving;

–

the situation of tacit co-ordination must be sustainable over time; that is to say, there must be an incentive not to depart from the common policy on the market; and

–

the foreseeable reaction of current and future competitors, as well as of con‑ sumers, would not jeopardise the results expected from the common policy.

A finding of a risk of collusion would inter alia have to rely on proof of the following market features: –

the product is very homogeneous;

–

the price-setting part of the transactions takes place on an exchange with a fairly high degree of transparency;

–

interaction is very frequent;

–

capacity restrictions lead to stable market shares and limit the scope for smaller players to disturb co-ordination by a tight oligopoly;

1818 Case M.3268 of 30.10.2003. 1819 Cf. CFI judgement of 6.06.2002 in case T-342/99 Airtours v Commission [2002] ECR II-2585, paragraph 62.

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4.362

4.363

–

barriers to entry prevent co-ordination being disturbed by new entrants;

–

some production facilities are co-owned or otherwise shared by several pro‑ ducers.”

This can also be seen from an examination of the Commission’s 2004 horizontal merger Guidelines,1820 where the following underlying characteristics of an oligopolistic (i.e., “co-ordinated”) market are identified: –

large market shares will be divided between few competitors;

–

the product is likely to be homogeneous in nature;

–

demand and supply will be relatively stable and predictable;

–

the product market in question is unlikely to be driven by innovation; prices are likely to be transparent;

–

competitors are likely to have similar market positions;

–

structural links such as cross-shareholdings help aligning incentives among the co-ordinating firms;

–

“retaliation” is possible; for example if one firm chooses not to follow the price initiatives of others and lowers its prices in an effort to gain market share, the likely consequence is that due to the transparency that exists on the market, the other companies will immediately follow, meaning that the effort to increase market share fails and all firms suffer from lower revenues;

–

potential competitors are not in a position to upset the price-following due to the existence of entry barriers.

It is clear that many EU electricity and gas markets present most, if not all of these characteristics:

1820 Available on DG Comp’s website.

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–

prices are transparent not least due to the operation of hubs, exchanges and pools. This important level of transparency is reinforced by the regular reporting by independent companies of current typical market price levels both on exchanges and based on bilateral deals;

–

both products are commodities, with relatively little innovation (particularly from the consumer viewpoint);

–

demand and supply are largely predictable;

–

many relevant geographic markets are characterised by large market shares being held in few hands;

–

on many markets, structural links, through cross-shareholdings and joint ventures, exist between the large companies traditionally active on the market;

–

significant entry barriers exist, inter alia due to (i) limited availability of transmission, pipeline or interconnector capacity, (ii) potentially high balancing costs, which may sometimes disadvantage smaller entrants versus well established suppliers, (iii) the fact that the largest players (usually ex-incumbents) often benefit from economies of scale, (iv) advantages in terms of generation portfolio and (v) vertical integration between wholesale supply and distribution, which can make it harder for non-vertically integrated companies to compete.

Such a finding is also reflected in past market behaviour in energy markets. For example it is widely believed (but legally unproven) that oligopolistic behaviour was a significant contribution (if not an underlying cause) of the California electricity crisis in 2000 and 2001, and suspicions of oligopolistic pricing on the England and Wales electricity exchange was one of the motivations for the introduction of the NETA trading scheme (a significant reform later extended to the entirety of Great Britain, and leading to the introduction of Great Britain’s Balancing and Settlement Code (BSC)).

4.364

The finding of a significant impediment to effective competition as a result of an oligopolistic market structure can result not only from horizontal mergers. In particular – as can be seen from the sections above – in future one can expect that where existing oligopolistic markets exist, these are likely to be strengthened (i) when one of the existing market participants, active at the wholesale

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level, acquires a network or distribution/retail business, thus potentially making market entry harder by new-comers and providing a further way to discipline other actors on the market if they fail to follow price initiatives, or (ii) when such a company acquires either a potential competitor in a neighbouring geographic market or a company in a related sector, thereby eliminating potential competition.

4.366

The decisions taken by the Commission to-date show a keen awareness of the fact that electricity and gas markets are inherently prone to the development of oligopolistic structures and the need for a “strong” merger control policy in such cases. See in this respect VEBA/VIAG (book paragraphs 4.223-4.226) and Grupo Villar Mir/EnBW/Hidroelectrica del Cantábrico (book paragraphs 4.254-4.260) and DONG/Elsam/Energi E2 (book paragraph 4.346-355).

4.367

In relation to electricity, a further relevant case concerning the possible existence of oligopolistic dominance is E.ON/TXU Europe.1821 E.ON, through its UK subsidiary Powergen, sought to acquire the UK assets of TXU, notably a sales portfolio of 5 million gas and electricity customers. A number of electricity and gas markets were defined, including electricity generation and the supply of electricity and gas to different categories of customers.

4.368

With respect to oligopolistic dominance the decision examines the situation in the wholesale electricity market in detail.1822 The Commission noted (i) the significant number of competitors (British Energy 10-15%, Innogy 10-15%, EDF 10-15%, AES 5-10% and a number of smaller competitors with 3-6%), (ii) the results of a detailed market enquiry which indicated the widespread belief by electricity purchasers that effective competition existed, (iii) the existence of numerous and varying supply bids when tenders took place, (iv) the regular switching of suppliers by customers and (v) the fact that the market shares of the largest companies had been significantly declining over the last three years in the geographic areas of the UK where they had been most active.

4.369

Most of the decisions examined in previous sections where a finding of oligopolistic dominance occurs were in electricity markets. However, as already mentioned, gas markets also exhibit the structural characteristics likely to lead to the finding of oligopolistic dominance. 1821 Case M.3007 of 18.12.2002. 1822 Regarding the other markets identified, the market structure and a market investigation confirming the existence of competition and regular switching of supplier by eligible customers was considered to be adequate to render a detailed examination on this issue unnecessary.

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A good example of a finding of oligopolistic dominance in the gas industry is the Exxon/Mobil case (1999).1823 With respect to the natural gas markets concerned, two geographic markets were considered to be affected, the Netherlands and Germany. Both were considered to be national in scope.

4.370

With respect to the Dutch market, the operation was considered to be likely to reinforce the sole dominant position of Gasunie on the market1824 – Exxon owned a significant stake in this company and Mobil owned one of the few real (if limited) competitors to Gasunie.

4.371

Regarding Germany, however, it was considered that the operation would lead to a reinforcement of the existing oligopolistic dominant position of Exxon. The German gas wholesale market was particularly concentrated, at the time of the merger, with links between the various market players:

4.372

BEB Thyssengas Ruhrgas

Jointly controlled by Exxon and Shell Jointly controlled by Exxon and Shell BEB and Mobil are important shareholders, together with BP and German coal and steel producers

VNG Wingas

Ruhrgas, BEB, Gazprom and Wintershall are shareholders Jointly controlled by Gazprom and Wintershall.

The market was viewed as being characterised by an anti-competitive oligopolistic dominant position on the following grounds: –

–

High market share between few firms: Ruhrgas, BEB, Thyssengas and VNG accounted for 80-90% of German gas imports. Due to “the common fear of retaliation, the stable relationship [between these companies, remaining in their respective regions] will continue”. Thus, even within Germany these companies would be unlikely to actively compete: each had its own traditional region and all had the commercial interest not to aggressively challenge this status quo. High entry barriers due to (i) the sunk cost investment necessary for the construction of new pipelines, (ii) the need to sign long-term take-or-pay contracts to finance construction, and (iii) the inadequate third party access arrangements that existed in Germany in 1999.

1823 Case M.1383 of 29.09.1999. 1824 See book paragraph 4.193.

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–

Structural links between market players limiting any incentive to compete.

–

Transparent market: each of the long-distance wholesale transmission companies would know immediately when one of their clients changed supplier and they would know immediately who the other supplier is.

–

No incentives to compete due to fear of retaliation.

–

Limited ability of Wingas (considered to be the main independent player) to further increase its market share, due to Ruhrgas participation in Gazprom and the maturity of the market.

–

Indications of non-competitive conditions: German prices were continuously amongst the highest of its surrounding countries.

4.374

RWE/Essent (2009)1825 also showed a continuing strict approach, where regarding the German wholesale electricity market, RWE held 30-40%, similar to E.ON. Main competitors, Vattenfall and EnBW held jointly 50-60%. The Commission recognised that this was “already an oligopolistic market, with RWE and E.ON ... part of a dominant duopoly”, and that the German competition authority had “ long considered that any strengthening of their position would further strengthen dominance and thus be prohibited”.

4.375

Essent held a 51% interest in two Stadtwerke, which had 1000-15000 MW coal based generation plant, and other minor interests, as well as a specialist energy supplier company active in the wholesale market. The Commission thus concluded that a strengthening of RWE’s joint dominance would be strengthened. Furthermore, the Commission concluded that the merger would have important vertical effect: “ independent suppliers will lose one of the very few remaining independent Stadtwerke in Germany, and thus endanger their entry plans in the highly concentrated German generation market”.

4.376

With respect to gas markets, whilst at the horizontal level of gas wholesale supply no significant competition concerns were found. However, as Essent was an important gas customer through its ownership of the two Stadtwerke, the merger was found to result in important customer foreclosure: as a result of the proposed transaction, RWE would thus be in a position to secure the future captive sales to Stadtwerke, representing 5-10% of the market. 1825 Case M.5467 of 23.06.2009

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In order to resolve the issue, RWE proposed to divest the interest in the Stadtwerke owned by Essent and the merger was permitted to proceed.

8.

Conclusion

In conclusion, and bearing in mind the largely concentrated nature of energy markets in most EU Member states, it is clear that mergers involving at least one of the gas and electricity “majors” in a given EU Member state will in all likelihood raise questions about the oligopolistic nature of the market post-merger, hence potential coordinated effects of the merger. This may be the case both in markets where a small number of players (e.g., four or less) is established, and in markets which are still dominated by one leading company (e.g., the pre-liberalisation incumbent). This is in addition to the horizontal (unilateral) and vertical concerns that mergers may also raise, as discussed earlier in this Chapter. Every case continues to require consideration on its own merits.

4.377

One may say that the transition from monopolistic to competitive energy markets is still work in progress across many parts of the European Union. More than two decades after the liberalization of EU energy markets started, these are still largely seen as national markets in nature (and rightly so from an economic analysis perspective), and most of them remain dominated by one or a handful of operators. So one thing is clear: the Commission will continue to examine concentrations with a critical eye. This will be done with two primary objectives in mind. Firstly, to ensure that mergers between companies on the same relevant geographic market, which is already characterised by dominance or an oligopolistic structure, do not raise further entry barriers (or reinforce those that exist already). Second, where cross-border mergers take place, to ensure that the result is not to create a wider regional or European market characterised by a wider oligopoly, with each firm possibly having an interest to largely remain in its traditional area, acting elsewhere as a price-follower to the ex-incumbent or incumbents.

4.378

The 2010s have arguably seen fewer industry-changing transactions than the first decade of the century and the late 1990s saw. This has several plausible explanations, from corporate prudence in times of greater economic uncertainty to exhaustion of the most obvious integration opportunities in the immediate years following liberalization. Yet, it is submitted that merger activity will likely increase in the medium term, spurred by a desire of energy companies to gauge the opportunities that the transition to a decarbonized energy system is bring-

4.379

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ing, or as a response to regulatory and competitive pressures (leading, for instance, to lower retail margins) in some of the more mature markets within the EU. The ongoing integration and re-organization of the generation and retail businesses of E.ON and RWE is probably a good example of both types of drivers. The greatest challenge of EU merger policy in the next years will be to help unlock the competitive potential of the EU energy industry, while balancing economic and policy pressures to boost European energy “champions” and to deliver the clean energy transition in a cost-effective manner.

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CHAPTER 5 Remedies in energy mergers 1.

Introduction

When a merger raises competition concerns, the only way to avoid a prohibition decision is to offer remedies that resolve them. Since the entry into force of the Merger Regulation, a number of clearance decisions have been conditioned by remedies. The experience gained by the Commission has led to a Notice which sets out the substantive and procedural principles it applies to remedies.1826 In recent years, the Commission has become more demanding as to their characteristics.

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The procedural aspects of the remedies are addressed in the general section on merger control at book paragraphs 4.606 and 4.610-4.615. This chapter focuses on the substance of remedies in merger decisions in the energy sector.

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The main principles applicable to remedies may be summarised as follows:

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(i)

It is the responsibility of the Commission to show that a concentration impedes effective competition. The merging parties have the responsibility to show that the proposed remedies, once implemented, completely eliminate the competition concerns.

(ii)

As a general rule, the Commission prefers structural remedies (divestiture) as opposed to behavioural remedies. According to the Commission, commitments which are structural in nature, such as the commitment to sell a business unit, are, as a rule, preferable inasmuch as such commit-

1826 Commission Notice on remedies acceptable under Council Regulation (EC) No 139/2004 and under Commission Regulation (EC) No 802/2004, OJ 2008 C 267/1.

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ments prevent, durably, the competition concerns which would be raised by the merger and do not, moreover, require medium or long-term monitoring measures.1827 By way of illustration, in RWE/Essent, the Commission has indicated that, as concerns the different types of remedy, the most effective way to maintain effective competition is to create the conditions for the emergence of a new competitive entity or for the strengthening of existing competitors via divestiture by the merging parties1828. The energy sector is relatively specific in this respect as access to generation capacities has often typically been given through virtual power plants (VPP) available to competitors via auctions rather than via real divestiture (i.e. the sale of shares or assets).1829 (iii) Whilst being the preferred remedy, divestiture is not the only remedy acceptable to the Commission. For example, where the competition concern results from control over a key piece of infrastructure, remedies might be accepted that guarantee non-discriminatory access to such infrastructure.1830 (iv) Remedies should be capable of being implemented quickly and effectively. However, certain remedies such as VPP auctions require a certain degree of ongoing monitoring. (v)

In certain cases, owing to the specifics of the competition problems raised by a given concentration, the parties may have to offer remedy packages which comprise a combination of divestiture and other remedies.1831

(vi) Where an existing dominant company acquires a competitor, thus increasing its market share and dominance, the Commission cannot require remedies to remove the dominance. It can only require remedies – almost 1827 Paragraphs 15 and 17 of the Commission Notice on remedies. However, in Energias de Portugal v. Commission (judgment of 21.09.2005 in case T-87/05) and again in EasyJet Airlines v Commission (judgment of 4 July 2006 in case T-177/04), the General Court has reiterated the statement held in the Gencor and Tetra Laval cases whereby “ behavioural commitments are not by their nature insufficient to prevent the creation or strengthening of a dominant position, and [that] they must be assessed on a case-by-case basis in the same way as structural commitments.” 1828 See RWE/Essent in case M.5467 of 23.06.2009, paragraph 454. 1829 See EDF/EnBW in case M.1853 of 7.02.2001, and Verbund/EnergieAllianz in case M. 2974 of 11.06.2003. 1830 See Total/GDF in case M.3410 of 8.10.2004; VEBA/VIAG in case M.1673 of 13.06.2000; Grupo Villar Mir/EnBW/hidroeléctrica dela cantabrico in case M.2434 of 26.09.2001. 1831 See VEBA/VIAG in case M.1673 of 13.06.2000; EDF/EnBW; Verbund/EnergieAllianz in case M.2974 of 11.06.2003; EDF/British Energy in case M.5224 of 22.12.2008.

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certainly divestiture – that returns the situation to the status quo ante, i.e. the situation after the merger should be no worse (but need not be any better) than before the merger took place.1832 The diversity of the remedies and the various possible combinations make any attempt at classification difficult. The present chapter classifies remedies in broad categories with a particular emphasis on their ability to solve the competition concerns identified by the Commission.

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A specific section has been devoted to the ENI/EDP/GDP1833 which ended in a prohibition because of the inadequate remedies proposed by the merging parties.

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2.

Divestiture of shareholdings

A number of electricity merger decisions have been approved subject to the divestiture of an interest in a company via the sale of shares.1834 This commitment may be necessary for several reasons, including the need (i) to remove the problematic horizontal overlaps (and thus increased market share that would have resulted from the merger) or the incentive to foreclose in the case of concentration raising vertical effects; (ii) to sever existing links with competitors or (iii) to offset the acquisition of a potential competitor by the creation of a new one. These divestitures may be accompanied by further commitments to ensure the autonomy of the business divested.

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2.1 Divestiture and severance of structural links In Verbund/Energie Allianz,1835 a commitment to divest Verbund’s controlling majority share (55%) in the undertaking PC prevented the accumulation of the Verbund and EnergieAllianz market shares in the market for supply to large customers that would otherwise have resulted from the merger.

1832 See ECS/Sibelga, case M.3318 of 19.12.2003. 1833 Case M.3440 of 9.12.2004. 1834 See, in addition to the cases discussed in this section, Vattenfall/Nuon Energy (case M.5496 of 22.06.2009) in which Vattenfall offered to divest Nuon Deutschland GmbH to eliminate the antitrust concerns on the affected markets for retail supply of electricity to small customers in Berlin and Hamburg. 1835 Case M.2974 of 11.06.2003.

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APC was responsible for all of Verbund’s distribution activities to large customers. In this market, the merged entity would have had a market share in the range of 55% to 65% (EnergieAllianz had between 45-55% and Verbund – through APC – had 5-15%). All remaining competitors had market shares of less than 10%. The parties’ pre-eminent position would have been secured by their leading position in electricity generation. Verbund was also the biggest challenger to the already very strong position of EnergieAllianz in this area. The divestiture of Verbund’s shareholding in APC resolved the competition concerns, restoring the status quo ante.

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In Gaz de France/Suez,1836 the Commission found that the merger, as originally planned, would have lead to very high combined market shares in the gas markets in Belgium and would have removed GDF as the strongest competitor to the incumbent Distrigaz. The removal of GDF’s competitive pressure would also have raised competition concerns with regard to the supply of gas to gas-fired power generators competing with Electrabel. The Commission also found that high barriers to entry would have further strengthened the parties’ dominant position in the gas markets in Belgium. Inter alia, the merging parties would have had access to most of the gas imported to Belgium and would have hold almost all long-term import contracts. In addition, due to their control over Fluxys, the network operator, the merging parties would have had privileged access to supply infrastructure and storage.

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The merger would also have strengthened GDF’s dominant position in France by removing the competitive pressure exerted by Distrigaz, one of its best placed competitors. In France too, barriers to entry, relating to access to gas and infrastructures, would have increased the horizontal effects of the merger. –

To remove these concerns, Suez has undertaken to divest its controlling majority holding in Distrigaz to a third party, having the relevant expertise in the energy sector. Distrigaz being a viable and well-established entity in the gas markets in France and in Belgium, it will be in a position to compete effectively with the merged entity Suez/GDF in the two countries.

–

Prior to the divestiture of its stake in Distrigaz, the merged entity undertook to conclude one or more supply contracts with Distrigaz, intended to cover part of Electrabel’s (Suez’ subsidiary) needs for its gas-fired power plants and the needs of Electrabel Customer Solutions (ECS) to

1836 Case M.4180 of 14.11.2006.

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serve its customers (mainly residential). The Commission noted that the viability of Distrigaz was not called into question by these contracts since, in particular, the volumes of gas available to Distrigaz outside the supply of Electrabel and ECS will be sufficiently important to meet an increasing demand. The amount of the TWh subject to the contracts(s) will decrease over time so that after five years, contracts for only 20 TWh will remain in place. –

The parties also undertook to transfer to Distrigaz, at any time, the storage capacity in Belgium and the corresponding volumes being stored, relating to any existing ECS public supply customer in Belgium which might be acquired by Distrigaz or by one of the resellers supplied by it.

–

The parties have also undertaken that GDF will relinquish its 50% shareholding in the capital of Segebel, a company which itself has a 51% shareholding in SPE’s capital, the second biggest player in the Belgian electricity and gas markets. The severance of GDF’s indirect shareholding in SPE aims at eliminating the overlaps between GDF and Suez in the supply markets to small residential and industrial customers and establishing SPE as a competitor of the merged entity in these markets.

Competition concerns would also have arisen in the market for district heating in France, where the merger would have combined the largest player (Suez) with its second largest competitor (GDF), thus leading to a further concentration of this market. To remove these concerns, the parties have undertaken to relinquish Cofathec Coriance (a indirect subsidiary of GDF) and all the elements which go to make up its stock-in-trade (with the exception of its holding in district cooling networks) and the five district heating networks operated by Cofathec Services. Such divestiture removes the horizontal overlap between GDF and Suez in the market for district heating in France.

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In EDF/British Energy,1837 one the concerns was that of a withholding of production by the merged entity. To address this concern, the parties proposed to divest BE’s Eggborough coal plant and EdF’s Sutton Bridge gas power (Sutton Bridge being subject to a tolling agreement before being sold to a third party), reducing the number of flexible plants owned by the merged entity from four to two.

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1837 Case M.5224 of 22.12.2008.

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The Commission noted that the divestment of Sutton Bridge was an important addition to the initially proposed remedy package since it is a gas plant with a higher marginal cost than the parties’ other flexible plants, which are all coal plants. It would thus have been less costly for the merged entity to withhold Sutton Bridge than other flexible plants in order to increase prices, in particular during peak hours when withholding is more likely.

4.393

Considering the revised remedy package, the Commission noted there will only be a relatively limited increment (one coal plant) in flexible technology for the merged entity compared to BE’s pre-merger portfolio. Furthermore, there is no material change in the marginal cost of the available flexible plants that could be used in a withholding strategy, since both the merged entity and BE’s premerger only have coal plants to withhold. Finally, the baseload production that would mostly benefit from a price associated with a withholding strategy would be unaffected by the merger.

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The acquisition of Essent by RWE is another example. This transaction would have significantly impeded competition on the German wholesale electricity market.1838 RWE is the largest Germany electricity producer. In Germany, Essent was primarily active though a 51% shareholding in Stadtwerke Bremen AG (“SWB”), an electricity generator and supplier as well as a gas supplier. SWB had several direct and indirect shareholdings in various municipal utilities, the most important of which being the 49.9% shareholding in Stadtwerke Bielefeld.

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In its decision on the German electricity wholesale market, the Commission had considered that RWE and E.ON formed part of a dominant duopoly on the German wholesale market.1839 For its part, the BKartA has in its long-standing decision practice also held that RWE and E.ON form a dominant duopoly on the German electricity wholesale market and that any further increase in Stadtwerke participations by either of the two would further strengthen their dominant position and is thus to be prohibited.

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The Commission noted that RWE’s acquisition of the 51% of SWB and with it of the Stadtwerke Bielefeld share would reinforce its structural links with E.ON. The market investigation has indicated (and this was in line with the assessment of the Commission in the antitrust case concerning E.ON) that there are significant hurdles with respect to building new generation capacities in Germany 1838 Case M.5467 of 23.06.2009. 1839 Case COMP/39.388 – (E.On) German electricity market – decision of 26.11.2008 relating to a proceeding under Article 82 of the EC Treaty (now Article 102 TFEU).

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which affect entrants comparatively stronger than the incumbents. In addition, the current economic crisis has caused the cancellation of many power plant projects, in particular those of incumbents. Therefore it was important, in the Commission’s view, to avoid that the merger reduces the number of independent wholesale market players and thereby impedes effective competition. In order to remove the serious doubts of the Commission, the parties have offered to divest Essent’s controlling shareholding of 51% in SWB. The Commission noted that SWB would constitute an independent, viable and competitive business (SWB is the incumbent municipal utility based in Bremen and the city of Bremerhaven (and some neighbouring municipalities); it is a vertically integrated electricity and gas utility present across the generation, distribution and supply of electricity and gas and other utility services; it is a stand-alone business and disposes of all necessary tangible and intangible assets to conduct its business and will continue to do so after divestment of Essent’s 51% interest).

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In EDF/Segebel,1840 the competition concerns arose from the fact that the proposed transaction (i.e. the acquisition by EDF of exclusive control of Segebel, a holding company whose only asset is a 51% stake in SPE, the second largest electricity operator in Belgium) removed EDF as the most ambitious entrant in the Belgian wholesale and generation markets.

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In this respect, the Commission noted that (i) prior to the proposed transaction, EDF had a very modest foothold in the Belgian electricity wholesale market but it had persistently tried to increase its access to generation capacity in various projects; (ii) EDF was developing two projects which, if realised, would create an important extension of its position in the Belgian electricity wholesale market; (iii) none of the other market participants have projects that foresee the construction of generation capacity as ambitiously as EDF.

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All current assets related to EDF’s development projects were located in two separate companies, [CCGT1 Company] and [CCGT2 Company] respectively, which are both owned at 100% (minus one share) by EDF Belgium.

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In order to remove the competition concerns identified by the Commission in respect of the proposed transaction, EDF provided remedies consisting of:

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1840 Case M.5549 of 12.11.2009.

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–

the immediate divestiture of the assets of either [CCGT 1] or [CCGT 2], and;

–

the divestiture of the assets of the remaining of these two companies if, by a certain date, EDF has not taken a final investment decision or has taken a negative final investment decision with regard to the remaining site.

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The combined effect of these remedies is that a generation capacity constituting approximately [10-20]% of the existing Belgian generation capacity will be made available to the market.

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However, the original text of the remedies proposed by EDF did not specify in more detail what constitutes a “final investment” decision. Therefore, during the market test of the remedies, the question arose as to what constitutes an irrevocable decision to invest in building a power plant and whether the entering into a final investment decision by a company is a sufficient guarantee that the project would be pursued.

4.404

After the market test, EDF submitted a revised commitments package so as to provide increased certainty that a final investment decision will result in the actual materialising of the investment. EDF undertook to sign an unconditional binding purchase contract for the essential components of a CCGT of a potential maximum capacity of [900-950] MW dedicated to the [CCGT 1] project or the [CCGT 2] project, within a certain deadline following the “Final Investment Decision Date”. In case that contract is not entered into in that period, EDF will be deemed to have taken a negative final investment decision and would thus be obliged to divest the second site.

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The clearance decision notes that this modification ensures that EDF can retain the second remaining site only if a high degree of probability exists that it will make an irrevocable decision to invest to construct a power plant before a given date. It is also ensured that EDF cannot delay or prevent the entry of other competitors. Failing this, EDF will also be replaced for this site by another market player that has incentives equivalent to those of EDF prior to the proposed transaction.

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The divestiture of a shareholding may also be necessary in mergers having vertical effects. Such commitments were necessary in E.ON/MOL1841 to remove the incentive of the new entity to foreclose its competitors on the downstream gas markets. 1841 Case M.3696 of 21.12.2005.

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The original plan between E.ON and MOL was that E.ON was to acquire an interest of 75 % minus 1 share in two subsidiaries of MOL (the incumbent oil and gas company in Hungary), [MOL] WMT (wholesale, marketing and trade) and [MOL] Storage. The agreements also provided for a 5-year put option under which MOL could sell its remaining 25 % plus 1 share interests in WMT and Storage to E.ON as well as a put option for two years under which MOL could require E.ON to purchase a 25 % plus 1 share or a 75 % minus 1 share interest in MOL Transmission.

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After an in-depth inquiry, the Commission found that the 25% + 1 minority shareholdings which MOL would retain in WMT and Storage and the existence of the put option for the shareholdings of MOL Transmission to E.ON would create structural links between E.On and MOL which would give MOL an incentive to discriminate against E.On and MOL’s competitors for access to domestic gas, gas transmission services and new gas storage facilities.

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In response, the parties offered to sever the structural link between the gas production (MOL E&P) and transmission (MOL Transmission) activities retained by MOL and the gas wholesale and storage activities acquired by E.ON, through the divestiture by MOL of its remaining minority interest in WMT and Storage.

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MOL agreed to divest its remaining shareholdings of 25% + 1 share in Storage and WMT within six months following the transaction to a buyer who will be subject to the Commission’s approval. In addition, MOL undertook not to acquire direct or indirect minority stakes in WMT and Storage for a period of 10 years as long as E.ON is a majority shareholder of those companies.

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The objective of such remedy was to alleviate the competition concerns raised by the Commission as regards MOL’s incentives (in particular through its subsidiary MOL Transmission and its branch MOL E&P) to favour WMT (for access to the transmission network) and Storage (for access to future storage sites).

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In particular, the sale of MOL’s minority share in Storage and WMT was found adequate to eliminate the incentive for MOL E&P to engage in discriminatory behaviour vis-à-vis potential future gas storage operators as regards the sale of depleted gas fields and the incentive of MOL Transmission to engage in discriminatory behaviour vis-à-vis traders and rival regional distribution companies with a view to increase WMT profits.

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4.413

Such remedy lead to a complete ownership unbundling between MOL controlling gas production and transmission (MOL E&P and MOL Transmission) and E.ON controlling gas wholesale and storage (WMT and Storage).

4.414

Furthermore, under the agreements initially concluded between MOL and E.ON, MOL was granted a 2-year put option under which it could require E.ON to purchase a 25% + 1 share or a 75% – 1 share interest in MOL Transmission.

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MOL undertook (i) that it will not exercise the put option for the 25% + 1 share interest in MOL Transmission (while retaining the put option for the 75% stake), and (ii) will not sell to E.ON or any of its affiliates, for a period of 10 years as long as E.ON is a majority shareholder of WMT and Storage, a share interest in MOL Transmission that would not result in E.ON acquiring either sole or joint control over MOL Transmission.

4.416

The objective of such remedy is to ensure that any acquisition of a share interest in MOL Transmission by E.ON will be subject to merger control review by the relevant competition authority in the framework of the market conditions prevailing at such time.

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In addition to horizontal concerns in the German wholesale electricity market, the acquisition of Essent by RWE1842 also raised vertical issues namely on the market for short-distance wholesale supply of L-Gas.

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The envisaged acquisition gave rise to a vertical relationship between the upstream market for L-Gas short-distance wholesale supply and the downstream markets for L-Gas retail sales.

4.419

RWE has market share of [90-100]% of in the short-distance wholesale supply of L-Gas in the RWE market area. It has also participations in a number of retailers (including Stadtwerke) in Germany. RWE’s sales are to a large extent secured by RWE through its shareholding in these entities. In this respect, the Commission noted that all the Stadtwerke present in the RWE TSO area and in which RWE holds participations were supplied with L-Gas by RWE in both 2007 and 2008.

1842 Case M.5467 of 23.06.2009.

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Essent/SWB owned shareholdings in a number of Stadtwerke including Stadtwerke (SW) Bielefeld, SW Gütersloh and SW Ahlen which are located in the RWE area. These three Stadtwerke are connected to the RWE L-Gas transmission grid, while SW Bielefeld and SW Ahlen are active on the downstream LGas supply markets. Against this background, the envisaged transaction offered the possibility to RWE to hold a share in SW Bielefeld and SW Ahlen and to secure (or further capture) the sales made to the Stadwerke in which SWB has direct and indirect participations, These sales together with the gas purchases (in 2008) of the Stadtwerke in the RWE L-Gas area in which RWE holds participations represent about [50-60]% of the short-distance wholesale supply market of RWE in its area. The transaction would thus have allowed RWE to raise the degree of captivity of clients through shareholdings to half of the market and, above all, lead to an increased incentive of RWE to engage in customer foreclosure, leading to the removal of its competitors or to entry pre-emption on the shortdistance wholesale market of L-Gas in the RWE area. The divestment of Essent’s controlling shares in SWB addressed the serious doubts identified by the Commission in relation as regards the increase of RWE’s ability to foreclose L gas wholesalers in the RWE TSO area.

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In GDF Suez/International Power,1843 the Commission found that the proposed transaction, i.e. the acquisition of International Power by GDF Suez, as initially notified, would have raised concerns with regard to the T-Power plant, the only electricity generation asset controlled by International Power (jointly with Tessenderlo and Siemens) in Belgium. The Commission noted that at that time (2009), GDF Suez controlled [60-70]% of the production capacity and [70-80]% of the electricity produced in Belgium, making it by far the market leader and providing it with a dominant position.

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The T-Power plant was foreseen to come online in the middle of 2011. Although International Power would have been the operator of the T-Power plant under an operation and maintenance agreement (the “O&M Agreement”), it would not have benefited from the electricity produced by the plant due to a gas tolling agreement entered into with RWE Essent to which T-Power committed its entire electricity production for a period of 15 years. According to the tolling agreement the entire capacity of T-Power was to be made available to RWE Essent which in turn would be responsible for the decisions on the volumes of electricity produced by the T-Power plant and for the gas sourcing of the plant.

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1843 Case M.5978 of 26.01.2011.

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4.424

The owners of the plant would have been rewarded a fee for making the generation capacity available to RWE Essent.

4.425

GDF Suez and International Power submitted that, by virtue of the tolling agreement, the T-Power plant would not confer to International Power any presence on the Belgian market for generation and wholesale of electricity as only RWE Essent would benefit of the electricity output produced by the plant. On this basis, the parties concluded that no horizontal overlap between GDF Suez’ and International Power’s activities would result from the transaction in Belgium.

4.426

However, strong concerns were voiced as to a possible reinforcement of GDF Suez’s position on the Belgian wholesale market given its commercial (through International Power’s stake in T-Power) and operational involvement (through the O&M Agreement) in the T-Power plant. Third parties argued that posttransaction GDF Suez would be in a position to gain access to detailed information on the production patterns and availabilities of the plant, which GDF Suez might use to strengthen further its position on the wholesale market. It was argued that this would have the same effect as a horizontal overlap between the parties’ activities as GDF Suez would indirectly benefit from the T-Power plant activity in coordination with its existing generation portfolio.

4.427

The Commission considered that the stipulations of the tolling agreement and the O&M Agreement would provide GDF Suez with the sensitive information which could be used to raise electricity prices on the Belgian wholesale market to its own profit and to limit the competitive pressure exerted by RWE Essent on this market through its discretion over the operation of the T-Power plant.

4.428

To address the concerns identified by the Commission, GDF Suez and International Power proposed, as a remedy, the complete withdrawal of International Power in T-Power, i.e. the divestment of International Power’s 33,33% shareholding in T-Power and the transfer of the agreement entered into between International Power and T-Power for the operation and maintenance of the TPower plant. The commitments apply as of the date at which the T-Power plant will start its commercial operations.

4.429

Since the competition concerns identified by the Commission originated from International Power being a co-controlling shareholder and the operator of the power plant, International Power’s withdrawal constituted a suitable remedy. However, the majority of the respondents to the market test were negative in their responses as to the modalities of the implementation of the commitments, 596

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i.e. the length and the starting date of the first divestiture period, the proposed timing for the appointment of the Monitoring Trustee and the ring-fencing measures to be adopted during the first divestiture period. The parties had proposed that the first divestiture period would begin at the date at which the T-Power plant would start its commercial operations, and the procedure of appointment of the monitoring trustee would start one week later.

4.430

The vast majority of respondents pointed out that the divestiture period should begin immediately after the adoption of the clearance decision of the Commission. However, there were diverging responses as to the appropriate length of the period allowed to lapse between the Commission decision and the day the divestment becomes effective. Some respondents took the view that this period should not extend beyond six months. Another respondent believed that the divestment should be effective before the start of T-Power commercial operations, as to avoid GDF Suez from accessing sensitive information regarding the T-Power plant.

4.431

With regard to the length and the starting date of the first divestiture Period and the proposed timing for the appointment of the Monitoring Trustee, it was also pointed out that if the parties were to start the divestiture at the date of the commercial operations, then the ring-fencing measures proposed by the parties should be reinforced in order to avoid any disclosure of sensitive information during the first divestiture period.

4.432

This lead the parties to amend the parts of the commitments text which related to the length and the starting date of the first divestiture period, the timing for the appointment of the Monitoring Trustee and the ring-fencing measures. As regards the first divestiture period and the ring-fencing measures (including the appointment of the Hold Separate Manager), the starting date was that of the adoption of the Commission decision. With respect to the timing for the appointment of the Monitoring Trustee, the parties proposed, consistent with the Commission practice, to submit a list of suitable persons to be appointed as Monitoring Trustee no later than one week after the Commission decision. Finally, in light of the results to the market test that showed that financial investors would be suitable purchasers of International Power’s shareholding in TPower, while the new contractor of the O&M Agreement should have a certain technical expertise, the parties removed the requirement of “proven expertise” with reference to the purchaser of the shareholding while they kept it as a prerequisite of the suitable purchaser of the O&M Agreement.

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4.434

The divestiture of shareholding may be also necessary to sever a link with a competitor. Such commitments were necessary in VEBA/VIAG in the context of an oligopolistic market.

4.435

The simultaneous mergers between VEBA and VIAG on the one hand, and RWE and VEW on the other,1844 would have led to the creation of a dominant duopoly. The two groups would have jointly controlled over 80% of the German market in electricity delivered from the interconnected grid.

4.436

In addition to a number of characteristics regarding the functioning of the electricity market which indicated that the merger could result in parallel behaviour of VEBA/VIAG and RWE/VEW, there were also numerous interrelationships between the two groups which might have encouraged such parallel behaviour. A number of commitments therefore ensured that the major corporate links between the members of the duopoly were severed: –

Firstly, VEBA and VIAG removed their most important link with RWE by selling their shareholdings in VEAG, an interconnected company in East Germany.

–

Until the implementation of the remedy, VEAG was jointly controlled by VEBA, VIAG and RWE. In this vein, the Commission noted that the situation with regard to VEAG had contributed to the two blocks having a common interest in peaceful parallel behaviour. In particular, VEBA, VIAG and RWE had stopped competing in VEAG’s traditional supply area. As a result of the commitment, VEAG became an independent competitor and a third force on the German market.

–

Other links with RWE/VEW were cut by selling off shares in VEW held directly and indirectly by VIAG, and shares in Rhenag (a RWE subsidiary) held by VEBA.1845

–

VEBA/VIAG and RWE/VEW had other joint shareholdings in STEAG (a company generating electricity from lignite) and in municipal electricity undertakings in the State of Saxony. However the Commission considered that these – minority – shareholdings were of somewhat lesser

1844 VEBA/VIAG was investigated by the European Commission while RWE/VEW was investigated at the same time by Bundeskartellamt. 1845 Rhenag was owned 54,1 % by RWE and 41,3% by VEBA. Rhenag s main business is the supply of gas, but it also supplies electricity. It has numerous minority shareholdings in municipal electricity undertakings which in addition to gas supply also electricity.

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importance from the point of view of the risk of parallel behaviour on the part of the two blocks at the interconnected level. No remedies were therefore taken concerning these shareholdings. In addition to the severance of structural links with RWE/VEW, VEBA/VIAG committed to divest certain shareholdings to competing interconnected companies. This increased the number and significance of competitors operating independently of VEBA/VIAG and RWE/VEW.

4.437

VIAG committed to divest its controlling shareholdings in BEWAG. This commitment aimed to make BEWAG become an independent supplier on the market for the supply of electricity at the interconnected level. The same reason was at the origin of VEBA’s divestiture of its shareholding in HEW, another interconnected company.

4.438

In EDF/EnBW, the divestiture of a controlling shareholding in Watt AG, a major Swiss electricity producer, aimed at eliminating the adverse consequences of the transaction in Switzerland (as a result of the merger, EDF would have been able to control a large part of the Swiss generation and supply of peak load) and safeguarded a potential competitor of EDF in France.

4.439

The Commission’s investigation showed that EDF had traditionally enjoyed a close commercial relationship (i.e. various long term supply agreements) with Atel,1846 an important player in the Swiss electricity market. Atel is one of the seven vertically integrated “Überlandwerke”, the transmission system operators which operate the Swiss transmission grid.

4.440

EnBW had a controlling stake in Watt AG, which held controlling stakes in two out of the seven “Überlandwerke” as well as in two other electricity companies KWL and KWR.

4.441

Post-merger, EDF would therefore have considerably strengthened its foothold in Switzerland by obtaining a controlling stake in Watt (and, indirectly, in Watt’s subsidiaries). This acquisition would have enabled EDF to control more than 50% of the Swiss interconnector capacity.

4.442

1846 EDF argued that it had no controlling shareholding in Atel. The Commission noted that although a minority shareholder, EDF was represented in Atel’s board of directors. It also took into account that EDF and RWE had a strategic commercial interest in Atel’s parent company.

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4.443

The Commission noted that due to its geographical position, its high voltage connections to France, Germany, Italy and Austria and the flexibility of Swiss hydro-based power, Switzerland was a turntable for peak load for its own and other European utilities’ both seasonal and daily requirements. As much as 80% of EDF’s total output in 1999 was generated in nuclear power stations, not suitable to satisfy peak load demand. Electricity exports from Switzerland to France account especially for peak load. Exports from France to Switzerland account mainly for base load.

4.444

Competitors that wish to supply eligible customers in France need to provide base load as well as peak load. Where such competitors are not in a position to satisfy peak demand themselves, they need to make arrangements with other suppliers of peak load, in particular Swiss suppliers. The proposed concentration would have considerably restricted the choice of Swiss peak load supply for such suppliers since EDF would have controlled a large part of the Swiss generation and supply of peak load.

4.445

Furthermore, the proposed concentration would have also led to the elimination of EGL (one of the two “Überlandwerke” controlled by Watt) as a potential competitor on the French market. At the time of the notification, EGL was approaching eligible customers in France. In this respect, the Commission noted that EGL would have been able to supply the full range of electricity products directly to French eligible customers as well as to other suppliers of such customers. However, following the concentration, such competition would have been excluded on a lasting basis. EDF’s dominant position in France would therefore have been strengthened.

4.446

In view of these concerns, the divestiture of EnBW’s participation in Watt was found necessary. This commitment restored the status quo ante in Switzerland.

2.2 Accompanying commitments to divestiture 4.447

In merger remedies, the ability of the newly established business to be operated on a stand-alone basis and to constitute an immediate competitive force is an important consideration. In certain cases, it was found necessary to add additional requirements to a divestiture commitment to cover issues such as supply contracts and/or further divestitures.

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–

In Verbund/EnergieAllianz, the Commission noted that APC had all the necessary human and material resources including know-how, a client list, an e-commerce platform, back office and systems management to enable its purchaser to enter the market for large customers immediately. All of APC’s existing customer relations were transferred to the purchaser, representing a market share of 5% to 15% in terms of large customers. This commitment meant that one of the independent firms already operating in Austria (or a foreign competitor) was able to expand its business significantly by buying APC and thus provide an important counterweight to the parties’ market power.



In order to safeguard the effectiveness of this commitment, Verbund/ EnergieAllianz undertook to conclude with the buyer of APC a power supply contract for 3 TWh a year for at least four years; enough to cover the bulk of APC’s electricity requirements. The buyer would also be able to make short-term adjustments to its demand profile.

–

In VEBA/VIAG, the divestiture of VEBA’s and VIAG’s shareholdings in VEAG was accompanied by an undertaking from them to buy electricity from VEAG for a transitional period. The safeguarding of sales for a period of seven years with a progressive reduction was considered necessary to help VEAG through the difficult initial period (VEAG’s position was weak owing to a significant indebtedness that had resulted from investments in power-station capacity).

Also related to the divestiture of VEAG, VEBA and VIAG undertook (i) to divest their shareholdings in the East German lignite producer LAUBAG and (ii) to transfer the rights which LAUBAG owned with respect to the mining of East German lignite to the acquirer of the shareholdings in VEAG. LAUBAG is the largest lignite producer in eastern Germany and was a major as a supplier to VEAG. In order that VEAG attained its full significance as an operator independent of the VEBA/VIAG and RWE, it was considered essential that control of LAUBAG should be in the hands of this new independent entity.

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2.3 Up-front buyer 4.449

Most of the divestiture remedies involve a commitment to complete the divestment within a certain period of time from the clearance decision. However, there are cases where the identity of the purchaser may be important in assessing whether the divested business will constitute an immediate competitive force.1847

4.450

In such cases, the Commission requests an “up-front” solution where the parties commit not to implement their operation until a purchaser (known as the “up-front buyer”) is found for the business to be divested and is approved by the Commission.

4.451

This procedure was used in Verbund/EnergieAllianz concerning the sale of Verbund’s shareholding in APC. The parties had undertaken not to implement the merger before a Commission-approved disposal of APC had taken place. The Commission noted that the full implementation of this commitment could therefore be guaranteed.

3. 4.452

Other remedies in relation to shareholdings

Instead of divesting the problematic shareholdings, the merging parties may propose not to exercise voting rights that derive from such shareholdings. In certain cases, this kind of commitment has been accepted by the Commission. In other cases, the merging parties have proposed a reorganization of the activities of the undertaking so as to loose control over the problematic activities. –

In Verbund/EnergieAllianz, in addition to the market shares of Verbund and EnergieAllianz, the European Commission took into account the fact that Verbund had a controlling interest in Steweag-Steg, a company also active in the markets dominated by the merged entity.



Verbund undertook to refrain from exercising the voting rights deriving from its holding in Steweag-Steg for a specific period of time, wherever its vote could influence the competitive behaviour of the undertaking, particularly with regard to pricing and products, distribution and procurement. It also withdrew its members indefinitely from the Steering Committee that developed distribution policy for Verbund/APC and Steweag-Steg.

1847 See paragraph 20 of the Commission Notice on remedies.

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The Commission considered that Verbund’s commitment to refrain from exercising its controlling rights in Steweag-Steg with regard to decisions concerning competition sufficiently neutralised the structural links between Verbund and Steweag-Steg for a transitional period. This had the effect that Steweag-Steg’s market share did not further reinforce the market position of the merged Verbund/EnergieAllianz at least during this transitional period.

–

Also in Verbund/EnergieAllianz, Energie OÖ – one of the member companies of EnergieAllianz – undertook to transfer to an independent trustee (to be approved by the Commission) the rights deriving from its holding in Salzburg AG and the rights deriving from the shareholder agreement it concluded with the Land and City of Salzburg (the two other shareholders of Salzburg AG) by the end of December 2007.

Salzburg AG, the regional supplier of electricity in the Land of Salzburg, was one of the remaining competitors besides Verbund and EnergieAllianz in the markets affected by the transaction.

4.453

Energie OÖ had a 26,13% share in Salzburg AG. This shareholding carried participation rights conferred by the articles of association, relating in particular to the appointment of the managing board and major energy transactions, which went beyond the statutory rights of a minority shareholder.

4.454

The aim of this commitment was to ensure that at least for the foreseeable future there would be no danger that Energie OÖ could use its rights to exert influence and obtain information to reduce the capacity of Salzburg AG to compete actively with the new merged undertaking.

4.455

In Gaz de France/Suez1848 the remedy entailed a reorganization of an undertaking so as to enable the merging parties to loose control over the problematic activities carried out by such undertaking.

4.456

In this case, the Commission found that high barriers to entry would have further strengthened the parties’ dominant position in the gas markets. Due to the control of Suez over Fluxys, the network operator in Belgium, the merging parties would have had privileged access to supply infrastructure and storage.

4.457

1848 Case M.4180 of 14.11.2006.

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4.458

In order to remove the Commission’s concerns, the merging parties have proposed to reorganize Fluxys’ activities so as to lose control over the regulated activities of Fluxys. As a result, the regulated activities in Belgium will be managed independently from Gaz de France/Suez. Together with the divestment of Distrigaz that cuts the link between the network operator (Fluxys) and the most important company active in the supply of gas. these commitments aim to lower the barriers to entry and create similar conditions of competition for all competitors concerning the access to infrastructure.

4.459

The merging parties have proposed to reorganize Fluxys’s activities into two entities, Fluxys s.a. and Fluxys International s.a. –

Post-merger, Fluxys International s.a., will own the Zeebrugge LNG terminal and the non-regulated Belgian and international assets.

–

The other entity (Fluxys s.a.) will own the entire Belgian gas transmission/transit system and the Belgian gas storage infrastructure. To this end, GDF has undertaken to transfer to Fluxys s.a. its 25% holding in Segeo (the natural gas transmission/transit operator) and Suez has undertaken to transfer to it Distrigaz & Co (which markets transit capacity on specific routes).

4.460

Fluxys s.a. will operate all the infrastructures regulated under Belgian law (transmission/transit system, storage, LNG terminal).

4.461

The parties have undertaken not to control Fluxys s.a., either de facto or de jure or by a shareholders agreement. In this respect, the parties have undertaken: –

not to hold more than 45% of Fluxys s.a.’s capital (therefore the merged entity will not hold the majority of the voting shares of Fluxys s.a);1849

–

not to have more than seven representatives out of 21 on the Board (this will give way to changing coalitions), and not to make proposals for the nomination of the seven independent directors who will also be members of the board of directors (this will ensure that the independent directors are effectively independent);1850

1849 The remaining shareholding being held by Publigaz (45%), the Belgian State (one golden share) and the public. 1850 The independence of the seven independent directors will be validated by the CREG, the Belgian regulator. The remaining seven representatives will be representatives of Publigaz.

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–

that no Fluxys s.a. director exercises any responsibility in gas supply activities;

As a supplementary guarantee of their commitment not to control Fluxys s.a., the parties have also undertaken to set up an executive committee within Fluxys s.a. with exclusive powers as regards (i) the management (including the commercial strategy) of the regulated infrastructures and (ii) the overall investment plan for regulated infrastructures in Belgium.

4.462

The system of designation of the members of the executive committee garantees its independence vis-à-vis the board of directors of Fluxys s.a. Moreover, the governance of Fluxys s.a. removes from the board all the powers which are vested to the executive committee so that the merged entity will not have veto rights on the commercial strategy of company. In addition, the merging parties have undertaken not to control the executive committee, either de facto or de jure or by a shareholders agreement.

4.463

As regards Fluxys International, the parties have undertaken that:

4.464

–

the merged entity will hold not more than 60% of the company’s capital;

–

the Fluxys s.a. executive committee will draw up an overall investment plan for the LNG terminal and the Zeebrugge hub.

The board of Fluxys s.a. will be unable to reject the overall investment plan for the regulated infrastructures in Belgium except on grounds of its financial impact on the company (under protection of financial interests of shareholders acting as investors). The same rule will apply to the vote of the investment plan for the LNG terminal and the Zeebrugge hub by the board of Fluxys International. Specific provisions are established to ensure that the parties cannot block the decisions concerning the investments relating to the infrastructures of Fluxys s.a. and Fluxys International. Should these investments be refused by the board of the companies, the parties have undertaken to vote to allow the investments to be financed by a third party and if necessary allow the capital of Fluxys s.a. and Fluxys International to be opened up to third parties with the specific objective of financing these investments.

605

4.465

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4.466

The reorganization of Fluxys and the related undertakings aim at ensuring that the regulated activities are managed independently. The governance scheme applicable to Fluxys s.a. also applies to the decisions relating to Fluxys International that are of the competence of the executive committee of Fluxys s.a.

4.467

Combined with the divestiture of Distrigaz, the reorganization of Fluxys leads to the separation of the Transport Operator (Fluxys) and the most important company active in gas supply (Distrigaz). The remedies lower the barriers to entry with a view to creating conditions of access to the infrastructure equivalent for all competitors.

4.

Access to generation capacities

4.468

In some cases, it is particularly difficult to divest specific shareholdings or assets, due to the inexistence of a particular corporate entity or structure of the size necessary to constitute an independent competitive force, returning the post-merger situation to the status quo ante. In these cases, the Commission has shown willingness to accept that new competition can be created through virtual power plants (VPP) or gas release programmes being made available to competitors via auctions.

4.469

In EDF/EnBW,1851 the acquisition of the German company EnBW by EDF was problematic as it removed EnBW as the most likely potential competitor of EDF in the French electricity market and strengthened EDF’s position as a panEuropean supplier. To eliminate this concern, EDF undertook to make available to competitors access to generation capacities located in France.

4.470

The access to generation capacity in France was found appropriate since it balanced the loss of EnBW as a potential competitor by allowing foreign suppliers to become active on the French market. The commitment was also intended to put foreign suppliers in a better position to offer pan-European supply contracts since they were able to supply customers from production sites in France.

4.471

Out of the 6000 MW generation capacities located in France subject to the commitment, 5000 MW were made available in the form of virtual power plants (VPP) and 1000 MW in the form of back to back agreements to existing cogeneration power purchase agreements. This commitment amounted to approximately 30% of the French market for eligible customers. Therefore, around one 1851 Case M.1853 of 7.02.2001, OJ L 59 of 28.02.2002, p. 1.

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third of the eligible market could in theory henceforth be marketed by EDF’s competitors with electricity generated in France. The acceptance of the remedy is the first stage. An equally important element is to closely examine the implementation of the remedy. Indeed, competition concerns will only be eliminated if the remedy is fully and properly implemented. A description of the way in which the auction will be held is important not only for the purchasers but also for the trustee who is supervising the auction process.

4.472

The commitment required EDF to operate auctions every three months. The VPP auction would comprise of 4000 MW of baseload and 1000 MW of peakload capacity. Both baseload and peakload VPP were to be offered simultaneously, but separately. The VPP contracts would have a duration of three months, six months, one year, two years and three years.

4.473

VPP contracts were to be awarded through an open, non-discriminatory public auction. The auctions were to be open to energy utilities and energy traders. Entrants could bid for a number of MW of capacity, the smallest bid being 1 MW. Bids were to be grouped according to the type of plant disregarding the duration of the contract. Within each group, bids were to be sorted in descending order according to their spread in relation to a reference value fixed by EDF (the reference value reflected EDF’s estimates of the French wholesale power market).

4.474

Bidders were to be awarded capacity according to their rank until the auctioned capacity volume was reached. Those bidding for a mix of baseload and peakload plants would have the option to withdraw their bids if they were not awarded the plant portfolio of their choice. When bids were withdrawn, the corresponding capacity was to be awarded to non-selected bidders according to their rank.

4.475

Successful bidders would be able to purchase a certain amount of generation capacity from EDF for a specific price on the basis MW/year (capacity price). Over the duration of the contract, the buyer would have the right to call upon EDF at any time in order to request delivery of the relevant quantities. The required load curve had to be notified one day ahead at midday.

4.476

As regards the duration of the commitment, EDF undertook to grant access to generation capacities for a period of five years from the date of the decision clearing the acquisition of EnBW. This time period was based on the expectation that within these five years the French electricity market should have developed so as to allow sufficient alternative sources of supply.

4.477

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4.478

Concerning the monitoring of the commitment, a trustee was appointed to supervise the auctions with a view to ensuring a transparent and non-discriminatory auction process. The commitment stated that if the trustee testified that the prices of the auctions were abnormally low in relation to market prices or that the auctions resulted in bids significantly below EDF’s costs, the Commission, upon reasoned request by EDF or the trustee, would decide about the fixing of a reserved price for auctions. In agreement with the trustee, further auctions could be suspended until the Commission had taken a decision.

4.479

The trustee was bound to respect the confidentiality of all information provided to him/her or otherwise obtained in the course of the exercise of his/her mandate. The trustee had in particular to refrain from disclosing any information related directly or indirectly to EDF’s costs. This obligation remained valid for as long as the information continued to be commercially sensitive.

4.480

A similar commitment was offered in Verbund/EnergieAllianz.1852 In this case, the commitment did not aim to counterbalance the loss of a potential competitor but the strengthening of the dominant position of EnergieAllianz in the supply market to small customers.

4.481

The merged entity undertook to make available 450 GWh of electricity per year, via auction in lots of 20 to 40 GWh, to be supplied on Austria’s high-voltage grid. This commitment to make available supplies in small quantities until 30 June 2008 ensured that new competitors entering the market for the supply of small customers had access to additional capacity for power generated in Austria.

4.482

In the gas sector, gas release programmes have also been implemented to offer gas traders and customers access to significant gas quantities at competitive, transparent and non-discriminatory conditions.

4.483

For the first time in the framework of the Commission’s merger control activities, E.ON1853 undertook to implement a gas release programme to obtain clearance of the acquisition of two subsidiaries of MOL. The Commission reviewed existing similar programmes in various European countries1854 to be in a position 1852 Case M.2947 of 11.06.2003, OJ L 92 of 30.3.2004, p. 91. See also the commitments proposed by Electrabel to the Belgian Competition Council in relation to the acquisition from the local authority organizations of the eligible clients who have not expressed a preference, an arrangement known as default supply. 1853 Case M.3696 of 21.12.2005. 1854 Gas release programmes are either part of a broader action plan required under national law and/or designed by the national energy regulators to open the gas wholesale markets to competition (UK, Spain, Italy) or are

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to assess properly whether the gas release commitment was suitable to remove the competition concerns identified during the procedure. The gas release programme implemented by E.ON foresees 8 annual businessto-business internet auctions for 1 billion cubic metres (bcm) of gas divided in several lots. Any undertaking interested in acquiring these gas quantities may participate into the auctions and place bids to enter into 2-year gas supply contracts with E.ON. The starting price of these auctions is lower than E.ON average cost of gas in Hungary, to encourage traders to participate.

4.484

The successful bidders enter into gas supply contracts with E.ON under the following terms and conditions.

4.485

–

The contracted gas is equally split over two years and delivered at the two Hungarian entry points (80% at the Eastern entry point and 20% at the Western entry point). Availability of gas at more than one delivery point reduces the risk that the transmission regime constrains competition in any market area and ensures that purchasers face similar physical and operational risks as the seller. The percentages 80/20 aim at enabling wholesalers and end users to source gas from the gas release programme for resale or for their own use in the geographical market where competition concerns have been identified.

–

Wholesalers and industrial customers should have the ability to structure the gas quantities they purchase according to their own or their customers’ consumption profiles. Therefore, the daily, monthly and yearly flexibility provisions for the gas supplied through the programme are essential. The remedy foresees that gas supply contracts provide for the same flexibility as WMT’s upstream gas supply contracts, namely an annual flexibility of 85% to the effect that the purchaser will have to purchase and pay only 85% of the annually contracted gas quantity (“TOP obligation”). In addition, the daily and quarterly flexibility cannot be lower than the weighted average daily and quarterly flexibility of all purchase contracts of WMT. In any event, the daily flexibility is at least 50% of the daily contracted quantity.

implemented as undertakings in merger or antitrust procedures (France, Germany, Austria). The Commission contacted the national energy regulators with a view to establishing the crucial characteristics for a gas release programme to be effective. The main results of the Commission s investigation are set out in para 768 to 798 of the Commission clearance decision of E.ON/MOL.

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–

The auctions are carried out by an international IT service provider, and the auction procedure is handled so as to ensure that WMT does not gain knowledge of the intermediary bids placed by participants to the auction.

4.486

The quantities released by the parties by the gas release programme and the gas contract release until 2014/2015 account for up to 14% of the total Hungarian demand and represent 21% of total third parties’ gas sales. The Commission therefore estimates that the released gas quantities will significantly increase liquidity and hence limit the likelihood of anticompetitive behaviour by the new entity. Auctions of gas are also implemented in the context of the DONG/Elsam/Energi E2 merger.1855

4.487

When assessing the acquisition of Elsam and E2 (the regional electricity generation incumbents in Denmark), and of KE and FE (the Danish electricity suppliers), by DONG, the Commission initially found that the deal would have anticompetitive effects in several markets along the gas supply chain in Denmark. These effects would have resulted from the combination of DONG’s dominant position and the removal of actual and potential competition from E2, Elsam, FE and KE, as well as the ability that DONG would then have to weaken its remaining competitors on the market.

4.488

In response to these concerns, DONG offered to divest the larger of its two Danish gas storage facilities along with an undertaking to auction off to competitors every year, for a 7-year period, large quantities of gas equivalent to 10% of Danish annual gas demand.

4.489

Compared to the remedy in E.ON/MOL, DONG’s auction comprises a novel two-stages selling procedure. The primary auction involves swapping the auctioned lots between the Danish hub (GTF) and any of four northern European hubs in the UK (NBP), the Netherlands (TTF), Belgium (ZBT) and Germany (BEB-VP). If all lots are not disposed of in the course of the primary auction, any remaining volumes are sold against cash settlement in a secondary auction. The provisions concerning the secondary auction ensure that even in the absence of a sufficient number of bidders wishing or able to swap, the effectiveness of the remedy is nevertheless ensured. In particular, any lots not sold in the primary auction are automatically transferred to the secondary auction of the same year which takes place sufficiently early to make sure that the purchaser has enough time to secure the sale of the acquired volumes to its customers. 1855 Case M.3868 of 14.03.2006.

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The gas release programme is complemented by a customer release clause, which entitles DONG’s customers who acquire gas quantities directly in the gas release programme or from suppliers who acquired the corresponding gas quantities in the gas release programme to request a release from their purchase obligations vis-à-vis DONG.

4.490

The combination of these measures was found to resolve both competition concerns raised on the gas wholesale market, namely customer foreclosure and removal of potential competition.

4.491

With regard to customer foreclosure, these quantities, in combination with the customer release provision, aim to compensate for the volumes which E2 has sourced in the past years, for any additional volumes which would potentially have been purchased by both Elsam and E2 prior to the expiry of their long-term supply contracts with DONG, and for the further quantities which Elsam and E2 could realistically be expected to have purchased from other suppliers than DONG.

4.492

As to the compensation for the elimination of potential competition by Elsam and especially E2, the Commission noted that all imports by and for E2 plus all competitors’ market shares (except for swaps with DONG) together, amounted to about 10% of Danish demand in 2004. The Commission held that, in view of these circumstances, an additional 10% independent source of natural gas in Denmark can be expected to offset the harmful effect of the merger by providing sufficient incentives for DONG’s existing actual competitors and DONG’s potential competitors to enter and/or expand their activities.

4.493

The Commission accepted the remedy because the swap could contribute to integrate European gas markets without compromising the objective of ensuring that significant quantities of gas would be released in Denmark in order to solve the antitrust concerns raised by the transaction.

4.494

In EDF/British Energy,1856 the Commission considered that the merged entity would have the ability and incentive to internalise power generation output that absent the merger would have been traded in the wholesale market, leading to a decrease of liquidity. Many respondents to the market test for the initial proposal for an auction of [0-5] TWh per year found that these volumes were insufficient and that the proposed auction process would not be likely to remove the risk of reduction of liquidity.

4.495

1856 Case M.5224 of 22.12.2008.

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4.496

It has been claimed that the auction process would add complexity to the wholesale market, and that measures such as the liquidity test or the reserve price included in the proposal may have negative effects as they may allow the manipulation of both the wholesale market and the auction itself, for example by forcing closing prices (base for the reserve price) to go up or down, disrupting the normal functioning of the wholesale market. It has also been raised that, since the merged entity would be long, the volumes of the auction would have been made available to the wholesale market anyway: basically the auction would change the normal route through which these volumes would have been sold.

4.497

EDF has accordingly proposed an alternative mechanism whereby the amounts would be assigned to a separate trading book under the supervision of a trustee. The sales will be made directly by the merged entity, therefore eliminating the negative effects identified in the market test that an auction may have on the wholesale market. This would make sure that the corresponding amounts of energy would be handled in a similar way as any other amounts on the market, thereby contributing simply to liquidity. In addition, the commitments include provisions to ensure that the volumes are effectively sold into the market and not purchased-back by the merged entity at a later stage.

4.498

With respect to the volumes offered, they represent twice the original proposal over the period of 4 years in which the Commission has identified serious doubts. Even if the proposed volumes were far from some of the proposals made during the market test by market respondents, the Commission considered that they were appropriate since the remedy has to be seen in conjunction with the divestitures of the power plants of Eggborough and Sutton Bridge. In the Commission’s opinion, these plants, once divested, will significantly reduce the level of vertical integration of the combined entity and therefore the scope for internalisation. Although the scope for internalisation is not totally removed, it is very significantly removed by the proposed remedy. By limiting the ability of the merged entity to such an extent, also the possible impact on liquidity is significantly reduced.

4.499

Moreover, taking into account that the identified problem related to a limited period of time, the Commission held that it would not be proportionate to request the sale of the committed volumes for a longer period. This is because, on the basis of the current plants to shut-down certain plants as of 2015, the problem was restricted to the period 2011-2016 (i.e. a period in which the merged entity would be physically in a position to internalise the additional output generation of British Energy). Beyond this period of time, any (uncertain) exten612

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sion of the life of the generation plants to be closed would in any case contribute no increase, and to diminish, the overall liquidity in the market.

5.

Access to infrastructure / divestiture of infrastructure

In certain cases, the change in market structure resulting from a merger can lead to the creation of important new barriers to entry into the relevant market. Such barriers may result from control over infrastructure by the new merged company, notably in the case of vertical mergers. In these cases, remedies accepted by the Commission seek to solve the competition problem by way of providing guaranteed non-discriminatory access to the necessary infrastructure or the divestiture of a given infrastructure. In some cases, where the capacity of the infrastructure in question is limited, in order to provide effective access, an increase of capacity may be necessary.

4.500

5.1 Access to transmission and storage infrastructure In Total/GDF,1857 Total undertook to implement a number of measures aimed at ensuring fair and sufficient third party access to its natural gas transmission network and storage facilities in the South-West of France.

4.501

The transaction consisted in the acquisition by Total of several gas assets in South-West and Central France (GDF), some of which were already jointly owned by Total and GDF. In the South-West, the assets in question chiefly comprise the company Gaz du Sud Ouest (“GSO”), several natural gas transmission pipelines and natural gas storage facilities in the Pyrenees.

4.502

The Commission’s investigation revealed that the notified transaction raised vertical competition concerns in that it gave Total, via GSO, a strong position on the market for the supply of gas to eligible customers and a monopoly over all the natural gas transmission and storage infrastructures in the South-West of France. In view of the limited natural gas transmission and storage capacities available in the region, the Commission considered that the operation would have had the effect of increasing Total’s incentives and possibilities for restricting third party access to its gas infrastructures in order to safeguard and strengthen its position on the downstream market in the supply of gas to eligible customers.

4.503

1857 Case M.3410 of 8.10.2004.

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4.504

In order to resolve these competition problems, Total offered several commitments. In particular, the commitments ensured that, where a customer changed supplier, the transmission and storage capacities necessary for supplying that customer would be transferred from the old to the new supplier in a simple, transparent and quick way. In the case where the transmission of capacities would not be sufficient to allow an adequate supply of the customer by the new supplier, the commitments provided for a mechanism enabling a transparent and non-discriminatory allocation of the existing capacities among all the users of the transmission and storage capacities. To allow more flexibility, Total undertook to insert in its commercial conditions a so-called “use-it-or-lose-it” clause. This provision aims at preventing operators from booking transmission capacities that they would not use. Total also undertook to publish, on a monthly basis, the transmission and storage capacities available on GSO’s network. These commitments were given for a total of five years, until December 2009.

4.505

In E.ON/MOL,1858 E.ON undertook to grant access to storage capacities at regulated price and conditions to end users and wholesalers that purchase gas directly through the gas release programme or the contract release.1859 The objective of the access to storage capacities is to ensure that successful bidders in the gas release programme and the third party assignee of the contract release are able to structure the purchased gas quantities according to their own or their customers’ needs.

5.2 Improvement of the functioning of the infrastructures 4.506

In Gaz de France/Suez,1860 in addition to the divestment of Distrigaz and SPE and the reorganization of Fluxys, the merging parties proposed various commitments relating to the gas infrastructures in Belgium & France.

4.507

With respect to Belgium, the parties have undertaken, in particular, to create a single point of entry at Zeebrugge bringing together the pipeline hub, the LNG terminal, the point of arrival of the Interconnector Zeebrugge Terminal (IZT) and the point of arrival of the Zeepipe Terminal (ZPT). This commitment aims at solving the difficulties resulting from the lack of access capacities to the Zeebrugge hub. The functioning of the hub will be enhanced through the creation of a single entry point linking all networks converging on Zeebrugge and through the operation of the hub by an independent operator, Fluxys, which will no longer be controlled by Suez. 1858 Case M.3696 of 21.12.2005. 1859 See book, paragraphs 4.483-4.486 for a description of the gas release programme and the contract release. 1860 Case M.4180 of 14.11.2006.

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With regard to France, except in the South-West of the country, all the gas infrastructure are owned by GDF either directly (storage and LNG terminals) or by GRTgaz, a 100% subsidiary of GDF. The Commission held that the paramount access of GDF, and a fortiori of the merged entity, constituted a barrier to entry for competitors willing to enter the downstream markets. To remove these concerns, the merging parties have undertaken in particular: –

to develop new LNG storage capacity (the first being available at the end of 2009, the other available at the latest in 2018) and new capacity at the Montoir terminal (available as from 2007), and to offer this new capacity on the market prior to their availability, partly already before the end of 2007.

–

to grant access to the Fos Cavaou terminal (under construction by GDF in 2006): as of its commissioning and for the capacities which are not under long-term reservation, a transparent and non-discriminatory mode of commercialisation will be established in coordination with the CRE (the French regulator).

–

to adopt a variety of measures designed to improve operation of the “use it or lose it” mechanisms and the returnable capacities on the GRTgaz network.1861

–

that GRTgaz will install a deodorisation plant at the Taisnières H entry point which will be able to provide a physical flow towards Belgium of 300,000 m3 per hour.

In addition to the commitments referred to above concerning the infrastructure in France, the parties have undertaken additional commitments relating to governance and transparency. They have agreed: –

to increase the independence of GRTgaz in the field of communication (creation, in the GRTgaz’ organisation chart, of a position in charge of communication policy, independently from the parent company) and to strengthen guarantees in connection with the protection of sensitive information (formalisation of the role of the “Compliance Officer” vested with the protection of commercially sensitive information);

1861 GRT is the acronym for GDF Réseau transport. GRTgaz is one of two gas network operators in France and a 100% subsidiary of GDF. GRTgaz operates the major part of the gas network in France.

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–

to transfer the activities of the LNG tanker-terminal operator to subsidiaries in accordance with rules on independence aligned on those of GRTgaz. As a result, the LNG tanker-terminal operator activities will be legally distinct from those of GDF, and its decisions, notably concerning investments, will be adopted independently from GDF.

5.3 Release of capacity at interconnectors 4.510

In VEBA/VIAG, in addition to the various divestiture based remedies aimed at limiting the likelihood that the merger would create or strengthen an oligopolistic market structure, the merged entity further undertook to make available additional capacity amounting to 400 MW on the interconnector on the German-Danish border.

4.511

Barriers to access to the market in the supply of electricity at the wholesale (interconnected) level in Germany were very high. The amount of the necessary investment and the lack of access from abroad due to the limited capacity of the interconnectors restricted competition.

4.512

The Commission held that potential suppliers were unable to present an effective challenge to the parties strong position. An increase in interconnector capacity was unlikely in the years ahead, owing to the costs and the lengthy authorisation procedure. As emphasized by the merging parties, it takes up to two years just to build the overhead lines, to which must be added the time it takes for the official authorisation procedure.

4.513

On the overland route from Denmark to Germany VEBA held a transport right amounting to 400 MW out of a basic transmission capacity of 1200 MW. In order that third parties could use such capacity, VEBA undertook to conclude an agreement with Eltra (the transmission system operator in Denmark) and Statkraft (the largest Norwegian electricity producer) to effectively cancel this capacity reservation, enabling this capacity to be placed on the market.

4.514

Because of the much lower price of electricity in Scandinavia, the German-Danish interconnector experiences capacity bottlenecks. The releasing of 400 MW facilitated access for imports from Scandinavia and, because of the favourable price level in Scandinavia, increased the competitive pressure on the large German interconnected companies.

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5.4 Increase of interconnector capacity In Grupo Villar Mir/EnBW/Hidroeléctrica del Cantàbrico,1862 the merging companies committed to increase the capacity of the interconnection between France and Spain, to increase the level of competition in Spain because in the Commission’s opinion, the operation would result in the de facto elimination of EDF as an aggressive competitor in Spain having an interest in not acting in parallel with the other major Spanish electricity producers.

4.515

The installed capacity of the French-Spanish interconnectors totalled a maximum of 1100 MW for flows from France to Spain of which 40 to 60 % was reserved for a 20-year supply contract between EDF and REE (the Spanish transmission system operator). On the basis of these figures, available commercial capacity on the French-Spanish interconnection amounted approximately to 500 to 600 MW. A comparison between the installed interconnection capacities of other European countries revealed that Spain had the lowest value as a percentage of the domestic consumption. Imports were extremely limited as a result of this restricted commercial interconnection capacity.

4.516

There were strong incentives for companies based in other Member States to enter the Spanish wholesale market: the price level applied to eligible customers was generally over 30% higher than in other European countries such as France. EDF was the Spanish electricity generating companies’ main potential competitor: the Commission noted that prior to the proposed merger, there were clear incentives for EDF to increase its exports to Spain and to favour increased interconnection capacity; EDF’s pan-European strategy requires it to be able to supply international customers established in Spain.1863 That strategy relies, among other things, on building up EDF’s position on the Spanish market.

4.517

In view of the difficulties involved in building new generating capacity main route for increasing competition on Spain’s oligopolistic electricity market was to increase substantially the volume of electricity exports from other European countries to the Spanish market.

4.518

1862 Case M.2434 of 26.09.2001, OJ L 48 of 18.02.2004, at p. 86. 1863 In its Decision in EDF/EnBW, the Commission already referred to the strategy developed by EDF, which placed it in a unique position to offer genuinely pan-European supplies to industrial and commercial consumers.

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4.519

As mentioned above, in the Commission’s view, following the merger, EDF would logically be more interested in exploiting its comfortable situation on the oligopolistic Spanish market, taking advantage of the excessive prices, than in boosting exports to Spain by increasing interconnection capacity. Under such circumstances it was highly unlikely that other competitors not established in Spain could successfully compete on the Spanish market, given the limited interconnection capacity.

4.520

The increase of the interconnection level was found necessary to resolve these concerns. Such a commitment increased the chances for operators based outside the Iberian Peninsula to compete on the Spanish market. This was expected to have a positive effect on the level of prices and the capacity of the members of the existing duopoly to fix those prices.

4.521

EDF committed to adopting the measures and carrying out the work necessary to increase the commercial interconnection capacity between France and Spain in the following stages: –

an additional 300 MW, through technical improvements to the existing lines by the end of 2002,

–

an additional 1200 MW through the construction of a new line. This additional capacity could be increased after the technical and economic feasibility is checked out,

–

an additional 1200 MW through the construction of an alternative line, the doubling of an existing line or the reinforcement of the French lines in the medium term, provided that feasibility studies to be drawn up by the end of 2002 justify such construction work.

5.5 Divestiture of infrastructure 4.522

The divestiture of storage infrastructure was proposed to solve the antitrust concerns raised by the acquisition the acquisition of Elsam and Energi E2 (“E2”), two regional electricity generation incumbents in Denmark, and of KE and FE, two Danish electricity suppliers in the Copenhagen area, by DONG, the Danish state-owned gas incumbent.1864

1864 See DONG/Elsam/Energi E2 in case M.3868 of 14.03.2006.

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The Commission’s investigation has led it to conclude, inter alia, that DONG was dominant in the Danish market for gas storage/flexibility, a market adjacent to the other gas markets. In its investigation, the Commission identified physical gas storage as the most important flexibility tool (flexibility is necessary for a gas supplier in order to be able to deliver gas with the necessary degree of flexibility and seasonal profile that customers demand). The Commission also found that flexible supply contracts and customers with the ability of demand modulation constitute important flexibility tools for gas companies. This holds in particular for the flexible consumption of Elsam’s and E2’s gas-fired power plants, the largest gas consumers in Denmark with [20-25%] of the national consumption.

4.523

As a customer of DONG Storage is also a competitor of DONG Trade, the Commission has assessed the likely future behaviour of DONG Storage, on the assumption that both the storage and trade activities are guided by the joint aim of promoting the profitability of the DONG group as a whole. On this basis the Commission found that the acquisition of the main sources of flexible demand in Denmark (Elsam and E2) would have given DONG the ability and incentive to simultaneously reduce its own storage needs and the storage available to its competitors. Due to the regulatory regime in Denmark, this would, all other things being equal, have resulted in higher storage tariffs and reduce other gas wholesalers’ ability to compete with DONG Trade.

4.524

With a view to addressing these concerns, DONG submitted a commitment to divest the larger of its two storage facilities,1865 to allow a new entry on the Danish storage/flexibility market. Most respondents to the market test considered, in the light of their experiences in other countries, that the two storages could be operated separately by two different operators without any technical or other difficulties. However, Energinet.dk, the Danish TSO emphasised that it needed to rely on both Danish storages to physically operate the Danish transmission system. The necessary access was provided under an “IOBA”1866 between Energinet.dk and DONG Storage. To solve this problem, DONG proposed to conclude an additional IOBA and that the purchaser of the Divestiture Business will also enter into such an agreement, so that the necessary interconnection and operating balancing between the two Danish storages can be ensured also in the future.

4.525

1865 The storage facility divested encompasses the personnel and all related assets including intellectual property rights, all licences, permits and authorisations, and all contracts, leases, commitments and customer orders as well as all customer, credit and other records. 1866 Interconnection and Operating Balancing Agreement.

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4.526

Such storage remedy is an example of a structural unbundling remedy, separating the assets of the incumbent wholesale operator and infrastructure facilities.

4.527

In EDF/British Energy,1867 the Commission considered that there will be a high concentration in the ownership of sites most likely to be suitable for a first wave of new nuclear build given that the merged entity will hold, or will have some influence on the development, of seven out of nine (or seven out of ten) such sites.

4.528

The vast majority of respondents to the market investigation had voiced concerns in relation to the potential dominance of the merged entity in the market for new build nuclear sites. These concerns related in particular to the potential competitive effects of this dominance in sites on the related market for generation and wholesale supply of electricity given the comparative competitive advantages associated with the holding of, and/or with dominating, nuclear generation in the British market.

4.529

In order to address these concerns, EdF has offered to commit to enter into a sale and purchase agreement for the sale of either the Dungeness Land or the Heysham Land (both belonging to BE), together with any grid connection rights to an independent operator.

6.

Remedies related to contracts

4.530

Where two merging companies hold long term purchase agreements with final customers, the Commission may consider accepting a remedy which provides these customers with the possibility of terminating these contracts early, thereby opening a previously closed segment of the market to competition. Such a remedy was accepted in GVS/EnBW/ENI.1868

4.531

The transaction consisted in the joint acquisition of a German regional gas wholesaler GVS by the German electricity company EnBW and the Italian gas and the Italian petroleum firm, ENI.

1867 Case M.5224 of 22.12.2008. 1868 Case M.2822 of 17.12.2002. Similar commitments have been proposed by Electrabel to the Belgian Competition Council in relation to the acquisition from the local authority organizations of the eligible clients who have not expressed a preference, an arrangement known as “default supply”. See ECS/Sibelga, in case M3318.

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GVS and EnbW are both based in Baden-Württemberg, in South-West Germany. GVS was the main gas supplier in this area with a market share of more than 75%. It supplied gas to local distribution companies and to a few industrial customers, through long-term wholesale supply agreements. Almost half of these contracts would end by 2008, the remainder run until 2015. EnBW was and remains active on the relevant geographic market with respect to local gas distribution through participation in numerous local gas distributors, which in turn are supplied by GVS and represent a substantial part of GVS’ customers. A result of the merger, combining GVS’ wholesale activities and EnBW’s distribution assets, the merged group would have a guaranteed customer base on the retail market of 20-30%, significantly strengthening GVS’ existing dominant position on the regional wholesale market.

4.532

As a shareholder of GVS, EnbW would be interested in securing demand for GVS. Therefore, the remedies had to focus on relaxing GVS and ENBW’s grip on customers. The parties undertook to grant early termination rights to all local gas distributors which had entered into long term supply contracts with either GVS or EnBW’s existing subsidiaries. This commitment aimed at allowing local distribution companies to switch to other gas wholesale suppliers. An important element in this case was that the strong position of GVS in the market for wholesale gas supply in Baden-Württemberg was expected to be challenged in the near future by Wingas. Wingas, which was operating its own gas pipeline system in Germany, was completing the construction of a new pipeline which crossed Baden-Württemberg from East to West giving it access to the high consumption Stuttgart area. Thus in the near future new competition would be introduced to challenge the strengthened position of the merged company. Without Wingas’ constraint, the merging parties may have been forced to offer more stringent commitments. The timing of the commitments matched the arrival of increased competition in Baden-Württemberg through the completion of the Wingas pipeline.

4.533

Other remedies relating to contracts can take the form of an assignment of such contracts. Such remedy can ensure sufficient availability of energy so as to prevent a merged entity from foreclosing the access to energy resources for its competitors. This type of remedy was accepted for the first time in the energy sector in E.ON/MOL.1869

4.534

1869 Case M.3696 of 21.12.2005.

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4.535

In this case, the Commission found that after the transaction E.ON would be in a position to use its control over gas resources in Hungary to increase its ability to determine prices and other trading conditions on various downstream markets (i.e. the supply of gas and electricity to industrial, commercial customers and residential customers and the generation/wholesale supply of electricity). One of the remedies proposed by E.ON to solve this issue consisted in the assignment of half of the supply contract for the Hungarian domestic production of gas to a third party (the “contract release”). Apart from an example in Turkey, it was the first time that a contract release was used as a means to bring gas liquidity to the markets.

4.536

This remedy allows a gas trader to take over half of the 10-year supply contract between MOL E&P and E.ON from July 2007 onwards. This measure also releases about 1 bcm of gas per year, enabling the trader to become a sizeable competitive force on the Hungarian gas markets.1870

4.537

As for the gas release programme, the objective of the contract release programme is to ensure sufficient availability of gas on the Hungarian gas and electricity markets (independently of the parties and at competitive conditions) so as to prevent the new entity from foreclosing the access to gas resources for its competitors in the gas and electricity markets.

4.538

In this respect, the Commission noted that the assignee of the contract will purchase significant quantities of gas from MOL E&P starting in July 2007 (expected date of the further liberalization of the Hungarian gas markets) until 2013/2014, independently from the new entity and that it will also have to ability to combine the contract release with the purchase of gas quantities through the gas release programme until 2013/2014.

4.539

The remedy gives the assignee of the contract release sufficient long term gas resources to develop its position on the Hungarian gas markets and introduce liquidity on these markets. The fact that the terms and conditions of the contract will be similar for the new entity and the assignee ensures that the latter will have the ability to compete with the new entity. Access to customers is also granted under the remedy as the merging parties undertook to entitle to amend 1870 E.ON agreed that in the case it (and subsequently the Divestiture Trustee) does not succeed in finding a Third Party for the partial assignment of the supply contract for the start of the gas year 2007 (or for a subsequent year), the gas quantities that would have been released in that given gas year would be added to the gas release programme for that year. In this case, E.ON (and the Divestiture Trustee) agreed to seek again to find a third party interested in the partial contract transfer until 50% of the Supply Contract has been effectively assigned.

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the existing contracts of their existing customers from the Third Party assignee of the contract release. In EDF/British Energy,1871 the market investigation voiced concerns regarding the number of connection agreements held by both EDF and BE respectively, at specific locations, which could potentially foreclose the opportunity of competitors to connect new power plants (nuclear or otherwise) to the grid. With respect to the merger specific elements regarding connection agreements, the Commission has identified an overlap between EDF and BE at Hinkley allowing the merged entity to hold connections for three nuclear reactors at that location, when in fact the intention of the merged entity was to only develop two nuclear reactors at that location. To address this issue, EDF offered a commitment to terminate one of the three National Grid connection agreements it hold in relation to Hinkley Point or to surrender such rights as EDF or BE may have under one such agreement.

7.

4.540

Remedies related to tariffs and prices

In relation to network access, one of the major issues is guaranteeing fair and non-discriminatory tariffs to infrastructure, access to which is essential to enable competitors to effectively compete with the merging firms. In VEBA/VIAG, in addition to the structural divestments, the parties further undertook to indicate the electricity prices for “special contract” customers (distributors and industrial customers), broken down by network-use charge, energy price, metering/reading, etc.

4.541

This obligation aimed to increase transparency. The showing of cost items separately inhibits any cross-subsidising of energy prices by companies which also own networks. In particular, it was considered that the separate indication of network and energy prices would make it easier to compare the pricing of VEBA/VIAG and of RWE/VEW1872 with that of other operators which do not own networks. This made for freer access by competing suppliers and at the same time counteracted any consolidation of the parties’ market position at the interconnected level.

4.542

1871 Case M.5224 of 22.12.2008. 1872 The two mergers, VEBA/VIAG and RWE/REW were contemporaneous.

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4.543

With regard to customers supplied outside their network area, VEBA/VIAG also undertook to ensure that the relevant network operator furnishes the corresponding data to them in broken-down form.

4.544

Also in VEBA/VIAG, the merging parties undertook to amend their charges for network use in Germany. As to the context of this commitment, it should be recalled that at the time the issue of the form of contracts for access network was delegated to the trade association concerned;1873 there was no Regulator in Germany.

4.545

The associations had agreed1874 to set up two trading zones in Germany. If power was delivered from one trading zone to the other or over the border to or from another country, a transmission charge (“T-component”) became payable, provided that the quantity of power transmitted could not be netted out.1875

4.546

This system created serious barriers to entry and thus mainly served to further consolidate and strengthen the position of VEBA/VIAG and RWE/REW.

4.547

Foreign suppliers had to pay the T-component at the rate of 0,125 pfennig/kWh when they imported electricity into Germany. The T-component also applied within Germany (at the rate of 0,25 pfennig/kWh) for all electricity traders and electricity generators that were unable to achieve a balance in supplies between the north and south trading zones. According to information obtained from electricity traders, in certain circumstances the payment of the T-component could reduce traders’ margins to zero. Only those companies that could offset the quantities of electricity supplied by them against the quantities of electricity which cross the trading zone boundary in the other direction did not have to pay the T-component. In this respect the members of the duopoly enjoyed significant advantages. VEBA/VIAG and VEW/RWE had an extensive supply area covering both trading zones. By contrast, smaller interconnected companies and electricity traders – without such a wide portfolio – found it more difficult to offset energy supplies and thus had to pay the T-component.

1873 In Germany, the general right to through-transmission is based on the idea of negotiated access to the grid. Operators of power supply networks must make the supply network available to other undertakings on conditions which are not less favourable than those actually or implicitly applied by them in comparable cases for services within their undertaking or vis-à-vis affiliated or associated undertakings. 1874 The Associations Agreement II. 1875 “Netting out” means setting off the quantity which crosses the border in one direction against the quantity which crosses it in the other direction.

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In the commitment, VEBA/VIAG and RWE/VEW abolished the T-component. As a result, competitors of the two blocks no longer suffered from this disadvantage and became able to supply electricity throughout most of Germany.

4.548

In EnergieAllianz/Verbund, the Commission identified the costs of balancing energy as a major entry barrier. It held that these costs placed remaining competitors at a disadvantage vis-à-vis Verbund/EnergieAllianz (the two parties being the largest suppliers of balancing energy with a combined market share, depending on the supply period, of between 60% and 90%).

4.549

The Commission’s investigations had shown that the risk of facing unplanned costs for balancing energy was greater for smaller market players than for large ones. Balancing energy was considered to be a significant factor in the minimum size required for a new competitor to enter the market. The merger would have made it even easier for the parties to achieve cost benefits through the coordination of their balancing energy costs. The impossibility for remaining and new competitors to derive similar benefits would have helped to marginalise remaining competitors even further and make market entry more difficult.

4.550

To deal with the problem of balancing energy, the parties submitted a package of commitments which set a price cap for a balancing services transitional period until an integrated cross-border market in balancing energy would be achieved. This was considered adequate to reduce the risk to competitors of new entry (enabling potential competitors in and outside Austria to enter Austria’s electricity markets and compete with Verbund/EnergieAllianz) and to encourage the integration of the markets in balancing energy in Austria and neighbouring countries.1876

4.551

8.

Insufficient remedies

In December 2004, the Commission prohibited the acquisition of Gás de Portugal (GDP), the incumbent gas company in Portugal, by Energias de Portugal (EDP), the ex-incumbent electricity company in Portugal, and ENI, the Italian energy company1877. Three sets of remedies were proposed by EDP and ENI, all were considered by the Commission to be insufficient to satisfy the competition 1876 The commitments relating to balancing energy were agreed between the notifying parties and the Austrian regulator E-Control. The plan is for E-Control to monitor fulfilment of the commitments as the Commission s trustee. E-Control has told the Commission that these commitments will suffice to solve the competition problems detected relating to balancing energy. 1877 Case M.3440 of 9.12.2004.

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concerns in the electricity and gas markets. The fourth and last set was proposed three workings days before the final decision of the Commission, leaving insufficient time to the Commission for an assessment. The decision is interesting from a remedy prospective as it details the reasons why the successive combination of remedies offered by the parties were found to be insufficient in terms of scale, scope and sometime duration.1878

4.553

In summary, the Commission objected to the merger because Portugal was considered to be the relevant geographic market and the merger of the dominant electricity and gas undertakings on the market would evidently strengthen that dominance. In particular, regarding the electricity wholesale market in Portugal, the Commission concluded that the deal would strengthen EDP’s dominant position as it would have eliminated GDP as a significant potential competitor.

4.554

In order to solve this issue, the parties had proposed commitments aimed at allowing other players to develop their activity in the wholesale electricity market while, at the same time, avoiding the divestiture of generation assets.

4.555

The parties proposed (i) a moratorium concerning EDP’s construction of gasfired power plants, (ii) to lease part of the generating capacity of TER (the most efficient gas-fired power plant in Portugal, owned by EDP) to a third party (iii), to divest EDP’s participation in the distributor Tejo Energia1879 and (iv) to suspend EDP’s voting rights and appoint independent board members in the distributor Turbogas.

4.556

These proposals were found to be insufficient to compensate for the significant loss of GDP as a potential competitor in the electricity market and to effectively ensure the timely entry of potential competitors:1880 1878 The General Court has upheld the prohibition of the transaction (see judgment of 21.09.2005 in case T-87/05, [2005] ECR II-3745). 1879 Tejo Energia and Turbogas are active in the wholesale electricity market in Portugal. At the time of the notification, EDF had a 10% minority interest in Tejo Energia; EDP had a 20% stake in Turbogas. 1880 On appeal (see judgment of 21.09.2006 in case T-87/05), the General Court noted that EDP has not raised in its application any serious criticisms directed against the factors identified by the Commission and on which it based its conclusion that these commitments were insufficient by reference to the competition concern identified. It concluded that EDP has not demonstrated that the Commission had made a manifest error of assessment when it considered that the concentration, as modified by all the commitments, taken together, had to be declared incompatible with the common market owing to its horizontal effect on the electricity markets. The Court held that in particular while all of those commitments improve the possibility of entering the wholesale electricity market, the applicant has not rebutted the Commission s conclusion, based on the market test, that all of those commitments do not create a competitive environment sufficient to render such entry likely.

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–

The proposed lease of generation capacity was considered insufficient, mainly because the lessee would not operate the plant autonomously. Some market participants argued that such a measure was not acceptable in principle because a lease would not have created any threat to EDP and that only a divestiture of generation assets would have allowed the development of a real competitor. Furthermore, it was argued, the proposed moratorium on the development of new generating capacity by EDP would also not ensure the effective entry of competitors.

–

The divestiture of EDP’s 10% share in Tejo Energia would have, in principle, been a positive move to the extent that it would have severed the links of EDP with one of its competitors. However, this commitment did not, as such, ensure that Tejo Energia would effectively develop a gas-fired power plant in the near future.

–

The remedy concerning Turbogas was also inadequate: it did not sever the links between EDP and Turbogás over the long term. It was of limited scope and of limited duration. Besides, it was never established that Turbogás was considering building new gas fixed generation capacity in the short term and that it would therefore exert an additional competitive constraint on EDP.

The second main specific competition issue identified was the upstream integration of EDP with GDP, the only supplier of natural gas in Portugal.

4.557

After the merger, EDP/GDP, which would now be a supplier of natural gas and electricity, would have had access to the daily gas nominations competing electricity companies that were de facto obliged to purchase gas from it, being the only significant gas supplier active in Portugal. This would have constituted a significant deterrent for firms willing to enter the Portuguese market as long as there are no effective and economic alternatives to EDP/GDP.

4.558

EDP/GDP would also have had the incentive to maintain a preferential access to natural gas infrastructure to its own electricity generating facilities to the detriment of companies actually or potentially involved in electricity generation. As an immediate result of the proposed operation, Turbogás would have been supplied with gas by EDP/GDP, its main competitor on the electricity wholesale market. Since Turbogás would not have been able to source its short-term requirements from independent gas suppliers (as the gas market was not due to be liberalised as Portugal was an emerging gas market), the

4.559

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merged entity would have had the ability and the incentive to raise a part of Turbogás’ input costs. To solve these problems, the parties offered: –

to sell the Sinès LPG terminal1881 and GDP’s Carriço underground storage1882 to REN (the independent manager of the Portuguese electricity grid). The Commission considered that many conditions and constraints were included in the commitments undermining their effectiveness and creating additional uncertainties as to the likelihood of their successful and timely implementation by the parties.

–

to make capacity accessible to third parties at Campo Maior (the entry point of the Algerian/Portuguese pipeline). The capacity made available in Campo Maior was considered by the Commission to be far too small (in the range of 10-20% of the capacity in the pipeline); there was no guarantee that competitors would have access to enough capacity in the pipeline to bring gas up to Campo Maior.



These commitments were not considered to ensure, with a sufficient level of certainty, that actual and future gas fixed electricity generating plants would be in a position to source natural gas from other companies at competitive conditions. Therefore, as a result of the merger and despite the proposed remedies, the Commission considered that EDP would have had the ability and incentive to control gas prices and raise its rivals, costs, thereby foreclosing its actual and potential competitors and deterring entry.1883

–

to address the issue of EDP’s access to proprietary information about its competitors costs, the parties proposed to erect Chinese Walls between certain parts of EDP and GDP. Given the long-lasting consequences of accessing this information even once, the Commission considered that Chinese Walls did not ensure with a sufficient degree of certainty that EDP will not become aware of its competitors costs.

1881 The only LNG terminal in Portugal, owned and operated by GDP. 1882 The only storage of natural gas available in Portugal apart from the LNG storage in Sinès which is much smaller. 1883 On appeal, the General Court noted that these commitments (relating to the non-horizontal effects on the wholesale electricity market) would have had only a very slight impact on the horizontal problem identified on all the electricity markets, namely the disappearance of GDP as the most likely important potential competitor, as a result of the concentration as modified (see paragraphs 224-227 of the judgment). Moreover, as regards the commitments relating wholly to the gas sector, the Court held that the applicant has not shown to what extent these commitments would improve the competitive capacity of any possible competitors of EDP (see paragraph 228 of the judgment).

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With respect to the retail supply of electricity, the Commission identified that the merger would (i) remove GDP as a strong competitor and (ii) raise additional barriers to entry as new entrants would have to enter both gas and electricity retail markets. The only proposed remedy of EDP/GDP which related directly to the retail supply of electricity was the commitment not to engage in dual offers of natural gas and electricity to retail customers. This commitment would have only applied for a limited period as it would have ended as from the legal opening of the gas market. For this reason, the Commission held that it did not ensure or significantly foster the appearance of competitors to compensate for the loss of GDP.

4.560

As regards to gas, through this position as legal monopolist in the pre-liberalisation period, GDP is dominant on all gas markets.

4.561

The market of gas supply to power producers – the first to be opened to competition in Portugal – would have been affected by the merger. Following the acquisition of joint control over GDP, EDP would have had a strong incentive to purchase the natural gas needed for its two power plants from GDP, so as to increase its profits on the upstream market and to prevent entry from GDP’s competitors. As concerns Turbogás’ position, EDP (holding a 20% participation in Turbogás), would have had every interest to exert its minority rights to veto any supply contract with gas operators other than GDP.

4.562

The Commission considered that the foreclosure of gas demand as a result of the merger would not be eliminated by the proposed remedies. The suspension of EDP’s voting rights on Turbogás’ new investments, the proposed sale of EDP’s participation in Tejo Energia, and the proposed moratorium concerning the construction of new gas fixed generating plants would be not sufficient to significantly change the situation.

4.563

EDP’s elimination as an immediate and potential competitor in the market for gas supply to large industrial customers and small customers was considered to further strengthen the dominant position of GDP and raise entry barriers. EDP would have had the ability to rely on its unrivalled customer base in the electricity market to enter the gas retail business, and would also have enjoyed a significant advantage as a multi-utility operator being able to make dual offers of electricity and gas in order to gain new gas customers.

4.564

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4.565

The parties proposed several remedies on this issue, i.e. the commitment not to engage in dual offers of gas and electricity until the natural gas supply market is liberalized, as well as the commitments mentioned above concerning the gas infrastructure. The Commission considered that these commitments failed to compensate for the loss of a potential competitor.

4.566

The parties also proposed to divest the Portuguese local distribution companies Setgás and – at a late stage of the procedure – Lusitaniagás. In this phase of the procedure, given the practical impossibility to conduct a new market test, the Commission was not able to conclude with a sufficient degree of certainty that the loss of EDP’s potential competition would be compensated by the procompetitive effect of the proposed amendments, and they were not therefore taken into account.



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CHAPTER 6 Merger procedure 1.

Pre-notification contacts

The pre-notification phase of the procedure is an important part of the whole review process, even in seemingly non-problematic cases.1884 The timing of the first contact with the Commission depends on the circumstances of each case, its complexity and the seriousness of the competition issues. The earlier the contacts (which are held in strict confidence), the better as they provide the Commission and the parties with the possibility to discuss issues such as the scope of the information to be submitted with the notification and to prepare for the upcoming investigation by identifying key issues and possible competition concerns at an early stage. Given that a notification is not considered effective until the information to be submitted in Form CO is complete, pre-notification is also aimed at avoiding any declaration of incompleteness with respect to the notification. Incomplete notifications significantly delay the procedure as the merging parties must resubmit the notification, with the time-limits for the Commission’s review starting anew.

4.567

In order for DG Competition to be able to allocate staff to cases in an efficient manner, the notifying parties are asked to use the standardised case allocation request that can be found on DG Comp’s web site.1885

4.568

Once a case team has been allocated to the case, the pre-notification may start with the submission of a briefing memorandum summarizing the background of the transaction, the markets affected and the possible competition issues. The

4.569

1884 See DG Competition Best Practices on the conduct of EC merger control proceedings, available on DG Comp s web site, paragraphs 5-19. 1885 http://ec.europa.eu/competition/contacts/mergers_mail.html

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notifying parties now often chose to submit a draft Form CO in place of the briefing memorandum. Meeting(s) and/or telephone conversations with the case handlers will follow these submissions.

4.570

The more complex the transaction, the more important it is to have regular contacts with the Commission. Irrespective of whether pre-notification meetings have taken place or not, the notifying parties must provide a substantially complete draft Form CO before notification. Therefore, it is not unusual to send successive revised versions of the draft Form that integrate the responses to questions asked by the case team on the previous draft. The case handlers take several days to review each successive draft. When they have confirmed informally the adequacy of the last version of the Form, filing can be made.

4.571

The 2013 Notice on a simplified procedure contains new paragraphs regarding the pre-notification process1886. The Notice indicates that pre-notification contacts, in particular the submission of a draft notification, may be less useful in cases where there are no reportable markets since the parties are not engaged in business activities in the same product and geographic market, or in a product market which is upstream or downstream from a product market in which any other party to the concentration is engaged. The Notice states that in such circumstances, notifying parties may prefer to notify immediately without submitting a draft notification before-hand. However, it remains the sole responsibility of the notifying parties to submit all the information necessary for the Commission to conclude that the proposed concentration does not give rise to any reportable market in the EEA. The Commission will not apply the simplified procedure if it is difficult to conclude that the proposed concentration does not give rise to any reportable markets. In such cases, the Commission may revert to the normal procedure and consider the notification as being incomplete.

1886 Commission Notice on a simplified procedure for treatment of certain concentrations under Council Regulation (EC) No 139/2004, OJ C366/5 of 14.12.2013, see in particular paragraphs 23 and 24.

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2.

Notification

2.1 Mandatory notification Regulation 139/2004 provides that concentrations must be notified prior to their implementation. Notification must take place following the conclusion of the agreement, the announcement of the public bid, or the acquisition of a controlling interest.1887 There is no specific time limit for notification.

4.572

Notification is also possible before the conclusion of the agreement or the announcement of the public bid. In this case, the undertakings concerned must show to the Commission that their plan for that proposed concentration is sufficiently concrete, for example on the basis of an agreement in principle, a memorandum of understanding, or a letter of intent signed by all undertakings concerned, or, in the case of a public bid, where they have publicly announced an intention to make such a bid.1888

4.573

Special rules would apply to acquisitions of minority shareholdings. Under the targeted transparency system, an undertaking would be required to submit an information notice to the Commission if it proposes to acquire a minority shareholding that qualifies as a “competitively significant link” (see section on non-controlling minority shareholdings in Part 4, Merger Control, Chapter 2, jurisdiction). The information notice would contain information relating to the parties, their turnover, a description of the transaction, the level of shareholding before and after the transaction, any rights attached to the minority shareholding and some limited market share information.

4.574

The Commission would decide whether further investigation of the transaction is warranted and Member States would consider whether to request a referral on the basis of this information notice.

4.575

The parties would only be required to submit a full notification if the Commission decided to initiate an investigation and the Commission would only issue a decision if it had initiated an investigation. In order to provide parties with legal certainty, they should also be able to voluntarily submit a full notification.

4.576

1887 Article 4(1) of Regulation 139/2004. 1888 Article 4(1) of Regulation 139/2004.

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2.2 Suspension effect 4.577

The implementation of concentrations is suspended until a final decision of the Commission has been taken. Article 7(1) of the Merger Regulation states that: “A concentration with a [Union] dimension as defined in Article 1, or which is to be examined by the Commission pursuant to Article 4(5), shall not be implemented either before its notification or until it has been declared compatible with the common market pursuant to a decision under Articles 6(1)(b), 8(1) or 8(2), or on the basis of a presumption according to Article 10(6).”

4.578

The first cases – Electrabel/CNR1889 and Marine Harvest/Morpol1890 – concerned the acquisition of de facto sole control resulting from the acquisition of minority investments in publicly listed companies, where a large minority stake was considered sufficient to confer control.

4.579

Electrabel was found to have acquired de facto sole control of CNR when it raised a small minority stake to 47.92% of voting rights. By decision of 10 June 2009, the Commission imposed a fine of €20 million on Electrabel for having implemented the transaction before having notified the Commission and before the concentration was declared compatible, for the period from December 2003 (when the acquisition of control took place) to August 2007 (when Electrabel contacted the Commission regarding this issue). Marine Harvest was found to have acquired de facto sole control over Morpol when it acquired a 48.5% stake, since this minority stake gave Marine Harvest a stable majority at Morpol’s shareholders’ meetings because of the wide dispersion of the remaining shares and previous attendance rates at these meetings. In both cases, the Commission imposed a fine of €20 million.

4.580

The General Court dismissed Electrabel’s and Marine Harvest’s appeals against the Commission’s decisions1891. The General Court holds that it is only if Electrabel had not been virtually certain, in December 2003, of obtaining control at future general meetings, that there would have been no concentration and, therefore, no infringement of the obligation not to put the transaction into effect as from that date. Specifically, Electrabel had not succeeded in demonstrating that, in December 2003, it was not virtually certain of obtaining a major1889 Case M.4994 of 10.06.2009. 1890 Case M.7184, of 23.07.2014. 1891 Case T-332/09, Electrabel v Commission, ECLI:EU:T:2012:672. The Court of Justice also rejected Electrabel’s appeal stating that the appelant had submitted new arguments which the Court did not have jurisdiction to consider (Case C-84/13 P, Electrabel v Commission. ECLI:EU:C:2014:2040) ; Case T-704/14, Marine Harvest v Commission, ECLI:EU:T:2017:753, under appeal (Case C-10/18 P).

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ity at CNR’s general meetings, even without holding the majority of the voting rights. With regard to the fine, the Court concluded that there was no reason to reduce its amount, as it was appropriate in the circumstances of the case, in the light of the gravity and duration of the infringement as established by the Commission and of Electrabel’s overall resources. The standstill obligation does not only cover full implementation of a concentration but also partial implementation. The difficulty lies in drawing the line between legitimate preparatory measures and partial implementation, as exemplified by the EY/KPMG case. This case gave the occasion to the Court of Justice – following a request for a preliminary ruling – to clarify the scope of the suspension obligation.1892

4.581

At the time of conclusion of the merger agreement, KPMG DK was a member of the KPMG international network of independent auditing firms, by virtue of a cooperation agreement.1893 The national court seeked to ascertain whether KPMG DK and EY had breached the standstill obligation because KPMG DK had terminated its cooperation with the international KPMG network prior to the final approval of the EY/KPMG merger. The Danish Competition Council issued a decision finding that KPMG DK had infringed the standstill obligation by giving notice to terminate the cooperation agreement with KPMG International before the merger had been approved by the Competition Council. Particular emphasis was laid on the fact that the termination of the agreement was (i) merger-specific, (ii) irreversible, and (iii) had the potential to have market effects in the period between the notice of termination and the approval of the merger, though those three elements were stated not to be exhaustive.

4.582

The Court of Justice found that the standstill obligation covers activities that contribute to the change in control of the target undertaking. According to the Court, although they may be ancillary or preparatory to the concentration, only measures that present a direct functional link with the implementation of the concentration, i.e. which contribute to lasting change of control should be considered as gun jumping. The Court concluded that the termination by KPMG Denmark of its agreement with KPMG International – even though subject to

4.583

1892 Case C-633/16, Ernst & Young P/S v Konkurrencerådet, ECLI:EU:C:2018:371. 1893 The cooperation agreement gave the participants the exclusive right to be included in the KPMG network on the national level and to use the trademarks of KPMG International for marketing purposes. The cooperation agreement also contains provisions on the allocation of customers, the obligation to service clients from other territories and the annual compensation for participation in the cooperation. The cooperation agreement presupposes that the auditing firms participating in the KPMG network at no point in time participate in a partnership/joint venture or the like.

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a conditional link with the concentration and likely of ancillary and preparatory nature and despite the effects it was likely to have on the market, did not contribute to the change of control of the target undertaking.

4.584

In April 2018, the Commission fined multinational cable and telecoms company, Altice, € 124.5 million for implementing its 2015 acquisition of a telecommunications operator, PT Portugal, before obtaining the Commission’s clearance, and in some instances, even before its notification of the merger.1894

4.585

The Commission indicates that an agreement between the seller and the buyer that affords the purchaser the possibility to exercise decisive influence over a target on matters that are not necessary for the preservation of the value of the target, for example because they pertain to the ordinary course of the target’s business operations or the target’s commercial policy, is not justified.

4.586

The Commission found that a number of provisions of the transaction agreement – which came into effect on the signing date – granted Altice the possibility to exercise decisive influence over PT Portugal, prior to the Commission having completed its review under the Merger Regulation. This was the case of provisions preventing PT Portugal from (i) appoint any new director of officer (or terminating or amending the terms of any existing contract), (ii) modifying its pricing policy and commercial terms and conditions with customers; and (iii) its ability to enter, terminate or modify its contracts. The Commission considered that the range of contracts over which Altice had a veto right was so broad that it gave Altice the possibility to exercise decisive influence over PT Portugal.

4.587

Moreover, the Commission found that between the signing date and adoption of the clearance decision, Altice was heavily involved in the decision making processes at PT Portugal. Even in situations where PT Portugal was not obliged to obtain Altice’s agreement in relation to commercial decisions pursuant to the transaction agreement, a variety of commercial decisions were not made unless and until Altice consented. The Commission noted that Altice actually exercised decisive influence over several aspects of PT Portugal’s business, for example by giving PT Portugal instructions on how to carry out a marketing campaign or by giving specific instructions to PT Portugal on how to negotiate contracts and by seeking and receiving detailed commercially sensitive information which did not form part of a due diligence process or as part of Altice’s valuation of PT Portugal. 1894 Case M.7993 of 24.04.2018.

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Derogation from the obligation to suspend concentrations is granted only exceptionally, normally in circumstances where suspension provided for in the Merger regulation would cause serious damage to one of the undertakings concerned if the transaction were postponed.1895 A request for a derogation must state the grounds on which it is based.

4.588

By way of illustration, in the electricity sector, a derogation from the obligation to suspend concentrations was granted in Baywa/Clean Energy Trading.1896 The target Clean Energy Trading (CET) was a company founded in view of the insolvency proceedings of the Clens group, a direct marketer of electricity from renewable energy and CHP plants, a supplier of electricity from renewable and conventional sources for industrial and commercial customers, and a marketer of flexibility from decentralized power generation plants. As part of the insolvency proceedings, it was proposed that the insolvency administrator transfers Clens’ business unit – i.e. namely, electricity purchase contracts concluded by Clens with power generators and electricity supply contracts concluded by Clens with industrial and commercial end customers – to CET. Following the intended transfer of those assets by the insolvency administrator to CET, BayWa proposed to sign a share purchase and transfer agreement for the acquisition of CET and to put in place bank guarantees securing the payments due to the electricity generators under the purchase contracts. These contracts were initially secured by bank guarantees put in place by Clens. Given its insolvency, Clens was no longer in a position to fulfil its payment obligations under these contracts, and the electricity generators made use of the initial bank guarantees. As a consequence, the electricity generators were contractually entitled to the replacement of the drawn bank guarantees by new ones or to immediately terminate the contracts if the electricity supply remains unsecured.

4.589

BayWa submitted that without the immediate issuance of new bank guarantees, a substantial amount of electricity producers would terminate their contracts. This would have lead to a significant loss of value of CET, which could put the entire transaction at risk, if no critical mass of purchase contracts could not be transferred. This would have had severe consequences for the employees of CET, for the electricity generators that are party to the contracts (who would quickly need to find new business partners), as well as for the customers of the business unit. It would also have affected the creditors of the insolvent Clens Group, who

4.590

1895 Article 7 (3) of Regulation 139/2004. See for example, Fiat/Teksid in case M.4840 of 24.07.2007; Gerdeau Europe/Ascometal in case M. 7273 of 13.05.2014; Parcom/PON/Imtech Marine in case M.7771 of 4.09.2015; Pilarstone/Famar in case M.8583 of 27.02.2017; Banco Santander/Banco Popular Group in case M.8553 of 7.06.2017. 1896 Case M.8758 of 7.12.2017.

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would not have been compensated with the earning from the purchase price during the insolvency proceedings. The Commission considered that those risks appeared material. It noted that no threat to competition caused by the transaction could be identified and decided to grant a derogation from the suspension obligation subject to the condition that BayWa must submit a complete notification no later than one month after the adoption of the decision granting the derogation.

4.591

The suspensive effect does not prevent the implementation of a public bid or acquisition made through the stock market provided that (i) the concentration is notified to the Commission without delay; and (ii) the acquirer does not exercise the voting rights attached to the securities in question or does so only to maintain the full value of its investments based on a derogation granted by the Commission.1897

4.592

In case of acquisitions of minority shareholdings, the Commission is considering1898 proposing a waiting period once an information notice has been submitted, during which the parties would not be able to close the transaction and during which the Member States have to decide whether to request a referral. Such a waiting period could last 15 working days. This would also align it with the deadline under Article 9 for a Member State referral request following a full notification. Such a system would ensure that transactions which are referred to Member States are not yet implemented and can be handled by the Member States under their normal procedure, as they might foresee a stand-still obligation and not be equipped to deal with consummated transactions. More generally, the referral system should ensure that the existing level of protection provided by the national merger regimes already capturing non-controlling minority shareholdings will be maintained and that enforcement gaps will be avoided.

4.593

The Commission would also be free to investigate a transaction, whether or not it has already been implemented, within a limited period of time following the information notice. Such a period could be 4 to 6 months, and would allow the business community to come forward with complaints. It would also reduce the risk of the Commission initiating an investigation on a precautionary basis during the initial waiting period.

1897 Article 7(2) of Regulation 139/2004. 1898 White Paper towards more effective EU merger control (2014).

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In the event that the Commission initiates an investigation of a transaction which was already (fully or partially) implemented, it should have the power to issue interim measures in order to ensure the effectiveness of a decision under Articles 6 and 8 Merger Regulation. Such power could take the form of a hold separate order, for example.

4.594

2.3 Content of the notification Notification of concentrations to the Commission must be made by means of a special form annexed to Implementing Regulation 1269/2013. A short Form is devoted to the notification of the transactions which qualify for the simplified procedure. The “Form CO” is applicable to all other transactions. The notification must be submitted to the Commission in the format and with the number of copies specified by the Commission in the Official Journal of the European Union1899.

4.595

Acquisitions of minority shareholdings would be subject to an information notice. The information notice would contain information relating to the parties, their turnover, a description of the transaction, the level of shareholding before and after the transaction, any rights attached to the minority shareholding and some limited market share information. The parties would only be required to submit a full notification if the Commission decided to initiate an investigation. In order to provide parties with legal certainty, they should also be able to voluntarily submit a full notification.

4.596

2.4 Language The notification must be drafted in one of the official languages of the European Union. This language becomes the language of proceedings.

1899 Communication pursuant to Articles 3(2), 6(2), 13(3), 20(1), 20(1a) and 23(4) of Commission Regulation (EC) No 802/2004, OJ C270/9, 19.06.2014.

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3. 4.598

Simplified procedure

Since 1 September 2000, a simplified procedure is applicable to the handling of concentrations which do not raise competition concerns. The simplified procedure applies to the following categories of concentrations:1900 (a)

joint ventures with no, or negligible, actual or foreseen activities within the EEA. Such cases occur where the turnover of the joint venture and/ or the turnover of the contributed activities is less then €100 million in the EEA and the value of assets transferred to the joint venture is less than € 100 million in the EEA at the time of notification;

(b)

transactions in which none of the parties are engaged in business activities in the same product and geographical market as one another, or in a product market which is upstream or downstream of a product market in which any other party to the concentration is engaged;

(c)

transactions which do not give rise to any affected markets, i.e. the combined market share of the parties must be less than 20% on the same market (horizontals relationships) or less than 30% on any market which is upstream or downstream of a product market in which any other party to the concentration is engaged (vertical relationships);

(d)

a party is to acquire sole control of an undertaking over which it already has joint control.

4.599

The Commission may also apply the simplified procedure where two or more undertakings merge, or one or more undertakings acquire sole or joint control of another undertaking, and both of the following conditions are fulfilled: (i) the combined market share of all the parties to the concentration that are in a horizontal relationship is less than 50 %; (ii) and the increment of the Herfindahl-Hirschman Index (HHI) resulting from the concentration is below 150.1901

4.600

In this latter case, the Commission will decide on a case-by-case basis whether, under the particular circumstances of the case at hand, the increase in market concentration level indicated by the HHI delta is such that the case should be examined under the normal first phase merger procedure.1902 1900 See OJ C366/5, 14.12.2013, and Corrigendum OJ C11/6, 15.01.2014, paragraph 5. 1901 Commission Notice on a simplified procedure, paragraph 6. 1902 Commission Notice on a simplified procedure, paragraph 18.

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While it can normally be assumed that concentrations falling into these categories will not raise serious doubts as to their compatibility with the internal market, there may nonetheless be certain situations which exceptionally require a closer investigation and/or a full decision. This includes instances where the market is already concentrated, where the concentration would eliminate an important competitive force or combine two important innovators, or where there are indications that the proposed concentration would allow the merging parties to hinder the expansion of their competitors.1903 In such cases, the Commission may revert to a normal first phase merger procedure.

4.601

In the cases of a simplified procedure, the Commission publishes the fact of the notification in the Official Journal and adopts a short form decision. In the absence of any observations from interested parties on circumstances which might require an investigation, the Commission does not undertake an investigation.

4.602

The concentration must be declared compatible with the internal market, within 25 working days from the date of notification, pursuant to Article 10(1) of the Merger Regulation. However, in its Notice on a simplified procedure, the Commission indicates that it will endeavour to issue a short-form decision as soon as practicable following expiry of the 15 working day period during which Member States may request referral of a notified concentration pursuant to Article 9 of the Merger Regulation.1904

4.603

It should be noted that in the period leading up to the 25-working day deadline, the option of reverting to a normal first phase merger procedure and thus launching investigations and/or adopting a full decision remains open to the Commission.

4.604

Short-form decisions contain limited information (names of the parties, nature of the concentration and economic sectors concerned) and a statement that the concentration is declared compatible with the common market because it falls within one or more of the categories described above.1905

4.605

1903 Commission Notice on a simplified procedure, paragraphs 11-15. 1904 Commission Notice on a simplified procedure, paragraph 26. 1905 See, inter alia, Lukoil/ISAB/ISAB Energy/ISAB Energy Services (case M.7168, 27.02.2014), Shell/Repsol (case M.6897, 2.07.2013), E.On/Sabanci/Enerjisa (case M.6810, 14.02.2013), EPH/SPP (case M.6786, 13.12.2012).

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4.

Standard procedure

4.1 Phase I 4.606

Decisions are adopted within 25 working days. The period is of 35 working days if the Commission receives a request for referral from a Member State or if the merging parties propose remedies.1906

4.607

During this initial period, the Commission checks whether the notified concentration can be approved or raises serious doubts.

4.608

In order to properly appraise concentrations, during both phase-I and phase-II proceedings, the Commission requests information from third parties (competitors, suppliers, customers and other relevant parties such as regulatory authorities). Information may also be requested from the notifying parties. Normally, case teams send their requests for information after the notification. However, they may decide that, in the interest of their investigation, market contacts should be initiated informally prior to notification. Such pre-notification contacts/enquiries only take place if the existence of the transaction is in the public domain and once the notifying parties have had the opportunity to express their views on such measures.1907

4.609

After notification, the Commission’s case team maintains close contact with the notifying parties and discusses, to the extent necessary, any major relevant issue for the assessment of the transaction. Where the transaction is problematic, a “state of play meeting” is proposed within 15 working days following notification.1908

4.610

At the end of phase I, the Commission takes a decision declaring the concentration compatible (with or without remedies) or initiating phase-II proceedings.1909

1906 Article 10(1) of Regulation 139/2004. 1907 DG Competition Best Practices on the conduct of EC merger control proceedings, available on DG Comp s web site, paragraph 26. 1908 See Best Practices on the conduct of EC merger control proceedings, paragraph 33 a). 1909 If it appears that the concentration notified does not fall within the scope of Regulation 139/2004, the Commission records that finding by means of a decision (Article 6(1)(a) of Regulation 139/2004). See Groupe Lagardère/SNCF Participations/JV case M.7253, 25.07.2014.

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4.2 Phase II Decisions must be adopted within 90 working days following the decision to enter into phase II-proceedings.

4.611

This deadline is automatically extended to 105 working days if the notifying parties submit remedies after the 55th working day.1910 The deadline of 90 working days can also be extended if the notifying parties make a request to that effect within 15 working days after the initiation of phase II-proceedings. Likewise, at any time, the deadline may be extended by the Commission with the agreement of the notifying parties. The total duration of any extensions cannot exceed 20 working days. These provisions aim at facilitating the investigation of complex phase II-cases.1911

4.612

During phase II-proceedings, the Commission carries out a very detailed investigation of the concentration. A peer review panel composed of experienced Commission officials is appointed for all phase II-investigations, and has the task of scrutinizing the case’s team conclusions with a fresh pair of eyes on key points of the enquiry. The team of the Chief Competition Economist also provides an independent economic view-point to case teams at all levels.1912

4.613

As a general remark, phase-II proceedings are burdensome as the parties must provide detailed answers to extensive requests for information within very short time limits.1913 answer to the statement of objections (if any), prepare oral hearings (if they have asked for) and – if need be – negotiate on remedies.

4.614

The main steps of phase-II proceedings are the following:

4.615

–

The notifying parties provide the case team with their written comments on the Article 6(1)(c) decision (the decision initiating phase-II proceedings, in which the Commission expresses its concerns).

1910 Article 10(3) of Regulation 139/2004. 1911 Article 10(3) of Regulation 139/2004. 1912 See in the final report of the hearing officer in Universal Music group/EMI Music (case M.6458 of 21.09.2012), the procedural issues that arose with regard to the access to the data and codes used to build the final datasets on which the Chief Economist Team s analysis was run. 1913 With regards to the Commission’s requests for internal documents, see the Best Practices on requests for internal documents under the EU Merger Regulation.

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–

If the investigation does not rule out the Commission’s concerns, a statement of objections is sent to the notifying parties.1914 The latter are then given the opportunity to respond to these objections in writing and by way of an oral hearing.1915

–

For this purpose they are given access to all parts of the file which does not contain confidential information.1916 A data room can be organized so that the notifying party’s economic advisers are able to access confidential quantitative information.1917



In June 2015, the Commission published on its web site its “Data Room Best Practices”. The Commission explains that data collected from third parties (e.g. cost and price data, sales data, bidding data, margins etc.) often constitute business secrets. However, granting access to such data may be necessary in certain circumstances for an effective exercise of the rights of defence. Quantitative data1918 included in a data room should enable the addressees of a statement of objections, through their external advisors, to verify the methodology used by the Commission to collect, check the consistency of, manage and analyse, the data used in a statement of objections, as well as to replicate and check the robustness of the Commission’s analysis. Access to a data room is subject to compliance with the data room rules, set out by the Commission, confidentiality undertakings and sanctions in case of non-compliance (the standard data room rules and the standard non-disclosure agreement are attached to the Data

1914 Unless the notifying parties do not contest the Commission’s concerns and use the phase II to discuss remedies. For example, no statement of objections was issued in Siemens/Drägerwerk, case M.2861. 1915 The hearing is not mandatory. For example, in E.On/MOL (Case M.3696 of 21.12.2005), DONG/Elsam/ Energi E2 (Case M.3868 of 14.03.2006) and in Gaz de France/Suez (Case M.4180 of 14.11.2006), the parties to the concentration did not request to develop their arguments in a formal oral hearing. 1916 In Outokumpu/Inoxum (see final report of the hearing officer in case M.6471 of 7.11.2012), the notifying party requested clarification regarding, and further access to, the redacted answers in certain market questionnaires. In order to address potential confidentiality issues, the notifying party suggested restricted access to its external advisors only. DG Competition agreed to grant the notifying party’s external advisors further access subject to a non-disclosure agreement. See also for access to market shares in ranges of the parties and their competitors and data which the Commission used to compute market shares, final report of hearing officer in Johnson & Johnson /Synthes (case M.6266 of 18.04.2012). 1917 See Western digital Ireland/Viviti Technologies (case M.6203 of 23.11.2011), Universal Music group/EMI Music (case M.6458 of 21.09.2012). See also the Beste Practices on the disclosure of information in data rooms under Articles 101 and 102 TFEU and under the merger regulation ( June 2015). 1918 Exceptionally, qualitative confidential documents may also be disclosed to the external advisors (external legal counsels) through a data room procedure. A qualitative data room may be organised where it is not possible or it is very burdensome for the data provider to provide meaningful non-confidential versions of such qualitative documents (for instance internal strategy documents) with sufficient evidentiary value and in a timely manner.

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Room Best Practices). Access to the data room is granted under strict confidentiality obligations (external Advisors shall neither remove data, information or documents from the data room, nor disclose confidential information obtained within the framework of a data room procedure to the addressees of the statement of objections or any third party), security measures and appropriate supervision.

Further, the notifying parties are given the opportunity to have access to the non confidential version of documents received after the issuing of the statement of objections up until the consultation of the Advisory Committee.1919



The statement of objections is a preparatory measure1920 setting out the Commission’s provisional findings, which it may revisit in the final decision. The Commission is therefore entitled, in order in particular to take account of the arguments or other evidence put forward by the undertakings concerned, to continue with its fact-finding after the adoption of the statement of objections with a view to withdrawing certain complaints or adding others as appropriate.



Seen from this angle, the statement of objections and the undertakings’ possibility to respond to it, offer the Commission the opportunity to refine its factual findings in view of the final decision.



There is no provision which prevents the Commission from sending to the parties after the statement of objections fresh documents which it considers support its argument, subject to giving the undertakings the necessary time to submit their views on the subject.1921 However, fresh objections will necessitate the issuance of a new statement of objections.1922



Additional requests for information can be sent after the issuance of the statement of objections in order to gather supplementary information. In this case, in order to ensure the notifying parties’ rights of defence,

1919 DG Competition Best Practices on the conduct of EC Merger Control Proceedings, paragraph 43. 1920 The statement of objections may not in any case be the subject of an action for annulment; see case 60/81 IBM v Commission [1981] ECR 2639, paragraph 21. 1921 Case 107/82 AEG v Commission [1983] ECR 3151, paragraph 29; Case T-23/99 LR AF 1998 A/S [2002] ECR II-1705, paragraph 190. 1922 Case T-275/94 Eurochèques [1995] ECR II-2169. See case M.5830 Olympic/Aegean Airlines, paragraph 6, in which the Commission sent the Parties a supplementary statement of objections one week after the hearing, to which the Parties replied. Then the Commission sent the Parties a Letter of Facts.

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the Commission sends a “ letter of facts” summarizing its additional factfinding and grants further access to file. The notifying parties respond to the letter of facts.

A letter of facts may also be sent to inform the notifying party about preexisting factual elements which were not expressly relied on in the statement of objections but which, on further analysis of the file, the Commission had concluded were potentially relevant to substantiate its final decision. A letter of facts can also set out a number of corrections to the statement of objections, where errors had been identified in certain paragraphs (depending on the circumstances, this may create a need to extend the deadline for responding to the statement of objections) as well as a clarification of the information contained, without altering the conclusions drawn therein.1923



In Olympic/Aegean Airlines, the notifying parties argued that the letter of facts raised several procedural issues. They considered that they did not have sufficient access to the underlying data to meaningfully comment on the economic analysis contained in the letter of facts. In response, the Commission organised a data room, with the agreement of the information providers, to grant access to the underlying data under conditions of confidentiality.1924



The notifying parties considered that the letter of facts contained new material and analysis, that the Commission should have addressed in a supplementary statement of objections. They also requested to be heard on the letter of facts at an oral hearing.



Considering that the letter of facts contained no new or modified objections, but referred to evidence collected by the Commission before the adoption of the statement of objections and merely supported the objections already set out in the statement of objections, the hearing officer rejected the request for such hearing. While the Commission has a discretion under Article 14(1) of the Implementing Regulation to organise another oral hearing, the hearing officer came to the conclusion that in this case, this was not justified because the issues covered in the letter of facts were of a limited scope and the notifying parties could fully exercise their right to be heard by submitting written comments on the letter of facts.

1923 See final report of the hearing officer in Outokumpu/Inoxum (case M.6471 of 7.11.2012). 1924 See final report of the hearing officer, case M.5830 Olympic/Aegean Airlines.

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The notifying parties also objected to the issuance of the letter of facts on day 70 of the Phase II procedure arguing that it infringed their rights of defence and breached their right to due process under Article 6 of the European Convention on Human Rights. They claimed that it is contrary to due process for them to have submitted commitment proposals while the letter of facts showed that certain competition issues still remained open for the Commission. Furthermore, they argued that the timing of the letter of facts meant that the Commission could not take into account their reply to the letter of facts before starting to assess the responses to the market inquiry concerning their latest commitment proposal. The hearing officer considered, nonetheless, that the objection was not founded given that, in his opinion, the letter of facts did not change any of the existing objections. It could therefore not negatively affect the notifying parties’ ability to propose commitments to the Commission. The hearing officer also indicated that there was no reason to assume that the Commission would not be able to take into account the notifying parties’ reply to the letter of facts and its putative consequences for the latest commitment proposal. Pursuant to Article 18(1) of the Merger Regulation, it is until the consultation of the Advisory Committee that the parties have a right to make known their views on the objections of the Commission, and the latter is obliged to take into account any comment submitted to it until then. Finally, the hearing officer stated when assessing alleged infringements of the right of defence and due process, that it is necessary to take into account the necessity for speed, which characterises the general scheme of the Merger Regulation. It is therefore often unavoidable that the necessary procedural steps overlap and cannot be rigidly kept separate.1925

–

Observance of the rights of the defence and, in particular, the right to a fair hearing, requires that the undertaking concerned must have been afforded the opportunity to make known its views on the truth and relevance of the facts and circumstances alleged, and on the documents used by the Commission to support its claims. The General Court annulled the decision by which the Commission refused to authorise the merger between UPS and TNT because the Commission relied on an econometric analysis which had not been discussed in its final form with UPS during the administrative procedure.1926 The General Court held that the Commission made non-negligible changes to the analyses previously

1925 See final report of the hearing officer, case M.5830 Olympic/Aegean Airlines. 1926 Case T-194/13 United Parcel Service v Commission, ECLI:EU:T:2017:144, paragraphs 206-221.

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discussed with UPS (the last results of the econometric analysis led the Commission to decrease the number of Member States where competition would have been significantly impeded). Moreover, the Court noted that UPS had been able, during the administrative procedure, to have a significant influence on the development of the econometric model proposed by the Commission, since it raised technical problems to which it provided solutions. In the light of the foregoing, the Court held that UPS might have been better able to defend itself if it had at its disposal, before the adoption of the decision, the final version of the econometric model chosen by the Commission. It concluded that the Commission infringed the applicant’s rights of defence by failing to communicate the final version of its econometric model to the applicant. –

State of play meetings are organized following the adoption of the Article 6(1)(c) decision (the decision initiating phase-II proceedings), before the issuing of the statement of objections, following the reply and the oral hearing and before the advisory committee meets. The objective of the state of play meetings is to contribute to the quality and efficiency of the decision-making process and to ensure transparency and communication between DG Competition and the notifying parties at key points in the procedure.

–

If following its investigation, the Commission is satisfied that the relevant operation is in fact compatible with the common market, it will clear the transaction without remedies.1927 In other cases, remedies may be necessary to eliminate the competition problem and they will be a condition for the adoption of a clearance decision. If the notifying parties nonetheless fail to convince the Commission that the concentration will not significantly impede competition or that the proposed remedies will eliminate the competition problem, the Commission will issue a decision declaring that the concentration is incompatible with the common market1928. Before taking its decision (whatever it is), the Commission consults the Advisory Committee composed of Member States representatives1929.

1927 For cases in which the Commission issued a statement of objections, referring to anticompetitive concerns but then cleared the transaction considering that the proposed transaction will not significantly impede competition, see for example TomTom/TeleAtlas (case M.4854 of 14.05.2008) or UPM/Myllykoski and Rhein Papier (case M.6101 of 13.07.2011). 1928 See for example, Deutsche Börse/Euronext (case M.6166 of 1.02.2012), UPS/TNT (case M.6570 of 30.01.2013). In the energy sector, the only prohibition decision is ENI/EDP/GDP (case M.3440 of 9.12.2004). 1929 See the Working Arrangements for the functioning of the Advisory Committee on concentrations, available on DG COMP’s web site.

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5.

Third party involvement in the proceedings

Third parties may play an important role in merger proceedings.1930

4.616

Their important role in the Commission’s procedure is stressed in particular in Article 18(4) of the Merger Regulation and Articles 16(1) and (2) of the Implementing Regulation which relate to the right to be heard.

4.617

Substantial objections by such parties may convince the Commission that the transaction raises serious doubts which the notifying parties must rule out if they want to get clearance.

4.618

The Commission’s investigation is mainly conducted in the form of requests for information. These requests are sent not only to notifying parties but also to the competitors, customers and suppliers identified in the Form CO as well as to the other third parties which have submitted information following the notice published in the OJ. In a notice published in the Official Journal immediately following the notification, the Commission invites interested third parties to submit their possible observations on the proposed operation within 10 days following the publication of the notice. In many cases however, third parties who have strong objections do not wait for the publication of the notice and comment on the transaction already at the pre-notification stage.

4.619

As stated by the Commission in its Best Practices on the conduct of EC merger control proceedings, if third parties wish to express competition concerns as regards the transaction in question or to put forward views on key market data or characteristics that deviate from the notifying parties’ position, it is essential that they are communicated as early as possible to DG Competition, so that they can be considered, verified and taken into account properly. Any point raised should be substantiated and supported by examples, documents and other factual evidence.1931

4.620



See also the Organisation of and participation in Advisory Committee meetings by video-link (also available on DG COMP’s web site). 1930 See DG Competition Best Practices on the conduct of EC merger control proceedings, paragraphs 34-38. In cases like inter alia AOL/Time Warner, MCI/Worlcom Sprint or GE/Honeywell, third parties’ arguments were an important element in the Commission’s decision to open a phase II-investigation and, later on, in the outcome of the cases. 1931 DG Competition Best Practices, paragraph 37.

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4.621

Third parties considered as having a “sufficient interest” to be heard by the Commission include customers, suppliers, competitors, members of the administration or management organs of the undertakings concerned or recognised workers’ representatives of those undertakings.1932 In addition, the Commission also welcomes the views of any other interested third parties including consumer organisations.

4.622

Third persons showing sufficient interest1933 have a right be heard in writing, and may only participate in the oral hearing of the parties if it is considered appropriate by the Commission,1934 for example if they can usefully contribute to the clarification of the relevant facts of the case.

6.

Business secrets

4.623

The Commission sends out copies of the Form CO and of the most important documents (including the proposals for remedies) to the Member States.1935 Both the Commission and the Member States have the obligation not to disclose information which contains business secrets.

4.624

To protect their business secrets, the merging parties must clearly mark confidential information submitted to the Commission as confidential. This applies to any document, i.e. Form CO, answers to the Commission’s requests for information, proposals for remedies. Business secrets are also deleted from the Commission’s decision before its publication.

4.625

In its Best Practices on the conduct of EC merger control proceedings, the Commission indicates that, in the interest of the investigation, DG Competition may in appropriate cases provide third parties that have shown a sufficient interest in the procedure with an edited version of the statement of objections from which business secrets have been removed, in order to allow them to make their views known on the Commission’s preliminary assessment.

1932 Article 16(3) of Implementing Regulation. 1933 See reasons for the rejection of status of interested third persons, final report of the Hearing Officer in case M.6166 (Deutsche Börse/ NYSE Euronext), paragraph 8. 1934 Article 16(2) of Implementing Regulation. See reasons for the rejection of application to attend the oral hearing, final report of the Hearing Officer in case M.6166 (Deutsche Börse/ NYSE Euronext), paragraph 13. 1935 Article 19(1) of Regulation 139/2004.

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In such cases, the statement of objections is provided under strict confidentiality obligations and restrictions of use, which the third parties have to accept prior to receipt.1936

4.626

The two cases Commission v Éditions Odile Jacob and Commission v Agrofert Holding,1937 provided the Court of Justice with the opportunity to define the scope of the right of access to documents of the EU institutions in the context of merger control proceedings, and to examine, for the first time, the relationship between Regulation  1049/2001 regarding public access to European Parliament, Council and Commission documents1938 and the Merger Regulation.

4.627

In both cases, the Commission refused to disclose documents relating to two sets of merger control proceedings to the French publishing company Odile Jacob1939 and the Czech company Agrofert – both of which were third parties in relation to the mergers which formed the subject-matter of the Commission’s controls.

4.628

The Court acknowledged the existence of a general presumption1940 that disclosure of documents exchanged between the Commission and undertakings in the course of merger control proceedings undermines, in principle, both protection of the objectives of investigation activities and that of the commercial interests of the undertakings involved in those proceedings. Generalised access to those documents would jeopardise the balance which the EU legislature sought to ensure, in the merger regulation, between the obligation on the undertakings concerned to send the Commission possibly sensitive commercial information to enable it to assess the compatibility of the proposed merger with the common market, on the one hand, and the guarantee of increased protection, with regard to the requirement of professional secrecy and business secrecy, for the information so provided to the Commission, on the other.

4.629

1936 DG Competition Best Practices, paragraph 36. 1937 Case C-404/10 P Commission v Éditions Odile Jacob SAS, EU:C:2012:393, and case C- 477/10 P Commission v Agrofert Holding a.s., EU:C:2012:394. 1938 Regulation (EC) 1049/2001 of 30 May 2001 (OJ 2001 L145/43). 1939 Odile Jacob asked the Commission, pursuant to the Access to Documents Regulation, for access to a number of documents (e.g. the decision of to initiate an in-depth investigation, the correspondence between the Commission and Lagardère SCA, the correspondence between the Commission and Natexis, the Commission’s internal memoranda, the Commission’s documents related to the implementation of the commitments, etc.) decision approving the appointment of the trustee ) relating to the administrative procedure which led to the conditional clearance of case M.2978-Lagardère/Natexis/VUP, so that it might use them in support of its actions before the Court seeking the annulment of the conditional clearance decision and the annulment of the decision on the approval of Wendel Investissement SA as purchaser of the assets sold by Lagardère. 1940 This general presumption does not exclude the right of the interested party to show that there is an overriding public interest which justifies disclosure of the documents.

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4.630

If persons other than those entitled to have access to the file by the rules on merger control proceedings, or those who could be regarded as involved parties but have not used their right of access to the information or have been refused access, were able to obtain access to the documents relating to such a procedure on the basis of Regulation  1049/2001, the system introduced by that the merger regulation would be undermined.

4.631

The Court ruled that in the present case the Commission was entitled, pursuant to the first and third indents of Article 4(2) of Regulation  1049/2001,1941 to refuse access to all the documents at issue relating to the merger control procedure referred to in the request for access made on the basis of Regulation 1049/2001, without first carrying out a specific, individual examination of those documents.

7.

Sanctions for violation of procedural obligations

7.1 Failure to notify 4.632

The EU Merger Regulation entitles the Commission to impose fines on undertakings where they fail to notify a concentration.1942 This fine – which is fixed according to the nature, the gravity and the duration of the infringement – cannot exceed 10% of the aggregate turnover of the undertaking concerned.

4.633

The Commission has imposed fines on this ground in a few cases. In the past, the level of the fines was not significant (€ 33.000 in Samsung/AST and € 219.000 in A.P Møller).1943

4.634

The level of fines has then raised significantly. In 2009, the European Commission imposed a fine of €20 million on Electrabel, for acquiring control of Compagnie Nationale du Rhône (CNR), without having received prior approval under the EU Merger Regulation.1944 1941 Article 4(2) of Regulation 1049/2001 states that the institutions shall refuse access to a document where disclosure would undermine the protection of (i) commercial interests of a natural or legal person, (ii) court proceedings and legal advice, and (iii) the purpose of inspections, investigations and audits, unless there is an overriding public interest in disclosure. 1942 Article 14(2) of Regulation 139/2004. 1943 Samsung/As (case M.920 of 18.02.1998 in, OJ L 225/12) A.P. Moller (Case M.969 of 10.02.1999 in, OJ L 183/29, 16.07.1999). 1944 Electrabel/CNR (case M.4994 of 10.06.2009). Again, in 2014, in Marine Harvest/Morpol (case M.7184, of 23.07.2014), the Commission imposed a fine of €20 million for putting into effect a concentration before it was notified and before it was cleared. The General Court dismissed the action for annulment lodged by

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By acquiring in December 2003 the shares of CNR held by EDF, Electrabel became by far CNR’s largest shareholder holding close to 50% of CNR’s shares. The Commission’s investigation found that due to the wide dispersion of the remaining shares and past attendance rates at CNR’s shareholders’ meetings, Electrabel enjoyed a stable majority at such meetings. The Commission considered that the infringement lasted for a significant period and that Electrabel should have been aware of its obligation to receive Commission approval before proceeding with the acquisition. Electrabel appealed the Commission’s decision to the General Court. The General Court upheld the fine of €20 million. It considered that the amount at issue was appropriate in the circumstances of the case, in the light of the gravity and duration of the infringement and of Electrabel’s overall resources.1945

4.635

7.2 Implementation of a concentration A fine (again not exceeding 10% of the aggregate turnover of the undertaking concerned) can also be imposed if the parties implement the concentration before receiving clearance or implement a concentration declared incompatible with the common market by the Commission. The Commission may also take interim measures appropriate to restore or maintain conditions of effective competition.1946

4.636

In the case of the implementation of a concentration declared incompatible, the Commission may require the undertakings concerned to dissolve the concentration so as to restore the situation ex-ante or order any other appropriate measure to ensure that the undertakings concerned dissolve the concentration or take other restorative measures.1947 Interim measures may also be taken. Fines (again up to 10% of the turnover) can be imposed if the parties do not comply with the measures ordered by the Commission.

4.637

7.3 Failure to implement a remedy The Commission has at its disposal appropriate instruments to ensure the enforcement of remedies and to deal with situations where they are not fulfilled (interim measures, dissolution of the concentration, fines).1948 Marine Harvest (Case T-704/14, Marine Harvest v Commission, ECLI:EU:T:2017:753). 1945 Case T-332/09 Electrabel v Commission, EU:T:2012:672. Electrabel appealed to the Court of Justice but its appeal was dismissed (case C-84/13 P, EU:C:2014:2040). 1946 Article 8(5) of Regulation 139/2004. 1947 Article 8(4) of Regulation 139/2004. 1948 See Articles 8(4)(b), 8(5), 8(7) and 14 of Regulation 139/2004.

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7.4 Supply of incorrect or misleading information 4.639

A fine can also be imposed on undertakings which supply incorrect or misleading information1949 or produce incomplete books or business records. The ceiling has been raised to 1% of the turnover of the undertaking concerned.1950 The supply of incorrect information may also lead to the revocation of the decision.1951 Fines may be imposed not only on notifying parties which supply incorrect and misleading information, but also on third parties (such as competitors, clients or suppliers) which supply incomplete information in response to requests for information.1952

4.640

The Commission can also impose periodic penalty payments in order to compel the undertakings concerned to (i) comply with a request for information or (ii) submit to an investigation. The ceiling of such periodic penalty payments is 5% of the average daily turnover of the undertakings concerned for each working day of delay.1953

8. 4.641

Judicial review

One of the most important safeguards for undertakings, whether as merging parties or third parties, is the availability of judicial review by the General Court and, ultimately on points of law, by the Court of Justice. The purpose of the present section is not to make an exhaustive description of the review by the European Courts but to highlight specific issues in the field of merger control.

1949 In May 2017, the Commission fined Facebook €110 million for providing incorrect or misleading information during the Commission’s investigation of its acquisition of WhatsApp. When Facebook notified the acquisition of WhatsApp in 2014, it informed the Commission that it would be unable to establish reliable automated matching between Facebook users’ accounts and WhatsApp users’ accounts. However, in August 2016, WhatsApp announced updates to its terms of service and privacy policy, including the possibility of linking WhatsApp users’ phone numbers with Facebook users’ identities. Contrary to Facebook’s statements in the 2014 merger review process, the technical possibility of automatically matching Facebook and WhatsApp users’ identities already existed in 2014. The Commission considered Facebook’s breach of procedural obligations was at least negligent since Facebook staff were aware of the user matching possibility and that Facebook was aware of the relevance of user matching for the Commission’s assessment, and of its obligations under the Merger Regulation. 1950 Article 14 of Regulation 139/2004. 1951 In Sanofi/Synthelabo (see decision of 28.07.1999 imposing fines, OJ L 95/34, 15.04.1999) complaints filed after the clearance forced the Commission to revoke its decision, reopen the case and adopt a new decision with remedies. For other decisions imposing fines see also Deutsche Post/trans-o-flex, Case n° M.1610 of 14.12.1999 and BP/Erdölchemie, Case No. M.2624 of 19.06.2002. 1952 In July 2000, the Commission fined Mitsubishi for failing to supply market information in relation to a concentration between Kvaerner and Ahlström. Case M.1634 of 12.07.2000. 1953 Article 15 of Regulation 139/2004.

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8.1 Decisions open to appeal The measures against which proceedings for annulment may be brought under Article 263 TFEU are measures the legal effects of which are binding on, and capable of affecting the interests of, the applicant by having a significant effect on his legal position. This include: –

decisions indicating that the transaction does not qualify as a concentration;1954

–

clearance decisions. It should be noted that in Coca-Cola Company & Coca-Cola Enterprises v Commission,1955 the General Court dismissed the actions brought by The Coca-Cola Company and Coca-Cola Enterprises as inadmissible. The two companies claimed that the Court should annul the clearance decision Coca-Cola/Amalgamated Beverages GB,1956 in which the Commission stated that CCSB (Coca-Cola and Schweppes Beverages) was in a dominant position on the British cola market, even though it had authorised the merger operation. According to the Court the finding of a dominant position, even if liable in practice to influence the policy and future commercial strategy of the undertaking concerned, does not have binding legal effects. The Court took the view that the undertaking given by CCE (to refrain from certain commercial practices) could only be the subject of an action for annulment if the Commission’s decision was conditional upon that undertaking’s being given. The Court considered that this was not the case: the undertaking has no binding legal effects as its breach would not affect the lawfulness of the decision authorising the operation or entail its revocation.

–

in the context of remedies, a decision refusing to approve the applicant as a suitable purchaser of the business to be divested1957 or a decision approving a suitable purchaser;1958;

1954 Case T-87/96 Assicurazioni Generali SpA and Unicredito SpA v Commission, [1999] ECR II-203. See also case T-3/93, Air France v Commission, 1994 ECR II-121 in which the General Court considered admissible an action for annulment brought by Air France against an oral statement of by the spokesman for the Commissioner responsible for competition matters, that the Commission had no jurisdiction to examine the acquisition of Dan Air Services by British Airways. 1955 Joined cases T-125/97 and T-127/97, [2000] ECR II-1733. 1956 Case IV/M.794, 22.01.1997, OJ L 218/15. Under the terms of the transaction CCE was to take over the activities of Coca-Cola and Schweppes Beverages Ltd. 1957 Case T-342/00 Petrolessence v Commission, [2003] ECR II-1161, paragraphs 39-41. 1958 Case C-514/14 P Editions Odile Jacob v Commission, ECLI:EU:C:2016:55. The Court of Justice confirmed that the Commission was justified in approving Wendel’s acquisition of the assets of Vivendi Uni-

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–

also, in the context of remedies, a decision rejecting a request seeking a waiver of commitments on the ground that significant market changes have occurred since the adoption of the decision.1959

–

prohibition decisions;1960

–

Article 11(3) decisions, i.e. requests for information made by decision;1961

–

decisions imposing a fine for having put a concentration into effect without Commission’s approval.1962

4.643

By contrast, provisional measures intended to pave the way for the final decision do not constitute acts which can be challenged before the General Court. This is the case of decisions to open the procedure,1963 and statements of objections.

4.644

Other decisions are not open to appeal. This was the case of a Commission’s letter sent to E.On Ruhrgas regarding the implementation of a commitment taken to obtain clearance of the E.On/Mol concentration. As one of the obligations, the applicant E.ON Ruhrgas International undertook to organise and implement a gas release programme on the Hungarian market. The initial auction price was to be set at 95 % of the weighted average cost of gas provided that the aggregate loss the applicants may incur as a result of the final auction price being set below the weighted average cost of gas does not exceed EUR 26 million. In the contested letters the Commission indicated that the losses made by

1959

1960

1961 1962 1963

versal Publishing (divested as a condition of the approval of Lagardère/Natexis/VUP concentration) and dismissed Odile Jacob’s appeal. Case T-712/16, Deutsche Lufthansa AG v European Commission, ECLI:EU:T:2018:269. The purpose of a decision concerning a request for waiver of commitments is to determine whether the conditions laid down in the review clause of the commitment are met or, as the case may be, whether the competition concerns identified in the decision authorising the merger subject to observance of the commitments have ceased to exist. The Court made clear that although the Commission has a certain discretion in carrying out such an assessment, it is nonetheless obliged to undertake a careful examination of the request, to conduct, if necessary, an investigation, to make the appropriate enquiries and to base its conclusions on all the relevant information. In the present case, the General Court considered that the Commission failed to fulfil that obligation and annuled the Commission’s decision in so far as it concerned one of the commitments. Case T-102/96 Gencor v Commission, [1999] ECR II-753, paragraphs 40-46. It should be noted that an undertaking which is party to a proposed concentration but has abandoned it as a direct consequence of the Commission’s decision to prohibit it retains a legal interest in bringing proceedings for annulment of the Commission decision (see case T-22/97 Kesko v Commission [1999] ECR II-3775 and case T-310/00 MCI v Commission, [2004] ECR 3253) ; case T-175/12 Deutsche Börse AG v Commission, ECLI:EU:T:2015:148. Case T-145/06 Omya v Commission, [2009] ECR II-145. Case T-332/09 Electrabel v Commission. Case T-48/03 Schneider Electric v Commission, [2006] ECR II-111, paragraphs 79-81.

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the applicants in a given auction should be offset by any profits made by the applicants in other auctions. The applicants contested this and were of the opinion that losses which results from the gas release auctions do not need to be offset by potential profits that may derive from future auctions. The General Court dismissed their action as inadmissible.1964

8.2 Standing to appeal Pursuant to Article 263 TFEU, proceedings may be brought by any natural or legal person to whom the decision is addressed. Proceedings can also be brought by any natural or legal person against a decision which is of direct and individual concern to it, although it is addressed to another person.

4.645

Parties to the concentration: Proceedings may be brought by any natural or legal person to whom the decision is addressed.

4.646

Therefore, parties to a concentration prohibited pursuant to Article 8(3) of the Merger Regulation (such as EDP following the prohibition of ENI/EDP/ GDP),1965 may seek annulment of prohibition decisions.

4.647

In Cementbouw, the parties to the concentration brought an action for annulment against a conditional clearance decision in a case in which they contested the existence of a concentration of a Community dimension.1966 Their pleas were rejected and their application dismissed in its entirety.

4.648

Shareholders: Shareholders are not the addressees of Commission’s decision. They can institute proceedings against a decision only if that decision is of direct and individual concern to them.

4.649

In the Zunis case, a number of shareholders in Generali requested the Commission to reopen the proceedings in respect of the operation between Mediobanca and Generali following the adoption, by the Commission, of a 6.1.(a) decision, i.e. a decision in which the Commission concluded that the notified operation did not qualify as a concentration.1967

4.650

1964 Case T-57/07 E.ON Ruhrgas International and E.ON Földgáz Trade Zrt v Commission [2009] ECR II132 (summary publication). 1965 Case T-87/05 EDP v Commission, [2005] ECR II-3745. See also case T-48/03 Schneider Electric v Commission op. cit. [2006] ECR II-111. Case T-175/12 Deutsche Börse AG v Commission, ECLI: EU: T-2015: 148. 1966 Case T-282/02 Cementbouw Handel & Industrie BV, [2006] ECR II-319. 1967 Case T-83/92 Zunis Holding SA and Finan Srl and Massinvest SA v Commission [1993] ECR II-1169.

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4.651

The Court considered firstly that the applicants, who relied on their capacity as shareholders of one of the notifying parties, cannot be included among the third parties whose legal or factual position may be affected by that decision. Secondly, the Court noted that a decision finding that the concentration notified does not fall within the scope of the Merger Regulation affected the applicants, in their capacity as Generali shareholders, in the same way as any other of the 140 000 or so shareholders of that company. On this basis, the Court concluded that the applicants were not directly and individually concerned by the Commission decision.

4.652

Competitors: A competitor to the merging parties could, on the date of the contested decision, be certain of an immediate or imminent change in the state of the market. As a consequence, this competitor is directly concerned by the contested decision.1968

4.653

As to the criteria of individual concern within the meaning of Article 263 TFEU, this means that the decision at issue must affect those third parties by reason of certain attributes which are peculiar to them or by reason of a factual situation which differentiates them from all other persons and thereby distinguishes them individually in the same way as the addressee.

4.654

Whether a competitor is individually concerned by a decision finding a concentration to be compatible with the common market depends, on the one hand, on that competitor’s participation in the administrative procedure and, on the other, on the effect on its market position. Active participation in the administrative procedure is a factor regularly taken into account in the case-law on competition, including in the more specific area of merger control, to establish, in conjunction with other specific circumstances, the admissibility of the action.1969

4.655

An action for annulment brought by a natural or legal person is admissible only if the applicant has an interest in having the contested measure annulled. That interest must be vested and present and is evaluated as at the date on which the On appeal, the Court of Justice concluded that the action brought by the appellants before the General Court was inadmissible, albeit on a legal ground other than that adopted by the General Court (C-480/93 P, [1996] ECR I-1). 1968 See, to that effect, Case T-3/93 Air France v Commission [1994] ECR II-121, paragraph 80. 1969 Case 169/84 Cofaz and Others v Commission [1986] ECR 391, paragraphs 24 and 25; joined cases C-68/94 and C-30/95 France and Others v Commission ( Kali & Salz ) [1998] ECR I-1375, paragraphs 54 to 56; Air France v Commission, op. cit, paragraphs 44-46; and case T-114/02 Babyliss v Commission [2003] ECR II-1279, paragraph 95.

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action is brought. Such an interest exists only if the action, if successful, is likely to procure an advantage for the party who has brought it.1970 This is the case if the concentration between two of its competitors may affect the applicant’s commercial situation. It should be noted even the action for annulment brought a potential competitor may be held admissible.1971 A competitor concerned by a merger is entitled to challenge, before the General Court, the Commission’s decision to uphold a national competition authority’s referral request.1972

4.656

By contrast, competitors and other interested third parties are not entitled to challenge a non-referral decision by which the Commission rejects a request for referral brought by a national authority. The procedural rights and judicial protection that EU law confers on those third parties are not in any way jeopardised by the non-referral decision. Quite to the contrary, that decision ensures for third parties concerned by a concentration with a Community dimension, first, that this merger will be assessed by the Commission in the light of EU law, and second, that the General Court will be the judicial body having jurisdiction to deal with any action against the Commission’s decision bringing the procedure to an end.1973

4.657

Employees: The standing of employees’ representative of the merging parties was addressed in the Perrier cases, following the action brought by three works councils of Perrier companies for annulment of the Commission’s clearance decision of the Nestlé/Perrier concentration subject to the divestiture of a number of brand names and sources.1974

4.658

As to the individual concern, the General Court held that the express mention of the recognized representatives of the employees of the undertakings concerned by a concentration, among the third parties showing a sufficient interest to be heard by the Commission under Article 18(4) of the Merger Regulation, suffices to differentiate them from all other persons. They must in principle be regarded as individually concerned by the Commission’s decision.

4.659

1970 Case T-310/00 MCI v Commission [2004] ECR II-3253, paragraph 44. 1971 Case T-114/02 Babyliss & Delonghi v Commission, [2003] ECR II-1279. Babyliss, which wished to acquire some of the activities of Moulinex and position itself as a potential competitor on the market for small household electical appliances brought a case against the decision of the Commission SEB/Moulinex. 1972 Case T119/02 Royal Philips Electronics v Commission [2003] ECR II1433, paragraphs 295-300, and joined cases T-346/02 and T-347/02 Cableuropa and Others v Commission [2003] ECR II-4251, paragraphs 7881. 1973 Case T-224/10 Association belge des consommateurs test-achats v Commission, op. cit. paragraph 80. 1974 Case T-96/92 Comité Central d’Entreprise (CCE) de la Société Générale des Grandes Sources and others v Commission, [1995] ECR II-1213.

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4.660

However, with regard to the direct concern, the Court stated that the acquisition of Perrier by Nestle, accompanied by the sale by Nestle of some of the Perrier group’s brand names and sources to a third party, did not in itself entail any direct consequences for the rights which the Perrier employees derive from their contracts or employment relationship.1975

4.661

The General Court concluded that the applicants could not be regarded as directly concerned by the decision and entitled to bring proceedings, except for the specific purpose of examining whether the procedural guarantees which they were entitled to assert, during the administrative procedure, under Article 18(4) of the Merger Regulation have been infringed.1976 The General Court rejected the plea in law of the applicants alleging breach of procedural rights, as unfounded. The application was therefore rejected in its entirety.

4.662

Customers and consumers’ associations: Customers and consumers’ associations have a right to be heard. With regard to consumer associations, they have a right to be heard where the proposed concentration concerns products or services used by final consumers.1977

4.663

Where a regulation gives procedural rights to third parties, those parties must have a remedy available for the protection of their legitimate interests. Thus, even where the Commission’s decision, in its substance, is not of individual and/ or direct concern to the applicant, the latter is entitled to bring proceedings against that decision for the specific purpose of examining whether the procedural guarantees which it was entitled to assert have been infringed.

4.664

The General Court dismissed the action for annulment of the clearance decision EDF/Segebel filed by ABCTA, the largest consumer association in Belgium, as being inadmissible.1978

4.665

As to the possibility to challenge the substance of the decision, the General Court held that the persons represented by ABCTA were affected by the clearance decision only by reason of their objective and abstract status as energy consumers, in so far as supply prices were liable to increase as a consequence of the concentration of supply, with the result that all electricity and gas consumers residing within the geographic market in question would be affected by it in 1975 1976 1977 1978

Case T-96/92 CCE de la Société Générale des Grandes Sources and others, op. cit. paragraph 45. Case T-96/92 CCE de la Société Générale des Grandes Sources and others, op. cit. paragraph 46. Article 11 of Regulation 802/2004. Case T-224/10 Association belge des consommateurs test-achats v Commission, [2011] ECR II-7177.

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the same way. The General Court concluded that since those persons were not individually concerned by the clearance decision, such a status could not be attributed to the association. As to the possibility to challenge the clearance decision on the ground of infringement of its procedural rights, the application for annulment was dismissed since ABCTA, who had asked the Commission to be heard in the context of the merger investigation procedure two months prior to notification of the merger, did not reiterate its request after the notification. Therefore, an application to be heard must be made in writing following the formal notification of the merger.

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Third parties affected by remedies: This issue was raised in the Kali und Salz case,1979 following the action for annulement of the conditional clearance decision brought by two French companies, SCPA and EMC.

4.667

In the Commission’s opinion, the concentration between Kali und Salz (K+S), a subsidiary of the BASF chemicals group, and Mitteldeutsche Kali AG (MdK) could have created a collective dominant position. The concentration was declared compatible subject to two conditions that were intended to loosen existing links between K+S and SCPA, a subsidiary of the French group EMC.

4.668

The Court of Justice found that the contested decision was of direct concern to the applicant companies since the implementation of the remedies affected the position of SCPA. As to the individual concern, the Court noted that the applicant companies submitted observations in the administrative procedure before the Commission, which took those observations into account for the purposes of the contested decision. Moreover, the conditions attached to the declaration of compatibility were the result of the Commission’s assessment of the competitive situation after the concentration, taking account principally of the position of EMC/SCPA as a constituent of a duopoly with K+S/MdK. The Court also noted that those conditions, which were aimed at dissolving the links between K+S and EMC/SCPA, touched primarily the interests of the latter, were liable to have an appreciable effect on its position on the market. Finally, the Court indicated that even the two commitments have already been complied with, the applicants still have an interest in seeking the annulment of the decision at least as the basis for a possible action for damages.

4.669

1979 Joined cases C-68/94 and C-30/95 France and Société commerciale des potasses et de l’azote and Entreprise minière and chimique v Commission [1998] ECR I-1375.

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8.3 Scope of judicial review 4.670

The grounds on which the legality of a Commission s decision may be questioned are: –

lack of competence. Applicants have brought actions for annulement for lack of competence against decisions in cases that did not, in their view, constitue a concentration1980 or did not have a Community dimension1981 or where the concentration was abandoned before the adoption of the final decision.1982 An applicant has also challenged a Commission s final decision, following a request for referral made by a Member State under Article 22 of the EU Merger Regulation, on the ground that the Commission should not have investigated other markets than the markets mentioned in the request for referral.1983

–

infringement of an essential procedural requirement. In a number of cases, applicants have claimed that their rights to be heard or their rights of defence have been infringed.1984 In almost cases, they also claim that the Commission’s decision lacks motivation.1985

–

misuse of powers. This concept refers to cases where an administrative authority has used its powers for a purpose other than that for which they were conferred on it. For example, in EDP v Commission, the applicant claimed (unsuccessfully) that the Commission misunderstood the powers conferred on it by the EU Merger Regulation by requiring that the commitments should be aimed at the liberalisation of the electricity and gas markets.1986

1980 1981 1982 1983 1984

Case T-282/02 Cementbouw v Commission, op. cit. Case T-310/00 MCI v Commission, op. cit. Case T-310/00 MCI v Commission, op. cit. See also T-22/97 Kesko v Commission, op. cit. Case T-221/95 Endemol v Commission [1999] ECR II-1299. See inter alia, case T-310/01 Schneider Electric v Commission [2002] ECR II-4071, case T-5/02 Tetra Laval V Commission [2002] ECR II-4381. 1985 See inter alia, case T-79/12 Cisco Systems and Messagenet v Commission, EU:T:2013:635; case T-224/10 Association belge des consommateurs test-achats v Commission, op. cit, case T-405/08 Spar Österreichische Warenhandels AG v Commission, EU:T:2013:306; T-162/10 Niki Luftfahrt GmbH v Commission, ECLI:EU:T:2015:283 ; case T-394/15 KPN v Commission, ECLI:EU:T:2017:756. 1986 Case T-87/05 EDP v Commission, op. cit. paragraphs 86 to 98. See also case T-417/05 Endesa v Commission [2006] ECR II-2533, paragraphs 239-259; T-162/10 Niki Luftfahrt GmbH v Commission, ECLI:EU:T:2015:283, paragraphs 164-172.

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–

infringement of the Treaty or any rule of law relating to its application. In merger cases, applicants usually claim that the Commission violated Article 2 of the EU Merger Regulation by considering that the concentration would (or would not) significantly impede effective competition.



In its case law,1987 the Court stated that the basic provisions of the Regulation, in particular Article 2, confer on the Commission a certain discretion, especially with respect to assessments of an economic nature, and that, consequently, review by the Community Courts of the exercise of that discretion, which is essential for defining the rules on concentrations, must take account of the margin of discretion implicit in the provisions of an economic nature which form part of the rules on concentrations.



Whilst the Court recognises that the Commission has a margin of discretion with regard to economic matters, that does not mean that the Community Courts must refrain from reviewing the Commission’s interpretation of information of an economic nature. Not only must the Community Courts, inter alia, establish whether the evidence relied on is factually accurate, reliable and consistent but also whether that evidence contains all the information which must be taken into account in order to assess a complex situation and whether it is capable of substantiating the conclusions drawn from it.1988 Such a review is all the more necessary in the case of a prospective analysis required when examining a planned merger.



According to the Court, a prospective analysis of the kind necessary in merger control must be carried out with great care since it does not entail the examination of past events – for which often many items of evidence are available which make it possible to understand the causes – or of current events, but rather a prediction of events which are more or less likely to occur in future if a decision prohibiting the planned concentration or laying down the conditions for it is not adopted.1989

1987 See inter alia, joined cases C-68/94 and C-30/95 Kali und Salz, op. cit. paragraphs 223 and 224; case T‑342/07, Ryanair/Commission Rec, EU:T:2010:280, paragraph 29. 1988 Case C-12/03 Commission v Tetra Laval [2005] ECR I-987, paragraphs 38-39, case T48/04 Qualcomm Wireless Business Solutions Europe v Commission, [2009] ECR II-2029, paragraph 92. 1989 Case C-12/03 Commission v Tetra Laval, op. cit. paragraph 42.

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8.4 Consequences of the annulment of a merger decision 4.671

Article 10(5) of the EU Merger Regulation states that where the Court of Justice gives a judgment which annuls the whole or part of a Commission decision, the concentration shall be re-examined by the Commission with a view to adopting a new decision. The concentration shall be re-examined in the light of current market conditions.1990 The notifying parties shall submit a new notification or supplement the original notification, without delay, where the original notification becomes incomplete by reason of intervening changes in market conditions or in the information provided.

1990 See Sony/BMG (case M.3333). The concentration had first been approved by the Commission on 19 July 2004. Following an action brought by Impala, an international association of independent music production companies, the General Court annulled the Commission decision by judgment of 13 July 2006 (case T-464/04, [2006] ECR II-2289), on the grounds that it was vitiated by manifest errors of assessment and was inadequately reasoned. Following the annulment of this approval by the General Court, the case was renotified to the Commission on 31 January 2007. The Commission cleared the concentration on 3 October 2007, again without imposing any conditions. At the same time as those proceedings were taking place, Bertelsmann and Sony brought an appeal before the Court of Justice against the judgment of the General Court, claiming that the General Court had overstated the legal requirements to be applied in relation to a Commission decision approving a merger and that court’s role in carrying out judicial review. In 2008, the Court of Justice set aside the judgment of the General Court (case C-413/06 P, [2008] I-04951. Since the General Court examined only two of the five pleas relied on by Impala, the Court of Justice considered that it was not in a position to give a ruling itself on the dispute and referred the case back to the General Court.

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Part 5 State aid

CHAPTER 1 Introduction The European Treaty rules on state aid are of considerable importance to the energy sector given both the traditionally high level of involvement of governments in energy production and supply, and the traditional role of the State as owner or part-owner of major companies within the sector. Even after market liberalisation and privatisation, governments have continued to play an important role with respect to ensuring an orderly transition from closed to open markets under competition. The rules on state aid may also be of relevance to the restructuring of public utilities including their eventual privatisation. State intervention is also prevalent as a means to ensure long-term investments in the interest of security of supply and in securing the realisation of large-scale investment projects.

5.1

Furthermore, many of the activities of energy sector companies, whether private or public, may be eligible for subsidisation, for example in the form of aid to promote environmentally friendly energy technologies, to promote the production and use of renewable energy as well as to stimulate the transition away from carbon-intensive fuels. The proceeds raised by para-fiscal levies or taxes may be a preferred instrument to fund this type of intervention. Finally, the energy sector may in itself provide a source of aid to other sectors of the economy, for example through the provision of special or preferential tariffs for certain energy users.

5.2

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5.3

Although state aid was frequently viewed in the past as the ‘Cinderella of European competition law’, this situation has changed considerably in the twenty first century. This is in part due to the adoption of a series of policy reforms by the Commission. First, in 2005 the Commission launched the State Aid Action Plan (SAAP)1991 designed to simplify the state aid rules, to introduce a more refined economic approach to state aid analysis and to allow the Commission to concentrate its efforts on the most distortive cases.1992 Second, in 2012 a further wave of reform-the State Aid Modernisation – or SAM-programme – was put in motion.1993

5.4

According to the Commission, “the modernisation of State aid control is needed to strengthen the quality of the Commission s scrutiny and to shape that instrument into a tool promoting a sound use of public resources for growth-oriented policies and limiting competition distortions that would undermine a level playing field in the internal market. The current complexity of the substantive rules as well as of the procedural framework, applying equally to smaller and bigger cases, are challenges to State aid control” (para 6). The objectives of modernisation of State aid control are therefore threefold: (i)

to foster sustainable, smart and inclusive growth in a competitive internal market;

(ii) to focus Commission ex ante scrutiny on cases with the biggest impact on internal market whilst strengthening the Member States’ cooperation in State aid enforcement; (iii) to streamline the rules and provide for faster decisions (at para 8). 1991 COM(2005) 107 final. 1992 On December 1, 2009, the Treaty on the Functioning of the European Union or TFEU entered into force, following the Lisbon Treaty. As a consequence, European Union is based on two treaties with the same legal value: the Treaty on the European Union and the Treaty on the Functioning of the European Union or TFEU. The former contains the basic principles of the structure, objectives, and organization of the Union; the latter is the successor to the EC Treaty and is largely inspired by the existing structure and EC policies. The articles of both Treaties are renumbered. Except for such renumbering, the competition rules – i.e. the Articles 81-89 EC Treaty, now known as Articles 101-109 TFEU, have seen very little change. Note, however, that an additional Protocol nr. 26, now exists that deals exclusively with services of general interest. This clearly shows the commitment of the Union towards these services. Moreover, Member States will likely have greater freedom to determine the services of general interest that they want to support. As it will be shown below in chapter 5, as well as in Part VI of this Book, given their interaction, the addition of this Protocol may have a significant impact on the application of the state aid rules to services of general interest. 1993 Com (2012) 209 final.

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Given these ambitious objectives, a thorough reform of existing guidelines and frameworks was inevitable. The adoption of common principles of assessment across the various guidelines should not only lead to streamlining and faster procedures, but also to a better substantive assessment based on consistent, objective principles.

5.4

In particular, the roll out of the SAM has led to the streamlining of various soft law guidelines, and has resulted in a complete overhaul of the guidelines on environmental aid, and their extension to various forms of support for the energy sector, including state aid for energy infrastructure and to guarantee generation adequacy. These new rules are discussed at Chapter 5 of this Part 5. In addition, and in order to allow the Commission to focus on high profile cases, the General Block Exemption Regulation (the GBER) has been thoroughly revised1994 so that a large number of national aid measures are deemed compatible without notification to, and prior clearance by, the Commission. The GBER is analysed in Chapter 4 of this Part 5. Finally, the SAM exercise has led to amendments to state aid procedures, as discussed in Chapter 6 of this Part 5. Moreover, the absence of specific state aid rules under the Euratom Treaty to deal with national financial support to the Union’s nuclear sector present a large number of conceptual as well as practical problems. The specific issues of nuclear (and coal) are analysed in chapter 2. Last but not least, a set of issues stemming from the continuing difficulties in defining with any degree of real certainty the actual scope of the concept of an “aid”, is the subject matter of chapter 3.

5.6

1994 OJ 2014 L187/1.

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CHAPTER 2 Coal and Nuclear Aid Section I: Coal: the ECSC Treaty

1.

Introduction

Coal still provides 15% of EU power generation. Two thirds of the coal power plants currently operating in Europe are expected to close between 2020 and 2030. Coal power plants in the EU employ around 53,000 people and coal mines 185,000 workers, totalling around 238,000 jobs. Indirect activities throughout the coal value chain, including power generation, equipment supply, services, R&D and other dependent activities provide around an additional 215,000 jobs. Phasing out coal is going to present more of a challenge for some regions than for others.

5.7

The most affected are located in Bulgaria, the Czech Republic, Germany, Greece, Hungary, Poland, Romania, Slovakia, Slovenia and Spain, where some coal regions already experience high levels of unemployment. One region in Poland, in particular, may lose up to 41,000 jobs by 2030. Many Coal mines are already closing down due to a lack of competitiveness. In 2014-2017, 27 mines were closed across Germany, Poland, the Czech Republic, Hungary, Romania, Slovakia, Slovenia and the United Kingdom. In 2018, 5 more were scheduled to close in Germany, Poland Romania and Italy. A further 26 mines are expected to close in Spain.1995 The European Coal and Steel Community (ECSC) Treaty expired on 23 July 2002 and since that date the general state aid rules provided for in the EC Treaty now apply to the coal sector, subject to certain transitional provisions. Article 4(c) ECSC placed an absolute prohibition on all subsidies or aid granted

5.8

1995 JRC Report, ‘EU coal regions: opportunities and challenges ahead’, Brussels, 2018.

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by States, or special charges in any form whatsoever. This prohibition applied irrespective of whether an inter-state trade effect could have been established. Unlike the EC regime, there was no possibility for exemption for state aid under the ECSC Treaty. In practice this absolute ban proved unworkable and the Commission availed itself of Article 95 ECSC to enact a series of special decisions for the Community coal sector. These specific sets of rules dealt with both direct and indirect forms of aid.

5.9

5.10

The Commission in the past applied Articles 107 and 108 TFEU to all aspects of a national measure which fell outside the specific scope of the ECSC rules given that the European courts had affirmed “the provisions of the (E) EC Treaty may apply to coal and steel except to the extent that matters are dealt with in the ECSC Treaty or in rules made under it: in so far as the latter has occupied the ground the (E) EC Treaty provisions are not to have effect”.1996 In Case 188/80 France et al. v Commission, the Court confirmed that the Transparency Directive of 19801997 could not be applied to undertakings in the coal sector as the ECSC Treaty provided rules governing this matter.1998

5.11

The Commission first adopted rules for state aid to the coal industry in 1986. Further rules appeared at regular intervals, culminating in Decision 3623/93/ ECSC,1999 implemented by Decision 341/94/ECSC2000 which expired on July 23, 2002 on the expiry of the ECSC Treaty. Despite the different approach between the two Treaties in respect of state aid, the decisions establishing rules for aid to the coal industry served to minimize any real divergence between the two Treaty regimes.2001

5.12

A year prior to the expiry of the ECSC Treaty the Commission adopted a proposal, based on the then Articles 87(3)(e) and 89 EC for a Council Regulation on state aid for the coal sector after expiry, because after this date, coal would fall under the EC Treaty state aid rules. The Regulation 1407/022002 stipulated that aid covering costs for the year 2002 would, on the basis of a reasoned request by the Member State, continue to be subject to the rules and principles set out in 1996 1997 1998 1999 2000 2001

Case 238/85 Deutsche Babcock v Commission ECR [1987] 5131. OJ [1980] L195/35. ECR [1982] 2545. OJ [1993] L329/12. OJ [1994] L049/1. For a survey of these specific rules and the decisions adopted under them as well as under Articles 107 and 108 TFEU, see Hancher, Ottervanger and Slot, EC state aid, (5th ed. 2016). 2002 OJ [2002] L205/8.

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Decision 3632/93/ECSC. A transitional procedure for the period up to 31 December 2002 was set in place for those cases which had not been fully disposed of prior to 23 July 2002. Hence three categories of cases were distinguished: (i)

those cases completed in all factual and legal respects on or before 23 July 2002 would be subject to the ECSC rules only;

(ii)

those cases in which all relevant factual and legal events occur after 23 July 2002 would be subject to the EC rules only;

5.13

(iii) those cases which had started before the expiry of the ECSC Treaty but which continued after expiry. This last category was the subject of a Commission Communication of June 2002 which in turn distinguished cases of notified and un-notified aid. With regard to the former, Member States could opt, for aid covering costs for 2002, for the application of the rules and principles laid down in Decision 3632/93/ ECSC, but with exception to its procedural rules. With regard to non-notified aid, EC Council Regulation 1407/02 would apply in so far as the type or form of aid was one which fell within the scope of that regulation.2003

2.

5.14

EC Council Regulation 1407/022004 and the Coal Decision 2010

This Regulation entered into force on 23 July 2002 and was due to expire on 31 December 2010, but is now replaced with Council Decision 2010/787 on state aid to facilitate the closure of uncompetitive coalmines – the Coal Decision. The Coal Decision is scheduled to expire on 31 December 2027.2005 In the following paragraphs the Regulation is first examined followed by a brief analysis of the Decision. The Regulation 1407/02 applied to high, medium and lowgrade coal category A and B within the meaning of the international UNECE coal classification system. It laid down rules specifying the maximum intensity of aid in relation to the costs incurred and the phasing out over time of aid to the coal sector in the countries still producing coal in the Union, while making allowance for social and regional factors.

2003 Communication from the Commission concerning certain aspects of the treatment of competition cases resulting from the expiry of the ECSC Treaty, OJ [2002] C152/5. 2004 OJ [2002] L205/8. 2005 OJ [2012] L336/24.

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2.1 Substantive provisions 5.16

In accordance with Article 3 of the Regulation, aid to the coal industry may be considered compatible only if it complies with the provisions of Chapter 2 (categories of aid), without prejudice to state aid schemes for R&D and environment and training. Articles 4 to 8 of Chapter 2 deal with different categories of aid. These include aid for the reduction of activity – i.e. current production losses of production units; aid for accessing coal reserves and aid to cover exceptional costs, including rationalisation and restructuring costs.

2.2 Procedural provisions 5.17

In addition to Articles 107 and 108 TFEU and Council Regulation 659/99, as amended,2006 aid referred to in the Regulation was subject to special procedural rules as laid down in Article 9(2) to (12). These provisions required the submission of detailed plans and related information, depending on the category of aid. The Commission’s eventual decision was taken in accordance with the rules set out in Council Regulation 659/99 (see book paragraphs 5.194 et seq.).

5.18

The Regulation had to be evaluated by the Commission and reported on no later than 31 December 2006 and proposals for its amendment for the period after 1 January 2008 could be submitted to the Council. By the end of 2005 only eight of the 25 Member States produced coal (Poland, Germany, Hungary, Great Britain, Spain, Czech Republic, Slovakia and Greece (lignite). France closed its last mine in 2004. Aid to the sector in the Czech Republic and Slovakia comprises only aid to meet inherited liabilities (see Article 7 of the Regulation) and Great Britain provides investment aid. The remaining countries have had their aid regimes approved under Article 5 – as restructuring aid.

5.19

Between May and April 2009, the Commission held a public consultation on “The aftermath of the expiry of Regulation (EC) No 1407/2002 on State aid to the coal industry”2007 and an impact assessment to determine whether State aid for the hard coal industry was still needed in the period after 2010 in order to minimize adverse effects of mine closures, especially with regard to the social consequences.2008 Although the Commission had originally intended to adopt a new regulation with the aim of securing the definitive closure of uncompeti2006 OJ [1999] L083/1, as amended by Regulation 1589/2015 .See Book pt V, chap 6. 2007 See http://ec.europa.eu/competition/consultations/2009_coal/index.html. 2008 See further Hancher et al., (5th ed 2016), chapter 21 for a short summary of the results of the consultation exercise.

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tive mines by 1 October 2013, this was never adopted and instead Regulation 1407/2002 was replaced by the Coal Decision of 2010.

3.

Individual decisions under Regulation 1407/02

The Commission took several decisions on the basis of Regulation 1407/02.2009 When assessing aid granted or envisaged, it examined the purpose of the aid and the criteria to be fulfilled by the grantee in order to be able to apply for aid. Moreover, the Commission verified that the conditions laid down in previous Commission decisions, which have been taken on the basis of the ECSC Treaty, were respected. According to the Commission the fact that the ECSC Treaty has expired and Regulation 1407/02 entered into force did not prejudice engagements of the past. Finally, the criteria to be taken into account when granting the particular type of aid on the basis of Chapter 2 of the Regulation were examined.2010 The Regulation was considered by the Commission to have resulted in a substantial reduction in the volume of aid to the coal industry.2011

5.20

Commission Decision N 178/2010 A controversial decision adopted under the Regulation and subsequently appealed to the General Court concerned a Spanish measure to incentive the production of electricity from domestic coal, which required Spanish electricity companies to purchase Spanish coal and to produce a fixed amount of electricity from this indigenous coal.2012 In return for their compliance the additional costs of implementation would be paid by the state. The power stations involved would benefit from preferential dispatch. Following a lengthy pre-notification procedure the Commission authorised the measure on September 29, 2010 until December 31, 2014. The Commission found that the obligations imposed 2009 See, for example, Commission Decision 2004/340 of 5 November 2003, concerning aid to the company González y Díez S.A. to cover exceptional costs, OJ 2004 L119/26. See also its Decision on the aid provided by Castile-Leon, Spain for 2001 and 2002, Commission Decision 2005/240, OJ 2005 L48/30. A further grant of aid was approved in 2005 following the opening of procedures in March 2004 see IP/05/1676, 21 December 2005. In 2009 the Commission adopted a decision in case NN 20/2009 (ex N 647/2008) – Spain, Aid to Coal Sector for the period 2008–2010 concerning article 5, section 3, of Regulation (CE) nº 1407/2002, OJ 2009 C 234/5. See further, Hancher et al., 2016, ch. 2 for a review of these decisions. 2010 See, for example, the authorisations as reported at OJ 2004 C79/07, OJ 2004 C79/08 and OJ 2004 C38/03 and in IP/04/646, concerning aid to France and to the United Kingdom, 15 May 2004. Further aid was authorised for Germany in 2004, see IP/04/668 of 19 May 2004 and again 2005, see IP/05/67 of 19 January 2005 as well as in 2006, see IP/06/1028, 19 July 2006. See also N 178/2010 Spain, C(2010)499, 29.09.2010. 2011 See Memo 10/348 of 20 July 2010. 2012 O J [2010] C312/02.

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on the electricity companies could be classified as services of general economic interest and were therefore compatible with the internal market (see also Book Part 5 (chapter 4) and Part 6). Applications for interim measures suspending the Commission decision were filed before the General Court. The President refused to grant suspension on the grounds that member states retained considerable discretion to define a service of general economic interest. The applicant, Castelnou went on to argue in the full procedure that the Commission infringed Article 106(2) of TFEU, the 2005 EU framework for state aid in the form of public service compensation2013 and of Article 11(4) of Directive 2003/54, as the Spanish measure was not justified on the grounds of any risk to the electricity supply, which would determine, as the Commission claimed, that there was a need for a service of general economic interest, and that even if there were a risk to the electricity supply (which there is not), the measure is in any event disproportionate to the objective of safeguarding the security of the electricity supply and is, therefore, unlawful.

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The General Court subsequently upheld the Commission decision in Case T-57/11 Castelnou.2014 The General Court noted that the Commission considered that the Spanish authorities had established the existence of risks to the supply of electricity in Spain, in particular, showing insufficient profitability, risks of closure between 2010 and 2014 of power plants, and no new plants coming on line, weak prices and uncertainty in the wholesale electricity market.

5.23

The appellant, Castelnou had also argued that the Commission’s decision infringed Article 4(e) of Regulation 1407/2002 (which prohibits distortions of competition in the electricity market), as well as Article 6 of Regulation 1407/2002 (on degression of aid to the coal industry).

5.24

The General Court noted that the principle of maintaining coal production capacity supported by state aid was been affirmed by Regulation 1407/2002, and that Council Decision 2010/787 on state aid to facilitate the closure of uncompetitive coal mines extended until 2018 the possibility for member states to grant aid to cover, among other things, costs in connection with coal for the production of electricity. The General Court also confirmed the Commission’s reasoning that the revenue generated by the Spanish measure in favour of coal producers reduced the amount of direct aid authorised by Regulation 1407/2002.

2013 OJ [2005] C297/4. 2014 Judgement of 3 December 2014. T:2014:102.

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3.1 New Member States The ECSC Treaty expired before the accession of the first wave of new Member States in May 2004. Nevertheless in accordance with the Europe Agreements concluded prior to accession, and prior to the expiry of the ECSC Treaty, the candidate countries were required to implement the ‘acquis communautaire’ into national law. In addition to the general state aid provisions incorporated into the Europe Agreements (EAs) to require the transposition of Article 87 EC into national law, the EAs contained specific provisions in Protocol 2 and in the Annexes to the EAs banning any aid not compatible with the exceptions laid down in the ECSC Treaty. Several candidate countries were however granted a five-year respite period from this requirement, to allow them to grant restructuring aid provided certain conditions were met and to allow for the continuation of VAT exemptions. Hence state aid to coal undertakings in the new Member States remained partially exempted from the complete and immediate applicability of Articles 107 and 108 TFEU and Regulation 1407/2002, as discussed above for the existing (i.e. the 15) member States. In particular Annex IV.3 lays down general procedural requirements concerning the granting of state aid prior to Accession.2015 These rules differ from the standard procedural regime, as discussed in Chapter 6 below. The Commission adopted a series of decisions approving aid to the coal sector in a number of the ten Member States acceding in 2004 as well as subsequently in 2007.2016

5.25

The Coal Decision of 2010 The Coal Decision has been applied as of 1 January 2011. It aims to make any further operating aid to the sector conditional on a closure plan for loss-making mines, and to direct State aid towards financing the social and environmental consequences of closures and to cover certain exceptional costs resulting from the closure. As its recitals make clear, the Union’s policy of encouraging renewable energy and a sustainable low-carbon economy does not justify indefinite support to uncompetitive coal mines. The Coal Decision marks the transition for the coal sector from the application of sector-specific rules to the application of the general State aid rules. The Council’s power to adopt the Coal Decision was unsuccessfully challenged in Case T-176/11 Carbunion v Council of 10 December 2010.2017 2015 For a full discussion of the relevant provisions of the Europe Agreements, see chap 5, in Hancher, Ottervanger and Slot, EC State Aids (5th Edition, 2016). 2016 See for example, aid to the Slovakian coal sector, IP/05/316, IP/06/76 and IP/06/1189; aid to the Czech coal industry, IP/05/1312 and aid to the Polish and Hungarian coal industry, Memo/05/217, 27 June 2005. 2017 ECLI:EU:T:2013:686

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5.27

The ECJ upheld the lower court’s ruling in Case C-99/14P of 11 December 2014.2018

5.28

In accordance with the Coal Decision, a mine receiving closure aid must be wound down by the end of 2018 at the latest but aid to cover exceptional costs resulting from the closure may be disbursed up until 2027. All aid must be based on an agreed closure plan. It is not unusual for the Commission to approve an extension of closure aid, albeit subject to the December 2018 deadline – as for example in the case of Poland.2019

5.29

All other forms of aid to the sector, including the conversion of coal power plant to biomass are assessed in accordance with the general state aid rules and in so far as that state aid is to be granted after 1 July 2014, in accordance with the relevant guidelines, as discussed below at Book Part V, chapters 4 and 5.2020 Aid for the Conversion of Coal Power Plants

5.30

In relation to the conversion of coal power plants to biomass, the Commission opened an in-depth investigation into a contract for differences that the UK government plans to conclude with the Drax coal fired power station for a conversion to biomass. On the basis of its analysis, the Commission concluded that the planned premium will not result in overcompensation.2021

5.31

In its decision on the conversion of a coal-fired station at Lynemouth to run on wood pellets, the Commission approved a contract for difference having established that no risk of overcompensation would arise. On the basis of its analysis, the Commission concluded that the project’s contribution to the European renewable energy and carbon dioxide emissions reduction targets clearly outweighs any potential distortions of competition that could be triggered by the State support.2022

2018 2019 2020 2021 2022

ECLI:EU:C:2014:2446 SA.41161, 18.11.2016. See for example SA.38762: UK measures in favour of Lynemouth power plant, IP 15/4456. Drax 3rd Unit Biomass Conversion – SA.38760, OJ 2017 L2. Lynemouth Biomass Conversion – SA.3876, OJ 2017 L205/70.

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Spain SA.47912 – Spain Environmental incentive for coal-fired power plants.2023

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On 28 December 2007 the Spanish authorities had introduced the so-called “environmental incentive” by means of Order ITC/3860/2007, which entered into force on 1 January 2008. Pursuant to this Order, investments in desulphurization filters carried out by existing coal power plants could be subsidised as a way to support the long term availability of these plants in the Spanish electricity market. The Spanish authorities consider that the contested measure constitutes aid for generation adequacy, i.e. aid for ensuring that the level of generation capacity will be adequate to meet the demand levels in any given period. As compatibility conditions for such aid are set out in the Guidelines on State aid for environmental protection and energy 2014-2020 (EEAG 2014) the Commission conducted its preliminary assessment in accordance with those guidelines, as well as where applicable its earlier guidelines.2024 It concluded that it had serious doubts as to whether the relevant criteria in section 3.8 of the EEAG 2014 had been met. As it appears that the measure constitutes aid for investments merely to bring the coal-fired power plants in line with Community environmental standards it opened a formal investigation. Commission Practice under the Coal Decision As the deadline of December 2018 for the winding down of closure aid approached, the Commission dealt with a number of notifications concerning aid for the closure aid. In May 2016, the Commission approved Spanish plans to grant €2.13 billion aid to support the operators of 26 coal mines that are due to be shut down until 2018.2025 The Commission decision takes into consideration previous closure aid granted to the same beneficiaries in the period from 2011 to 2012, a measure which was complemented by a preferential dispatch mechanism involving financial compensation to coal-fired power plants burning indigenous coal but had been phased out in 2014. The revised closure plan foresees the possibility to receive additional aid with a view to mitigating the risk of disorderly closure. The Commission concluded that the measures were in line with the Coal Decision. The Commission found that the aid aims to ease 2023 27.11.2017. 2024 The Commission assesses the compatibility on the basis of the 2001 Community guidelines on State aid for environmental protection. On 1 April 2008, new Guidelines entered into force: the 2008 Community guidelines on State aid for environmental protection. Aid granted as from 1 April 2008 is therefore assessed on the basis of these Guidelines. 2025 SA.34332), 2016 OJ C47/1.

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the closure process by covering production losses of the mines until closure. It will also provide financial support to those workers who have lost or will lose their jobs due to the closures, by funding severance payments and social security benefits. Furthermore, it will finance the safety and remediation works necessary after the mine closures. The mines must be wound down by the end of 2018 at the latest and the Spanish authorities have given a commitment to recover any aid from mines that have not been closed by that date. Poland

5.34

In November 2016, the Commission cleared Polish funding of €1.79 billion to ensure the orderly closure of coal mines in Poland. 121 Similar to the Spanish scheme, the new aid is partially an extension of schemes that had been approved by the Commission but had meanwhile expired. The Commission’s assessment found that, in line with the Coal Decision, the aid aims to ease the closure process by providing financial support totalling approximately €1.71 billion to workers who have lost, or will lose their jobs due to the closures. In particular, the State support will fund severance payments, compensatory pensions and social security benefits for these workers. Furthermore, it will be used to secure mine shafts and the decommissioning of mine infrastructures, repair damage to the environment caused by mining and recultivate land after the mine closures. The remainder of the aid will cover production losses of the mines until closure.2026 Czech Republic

5.35

A decision approving aid to alleviate social costs of closing down the Paskov mine in the Czech Republic allowed the authorities to fund one off severance payments as well as providing special bonuses to workers exposed to occupational health risks.2027 If the coal production units to which aid is granted are not closed by the authorised closure date, the Member State shall recover all aid granted in respect of the whole period covered by the closure plan. Romania

5.36

The restructuring and eventual closure of Romania’s coal mines has led to a series of decisions, two of which were adopted under the Coal Decison, as well as the Rescue and Restructuring guidelines – see chap 4]. The interaction between the two sets of measures is complex, as illustrated by the sequence of 2026 SA.41161)[ 2017 ] OJ C5/1 2027 SA.39570 of 12 February 2015.

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decisions adopted by the Commission since 2012. On 22 February 2012, the Commission had approved planned aid totalling RON 1.169 million (ca. EUR 251.3 million) for the closure of three out of the seven coal mines exploited by the National Hard Coal Company JSC Petrosani in its “first aid to coal mines decision”.2028 Subsequently in its second aid to coal mines decision, on 24 November 2016, the Commission approved RON 447.8 million (ca. EUR 96.2 million) planned to be granted to CE Hunedoara for the closure of two out of the four coal mines still operated by CE Hunedoara which were not the subject of the first aid to coal mines decision (“2012 Decision”). On 13 Nov 2016 the Commission approved the prolongation of the duration and the redistribution of the aid amounts for the same State aid to finance the closure of two mines, i.e. Lonea and Lupeni (the “2016 Decision”). The prolongation of these measures was approved in the Commission’s decision of February 2018. According to the Romanian authorities, the main reasons for the prolongation of the period for granting the aid and the redistribution of the aid amounts to cover exceptional costs relate to the ‘CEH SA crisis’ situation. The company CEH SA is the only beneficiary of the thermal coal products produced by SNIMVJ-SA (in the mining units Paroșeni and Uricani). The CEH SA crisis situation requires that the two coal mines, Paroșeni and Uricani, continue delivering steam coal to CEH SA until December 2017 in order to prevent putting the national energy system and the supply of heating in difficulty.2029 Indeed following restructuring and by 2012, the first year of operation, CE Hunedoara made a profit (net earnings) of (EUR 8.1 million). However, as from 2013 when the four coal mines and related coal preparation unit were transferred, CE Hunedoara started to generate mounting losses up to EUR 31.7 million in 2013 and EUR 76 million in 2014, whilst showing deteriorating financial indicators as to operating income, debt to equity and liquidity. On 21 April 2015, the Commission decided not to raise objections on State aid planned to be granted to CE Hunedoara in the form of dedicated loans up to RON 167 million (ca. EUR 37.7 million).2030 At the end of 2015, CE Hunedoara had negative equity of around EUR 232.7 million. By 30 June 2017, negative equity had doubled to EUR -465 million, compared to 2015.

5.37

In a decision on the first rescue aid loan to CE Hundedoara, the Commission raised no objections by its rescue aid decision of 21 April 2015 However, in its later opening decision SA.43785 of March 2018, the Commission has prelimi-

5.38

2028 OJ L 336, 21.12.2010, p.24-29. 2029 SA.49558 (2018/NN). 2030 SA 41 318 (2015/N).

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narily considered that a loan granted to repay earlier incompatible aid, as well as a further series of loans contracted for the benefit of CE Hunedoara and a loan guaranteed by the Romanian State. As the rescue aid loan which was the subject of the rescue aid decision of 21 April 2015, including the prolonged and not repaid portion of it, and the non-repaid loan granted to repay State aid which was declared incompatible with the internal market on 20 April 2015, these later measures were assessed under the 2014 R&R aid Guidelines on 1 August 2014. Only undertakings in difficulty as defined in point 20 of the R&R aid Guidelines and not active in the coal sector as defined in point 16 thereof can benefit from compatible rescue or restructuring aid. However as Romania had failed to meet its commitment of April 2015 to legally separate the coal mines from power generation within CE Hunedoara, it could not be excluded at this stage that some of the loans covered by the present decision have benefitted directly or indirectly the coal mines of CE Hunedoara, in contravention of point 16 of the R&R aid Guidelines.2031 The Commission therefore opened a formal investigation into the measures. Lignite

5.39

The Coal Decision does not apply to lignite which can generally be extracted without the need for subsidies. Lignite is a relatively cheap source of energy and is a significant factor in the energy mix of some Member States, notably Germany, where lignite fired power plants play a significant role in the baseload supply. However, lignite also causes the highest levels of carbon dioxide emissions and it has become clear that Germany will not be able to meet its emissions targets if it does not significantly reduce energy production from lignite as part of its energy transition programme. Until recently state aid has not played a significant role in the lignite sector. In May 2016, the Commission approved €1.6 billion public financing for mothballing and subsequently closing eight lignite-fired power plants in Germany to be in line with State aid rules. Operators of these power plants would be compensated for foregone profits.2032

5.40

The Commission found that the remuneration is primarily based on the foregone profits that the operators of the eight plants would have earned, had they continued operating in the electricity market for four more years until their final closure and decommissioning. In addition, during the mothballing phase, the companies will be remunerated for the extra costs of the mothballing and for producing electricity in emergency situations if other security reserve mecha2031 Two coal mines are receiving operating aid pursuant to the second aid to coal mines decision. 2032 Closure of German lignite plants (Case SA.42536)[ 2016 ] OJ C258 /1.

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nisms do not provide sufficient backup energy (“security readiness”). However it was questionable whether lignite plants were suitable to contribute in a meaningful way to the envisaged security of supply objectives in view of their slow response times to sudden increases in demand and the plants ’location.2033 Germany took the view that the advantage, if any, was not financed from State resources and not imputable to the State. As the measure is financed via increased network tariffs levied on the consumers, no State resources would be involved. The network tariffs would be collected by TSOs who subsequently transfer it to the beneficiaries without intervention from the State. The Commission rejected the argument: even absent any direct impact on the State budget there was sufficient State control to bring the payments within the ambit of State resources. Germany also argued that measure should be viewed as constituting a compensation for damages and therefore, in principle, as excluding the existence of a selective advantage for the companies involved. The Commission decision assesses this argument in detail and noted that a legal framework is in place in German law that may entitle operators whose rights as owners are affected to compensation and that it cannot be excluded that such right to compensation exists. However, the Commission concludes that on the basis of the information provided by the German authorities it cannot be concluded “with a sufficient degree of certainty that a right to compensation of an amount resulting from the formula adopted … for the operators exists.” It left the question open as to whether the measure provides the operators with an advantage as it considered that, even if State aid were involved, the measure is compatible with the internal market. The Commission went on to assess the measure under Article 107(3)(c) TFEU. The Commission considered that with the mothballing and closure of the eight power plants, the German government aims to reduce carbon dioxide emissions by 1112.5 million tons per year as of 2020, when all eight plants will have stopped operating. While the costs for closing the plants will be borne by the operators themselves, Germany would only compensate the operators for their foregone profits. The Commission assessed this support in light of the significant contribution to Germany reaching its emissions target. It also came to the conclusion that the remuneration paid to the operators concerned would not confer an undue advantage over their competitors.

2033 None of the lignite-fired plants in question will take part in the Network Reserve, see Commission, German Network Reserve (Case SA.42955)[ 2017 ] OJ C68 /1.

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Section II: Nuclear: the Euratom Treaty 1.

Introduction

5.42

The Euratom Treaty, unlike the EC (now the Lisbon Treaty) and ECSC Treaty does not contain any specific provisions on state aid control. At the same time, the Euratom Treaty is a ‘ lex specialis’. Nuclear energy may remain a special case in that the EC Treaty rules cannot be straightforwardly and directly applied to evaluate aid to this sector.

5.43

The Euratom Treaty entrusts the Commission with the duty to promote the development and use of nuclear energy (Articles 2 and 4 Euratom).2034 This duty of promotion does not appear to be open-ended. To exclude a sector which is after all now a “mature” sector of the economy of a number of Member States from any form of state aid discipline whatsoever would seem to furnish that sector with a considerable advantage over and above other competing fuel forms which are subject to the full discipline of the EC Treaty rules. Moreover, to accord a completely separate or privileged status to the state funding of nuclear energy would seem to make something of a non-sense of the concept of a single European electricity market, a concept which is predicated on competition between all forms of electricity, irrespective of the source of their generation.

5.44

Article 305(2) EC (now repealed) stated that the provisions of the EC Treaty shall not derogate from the rules establishing the Euratom Treaty. This provision is worded slightly differently from Article 305(1) EC (now repealed) which stated that the EC Treaty shall not affect the provisions of the ECSC Treaty. As the ECSC Treaty contained specific provisions on state aid to the coal and steel sectors, there was no doubt that the relevant provisions applied to the exclusion of Articles 107 and 108 TFEU.

5.45

The legal relationship between the Euratom Treaty and the ‘standard’ EU Treaty state aid rules has however not yet been fully clarified by the European Courts and this has led to considerable debate as to whether the EC state aid regime may also apply to the nuclear sector. In his Opinion in Joined Cases 188-190/88 Advocate General Reischl was of the opinion that Articles 107 to 109 TFEU should be applied to regulate state aid to the nuclear sector. This was not precluded by the application of Article 305(2) EC. The Court did not address the issue di2034 Article 197 Euratom which defines such terms as special fossile materials, source materials and ores, does not appear to apply to waste materials. Furthermore, the activities covered in Annex 1 to the Treaty would not seem to apply to decommissioning or storage as such - but only to certain forms of research.

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rectly. The Court did not accept the submission of the French government that the so-called Transparency Directive derogated from the provisions of the Euratom Treaty as the French government had not established this point.2035 Thus the starting point should be that the EU Treaty rules apply to the nuclear sector provided that those rules are not at variance with those of the Euratom Treaty. Further, even where for certain matters the provisions of the Euratom Treaty as a lex specialis can take precedence over the provisions of the EC Treaty as a lex generalis, in the interpretation of the lex specialis the Court may call on the lex generalis. In Ruling 1/78 the Court held that, in the light of the EC Treaty, the provisions of the Euratom Treaty on the nuclear common market “appear to be nothing other than the application, in a highly specialised field, of the legal conceptions which form the basis of the structure of the general common market”.2036

5.46

Commission proposals for a Council Decision empowering the Commission to issue Euratom loans for the purposes of contributing to the financing of nuclear power stations have not been favoured by the Member States and as such decisions require unanimity little progress has been made on their adoption.2037

5.47

Although the Commission has adopted a number of decisions relating to state aid to the nuclear sector, it has tended to avoid arriving at a definitive position on the application of the Treaty state aid rules to the sector, and has usually found a means to declare the measure in question not to be aid, or if in the alternative that it might be aid, this aid has in any event been found to be justified (see below). As a result of this practice no direct challenges against a Commission decision had been lodged before the Courts prior to 2015. However an (unsuccessful) direct challenge to the Commission decision on aid given by the UK government to Hinkley Point was lodged by Austria2038 supported by Luxembourg. The GC’s ruling is now subject to appeal.2039

5.48

The GC has confirmed that the Euratom Treaty, even if it does not contain a specific state aid regime, does not immunize all national measures from Commission supervision.

5.49

2035 See paragraph 29 of Joined Cases 188 to 190/80 France and the UK v Commission (Transparency Directive) ECR [1982] 2545. 2036 ECR [1978] 2151, at 2172. 2037 See European Energy Journal 2015, vol 5, nr 1, p5. 2038 Case T-356/15 Austria v Commission, EU:T:2018:439. 2039 Case C-594/18 P.

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5.50

Finally, Member States are, in accordance with Article 192 Euratom, under a general duty to ensure the fulfillment of the Treaty objectives and abstain from any measure which could jeopardize the attainment of those objectives. Recital 3 of the Euratom Treaty also confirms as one of those objectives, the guarantee of security of supply.

5.51

The scope of Article 192 was considered in relation to a German excise duty on nuclear fuel (Kernbrennstoffsteuergesetz). Nuclear fuel used to produce electricity commercially is subject to a tax on nuclear fuel. The tax is due when the fuel is used for the first time in a nuclear reactor and the chain reaction is initiated. The tax is levied on the operator of nuclear power plant. In his opinion in Case C-5/14 Kernkraftwerke Lippe-Ems GmbH of 3 February 2015, the Advocate General advised that (i) this levy is not a form of state aid as it does not confer a selective advantage on non-nuclear electricity producers and (ii) Article 192 does not preclude the introduction of such a levy. In its ruling of 4 June 2015 the CJEU confirmed this analysis and held that: “It must be noted that methods of producing electricity, other than that based on nuclear fuel, are not affected by the rules introduced by KernbrStG and that, in any event, they are not, in the light of the objective pursued by those rules, in a factual and legal situation that is comparable to that of the production method based on nuclear fuel, as only that method generates radioactive waste arising from the use of such fuel.” 2040

2. 5.52

Commission decisions

The Commission has assessed a number of proposed as well as existing national aid measures to the nuclear sector under the EC Treaty state aid rules, although it is cautious in the manner in which if frames its decisions. In earlier decisions it did not always take a definitive position on the application of Article 107(1) TFEU and further added that, even if that article would be applied, the aid in question would be compatible with Article 107(3)(c). In its opening decision C31/2002 – ‘Transitional regime for the Belgian electricity market’ – it concluded that proposed compensation of Euro 377,033 million to Electrabel and SPE to meet the costs of dismantling experimental nuclear sites would be compatible with Article 107(3)(c), but provided no further reasons for this finding.2041 In 1989 the UK authorities notified a package of state aid measures destined for the nuclear industry in England and Wales and in Scotland just prior to privatisation of the sector in 1989. The Commission authorised: 2040 At para 79, ECLI:EU:C:2015:354. 2041 OJ [2002] C222/2.

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–

a guarantee of up to 2.5 billion pounds to cover present and future liabilities in the nuclear sector, including decommissioning of existing power stations at the end of their lives;

–

use of the proceeds of a levy (the non-fossil fuel levy) on consumers to bring down the higher costs of nuclear produced power and to promote renewable energy sources;

–

the debt write-off provision of up to 1.4 billion pounds for Scottish nuclear production.

Further details of the approved aid are only scantly described in the press notice issued on the decision.2042 It is noteworthy that the Commission approved the non-fossil fuel levy as state aid which was expected to average £1.150 million per year (1.55 bn ECU) over 8 years, and would be used, inter alia, to cover the difference between the price negotiated in the contracts between distribution companies and nuclear suppliers and the market price of electricity from other suppliers. The levy was to be phased out in 1998. The Commission reasoned that the plants had to be kept in operation for a certain time in order to earn sufficient profits to meet liability for decommissioning. In its decision of 11 December 2001 concerning the application of the EC state aid rules to German tax treatment of reserves for the decommissioning of nuclear power plants and the safe disposal of nuclear waste, the Commission ruled on the basis of a complaint by a number of regional energy supply companies, that the rules in question did not constitute state aid because the tax treatment in question was apparently equally applicable to all undertakings that have to constitute similar reserves. It did not therefore confer a “selective benefit” on a particular sector and hence could not be caught by Article 107(1) TFEU.2043 It was noted in conclusion, that “the Commission’s decision does not affect the application of the Euratom Treaty and is only valid to the extent that the EC Treaty is applicable”.2044 The Commission’s decision was upheld on appeal: the General Court (then the CFI) confirmed that the measures in question were general taxation rules, and therefore not aid within the meaning of Article 107(1) TFEU.2045 2042 IP/90/267, 28.03.1990. 2043 The concept of selectivity is discussed below. 2044 IP01/1799, 11.12.2001. For earlier parliamentary questions on this issue, see WQ E-2472/97. P/K/ 1998 C76/114. and WQ P-1873/00, OJ [2001] C53/195. 2045 CaseT-92/02 [2006], ECR II - 11.

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Distortion of Competition?

5.55

In an early Illustrative Nuclear Programme for the Community (PINC) under Article 40 of the Euratom Treaty (Com (96) 339)) the Commission had stated that: “Developments towards the liberalisation of the Community internal electricity market will mean that nuclear energy will have to compete in the same framework and under the same conditions as all other energy sources. Full implementation of the internal market and a rigorous application of the relevant state aid and competition rules implies a level playing field for all energy sources”. In its updated PINC (Com 2006/844 of 10/1/2007) the Commission indicated at section 4.2 that it expected that nuclear power could be financed by the private sector given that it was increasingly competitive with other forms of power.

5.56

The most recent PINC of 2016 indicates that billions of euro (estimated between EUR 650 billion and EUR 760 billion) would need to be invested in nuclear power between 2015 and 2050 in order to secure a safe future of energy supply on a Union-wide basis. Nuclear energy currently generates approximately onethird of all electricity produced in the EU. There are 129 nuclear power reactors in operation in 14 Member States with a total capacity of 120GWE. The PINC of April 2016 predicts a decline in nuclear capacity up to 2025 but also that this trend could be reversed by 2030 when new reactors come on stream. By 2050, nuclear capacity is predicted to remain stable at between 95 to 105 GWE.

2.1 Decisions pre-Lisbon British Energy

5.57

An attempt to resolve the interplay between the Euratom Treaty and the EC Treaty state aid regime is evident in the Commission’s decision to open procedures against the restructuring aid granted by the UK government to British Energy in 2003.2046 This important case, which is also, discussed below at book paragraph 5.186, concerned a package of seven measures. The Commission observed that several of the measures in question concerned issues covered by the Euratom Treaty, “and therefore have to be assessed accordingly. However, to the extent that they are not necessary for or go beyond the objectives of the Euratom Treaty or distort or threaten to distort competition in the internal market, they have to be assessed under the EC Treaty”.2047 Two sets of measures had to be assessed in the light of the objectives of the Euratom Treaty – i.e., measures to 2046 OJ [2003] C180/5. 2047 See Part VI of the decision at para 239.

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cover the reprocessing, storage and ultimate disposal of spent fuel and for decommissioning nuclear power stations, and measures concerning the restructuring of nuclear fuel supply agreements concluded with British Nuclear Fuels Ltd (BNFL), a publicly owned company. The UK government on the other hand, contended that all the measures should be assessed under the Euratom Treaty, as the aims of the measures were to preserve the safety of nuclear power stations, to ensure the safe management of nuclear liabilities and to enhance security of supply by maintaining diversity of fuel sources in Great Britain as well as to avoid carbon dioxide emissions. On 22nd September 2004 the Commission adopted a decision2048 approving the restructuring plan for British Energy. However, out of seven sets of measures notified to the Commission only one was found to involve state aid in the sense of Art. 107(1). The Commission observed that the measures foreseen by the UK authorities were appropriate to address the combination of objectives pursued and that they were fully endorsed by the Euratom Treaty. Because the Commission concluded that the BNFL acted in conformity with the private creditor principle, the measures concerning fuel cycle agreed with BNFL were deemed not to contain state aid, thus the issue of their compatibility with the common market was no longer relevant. As for the measures linked to the funding of nuclear liabilities, which were found to constitute state aid, the Commission assessed their compliance with Article 107(3) (c). The Commission found that the measures were in line with the objectives of the Euratom Treaty and additionally fulfilled the guidelines in respect of restructuring. Moreover, the measures did not distort competition contrary to the common interest. Therefore both the necessity and proportionality tests were satisfied and the measures were found to be compatible with the common market. However, the authorisation of the measures was subject to compliance with a number of conditions set out in Article 2 to Article 10 of the decision. BE agreed to cap its production capacity and not to extend its fossil fuel activities outside the United Kingdom and would also refrain from acquiring hydro capacity from its UK competitors. The funds received under the approved plan would be ring-fenced and BE would create three separate businesses, each with separate accounts. Adherence to the further conditions that ARE would not be allowed to undercut prices charged by its non-aided competitors on the market for supply to large users is monitored by an independent trustee.

2048 OJ [2005] L 142/26.

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5.59

In its decision to require the French government to put an end to the unlimited State guarantee to EDF under Article 108(1) TFEU, discussed at book paragraph 5.591 below, the Commission considered that its decision was without prejudice to the application of or respect for the provisions of the Euratom Treaty.2049 The NDA

5.60

In December 2004 the Commission published its decision to open procedures in respect of the notification by the United Kingdom government of its plans to set up a Nuclear Decommissioning Agency (NDA).2050 The NDA was to handle the decommissioning of nuclear sites belonging to the government as well as public sector companies such as BNFL. The UK authorities advanced a number of arguments in support of their claim that the transfer of these sites including several nuclear power stations to the NDA would not amount to a state aid, despite the fact that the UK government had committed itself to pay up to 2 billion pounds to take over the outstanding decommissioning liabilities incurred by a number of commercial entities such as BNFL. It has argued that decommissioning activities and the treatment, re-processing and disposal of nuclear waste and storage of spent fuels are not activities within competitive markets and hence the financial support cannot have an impact on competition and on intra-Community trade.

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The Commission considered that prima facie the measure fell within the scope of Article 107(1). The UK authorities also considered that the re-structuring measures are designed to meet the objectives of the Euratom Treaty and in particular, to contribute to safe and effective waste management. In its initial decision opening proceedings the Commission took as its starting point that the measure as notified concerned issues covered by the Euratom Treaty and therefore had to be assessed accordingly. However to the extent that it is not necessary for or goes beyond the objectives of the Euratom Treaty, or distorts or threatens to distort competition in the internal market, it had to be assessed under the EC Treaty. In the decision 2006/643/EC of April 20062051 the Commission authorised transfer of nuclear assets from BNFL to NDA subject to conditions. The Commission assessed the measures in the view of the objectives of Euratom Treaty and held that the measures were appropriate to address the combination of objectives pursued, and thus was fully in line with the objectives 2049 E- 3/02 – EDF, OJ 2003, C164/7 at pt. 60. 2050 OJ 2004 C315/4. 2051 OJ [2006] L268/37.

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of Euratom Treaty. Next the Commission assessed the existence of aid to the NDA and the BNFL. In the case of presumed aid to the NDA the Commission observed that the measure would provide an unlimited guarantee to the NDA as the State would cover all the NDA’s expenses if these could not be covered by the NDA’s revenues from commercial activities or by financial assets transferred to it. This unlimited guarantee was considered to be an advantage granted by the State to the NDA. However, the Commission authorised the measure on the grounds that the aid in question was in line with the objectives of the Euratom Treaty and did not affect competition to an extent contrary to the common interest which meant that both the necessity and proportionality test for a measure to be deemed compatible with the common market under Article 107(3) (c) were fulfilled. NDA would continue to operate some of the assets and thus would not comply with the “polluter pays” principle. However, because the NDA would operate the power plants for a residual time, the Commission gave an authorisation to the measure imposing similar conditions on the NDA to the ones imposed on British Energy. The Commission also assessed whether BNFL was a recipient of aid. The Commission found that since BNFL complied with the “polluter pays” principle the measure did not include aid to the BNFL.

3.

Hinkley Point C

The UK government notified several measures to the Commission including a price support mechanism (a contract for difference) to ensure that the operator of the new Hinkley Point C nuclear plant will receive a stable revenue for a period of 35 years despite the volatility of the wholesale electricity price. Under this arrangement, when the market price at which the electricity is sold is lower than the determined “strike price”, the government will pay the difference between the strike price and the market price, but if the market price is higher than the strike price, the operator will be obliged to pay the difference to the government. The operator will also benefit from a state guarantee covering any debt which the operator will seek to obtain on financial markets to fund the construction of the plant. This latter measure was not notified, however as the UK authorities considered it to be market conform. Finally the so-called Secretary of State Agreement provided for compensation in damages if the project was cancelled due to political objections.

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The Commission adopted a detailed opening decision in 2013,2052 but in its final decision of October 20142053 found that the UK authorities had demonstrated that the planned support would address a genuine market failure and that state aid was, therefore, justified.2054 In particular, the promoters of the project would not be able to obtain the necessary financing due to its unprecedented nature and scale. With regard to the Euratom Treaty the Commission held that: “(370) As recognised in past Commission decisions, the Euratom Treaty aims at creating the “conditions necessary for the development of a powerful nuclear indus‑ try which will provide extensive energy sources.” This objective is further reiterated in Art 1 of the Euratom Treaty, which establishes that “it shall be the task of the Community to contribute to the raising of the standard of living in the Member States (…) by creating the conditions necessary for the speedy establishment and growth of nuclear industries.” (371) On this basis, the Euratom Treaty establishes the Euratom Community, fore‑ seeing the necessary instruments and attribution of responsibilities to achieve these objectives. The Commission must ensure that the provisions of this Treaty are ap‑ plied. … 372) Art 2(c) of the Euratom Treaty provides that Member States shall “facilitate investment and ensure, particularly by encouraging ventures on the part of under‑ takings, the establishment of the basic installations necessary for the development of nuclear energy in the Community.” Art 40 of the same Treaty envisages the Com‑ munity publishing of illustrative programs “to stimulate investment, indicating production targets.”

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The UK authorities also agreed to modify the terms of the proposed state financing to ensure that the state aid provided is proportionate and that distortions of competition are minimised: –

State guarantee. The Commission found that the initial guarantee fee which the operator would have paid to the UK Treasury was too low for a project with this risk profile. The guarantee fee was therefore raised. This increase will reduce the subsidy by more than £1 billion (about EUR1.3 billion) and procure the UK Treasury an equivalent gain. This will reduce

2052 OJ [2013] C69/60. 2053 SA.34947 of 8 October 2014. 2054 ‘State Aid in Energy under the Spotlight: The Implications of the Hinkley Point Decision’, 
Nicole Robins and Tridevi Chakma, EStaL 2 (2016) 247.

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any distortions of competition created by the aid and will also benefit UK taxpayers. –

Contract for difference. As a result of modifications, the gains generated by the project will be better shared with UK consumers: as soon as the operator’s overall profits (return on equity) exceed the rate estimated at the time of the decision, any gain will be shared with the public entity granting the public support; and there is a new second, higher threshold above which the public entity will obtain more than half of the gains. These gains will be shared with UK consumers by a decrease in the price paid by the public entity to the operator (the strike price). This gain-share mechanism will be in place not only for the 35-year support duration as initially envisaged, but at the request of the Commission for the entire 60 year lifetime of the project.

The then Vice President Almunia, in announcing this decision, recalled that there are no specific guidelines specifying how the Commission is to assess state aid measures in favour of nuclear energy investment projects. The Commission decided not to include this matter in the new guidelines on state aid for energy and the environment that were adopted in April 2014, as discussed in Book Part V chapter 4. He further emphasised that the Hinkley decision will not create any kind of precedent.2055

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Given the strict rules on standing, (see Book Part V, Ch. 6) challenge from individuals or NGOs to the Commission decision was unlikely to succeed. Indeed the GC and as confirmed by the ECJ, had rejected the NGO Greenpeace’s application to challenge the decision.2056 Member States can challenge a decision of the Commission without establishing direct and individual effect – as they are not subject to same strict standing rules, but they face a heavy burden of proof in order to convince the court that the Commission has committed manifest errors of assessment.

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3.1 The General Court judgment The GC held that ‘the provisions of the Euratom Treaty constitute special rules in relation to the provisions of the TFEU Treaty and therefore derogate from the latter provisions in the event of any conflict.’ This however does not preclude Article 107 TFEU from being applied to measures pursuing an objective covered 2055 IP/14/1093 and SPEECH/14/668. 2056 C-640/16 EU:C:2017:752.

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by the Euratom Treaty. Even if certain provisions of the Euratom Treaty, such as Article 2(c) and the provisions laid down in Chapter 4 of Title II concern investment in the field of nuclear energy “the latter do not set out the conditions under which, notwithstanding the distortion of competition to which it gives rise, State aid concerning investment in the field of nuclear energy may be considered to be compatible with the internal market” (see para 77).

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The GC therefore concluded that: “Consequently, Article 107 TFEU is applicable to the measures at issue. However, in the context of the application of that provision to measures concerning the field of nuclear energy, it is necessary to take into account the provisions and objectives of the Euratom Treaty (at para 78).

5.69

Notably, Austria’s attempt to argue that Article 2(c) Euratom was binding on the Commission, and not the Member States, was dismissed given that Article 192 Euratom requires member states to facilitate the achievement of the Euratom Community’s tasks. Furthermore the GC recalled that Article 194(2) TFEU allows the Member States to determine its own energy mix.2057

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The objectives of the Euratom Treaty would therefore form part of the compatibility assessment under Article 107(3)(c) TFEU. The current Energy and Environmental Aid Guidelines (EEAG) of 2014 do not apply to state aid to the nuclear sector 2058 but the so-called common principles of assessment developed in the context of the State Aid Modernisation exercise (SAM) of 2013 are also applied to ad hoc or individual decisions where the Commission applies Article 107(3)(c) directly, as it did in its Hinkley decision.2059 In effect, Austria supported by Luxembourg, contested the Commission’s application of each of these principles, and most notably the finding that support to nuclear energy could be considered a public interest objective designed to remedy a market failure. 2057 At para 97: ... “In the light of the second paragraph of Article 1 and Article 2(c) of the Euratom Treaty, it must be held that the Commission did not err in finding that the United Kingdom was entitled to decide upon the promotion de nuclear energy and, more specifically, incentives for the creation of new nuclear energy generating capacity, as a public interest objective for the purposes of Article 107(3)(c) TFEU. That objective is related to the Euratom Community’s goal of facilitating investment in the nuclear field, and it is apparent from the first paragraph of Article 192 of the Euratom Treaty that the Member States are to facilitate the achievement of the Euratom Community’s tasks. Moreover, it is apparent from the second subparagraph of Article 194(2) TFEU that each Member State has the right to choose between the different energy sources those they prefer”. 2058 OJ 2014 C 200/1. 2059 See further, L. Hancher and P. Nicolaides in: P. Werner and V. Verouden, EU State Aid Control: Law and Economics, Kluwer 2017. pp. 193-220, at 204.

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Public interest objective The Court underlined that the promotion of nuclear energy as a public interest objective in line with the Euratom Treaty would not mean that each and every measure to support this energy form was justified. It would still have to be demonstrated to be appropriate, necessary and not disproportionate. Finally Austria’s contention that only support to new technologically advanced nuclear plant could be justified as being in the public interest was rejected – neither Article 2(c) Euratom or Article 107(3)(c) TFEU require the facilitation of technological innovation (at recital 144).

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Market failure – a necessary but not sufficient condition? The EC had accepted the UK government’s contention that without the contested aid measures the new nuclear capacity would not be delivered in sufficient time so that the support was therefore necessary to deal with this specific market failure. The GC ruled that Article 107(3)(c) does not expressly include a condition relating to the existence of a market failure and that the absence of such a failure does not necessarily mean that the aid is not necessary. State intervention may be considered necessary if market forces cannot deliver the public interest objective in sufficient time. The essence of the Court’s reasoning would appear to be that the Commission was entitled to conclude that existing products and instruments in the financial market were not sufficient to allow the necessary level of investment to be adequately hedged. The burden of proof here was on Austria to establish that private investment would have been available in a reasonable time frame to deliver the new capacity on time despite the specific risks facing investors in nuclear facilities.2060 The Court relied on its own earlier case law2061 to conclude that market failure is a legitimate reason to administer state aid but not a necessary condition.

2060 See in this respect the judgments of 12 December 1996, AIUFFASS and AKT v Commission, T‑380/94, EU:T:1996:195, paragraph 59, and of 6 October 2009, FAB v Commission, T‑8/06, EU:T:2009:386, paragraph 78) / In order to establish that the Commission committed a manifest error in assessing the facts such as to justify the annulment of the contested decision, the evidence adduced by the applicant must be sufficient to make the factual assessments used in the decision implausible (Case T-380/94 AIUFFASS and AKT v Commission [1996] ECR II-2169, paragraph 59). 2061 Case T-92/11 Jorgen Andersen EU:T:2017:14, paragraph  69 and Case T‑162/13 Magic Mountain, EU:T:2016:341, paragraph 77.

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Appropriate and necessary measures

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Recalling first, that on the basis of Article 194(1) TFEU and Article 2(c) Euratom, that a Member State was entitled to declare the construction of new nuclear capacity as public interest objective and second, that the Court had a limited power of review, the Court’s assessment was cautious (see paras 160 and 161 and paras 372). The GC proceeded on the basis of the narrow public interest objective pursued by the measures, i.e., the realization of new nuclear capacity within a sufficient time.

5.74

The GC concluded that Austria has not put forward any detailed argument that might establish that the aid elements contained in the various measures at issue were excessive in the light of the objective of triggering a decision to invest in new nuclear energy generating capacity. The Commission had considered the measures as interlinked and as necessary to realize the stated objectives of investing in new capacity. In fact it had demanded the adjustment of the fee for the Credit Guarantee and requested an amendment of the ‘gain-share mechanism’, and had considered that the impact of the Secretary of State Agreement was to lower the strike price in the CfD. Balancing the positive and the negative effects

5.75

The GC did not accept the arguments that the EC had wrongly identified the positive effects of the measures or downplayed the negative impacts. The Court accepted that the Commission had been correct to assess the positive impact of the measures on the UK’s security and diversity of supply as well as its decarbonisation strategies. The Commission had opened the formal investigation to ensure that following an in-depth analysis of the UK strategy, it was satisfied that the new nuclear capacity would be available to meet the projected future capacity deficit. Austria had failed to advance evidence to establish that the Commission’s position was implausible (paras 400-462). As to the negative effects, Austria had argued that he Commission had disregarded the impact on the internal energy market. The GC recalled that the Commission had concluded that the impact of the measures on trade and competition would have been insignificant, and that the impact on wholesale electricity prices in GB and beyond would be minimal.

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The Court considered that; “In the light of the United Kingdom’s right to determine its own energy mix and to maintain nuclear energy as a source in that mix, which follows from the second subparagraph of Article 194(2) TFEU, and from the second paragraph of Article 1, Article 2(c) and the first paragraph of Article 192 of the Euratom Treaty, the deci‑ sion to maintain nuclear energy in the supply structure cannot be considered to be manifestly disproportionate as compared with the positive effects of the measures at issue” [para 507]. Also in view of this right to determine its own energy mix, the UK was entitled to conclude CfDs for HPC with more favourable terms than contracts for other technologies. Austria’s contention that the Commission acted in contravention of the polluter pays principle, the precautionary principle and the principle of sustainability was dismissed by the Court, as the UK had not intended the contested measures to give effect to these principles. If the principles were to be invoked to preclude state aid to a nuclear plant, this would be inconsistent with Art 106(1) Euratom [para 517].

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Operating v Investment Aid Austria argued that the Commission had at paras 344 to 347 of its decision, wrongly stated that even although the measures constituted operating aid and were in principle incompatible with Art 107(3)(c), the measure at issue had to be regarded as being equivalent to investment aid. The General Court agreed that it is settled law that operating aid is intended to maintain the status quo or release an undertaking from its normal costs and so cannot be considered compatible state aid.2062 However in the Court’s view, the Commission had put forward sufficient reasons to justify its positive assessment of the aid, and to explain why that the case law on operating aid could not be applied to the measures given the specific features of the project. The Court reasoned that if the measures in question had already met the various tests for a positive assessment as set out above – and in particular that they were established to be necessary and appropriate, then it was irrelevant if they were classified as operating as opposed to investment aid.2063

2062 See paras 579 and case law cited there 2063 At paras 583 to 623. The GC relied on the case of T-162/13 Magic Mountain at paras 116-117.

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Failure to tender

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The GC agreed with the Commission that Article 8 of the IEM Directive 2009/72 did not require a tendering procedure nor did the application of the general Treaty principles of equal treatment, non-discrimination or transparency mandate such a procedure. The Court recalled that: “the principles of equal treatment, non-discrimination and transparency are applicable to public contracts, to concessions, to exclusive authorisations and to exclusive licences granted by a public authority and for which the EU legislature has not laid down special rules”. It went on to state that: “They do not therefore limit the right of a Member State to choose between a public contract and the grant of a subsidy to encourage undertakings to achieve a particu‑ lar public interest objective.2064

4.

Recent Commission Decisions

Belgium

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Investment Guarantees In its decision SA.39487 of 17 March 2017 the Commission considered that support measures for the long-term operation of three nuclear power plants included investment guarantees in two agreements with Engie-Electrabel and EDF Belgium conferred an advantage on these companies. The Commission found that the investment guarantees provide an economic advantage to EngieElectrabel and EDF, which goes beyond what they would have been entitled to under general Belgian law, and thus entail State aid elements. The agreements envisaged prolonging the operational lifetime of the nuclear reactors Doel 1 and Doel 2 (owned by Engie-Electrabel) and Tihange (owned by Engie-Electrabel together with EDF Belgium). Under the agreements, the companies have committed to invest around € 1.3 billion in exchange for authorisation to run the plants for another 10 years. The companies would receive financial compensation, if Belgium decides to close the reactors before the end of the ten year period, modifies the level of nuclear tax to be paid by the owners or changes other economic parameters of the agreements. The Commission cleared the investment guarantees on the basis that they would avoid undue distortions of the Belgian energy market. Among other things, the Commission 2064 Paras 686-688.

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took note of the obligation that Engie-Electrabel as the major player on Belgian electricity markets to sell on regulated electricity markets each year a volume equivalent to Engie-Electrabel’s share of the annual production of the power plants in question. This would ensure liquidity on Belgian electricity markets and help increase competition between electricity suppliers. Nuclear Guarantee Under the nuclear guarantee scheme notified by Belgium and which will be enshrined in a Royal Decree, the Belgian State would grant a guarantee of up to the EUR 1.2 billion to the nuclear operators as of 1 January 2018.2065 In defending the compatibility of these measures, Belgium explained that the insurance market is currently not able to provide for a full coverage of all heads of nuclear damages stipulated under the 2004 Protocol amending the Paris and Br Conventions on nuclear liability. The private insurance market can currently cover General Damages up to EUR 1.2 billion during ten years. Environmental losses and damages suffered by natural persons between ten and thirty years after the nuclear incident are only partly covered. The Commission noted that there is only a market price for part of the risks to be covered by the proposed guarantee, but not for the full coverage of all risks in question. Hence the Commission ruled hat the absence of a developed market price did not exclude the possibility to rely on the MEO. It examined whether the premium to be paid by nuclear operators to benefit from the State guarantee is set at the adequate level to remunerate the risk carried by Belgium. Notably, Therefore, the guarantee premium in this case constitutes a remuneration for the State as, even if it has to be paid upfront in case a nuclear incident occurs and the cost of damages exceeds the private insurance coverage, it will be reimbursed afterwards by the liable nuclear operator. A nuclear operator benefitting from the State guarantee is not insured against the risk as it will still have to pay if a nuclear incident occurs. The Commission concluded that the guarantee scheme designed by Belgium complies with the market economy operator test as the State guarantee remains at all times more expensive than the private solutions (at para 65).

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France Areva Restructuring Aid (SA.44727) concerned the restructuring plan that aims to restore the State-controlled Areva group’s long-term viability, refocusing the group on fuel cycle activities, and isolating Areva’s most ‘toxic’ liabilities from the sounder parts of the group. As part of the package, the electricity company EDF would take a majority stake in Areva NP. To enable the sale, the loss2065 SA.46602, 14 July 2017.

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making Finnish OL3 project would be carved out from other businesses. This sale remains conditional on the successful completion of safety tests for another new reactor project in France. The Commission considered whether this transaction would be in conformity with the so-called ‘private seller’ test. Normally a private seller would establish the value of the assets to be sold by way of open tender or on the basis of an independent evaluation based on established principles. The French authorities had provided the Commission with sufficient evidence that an independent valuation had been carried out for Areva NP’s five distinct business units and that the transaction would not therefore amount to aid to either the seller or the buyer in this case.

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The Commission cleared other elements of the package, including a capital injection of €4.5 billion to Areva under the 2014 Guidelines on State aid for restructuring of non-financial undertakings in difficulty. The restructuring plan to restore Areva’s competitiveness provides for various divestments including of the group’s nuclear reactor business to EDF. The French government claimed that the proposed restructuring meets an objective of common interest, particularly as the eventual bankruptcy of Areva would have grave consequences for nuclear security and safety throughout the EU and would be manifestly contrary to the objectives set forth in Articles 1, 2 and 52 Euratom. According to the Commission, Areva’s withdrawal from the nuclear reactor business will allow the group to focus on a clear and profitable business in the nuclear fuel cycle. The complete divestiture of Areva’s reactor business would reduce the group’s activities in the nuclear sector and thereby limit the distortions of competition brought about by the State support. Furthermore, a competitive Areva also contributes to ensuring Europe’s security of uranium supply. Finally, Areva will finance a significant part of the restructuring costs with proceeds from planned asset sales, including the divestiture of Areva’s reactor business. Germany

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Germany notified for legal certainty a measure allowing the transfer to a public fund of the liabilities for radioactive waste and spent fuel management in the context of the German nuclear phase-out, against payment by the German nuclear operators of a fee (SA.45296). Payment of the fee relieves the nuclear operators of their obligations relating to the interim storage and final disposal of spent fuel and radioactive waste which passes to the German State. The measure takes place in the broader context of the German decision to phase-out of nuclear electricity production by 2022. The nuclear phase-out was proposed directly after the 2011 Fukushima nuclear accident and enacted in the amended Nuclear 698

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Energy Act (“Atomgesetz”) which entered into force on 6 August 2011. An Act on the Reallocation of the Liabilities for Nuclear Waste Management (“Gesetz zur Neuordnung der Verantwortung in der kerntechnischen Entsorgung”, which will enter into force upon State aid clearance. The Act encompasses the Act on the Transfer of Nuclear Waste Liabilities (“Entsorgungs-Übertragungsgesetz”) and the Act on the Nuclear Waste Management Fund (“Entsorgungsfondsgesetz”). The State will become responsible for the interim storage and remain responsible for the final disposal of LLW, ILW and HLW and spent fuel produced and to be produced until 2022 in Germany. Germany maintained that the measure does not provide any advantage to the Operators, notably referring to the position taken by independent auditors that the Operators’ Provisions constitute a fair value of the spent fuel and radioactive waste management costs – and therefore a good reference for the Basic Amount – and that the Risk Premium adequately reflects the risks of cost increases and cost savings likely to arise after payment of the Basic amount. Germany therefore argued that the measure does not amount to State aid. The Commission applied the Market economy investor principle, to assess whether the set-up of the risk transfer proposed by Germany is such that a private operator would have accepted to bear it or not. It concluded that due to the uncertainty over the risk at stake, the transfer of liabilities for spent fuel and radioactive waste management provides the Operators with an advantage in the sense that the calculation of the aggregated amount of EUR 24.1 bn as payment for this transfer does not address the risk of cost overruns exceeding this amount. No market operator would have taken over such a risk (at para 37). However, recalling its decision on the UK waste transfers (see below) the Commission confirmed that “Member State have ultimate responsibility for the safe management (including disposal) of spent fuel and radioactive waste” and that Directive 2011/70/Euratom requires them to “ develop, maintain and implement national programmes to ensure the safe disposal of spent fuel and radioactive waste”. Article 4(4) of Directive 2011/70/Euratom provides that “radioactive waste must be disposed of in the Member State in which it was generated, unless at the time of shipment an agreement [...] has entered into force between the Member State concerned and another Member State or a third country to use a disposal facility in one of them”.

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Taking into account that the spent fuel and radioactive waste generated in nuclear power plants situated in Germany shall be disposed of in Germany, the potential impact of the measure on trade between Member States is very limited.

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Hungary

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Paks II: In May 2015, the Hungarian government notified the Commission of certain measures which it intends to implement to realise the construction of the Paks II nuclear plant. The Hungarian authorities claimed that the measures are market conform.2066

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In its submissions during the formal investigation, Hungary argued that the financing of the project in the nuclear industry should fall under a notification obligation within the meaning of Article 43 of the Euratom Treaty. It further argued that pursuant to Commission Regulation (EC) 1209/200047 the data on the methods of financing should be provided in the event of any new project by the given Member State. Hungary argues that it had provided all the necessary information under Articles 41 and 43 of the Euratom Treaty and as the fuel supply agreement was approved by the European Supply Agency in April 2015, Hungary believed that the Commission could not now claim that the financing of the project could be unlawful. Having analysed the financials in some detail the Commission concluded that the project would not produce sufficient returns to cover the costs of a private investor who could only obtain financing at market prices. Paks II therefore benefited from a selective economic advantage. However, and as recognised in previous decisions, the Commission held that the promotion of nuclear energy is a key objective of the Euratom Treaty, and therefore the Union.

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“As set out in the preamble to the Euratom Treaty, the Commission is an institution of the Euratom Community and is obliged to ‘create the conditions necessary for the development of a powerful nuclear industry which will provide extensive energy resources’. This obligation should be taken into account in exercising its discretion to authorise State aid in accordance with Article 107(3)(c) and Article 108(2) TFEU” (para 292).

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The Commission also considered that the measures were necessary and proportionate. Support for new nuclear was necessary to remedy a market failure: “To establish whether a market failure exists, the Commission must first determine what objective in the common interest is being pursued by the Member State. The common interest objective of this measure does not concern the internal market in electricity in general or investments in electricity generation in general; rather it concerns the promotion of new nuclear investments, as enshrined in the Euratom Treaty, which are, of course, undeniably part of the electricity market and will 2066 Case SA.38454 [2016] OJ C8/2.

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help deal with Hungary’s future gap in its overall installed capacity …” (at para 301). In assessing proportionality, the Commission examined whether any overcompensation could occur if the beneficiary realised, during the operation of reactors, returns which turn out to be higher than those estimated by the Commission in its IRR calculations (see Section 5.1 of the decision) and what would happen if Paks II could reinvest any profits that are not paid to the State in the form of dividends to develop or purchase additional generation assets and thus strengthen its position on the market. Hungary however committed to ensure that Paks II compensates the State for the new generating units and Paks II will not retain extra profits beyond what is strictly necessary to ensure its economic operation and viability. The profits generated by the beneficiary will not be used to reinvest in Paks II’s capacity extension or to purchase or construct new generating capacities without State aid approval. These commitments are spelled out in Article 3 of the Commission’s final decision. Procurement issues In relation to the observations which alleged that the completion of the project breaches the of the European Parliament and of the Council and Directives 2014/24/EU and 2014/25/EU2067 – the Hungarian authorities countered that the IGA and the implementation agreements fall outside the scope of TFEU and these Directives. In addition, they stated that even where TFEU would apply, the IGA and its Implementation Agreements would fall within the specific exemption in respect of international agreements as set out in Article 22 of the Directive 2014/25/EU should be exempt from the application of Union public procurement rules. As to Article 8 of Directive 2009/72/EC. Hungary argued that this Directive does not apply to the project because it falls within the exclusive remit of the Euratom Treaty, which takes precedence over the rules in the TFEU and any secondary legislation (see paras 192-193). In response, the Commission recalled on the basis of earlier case law that where the assessment on compatibility under the state aid rules could be affected by a possible non-compliance with Directive 2014/25/EU if it produced additional distortion of competition and trade on the electricity market (market on which the beneficiary of the aid – Paks II – will be active)(see para 282). The Com2067 Directive 2014/24/EU of the European Parliament and of the Council of 26 February 2014 on public procurement and repealing Directive 2004/18/EC (OJ L 94, 28.3.2014, p. 65) and Directive 2014/25/EU of the European Parliament and of the Council of 26 February 2014 on procurement by entities operating in the water, energy, transport and postal services sectors and repealing Directive 2004/17/EC(OJ L 94, 28.3.2014, p. 243).

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mission noted that Directive 2014/25/EU is of relevance as regards the direct award of construction works for the two new reactors to one specific undertaking. Thus, a possible inobservance of public procurement rules in the case at hand might produce distortive effects on the market of nuclear construction works. However, “as the object of the investment aid to Paks II is to enable it to generate electricity without bearing the investment costs for the construction of nuclear installations, no additional distortive effect on the competition and trade on the electricity market has been identified that would be created by the non-compliance with Directive 2014/25/EU, as regards the direct award of the construction works to JSC NIAEP. Therefore, in absence of “indissoluble link” between the possible infringement of Directive 2014/25/EU and the object of the aid, the compatibility assessment of the aid may not be affected by this possible infringement” ( para 285).2068

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As regards the possible breach of Article 8 of Directive 2009/72/EC on the internal electricity market, the Commission considered that the requirement of applying a tendering procedure or any procedure equivalent in terms of transparency and non-discrimination for providing new capacity is not an absolute. In accordance with the second sentence of Article 8(1), a tendering procedure must not be required if the generation capacity to be built on the basis of the authorisation procedure laid down in Article 7 of Directive 2009/72/EC were sufficient to ensure security of supply. The project has been authorised (following the authorization procedure described in Article 7) precisely to cover, inter alia, the gap in the envisaged future domestic total installed capacity and the Commission does not have elements available showing that the installed capacity would be insufficient. Thus the tendering or equivalent procedure requirement pursuant to Article 8 Directive 2009/72/EC does not seem to apply to the project at hand. Slovakia

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In Slovakia – decommissioning concerning the decommissioning of two already shut down nuclear plants (A1 and V1), the Commission considered that through the transfer of V1 and A1 from Slovenské elektrárne (SE) to a Stateowned company, SE has been relieved from its obligations in respect of decommissioning and the costs relating to it. Therefore, by agreeing to this transfer in 2068 As is noted at para 265 Hungary’s compliance with Directive 2014/25/EU was assessed in a separate procedure by the Commission where the preliminary conclusion on the basis of available information is that the procedures laid down in Directive 2014/25/EU would be inapplicable to the entrustment of construction works of two reactors on the basis of its Article 50(c).

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the privatisation contract signed between the Slovak government and ENEL, now the majority shareholder of SE, Slovakia has mitigated the charges which are normally included in the budget of an undertaking operating a nuclear power plant in Slovakia, and has therefore granted an advantage to SE. Slovakia had also set up the National Nuclear Fund in 2006 to finance the costs related to the decommissioning and treatment of nuclear waste and spent fuel of two obsolete nuclear power plants: Bohunice A1 and V1.

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Since 2011, final electricity consumers are required to pay a nuclear levy, based on their electricity consumption, to finance the National Nuclear Fund. This financial set-up was approved by the Commission in 2013.2069 As of 2019, Slovakia intends to grant reductions on the nuclear levy to certain electro-intensive industrial users exposed to international trade, such as companies active in the production of refined petroleum products, basic iron, steel, ferro-alloys and aluminium.

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In its decision SA.50877 of 6 July 2018, the Commission acknowledged that the nuclear levy contributes to an objective of common interest, as it ensures the safety of nuclear facilities and the correct, timely and safe decommissioning of obsolete nuclear facilities, and provides long-term solutions for spent fuel and radioactive waste management.

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UK Waste Transfer Contract for New Nuclear Plants The Commission assessed various measures concerning the funding of certain waste disposal services for spent fuel and intermediate level waste (SA.34962). The UK argued that the Waste Transfer Contracts would not provide any advantage to operators given that the service is priced in a way which, in the absence of a market in higher activity radioactive waste disposal, provides a proxy commercial service and given that the operators pay a risk fee for the cap that is equivalent to an insurance premium. The UK had therefore notified the measures for the purpose of legal certainty. The Commission did not accept this argument. It noted that the State was in effect offering three different services under the Contracts. First, a disposal service (Service A) as such, the price to be paid for the disposal of the waste and spent fuel would be determined some 25 to 30 years after a new power plant starts operation, so that the exact costs of the disposal services are, to a certain extent, unknown. That uncertainty is compen2069 SA.31860.

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sated by a risk premium included in the Waste Transfer Price. This latter price is in turn capped at the outset and the risk-hedging service is remunerated by a risk fee (Service B). Finally, the Contracts provide for the possibility of a so-called Early Transfer (Service C). This means that liability for the waste is transferred at a point in time when that waste is kept in interim storage. The price for this service is not capped as interim storage costs that are under the control of operators are known to them.

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With respect to Service A, the Commission concluded that the Waste Transfer Price does not confer any advantage on operators of new nuclear power plants as it will cover all variable costs and a portion of the fixed costs that is in proportion to the use of the storage capacity (GDF). The calculation of the costs was such that the Waste Transfer Price will include adequate remuneration for the UK for taking on the costs being higher than expected and therefore it would not involve State aid. As to Service C, the Commission concluded that the Early Transfer Payment would not include any advantages to operators of new nuclear plants given that the opera- tor will have to make a lump sum payment that must entirely cover all costs linked to the interim storage services. A risk premium would be paid to fully compensate any risk of cost escalation.

5.102

However, the Commission considered that Service B would confer an advantage on investors as the proposed methodology would mean that the UK government would offer an insurance against all costs realisations exceeding the cap (and the maximum costs) whereas the insurance fee covers only cost realisations between the cap and the maximum cost realisation. The Commission concluded that it could not exclude that cost realisations would exceed the maximum costs calculated under the model. The Commission reasoned that as the UK had renounced the right to factor in the risk that costs might be higher than the modelled maximum in the risk fee, it had forgone resources but came to the conclusion that the measures were in line with Article 107(3) TFEU. As the Waste Transfer Contracts aimed at ensuring the safe management of spent fuel and waste and enable prospective operators to make investment decisions to build new nuclear plants, they were considered to further both the objectives of nuclear safety and the development of nuclear energy in line with Article 2 EA and are therefore also objectives of common interest within the meaning of Article 107(3)(c) TFEU. Also, the contracts met a well-defined market failure – the absence of suitable hedging services in the market – and the Cap and Risk Fee were appropriate instruments to address the UK’s objectives. They would have an incentive effect for new investment. As the amount of State aid would in fact be unknown until suitable disposal sites had been constructed, 704

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the assessment of the proportionality of the aid amount was based on complex modelling by external consultants. The scheme did not relieve operators from their costs—in line with the polluter pays principle – but is limited to a free insurance if those costs turn out to be higher than the modelled maximum. The chances that this will occur were considered to be low as the CAP and Risk Fee incentivise the State to safely and efficiently carry forward the disposal project so as to keep costs below the Cap and the Risk Fee. In terms of waste disposal services, distortion of competition would be very limited as it was unlikely that other operators might offer such services.

5.

Transparency

The nuclear sector was originally exempted from the rules on financial reporting under the regime concerning the transparency of financial relations between Member States and public undertakings. Commission Directive 80/723 (the ‘Transparency Directive’), Article 4(b) excluded the energy sector in general and the nuclear sector in particular, but this exemption was subsequently dropped when the Directive was amended in 19852070 and has not re-surfaced in any subsequent amendment.

2070 OJ [1985] L229/20.

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CHAPTER 3 State aid in the TFEU 1.

Introduction

Articles 107 to 109 TFEU regulate the granting of state aid by Member States. More specifically,

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Article 107(1) TFEU prohibits “aid granted by a Member State or through state resources in any form whatsoever which distorts or threatens to distort competition, by favouring certain undertakings or the production of certain goods, in so far as it affects trade between Member States.”

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Article 107(1) TFEU permits a declaration of incompatibility with the common market, but not a directly applicable prohibition of an aid.

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Article 107(2) and (3) TFEU provide for exemptions to this strict prohibition to be applied under certain circumstances.

5.107

Article 108 TFEU regulates the procedural aspects of state aid supervision while Article 109 TFEU provides that the Council may make appropriate regulations for the application of Articles 107 and 108 TFEU, including empowering the Commission to issues regulations for the enforcement of the state aid rules.

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This first part of this chapter will provide a detailed examination of what constitutes an “aid”, also in light of the 2016 Commission Notice on the notion of State aid (the Notice on the Notion of Aid or “NOA”).2071 The NOA states that the constituent elements of the notion of State aid are (i) the existence of an undertaking, (ii) the financing of a measure through State resources, (iii) its

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2071 OJ 2016, C 262/1.

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imputability to the State, (iv) the granting of an advantage, (v) the selectivity of the measure and (vi) its effect on competition and trade between Member States.2072

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The various aspects of the definition will be dealt with in turn. As will become evident, the problematic nature of the definition of “aid” for the purposes of Article 107(1) TFEU is of particular importance in the energy sector. The final sections of the chapter will examine the relationship between Article 107(1) TFEU and the other Treaty Articles on taxation, free movement and competition.

2.

The beneficiary

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Before turning to the various aspects of the definition, a preliminary clarification is in order on the concept of “beneficiary”, i.e. the recipient of aid.

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First of all, to be caught by the application of the State aid rules, a beneficiary must be an “undertaking”. This term is usually defined broadly, covering any entity engaged in an economic activity.2073 However, the Commission and the Court have excluded from this definition organizations managing national health funds, insofar as they were not carrying on an economic activity and were not, therefore, undertakings. In order to reach this conclusion, the Court relied on the fact that these entities were fulfilling an exclusively social function, that their activity was based on the principle of national solidarity and, lastly, that they were non-profit-making, the benefits paid out being statutory benefits that bore no relation to the level of contributions.2074

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In addition, it is well-settled in the case-law that recipients of aid are those who actually benefit from it.2075 In this context, it is worth pointing out that, in the identification of a beneficiary, the Commission has a wide discretion in determining whether companies forming part of a group must be regarded as an economic unit or as legally and financially independent for the purposes of applying the State aid rules.2076 2072 In Case C-83/98 P Ladbroke ECR [2000] I-3271., the Court of Justice ruled that the concept of aid was an objective one and as such the Court had full powers to review the application of Article 107(1) TFEU by the Commission. 2073 See, e.g., Case C-41/90 Höfner and Elser [1991] ECR I-1979, para. 21. 2074 See Joined Cases C-159/91 and C-160/91 Poucet and Pistre [1993] ECR I-637. See also Case T-319/99 Fenin v Commission [2003] ECR II-357, confirmed on appeal in Case C-205/03 P Fenin v Commission [2006] ECR I-6295. 2075 See, e.g., Case C-303/88 Italy v Commission, [1993] ECR I-2098, para. 57. 2076 See case T-394/94 British Airways v Commission [1998] ECR II-2405, para. 314; Case T-234/95 DSG

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Finally, it is equally well-settled that Article 107 TFEU prohibits aid granted by a State or through State resources in any form whatsoever, without drawing a distinction as to whether the aid-related advantages are granted directly or indirectly.2077 The only proviso is that there must be a causal link between the aid granted through State resources and the benefit.2078

3.

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State resources

It is well established that the financial benefit granted to a recipient must have been brought about by the State. Article 107(1) TFEU applies to aid granted by central, regional or local government bodies and by a private body established or appointed by the State to administer certain resources, even if they originate from private sources.2079 Resources at the disposal of public undertakings, i.e. undertakings owned or controlled by the State (whether national or regional or local) are also considered to be state resources.

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The relationship between the phrases “aid granted by a Member State” and “aid granted through state resources” was the subject of some debate as a number of authors claimed that it was necessary for a financial measure to be funded by a transfer of state resources or through a charge or burden on state resources, in order to be classified as aid. Others maintained that any measure which resulted in the conferral of a selective benefit could come within the definition, irrespective of whether that measure actually involved a burden on the State: the key test was whether the measure, whatever its form, had the effect of conferring a selective benefit.

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The scope of Article 107(1) TFEU has, however, been deemed by the Court of Justice to be narrower that assumed by many. In Case C-379/98 PreussenElektra,2080 the Court ruled that a state measure, a federal law which required certain regional electricity distribution undertakings to purchase at fixed minimum price electricity produced from renewable energy sources within the supply area of each distribution undertaking concerned, and further required

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2077 2078 2079 2080

v Commission [2000] ECR II-2603, para. 124; and Case T-303/05 AceaElectrabel v Commission [2009] ECR II - 137, paras. 95-145, and on appeal Case C- 480/99 P [2010] 1-13355. See Case T-445/05 Associazione italiana del risparmio gestito and Fineco Asset Management v Commission [2009] ECR II-289 at para. 127. See Case C-382/9 Netherlands v Commission [2002] ECR I-5163 and the Advocate General’s opinion in that case, especially para. 130. See also Case C-156/98 Germany v Commission [2000] ECR I- 6857. Case 76/76 Steinike and Weinlig v Germany ECR [1977] 595. See also Case C-345/02, Pearle [2004] ECR I-7139. [2001] ECR 1-2009.

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suppliers of electricity from conventional sources partially to compensate the distribution undertakings for the additional costs, did not constitute state aid, because it did not involve the transfer of State resources. In line with earlier case law, including Case 82/77 Van Tiggele 2081 and Case C-73/91 Sloman Neptun,2082 it was apparent that such measures were paid for by private consumers on the one hand, and even if they had the effect of conferring an advantage on a particular beneficiary (in this case the producers of renewable energy) this was inherent in the legislative system.2083 Based on this rationale, in May 2002, the Commission decided that the then applicable German laws on the promotion of electricity from renewable energy sources and from combined heat and power (CHP) did not constitute state aid within the meaning of Article 107(1) TFEU as State resources were not involved. The Commission noted that the measures were applicable without distinction to public and private operators and suppliers.2084

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Shortly after its issuance, the impact of the PreussenElektra judgment caused some legal uncertainty in the energy sector. For instance, certain Member States had imposed obligations on, for example, energy supply companies to pay a surcharge to electricity producers to compensate the latter for so-called “stranded costs” (past investments which can no longer be exploited commercially due to energy market liberalisation; see below at Book, chapter 4 paragraphs 5.3425.395). Based on the PreussenElektra holding, these measures could fall outside the notion of state aid, because they do not involve a transfer of state resources as long as no intermediary is involved over which the state exercises some form of control.2085 However in its 2001 decision on the UK’s Renewables Obligation and Capital Grants for Renewable Technologies, which obliged all licensed electricity suppliers in Scotland, England and Wales to ensure that a proportion of electricity supplied to customers in Great Britain comes from a renewable source of energy, the Commission found that one aspect of the scheme (a redistribution fund) did constitute state aid, although it was compatible with 2081 ECR [1978] 25. 2082 ECR [1993] I-887. 2083 In case C-128/03, AEM SpA and AEM Torino SpA v AEEG (ECR 2005 p. I-2861, ECLI:EU:C:2005:224), the Court of Justice took a similar position to the Sloman Neptun case, as it held that a measure which imposed an increased charge for a transitional period for an access to the national electricity transmission system only on hydroelectric/geothermal electricity producers to offset the advantage created for them by the liberalisation of market in electricity, constitutes different treatment of undertakings in relation to charges, which is attributable to the nature and general scheme of the system of charges in question. According to the Court, that different treatment is not therefore per se State aid. 2084 Case NN 27/2000 – Law on promotion of electricity generation from renewable energies (OJ [2002] C 164/5). 2085 See IP/02/322 UK: Compensation to NIE for stranded costs constitutes no state aid. A levy imposed on final consumers was collected by distributors or the network operator and was transferred to NIE. This did not include a transfer of state resources.

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the then current version of its Environmental Aid Guidelines (see chapter 4, below).2086 A number of judgments in the energy sector have restricted the application of the PreussenElektra holding to a very narrow set of circumstances. For instance, in its ruling in Case C-206/06 Essent Netwerk,2087 the Court of Justice shed some further light on the definition of state resources and the restricted impact of the Pearle ruling.2088

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The Dutch measure at issue in this case provided for the payment to the designated company, SEP, of a stated sum levied by way of a surcharge on electricity consumers for the defrayal of stranded costs and for the payment of the excess levied through the surcharge to be paid to the Minister. The charge had to be paid to the network operator who was required to transfer a fixed sum to SEP and to pay the excess to the Minister. The network operator was at the relevant time, owned by the Dutch local authorities and provinces. The SEP was owned by the generators – who were both under public as well as private control. The Court held that the surcharge proceeds remained under public control and were available to the national authorities. This distinguished the measure at issue here from the situation in Pearle where the advertising campaign had been organised for a purely commercial purpose and had nothing to do with a policy determined by the state. In the Essent case, the payment of the fixed sum to the SEP had been the subject of a decision of the legislature. Likewise, the measure differed from that referred to in PreussenElektra, as the SEP had been appointed to manage a State resource.

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In a subsequent case from 2009, Case T-25/07 Iride,2089 the applicants claimed that the measure at issue, a system for covering stranded costs, did not involve state resources but rather entailed transfers between economic actors – i.e.

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2086 Commission Decision N 504/2000, OJ [2002] C30/15. See also the Commission’s decision on green certificate systems in Belgium (N415a/01, OJ [2002] C30/14) and in Sweden (N789/2002 of 5 February 2003). In its decision on state aid for the production of electricity from renewable sources in Luxembourg, the Commission’s analysis equally centred on the role of a fund (see case C43/2002, OJ [2009] L 159/11). 2087 [2008] ECR I-5497. See also Case C-677/11 Doux élevages SNC et al [2013] ECR I-582. 2088 In its judgment in Case C-345/02 Pearle (ECLI:EU:C:2004:448), the Court of Justice held that in the circumstances of that case, where a compulsory levy was paid to a public body, the funds in question were not under public control and the initiative to raise the levy and to devote its proceeds to cover the costs of a general advertising campaign was an initiative taken by a private sector organisation. The public body in question merely served as a vehicle for levying and allocating resources collected for a purely commercial purpose which had been determined by the sector itself, and had nothing to do with a policy determined by the Dutch authorities (see paragraph 37 of the judgment). 2089 [2009] ECR II-245.

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final consumers of electricity and electricity distributors – even though it was channelled through a separate fund.2090 It therefore claimed that following PreussenElektra, the contested measure did not amount to state aid. The General Court held that the sums in question were indeed state resources, not only because they are under constant state control, but also because they are state property. In this respect, the Court distinguished the case at hand from PreussenElektra by arguing that in the latter case “apart from the creation of the legal obligation to purchase at a minimum price, the State had not played any role in the collection and/or redistribution of the funds in question.” By contrast, in Iride, the funds were collected and managed by a fund, which was a public body, before being redistributed to the recipient.

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In 2013, the Court of Justice again was seized by a national judge on the issue of state resources in the energy sector. In Case C-262/12 Vent de Colère the question was whether a mechanism for offsetting in full the additional costs imposed on undertakings because of an obligation to purchase wind-generated electricity at a price higher than the market price that is financed by final consumers, must be regarded as an intervention by the State or through state resources within the meaning of Article 107(1) TFEU.2091

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In this case, the sums intended to offset the additional costs arising from the obligation to purchase imposed on the undertakings are collected from all final consumers of electricity in France and entrusted to the Caisse des dépôts et consignations (CDC) – a public body – under a mandate from the French State, that provides administrative, financial and accounting management services for the national regulator (Commission de régulation de l’énergie – CRE). The CDC also determines late payments or defaults in payment by final consumers and reports them to the regulatory authority. The Court held that, “the sums thus managed by the Caisse des dépôts et consignations must be regarded as remaining under public control.” All these factors were taken to distinguish the present case from the set of facts at issue in PreussenElektra. In particular, according to the Court of Justice, “… the funds at issue [in Preussen Elektra] could not be considered a State resource since they were not at any time under public control and there was no mechanism, such as the one at issue in the main proceedings in the present case, established and regulated by the Member State, for offsetting the additional costs arising from that obligation to purchase and through which the State offered those private operators the certain prospect that the additional costs would be covered in full” (para. 36). 2090 See also for a similar approach, the GC s ruling in the Alcoa case, loc. cit. 2091 EU:C:2013:851, paras. 34 and 35.

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In the NOA, the Commission has relied on the Essent case to make the following points: –

“subsidies financed through parafiscal charges or compulsory contributions imposed by the State and managed and apportioned in accordance with the provisions of public rules imply a transfer of State resources, even if not administered by the public authorities” (para. 58); and

–

“a transfer of State resources is present where the charges paid by private persons transit through a public or private entity designated to channel them to the beneficiaries. For example, this is the case even where a private entity is appointed by law to collect such charges on behalf of the State and to channel them to the beneficiaries, but is not allowed to use the proceeds from the charges for purposes other than those provided for by the law. In this case, the sums in question remain under public control and are therefore available to the national authorities, which is sufficient reason for them to be considered State resources”. (paras. 63-64)

It is therefore apparent that the relevant factor is not the origin of the resources but the degree of control. The GC has so far upheld the Commission’s approach. –

In Case T-251/11 Austria v Commission,2092 the GC dismissed Austria’s challenge against a 2009 decision concerning Austrian law to support production of electricity from renewable energy sources,2093 where the Commission found that the system at hand differed significantly from the PreussenElektra scheme to the extent that the body in charge of administering the funds was and should remain subject to strict monitoring and financial support from the State. Moreover, even if the entity administering the funds was private, this did not provide a sufficient basis to consider that the financial resources channelled through it were of private nature and not imputable to the State. The GC upheld the decision, confirming that the Commission had correctly identified a number of elements in the Austrian system that established considerable state involvement in the operation of the system.

–

In case T-47/15, the GC heard Germany’s challenge against the Commission decision from 2014 on the German EEG 2012, the German law to support energy from renewable energy sources, which had been crafted after the

2092 Judgment of 11 December 2014, Austria / Commission (T-251/11) ECLI:EU:T:2014:1060. 2093 See Case C 24/2009 (OJ [2009] C 217/12).

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PreussenElektra ruling as a series of bilateral payment obligations between obliged parties.2094 The GC dismissed Germany’s challenge, holding that “… it must be held that the funds generated by the EEG surcharge and administered collectively by the TSOs remain under the dominant influence of the public authorities in that the legislative and regulatory provisions governing them enable the TSOs, taken together, to be assimilated to an entity executing a State concession” (para. 94). By judgment dated March 28, 219, in case C-405/16 P, the Court of Justice overturned the lower court’s ruling.2095

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The adoption of national emission trading schemes has given rise to a number of issues, in particular whether the allocation schemes involved can amount to a burden on state resources and if so whether the mechanisms for trading can produce selective benefits. This debate extended to whether the allocation schemes foreseen under the EC Directive 2003/67 on the European wide greenhouse gas emission allowance trading, which originally entered into force in October 2003, also gave rise to state aid issues.2096

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In early decisions, the Commission was not definitive on whether the grant of tradeable certificates involved aid, as it seemed to lack State resources. However, the Court of Justice’s ruling in Case C-279/08P clarified this point. The background to the case is as follows:

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The measure at issue was a Dutch Nox emission trading scheme. The measure was based on tradable emission credits which were neither direct permits nor mere forms of authorised proof or certification. This system was a form of dynamic cap system – new companies or companies wishing to expand do not have to acquire allowances but they must comply with the relative emission system. The annual allowed absolute emission per facility was calculated inter alia on the energy use of that facility. If the producer exceeded this absolute emission ceiling, it would have to buy Nox credits or borrow the credits of its obligation in the following year, or ultimately, pay a fine. The tradable Nox credits thus contributed directly to the absolute emission standard imposed by the State. Hence the Commission considered the scheme to be comparable to a direct Nox emission allowance allocation. As the producer has an incentive to pay for the 2094 See Commission decision in case SA.33995. The German law was subsequently amended and approved in Commission Decision SA.38632 (2014/N) – Germany: EEG 2014. 2095 See case C-405/16 P. 2096 OJ [2003] L275/32.

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tradable emission documents these will represent a value to it. Furthermore, the Dutch government had an option to sell or auction2097 the emission standards and receive revenue. The credits were provided free of charge, so state revenues were foregone. Finally the scheme was selective as it benefited a selected group of large industrial undertakings. The scheme was therefore considered to constitute state aid and was considered for exemption under the Guidelines on environmental protection.2098 On appeal, however, the General Court quashed the Commission decision because of the measure’s lack of selectivity.2099 The Court found that the criterion for application of the measure in question was an objective one, without any geographic or sectoral connotation. Moreover, since the measure in question was aimed at the undertakings which are the biggest polluters, that objective criterion was furthermore in conformity with the goal of the measure that is the protection of the environment, and with the internal logic of the system. 2100 But in 2011, the ECJ took a different approach.

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First, the Court of Justice held that the scheme was selective as it treated large and small polluters, who were in competition with one another, differently. Second, the Court of Justice observed that NOx emission allowances were tradable, as the State authorized the sale of these allowances and it allowed those undertakings which emitted a surplus of NOx to acquire from other undertakings the missing emission allowances. This created a market for the allowances. By making the allowances tradable, the State conferred on them a market value. Accordingly, the award without consideration of freely tradable emission rights involved State resources.

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4.

Imputability

In Case C-482/99 France v Commission (“Stardust Marine”),2101 the Court, following the AG, held that even although resources which may eventually be at the disposal of the State may be deemed to be “State resources” it is also necessary to show that the actual deployment of those resources for the benefit 2097 See further M. Konings, Emission Trading – Why state aid is Involved, Competition Policy Newsletter, nr. 3, autumn 2003, pp. 77-79. 2098 Commission Decision C(2003) 1761 final of 24 June 2003 on State aid N 35/2003 concerning the emission trading scheme for nitrogen oxides notified by the Kingdom of the Netherlands. 2099 Case T-233/04 Netherlands v Commission ECR [2008] II-591. 2100 Case T-233/04, cit., paragraphs 84-100. 2101 ECR [2002] I-4397.

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of a particular undertaking can be attributed to some form of government decision. According to Advocate General Jacobs’s Opinion, the reason why in most of the cases concerning aid financed through public undertakings the origin of the resources was not at issue was that it was accepted law that, as long as the resources were under the control of the State and the economic burden of the measures was ultimately borne by the State, then this was sufficient for the purposes of Article 107(1) TFEU. Therefore, the funds used by the two subsidiaries of the state-owned Credit Lyonnais, SBT and Altus, to finance the measures in favour of Stardust were “state resources” within the meaning of Article 107(1) TFEU.

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However, the Advocate General was of the view that something more was still required: “... where aid is granted under the second alternative “through state resources” the measures must be the result of action of the Member State concerned. That is confirmed by the title of the relevant section “Aid granted by States” which suggests that in all cases the measure must be ultimately imputable to public authorities” (paragraph 54). As to the Commission’s objections that such an approach would conflict with the established view that aid had to be assessed in accordance with its effects and not its aims, the Advocate General responded that this test was indeed appropriate where it was established that a state measure was at issue. He observed that the case raised the preliminary question of whether the measures at issue were actually state measures (paragraph 75). Merely “organic” forms of public control over such resources are not in themselves sufficient. Therefore, the Court annulled the Commission’s decision that capital injections made by two subsidiaries of a publicly-owned bank, Credit Lyonnais, to the French charter boat company, Stardust, amounted to aid in that case.

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In any event, it would appear from paragraph 52 of the Court’s ruling in “Stardust” that it cannot be expected for the Commission (or an eventual third party such as a competitor) to establish the actual involvement of the State in a particular decision. The Court stated that, even if a State is in a position to control a public undertaking and exercise a dominant influence over it, “actual exercise of that control in a particular case cannot be automatically presumed … It is also necessary to examine whether the public authorities must be regarded as having been involved in one way or another, in the adoption of those measures”. The Court suggested that, whilst it would not be necessary to require proof of a specific incitement to take the aid measures in question, it must be accepted that the imputability to the State of an aid measure taken by a public undertaking may be inferred from certain indicators arising from the circumstances in which the measure was taken. 716

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Recalling its earlier ruling in Case 67/85 Van der Kooy (preferential gas tariffs for Dutch greenhouse growers),2102 the Court suggested that the fact that the body in question could not have taken the contested decision without taking the requirements of the public authorities into account would be indicative of attributability. A further example would be cases in which the public undertaking had to take account of directives issued by the State. Other relevant factors, including the degree of integration of the public undertaking into the structure of the public administration, and the extent to which that undertaking participated in the relevant market under normal conditions of competition with private operators, are listed at paragraph 56 of the judgment.2103

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The implications for the energy sector of the “Stardust” ruling are significant.

5.135

In two cases concerning alleged preferential energy tariffs, the Court of Justice had no difficulty in reaching the conclusion that the decision by the publicly-controlled gas supplier, Gasunie, to award certain preferential tariffs to particular large consumers, could be attributed to the Dutch government. At the relevant time, the Dutch government enjoyed certain rights of veto over Gasunie’s commercial decisions, and, further, two members of the Gasunie were appointed by the government. This type of structure may be sufficient to establish something more than organic control.2104 Similarly, in the French regulated tariff case, the Commission, following the Stardust Marine jurisprudence, imputed to the State a tariff adopted by EDF.2105

5.136

Finally, in September 2017 (case C-329/15 ENEA) the Court of Justice handed down a judgment on a request for a preliminary ruling on a Polish support mechanism for renewable energy sources.

5.137

The national judge asked the Court to clarify whether State resources were present in a system whereby undertakings selling electricity to end users, including producers and suppliers acting as intermediaries, were obliged to purchase a quota of their total sales of electricity (in the case at issue, a minimum of 15% for the year 2006) from cogeneration. According to Polish law, the president of the regulatory authority had the power, when approving the tariff charged by electricity companies, to fix the price of electricity produced by cogeneration at a level that he considered reasonable when calculating the maximum price that

5.138

2102 ECR [1988] 219, paragraph 36-38. 2103 For a further discussion of “Stardust”, see L. Hancher, CMLRev 2003, vol. 40, nr 3, pp. 739-751. 2104 Case C-56/93 Belgium v Commission [1996] ECR I-0723 and Case C-181/97 Van der Kooy ECR [1999] I-483. See also Case C-242/13 Commerz Nederland, 17 September 2014, ECLI:EU:C:2014:2224. 2105 See Commission opening decision in C 17/2007, and its final decision in this case, OJ 2012 C398/24.

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could be charged when selling electricity to end users. However, there was no guarantee that the tariff set by the regulator would cover in full the price for the purchase of electricity from cogeneration. Thus, the financial burden resulting from that purchase obligation could remain on the obliged undertakings. And it was clear that in certain cases, electricity suppliers had purchased electricity produced by cogeneration at a higher price than that charged to end users, which resulted in extra costs for them.

5.139

After holding that the Polish case was different from Essent and Vent De Colère!, the Court dwelled on a specific feature of the Polish sector: most of the undertakings bound by the purchase obligation were public undertakings. According to the plaintiff, this circumstance justified holding that the resources for purchasing electricity from cogeneration were State resources. In dismissing this argument, the Court of Justice started by recalling the Stardust case-law. It then went on to hold that “the mere fact that the State held the majority of the capital in some of the undertakings subject to the purchase obligation does not lead to the conclusion that, in the main proceedings, the State exercised a dominant influence that enabled it to direct the use of the resources of those undertakings … It appears that the purchase obligation applied equally to all electricity suppliers, regardless of whether their capital was predominantly held by the State or by private operators” (paras. 32-33). As a consequence, the Court held that the Polish measure at issue was not financed by State resources, even although in reaching this conclusion it relied on the case –law typically used in the context of imputability – the Stardust case-law.

4.1 Imputability and Taxation on Energy Products 5.140

Following prolonged negotiations, the Community finally agreed on EC Directive 2003/96 on the taxation of energy products in late 2003.2106 One problematic aspect in the negotiations leading up to the adoption of this measure was the inter-relationship between certain tax reductions/exemptions and the EC state aid rules. In this respect the compulsory or facultative nature of certain tax exemptions/reductions must be considered. If the tax exemption derives from a Community measure such as a Directive, without leaving any scope for discretionary application at national level, the measure is not imputable to the state and cannot therefore be considered to be a state aid. For example, Council Directive 92/81 provides that mineral oils injected into blast furnaces for the purpose of chemical reduction as an addition to the coke used as a principal fuel, are subject to a Community-wide mandatory exemption. In 2106 OJ [2003] L283.

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Case T-351/02 Deutsche Bahn, the German railway company had complained to the Commission that the exemption granted under this directive for aviation fuel, as implemented into German law, was distorting competition between rail and air services. The Commission replied that the exemption stemmed from the implementation of the EC Directive and was not a grant of aid by Germany. The Court confirmed the Commission’s standpoint. It recalled that it was not sufficient for the purposes of Article 107(1) TFEU that the aid had been granted through state resources – it must also be imputable to the state. These are separate and cumulative conditions.2107 Where however, the measures concerned result from the national system, they will have to be assessed under the state aid rules.2108 A case in point is Article 4(2) of the Directive, which allows Member States to add all indirect taxes levied on the quantity of energy products.2109

5.141

The conditions under which Member States can grant tax reductions or exemptions from a harmonised environmental or energy tax, such as foreseen in the Energy Taxation Directive 2003/96, were defined in Section 3.7 of the 2014 Guidelines and Art. 17 of the Energy Taxation Directive. This latter article makes provision for tax reduction on the consumption of energy products for energy-intensive business.2110 See also Book chapter 5.

5.142

4.2 Imputability and Power Purchase Agreements (PPAs) The issue of imputability also came to the fore in connection with the PPAs cases in Poland and Hungary, described above at book paragraph 5.91.2111 The Commission concluded that the signature of PPAs was a political decision taken in the view of meeting the public policy objectives, such as the security of supply, the modernisation of the infrastructure of power generation and the limitation of negative effects in relation to the outdated processes of power generation. In particular, the PPAs were attributable to the state as they pursued general policy objectives of the state, formulated at privatisation. This finding was confirmed by the GC: “In that regard, it cannot be required that it be demonstrated, on 2107 Case T-351/02 Deutsche Bahn v Commission [2006] ECR II-1047. 2108 See Case C-5/14 of 4 June 2015 with respect to a special levy on nuclear materials in Germany. 2109 See for the problems this can cause, the Commission s decision on the Swedish eco-tax and energy tax system, NN 3/B/2002 where it concluded that it was necessary to open proceedings as regards the full exemption for the electricity tax for the manufacturing sector. See further, J. Lannering and B. Renner-Loquenz, Competition Policy Newsletter, nr 3 autumn 2003, pp. 75-76. 2110 See N 190A/2005 – United Kingdom, Modification of the Climate Change Levy, Commission Decision of October 5, 2005. 2111 Commission Decision 2009/609/EC of 4 June 2008 on the State aid C 41/05 awarded by Hungary through Power Purchase Agreements OJ 2009 L 225, p. 53.

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the basis of a precise inquiry, that in the particular case the public authorities specifically incited the public undertaking to take the aid measures in question. For those reasons, it must be accepted that the imputability to the State of an aid measure taken by a public undertaking may be inferred from a set of indicators arising from the circumstances of the case and the context in which that measure was taken”.2112

5.

The concept of advantage

5.144

The core of the concept of state aid is that it confers an economic advantage on the (potential) recipient – that is an advantage that the recipient would not enjoy under normal market conditions. Combined with the Courts’ insistence that the form of the measure is irrelevant and that it is the effect of the measure that is of key importance, this means that a wide variety of state actions can potentially fall within the scope of the Treaty state aid regime, provided of course that the cumulative criteria as set out above are met.

5.145

The three examples below are illustrative of the Commission’s approach to this issue in the energy sector. (i)

5.146

The Concept of Advantage in the Hungarian and Polish PPAs

In the Hungarian and Polish decisions on long term power purchase agreements (PPAs), in order to determine whether these contracts as a general system provided an economic advantage to power generators, the Commission had to assess whether, via the PPAs, generators obtain economic advantages that they would not obtain from the market. PPAs could provide eligible generators with an advantage if the parties to these agreements are placed in a better economic position than other companies. Even though the details of individual PPAs may vary, in the Commission’s view, all the PPAs were structured around a core principle: the mandatory purchase of most (sometimes all) of the electricity generated by the companies concerned, at a price reviewed periodically in accordance with the principle that the total costs (fixed and variable) of generating electricity, plus a profit margin, are passed on to the consumer.2113 2112 T-468/08 Tisza v Commission, 30 April 2014. ECLI:EU:T:2014:235. 2113 The Polish electricity regulator, URE, indirectly retained the right to check whether the costs charged to PSE were justified and reasonable, but the Commission held that in practice URE used this power only to check that the costs were actually linked to electricity generation. See Poland: Commission Decision of 25.09.2007, OJ [2009] L83/1. Hungary: Commission Decision of 04.06.2008, OJ [2009] L225/53.

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The core principle as described above is applied for the whole duration of the PPA, which lasted in the majority of cases for more than 15 years. This meant that, during this period, the commercial risk associated with operating the power plants was borne by the buyer of the electricity, i.e. PSE in Poland and MVM in Hungary. These are the typical risks that any power generator without a PPA would bear itself. The longer the period is, the greater the value of the guarantee, since it protects against a risk whose occurrence is increasingly unpredictable. In the Hungarian case, the Commission dismissed the impact of the regulatory framework, which divided the Hungarian market into two distinct sectors, so that the generators were not in fact free to sell directly into the “utility” part of the market, but were required under national law to sell to MVM, the single buyer, and until 2004, at regulated prices.

5.147

The Commission considered in the Polish case that this arrangement amounted to a guarantee, which placed the beneficiaries in a better economic situation than other companies on the market and therefore provided an advantage to the relevant power plants. Admittedly, the PPAs were not a traditional form of guarantee but simply provided for payment by the State-owned and Statecontrolled PSE of the investment costs and the most important (if not all) operating costs of the power plants which are parties to the agreements.

5.148

In the Commission’s view, the PPAs transferred more risks to the Single Buyer than standard commercial practices (as applicable as of May 2004) and prevented both MVM and PSE from diversifying their portfolios and furthermore forced both companies to purchase more than they would need in the future.

5.149

The Commission further analysed several other aspects of the PPAs – noting that they were concluded only with selected power generators. At the time they were concluded, there were other electricity generators that did not benefit from the PPA rules. More were set up in later years, and new investments were under way without PPA support.

5.150

On the basis of its assessment of the Hungarian PPAs, compared with “standard practices” elsewhere in Europe, the Commission concluded that: “the main terms and conditions of the purchase obligation enshrined in the PPAs, i.e. the capacity reservations and minimum guaranteed off-take by MVM under such conditions as to ensure the return on investment of the power plants by shielding them from the commercial risks of the operation of their plant, constitute State aid within the meaning of Article 107(1). This State aid is achieved by the combination of the capacity reservations, the minimum guaranteed off-take, the pricing mechanism based on

5.151

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a capacity fee and an energy fee meant to cover fixed, variable and capital costs, over a long duration beyond normal commercial practice” (at para. 340).

5.152

Given that, unusually, it had limited its assessment to the period after May 2004, i.e. the date of Accession, the Commission did not consider it necessary to establish whether the business case for the PPAs might have been different in the mid 1990s and whether the PPAs would have indeed met the commercial objectives of MVM and PSE at the time they were concluded. Surprisingly, even taking 2004 as the starting point, the Commission failed to consider the disadvantages for buyers relying on spot markets and short term contracts – that is the exposure to volatility and liquidity risk.

5.153

A number of the Hungarian generators appealed to the General Court seeking annulment of the Commission decision, which was however upheld by the GC in three separate judgments.2114 On appeal, in Case C-357/14, the AG Opinion advised the Court to annul the Commission decision, arguing that “If, in the context of applying the private investor test, it is necessary to ask the question whether, at the time of accession, a hypothetical market operator would have acted in the same way as the State had acted, then the relevant factual circumstances which dictated the grant of the aid measure at issue cannot be excluded solely because they precede accession, since that would place the State and the hypothetical market operator in situations that are not comparable, which could obviously lead them to take different decisions” (para. 121). However, the Court of Justice upheld the GC’s judgment, holding that the Access Treaty set out a special – and very strict – rule, which takes precedence over normal provisions on the relevant date to assess aid.2115 2114 Case T-80/96 and T-182/09 Budapesti, 8 February 2012; Case T- 468/08 AES Tisza, 30 April 2014, and Case T-179/09 Dunamenti, 30 April 2014. 2115 Case C-357/14P, paras. 61 et seq. (“ ... it must be observed that, as stated by the General Court in paragraph 62 of the judgment under appeal, it is apparent from Chapter 3 of Annex IV to the 2003 Act of Accession that the States which were members of the European Union before 1 May 2004 wanted to protect the internal market against measures containing State aid, which had been introduced in the candidate countries before their accession to the European Union and which could potentially distort competition, by making those measures subject, as from 1 May 2004, to the rules relating to new aid, if those measures did not come within the exceptions specifically listed in that annex. & It follows that the finding made by the General Court in paragraph 65 of the judgment under appeal, that the date of the accession of Hungary to the European Union is the date on which an aid measure still applicable after that date must be assessed in the light of the four conditions laid down in Article 87(1) EC, is not vitiated by any error of law. As the General Court correctly held in the same paragraph, the effect of any other conclusion would be to render meaningless the objective pursued by the authors of the Accession Treaty, as recalled in paragraph 61 of this judgment. If the approach advocated by Dunamenti ErQmq in the second ground of appeal were to be accepted, the consequence would be that the Commission would not have the power to review, in the case of a Member State such as Hungary, which acceded to the European Union on 1 May 2004, any measure adopted before that date which did not constitute State aid at the time of its adoption but which, subsequently, became State aid and remains so after that date”).

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(ii)

The tariff cases

In the 2007 Sector Inquiry,2116 the Commission took issue with regulated supply tariffs because “such supply tariffs have adverse effects for competition and thus for consumers in the longer run”, mentioning that it had received a complaint concerning Spanish tariffs and that it was investigating whether “any violations of state aid or antitrust rules have taken place”.2117

5.154

Indeed, in January 2007 the Commission started a state aid investigation on the Spanish regulated tariffs,2118 and in June of the same year it also started a state aid investigation on regulated supply tariffs in France.2119

5.155

France The Commission closed its investigation into the French legislation in 2012 with a positive decision with a number of conditions.2120 The French authorities had entered into the commitment on 12 January 2012 to put an end to regulated tariffs in 2015, whereas the so-called return tariffs – which allowed customers to return to the incumbent provider, EdF, were already abolished in July 2011. Spain As for the Spanish legislation, it was not until February 2014 that the Commission adopted two separate decisions finding that the particular tariff arrangements in Spain at the time of the complaint did not confer an economic advantage on either electricity supply companies2121 or large energy consumers.2122 With respect to the former decision, the Commission reasoned that the supply companies were merely intermediaries and received only a compensation for the services they performed. With respect to the latter decision – regarding large consumers – the Commission considered that it had been demonstrated that, firstly, the companies that received electricity at integral regulated tariffs did not obtain benefits from the level of these tariffs and, secondly, bearing in mind Spain’s undertaking to amend the measure, that interest will be charged at an appropriate rate for the delay by certain companies in paying part of their electricity bills in 2005. 2116 2117 2118 2119

See DG Competition report on energy sector inquiry (SEC (2006)1724, 10 January 2007). See Sector Inquiry, paras. 610-612. See Case C 3/2007, OJ [2007] C 43/9. See Case C 17/2007, OJ [2007] C 164/9. In 2009, the Commission took note of a change in the original measure under investigation and adopted a decision extending the scope of the investigation (see OJ 2009 C 96/18). 2120 SA.21918 (C 17/07) (ex NN 17/07) implemented by France Regulated electricity tariffs in France [2012] OJ C 398/05. 2121 SA.36559 (C 3/07) (ex NN 66/06) implemented by Spain- Spanish Electricity Tariffs: distributors. 2122 SA.21817 (C 3/07) (ex NN 66/06) implemented by Spain - Spanish Electricity Tariffs: consumers.

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5.158

Italy The Commission also adopted a final decision in a case relating to tariffs for certain energy-intensive users in Italy (the Alcoa case).2123

5.159

The conditions under which Alcoa purchased electricity had first been assessed by the Commission in 1996.2124 At that time, the Commission examined the electricity tariff, which ENEL charged the plants in question. The Commission took the view that the tariffs did not constitute state aid because ENEL was behaving like an operator acting under normal market conditions. This decision was in line with earlier case-law and decision practice on electricity tariffs, notably the 1988 Van der Kooy judgment and the 2000 EDF decision.2125 Under this line of cases, it was established that preferential electricity tariffs, i.e. tariffs made available only to certain consumers, did not confer an advantage, and hence fell outside Article 107(1) TFEU, where they were justified on commercial grounds. In the 1996 Alcoa decision, the Commission was satisfied that this requirement was met because the tariff covered the marginal cost and at least a proportion of the fixed costs of the supplier, in circumstances where there was overcapacity and Alcoa was amongst the largest consumers.

5.160

Although the economic circumstances of supply and demand had not changed since its prior assessment, the Commission took issue with a change in the mechanism of the tariff. This is because the measure no longer consisted in ENEL applying a tariff for the supply to Alcoa, which was equivalent to a market price, but in the grant of a reimbursement by a public fund, financed through state resources (in order to offset the difference between the price paid to the supplier and the tariff approved by the Commission in 1996).

5.161

Contrary to its 1996 Alcoa decision and the 2000 EDF decision, in the 2009 Alcoa decision the Commission was no longer concerned about the level of the tariff. According to the Commission, the mere existence of a component designed to mitigate the price paid by the consumer was in and of itself conferring an advantage on the latter, regardless of (i) the price actually charged by the supplier; and/or (ii) the level of support provided by the State. In other words, the Commission seemed minded to regard as a measure of aid any State intervention, which might diminish electricity costs. 2123 See Case C 36/B/2006, OJ [2010] L227/62. See also Case T-332/06 Alcoa Trasformazioni v Commission [2009] ECR II-29, in relation to Alcoa’s unsuccessful challenge to the Commission decision to open the formal investigation. The ECJ upheld the GC’s ruling in Case C-194/09P [2011] I-6311. 2124 OJ [1996] C 288/4. 2125 See Case 67/85, Van der Kooy v Commission [1988] ECR 219; and Commission decision of April 11, 2000 on the measure implemented by EDF for certain firms in the paper industry (OJ [2001] L 95/18).

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Alcoa appealed this decision unsuccessfully to the General Court in Case T-177/10.2126 The GC held that Alcoa had enjoyed an economic advantage as result of the introduction of the tariff mechanism in question, and that the Commission was not further required to carry out complex investigations as to the economic impact of the tariff. The ECJ confirmed the GC judgment (Case C-604/14P).2127

5.162

(iii) Favourable licensing agreements – the MOL ruling 2128 From 1993, all mining activities in Hungary were regulated by the Mining Act, which inter alia, established the rules for fixing the mining fees which must be paid to the State. In 2007, the Mining Act was amended so that the general mining fees were increased with effect from 1 January 2008. The fees were subsequently reduced again with effect from 1 January 2009. In December 2005, the Minister in charge of mining issues and MOL – the Hungarian oil and gas company – had concluded an agreement for the extension of MOL’s mining rights for 12 of its hydrocarbon fields (the 2005 agreement). This agreement fixed the fees to be paid by MOL to the State throughout the 15-year duration of the agreement, and provided that the fees set by the agreement could not be changed. In November 2007, the Commission had received a complaint that this agreement had operated to shield MOL from the 2007 increases in mining fees and was therefore state aid. As the Commission was concerned that the combined effect of the agreement and the recent increase in fees exempted MOL from taxes that had to be paid by its competitors, thereby conferring on MOL an unfair competitive advantage – it decided to open an in-depth investigation. The Commission finally concluded that the two measures constituted state aid within the meaning of Article 107(1) of the TFEU and ordered Hungary to recover aid in the amount of EUR112 million from MOL. On appeal by MOL, in November 2013, the GC annulled the Commission’s decision and the latter in turn appealed the GC’s ruling to the ECJ.

5.163

The Commission criticised the GC’s analysis of the legal framework governing the conclusion of the 2005 agreement and, in particular, the discretion enjoyed by the Hungarian authorities with regard to the choice of whether or not to conclude an extension agreement and with regard to the level of the fee which they set in such an agreement.

5.164

2126 See Case T-177/10 ECLI:EU:T:2014: 897. 2127 See order of 21 January 2016, Alcoa Trasformazioni / Commission (C-604/14) ECLI:EU:C:2016:54. 2128 ECLI:EU:C:2015:362.

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5.165

The ECJ held that the requirement as to selectivity must be clearly distinguished from the detection of an economic advantage, and it is for the Commission to establish that that advantage specifically benefits one or more undertakings, in particular, by showing that the relevant measure creates differences between undertakings that, with regard to the objective of the measure, are in a comparable situation. The advantage must be granted selectively and it must be liable to place certain undertakings in a more favourable situation than that of others. The ECJ also found that the GC was correct to hold that the fact that the rates set under the 2005 agreement were the result of negotiation between MOL and the Hungarian authorities did not suffice to confer on the agreement a selective character. The situation would have been different only if the Hungarian authorities had exercised their margin of assessment in such a way as to favour MOL by agreeing to a low fee level without any objective reason (having regard to the rationale of increasing fees in the event of an extension of authorisation and to the detriment of any other operator having sought to extend its mining rights or where there was concrete evidence that unjustified favourable treatment had been reserved to MOL).

5.166

If the measure in question constitutes an economic or financial advantage for the recipient, it must then be ascertained whether or not that benefit is financed by or through state resources. This requirement has generated complex litigation in the energy sector given that many state objectives are financed not directly by the State but by indirect means, such as levies and charges.

5.1 Disposal of public land or assets at less than full market value 5.167

It is the essence of state aid that the recipient undertaking has received a gratuitous benefit – that is an advantage or benefit it would not have received in the normal course of business. In this respect the price at which the State makes available land or infrastructure assets to energy undertakings or the price at which, for example, it disposes of strategic assets such as network or pipeline facilities, may be of importance in determining whether or not an element of aid is involved. An under-valuation of such assets could lead to the conferral of a benefit to the eventual purchaser. By the same token, if the state were to purchase assets from an energy undertaking at an above-market value, this might also confer a benefit.

5.168

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liberalisation of the Dutch electricity sector. In this case the Commission was satisfied that the eventual price paid to the former owners of the networks – the Dutch production companies – was based on an independent valuation of the market value of those assets.2129

5.2 State participation and the market economy investor test2130 5.2.1 Introduction The State may intervene in the economy in many guises: through the exercise of its public prerogative powers (for example to levy taxes) or through its ownership or control of certain assets or through decisions to purchase certain goods and services from the market. It is important to distinguish these two separate roles of the State in understanding the jurisprudence of the European courts and the decision-making practice of the Commission on state aid. The active participation of the State in the market economy involves the use of state resources but this does not automatically lead to the conclusion that state aid is involved.

5.169

It is established law that not each and every participation by the State in the capital or the operations of a company (private or public) may automatically be classified as aid. Where, for example, the State owns a shareholding in an undertaking it may under certain conditions make state resources available, in the form of capital injections for example, to that undertaking without falling foul of Article 107(1) TFEU. The Treaty takes a neutral position with regard to national property laws and hence state-owned or controlled enterprises must be treated in the same way as private enterprises. It is in this context that the Courts have developed and applied the so-called “private market investor test or market economy investor test” (MEIT). In recent years, the Courts have extended the logic of this test to embrace a related “private purchaser test” and a “private creditor” test. Indeed the test is applied to all types of measures, including government capital injections, loans guaranteed by the State, sales of government assets, and privatisations, state guarantees and waivers of debt by the State.

5.170

The MEIT does not however, extend by its very nature to situations where the State is acting in the exercise of its public powers – that is using its state

5.171

2129 Commission Decision related to Dutch stranded costs, 25.07.2001, discussed further below, paras 5.370 and 5.371. 2130 See for a general introduction to the relevant Commission Communication of 1993 and its application up to 1999, Hancher, Ottervanger and Slot, EC State Aid, Sweet and Maxwell, 4th ed, 2012, Chapter 8.

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prerogatives in areas such as taxation or social security.2131 With respect to the classification of these types of measures as state aid or not, the appropriate test is normally whether the measure in question is selective, as explained below.

5.172

Although the test is often criticised as inadequate or as impracticable, it has proved difficult to find a more suitable, alternative benchmark. The major limitation in the test is that the State will inevitably be in a different position from any hypothetical private investor. It has theoretically almost unlimited resources, and thus a higher credit rating than most.2132 In the case of very large government investments, particularly in infrastructure, there is often no private investor that could have taken the place of the government. Although the Courts have ruled that the specific interests of the State as such, for example in providing employment or achieving social objectives cannot be taken into account in applying the MEIT to determine if a measure can be qualified as aid or not, it is recognised that there is a distinction between short-term and longterm investments. The Commission also accepts that minority holdings result in different commercial considerations than those where an investor is a majority shareholder.

5.173

In general, the Commission attempts to examine whether, given all the circumstances in question, a private investor would have been prepared to shoulder the risk of the investment in question and on the same commercial terms. In Case T-296/97 Alitalia, the Court confirmed that a capital contribution from public funds normally satisfies the test of a private investor operating in the normal conditions of a market economy and does not imply state aid if, inter alia, it was made at the same time as a significant capital contribution on the part of a private investor in comparable circumstances.2133

5.174

Private participation in any capital increase by a State (“concomitance”) may be indicative but not conclusive. Participation by employees in the capital of an undertaking does not in itself establish that a capital injection from public funds is not state aid due to the existence of a private investor.2134 According to the ruling of the Court of Justice in Seleco, even a significant participation by private investors is not sufficient in itself to exclude aid.2135 Account must be taken of 2131 See however C-124/10P Commission v EdF, 5 June 2012, discussed below. 2132 Indeed this is recognised explicitly by the General Court in the West LB case at paragraph 272, but the General Court failed to suggest a better approach. See also the Commission’s subsequent decisions on the West LB cases, OJ [2006] L307/1- 134. 2133 Case T-296/97 ECR [2000] II-3871 and case T-296/97 [2000] ECR II-3871. 2134 See Case T-296/97, loc. cit. 2135 Joined Cases C-328/99 and C-399/00, [2003] ECR I-4035.

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all relevant economic and legal facts. Where there is no concomitance or an available public benchmark (such as a commercial rating for the borrower), it is always difficult to ascertain what terms a private investor would have accepted, as priorities and objectives of investors inevitably vary. In the NOA, the Commission has set out its position in the following terms: –

In certain situations, the transaction’s compliance with market conditions can be directly established through transaction-specific market data: (i) where the transaction is carried out ‘pari passu’ by public entities and private operators; or (ii) where it concerns the sale and purchase of assets, goods and services (or other comparable transactions) carried out through a competitive, transparent non-discriminatory and unconditional tender procedure.

–

In other situations, compliance with market conditions can still be assessed through (i) benchmarking (comparable transactions carried out by comparable private operators in comparable situations) or (ii) other assessment methods, such as, for instance the internal rate of return (IRR) of an investment

5.175

5.2.2 The private investor test or the ‘MEIT’ and investments by State Undertakings As mentioned, given the wide definition of public resources, the MEIT or “MEO”, according to the NOA, also applies to investments made by public undertakings in so far as the resources of these entities can be deemed to be State resources and the measure in question can be attributed to the state, as discussed above.

5.176

In its decision concerning the legality of rebates made by EDF to firms in the paper industry, the Commission considered that EDF had acted in accordance with the MEOP.

5.177

EDF had granted certain advances to paper mills for the purpose of installing electrical infrared paper drying equipment. These advances corresponded to a reduction in the price for electricity normally consumed by the dryer for the duration of the 6 year supply contract. The investigation concerned rebates granted between 1990-1996, i.e. before the adoption of EC Council Directive 96/92 on the internal electricity market, at a time when EDF disposed of

5.178

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overcapacity in nuclear energy. The French authorities demonstrated that EDF covered its variable costs, and at least 35% and on average 57% of its fixed costs. In a situation of overcapacity and in the absence of competition, the Commission considered that a private operator would rather sell an additional unit of electricity without covering the total cost for that unit rather than not sell it all. Hence EDF’s behaviour was justified on commercial grounds, and the rebates did not constitute state aid. It is of interest to note that the Commission emphasised that the decision should be seen in the context of the prevailing circumstances on the French market in the past, and should not be seen as preventing the Commission from examining the creation of the said overcapacity and its implications in the context of the ongoing liberalisation of the electricity market.2136

5.179

The British Energy decision is also illustrative of this strand of cases. In its decision to open a formal procedure against the UK in connection with the aid package to British Energy (BE), the Commission initially formed the view that BNFL, a publicly owned company, was not operating as a private investor in agreeing to re-negotiate a number of nuclear fuel supply contracts with British Energy, but that BNFL’s agreement to conclude more favourable contracts can be imputed to the State. Furthermore, BNFL as BE’s largest creditor had agreed more favourable standstill conditions than those agreed with private creditors2137. In the decision of 22 September 2004,2138 the Commission decided that both the measures concerning fuel cycle agreed with BNFL and the standstill measures were not state aid. The Commission established that BNFL acted in conformity with market creditor principle arguing that BNFL was treated on an equal footing vis-à-vis the private creditors. This further indicated that BNFL did not behave differently in the restructuring plan negotiation than private creditors would have done. Furthermore, the Commission came to the conclusion that BNFL acted independently of the UK government and thus the measures were not imputable to the State.2139

5.2.3 The market investor test and the PPAs 5.180

The application of the MEIT was rejected by the Commission and the GC in the Hungarian and Polish cases.2140 There were two main reasons why the relevant Single Buyer could not have had an economic interest in taking this 2136 2137 2138 2139 2140

IP/00/370, 11.04.2000. OJ 2003 C180/5 at pt 119 et seq. C (2004)3474, OJ L 142/26. See above at para 5.101. C41/05, OJ [2009] L225/53.

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decision without government intervention. In the Polish case, which was not appealed, the Commission held that the very fact that the Polish Government had to decide in PSE’s place that new investments would take place and would benefit from PPAs clearly shows that this decision was mainly based on criteria other than market investor considerations. First, PSE purchased a quantity of energy that it already knew might be surplus to its requirements. The very fact that the Polish Government had to decide in PSE’s place that new investments would take place and would benefit from PPAs clearly showed that this decision was mainly based on criteria other than market investor considerations. It was known that Poland’s accession to the European Union would entail integration into the internal electricity market, liberalisation of which started with the adoption of Directive 96/92/EC. This meant the opening-up of the market to other suppliers competing with PSE, and, accordingly, that PSE might not need all the electricity provided for in the PPAs in the light of changes on the electricity market.

5.181

Second, even for the share of electricity which PSE actually needed, it made no sense for PSE, as the buyer, to undertake to pay the power plants the full costs of generating power, plus a profit margin established such a long time in advance even though it was already known that liberalisation would allow it to choose between different technologies and prices, including those offered by new market entrants using more efficient technologies.

5.182

Buyers have an interest in concluding long-term contracts, argued the Commission, only if these contracts provide them some hedging against fluctuations in the electricity market, and in particular against changes linked to fluctuations in fuel costs. For this reason a buyer would have an economic interest in a long-term contract of this type only if the seller offered to take part of the risk associated with fluctuations in fuel costs or if the generating technology ensured stable fuel costs, as is the case with hydropower plants, and, in certain conditions, nuclear plants.

5.183

The Commission considered that this economic logic was confirmed by the fact that, at the time, there wasn’t any example of private buyers taking long-term contracts without state intervention with plants using fossil fuel and covering all production costs for the same duration as the PPAs (more than 10 years). The Commission found none in its 2007 Energy Sector Enquiry, and none of the interested parties submitted an example of such a contract to the Commission. Similarly, most of the Hungarian generators argued that the PPAs did not confer

5.184

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any advantage to the generators as they corresponded to the normal behaviour of any market economy operator in both MVM’s and the generators’ position. Any private actor in the position of MVM (with legal obligation of security of supply, as a single buyer) would have chosen to enter into the PPAs, and that the advantage out of the PPAs did not go beyond what, in the circumstances of the immature energy market of the nineties in Hungary, was a normal commercial advantage for the parties. Moreover, generators had the legal obligation to enter into an agreement with MVM in order to obtain their operating license. They emphasized that applying the private investor principle should lead the Commission to take account of the legal requirements and economic reality of the time of conclusion of the PPAs.

5.185

With regard to the market economy investor test, in the Hungarian case, the Commission referred resolutely to the relevant time of assessment of the existence of a State aid in the PPAs – i.e. May 2004. The Commission recalled that it did not intend to put into question the necessity of entering into PPAs under the circumstances prevailing at the time of the conclusion of those agreements. This, however, did not in any way mean that the PPAs would not confer an advantage to the generators. None of the interested parties had argued that they would correspond to current market conditions on the internal market.

5.186

Several appeals against the Hungarian decision were lodged before the General Court and two applications for interim measures were dismissed.2141 In its rulings, the GC upheld the Commission’s analysis and found that at the relevant time of assessment (that is, May 2004) the Commission had correctly concluded that a private operator would not have entered into a long term contract under which it would be required to purchase more electricity than it might need. The GC’s ruling in T-179/09 was upheld on appeal.

5.2.4 The EDF rulings 5.187

In Case T-156/04 EDF v Commission the Court was requested to examine the legality of a Commission decision condemning various fiscal measures adopted in the context of the restructuring of EDF in order to remedy the company’s under-capitalisation in relation to its transmission network. The background to the case is the following:

2141 Cases T -80/96 and T-182/09 Budapesti, Feb 2012; T-468/08 AES v Commission; T-179/09 Dunamenti, 30 April 2014 (the latter is now under appeal in Case C-357/14P).

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–

The French government had inter alia waived payment of certain taxes due by EDF following a revision of its accounting system as part of its ‘contrat d’entreprise’ with the French state for the period 1997-2000, and in preparation for the liberalisation of the electricity market as required by EC Directive 96/92. The Commission had considered certain of these measures to constitute aid and had opened a formal investigation under Article 108(2) TFEU.2142

–

In December 2003, the Commission adopted a final decision in which it found that the non-payment of company tax by EDF amounted to aid and directed the French state to recover some 14 billion FFr from EDF. The French authorities claimed that these various measures did not amount to aid but should have been seen as a normal investment. The Commission rejected this argument on the grounds that the private investor principle did not apply in the context of the operation of the exercise of state prerogative powers – including fiscal powers. A state could not combine both roles and functions.

EDF appealed this decision to the General Court. That Court upheld EDF’s plea in this respect. It recognised that the established jurisprudence indeed drew a distinction between the state’s obligations as owner and its obligations in regard to the exercise of its public powers. However, the Court also held that it was necessary to look not only at the form of the measure in question, but also its effect. In this case, the French state was the sole shareholder and was entitled as such to select the most effective means to restructure EDF’s financing – including measures relating to the exercise of its fiscal powers. The Court therefore annulled the Commission’s decision in this respect.2143

5.188

On appeal, the ECJ confirmed that the roles of the state should be kept separate, but that the financial advantage to the beneficiary depends not on the means used to confer the advantage but the amount that it receives. Accordingly, the Court held that the private investor test could be applied even if that advantage has been conferred through a fiscal measure, if on the facts of the case, the Member State conferred that advantage in its capacity as shareholder of the undertaking.2144

5.189

2142 OJ [2002] C280/8. 2143 Case T-156/04 EDF v Commission [2009] ECR II-4503. 2144 Case C-124/10P Commission v EDF, judgment of 5 June 2012, ECLI:EU:C:2012:318, paras 91-92.

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In 2015, the Commission adopted a new decision finding that France’s tax revenue loss was not economically justified from the point of view of a private investor as the expected profitability was too low, and ordered recovery of Euro 1.37 billion.2145 In January 2018, the General Court dismissed EDF’s challenge against the new decision.2146 According to the General Court, the earlier rulings did not imply that the Commission should apply the MEO test; it was for the applicant and France to provide evidence that the State had acted in its capacity as shareholder, thus pursuing an objective of investment comparable by its very nature to that of a private investor.

5.190

The General Court also observed, like the Commission, that the various documents provided by EDF and the French State failed to meet the required standard because they did not contain economic evaluations comparable to those that a private investor would have made before implementing the measure at issue for the purposes of determining its future profitability. On appeal, the Court of Justice confirmed the General Court’s judgment.2147

6.

Selectivity

5.191

As the Courts have confirmed in their review of a Commission decision which held that various aspects of Hungarian mining legislation conferred state aid on MOL, the requirement of selectivity must be clearly distinguished from the concomitant detection of an economic advantage. The Commission must not only show that a measure gives rise to an advantage but it must also establish that that advantage benefits one or more undertakings. In the MOL case, the Commission had adopted a negative decision finding that two agreements between Hungary and MOL exempting the latter from increases in mining fees constituted unlawful state aid.2148 The General Court annulled this decision on the grounds that the Commission had failed to establish that the measures in question were selective.

5.192

On appeal, the ECJ upheld the findings of the GC and ruled that there is a fundamental difference between the assessment of the selectivity of general schemes for exemption which by definition confer an advantage and the assessment of the selectivity of optional provisions of national law prescribing the imposition of additional charge. In cases in which national authorities 2145 2146 2147 2148

SA.13869. See also IP/15/5424. Judgment of 16 January 2018, EDF / Commission (T-747/15) ECLI:EU:T:2018:6. Order of 13 December 2018, EDF / Commission (C-221/18 P) ECLI:EU:C:2018:1009. C1/09, OJ [2011] L34/55.

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impose such charges to maintain equal treatment between operators the simple fact that those authorities enjoy discretion defined by law cannot be sufficient to establish that the scheme is selective.2149 General measures which can benefit the entire economy, such as a lowering of tax rates or interest rates do not create a selective benefit. The Courts have generally found the “selectivity criteria” to be easily met. Hence in Case C-143/99 AdriaWien Pipeline 2150 a tax measure which distinguished between the manufacturing sector and the rest of the economy, including the service sector, was held to be selective. In its judgment in Adria-Wien, the Court held that an Austrian tax measure awarding a rebate on energy taxes charged on supply of natural gas and electricity to undertakings active (i) in the manufacture of goods (ii) in so far as energy taxes exceeded 0.35% of the production value, was in fact a selective measure.

5.193

The Court observed that “undertakings supplying services may, just like undertakings manufacturing goods, be major consumers of energy” and further that “the ecological considerations underlying the national legislation at issue do not justify treating the consumption of natural gas or electricity by undertakings supplying services differently than the consumption of energy by undertakings manufacturing goods. Energy consumption by each of these sectors is equally damaging to the environment.”

5.194

The Court further held that the criterion applied by the national legislation at issue was not justified by the nature or general scheme of that legislation. Therefore the measure was considered to be selective because it was reserved to manufacturing undertakings and was not the result of the limitation expressed in terms of the production value. At paragraph 36 of its ruling, the Court seemed to imply that, if the rebate of the energy taxes had been applied to all undertakings in the national territory regardless of their activity, and insofar as the energy taxes exceeded 0.35% of the production value, the measure would not have been considered as selective.2151 However, in a subsequent decision concerning a modification of the same law, the Commission was required to consider whether a tax rebate on gas and electricity paid to all businesses if the taxes together exceeded 0.35% of their net production value would constitute aid. The Commission considered in its preliminary assessment that, as only larger

5.195

2149 Case T-499/10 EU T:2013:592, upheld on appeal in Case C-15/14 P Commisson v MOL, 4 June 2015. 2150 Case C-143/99 [1999] ECR I-8365. 2151 The Commission subsequently approved the energy rebate tax as a state aid compatible with Article 107(c) TFEU and with the Guidelines for environmental protection. The same law was modified in late 2002 – see OJ 2003 C164/2.

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companies would benefit from this measure, the tax rebate did not constitute a general measure.2152

5.196

Following the Court’s ruling in the Adria Wien case, the Commission reexamined earlier exemptions it had issued for several national eco-tax exemption schemes. In the case of the Danish 10% CO² tax exemption, the Commission had considered this to be a general measure as it was available to all VATregistered companies. On review, it established that the VAT-criterion did not preclude certain categories of companies, for example those in the service sector. The objective of the Danish government when applying the VAT-criterion was to make a distinction between domestic consumers and others. In order to ensure the underlying objectives, a further adjustment was made so that certain types of VAT-registered companies were not eligible for relief if their energy consumption corresponded only to that of a domestic user. That resulted in the exclusion of certain service activities, but the Commission held that this was justified under “the nature or general scheme of the system” and did not render the measure selective.2153

5.197

In the Finnish and Swedish decisions the Commission examined so-called twotier systems where higher targeted tax reductions for energy intensive consumers were available alongside a general tax reduction for most types of companies. The latter types of exemption were considered selective and in the Finnish and Swedish cases the Commission granted an exemption on the basis of Article 107(3) TFEU as it considered the regimes to comply with its Guidelines on state aid for environmental protection.2154

5.198

However, a measure which at first sight might appear selective may be justified by the nature or general scheme of the underlying legislation, and thus escape classification as aid within the meaning of Article 107(1) TFEU. For instance, in 2009, the General Court upheld a Commission decision, which had, inter alia, found that a tax exemption applicable to certain undertakings active in the supply of energy was justified by the nature or general scheme of the system.2155 In Case C-5/14 Kernkraftwerke Lippe-Ems, the ECJ ruled that an excise duty imposed on nuclear fuel as opposed to other fuels was not selective as only nuclear fuel generates radioactive waste.2156 2152 OJ 2003 C164/2 at p. 3. 2153 N841, OJ 2002/13. 2154 Finland, NN 75/2002, OJ [2002] C309/17, NN3/A/2001 and NN 4/A/2001. See also M. Infeldt, EcoTax Reliefs, Competition Policy Newsletter, nr. 1, Spring 2003 at pp. 103-4. 2155 Case T-189/03 AEM Brescia SpA v Commission [2009] ECR II-1831. 2156 Judgement of 4 June 2015.

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Whether a tax measure is justified by the general nature of the scheme of the tax system or for reasons relating to the logic of the tax system, also remains a highly controversial area. The Commission incorporated this latter principle in a Notice from 2008 on direct business taxation: accordingly, an exception to the application of the tax system will not involve state aid at all, provided that it derives directly from the basic or guiding principles of the tax system in the Member State.2157 It is then necessary to determine the common system applicable and then seek the justification for the exception. This could imply that the complexity of eco-taxes as well as energy saving or efficiency tax measures could justify a more flexible approach.

5.199

However, as demonstrated by the Adria-Wien judgment, it cannot be guaranteed that the Court will be easily convinced. In that case the Court was not impressed by the Austrian government’s argument that the Court should not consider the introduction of the energy taxes and the rebates as an isolated measure but in the broader context of the overall package intended to consolidate the budget, also taking into account the disproportionate impact of the taxes on certain sectors.2158

5.200

Similarly, the Commission practice has been criticised as it does not always allow for a clear indication on what may fall within the nature or general system of a scheme. For example in its assessment of the UK Climate Change Levy’s dual-use exemption scheme, the Commission opened a formal investigation because of its doubts about the effects of the “ dual-use” exemption. The levy in question was imposed on the non-domestic use of energy for fuel purposes but not on energy products used for non-fuel purposes or on energy products that provide fuel as a by-product (dual use). The Commission approved an extended exemption, considering the scheme to be justified by the logic and nature of the system, by reference not only to the environmental aims of the UK legislation, but also taking into account the competitive situation of the affected products on the market.2159 However, in a later decision on the environmental tax imposed by the UK government on the commercial exploitation of rock, sand and gravel when used as an aggregate for construction purposes – the so-called Aggregates Levy, the Commission did not raise objections to a number of exemptions on materials that arise as by-products or waste products from certain processes. The Commission found that these exemptions fell within the general scheme of the levy and thus did not constitute aid.2160

5.201

2157 See also in this respect the ruling of the English Court of Appeal in R v Commissioners of Customs and Excise, ex parte Lunn Poly [1999] EuLR 653. 2158 Case C-143/99 Adria-Wien pipeline and Wiesersdorf & Peggauer Zemerswerke [2001] ECR I-8365. 2159 Case C18/01, IP/02/491. 2160 Case N 863/01, C (2002) 1478, of 24.04.2002. See also for a discussion of the UK litigation on the Aggre-

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5.202

The Commission’s decision was upheld by the Court, but subsequently annulled by the Court of Justice in the British Aggregates’ judgment of 2008.2161 In the NOx permits case, by contrast, the General Court had annulled a Commission decision, because it found that the Commission erred when it considered that the measure – amenable to a tax exemption- was selective.2162 On appeal the ECJ reversed this ruling and upheld the measure to be selective.

5.203

The issue of selectivity has come to the fore in 2 decisions concerning Germany, issued in 2017 and 2018.

5.204

In December 2017, the Commission issued a decision on reductions/ exemptions from the EEG surcharge (used to provide support for the production of renewable electricity) for electricity generated by self-suppliers.2163 The Commission first defined the reference system under the applicable legislation as one where “the EEG surcharge is expressed in kWh and is in principle to be levied on each kWh of electricity consumed” (para. 91). The Commission went on to assess whether reductions and exemptions for certain customers derived directly from the intrinsic basic or guiding principles of the reference system or whether they were the result of inherent mechanisms necessary for the functioning and effectiveness of the system. For instance, as regards new selfsuppliers (i.e. having entered into operation as of August 2014) using renewable energy sources, the Commission found that the exemptions and reductions did not qualify as State aid as they were in the logic of the German renewable energy surcharge system.

5.205

In May 2018, the Commission issued a negative decision with recovery in connection with German rules providing for a full exemption from network charged for base load consumers.2164 Network charges are part of the usual electricity costs that any electricity user connected to the grid has to pay. These charges serve to remunerate the network operator for the network services they provide and to maintain the network in good shape. Large electricity users that have a stable electricity consumption can generate fewer network costs, notably due to the predictability of their demand.

gates Levy, K. Bacon, The Concept of state aid, in: ECLR vol. 24, n°. 2, 2003 pp. 54-61. 2161 Case T 210/02 British Aggregates v Commission [2006] ECR II-2789, annulled by Case C-487/06 British Aggregates v Commission [2008] ECR I-10505. 2162 Case T-233/04 Netherlands v Commission [2008] ECR II-59, reversed on appeal – Case C-279/08P. 2163 Case SA.46526. 2164 Case SA.34045.

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Between 2011 and 2013, electricity users that had an annual consumption above 10 gigawatt hours and a particularly stable electricity consumption were fully exempted from paying network charges under German law (§19(2) of the German Network Charges Ordinance). In 2012, thanks to this provision, these users avoided paying an estimated €300 million in network charges. These costs were instead financed by a special levy imposed on final electricity consumers (the so-called §19-surcharge), which Germany introduced in 2012.

5.206

The Commission ascertained that a different treatment of atypical users (i.e. nonpeak consumers and baseload consumers) compared to the other network users was an integral part of the reference system. However, the Commission took issue with the full exemption in force between 2011 and 2013, as it gave rise to a deviation from the reference system because baseload consumers do cause network costs. Therefore, the full exemption from network charges was a deviation from the reference system. The Commission further noted that “Germany has not put forward any element showing that the full exemption would be justified by the nature and general scheme of the network charge system in Germany. It has put forward that the full exemption could help ensuring security of supply by securing the existence of conventional power plants needed to ensure security of supply and could also help facilitating the promotion of renewable electricity. Those objectives, however, are external to network charges and must therefore be examined under the compatibility assessment in line with the case law of the Court” (para. 119). The Commission concluded that the aid was incompatible and ordered recovery. Several appeals are pending against this decision. See chapter 5, para. 2.4.3.

5.207

6.1 Selectivity issues and the EC Directive 2003/872165 This Directive, which has now been amended, initially provided for a Community-wide emission trading scheme and for national allocation plans (NAPs). Article 9 provided that in drawing up these NAPs, the Member States must comply with EU law, in particular with the state aid rules. The Directive only covered certain industries as listed in its Annex I. In accordance with Article 9(1) the NAPs had to be notified to the Commission by 31 March 2004 for consideration by a special committee. The Commission may reject a NAP or any part of it within three months of its notification if it considered the NAP to be incompatible with the criteria listed in Annex III or with Article 10 of the Directive. According to pt. 5 of Annex III the Commission must also consider the state aid aspects of the plan. 2165 OJ [2003] L 275/32.

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5.209

5.210

The Commission took the preliminary view that even if the coverage of the Directive is selective, it cannot in and of itself lead to the conclusion that a national NAP automatically falls within the state aid regime. This would be otherwise if the NAP conferred selective advantages on particular facilities within one of the sectors or industries to which the Directive applies. Notification of the national NAPs for Commission assessment under the Directive was not to be equated with notification under Article 108(3) TFEU and Regulation 659/99.2166 This point was clearly affirmed by the Court in Case T-387/04, EnBW Energie Baden-Württemberg AG v Commission.2167 Directive 2003/87 was subsequently amended, including by Directive 2009/29,2168 which abolished the NAP system for the trading period starting in 2013. From that year onwards, the principle was established that the allocation of emission permits will be carried out through an auction process and the total number of emission permits available would be set by the Commission.

5.211

While these new rules may minimize the selectivity issue which was inherent in the NAP, exceptions exist that may bring back the State aid dimension. This is because the new rules recognize that installations in certain sectors are exposed to a significant risk of ‘carbon leakage’, i.e. the EU ETS could increase production costs so much that companies decided to relocate production to areas outside the EU that are not subject to comparable emission constraints.

5.212

Since CO2 costs passed on in electricity prices could also expose certain installations to the risk of carbon leakage, Member States may grant compensation with respect to such costs. To take this into account, the Commission adopted guidelines on certain state aid measures relating to the EU Emission Trading System after 2013 and has now also adopted a separate chapter in the latest Energy and Environmetnal Aid Guidelines of 2014. [For a discussion of this measure and for the treatment of carbon leakage measures in the EEAG 2014, see below at Book, Part V, Chapter 5]

2166 See further, M. Lorenz, Emission Trading – the State Aid Dimension, 2004 EStAL vol 3, nr. 3, 399-406. 2167 ECR [2007] II-1195. 2168 OJ [2009] L 140/63.

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7.

Effect on trade

In order to fall within the prohibition of Article 107(1) TFEU, the measure in question must have an effect on competition and trade.

5.213

Given the structure of Articles 107 and 108 TFEU, and the system of prior notification of all planned state aid, it is not incumbent on the Commission to establish that the measure in question can appreciably effect competition or inter-State trade. It is sufficient that the Commission can establish a link between the measure in question and the likely or potential effect on competition and trade; for example, if the recipient undertaking(s) competes with other undertakings on markets open to competition. This does not mean that the recipient undertaking has to be active internationally – for example as an exporter of products or services. It is sufficient that the importation of competing products or services from other Member States may be rendered more difficult through the beneficiary’s stronger market position. As a general rule, the Commission must at least provide reasons as to why it assumes there is a foreseeable prospect for the measure to affect trade.2169 The General Court confirmed in Case T-303/05 ACEA Electrabel v Commission that an aid measure to support the construction of a district heating network in the Rome area can affect trade given that aid to the recipient would strengthen its position vis-à-vis other energy suppliers.2170

5.214

Where there is over-capacity in the particular sector where the aid is granted, the potential affect on trade will more often be foreseeable, since the probable effect of the grant is to increase or maintain the market share of the recipient, thereby reducing the chances for undertakings established in other Member States to sell their products or services to the market of that Member State. Accordingly, even aid to undertakings operating only locally may affect trade, even if the recipient does not provide services outside its state of origin. In the Altmark case the Court held that: “The granting of a public subsidy to a (transport) undertaking by a Member State may maintain or increase the supply of transport services by that undertaking, and thus reduce the possibility of other undertakings to provide transport services in that Member State. Thus the condition that the aid must affect trade between Member States, does not depend on the local or regional character of the services supplied, or the scale of the activity covered”,2171

5.215

2169 See Case T-156/04 EDF v Commission [2009] ECR II-4503, for an application of this case law in order to reject EDF’s argument that the measures in question did not have any impact on trade or competition. 2170 [2009] ECR II-137, upheld on appeal - Case C-480/09P. 2171 Case C-280/00 [2003] ECR I-7747, paragraphs 78-82.

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or even on the fact that competition for the goods or services in question may be primarily local.2172

8.

The de minimis Regulation

5.216

Where the aid concerned is of a very low level, the actual or potential effect on trade may be doubted. Traditionally the European Courts have taken a very strict attitude to so-called de minimis aid, fuelling debate as to the validity of a Communication of 1996 purporting to exempt this type of aid – i.e. of less than 100,000 Euro over a three year period – completely from notification requirements under Article 108(3) TFEU. This Communication was superseded by Regulation 69/2001 of 12 January 2001.2173 In December 15, 2006, the Commission adopted new de minimis Regulation2174 exempting from notification aid below 200,000 Euro. That Regulation entered into force on January 1, 2007 and has in turn been further amended by Regulation 1407/2013.2175

5.217

Under the 2013 Regulation, aid up to 200, 000 Euro granted over any period of 3 years will not have to notified to the Commission. However, the Regulation excludes from its application forms of aid for which the inherent aid amount cannot be calculated precisely in advance (so-called “non-transparent aid”) and aid to firms in difficulty. Moreover, the new Regulation, unlike the previous Regulation, does apply to the transport sector and to the processing and marketing of agricultural products. Nevertheless, due to the fact that many companies in the transport sector are relatively small, the lower ceiling of 100,000 Euro applies to this sector. It should be noted that under the new Regulation, the de minimis amount is applicable to a single undertaking, as defined in its Article 2(2).2176 Furthermore this Regulation can apply only to aid in respect 2172 Case C-172/03 Heiser [2005] ECR I-1627. For a further discussion, see section 6 of the Consultation document on the notion of aid. 2173 OJ [2006] L10/30. 2174 OJ L 379/5. 2175 Commission Regulation (EU) No 1407/2013 of 18 December 2013, OJ 2013 L352/1. 2176 Single undertaking : all enterprises having at least one of the following relationships with each other: (a) one enterprise has a majority of the shareholders or members voting rights in another enterprise; (b) one enterprise has the right to appoint or remove a majority of the members of the administrative, management or supervisory body of another enterprise; (c) one enterprise has the right to exercise a dominant influence over another enterprise pursuant to a contract entered into with that enterprise or to a provision in its memorandum or articles of association; (d) one enterprise, which is a shareholder in or member of another enterprise, controls alone, pursuant to an agreement with other shareholders in or members of that enterprise, a majority of shareholders or members voting rights in that enterprise.

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of which it is possible to calculate precisely the gross grant equivalent of the aid ex ante without any need to undertake a risk assessment (‘transparent aid’).2177 In Case C- 382/99 The Netherlands v Commission, a Dutch fiscal rule providing a benefit to petrol stations situated near borders was the subject of dispute. The Commission had ruled that the de minimis rule could not be applied to a situation in which the aid was cumulated by the owners of several petrol stations nor to cases where the relationship between the owner of the petrol station and an oil company was regulated by particular contractual provisions which allowed the latter to deduct the value of the fiscal provision from contractually agreed price rebates.2178 In both instances the amount of aid in question had to be calculated taking into account who the actual beneficiary of the measure was. The Court of Justice upheld the Commission decision.2179

5.218

The 2013 Regulation does not change the strict conditions which the earlier Regulations imposed on Member States. A Member State may only grant a new de minimis aid after having checked that this will not raise the total amount of de minimis aid received by an undertaking during the relevant period of three years to a level above the ceiling. Moreover, the monitoring and reporting obligations are intended to rule out the cumulation of de minimis aid above the ceiling.

5.219

9.

Conclusion

In conclusion, establishing whether the cumulative conditions which must be met in order to classify a measure as aid within the meaning of Article 107(1) TFEU is often a complex exercise. As the decisions and case law reviewed above indicate, the energy sector has proven to be problematic in many regards. Even if all the conditions are met, however, this does not necessarily mean that the aid in question is automatically incompatible – it may still qualify for one of the exemptions listed in Article 107(2) or (3) or it may also qualify for exemption on the basis of Article 106(2) TFEU. The key issue to be firmly kept in mind, however, is that, if a measure is classified as aid within the meaning of Article 107(1) TFEU, it must be notified to the Commission for clearance under one of the exemption

Enterprises having any of the relationships referred to in points (a) to (d) of the first subparagraph through one or more other enterprises shall also be considered to be a single undertaking. 2177 Article 4. 2178 See also Case T-354/99 Kuwait v Commission ECR [2006] II-1475, where the GC upheld the ECJ’s earlier ruling and held that if Kuwait had not in fact exercised the relevant contractual rights, this was a matter to be dealt with at national level, in connection with the recovery of any alleged aid – at para 68. 2179 ECR [2002] I-5163.

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provisions. Failure to notify can give rise to actions before the national courts to recover illegal aid. The Commission also has powers to order recovery of aid. These procedures are discussed in detail at book Part V, Chapter 6.

10. Forms of state aid 10.1 Introduction 5.221

The Treaty does not confine the prohibition of a state aid to any particular form or indeed type of aid. The case law and the decision-making practice of the Commission has confirmed that any State measure which has the effect of conferring a benefit on an undertaking or a particular sector or region is in principle prohibited unless it can be justified under Article 107(2) or (3) TFEU (see Chapter 1). Thus, the types of measures, which may be prohibited, go well beyond straightforward “subsidies” in the form of cash grants or loans.2180 The Commission has published various notices and guidelines which are of use in determining whether a particular form of state measure may fall within the scope of Article 107(1) TFEU. The sections below outline the main content of these notices and guidelines as regards their application in the energy sector. The Commission Communication on State aid elements in sales of land and buildings by public authorities and the Commission Notice on the application of the State aid rules to measures relating to direct business taxation have been replaced by the NOA.

10.2 The Communication on state guarantees 10.2.1 Background 5.222

The Commission’s concern with respect to a State guarantee is that it enhances the borrower’s credit position, enabling it to borrow more cheaply, thereby distorting competition with other firms operating on the market which have to pay a commercial interest rate. Unless the borrower has paid an arm’s length fee to the State, it could be surmised that the borrower has received an aid. A private investor would not be willing to issue a guarantee without receiving a fee to cover the risk assumed. The Commission’s approach to State guarantees is therefore an application of the market economy investor test.

2180 Case 17/57 Steenkolenmijnen v High Authority ECR [1959].

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10.2.2 The Commission’s 2008 Notice on State Guarantees The current position on State guarantees is set out in the Notice of 2008 (the Notice).2181 The revised Notice of 2008 updated the Commission’s approach to State aid in the form of guarantees and aims to give Member States more detailed guidance about the principles on which the Commission intends to base its interpretation of Articles 107 and 108 TFEU to State guarantees. The NOA does not replace the Notice of 2008, which, therefore, continued to be in force (albeit Section 4.2.3.4 of the NOA dwells on “Specific considerations to establish whether the terms for loans and guarantees are in line with market terms”).

5.223

It is important to stress that the Notice of 2008 takes the position that the aid can occur at the time when the guarantee is issued, even if it is never called upon or drawn down. This has been confirmed by the Court.2182 The Notice provides that the State aid rules apply to all forms of guarantees, irrespective of their legal basis and the transaction covered. It therefore includes express contractual guarantees and guarantees arising by operation of law.2183

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The 2008 Notice identifies a list of cumulative conditions, fulfillment of which will ensure that an individual State guarantee does not constitute aid:

5.225

(a)

the borrower is not in financial difficulties;

(b)

the borrower would, in principle, be able to obtain a loan on market conditions from the financial markets without any intervention from the State;

(c)

the guarantee is linked to a specific financial transaction, and is for a fixed maximum amount and does not cover more than 80% of the outstanding loan, and is not open-ended;2184

(d)

the market price for the guarantee is paid.

2181 2182 2183 2184

OJ [2008] C155/1. Case T-204/97 EPAC [2000] ECR II-2267. IP/02/1485, dated 16.10.2002. In its decision on the Channel Tunnel Rail Link, the Commission concluded that a guarantee covering 100% of the exposure under a swap agreement amounted to a state aid but was compatible with the common market – N706/2001, 24 April 2002. See also the Commission’s decision in SKET SMM in regard to counter guarantees and reinsurance financing which was held to be based on market terms, OJ [1997] L314/20.

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5.226

The 2008 Notice states that the usual beneficiary of a State guarantee will be the borrower, but does not preclude that in certain situations the lender may also benefit from the aid, where for example the guarantee is given ex post, in respect of a loan already entered into without the terms of that loan being adjusted. In other words the lender’s credit position is improved, without the lender having paid any consideration.

5.227

An important novelty introduced by the 2008 Notice is that the limitation of 80% will not apply to a public guarantee given to a company whose sole activity is the provision of services of general economic interest (SGEI).2185 For all companies, if the size of the underlying loan decreases over time, the guaranteed amount must decrease proportionally. If the 80% threshold has been exceeded, the guarantee should be notified.

10.2.3 Benchmarks 5.228

The Notice also contains further, albeit rudimentary, guidance on the last criteria – the market price. Often a market benchmark will not be available for large, one-off transactions although the Notice suggest that Member States can resort to classifications issued by risk rating agencies, and can compare guarantee fees paid by similarly rated undertakings on the market. In any event the Commission will not accept that the guarantee fee is set at a single rate deemed to correspond to an overall industry standard. The general rule is that guarantees must be linked to a specific financial transaction, for a fixed maximum amount and limited in time. Unlimited guarantees are incompatible with Article 107(1) TFEU. Finally, the Notice contains a more lenient approach for small and medium-sized enterprises (SMEs).

5.229

The Commission Notice is primarily designed to give guidance on guarantees linked to a specific financial transaction such as a loan as these are the most frequent and easily quantifiable types of transaction.2186

5.230

If the criteria (a) to (d) are met, the Commission considers that the State guarantee conforms to the MEIP, as discussed above. If the guarantee does not meet these cumulative criteria, the Commission will consider it to be an aid and will quantify the aid element on the basis of the difference between the market price of the guarantee and the price actually paid.

2185 On SGEIs more specifically, see also Part 6. 2186 See further, Part 6.

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The Commission will then examine the compatibility of the aid measure using the same rules as are applied to all other forms of aid measures. For example, guarantees given in connection with rescue and restructuring aid will be assessed under the relevant guidelines for this type of aid (see book paragraphs 5.3815.393. The Commission has stated that in general, it will only accept guarantees as compatible aid if their mobilisation is contractually linked to specific conditions, which have been agreed between the parties when the guarantee was initially granted. If the guarantee is mobilised under different conditions, the Commission will treat this as new aid which must be notified separately in accordance with Article 108(3) TFEU.

5.231

The 2008 Notice, as well as its predecessor, the Notice of 1999, provides that the state aid rules apply to all forms of guarantees, irrespective of their legal basis and the transaction covered. It therefore includes express contractual guarantees and guarantees arising by operation of law.

5.232

Thus, in its investigation into the financial arrangements between the French State and the electricity company EDF, the Commission noted that, as EDF enjoyed the legal status of an “ établissement public à caractère industriel et commerciel” (public industrial and commercial establishment – EPIC), it benefited from an unlimited state guarantee on all its liabilities under the legal status of EPIC – a status which exempts it from insolvency law and hence lowered the cost of its borrowing. The Commission went on to state that it was not questioning the state ownership of EDF’s capital or the legal status of EPIC as such. The Commission only questioned the advantages that EDF draws from certain features of the EPIC status, namely the exemption from insolvency and bankruptcy proceedings and the role played by the State as ultimate guarantor for the company’s debts.2187 Obviously, the Commission must, in accordance with Article 345 TFEU, guarantee the neutrality between public and private ownership. The Commission investigation on the unlimited state guarantee was carried out under the existing aid procedure, which requires Member States cooperation. In 2003, France notified the Commission of its intention to turn EDF into a limited company, which implied putting an end to the state guarantee.2188

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The Commission has also condemned a French government measure intended to accord special exchange risk cover to French exporters for the construction

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2187 IP/02/1485, 16.10.2002. 2188 IP IP/03/1737, “Commission secures withdrawal of the unlimited guarantee granted to EDF, thereby encouraging competition in the energy sector”.

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of a power station in Greece, on the grounds that an aid which is granted to undertakings in one Member State to reduce the risk of currency devaluation in another is a form of export aid, incompatible with the common market.2189

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5.236

TVO The Commission approved a guarantee provided by the French government to the Finnish electricity producer TVO to cover a loan to purchase part of its nuclear plant from the French company AREVA NP. The Commission had opened a formal investigation following two complaints to verify whether the guarantee had been given on market terms. The Commission found that TVO would have been able to finance the entire operation without state intervention as TVO had a good credit rating and was not in difficulty. TVO had also already raised substantial capital on the international markets without the guarantee and finally, the fee paid was not below than the costs of the loans concluded at the same time without state guarantees. Finally, the measure did not confer a benefit on AREVA NP as it had been selected by TVO before the guarantee was granted.2190 LNG Terminal-Lithuania In its decision concerning aid for the construction and operation of an LNG terminal in Lithuania – the Commission assessed state guarantees of 100% of the amount of loans to the operator (KN) to cover the loans from EIB and another lender (at the total amount of EUR 116 million) against payment of a one-off fee of 0.1% on the respective loan amount. Lithuania did not claim this fee to be market conform, but the Commission nevertheless examined whether the Notice might apply. It recalled that in its practice, it uses various methodologies to analyse whether a guarantee price is market conform and, if not, for establishing the aid element therein. First, it may be possible to compare the guarantee price to the price for a guarantee of a similar amount, duration, collateral and risk level provided by a private bank to the same company, or even in relation to the same loan (closes comparator method). Second, in case there is no such readily available information to indicate the market conform guarantee remuneration, it may be possible to establish a guarantee premium benchmark on the financial markets (benchmarking method). Alternatively, where market benchmarks are not available (or as a cross-check where market benchmarks are available), a cost-based approach such as Risk Adjusted Return On Capital (“RAROC”) can be used to establish the different cost elements of a guarantee, i.e. the expected loss related to credit risk, the required return on capital, and a 2189 Decision 84/416/EEC OJ [1984] L230/25. 2190 IP/07/1400, 26.9.2007.

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normal administration fee (costing approach). Here the Commission concluded that using the benchmarking approach with CDS spreads or the costing approach would not be fully appropriate and that a rate differential approach was a more adequate method in this case, as the ‘benchmarking’ approach may be faced with the issue that the obtained estimate for a market oriented price primarily relates to guarantors with a very strong credit standing and may hence overstate the value of the guarantee to the company (and the loan provider/bank) in question when the state guarantor has a significantly lower credit standing. The Commission therefore concluded that the guarantee would confer state aid on the operator but as it enabled KN to obtain loans for the main portion of the investments and thus reduced the costs of the project, the aid was deemed to be compatible aid.2191 Hinkley Point In relation to the state support for the construction of a nuclear reactor at Hinkley Point, the UK authorities had notified the so-called ‘contract for difference’ or CFD but not the Credit Guarantee as it was the opinion of the UK authorities that it would not confer an advantage on an undertaking since it would be offered on commercial terms in accordance with the market economy investor principle (“MEIP”). The UK also considered that the Credit Guarantee and the terms of the CfD served different purposes and any benefit derived from the former measure could not be cumulated with the latter measure. The Commission however decided that the measures had to be considered together as a single aid measure “ due to the amount of debt required for the project that could not be obtained without State intervention, the timing of the State interventions that happen concomitantly and the link between the rating of NNBG, the pricing of the Guarantee and the provisions of the CfD. The CfD, the Secretary of State Agreement and the Credit Guarantee, are different in terms of means, but are part of the same investment decision of the UK authorities and have the same aim, to incentivize and allow the investment into new nuclear power”.2192 Given the unprecedented nature of the project, of the financing and of the guarantee for which there were no precisely comparable benchmarks, even if it were to consider that the remuneration minimizes the support, the Commission considered that the price paid by NNBG for the credit guarantee could not be considered a market price, since the market did not and would not provide a similar facility.

2191 SA.36740 (2013/NN) – Lithuania Aid to Klaipedos Nafta – LNG Terminal, 20.11.2013. 2192 SA.34947. para 337.

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5.239

With regard to guarantees given in connection with rescue aid, the rules under the relevant guidelines for this type of aid apply and will be considered below (see further, book paragraphs 5.385-5.387).

10.3 Infrastructure aid 5.240

The question whether state funding of infrastructure or other forms of State measures relating to the operation of infrastructure constitute aid has become of increasing complexity, given in particular that Member States have resorted to various forms of public-private partnerships to operate infrastructure and to distribute private services.

5.241

In the NOA, the Commission set out to provide specific clarification on infrastructure aid (paras. 199 et seq.), later supplemented by the publication of an “Infrastructure analytical grid for energy infrastructure”.2193 The grid indicates instances in which support for energy infrastructure likely does not involve aid. In essence, these instances concern support to TSO and/or DSO because of the legal monopoly they enjoy (in compliance with EU law). Besides the legal monopoly, the following other cumulative requirements must be present: (i) the legal monopoly not only excludes competition on the market, but also for the market, in that it excludes any possible competition to become the exclusive operator of the infrastructure in question; (ii) the service is not in competition with other services; and (iii) if the operator of the energy infrastructure is active in another (geographical or product) market that is open to competition, crosssubsidization has to be excluded.

10.4 Aid granted through energy sector companies 10.4.1 Introduction 5.242

Aid may be provided to certain groups of final consumers through energy companies owned or controlled by the State in so far as the resources of such companies can be considered to be state resources. In this respect, alleged aid through an energy company may take a number of forms. In the first place, two inter-related situations can be considered: preferential tariffs for energy supply or network system use and cross-subsidisation between different classes of consumers. In the second place, a state-owned or controlled company may be required to purchase energy (such as domestically produced coal or renewable energy) at a higher price or on more advantageous terms than a normal market 2193 Available at http://ec.europa.eu/competition/state_aid/modernisation/grid_energy_en.pdf.

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purchaser might have done so. In both cases it is possible that these actions could amount to the conferral of a selective benefit, and, provided all the remaining elements of Article 107(1) TFEU are present, this could constitute, prima facie, state aid. In principle, the resources at the disposal of any public undertaking which is either owned or controlled by the State within the meaning of Article 2 of the Transparency Directive, may be considered to be state resources. Following the ruling of the Court of Justice in Case C-482/99 France v Commission (‘Stardust Marine’) 2194 it is also necessary for the purposes of establishing the applicability of Article 107(1) TFEU to attribute or impute a decision or policy to deploy these resources in a particular way, to the state itself in order to bring either preferential tariffs or cross-subsidisation practices within the scope of Article 107(1) TFEU. The applicability of the market economy investor principle (MEIP) discussed above, must also be examined (see book paragraph 5.159 et seq. above).

5.243

In the light of the “Stardust Marine” ruling, the Court’s rulings in several earlier cases concerning special gas tariffs available for users in the horticulture and fertilizer sectors, although handed down some time ago, and before energy market liberalisation, may now provide only limited guidance as to when a form of preferential tariff or cross-subsidisation policy or indeed preferential purchase arrangements can be held to be attributable to the State. The various ‘elements’ outlined by the Court at paragraph 56 of its ruling will have to be considered.

5.244

Thus, if an energy supplier chooses to grant a particular tariff to a certain group of users on the basis of its own commercial policies and this policy cannot be attributed to the state, then it is likely that the tariff would not qualify as a form of state aid. If, however, the company was mandated by law or as a result of indirect pressure from its government owners to grant preferential tariffs, the situation may be different. Nevertheless, even if the preferential tariffs in question are not caught by the state aid rules, the application of the Treaty competition rules, and especially Article 102 TFEU where excessive or discriminatory tariffs are involved, cannot be ruled out.

5.245

2194 ECR [2002] I-4397.

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10.4.2 Cross-subsidisation 5.246

On the assumption that the decision to grant a particular tariff is attributable to the State, a further relevant issue is on what basis could a tariff be deemed to be a form of unfair cross-subsidisation. This is a complex issue and one on which the Directives on the internal electricity and gas markets as well as the general case law of the Court do not provide definitive guidance. If one takes the example of a company which owns both network assets and a supply company and that company uses its profits on its network activities to finance the construction of a new generating plant or the installation of new metering systems, is this a form of cross-subsidisation that can be prohibited under Article 107(1) TFEU? Is such a situation different from that in which an energy supply company charges its captive customers a higher price per kilowatt hour for the energy supplied than that which it supplies to its large industrial users? The answers to these questions are by no means straightforward.

5.247

The Electricity Directive 2009/722195 provides that electricity undertakings shall keep separate accounts for each of their transmission and distribution activities in order to avoid discrimination, cross-subsidisation and distortion of competition. Their annual audit process should verify that there has been no discrimination or cross-subsidisation.2196 The national regulatory authorities must ensure that accounts are effectively unbundled and must ensure that there are no cross-subsidies between generation, transmission, distribution and supply activities. These provisions do not indicate however, what is meant by the term “cross-subsidisation”. Internal transfers from profit-making to loss-making activities are after all a fact of normal commercial life in all sectors, whether public or private.

5.248

The main issue however, is that often energy companies are not ‘normal’ companies; they have traditionally enjoyed certain exclusive or special rights to supply certain services or types of customers or areas. It is the risk that they can generate additional revenue from these “reserved” activities (for example, supply to captive customers) to finance activities under competition (for example, supply to eligible customers) that creates regulatory and competition concerns. Similarly, if reserved activities bear a disproportionate share of common costs this will have the same end result: the activity under competition can be performed without covering its real costs by the prices charged for it. 2195 Article 31 of Directive 2009/72 (Electricity) OJ [2009] L 221/55 and Article 31 of Directive 2009/73 (Gas) OJ 2009 L211/92. 2196 Article 37 of Directive 2009/72 and article 40 of Directive 2009/73.

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In general, the main concern has been limited to the cross-subsidisation of services under competition through unfair revenue or profit levels or cost allocation methods; the subsidisation of the reserved sector by revenues generated in the competitive sector is not problematic.

5.249

This approach was upheld by the General Court in Case T-106/95 FFSA.2197 To date the case law of the Courts has generally concerned the provision of logistical assistance and commercial services by a public undertaking to a subsidiary where the remuneration received in return is alleged to be less than that which would have been demanded under normal market conditions.2198

5.250

Furthermore, although separate or unbundled accounts are required in accordance with the Directives, they do not prescribe any particular method of cost accounting, and in particular do not require any specific treatment of “common costs” and their proper allocation to different services or activities. It will be up to national regulators to monitor cross-subsidisation, but whether this will also entitle the regulators to develop their own cost-allocation methodologies will remain a question of national law.

5.251

11. The Relationship between Article 107(1) TFEU with other Treaty Articles 11.1 Introduction It is settled case law that in granting an exemption under Article 107(2) or (3) TFEU the Commission cannot contravene other provisions of the Treaty, and the same applies to secondary legislation.

5.252

Suppose a Member State wishes to grant an aid to national producers of renewable power equipment, to the exclusion of suppliers from other Member States. Would such a provision contravene Article 18 TFEU? The General Court in the Thermenhotel Stoiser Franz case has handed down a somewhat unclear ruling on the application of this Treaty provision in an appeal by Austrian hotel operators in a region where aid had been granted to an Austrian affiliate of the German Siemens AG for the construction of a hotel in an Austrian tourist region. The hotel operators contended that the Commission’s approval, inter alia, contravened Article 18 TFEU. The General Court denied the appeal on the basis of Article 18 TFEU on the grounds that as “the first paragraph of Article 18

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2197 ECR [1997] II-229. 2198 Case C-39/94 SFEI ECR [1996] I-3547.

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applies independently only to situations governed by Community law for which the Treaty lays down no specific rules prohibiting discrimination. […] it follows that the first paragraph of Article 18 TFEU is not apt to be applied independently in the context of this action, by reason of the existence of the competition rules of the TFEU. They cover discrimination, not in relation to the nationality of the undertakings allegedly affected but by reference to the geography and sector of the market considered.” 2199

5.254

This ruling has been criticised in that, even if the result is correct, the reasoning is not. Nevertheless, there can be no doubt that aid measures which infringe Article 18 TFEU may not be approved.

11.2 The free movement principles 5.255

The Courts have had occasion to rule in the past on the application of Articles 34, 49 and 56 TFEU in relation to state aid, to the effect that any measure infringing these Articles cannot be declared compatible under the state aid rules.2200 At the same time, the Courts have also made it clear that Article 107 TFEU could not be used as a justification to derogate from the application of either Article 34 TFEU or Article 110 TFEU. With respect to the former Article, once it is established that it applies, any potential exception to it must be firmly based on the derogations provided in Article 36 TFEU or under the rule of reason.2201

5.256

It has, however, been confirmed by the Court of Justice that a state aid scheme cannot be declared unlawful merely because it does not extend to undertakings established in other Member States. In Case C-351/98 Spain v Commission, the Court stated that: “A measure to support investment adopted by a public authority can by definition apply only in respect of the territory for which it is responsible and the authority cannot be criticised for not extending the benefit of the measure to undertakings not established in its territory, since such undertakings are in a wholly different position vis-à-vis the authority from undertakings established within the territory. That statement does not, however, mean that such a measure of support cannot be classified as “aid” within the meaning of Article 87(1) of the EC Treaty if it fulfills the conditions laid down by that provision.” 2202

2199 2200 2201 2202

Case T-158/99, [2004] ECR II-1, paragraphs 146-147. See Case C-169/08 Region of Sardinia [2009] I-10821. Case C 21/88 Du Pont de Nemours Italiana [1990] ECR I-889. [2002] ECR I-8031, at paragraph 57.

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An unresolved question in relation to the inter-relationship of the various Treaty articles may well arise in the context of the Altmark and Gemo line of cases. If it is established, in accordance with the criteria set out in Case C-280/00 Altmark (Chapter 4, at paragraph 5.57 et seq.) that the financial measure in question does not qualify as an aid within the meaning of Article 107(1) TFEU but is merely compensation for services of general interest provided on behalf of the state, this would not necessarily immunize that measure from attack under other Treaty rules. For example, if a state imposes a public service obligation on its own national companies and compensates them for that, would this exclude the application of Article 49 TFEU if only national companies could qualify?

5.257

The Court tackled this issue in its ruling in Case C-451/03 Servizi Ausiliari,2203 which concerned subsidies payable to operators who, under a system of exclusive rights, were entitled to provide tax advice to the exclusion of other types of professional advisers both within Italy and from other Member States. It held that the provision of taxation advice could be a form of public service and any compensation for its performance could be classified as an aid within the meaning of Article 107(1) TFEU if the four ‘Altmark’ criteria, discussed above, are not met. This however does not prevent the Commission from relying upon Article 106(2) TFEU to justify the aid as compatible. This has been confirmed in Case T-354/05 TFI v Commission.2204

5.258

The situation may be different however if the obligation comprises a requirement that the firms tendering for a contract to perform a service have to be publicly owned or controlled. This may not necessarily be problematic. In any event it may not be possible to severe the effect on free movement from the overall assessment of the measure under Article 106(2) TFEU. This in turn raises the complex question of whether Article 106(2) TFEU can be invoked as an exemption where other Treaty rules are infringed. This is dealt with further in Part 6 on Article 106.

5.259

11.3 Para-fiscal charges and indirect taxation Of particular interest to the energy sector is the relationship between Articles 30 and 110 TFEU and the state aid provisions. Para-fiscal levies are not uncommon in the energy sector, and indeed different forms of levies are increasingly imposed on consumers connected to a grid network to finance stranded cost obligations, capacity market mechanisms or to meet the additional costs of quotas for 2203 [2006] ECR I-2941. 2204 [2009]ECR II-471.

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renewable and other forms of domestically produced energy. The case law in this area is notoriously opaque. Para-fiscal charges which are levied on domestic as well as imported goods but which are used to support activities that benefit solely domestic products may constitute a state aid and the financing mechanism itself may infringe Article 30 TFEU or Article 110 TFEU.

5.261

The Commission has, reflecting the Court’s jurisprudence, frequently stressed that it cannot consider the legality of a state aid measure without addressing the legality of the financing mechanisms underlying the scheme in question.

5.262

In Joined cases C-78-83/90 La Pallice Port, the Court considered the legality of para-fiscal charges levied on fuel oils of both domestic and imported origin, which were to be used to finance a French state agency charged with the promotion of energy conservation and rational energy use. The Court held that the levy in question might amount to a state aid2205.

5.263

With respect to the application of Articles 30 TFEU – the prohibition on charges having equivalent effect to a customs duty, and Article 110 TFEU – which prohibits discriminatory forms of indirect taxation – the situation may be more complex. The focus here is not so much on the purpose of the aid and whether it can be declared compatible in relation to its objectives but on the mechanisms for financing the aid. If these mechanisms are contrary to other provisions of the Treaty, including Article 30 TFEU (and Article 110 TFEU), then the entire measure must be declared incompatible. National courts also have an important role to play here given that Article 30 TFEU (and Article 110 TFEU) are directly effective. The Nygard judgment concerned a levy imposed by Denmark on the production of live pigs for export. The Danish court was uncertain whether the authorisation granted by the Commission under Article 107(3) TFEU could preclude it from setting aside a levy used to finance authorized aid and referred the matter to the Court of Justice.

5.264

The Court held that the national court must establish whether any directly effective provisions of Community law have been violated in order to protect individual rights. Furthermore, national courts were best placed to carry out an assessment of the manner in which the revenue generated by a domestic parafiscal charge is allocated.2206 2205 [1992] ECR I-1847. 2206 Case C-234/99 Nygard [2002]ECR I-3657.

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Joined Cases C-261/01 and C-262/01 Van Calster, Cleeren and Openbaar Slachthuis NV2207 concerned the legality of various financial arrangements pertaining to a fund set up to finance services to combat animal diseases and improve animal health and hygiene. The interesting feature of these cases is that they concerned a duly notified and approved system of aid – a Law of 1998, elements of which were imposed retroactively for a substantial period before the date of Commission approval. Prior to the adoption of the 1998 Law, a Law of 1987 had been in place and had required the constitution of a fund with a broadly similar purpose. Moreover, the aid scheme for the 1987 fund was financed by a system of para-fiscal levies on certain animals and animal products, whether slaughtered or exported alive, including imported animals and animal products. In a decision of 1991, the Commission had ruled the 1987 regime – which was never notified – to be incompatible with Article 92 EEC in so far as the compulsory charges were also imposed, at the stage of slaughter, on animals and products from other Member States. In 1996 the Belgian State notified draft legislative measures for the abolition of the 1987 regime and its replacement by a new scheme, which was eventually to become the Law of 1998, and which was declared compatible with the common market by the Commission’s 1996 decision. Under the 1996 Law, no charges would be levied inter alia, on imported animals and products (or for exported animals). In principle, contributions paid since 1987 on imported animals were to be repaid, but the 1998 Law included a provision which provided for the automatic equalisation between the amounts owed in respect of the repayment of charges paid under the 1987 regime and charges due under the 1998 Law.

5.265

Messrs Van Calster and Cleeren and Openbaar Slachthuis sought reimbursement of the contributions they had paid to the fund under the 1987 legislation which they claimed were contrary to Community law. Moreover, they argued, under Community law, the 1998 Law could not constitute a basis for a retroactive charge. In its observations to the Court, the Belgian government invoked Article 106(2) TFEU as a justification for the measure, but it also maintained that all aspects of the 1998 Law including the retroactive elements had been validly notified to (and approved by) the Commission. The Court however, ruled that the retroactive elements, which imposed charges with effect to January 1988, could not have been considered properly notified in 1996. Moreover the earlier law of 1987 had not been notified at all and the aim of the Belgian legislature was merely to remedy the consequences of its original failure to notify the 1987 Law,

5.266

2207 [2003] ECR I-12249.

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including the method of financing the fund through para-fiscal charges. This conclusion could not be invalidated by the Belgian State’s argument based on Article 106(2) TFEU.

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The Court then went on to rule that, even if the Commission had examined the compatibility with the common market of the charges imposed with retroactive effect, it would not have been competent to decide that an aid scheme put into effect contrary to Article 108(3) TFEU is legal. This would effectively lead to confusion between the separate and complementary roles of the Commission and the national courts – the role of the latter being to safeguard the obligation to give prior notification and to order the return of state aid if this has not been duly notified.2208

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The Court then went on to consider whether the charges in question were contrary to Articles 30 or 110 TFEU. It held that “charges, such as the port charges at issue in the main proceedings, constitute internal taxation within the meaning of Article [95] of the Treaty not falling within the ambit of Article [12] or Article [30] of the Treaty. In the absence of any unequal treatment discriminating against goods from other Member States, the measure by virtue of which a Member State provides for the collection of those charges and the allocation of a significant proportion thereof to a public undertaking, when the sum so allocated corresponds to a service actually provided by that undertaking, does not infringe Article [95].” 2209

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Hence if the “charge” was actually a fee for a service provided it would not fall within the scope of Article 110 TFEU as this measure only applies to discriminatory indirect taxation – the fee is not a “tax”.2210

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On the basis of this reasoning, a levy collected by a TSO on imported electricity or gas and used to compensate, for example, past stranded costs or for environmental improvements or to finance new LNG facilities could not be characterised as a fee for services rendered: it is a charge or tax to defray general expenditure relating to public policy objectives.2211 2208 Cases C-261/01 and C-262/01[2003] ECR-12249. 2209 Paragraph 62 of the judgement [2003] ECR I-14243. 2210 Case T-351/04 British Aggregates v Commission, ruling of 9 September 2010, and on appeal C-487/06 P [2008] ECR I-10515. 2211 SA.36740 (2013/NN) – Lithuania.

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In its decision N 533/01– Ireland: aid to promote renewable energy sources, the Commission considered a scheme in which the Irish government imposed on the state owned Electricity Supply Board (ESB) an obligation to purchase under 15 year contracts renewable electricity generated by new plants belonging to independent green electricity producers at a price to be determined by the lowest bid prices in each technology (wind, hydro, biomass). The additional costs incurred by the ESB would be collected by means of a levy imposed on all consumers by the network operator under the supervision of the Irish regulator (the latter would not become the owner of these payments).

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The Commission assessed the compatibility of that aid and found that the conditions of the Guidelines on environmental aid were met. It then went on to assess the compatibility of the levy with Articles 30 and 110 TFEU. It held that: “under this system, where one consumer would import all its electricity, the imported electricity, being the only electricity bought by the said consumer, would bear alone the charge of the connection. In this case although the levy would in principle not depend on the electricity consumption level, its practical effect would result in a charge imposed on imported electricity consumption” (pt. 25).

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Given the very low level of interconnection capacity between Ireland and Northern Ireland, the Commission deemed this to be a theoretical scenario. As the levy could be disconnected in practice from the consumption of electricity, it was found not to be subject to the constant practice of the Court and the Commission on para-fiscal levies.2212

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In Case C-206/06 Essent Noord, the Dutch measure was condemned as contrary to Article 30 TFEU as the surcharge levied by the network operator and paid to SEP for compensation for stranded assets, only applied to domestic electricity.2213

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In the 2014 Guidelines, discussed in chapter 5 below, the Commission stated that “ if a State aid measure or the conditions attached to it, including its financing method when it forms an integral part of it, entail a non-severable violation of Union law, the aid cannot be declared compatible with the internal market. For example, in the field of energy, any levy that has the aim of financing a State aid measure needs to comply in particular with Articles 30 and 110 of the Treaty” (para. 29). Since then, the Commission systematically checks the financing

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2212 In its decision concerning stranded costs in Portugal it would appear that the Commission has also taken the same approach – a charge per connection would not be problematic as this would not affect the volume of imported electricity. See below at book paragraph 5.441. 2213 [2008] ECR I-5497.

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method of RES support mechanism. In several cases, it found that the charges imposed to finance RES support mechanism were in breach of Articles 30 and 110. Ultimately, the Commission cleared the measures in return for Member States’ commitments to amend the support systems in a way that permitted cross-border access.2214 Free Movement

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If the Court establishes that Article 107(1) TFEU does not apply to a particular measure, this does not mean it will remain immune from appraisal under the rules on free movement. In PreussenElektra, the Court recognized that the quota and minimum price regulations imposed on regional supply companies with respect to locally-produced renewable energy could potentially have violated Article 34 TFEU – as it constituted a barrier to imported green energy - although it went on to find that the German measure did not in fact violate that Treaty provision. The Court has also applied this approach in two recent rulings concerning the scope of Article 34 TFEU to national support schemes for renewable energy. In both cases the Court held that the schemes in question could be justified on the basis of environmental policy grounds.

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The Ålands Vindkraft 2215 case and that of Essent Belgium2216 both concerned national restrictions on imports of renewable energy which arose from the application of territorial restrictions in the operation of green certificate schemes. Only domestic green energy could qualify for such a certificate. Advocate General Bot in his opinion in Ålands Vindkraft had urged the CJEU to rule on the validity of the Directive, finding that the national measure at issue in this case was caught by Article 34 TFEU.2217 In his view, whilst it is easy to accept that green certificate schemes contribute to environmental protection by stimulating the production of green energy, it would, on the other hand, appear somewhat paradoxical to assert that the importation of green energy from other Member States might undermine environmental protection (para 93).

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The Court confirmed that the national measures were indeed restrictions to the free movement of goods, but as the national schemes designed to achieve binding targets could be justified on the basis of Article 36 TFEU, if the relevant tests of necessity and proportionality were met.2218 In this respect it held that: “The 2214 2215 2216 2217 2218

See, e.g., State aid SA.38632 (2014/N) – Germany, EEG 2014 – Reform of the Renewable Energy Law. Case C-573/12, Ålands Vindkraft AB v Energimyndighete. ECLI:EU:C:2014:2037. Case C-204/12, ECLI:EU:C:2014:219. As was the third subparagraph of Article 3(3) of the Directive 2009/78. See by way of contrast Case C169/08 where a tax levied on passenger ferries from outside the territory of

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finding made by the Court in paragraph 79 of the judgment in PreussenElektra to the effect that the nature of electricity is such that, once it has been allowed into the transmission or distribution system, it is difficult to determine its origin and in particular the source of energy from which it was produced – remains valid.” Hypothecation In a further line of jurisprudence, the European courts have examined the link between a state aid measure and its financing further with reference to the concept of hypothecation in order to establish that the revenue from an indirect tax is necessarily linked to the financing of the aid. If the financing of the aid is an intrinsic part of the aid measure then even if the aid as such is compatible, the financing of the aid may not comply with other Treaty provisions. In the event of such hypothecation the revenue from the tax has a direct impact on the amount of aid, and consequently on the compatibility of the aid with the common market. In Case C-174/02 Streekgeweest Westelijk Noord-Brabant,2219 no such hypothecation was held to exist as it was clear that the provisions of the law introducing a waste tax did not hypothecate the tax to the financing of the tax exemption. This approach has been confirmed in the later cases of C-175/02 Pape 2220 and Joined Cases C-266 to C-270/04 Nazairdis SAS.2221 In Case C-206/06 Essent Noord, however, the Dutch measure was condemned as contrary to Article 30 TFEU as the surcharge levied by the network operator and paid to SEP for compensation for stranded assets, only applied to domestic electricity and the proceeds of the levy were set aside in a special fund. 2222 The Commission similarly concluded that a Luxembourg measure relating to a compensation fund for financing the additional costs involving the purchase of green electricity would infringe Articles 30 and 110 TFEU if it discriminated against imported green electricity. Luxembourg undertook to modify the regulation in question; so that the Commission could conclude that the reimbursement system was compatible with the Treaty.2223

2219 2220 2221 2222 2223

Sardinia but not on domestic companies was found to be a restriction of the free movement of services and could not be justified as an environmental measure. [2009] ECR 1- 10821. [2005] ECR I-85. [2005] ECR I-127. [2005] ECR 1-19481. See however Case C-526/04 Boiron, [2006] ECR 1- 7529. [2008] ECR I-5497. Case C43/02 (ex NN75/01) OJ 2009 L159/11. See also Case NN 162/03 and N316/06 Austria OJ 2006 C221/86.

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In its recent decisions, the Commission has been prepared to accept commitments from Member States to remove the discriminatory elements of such financing mechanisms. For example in the German EEG 2014 decision, it accepted that the system of support in question would be available, after 2017, for all technologies and for producers located in other Member States up to a percentage established as a function of the total capacity of interconnectiors connecting Germany to other Member States and EEA countries divided by the total electricity consumption in Germany and multiplied by the yearly new installed capacity (expressed in production volumes).2224

11.4 The Competition rules 5.284

Mention should also be made of the interaction of the Treaty competition rules (Articles 101 and 102 TFEU) and Articles 107 and 108 as a number of issues have arisen in the energy sector in relation to the potential parallel application of these two sets of rules, as well as the EC Merger Regulation. Both the Treaty articles and the Merger Regulation are discussed in Part 3 of this book.

11.4.1 Articles 101 and 102 TFEU 5.285

With respect to the possible interaction of Article 107(1) with Article 101(1) TFEU the leading case – C-225/91 Matra – was decided at the time when Regulation 17/62 was still in force. The applicants claimed, unsuccessfully, that the Commission had failed to co-ordinate its review of the state aid elements of a proposed package of support granted by the Portuguese government to Ford and VW who had formed a joint venture to produce multi-purpose vehicles, with its assessment for negative clearance of that joint venture under Article 101(1) and (3) EC.

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The Court dealt with the procedural aspects of the two sets of rules and stated that although these two procedures were distinct, and they must be carefully followed by the Commission, they must be applied consistently. In the Matra case the state aid decision finding compatibility was taken only three days after the publication of the Article 19(3) Notice in which the Commission stated that it intended to grant negative clearance to the joint venture agreement. The Courts concluded that the Commission can take a decision on the compatibility of the planned aid provided that it has formed the conviction, with sufficient probability that the operation is not in breach of Article 81 and 82 EC.2225 The 2224 S.A.383632, at paras 334-336. 2225 T-17/93 Matra v Commission ECR [1994] II-595 and Case C-225/91 Matra v Commission [1993] ECR

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doctrine of “substantive consistency” has been further strengthened in the SIDE case, where the CFI held that the Commission should have shown that it was in a position to arrive at a firm view, based on economic analysis that the recipient of the aid was not in contravention of Articles 101 and 102 TFEU.2226

11.4.2 The Merger Regulation In Case T-156/98 RJB Mining v Commission, the Commission approved a merger in the coal sector under the now defunct Article 66(2) ECSC whilst competitors were questioning whether there was a state aid element in the purchase price that benefited the acquiring party. The Commission did not address the state aid issue in its decision clearing the merger. The General Court annulled this decision on the grounds that, although the Commission was not required to assess the legality of the supposed aid, namely the aid inherent in the merger in a formal preliminary decision, it could not in its merger analysis ignore the extent to which the financial and thus the commercial strength of the merged entity was strengthened by the financial support provided by that supposed aid.2227 The “RJB doctrine” (the “inherent link” test) was applied in several subsequent decisions.2228 In Case T-114/02 BaByliss v Commission,2229 the General Court appears to have imposed limits on the doctrine by narrowing the scope of the inherent link test and by finding that whilst there might be such a link in a privatisation case, there was no such link in a case involving a merger between two private parties (at paragraph 441). The RJB case was appealed before the Court of Justice and it was the hope of many commentators that the higher court would take the opportunity to further limit what they view as a flawed doctrine. It is argued that the Commission should examine the strengthening of the competitive position of the recipient of an aid in the context of a state aid procedure and not as part of the merger decision, in line with the Matra doctrine. The appeal was however withdrawn.2230

I-3203, at paragraph 45. See also Case T-197/97 [2001] ECR II-303, paragraphs 76-78. 2226 T-49/93 SIDE v Commission [1995] ECR II-2501 at paragraph 72 and C-164/98 DIR International Film v Commission [2000]ECR I-1447, at paragraphs 29-30. 2227 [2000] ECR I-337 at paragraph 125. See also Case T-175/99 UPS v Commission [2002] ECR II-1915. 2228 See COMP M.2694. Metronet/Infraco and COMP M.2908 Deutsche Post/DHL and COMP M.2621 SEB/Moulinex, as well as COMP/ECSC.1350 Saarbergwerke II – the decision which followed the annulment of the first decision in RJB Mining. 2229 [2003] ECR II-1279. 2230 OJ [2002] C274.22.

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11.4.3 Conclusion 5.288

There are many aspects of the energy sector in which the State is inextricably involved and which may raise issues relating to the possible receipt of a selective benefit by a recipient. The “effects-based” definition of a state aid as developed in the jurisprudence of the Courts has to a certain extent been refined in recent judgments. Nevertheless, the definition of aid still remains open-ended and often unclear. This is hardly an ideal situation and leads to legal uncertainty. The Commission has gone some way to address this problem with the publication of the NOA. Nevertheless, the European Courts continue to enjoy the last word on the complex matter of when a measure is a state aid or not for the purposes of Article 107(1) TFEU.

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As we shall observe in the following chapter, the Commission is often tempted to avoid committing itself to a definitive statement on whether a measure is in fact aid and instead opts for a somewhat easier way out – by applying one of the exemption provisions and hence authorizing the measure in question. This of course means that the Commission remains firmly in the driving seat as Member States remain compelled to notify their aid schemes and measures to the Commission if they want legal security.

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CHAPTER 4 The application of EU state aid law to the energy sector

1.

Introduction

Although an aid measure may be characterised as state aid within the meaning of Article 107(1) TFEU, this does not mean that it is prohibited: Article 107(1) is a conditional prohibition in the sense that a state aid measure may nevertheless be deemed to be compatible with Article 107(2) or 107(3). The Commission has exclusive competence to rule on the compatibility of a particular measure – national courts cannot apply either Article 107(2) or (3). This Treaty Article provides for so-called automatic and discretionary exemptions. This chapter will examine the application of these exemptions to the energy sector. It will then turn to the potential application of Article 106(2) TFEU to finance support measures for services of general economic interest in the energy sector.

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1.1 The automatic exceptions – Article 107(2) TFEU With regard to the exceptions listed in Article 107(2) TFEU it is well established that the Commission has no discretion in their application. Its primary task is to ensure that the conditions for exemption are met.

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Article 107(2)(a) TFEU provides that aid having a social character and granted to individual consumers is compatible with the common market provided that the aid in question is granted without discrimination with regard to the origin of the products or service concerned. To determine if this is in fact the case, it must be ascertained whether consumers benefit from the aid in question irrespective of the economic operator supplying the product or service capable of fulfilling the social objective relied on by the Member State concerned. If, for example, a social form of aid was provided to consumers to install smart meters in

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their homes allowing them to switch easily between energy suppliers but the aid in question would only be disbursed if the consumers either purchased meters from locally based companies or had such meters installed by a local company, then Article 107(2)(a) could not apply.2231

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Article 107(2)(b) TFEU covers aid to make good damage caused by natural disasters or exceptional occurrences. This last exception has been considered to apply to certain state measures in the wake of the 9/11 disaster. It is, however, always applied very strictly.

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Finally, Article 107(2)(c) TFEU dealt with aid which is granted to certain areas affected by the division of Germany in so far as this is necessary to compensate for the economic disadvantages caused by that division. The various specific problems related to the transition of East Germany from a planned to a market economy were based on a series of unpublished Commission decisions on the “Treuhand Regimes”. This Article may be removed from the Treaty of Lisbon on the adoption of a Council Decision five years after the Treaty has entered into force.

1.2 The discretionary exceptions – Article 107(3) TFEU 5.295

Article 107(3) TFEU lists the conditions under which the Commission may exempt aid covered by Article 107(1) TFEU. It is settled case law that the Commission enjoys wide discretionary power in applying this Article and the Courts will only conduct a marginal review of the exercise of that power. The aid in question must be both necessary to achieve the stated objective and it must moreover be proportionate to the objective in terms of its intensity, duration and scope and must not distort competition to an extent contrary to the common interest. The trade-off between the advantages claimed and the distortion of competition must be assessed. The aid must contain a compensatory justification which takes the form of a contribution by the beneficiary over and above the normal working of market forces to the achievement of Community objectives.

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In order to assist Member States and potential aid recipients the Commission has published numerous guidelines and notices on the conditions under which certain types of aid may be considered compatible with Article 107(1) TFEU. These various guidelines and notices are considered to be binding on the Com-

2231 See in particular Joined Cases T-116/01 and T-118/01 P&O Ferries (Vizcaya) v Commission [2003], ECR [2003] II-2957, paragraph 163.

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mission and on the Member States if the latter have agreed to their contents.2232 Between 2006-2007 a large number of the existing guidelines came up for renewal and reassessment. This reassessment was carried out in accordance with the objectives of the SAAP, discussed in Chapter 1 at book paragraph 5.3. These included the regional aid guidelines 2007-2013, the framework for research and development and innovation 2006, environmental guidelines 2008 (see chapter 5), and guidelines on state aid to promote risk capital investments in small and medium-sized enterprises. On May 8, 2012, the Commission set out its reform programme in the “Communication on State aid Modernisation” (or “SAM”), subsequently supported by a Parliament Resolution in January 2013.2233 The State aid modernisation program is based on three primary objectives: (i) to foster growth in a strengthened, dynamic, and competitive internal market, (ii) focus enforcement on cases with the biggest impact on the internal market, and (iii) streamline rules and faster decisions. Within this context, the existing guidelines have once again been reviewed and updated. The current set of guidelines include the following: the framework for research and development and innovation ( June 27, 2014),2234 rescue and restructuring aid ( July 9, 2014),2235 regional aid (20142020),2236 agriculture (draft 2014-2020), environmental protection and energy aid ( June 28, 2014),2237 risk finance ( January 15, 2014),2238 broadband ( January 26, 2013),2239 aviation (April 4, 2014),2240 and a communication setting out criteria to analyse the compatibility of projects of common European interest ( June 20, 2014).2241 The Commission has recently announced that most sets of guidelines due to expire in 2020 will be maintained in force for two more years.

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It should be stressed that aid falling within the scope of a particular set of guidelines must still be notified for eventual clearance, albeit that if the notified measure or scheme fulfils the criteria set out in the guidelines, this should allow the Commission to reach a positive decision on the notified measure or scheme at the end of its preliminary investigation.

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2232 See Case C-242/00 Germany v Commission [2002] ECR I-5603, paragraph 27. 2233 Commission communication of 8 May 2012 (Com/2012/0209); European Parliament Resolution of 17 January 2013 (P7_TA(2013)0026). 2234 OJ [2014] C 198/1. 2235 OJ [2014] C 249/1. 2236 OJ [2013] C 209/1. 2237 OJ [2014] C 200/1. 2238 OJ [2014] C 19/4. 2239 OJ [2013] C 25/1. 2240 OJ [2014] C 99/3. 2241 OJ [2014] C 188/4.

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5.299

For example in its defence of a measure exempting large energy users from network charges, 2242 a measure not covered by the applicable guidelines, Germany claimed that the full exemption was contributing to security of supply and to the promotion of renewable electricity in three different manners (see recital (165)). It argued that the baseload consumers delivered a necessary stability service in the period 2011 to 2013 before the network stabilizing measures could be introduced. Germany argued that the continuous and constant electricity consumption by the exempted baseload consumers would relieve and stabilize the network. Germany also argued that the exempted baseload consumption would contribute to the promotion of renewable electricity by reducing the costs of such promotion. In particular, in the stable offtake of electricity by baseload consumers ensured that renewable electricity was always consumed when it was produced, which reduced the necessity to curtail and compensate the renewable electricity installations in case of curtailment. The Commission however held that as the full exemption is devoid of any locational signal and being granted without any consideration for network bottlenecks, the exemption from network charges could increase the costs of renewable electricity deployment.

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The Commission also rejected the argument that the exemption would contribute to security of supply as being based on a circular reasoning: “By arguing that baseload consumers are needed to maintain the operation of power plants, Germany and the interested parties are using a circular argument insofar as those power plants are required to cover those consumers’ own demand. Such an argument cannot support the view that the full exemption was appropriate to achieve security of supply.” [recital 186].

1.3 The exemption regulations 5.301

In addition to the various Guidelines on different forms of aid, the Commission has adopted several “horizontal” Regulations (BERs) on the basis of the enabling Council Regulation 994/982243 exempting certain types of aid from prior notification, albeit subject to strict conditions. These exemption regulations are, in principle, applicable to all sectors except agriculture and transport and are therefore of relevance to the energy sector. In order to qualify for exemption under one of the Commission Regulations it is necessary that the measure in question complies with the conditions as specified in the relevant regulation. The 2242 SA.34045 (2013/c) (ex 2012/NN) implemented by Germany for baseload consumers under Paragraph 19 StromNEV, 28.5.2018. 2243 OJ [1998] L142/1 as amended by Regulation 733/2013, OJ [2013] L204/11.

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first BERs were adopted in 2001 (applicable to training aid2244 and aid to small and medium sized enterprises2245 (“SMEs”)). The Commission gradually introduced new BERs for other categories of aid once it had gained sufficient experience in enforcing the State aid rules in other fields. The Commission introduced individual BERs for employment aid in 2002,2246 regional aid in 20062247, and R&D and environmental aid in 2008 together with a new, overarching General Block Exemption Regulation (see below). In April 2007 the Commission launched consultations on a ‘super BER’ which would consolidate the five existing BERs and would incorporate additional sets of guidelines.2248 This led in 2008 to the adoption of a General Block Exemption Regulation (GBER) 800/2008.2249 In line with the Commission’s ‘Better Regulation’ agenda, the GBER also harmonised, as far as possible, all horizontal aspects applying to the different aid areas concerned. The GBER therefore incorporated and repealed the content of a series of existing State aid instruments adopted by the Commission since 2001. Further, the Regulation integrated five new categories of aid: environmental aid, innovation aid, research and development aid for large companies, aid in the form of risk capital, and aid for enterprises newly created by female entrepreneurs. The exemption conditions for the latter type of aid measures were consistent with the revised guidelines applicable at that time on State aid for environmental protection,2250 the risk capital guidelines2251 and the Framework on Research & Development & Innovation.2252

5.302

The GBER originally applied until December 31, 2013, but was extended until June 2014 leaving the Commission additional time to introduce a greatly revised GBER consistent with its SAM objectives and the updated ‘enabling Regulation’.2253 The GBER (Regulation 651/2014)2254 entered into force on July

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2244 OJ [2001] L10/20, as amended by Commission Regulation 363/04, OJ 2004 L63/20. 2245 Exempting notification for aid to SMEs provided that the recipient undertaking(s) either employ fewer than 250 people or have a turnover of less than Euro 40 million or an annual balance sheet of Euro 27 million. See Commission Regulation 70/2001, OJ [2001] L10/3333, as amended by Commission Regulation 364/04, OJ 2004, C63/22 and Commission Regulation 1976/2006, OJ [2006], L368/85. See also Case T-137/02 Pollmeier Malachov v Commission, ECR [2004] II-3541. 2246 OJ [2002] L337/3 as amended by Commission Regulation 1976/06, OJ [2006] L368/85. 2247 OJ [2006] L302/29. For a fuller discussion of the terms of these different regulations, see Hancher et al., EC State Aids, 3rd edition, 2006. 2248 IP/07/549. 2249 OJ [2008] L214/3. 2250 See IP/08/80 and MEMO/08/31. 2251 See IP/06/1015. 2252 See IP/06/1600 and MEMO/06/441. 2253 OJ [2013] L204/11. 2254 OJ [2014] L187/1.

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1, 2014, introducing in broad terms: (i) increased thresholds for aid measures already covered by the GBER, (ii) new categories of exempted aid, and (iii) simplified and clarified exemption conditions. The new categories of block exempted aid include: aid to repair damage caused by certain natural disasters, social aid for transport for residents of remote regions, aid for broadband infrastructures, aid for innovation, aid for culture and heritage conservation, and aid for sport and multifunctional recreational infrastructures. The Commission reviewed the scope of the GBER in December 2015, notably with the aim to develop criteria for port and airport infrastructure aid.2255 Promotion of environmental protection

5.304

The first GBER2256 built further on the 2008 Guidelines on State aid for environmental protection,2257 by exempting from notification a set of varied subsidies promoting environmental protection. The simplified treatment offered by the Regulation constituted one more tool for Member States to implement the EU’s Climate Action Plan.2258 All of the 26 categories of aid covered in the Regulation could be provided to SMEs. To the extent such aid was also available to large companies, SMEs would benefit from an additional top-up. Aid was only allowed if it has an incentive effect (i.e. if it results in investment that would not take place in the absence of the aid). To this end, the GBER provided different criteria for the verification of the incentive effect, but for SMEs, the incentive effect was deemed to be present if the application for aid was submitted prior to the start of the project.

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The current GBER2259 came into force at the same time as the revised guidelines on State aid for environmental protection and energy (the EEAG), applicable from July 1, 2014 until December 1, 2020 (repealing the 2008 guidelines).2260

2255 Commission Regulation (EU) 2017/1084 of 14 June 2017 amending Regulation (EU) No 651/2014 as regards aid for port and airport infrastructure, notification thresholds for aid for culture and heritage conservation and for aid for sport and multifunctional recreational infrastructures, and regional operating aid schemes for outermost regions and amending Regulation (EU) No 702/2014 as regards the calculation of eligible costs. 2256 Commission Regulation (EC) No 800/2008 of 6 August 2008 declaring certain categories of aid compatible with the common market in application of Articles 87 and 88 of the Treaty, OJ [2008] L241/3. 2257 OJ [2008] C82/1. 2258 See IP/07/29 and IP/08/80. 2259 Commission Regulation (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty, OJ [2014] L187/1. 2260 OJ [2014] C200/1.

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As the revised title suggests, the Guidelines now have a broader scope and cover energy infrastructure, energy capacity, and reductions from electricity levies (for more information see Book Pt. 5 Ch. 5). With respect to environmental protection measures, the GBER closely reflects the principles of the Guidelines, seeking to assist Member States in achieving their Europe 2020 climate targets. In particular, the revised GBER contains new categories of exempted aid such as: costs to remediate contaminated land, operating aid for renewable electricity production, small-scale renewable energy installations, measures to rehabilitate buildings, and categories of waste recycling aid. As in the previous GBER, SMEs are able to benefit from all categories covered the Regulation, including certain additional SME-specific categories of aid. The “ deemed presence” of an incentive effect for SMEs remains unchanged as well. The broader changes with respect to SMEs include a new category on aid for costs incurred when participating in European territorial cooperation projects (allowing support up to Euro 7.5 million), a wider range of companies eligible for measures to help gain access to finance, a replacement of the previously applicable ‘funding tranches’ of Euro 1.5 million by an overall company-specific limit of Euro 15 million, and a broader scope of funding instruments eligible for exemption.

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Aid measures not included in the GBER are not necessarily illegal. They remain subject to the traditional notification requirement: the Commission will examine such notifications on the basis of the existing guidelines and frameworks. This Regulation only applies to ‘transparent’ forms of aid: i.e. grants and interest rate subsidies, loans where gross grant equivalent takes account of the reference rate, guarantee schemes, fiscal measures (with a cap) and some types of repayable advances.

5.307

The GBER applies to nearly all sectors of the economy, except fisheries and aquaculture, agriculture and parts of the coal sector. Regional aid schemes targeted at specific sectors of economic activity are excluded, and it does not apply to aid to export- related activities or to preferred use of domestic over imported goods. Finally, the GBER does not apply to ad hoc aid to large undertakings, (this exclusion does not concern regional investment and employment aid).

5.308

Cumulation of different measures under the GBER is possible as long as they concern different identifiable eligible costs.2261 Cumulation is not allowed for

5.309

2261 Following the recent adoption of Council Regulation (EU) 2018/1911 of 26 November 2018 amending Regulation (EU) 2015/1588 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to certain categories of horizontal State aid, the GBER provisions can be amended to allow exemption for projects co-funded by EU funds.

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partly or fully overlapping costs if such cumulation would lead to exceeding the highest allowable aid intensity applicable under GBER.

5.310

If the aid cannot be brought within the Regulation and on the assumption that it is not de minimis within the meaning of the de minimis Regulation,2262 it must be notified to the Commission and is subject to the “standstill” provision, as discussed further at book paragraph 5.628.

2. 5.311

The individual exemptions

Article 107(3) TFEU provides for several categories of exemption. Article 107(3)(a), b) and (c) TFEU are the most relevant to the energy sector and are examined in detail below. Article 107(3)(d) TFEU provides for a discretionary exemption from measures aimed to promote culture and heritage conservation. Finally, it may be noted that Article 107(3)(e) TFEU provides for such categories of aid as may be specified by decision of the Council acting by a qualified majority on a proposal from the Commission. Council Regulation 1407/2002 on state aid to the coal industry after expiry of the ECSC Treaty is based on this provision.2263

2.1 Article 107(3)(a): Regional aid 5.312

Article 107(3)(a) TFEU provides that aid to promote the economic development of areas where the standard of living is abnormally low or where there is serious underemployment may be considered compatible with the common market.

5.313

The criteria applied by the Commission in assessing the compatibility of regional aid with the common market are currently set in the 2013 guidelines on regional aid.2264 These guidelines apply from 2014 to 2020, and replace the 2007-2013 guidelines.2265 In line with the State Aid Action Plan and the renewed State aid Modernisation objectives, the guidelines call for less and better targeted state aid, concentrating on the most deprived regions of the enlarged EU, while allowing for the need to improve competitiveness and to provide for a smooth transition. These Guidelines apply to every sector, with some limited exceptions. 2262 2263 2264 2265

OJ [2006] L 379/5, as revised by OJ [2013] L352/1. OJ [1998] L202/1. OJ [2013] C209/1. OJ [2006] C 54/13.

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They also applied to the energy sector, up until the end of 2013. The Commission will continue to assess energy related measures from 2014 onwards under the revised guidelines on State aid for environmental protection and energy (discussed further below), while taking the “specific handicaps of the assisted areas” into account.2266 Regional aid should be designed to favour less developed regions by supporting investment and job creation in a sustainable context and by promoting expansion, modernisation and diversification of activities of undertakings located in those regions and by encouraging new firms to settle there. Operating aid is normally prohibited.

5.314

Exceptionally however such aid may be granted in regions eligible for an Article 107(3)(a) TFEU derogation provided that it is (i) justified in terms of its contribution to regional development and its nature and (ii) it is proportional to the handicaps it seeks to alleviate. It is for the Member State to demonstrate the existence and importance of any handicaps.2267 In its Decisions on the Hungarian and Polish PPAs, the Commission rejected the application of the Regional Guidelines to the aid granted through the PPAs.2268 The Commission also rejected the application of the Guidelines in the Alcoa case.2269

5.315

In certain sectors where particular Commission guidelines apply, aid cannot normally be approved solely on the basis that it falls within the scope of a general regional aid scheme which has been authorised pursuant to Article 107(3) (a) TFEU. A confirmation of this approach can be found in HGA v Commission which concerned aid granted to hotels under a general regional aid scheme in the Regione autonoma della Sardegna.2270 In that case, the Court reiterated that “[a]lthough that requirement [whether the region in question was eligible for regional aid] is an indispensable condition in order for the exception in Article 107(3)(a) TFEU to apply, the fact remains that it does not mean, as the Commission suggests, that any aid project which might be carried out in the Regione autonoma della Sardegna will automatically be considered necessary for its development. Therefore, that factor alone will not define the scheme in question as being necessary for the development of that region.”2271

5.316

2266 2267 2268 2269

See OJ [2013] C209/1, fn 14. See Point 5 of the Guidelines See OJ [2009] L225//53 (Hungary) at paras 392-398. See OJ [2010] L 227/62, at paras 220-261, and on appeal before the General Court in Case T-332/06 [2009] ECR II-00029, and before the Court of Justice in Case C-194/09P [2011] ECR I-06311. 2270 Case C-630/11 (ECJ 2013). 2271 Case C-630/11 HGA v Commission, paras. 111-112 [emphasis added].

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5.317

Instead, the Commission must take the Community interest into account and consider the impact of the aid on trade and the sectoral repercussions to which it might give rise at Community level.2272

2.2 The Financial Crisis – the Temporary Frameworks 5.318

The financial crisis of 2008 led Member States to take steps to support their industries and financial institutions. Article 107(2)(b) TFEU provides a possibility for the Commission to authorise aid to deal with exceptional circumstances while Article 107(3)(b) TFEU allows aid to remedy a serious disturbance to the economy – an exception which, understandably, was always interpreted very narrowly in the past. Limited reliance on Article 107(2) (b) EC was allowed in the wake of the September 11 attacks on the USA.2273 Article 107(3)(b) EC, however, had rarely been relied upon prior to the current economic crisis. The Temporary Community Framework

5.319

In response to a steady flow of national measures intended to rescue and restructure both financial institutions and to provide support to firms in the ‘real economy’, the Commission modified a number of its then existing Guidelines in an effort to allow Member States more flexibility to support their ailing financial institutions and companies, but at the same time to ensure that the State Aid rules continue to have some disciplining effect against resort to protectionist measures. To this end, the Commission adopted a Temporary Community Framework to support access to finance for the period December 2008 to 31 December 2010,2274 although certain measures were extended until 31 December 2011.2275 Further clarifications regarding the applicability of Article 107(3) (b) TFEU and the application of the criteria for allowing aid in the form of guarantees were issued in late February 2009.2276 The temporary framework expired in December 2011.2277

5.320

The Temporary Framework also placed importance on the production of more environmentally friendly products, for which access to finance may become difficult. In order to preserve the EU’s environmental commitments, the Tempo2272 See e.g., joined cases C-278/92, C-279/92 and C-280/92 Spain v Commission [1994] ECR I-04103, at paragraph 49. 2273 See Bo Jaspers, M. ‘Emergency Aid’ (2004) ECLR 546. 2274 OJ [2009] C16/1. 2275 OJ [2011] C6/5. 2276 OJ [2008] C244/11. 2277 See e.g.; OJ [2011] C 356/7; and Commission Press Release of July 10, 2013 (IP/13/672).

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rary Framework set rules for measures consisting in interest-rate reduction.2278 Measures of this kind that had received Commission approval include a UK scheme providing interest rate subsidies for businesses investing in the production of cars that meet high environmental standards,2279 and a similar scheme launched by Spain.2280

2.3 Article 107(3)(b) TFEU: Projects of common interest Article 107(3)(b) TFEU provides that aid may be compatible with the common market if it promotes the execution of an important project of common European interest (IPCEIs). As with any exemption from a Treaty principle, the European “Courts have repeatedly confirmed that the exemption must be interpreted strictly.2281 Point 147 of the old Guidelines on environmental aid2282 provides that aid to promote the execution of important projects of common European interest which are an environmental priority and will often have beneficial effects beyond the frontiers of the Member States concerned, can be authorised under this provision. The Courts can review whether the Commission has conducted the balancing test correctly.2283

5.321

In its decision on the UK Emission Trading Scheme, the Commission considered the application of Article 107(3)(b) TFEU to the scheme, acknowledging that such schemes could well be considered as projects of common European interest. However, it went on to conclude that many of the key elements of the design of the UK scheme would not necessarily be reflected in a European scheme – in particular because the British scheme was not mandatory – and therefore based its assessment on Article 107(3)(c) TFEU.

5.322

Although unrelated to the energy sector, the following case is exemplary. On October 15, 2014, the Commission cleared several tax and related measures granted in favour of the Øresund Fixed link project (a combined road and rail link connecting Sweden and Denmark) on the basis of its compatibility as a IPCEI under Article 107(3)(b) TFEU.2284 The Commission applied the criteria adopted in its IPCEI Communication, discussed below. In particular, the Commission placed importance on the fact that the project was the longest com-

5.323

2278 2279 2280 2281 2282 2283 2284

See Temporary Framework, para. 4.5 ‘Aid for the production of green products’. See IP/09/333. See IP/09/499. See Case T-150/12 Greece v Commission T:2014:191 at para 146 and the case laws cited there. OJ [2008] C82/1. See in this respect Case T-68/15. OJ [2014] C437/1 and C437/2.

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bined road and rail bridge in Europe connecting two Member States, and was one of the European Council’s 1994 priority projects (under TEN-T). Without the aid measures, the Commission concluded that the project would likely not have taken place, inter alia, because the project had been discussed for over 35 years and there was no indication that it would have been built without public support. In September 2018 the GC partially annulled the decision in its ruling in Case T-68/15, inter alia, on the grounds that the Commission had not correctly applied the tests of the necessity and proportionality of the aid measures in question.2285 The trans-European energy infrastructure Regulation

5.324

Of direct relevance to the energy sector, the Commission adopted a Regulation on 17 April, 2013, that lays down guidelines for trans-European energy infrastructure, intended to facilitate a faster development and interoperability of trans-European energy networks (“TEN-E”).2286 In particular, it aims to (i) help identify projects of common interest (“PCEI”) needed to implement ‘priority corridors’2287 and areas that fall under a number of ‘energy infrastructure categories’ such as electricity transmission and storage; gas transmission and storage, LNG and CNG infrastructures, smart grids; carbon dioxide transport; and oil infrastructure,2288 (ii) streamline and accelerate the process of granting permits, (iii) provide rules and guidance for the cross-border allocation of costs and riskrelated incentives, and (iv) determine conditions for PCEIs eligible to receive Union financial assistance (under the ‘Connecting Europe Facility’).2289

5.325

In January 2018 the Commission adopted a decision setting up a strategic forum of experts in the field of strategic value chains and investment projects, in particular in relation to Important Projects of Common European Interest, and to define its tasks, objectives and structure. The Forum should provide the Commission with advice and expertise, with a view to helping to build a common Union 2285 T:2018:563. 2286 Regulation (EU) No 347/2013 of 17 April 2013 on guidelines for trans-European energy infrastructure and repealing Decision No 1364/2006/EC and amending Regulations (EC) No 713/2009, (EC) No 714/2009 and (EC) No 715/2009, OJ [2013] L 115/39. For a detailed review of the impact of Regulation 347 see the assessment carried out for the Commission by Trinomics, available at: trinomics.eu/wp-content/uploads/2018/08/Evaluation-of-the-TEN-E-Regulation.pdf 2287 As defined in Annex I of the Regulation. 2288 The full list of priority energy infrastructure categories can be found in Annex II. The Commission published its first list of PCIs in 2013. The list is updated every two years. 2289 Regulation (EU) no 1316/2013 of 11 December 2013 establishing the Connecting Europe Facility, amending Regulation (EU) no 913/2010 and repealing Regulations (EC) no 680/2007 and (EC) no 67/2010, OJ [2013] L 348/129.

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vision on the key value chains for Europe and facilitate agreements to design and take forward new investment projects in key value chains in Europe through cooperation and coordination between public authorities and key stakeholders from several Member States.2290 The Regulation sets out the following (cumulative) general criteria in Article 4 for identifying the PCI-status of a project: 1.

the project is necessary for at least one of the energy infrastructure priority corridors and areas;

2.

the potential overall benefits of the project outweigh its costs, including in the longer term, (the CBA methodology), and

3.

the project either: (i) involves at least two Member States by directly crossing the border, (ii) is located on the territory of one Member State and has a significant cross-border impact,2291 or (iii) crosses the border of at least one Member State and a European Economic Area country.

5.326

The Regulation continues to set out specific compatibility criteria for the ‘energy infrastructure categories’ in Article 4(2). Electricity and gas projects must at least facilitate market integration, sustainability, competition, or security of supply. Smart-grid electricity projects (as defined in Annex II.2), however, must meet 6 cumulative criteria, including: user participation, DSO-TSO interoperability, quality of supply, and optimised planning. Oil PCIs must significantly contribute to: security of supply, efficient and sustainable use of resources through mitigation of environmental risks, and interoperability.

5.327

For example, The Trans Adriatic Pipeline is recognised as a project of common interest (PCI) in the framework of the EU’s Trans-European Energy Infrastructure Guidelines. The Commission has assessed the compatibility of certain support measures provided under a Host Government Agreement by Greece to TAP AG with the internal market pursuant to section 3.8 “Aid to energy infrastructure” of the EEAG 2014 (see Chapter 5).2292

5.328

2290 OJ 2018 C39/3. 2291 Cross border impact is defined in Annex IV.1 of the Regulation. 2292 SA.43879.

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5.329

In 2018 Bulgaria and Greece notified the Commission of certain measures to support the construction of IGB – an interconnector between the two countries. As with TAP, the IGB has been included in the list of European Projects of Common Interest, given its strategic importance for the diversification of natural gas supplies into Eastern Europe through the Trans Adriatic Pipeline (at present 98% of gas imports in Bulgaria come from a single source). The IGB pipeline will connect the DESFA and TAP gas transmission systems in Greece with the gas transmission system in Bulgaria. The measures assessed under the 2014 EEAG are: –

An unconditional state guarantee to be granted by the Bulgarian State to BEH to cover the €110 million loan that the company will receive from the EIB. This guarantee will be granted to BEH free of charge.

–

The €39 million direct financial contribution by Bulgaria via the Bulgarian OPIC programme.

5.330

A fixed corporate tax regime that will apply to ICGB AD for 25 years from the start of commercial operations and will be governed by an intergovernmental agreement between Bulgaria and Greece. The Commission has adopted two separate decisions declaring the national measures to be compatible aid under the EEAG 2014: SA.51023 (Bulgaria) and SA.52049 (Greece).

5.331

Notably neither the TAP nor the IGB projects were assessed as IPCEIs – but as PCIs.2293 The IPCEI Communication

5.332

On 20 June, 2014, the Commission published a broad communication setting out the criteria to analyse of the compatibility of State aid to promote the execution of important projects of common European interest (the Communication)2294 which updates and replaces the previously applicable rules within the R&D and Innovation Framework and the Environmental Guidelines. The Communication now applies to potential IPCEIs in all sectors of economic activity, making it easier to support projects with a clear European dimension that would normally have to be assessed under several different sets of State aid rules. The eligibility criteria hinge on three main pillars: (i) the project needs to be well defined, (ii) it must fulfil strict cumulative criteria to determine its qualification 2293 SA.43879 – Hellenic Republic, 3.3.2016. 2294 OJ [2014] C188/4.

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under ‘common European interest’, and (iii) the project must be of qualitative and/or quantitative importance. Granted aid, as always, should be necessary and proportional.2295 Of particular relevance to the energy sector, the second criterion mentioned above is more easily assumed if the project falls within the scope of the Energy Strategy for Europe,2296 the 2030 framework for climate and energy policies,2297 the European Energy Security Strategy,2298 or the Trans-European Transport and Energy networks (as discussed above).2299

5.333

According to the Commission, “[t]he deployment of IPCEIs often requires a significant participation from public authorities since the market would not otherwise finance such projects.” 2300 As such, if an IPCEI falls under the definition of State aid, it should nevertheless be declared compatible if it adheres to the conditions set out in the Communication. Any such project must still be notified to the Commission (see Section 5), but if a clear compatibility assessment is delivered along the lines set out in the Communication, the Commission’s assessment can be expected to be more timely and efficient.

5.334

2.4 Article 107(3)(c) TFEU: Development of economic activities or areas Article 107(3(c) TFEU provides that aid to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest may be considered compatible with the common market. This exception is therefore wider than that provided under Article 107(3)(a) TFEU but at the same time it can only be granted under stricter conditions. In principle it does not allow for aid to be granted for the development of individual undertakings – the measure in question must contribute to the development of the particular sector or region. The aid must ensure that there is an improvement in the way 2295 See further Case T-68/15 Oresund, op cit. at para 196. 2296 Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions – ‘Energy 2020 – A strategy for competitive, sustainable and secure energy’ – COM(2010) 639 final. 2297 Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, ‘A policy framework for climate and energy in the period from 2020 to 2030’ – COM(2014) 15 final. 2298 Communication from the Commission to the European Parliament and the Council, ‘European Energy Security Strategy’, COM(2014) 330 final. 2299 Supra, OJ [2013] L 115/39. 2300 OJ [2014] C188/4, para. 5.

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in which the economic activity is carried out. Merely keeping an ailing company alive in a period of recession does not amount to facilitating development. As noted, the Commission has adopted various guidelines on the application of Article 107(3)(c) TFEU to particular forms of aid and for aid to particular sectors. In applying Article 107(3)(c) TFEU the Commission must assess whether the aid is both necessary and proportionate.

2.5 The Regional Aid Guidelines 5.336

Article 107(3)(a) and (c) TFEU both deal with regional aid, albeit under somewhat different conditions. The disadvantaged regions qualify for the highest rates of aid under Article 107(3)(a) TFEU, as well as operating aid. The Member States joining the Union in May 2004 were granted Article 107(3)(a) TFEU status. The same applies to the 2007 Accession countries – Romania and Bulgaria as well as Croatia (as of 2013).

5.337

Aid to Article 107(3)(a) TFEU regions may exceptionally cover operating aid, and higher aid intensities are permissible in these types of region. However, the Union interest in undistorted competition must be weighed against the principle of Community solidarity so that regional aid to a doomed firm cannot be viewed as ‘aid to promote economic development’ in the area concerned within the meaning of Article 107(3)(a) TFEU.2301 The Commission must take into account the impact of the aid on the sector as a whole even if it is not expressly required by the terms of this Article to examine the impact of the aid on ‘trading conditions’ as is required by the stricter test imposed under Article 107(3) (c) TFEU.2302 No regional aid can therefore be authorised in sectors with serious structural problems.2303

5.338

It is established Commission practice, now endorsed by the Courts, only to grant an exemption on the basis of either Articles 107(3)(a) or (c) TFEU to multi-sectoral general aid schemes open in a given region to all firms in the sector concerned, as opposed to individual ad hoc subsidies to a single firm, or aid confined to one area of activity.2304 The Commission therefore opened a full investigation into an Italian measure to grant ad hoc regional aid allowing the takeover of a closed traditional power plant for its conversion from conventional fuel to palm oil. As the works on the project had started before the aid was 2301 2302 2303 2304

See Case T-126/96 Breda Fucine [1998] ECR II-3437. Case C-169/95 Spain v Commission [1997] ECR I-135. Case T-27/02 Kronofrance SA v Commission, [2004] ECR II-4177. Case T-152/99 HAMSA v Commission [2002] ECR II-3409, at paragraphs 201-209.

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granted, the Commission doubted as to whether the measure could have a real incentive effect. Second the Commission doubted whether the transactions in the framework of the takeover of the closed power plant were based on market conditions. Finally the impact on the region where the plant is situated had to be fully investigated.2305 On 15 September 2010 the Commission found that the aid measure was incompatible with the internal market. On appeal, the General Court fully supported the Commission’s analysis and dismissed the appeal.2306 Since the regional aid ceilings are in general designed to provide an incentive for the type of investment facing the biggest problems and are usually in excess of the average regional aid handicaps, the Commission had originally adopted a Framework on Regional Aid for Large Investment Projects – also known as the Multi-Sectoral Framework.2307 On the basis of this framework the Commission assessed on a case-by-case basis a maximum allowable aid intensity for large projects which might lead to the authorised aid intensities being below the applicable regional ceilings.

5.339

As a result of this sector-wide approach, an ad hoc payment for example to a power producer to locate a new generation plant in a particular region would not be compatible with Article 107(3)(a) or (c) TFEU as a form of regional aid. Prior to the adoption of the 2006 Regional Guidelines, this would not have precluded the Commission exempting it on the basis of Article 107(3)(c) TFEU on other grounds, for example in the interest of environmental protection or energy security, and from applying the ceilings specified in the Guidelines and the Multi-sectoral Framework accordingly. An example of such an individual aid arose in relation to a project initiated by the Basque authorities for the construction of a CCT power station and a re-gasification plant to be built near the port of Bilbao.2308 After some adjustments to the amounts and categories of eligible expenditure to bring the package into line with both the then applicable regional guidelines and the Multi-sectoral Framework, the Commission approved the aid.

5.340

This decision is illustrative of the technical complexities imposed by the detailed rules in the frameworks as then in force, as well as the need to consider the interaction of different guidelines and frameworks which may be applicable to the same set of measures. Furthermore, the interaction of the regional aid guidelines

5.341

2305 2306 2307 2308

C 8/09 Fri-El Acerra, OJ [2009] C 95/20. Case T-551/10 Fri-El Acerra Srl v Commission T:2013:430 OJ [1998] C74/9. OJ [2002] L329/10.

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and those relating to restructuring aid may also need to be examined.2309 On December 21, 2005 the Commission decided to cease the application of the Framework to aid notified or awarded after December 31st, 2006 and replaced it with the rules applicable to large investment projects, as laid down in section 4.3 of the old regional guidelines.2310

5.342

The most recent SAM reform was partly inspired by these issues, i.e., that stakeholders (and the Commission) would face multiple sets of rules applicable to the same aid measure. All new guidelines and legislation have therefore been revised, streamlined and consolidated, in accordance with the third SAM objective. In the current 2014-2020 regional guidelines,2311 the Commission has taken a far more restrictive approach to large investment projects. In its policy briefing,2312 the Commission considers that large enterprises/investment projects are less affected by regional handicaps, and is generally sceptical about the effectiveness of aid in these regions. In particular, the Commission is worried about ‘follow up’ investments, i.e., those granted after the initial investment was made in the region, for which it claims that granting aid would be paramount to “ handing out free money” (inter alia, due to potential economies of scale).2313 It therefore wishes to limit aid to truly ‘new’ projects under strict conditions for the more developed assisted regions. This restriction, however, will not apply to the least developed (‘category a’) regions, as long as the contribution value to development exceeds negative effects on competition.

5.343

As we shall see below, in practice in regard to the energy sector, the Commission has relied most heavily on Article 107(3)(c) TFEU. Where appropriate regional considerations may still be examined in its assessment even if the regional aid guidelines as such are not at issue.2314 In Case SA.33823 the Commission cleared State aid granted to Kraftnät Åland Abin designated to support the construction of an electricity cable between mainland Finland and Aland.2315 The rationale for the measure was the insufficient budget of the Aland region for the period between 2012 and 2015. The project’s purpose was to secure the supply of back-up power to Aland until 2032. Among others, the Commission found that the only existing way to transfer electricity to Aland was through Sweden, and that any disruption in that connection would leave Aland without sufficient 2309 2310 2311 2312 2313 2314 2315

Case T-152/99 Molina v. Commission ECR [2002] II-3049, at paragraphs 199-209. See further, Hancher et al., EC State Aids, 5th edition, 2016. OJ [2013] C209/4. Competition Policy Brief [2014] Issue 14. Ibid., p. 4. OJ [2001] C 265/5. OJ [2012] C 382/3.

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backup power. An alternative to the proposed cable would be a substantial expansion of gas turbines to replace Aland’s backup system. This however, would have been a less favourable alternative, inter alia, for environmental reasons. In its analysis under Art. 107 (3)(c), the Commission concluded that on balance the envisaged project was positive in light of its common interest objective.2316

2.6 The Regional Aid Guidelines for 2014-2020 The current regional aid guidelines2317 are applicable to all regional aid awarded after 30 June 2014.2318 The scope of the guidelines has changed significantly, and no longer applies to the energy sector.2319 In footnote 14, the Commission makes it clear that the assessment of State aid in the energy sector will continue to take place along the principles contained in the new environmental protection and energy aid guidelines (see chapter 5), while taking into account specific handicaps in the assisted areas. Despite this change, and therefore the limited continued relevance for the energy sector, the broad changes can be summarized as follows.

5.344

First, the overall share of regions eligible to receive aid will increase from 46.1% to 47.2% of the EU population. The total percentage of Europeans living in least developed (“a”) regions, however, decreased to 25% as compared to 33% when the previous Guidelines were adopted. Second, more aid categories will be exempt from notification, e.g., operating and transport aid for the outermost regions, which will significantly reduce the burden on the Commission and the Member States concerned. Third, the Commissions adopts a more restrictive approach towards aid to large enterprises and/or large investment projects in the more developed assisted areas.2320 Such measures will be subject to an indepth assessment, in particular as regards the incentive effect, proportionality of the measure in question, and its overall contribution to regional development. At the same time, the Commission has lowered the maximum ‘aid intensities’ in all regions except the poorest ones by 5%.2321 Finally, a new publication requirement has been adopted according to which Member States must publish detailed information on the aid granted on a central website.2322

5.345

2316 Ibid., Section 3.1. 2317 OJ [2014] C290/1. 2318 The RAG provides for a mid-term review of the regional aid maps in June 2016. The amended regional aid maps will be in force from 1 January 2017 to 31 December 2020. OJ 2016/C 231/01. 2319 See Point 11 of the regional guidelines. 2320 See e.g., ibid., para. 20(c). 2321 Ibid., Section 5.4. 2322 Ibid, Section 3.8.

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2.7 Research and Development and Innovation Framework 5.346

On 27 June 2014, the Commission adopted a new “Framework for State aid for research and development and innovation” (“R&D&I”) which sets out criteria for assessing the compatibility of State aid granted in pursuit of stated objectives, replacing the previously applicable “Community Framework” adopted in 2006.2323 R&D&I aid will, according to the Commission, primarily be justified under Articles 107(3)(b) and 107(3)(c) TFEU.2324 Promoting R&D&I is considered to be an objective of great Union importance, underlined in inter alia Article 179 TFEU and the Europe 2020 strategy2325 and is expected to “contribute to smart, sustainable and inclusive growth.”2326 The Framework applies to State aid for R&D&I in all sectors governed by the Treaty, regardless of whether other sectoral or specific State aid rules apply – with the exception of firms falling under the scope of rescuing and restructuring guidelines.

5.347

The Framework identifies five main series of R&D&I measures for which State aid may, under specific conditions, be compatible with the internal market. These include: (i) aid for R&D projects falling within the category of “ fundamental or applied research” targeted at remedying market failures, (ii) aid for feasibility studies related to R&D projects, (iii) aid for the construction and upgrade of research infrastructures, (iv) aid for innovation activities – mainly targeted at market failures (knowledge spill-overs), and (v) aid for innovation clusters.2327

5.348

The R&D&I Framework is of particular (and increasing) importance to the energy sector considering the key theme of innovation underlying the Energy Union Package.2328 Several State aid measures have been cleared by the Commission under the R&D&I Frameworks.

5.349

The following cases are illustrative:

2323 OJ [2014] C 198/1, replacing OJ [2006] C 323/1. 2324 OJ [2014] C 198/1, para. 5. 2325 Communication from the Commission, ‘Europe 2020 — A strategy for smart, sustainable and inclusive growth’, COM(2010) 2020 final, 3.3.2010. 2326 OJ [2014] C 198/1, para. 4. 2327 OJ [2014] C 198/1, para. 12. 2328 Energy Union Package of 25 February 2015, COM(2015) 80 final.

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Swedish wave energy project.2329 On November 9, 2011, the Commission cleared State aid of around € 15 million granted by Sweden for the development of a ‘wave energy production demonstration plant’ by Seabased Industry AB, by declaring it compatible with the R&D&I Framework. The Commission found that the research project would have been unable to attract private sector funding, considering the fundamental risks and complexity of the project.2330 The Commission also acknowledged the positive externalities that could result from the project in terms of knowledge spill-over,2331 environmental protection and security of energy supply.2332 The Commission also acknowledged the existence of a “general market failure in the area of the renewable energy technology at EU level.”2333 It did not consider that competition issues would arise given the limited expected market shares of the beneficiary and the existence of competing projects in other Member States.

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French aid for the “Genesys” research programme for third-generation biorefineries.2334 On May 15, 2013, the Commission cleared a grant and capital injection amounting to € 39.8 million under the R&D&I Framework to the Institut d’Excellence en Énergies Décarbonées in order to set up a Public-Private Partnership (PPP) R&D program called “Genesys” aimed at developing “zero-waste, positive-energy” third‑generation biorefineries using oilseed and lignocellulosic biomass to produce clean energy. The Commission found that the aid addressed a serious market failure due to information asymmetries that hampered the ability to attract proper funding from financial markets.2335 At the same time, the project would result in positive externalities in terms of scientific, environmental and public health knowledge, and would otherwise not have been set up without the aid (i.e. there was a positive incentive effect).

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French aid for the “SuperGrid” research program.2336 On September 16, 2014, the Commission approved under the newly adopted 2014 R&D&I Framework, a subsidy of € 86.6 million granted for a research project aimed at developing a new generation of long-distance energy transmission networks. SuperGrid networks are designed for large-scale transmission of energy from renewable sources, usually from an off-shore location, by using high-voltage

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2329 2330 2331 2332 2333 2334 2335 2336

Case SA.32263 of 9 November, 2011. Ibid., paras. 39-45. Ibid., para. 48. Ibid., paras 49-50. Ibid., para. 35. Case SA.34876 of 15 May, 2013. Ibid., paras. 148-150. Case SA.37178 of 16 September 2014.

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direct and alternating current. Examples include transmission from off-shore wind energy farms in the North and Baltic seas, and from solar fields in the Sahara desert that will require much more complex and high powered infrastructure.2337 The Commission considered that the project would promote important European objectives such as securing energy supply and protecting the environment, without unduly distorting competition. Similar to the cases above, the Commission considered that the project would face a market failure in its attempt to be financed through other means – and therefore the aid would provide incentives otherwise not available. The Commission found that “[g] iven the openness of the technology markets and the scope for exploiting the intellectual property rights arising from the project, there was no risk of competition being distorted.”2338

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The annual State of the Energy Union report offers the chance to assess progress towards the Energy Union targets and objectives. Its fifth dimension, the R&I and competitiveness approach aims to accelerate the overall energy system transformation. At the very heart of this dimension’s measurement is the Integrated Strategic Energy Technology (SET) Plan and its Information System (SETIS). Through its capacities mapping, SETIS aims at providing an assessment of the public R&D investment in low- carbon energy technologies.2339

3. 5.354

Guidelines with relevance to the energy sector

Various guidelines and notices purport to assist Member States in framing new aid measures with a view to expediting a positive Commission Decision. In July 2001 the Commission adopted a Methodology on Stranded Costs in the Energy Sector. Furthermore, a number of guidelines may be of particular relevance to the sector in general, including the Guidelines on Environmental Aid which, as of 2014, have been updated to include energy sector-specific provisions (see Chapter 5). Although it is beyond the scope of this chapter to examine all the relevant guidelines in detail, the provisions of the guidelines on Rescue and Restructuring Aid as well as the provisions under the Framework on Multi-Sectoral Aid have been of relevance to many activities in the energy sector. 2340 2337 Ibid., paras. 5-6. 2338 Commission Press Release of 16 September 2014. 2339 See further JRC Policy Report on EU R&D Funding for Low Carbon Technologies, 2015, available at: http://publications.jrc.ec.europa.eu/repository/bitstream/JRC99158/commitmentanalysis/2007-2013bn l09122015.pdf. 2340 The Framework has been replaced by the regional aid guidelines as of December 31, 2009. See Art. 38 of the Framework.

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The absence of a relevant set of guidelines does not of course mean that the aid in question is likely to be declared incompatible. If no guidelines are applicable, the Commission must deal with the state measure on a case-by-case basis, as for example, in its analysis of the aid granted by the UK government to Hinkley Point C. (See Book, Pt 5, chapter 2). Similarly, if a case cannot be decided under the relevant guidelines, the Commission is still bound to examine the possible application of Article 107(3)(c) TFEU. For example, in Case SA.24895 which concerned State investment in a wind power development project, the Commission considered that the measure did not fall under any of the then existing frameworks or guidelines, but concluded on the basis of Art 107(3)(c) that the measure was compatible as it fulfilled all relevant criteria.2341

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The following section will deal with the most relevant guidelines for the energy sector: the rescue and restructuring aid guidelines and the methodology on stranded costs. The guidelines on environmental protection and energy aid (EEAG) are the subject of the next chapter.

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3.1 Rescue and restructuring aid 3.1.1 Introduction In principle this form of aid is typically granted in a situation of acute financial distress where state funding is often the last resort to keep the beneficiary from going into administration. The UK government’s rescue of the bankrupt British Energy is a case in point, as is the French government’s rescue of Alstom and the financial restructuring of France Telecom. In the British Energy case, the UK put the rescue package into place in September 2002 and the Commission took a decision not to raise objections to the case on 27 November 2003.2342 At the same time rescue and restructuring aid is probably one of the most distortive forms of state aid as it covers the ongoing operating expenses of a company. This type of aid is usually strictly forbidden as it will always have a severe impact on competitors and intra-Community trade. The source of the aid may be any level of government and any public undertaking as defined by Article 2 of the Transparency Directive.2343

2341 OJ [2013] C 279/1. 2342 OJ [2003] C 39/15. 2343 OJ [2000] L 193/75; as amended, see also Case C-482/99 Stardust Marine [2002] ECR I-04397.

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In order to try to balance these different issues, the Commission published detailed rules on rescue and restructuring aid, first in 19942344 and later in 1999.2345 The 1999 guidelines expired in October 2004 and a new set was adopted in July 2004.2346 The current guidelines, adopted within the context of the SAM, entered into force on 1 August 2014 and will apply until 31 December 2020.2347 Notifications made prior to the entry into force of the 2014 Guidelines are dealt with according to the 2004 version, and not the new version adopted in July 2014.2348 The 1999 Guidelines

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The number of cases involving challenges to the application of the 1999 Rescue and Restructuring Guidelines illustrate the difficulties involved in these cases.2349 The Commission decision in British Energy, approving € 1,88 billion in rescue aid2350 was initially challenged by Greenpeace and by DRAX.2351 The Commission opened an investigation into the Dutch hazardous waste management company AVR given the high level of operating aid involved in the restructuring/rescue operation of this company, and ultimately ordered recovery of certain elements of the aid.2352

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Rescue measures are designed to keep a company in business for a limited period of time (maximum 12 months) during which its future can be assessed. However, the normal procedural regime as set out in Council Regulation 659/99 applies: the “standstill” obligation must be observed and in principle the Commission must complete its investigation within two months of notification. In many cases rescue measures are often implemented prior to approval, if not notification. In fact in these situations, even if recovery is eventually ordered, the state may not necessarily bear any financial burden.2353 It is private investors who 2344 OJ [1999] C 288/2. 2345 Separate Guidelines applied to the coal sector under the ECSC Treaty, and a transitional period is provided in accordance with the Communication of the Commission concerning the expiry of the ESCS Treaty, OJ [2002] C152/5 and Annex B of the Multisectoral Framework on Regional Aid for Large Investment Projects, OJ [2002] C70/8. 2346 OJ [2004] C 244/2. The 2004 Guidelines originally applied until 9 October 2012, but were extended until entry into force of the new 2014 Guidelines. See OJ [2012] C296/3. 2347 OJ [2014] C 249/1. 2348 See in that respect, Point 34 of the Commission decision in Case SA.37501 (2014). 2349 See for example T-73/98 Prayon-Rupel v Commission, [2001] ECR II-86; T-35/99 Keller v Commission [2002] ECR II-261; T-126/99 Graphischer Maschinenbau GmbH v Commission [2002] ECR II- 2427. 2350 NN 101/2002, OJ 2003 C39/15, 18.02.2003, p.15-16. 2351 T-121/03 Greenpeace Ltd and Nexgen group v Commission; Case T-124/03 AES Drax Power Ltd v Commission. 2352 Invitation to submit comment, OJ [2003] C196/5; see also OJ [2004] C250/6, and OJ [2006] L/84/37. 2353 In principle a Member State could be exposed to a fine if it refused to comply with an eventual ruling of the

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have been involved in the rescue package which are most at risk. Nor can the Commission declare an aid illegal simply because it has not been notified prior to implementation or approval. It may, however, issue an injunction against the Member State for failure to observe the standstill obligation, followed by infringement proceedings pursuant to Article 108(2) but even this procedure could take several years. Indeed in most cases where the restructuring element of the aid is ultimately approved, such practices appear futile. That is not to say, however, that competitors cannot seek to enforce Article 108(3) TFEU in their national courts, as will be further discussed below in Chapter 6.

3.1.2 Rescue aid According to the 1999 Guidelines, rescue aid had to (i) be in the form of remunerated guarantees and loans; (ii) limited to the amount necessary to keep the enterprise in business; (iii) restricted in duration; and (iv) serve to alleviate a social crisis without adverse spill-over effects on other Member States.

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The first two conditions proved to be the most controversial. To restrict a rescue package to loans and guarantees may prove over-simplistic. In British Energy, the Commission approved loans and deposits by the government (which served as collateral for British Energy’s trading and non-trading (regulatory) counterparties). In Alstom, the Commission allowed the use of convertible bonds (having rejected an outright capital increase). The convertibility of the bonds was made subject to approval of the resulting equity investment as restructuring aid. Thus the measures were a hybrid form of loan during the restructuring phase.

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The 1999 Guidelines provided that the rescue aid should not be in effect for more than 6 to 12 months, unless there are exceptional circumstances. Thereafter, the aid must be either withdrawn or justified as restructuring aid. If the measures are continued, the Commission can order recovery of the principal loans with interest and can declare any guarantees to be unenforceable. Competitors could also seek to petition national courts to declare the rescue loans to be in contravention of the Commission’s decision – which has direct effect (see below, chapter 6).2354 In accordance with paragraph 25 of the 1999 Guidelines, rescue aid could only be a “one-off operation” so that repeated rescues “cannot be allowed”. Commission practice indicates that this principle is not always applied rigorously.2355

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CJ. See Case C-387/97 Commission v Greece [2000] ECR I-5047. 2354 See Bull, Commission Decision of 13.11.2002, OJ [2002] L209/1. 2355 See Addinol, and also Credit Lyonnais, OJ [1998] L221/28.

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3.1.3 Restructuring aid 5.364

In accordance with the 1999 Guidelines, the basic conditions for approving restructuring aid were: (i)

a restructuring aid can only be granted once within a 10 year period (the “one last shot” principle);

(ii)

that a coherent restructuring plan is to be in place which ensures the return to viability in the foreseeable future; and

(iii) that the aid must be limited to the absolute minimum, requiring own investment from private sources and that the aid recipient must reduce capacity or take other compensatory measures.

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Restructuring plans require complex financial and business plans which, if prepared by the beneficiary, should also be reviewed by the Member State with the assistance of external experts. In British Energy the Commission retained its own experts to review the restructuring plan.

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The UK government submitted its plan to restructure British Energy six months after the rescue package had been put in place and following an exchange of letters, the UK authorities informed the Commission that they considered the notification as complete, and gave notice to the Commission that they would implement the measures unless the Commission would take a decision within a period of 15 days, in application of Article 4(6) of Regulation 659/99 (see Chapter 6, below). The Commission took a decision to open the formal procedure pursuant to Article 108(2) TFEU on 23 July.2356 It is apparent that the Commission was forced to work under pressure, especially given the complexity of the matters involved.

5.367

Under the 1999 Guidelines, the nature of the compensatory measures required was related directly to whether the Commission considered that there was overcapacity in the relevant market. If there is structural overcapacity in this market, then the restructuring plan had to provide for capacity reductions. In any event, the requirement of capacity reduction proved difficult to apply to the energy sector, especially as there were currently few community markets with overcapacity. In practice, the requirement was often relaxed where a reduction in capacity would lead to a substantial lessening of competition in the market 2356 OJ [2003] C180/5.

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affected. This approach was applied to justify decisions not requiring capacity reductions where such reduction could have altered the market structure by creating a narrow oligopoly or even a monopoly.2357 Other forms of compensatory measures could also be used, for example to require the Member State to open up its market to other Community operators, or to require it to ensure that the recipient will not act as a price leader. The measures were to be designed to mitigate the potentially distortive effects of the aid. Hence a market study had to be communicated together with the restructuring plan. The 2004 Guidelines As noted above, the 1999 Guidelines were subject to a sunset clause and had to be revised by October 2004. The 2004 Guidelines were in force until October 2009, but their application was extended twice to 2014.2358

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Given the problems experienced with the strict distinction between rescue and restructuring aid in the past, the Commission proposed to introduce a new concept of “urgency aid” which would have the same purposes as a rescue aid, but would also allow the beneficiary to undertake urgent measures, even of a structural nature. Given the urgent character of such aid, the Member States were to be given an opportunity of opting for a simplified approval procedure. In the final event however, the terminology remains the same and the concept of ‘rescue aid’ continues to be used. In addition, the 2004 Guidelines remove the ambiguity in the 1999 Guidelines with respect to whether rescue aid could be authorised without a restructuring plan.

5.369

The 2004 Guidelines provided a clearer definition of a “firm in difficulty”. It is not necessary that the firm is actually insolvent or may be subject to collective insolvency proceedings. Given the current lack of harmonisation of national insolvency laws the creation of such a link would prove difficult.2359

5.370

For rescue aid, assistance had to be limited to reimbursable loans or loan guarantees (with the exception of the banking sector), i.e., the aid must be reversible. The automatic and irremediable acquisition of a shareholding by the State in an ailing firm cannot be considered as urgent but must be assessed as restructuring

5.371

2357 1999 Guidelines, at paragraph 38; Brittany Ferries, at paragraph 258; Case T-110/97 Kneissl Dachstein v Commission [1999] ECR II-2881, at paragraphs 60 and 97. 2358 See OJ [2009] C156/3 and OJ [2012] C296/3. 2359 The question of whether the Commission is dealing with a group of companies or not was at issue in the ABX logistics case where Belgium claimed that there was no ABX-holding encompassing the various companies in different member States. Commission’s Decision 2006/947, OJ [2006] L383/21.

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aid. Rescue aid must now be limited in duration to six months and must respect the one time, last time condition.2360 Recipients of previous unlawful aid were not eligible as long as the aid has not been recovered. The Commission proposed to take a decision within a period of one month for rescue aid respecting all the conditions mentioned in section 3.24 of the new Guidelines, and subject to two further cumulative requirements, i.e., it must meet the definition of a firm in financial difficulties as set out in paragraph 10 and the aid must be limited to the amount resulting from the formula mentioned in Annex 1 and in any event cannot exceed a ceiling of € 10 million.

5.372

With respect to restructuring aid, the same definition of a firm in financial difficulties applies. Paragraph 43-4 of the 2004 Guidelines gave clearer guidance on what amounts to a “significant contribution” from private investors. The absolute minimum is set at 20% for SMEs and 40% for medium-sized firms. Large undertakings were to be examined on a case by case basis but the expectation was that the minimum contribution would be 50%.

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An example of the application of these guidelines is the Ottana rescue and restructuring in Sardinia, Italy. As a result of shortages of funds to pay for fuel oil, Ottana got into financial difficulties and was given a guarantee for a loan of Euro 5 million. Almost a year later that guarantee was prolonged on the basis of a restructuring plan to prepare for its conversion to coal and to vegetable oil, and to allow Ottana to shift its power from the day-ahead market to the more profitable balancing market. Ottana Energia subsequently formed a joint venture with a private partner who injected some Euro 15 million of equity – approximately 25% of the project’s total costs – into the new joint venture. As the Italian government had illegally prolonged the rescue aid for a period of 12 years, and the Commission doubted that the plan could restore the company to long-term viability, it considered it was obliged to open proceedings under point 27 of the Guidelines.

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In its final decision, the Commission accepted Italy’s arguments that the company would make significant profits as of 2010 and that its return on equity should match those of its competitors. Hence the Commission concluded that the plan was capable of restoring long term viability. Although the first phase of the plan was financed by regular cash flows, which could not be accepted as own contribution as it is seen as being at least induced by state aid, the second phase is entirely financed through shareholder equity or by external finance or 2360 See C11/07 Misuse of rescue aid and compatibility of restructuring aid to Ottana, a local energy producer in Sardinia, OJ [2007] C122/22.

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the production assets (and not by the state guarantee). Finally Ottana would pay back the rescue aid loan between 2009 and 2014. As for the compensatory measures, divestiture of certain assets was acceptable as this was not a sacrifice, but given Ottana’s small size, only production limitations were considered to be feasible. Moreover as Ottana was the only alternative supplier to the two dominant suppliers, Enel and Endesa with a 95% share of the market, its very survival contributes to stabilising competition on the Sardinian energy market.2361 The 2014 Guidelines The current Guidelines were developed within the context of the Commission’s wider State Aid Modernisation (SAM) programme, and entered into force on August 1, 2014.2362 Many of the 2004 Guidelines’ key features remain unchanged. The key issues subject to review in the current Guidelines relate to: (i) the definition of “firms in difficulty”, (ii) the application of the Guidelines to providers of Services of General Economic Interest (SGEI), (iii) a lack of incentives to grant aid in less distortive forms, (iv) the lack of requirements to ensure that investors take a fair share in restructuring costs, and (v) insufficient mechanisms to ensure the aid is justified. The Commission continues to stress (if not more so than before) that subsidising companies in difficulty can have a severe negative impact on the wider economy by distorting the normal process of competition. If nothing else, the new Guidelines aim to reduce the amount of rescue and restructuring aid even further, while at the same time making it easier to implement aid that is truly warranted.

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To address the identified issues, the 2014 Guidelines introduce so-called “filters” that are designed to verify whether the intended aid is truly in the public interest. Point 43 of the Guidelines clarifies that Member States will need to prove that the aid measure is granted in pursuit of an ‘objective of common interest,’ i.e., to prevent serious social hardship or address a market failure.2363 Member States will also have to submit a type of counterfactual analysis, showing that credible market alternatives would not be able to solve the identified hardship or market failure (to the same extent) without the envisioned aid.2364 Finally,

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2361 Case C11/2007, 2 July 2008, OJ [2009] L259/22. 2362 OJ [2014] C249/1. 2363 The Guidelines contain a non-exhaustive list of examples such as: a high unemployment rate in the region where the failing firm is located, risk of disruption of an important service (such as a national infrastructure provider) or a SGEI, and loss of important technological knowledge or expertise. 2364 The Commission provides examples of alternative scenarios that will need to be considered, such as: debt reorganisation, asset disposal, private capital raising, sale to a competitor, or break-up - either through entry into an insolvency or reorganisation procedure or otherwise.

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Member States will need to provide evidence that the proposed form of restructuring aid is the most appropriate for the job (for rescue aid, instruments are still limited to loans or loan guarantees).

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Another main feature of the 2014 Guidelines is the introduction of “burden sharing” to counterbalance the risk of moral hazard under private investors when State aid is granted. In essence, the new rules require that incumbent shareholders (and subordinated creditors) absorb losses in full before State intervention takes place, and that the State receives a “reasonable share” of future gains.2365

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A third novelty includes a new type of “temporary restructuring support” that can be used to support SMEs. Under the 2004 guidelines, all firms were treated equally and rescue aid could only be granted for a period of up to 6 months before the supported firm had to submit a full restructuring plan. The new rules allow a bit more flexibility with respect to SMEs, in the sense that they can submit a “simplified restructuring plan” in order to receive aid for up to 18 months.2366

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As a final point worth mentioning, the 2014 Guidelines attempt to simplify the definition of “undertaking in difficulty.” Point 20 introduces new objective elements, of which more than one must be met in order to fall within the scope of the Guidelines. These are: 1.

In case of a limited liability company: more than half of its subscribed share capital must have disappeared as a result of accumulated losses.

2.

In case of a company where at least some members have unlimited liability for debt: more than half of its capital must have disappeared as a result of accumulated losses.

3.

Where the undertaking is subject to- or fulfils the criteria for national collective insolvency proceedings.

4.

For non-SMEs, during the last two years: the debt to equity ratio has been greater than 7.5 and the EBITDA interest coverage ratio has been below 1.0.

2365 See Points 66-67 of the Guidelines. 2366 Point 115 of the Guidelines provides that SMEs must, at a minimum, identify the actions required to restore long-term viability.

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Romania The 2014 Guidelines were applied to measures granted by Romania to its electricity sector. On 21 April 2015, the Commission decided not to raise objections on State aid planned to be granted to CE Hunedoara in the form of dedicated loans up to EUR 37.7 million. In its “the rescue aid decision” the Commission found that the loans amounted to rescue aid to CE Hunedoara and considered that the aid was compatible with the internal market pursuant to the Guidelines on State aid for rescuing and restructuring non-financial undertakings in difficulty. One day before, on 20 April 2015, the Commission had considered that Electrocentrale Paroseni and Electrocentrale Deva, two electricity generation companies that had been merged into CE Hunedoara in 2012, had received between 2009 and 2011 operating State aid which was incompatible with the internal market. In its “ incompatible aid decision”, the Commission requested Romania to recover the aid and interest from CE Hunedoara as successor company in case the beneficiaries failed to repay. On 21 October 2015, six months after the rescue aid decision, Romania transmitted a restructuring plan for CE Hunedoara. CE Hunedoara is a vertically integrated power generation company mining and using indigenous hard coal,2367headquartered in Petrosani, Hunedoara County. It is fully owned by the Romanian State. CE Hunedoara uses mainly indigenous coal to produce electricity. Its two power generation plants, Deva and Paroseni produce approximately 4.2% of the electricity consumed in Romania, where it is the only major producer of electricity in the centre and northwest areas. Following the transfer of seven loss making coal mines to it, CE Hunedoara became insolvent and allegedly owed around EUR 507.4 million) to various State bodies. This amount referred among others to loans, as well as to fines charged by the Environment Agency for failure to acquire carbon allowances, green certificates and other debts to the State and to the Social Security budget.

2367 On 22 February 2012, the Commission had decided not to raise objections on the planned aid totalling RON 1 169 million (ca. EUR 251.3 million) for the closure of three out of the seven coal mines exploited by the National Hard Coal Company JSC Petrosani. In its decision, (“the first aid to coal mines decision”) the Commission found that the planned aid was compatible with the internal market pursuant to Council Decision 2010/787/EU on State aid to facilitate the closure of uncompetitive mines (“the Council Decision on aid to coal mines”). On 24 November 2016, based on a separate notification, the Commission had decided not to raise objections on RON 447.8 million (ca. EUR 96.2 million) planned to be granted to CE Hunedoara for the closure of two out of the four coal mines still operated by CE Hunedoara which were not the subject of the first aid to coal mines decision. In its decision (“the second aid to coal mines decision”), the Commission found that the planned aid was compatible with the internal market pursuant to the Council Decision on aid to coal mines.

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5.381

As the Commission observed, to date, Romania had also failed to meet its commitment of April 2015 to legally separate the coal mines from power generation within CE Hunedoara. It cannot be excluded at this stage that some of the loans covered by the present decision have benefitted directly or indirectly the coal mines of CE Hunedoara, in contravention of point 16 of the R&R aid Guidelines. It is also doubtful at this stage that the conditions for compatibility for restructuring aid set out in the R&R aid Guidelines would be met if all loans examined in the present proceedings, namely the BCR and BRD loans contracted for the benefit of CE Hunedoara and the IBRD loan to CE Hunedoara loan guaranteed by the Romanian State, were to be assessed jointly with the non-repaid portion of the rescue aid loan and the non-repaid loan granted for earlier incompatible aid and were considered altogether as restructuring aid: the restructuring plan of October 2015 as amended in December 2016 was not valid at the outset and has not been pursued; no discernible contribution of CE Hunedoara in line with points 62 to 64 of the R&R aid Guidelines nor measures limiting distortions of competition in line with points 74 to 86 thereof can be identified at this stage.

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Finally, although points 99 to 103 of the R&R aid Guidelines allow specific conditions for aid to providers of services of general economic interest (SGEI) in difficulty, it is doubtful that the possible State aid which is the subject of these proceedings can be assessed or taken into account as a compensation for the provision of such services as referred to in point 100 of the R&R Guidelines.2368

4.

The methodology on stranded costs

4.1 Introduction 5.383

Article 24 of the first Internal Electricity Market Directive 96/922369 provided that Member States could apply to the Commission for a derogation from certain provisions of the Directive if this was necessary in the light of long-term commitments or guarantees that could no longer be honoured on account of the entry into force of Directive 96/92 EC. The Directive provided a strict timetable for the notification of the request for derogation. This procedure is further referred to as the “Article 24 procedure”.

2368 SA.43785 of 3 March 2018. 2369 OJ [1996] L 27/ 20.

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Although this provision indicated that Member States were entitled to apply to the Commission for permission to derogate from certain provisions of the Directives, this did not in turn allow the Commission to grant a derogation from the state aid rules. Hence in a series of decisions in mid-1999 the Commission rejected a number of national submissions based on Article 24 on the grounds that they envisaged potential state aid measures which had to be notified, and if appropriate approved in accordance with the state aid rules. After considerable internal preparation the Commission finally issued a Methodology on state aid2370 linked to stranded costs in the energy sector on 26th July 2001 and on the same day, it adopted three decisions on applications from Spain, Austria and the Netherlands. The Methodology indicates how the Commission intends to apply Article 107(3)(c) and Article 106(2) TFEU in order to allow certain types of aid, under certain conditions.2371

5.384

Commitments or guarantees of the type referred to in the Methodology and Article 24 of the Directive are referred to as “stranded costs” or non-market conform costs. They may in practice take a variety of forms, including long-term contracts, investments undertaken with an implicit or explicit guarantee of sale, or investments undertaken outside the scope of normal activity. In order to qualify as stranded costs, commitments or guarantees must become uneconomical on account of the price-lowering effect of Directive 96/92 and must significantly affect the competitiveness of the undertaking (paragraph 3). It should be noted that Directive 98/30 on the internal gas market did not contain an equivalent provision given that a separate procedure was provided in that Directive for dealing with long-term take-or-pay contracts entered into before the adoption of that Directive.2372 Furthermore, there is no equivalent to Article 24 of Directive 96/92 in the later Internal Electricity Market Directive 2003/54,2373 which has repealed Directive 96/92 in full. Hence it might appear that the Methodology does not apply to state aid measures which might be aimed at commitments or guarantees which become uneconomic after 1st July 2004, the date on which the market for smaller industrial and commercial customers should have been opened up to competition. Obviously this will not preclude the Commission from examining any individual notifications on their own merits, and the Methodology has been of significance for assessing transitional measures in the new Member States.

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2370 2371 2372 2373

SG (2001) D 290869 of 6.08.2001. See Also Thirty-First Report on Competition Policy (2001), pts. 346-353. OJ [1998] L 204. OJ [2003] L176/37.

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5.386

Nevertheless, the stated point of departure for the Methodology is that state aid which is designed to facilitate the transition to a liberalised electricity market may be viewed favourably to the extent that any distortion of competition is counter-balanced by the contribution made to the achievement of a Community objective which market forces could not achieve. The exact reasoning behind this statement is fairly obscure but presumably it is intended to convey the idea that transition to a market-based electricity sector is not something that can be achieved by the market alone. Furthermore, the Commission reasons, perhaps more practically, that if there was no compensation for stranded costs, there would be a greater risk that costs might be passed on to captive customers. Finally, it is submitted that stranded cost aid would also encourage electricity undertakings to reduce the risks relating to their historic commitments or investments and thus encourage them to maintain their investments in the longterm.

4.2 The criteria for stranded cost exemption 5.387

Section 4.1 – 4.9 of the Methodology sets out the six tests that the aid to compensate the stranded costs has to satisfy to be deemed prima facie compatible and section 5 set out several negative criteria. The basic principle of the Methodology is that compensation for stranded costs should be limited in time and extent. They should not exceed the costs actually borne by the undertakings, directly caused by the liberalisation of the market, and resulting in losses. Hence no compensation could be permitted if it only contributed towards falling profitability. The compensation must be fixed ex-ante and should also include expost adaptation mechanisms which would take into account the real evolution of the market, and in particular the actual evolution of electricity market prices. In several decisions the Commission has imposed a benchmark related to the costs of a “fictitious” efficient new entrant using combined gas cycle technology.

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The Methodology attempted to preserve the interests of new entrants; financing arrangements for the aid must not have the effect of deterring other undertakings or new players from entering national or regional electricity markets. However it is difficult to discern from the wording of the Methodology how this objective is in fact to be guaranteed. There is certainly no provision for adjusting the level of permitted aid if a deterrent effect is in fact established. At the same time, aid must not be financed from levies on electricity in transit between Member States or from levies linked to the distance between the producer and the customer (paragraph 5), so that imported energy can compete without being subject to additional charges. 798

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4.3 The individual decisions As noted, at the same time as it published its Methodology on state aid linked to stranded costs, the Commission adopted three individual decisions applying the Methodology and closed its procedures following a preliminary investigation. Several decisions have since been adopted and a number of new cases are still pending. It should be observed that a detailed or critical assessment of the Commission’s decision-making practice is not a particularly easy task for a number of reasons. Most decisions have been taken on the basis of a preliminary investigation and without resort to the formal procedures under Article 108(2) TFEU. Regrettably, in several decisions, the Commission has tended to leave a number of crucial issues unresolved. In particular the central question of whether the measures in question actually constitute aid at all is often left open and the Commission then goes on to conclude that if the measure is in fact aid, it is nevertheless compatible with either Article 107(3) (c) TFEU or, eventually, Article 106(2) TFEU. Finally, and perhaps once again because many of the cases have been closed after preliminary investigation, one is often surprised by the lack of detailed analysis of the economic impact of the aid measures, which involved substantial sums of money, on the general conditions of competition in the national electricity market in question and on the general trend towards further liberalisation.

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4.3.1 Austria In the Austrian case compensation of € 456 million was envisaged for three hydropower projects and a further € 132 million for a lignite-fired plant.2374 The sums would be paid out annually for costs incurred in the preceding business year and would be financed by contributions from both regional network operators and other customers who historically consumed the electricity produced in the plants which had become stranded. The scheme would be phased out at the end of 2009, at the latest. Although it did not reach a definite conclusion on this issue, the Commission concluded that even if state aid was involved, the planned compensation was in line with the Methodology and could be eligible for authorisation on the basis of Article 107(3)(c) TFEU. The compensation to be paid to the lignite plant was authorised on the basis of Article 106(2) TFEU (and Articles 3(2) and 8(4) of Directive 96/92) as contributing to security of supply and thus a service of general economic interest.

2374 OJ [2002] C5/2.

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4.3.2 Belgium 5.391

In the Belgian case the envisaged state aid contained three elements. First, the dismantling of nuclear plants throughout Belgium; second, financing the costs of a new pension regime in the electricity sector; and third, promoting renewable energy sources. After the initial filing with the Commission, Belgium subsequently withdrew from the overall filing its financing scheme of the contemplated scheme. For its final assessment the Commission still waits to this date additional information from Belgium on this subject. Although the Commission was therefore not in a position to assess whether the scheme qualified as state aid, it nevertheless commented on the applicability of the Methodology on the respective elements.

5.392

The Commission found that the compensation of the costs related to the dismantling of nuclear plants, insofar as it would qualify as state aid, was in compliance with the Methodology. The scheme provided for compensatory funds being paid to Electrabel and SPE, for the costs that these companies would incur in dismantling nuclear plants, pursuant to an agreement between these companies and the Belgian State that was entered into prior to 19 February 1997, the date set in the Methodology. In its extensive assessment of this element of the scheme, the Commission concluded inter alia that the size of these stranded costs would significantly weaken these companies’ competitive position. Furthermore, the agreement with the Belgian State did not contain provisions to amend the agreements. The dismantling of the plants would not result in profits for the companies and the assets involved were not owned by these companies. Also the amount of the stranded costs would not result from a decreased power price or loss of market share but was an amount fixed beforehand corresponding to the amount of the compensation. The Commission also took into consideration the high environmental risks.

5.393

With respect to the pension issues for which a subsidy of € 758 million would be granted to the two companies, the Commission had considerable doubts whether the Methodology could apply. The Commission ruled that the third element of the Belgian subsidy, a financing scheme for the promotion of energy from renewable sources, should not be regarded as state aid. Reference was made to the decision of the Court of Justice in the PreussenElektra case as the amounts levied by both Electrabel and SPE on electricity tariffs would not pass through a state controlled or state designated fund.

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4.3.3 Greece The Greek stranded costs decision is comprised of three components. The first component involved compensation to be paid up to 2015 for the costs for the Greek Public Power Corporation (PPC) in relation to power stations that are unprofitable in a liberalised market, as they were built at a time when inflation was very high. Until liberalisation the costs were recovered in a system under which the prices were fixed on an ad hoc basis by the State. The second component involved compensation paid by the State to PPC for water resource management and irrigation work in conjunction with the construction of the power plants, imposed on PPC by the State, up to an amount of € 324 million. Both elements were concluded by the Commission to be in compliance with the Methodology. The third component, compensation by the State for losses resulting from a low-priced, long term power sales agreement with Aluminium of Greece, was not regarded as state aid to PPC as PPC was not the ultimate beneficiary of the compensation.

5.394

4.3.4 Hungary In its final decision on Case C45/20052375 the Commission examined whether the long term power purchase agreements (PPAs) concluded between MVM and a number of generators were themselves compatible with the Stranded Cost Methodology and concluded that several elements of the main principles constituting the PPAs did not met the conditions laid down in Section 4 of the Methodology. Instead of helping transition to a competitive market the PPAs had rather created an obstacle to the development of substantial competition. As a consequence they also contradicted the principles laid down in Section 5 of that Methodology. Following termination of the PPAs Hungary adopted legislation to deal with both recovery of the past illegal state aid and to provide some compensation for stranded costs. This measure was in turn approved by the Commission in Decision N691/2009.

5.395

4.3.5 Ireland Ireland notified to the Commission a program where the State would impose on the state-owned Electricity Supply Board (ESB) a public service obligation to purchase the electricity generated by new green electricity plants (RES-E) under 15 year contracts at a guaranteed price. As the scheme was notified one day prior to the Methodology being adopted – 25 July 2001 – the Methodology was not 2375 OJ [2009] L 225/53 at paras 417 – 432.

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applied as such. Nevertheless the scheme was approved by the Commission as it complied with the Community Guidelines on environmental aid, as the Member State concerned could show that the support (i) is essential to ensure the viability of the renewable energy sources concerned, (ii) does not overall result in overcompensation and (iii) does not dissuade renewable energy producers from becoming more competitive.

4.3.6 Italy2376 5.397

This decision covers in particular the grant of aid to cover stranded costs concerning on the one hand the construction costs for generation plants built prior to 1997 and on the other hand the costs linked to a ‘take-or-pay’ contract for imported gas to be used in electricity production, signed by ENEL in 1992. In April 20062377 the Commission opened a formal investigation into an alleged 16 million Euro subsidy which Italy intended to grant to local utility companies as these had not been covered by the earlier notification. The Italian authorities had notified the intended grant of aid in March 2005 but, three years prior to this, the Commission had taken a negative decision on fiscal aid to the local utility companies,2378 including AEM Torino, and Italy had still failed to recover the amounts of illegal aid granted at that time. In accordance with Case C-355/95P Deggendorf, when assessing the compatibility of new aid the Commission must take into account the fact that the beneficiaries may not have complied with earlier Commission decisions requiring recovery of illegal aid.2379

4.3.7 Luxembourg 5.398

The scheme proposed by the Luxembourg government related to a long term agreement for the supply of electricity by RWE to the incumbent distribution company and TSO Cedegel. It is one of the few measures where the Commission has refused to accept the aid in question to be justified. This request was denied by the Commission based on the assessment that the agreement did not contain any take-or-pay obligations for Cedegel as the electricity actually taken (MWh) was calculated afterwards, and the power capacity (MW) could be adjusted regularly. Therefore, if eligible consumers were to decide to switch suppliers, Cedegel could adjust its off-take from RWE, resulting in a normal and acceptable commercial risk only. 2376 2377 2378 2379

IP/04/1429, 1.12.2004. IP/06/451, April 5, 2006. IP/02/817, June 5, 2002. [1997] ECR I-2549. See further Chapter 6 point 9 on Recovery of unlawful aid.

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4.3.8 The Netherlands Two types of assets considered as ‘stranded’ were notified – long-term city heating contracts and a coal-gasification plant.2380 The compensation for the city heating contracts was to be based on an annual calculation of the related fuel price risk which producers had to bear. In the Netherlands, city heating is based on a link to gas prices. With regard to the coal-gasification plant, this was to be auctioned and compensation would be restricted to the estimated value as determined by an independent valuation and the actual proceeds of the auction. The estimated total budget was € 600 million. Initially the Dutch government had proposed to fund this compensation by way of a levy imposed on all customers connected to the network system, the proceeds of which would be transferred to the beneficiaries. However, following discussions, this financing mechanism was withdrawn and the government provided in later legislation that the funding would be provided by a charge on the general state budget. The Commission concluded that state aid within the meaning of Article 107(1) TFEU was involved but declared the aid to be compatible with Article 107(3)(c) TFEU and the Methodology.

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4.3.9 Poland The Commission initiated a formal investigation into long term power purchase agreements (PPAs) in Poland in 2005.2381 In the mid 1990s, in order to ensure security of supply and the modernisation of the infrastructure of power generation, the state owned network operator ‘PSE’ entered into long terms PPAs with power generators in Poland. Under PPAs, PSE has the obligation to buy a fixed quantity of electricity at fixed price in order to guarantee a return of investment to the generators. The Polish authorities have drafted legislation that would allow generators to cancel their PPAs in exchange of compensation. The Commission found that both measures, PPAs as well as the draft law, could constitute state aid but were compatible aid give that the investments involved were very significant and may generate very large losses. This also applied to longterm take or pay contracts. The Commission held that, were these losses not to be compensated in any way, they might, in the light of their size, jeopardise the continued viability of the companies in question. This conclusion was further reinforced by the reaction of the financial institutions which financed the investments, which informed the Commission that failure to provide proper compensation could be deemed to constitute default under the financing ar2380 OJ [2001] C268/6. 2381 OJ [2006] C 52/8.

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rangements because of the significant risk of bankruptcy facing the company in question. The Commission was satisfied that the compensation did not exceed what is necessary to cover the shortfall in investment return over the lifetime of the new assets, including where necessary a reasonable profit margin.

4.3.10 Portugal 5.401

After prolonged negotiations, the Commission decided not to raise objections to various plans by the Portuguese government to compensate three energy providers for the cancellation of long term power purchase agreements (PPA), concluded with the publicly owned network operator REN prior to market liberalisation. The PPAs had assured the producers a guaranteed off-take at a fixed price which covered their investment costs. The investments in question were considered to be of fundamental importance and would generate heavy losses in the future. If the losses were not compensated in any manner, they would jeopardise the viability of the undertakings concerned. Furthermore the investments were irrevocable – they could not be recovered except through operation or through a sale at a very reduced price. The Commission had been provided with a list of costs to be covered when the income from the power plant would prove insufficient. These costs were identified in the PPAs. The computation of the maximum value of the compensation is based on a series of economic assumptions – taking as base price that which would be offered by a new entrant using a combined cycle gas turbine. Only if the actual market price would be lower than this price would it be taken into account for the calculation of the compensation. The Commission considered this approach to be consistent with the one taken in past cases and it would guarantee that the compensation would match the actual sums invested. In addition, as in earlier cases, the computation model would take the actual evolution of electricity prices into account.2382

4.3.11 Slovenia 5.402

The Commission authorised compensation for stranded costs for three Slovenian electricity generators: TE Šoštanj, NE Krško and TE Trbovlje.2383 The measure aims at mitigating the difficulties faced by a number of power plants during the process of liberalisation of the electricity sector in Slovenia. The Commission concluded that scheme was in line with the Methodology for analysing state aid linked to stranded costs in electricity sector. In particular, the Commission decided that since the state guarantee for Krško nuclear plant has been awarded 2382 IP/04/1123, 22.09.2004. 2383 OJ [2007] L219/9.

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before accession, it cannot any longer be subject to the assessment under state aid rules. Moreover, the Commission found the aid for closing the gas fired part of Trbovlje plant compatible with the criteria of the Methodology and lastly the Commission decided that the aid for Šoštanj plant can be authorised under Article 106(2) TFEU because although it does not meet the Methodology criteria, it still qualifies for the exemption from state aid rules as compensation for a service of general economic interest as regards security of electricity supply.2384 The Commission also decided to open a formal investigation into the so-called system of preferential dispatching of electricity to assess the compatibility of the measure with the state aid rules. Under the scheme network operators are obliged to purchase energy at fixed price, above market price, from producers of renewable energy and therefore the scheme provides an advantage to those producers. The Commission had doubts whether this measure was in accordance with its environmental guidelines, Stranded Costs Methodology and the rules linked to a compensation for services of general economic interest. Therefore, the Commission decided to initiate the formal procedure under Article 108(2) TFEU.2385 Following agreement to revise the financing mechanisms of the scheme, the Commission approved the measures.2386

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4.3.12 Spain2387 Similar issues of initial classification of the compensation payment system as aid arose in the Commission’s assessment of the Spanish measures, known as the CTC system (Costes de Transicion a la Competencia). The CTCs were incorporated by means of a levy modifying the tariff system. The coal-fired plant operators would receive compensation linked to the evolution of the market price and if the price rose above a fixed ceiling the compensation would be reduced accordingly. The scheme is scheduled to expire in December 2010.

5.404

As consumers appeared to pay the levy and it was unclear whether the State had more than marginal control over its distribution, the Commission did not definitively determine whether aid was involved. However, on the preliminary assumption that the scheme could be classified as aid, the Commission declared it to be compatible with Article 107(3)(c) TFEU as interpreted in the Methodology. With regard to the compensation for indigenous coal-fired electricity

5.405

2384 2385 2386 2387

IP/05/126. IP/05/126. IP/07/549. OJ [2007] L219/9. Case NN 49/99 Spain, OJ 2001 C7.

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generation, the Commission concluded that although it did not comply with the Methodology it would nevertheless benefit from an authorisation as compensation for the provision of a service of general economic interest (security of supply) in accordance with Article 106(2) TFEU and Articles 3(2) and 8(4) of the Directive 96/92.

4.3.13 United Kingdom 5.406

The Commission also ruled in February 2002 that a series of measures adopted by the United Kingdom in favour of Northern Ireland Electricity (NIE) in compensation for stranded costs related to PPAs which were based on fixed prices between it and 4 electricity generators did not fall within the scope of Article 107(1) TFEU. The compensation would be met by a levy imposed on all final consumers which would be collected by distributors and/or the network operator and transferred to NIE. Hence the levy did not constitute “state resources” within the meaning of Article 107(1) TFEU.2388

5.

Public service obligations

5.1 Introduction 5.407

Article 106(2) TFEU may be relevant in examining whether a particular measure of financial support is an aid at all within the meaning of Article 107 (1) TFEU. In accordance with the judgment of the Court of Justice in Case C-280/00 Altmark, in July 2003,2389 if the four cumulative criteria set out in that judgment are met, the measure is not aid, and need not therefore be notified.2390 Although the Court did not make an explicit reference to Article 106(2) TFEU in its judgment, the first and third criteria are clearly based on that Article. If, for example, the public service in question cannot be established to be in the general interest but is closely related to an economic activity carried out by particular firms, it will not be seen as having a sufficiently general character.2391 If, however, any one of the four conditions established in Altmark are not met, the measure will be deemed to be a state aid measure and must be notified to the Commission. Given the relative strictness of the Altmark criteria, there will 2388 2389 2390 2391

IP/02/322 of 27.02.2002. Case C-280/00, Altmark, [2003] ECR I-7747. State aid granted by Ireland to CADA, N 475/2003, 16.12.03. Joined Case C-34/01 to 38/01 Enirisorse [2003] ECR I-14243; see also the Commission’s assessment of a Dutch aid measure to sludge treatment companies, N812/01.

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be many instances where either an existing measure of compensation or a new measure cannot be exempted from notification.2392 The Commission must then in any event assess its compatibility under Article 107(2) and (3) TFEU.2393 Its decisions in relation to capacity market remuneration mechanisms are illustrative of the strict approach which the Commission appears to take to the application of the “Altmark” criteria (see chapter 5). If, however, it is not possible to declare the aid to be compatible under Article 107(2) or (3) TFEU, it now seems to be the Commission’s practice to apply Article 106(2) TFEU to exempt the measure, provided certain conditions are met. In this respect it should be noted that in Case C-53/00 Ferring, the ECJ stipulated that Article 106(2) TFEU could not be relied upon to justify overcompensation of a service of general economic interest.2394

5.408

The Commission must therefore establish that:

5.409

(i)

the undertaking in question has been entrusted with a genuine service of general interest;

(ii)

the parameters for calculating and reviewing any compensation and for calculating a reasonable profit are sufficiently specified; and

(iii) the compensation is proportional to the actual costs incurred in providing that service and the compensation does not give rise to a distortion of competition. In the decisions concerning the Polish and Hungarian PPAs the generators who were parties to the respective PPAs argued that these contracts conferred SGEIs upon them and that therefore the PPAs fell outside the scope of Article 107(1) TFEU. The generators had also argued in both cases that the PPAs should be regarded as implementing SGEIs for the purpose of securing electricity supplies and environmental protection and to fulfill the criteria laid down in the Altmark judgment, which means that they did not constitute aid within the meaning of Article 107(1) TFEU.

5.410

The Commission rejected these arguments for the following reasons: Although it acknowledged that Member States have a wide margin of discretion to de-

5.411

2392 See Case C-126/01 Gemo, [2003] ECR I-13769 and Joined Cases C -34/01 to 38/01 Enirisorse. 2393 See the Commission’s Decision in Cumbria Broadband., IP. 2394 Case 53/00 Ferring, [2001] ECR I- 9067.

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fine the scope of SGEIs, however, the existence of this wide margin of discretion does not mean that just any state intervention with a policy motivation can be characterised as an SGEI. For instance, in the Merci convenzionali porto di Genova judgment, the Court rejected the application of Article 106(2) TFEU because “ it does not appear [...] that [dock] work is of a general economic interest exhibiting special characteristics as compared with the general economic interest of other economic activities”.2395 The Member States’ wide margin of discretion in defining the scope of SGEIs is restricted in fields where Union legislation exists.

5.412

The Commission also held that the requirement to fulfill environmental standards does not exhibit any special characteristics as compared with the constraints imposed on all companies active in an industrial sector. Furthermore, considering the fulfillment of environmental standards as an SGEI would go directly against the polluter pays principle which is one of the core principles of Union environmental law, enshrined in primary legislation by Article 192 TFEU. The Commission further held that security of supply could be an SGEI, subject to the restrictions provided for in the in internal energy market legislation, that is, provided that the generators concerned use indigenous primary energy fuel sources, and that the total volume of energy does not exceed in any calendar year 15% of the total primary energy necessary to produce the electricity consumed in the Member State concerned.2396

5.413

In view of the above, the Commission concluded that the Treaty provisions on SGEIs did not apply to PPAs. The Commission also held that the PPAs would not fulfill all the criteria laid down in the Altmark judgment.2397 First, under the Altmark judgment, the recipient undertaking is actually required to discharge public service obligations and those obligations must have been clearly defined. This was not the case. Second, in the absence of a clear definition of the SGEIs to be provided, in particular one making a clear distinction between the service to be rendered and the power plants’ normal business operations, it was impossible to establish parameters for compensation and/or to determine whether the compensation exceeds the amount necessary to cover the costs incurred in discharging these obligations.

5.414

Third, where the company which is to discharge public service obligations has not been chosen in a public procurement procedure, the level of compensation 2395 Case C-179/90 Merci convenzionali porto di Genova SpA v Siderurgica Gabrielli SpA [1991] ECR I-05889, paragraph 27. 2396 See Commission decisions in cases N 34/99 (OJ [2002] C5/2), NN 49/99 (OJ [2001] C268/7), N 6/A/2001 (OJ [2002] C 77/26) and C 7/2005 (OJ [2007] L219/9. 2397 Case C- 280/00 [2003] ECR I –7747.

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needed must be determined on the basis of an analysis of the costs which a typical undertaking, well run and provided with adequate means of production to meet the public service requirements, would have incurred in discharging those obligations. Neither the Polish or Hungarian authorities nor the interested parties provided an analysis of the costs of the generators in question to support the contention that they tally with the costs incurred by a typical undertaking.2398 Hinkley Point C The Commission’s recent analysis of two measures in favour of EDF’s Hinkley Point C nuclear project in the UK confirms its strict interpretation of the ‘Altmark criteria’.2399 On 22 October, 2013, under a broad UK-wide Electricity Market Reform (“EMR”), the UK notified draft measures consisting of: (i) Contracts for Difference (“CfDs”) guaranteeing a fixed level of revenues in the form of payments to the generator, and (ii) a credit guarantee by the HM Treasury. Under the broad and ambitious market reform, the UK seeks to implement various measures to decarbonise the entire electricity sector by 2050, safeguard the national security of supply, and ensure diverse and affordable electricity.

5.415

Although the measures were ultimately cleared (subject to modification) under Art 107(3)(c) TFEU, the UK attempted to argue that its support of the project should be qualified as an SGEI under the Altmark criteria and Art 106(2) TFEU. According to the UK, the first Altmark criterion was met because the service provided by the generation company ensured a compulsory investment in new generation capacity under the CfD, was clearly defined, and would not otherwise be provided by the market. The Commission mainly considered that the use of CfDs as a mechanism to provide aid under the EMR had previously been deemed appropriate in other cases,2400 but under Art 107(3)(c) TFEU. With reference to those other cases, the Commission held that it should not have to apply different reasoning (on the existence of an SGEI) in the case at hand. It further considered that the aim to unlock investments into low carbon (nuclear) generation is “commensurate with a common interest objective for which State Aid can be granted rather than with the entrustment of an SGEI.” 2401

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2398 The Commission asserted that the estimates provided by Poland under the Act for the purpose of calculating compensation to individual power generators show that their costs are significantly higher than those incurred by a typical new entrant in Poland. 2399 OJ [2014] C69/60 (decision to open the formal investigation), and Commission decision of 8 October 2014 in Case SA.34947 (clearance decision under Article 107(3)(c) TFEU). 2400 SA.36196, SA.38812, SA.38763, SA.38761, SA.38759 and SA.38758. 2401 Case SA.34947, Commission decision of 8 October 2014, para. 308.

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5.417

Despite the UK’s claims that the strict contractual requirements in the CfD that were in place to ensure the generator would perform its obligations should be regarded a ‘public service obligation,’ the Commission found that such contractual clauses were typical for any deal struck on the free market. There were no obligations in place to actually build the plant or produce electricity, or to make the electricity available on the market (para 290).2402 The Commission acknowledged that the CfD would provide strong incentives to produce as much electricity as possible, but that there was no clear obligation to do so. Since the first Altmark criterion was not met (and the criteria are cumulative) the Commission did not consider that the investment itself could qualify as a SGEI, and as such, it was also unable to fulfil the requirements under 106(2) TFEU.2403 Italian tax exemptions and loans to public utilities

5.418

In a series of appeals brought by Italian public utilities in which various municipalities held shares, the General Court was required to consider the plea that the various beneficiaries of the relevant Italian legislation pursued services of general economic interest. As the contested measure took the form of an aid scheme, the General Court examined whether the scheme met all the conditions set out in the Altmark judgement or alternatively, could qualify for derogation on the basis of Article 106(2) TFEU. The contested decision at issue was adopted before the Altmark ruling, but as the criteria are based on the interpretation of Article 107(1) TFEU, the four cumulative criteria were held to be fully applicable to the factual and legal situation in the case before the General Court. The only argument put forward by the Italian Republic was that the undertakings pursue activities in the public economic interest. The General Court held that the Italian legislation at issue did not define clearly and precisely the public service obligations involved and therefore rejected the plea.2404

5.2 The SGEI frameworks and decisions 5.419

In 2005 the Commission issued a Framework2405 to provide further guidance on compatibility issues including how the amount of compensation at issue is to be calculated. Only the costs of providing the service of general economic interest “SGEI” can be taken into account (paragraphs 12-16). However, at paragraph 2402 OJ 2016 C69/1. 2403 Austria lodged an unsuccessful appeal in the summer of 2015 against the Commission decision. Case T-356/15, T:2018:439. The Commission’s interpretation and application of the Altmark criteria was not however a matter of dispute before the General Court. 2404 Case T-222/04 Italy v Commission [2009] ECR II-1877. 2405 OJ [2005] C 297/4, replaced by OJ [2012] C8/15.

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17, the Framework specifies that the amount of compensation includes all the advantages granted by the State through state resources. This raises some confusion and it may be that this latter phrase was intended to refer to any additional advantages (e.g., state guarantees or other ad hoc measures) over and above the revenues earned from the SGEI. This approach seems entirely reasonable and in line with the proportionality test: the Commission must examine all costs and all relevant receipts in order to establish whether the compensation measures are (i) necessary and (ii) not likely to be excessive and lead to distortions of trade. The Commission also published a Decision2406 on the application of Article 106(2) TFEU to state aid in the form of public service compensation. The 2005 Decision takes Article 106(3) TFEU as its legal base and provided an exemption from notification for aid for small amounts of compensation granted to undertakings providing SGEIs whose turnover is limited.2407

5.420

Finally, the Commission adopted an amendment2408 to the Transparency Directive 80/7232409 so that the text of the existing Article 2(1)(d) is amended, and the definition of undertakings required to maintain separate accounts includes “any undertaking that enjoys special or exclusive rights granted by a Member State pursuant to Article 106(1) TFEU or is entrusted with the operation of an SGEI pursuant to Article 106(2) TFEU that receives public service compensation in any form whatsoever in relation to such service and that carries on other activities”. Hence the obligation to maintain separate accounts applies irrespective of the legal classification of the public service compensation as state aid or otherwise.

5.421

The Commission had also published a White Paper on Services of General Economic Interest in May 2004. This summarises the results of the consultation exercise initiated by the Commission’s earlier Green Paper on this subject. One of the purposes of this exercise was to canvas views on the necessity of a horizontal framework directive dealing with various aspects of services of general economic interest as well as to explore the need for further legal clarity on the question of financing such services.

5.422

2406 OJ [2005] L312/67, replaced by OJ [2012] L7/3. 2407 The Commission aligns the exempted amount (€ 30 million) and turnover thresholds (i.e., € 100 million) with those used in the Exemption Regulation for SMEs – Commission Regulation 70/2001, OJ [2001] L10/33. 2408 OJ [2005] L312/47. 2409 As amended by Directive 2000/52, OJ[2000] 193/75.

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5.423

The White Paper rejected the need for a directive and considers that the Altmark ruling as well as the Commission’s follow-up package of measures (see above) should serve to resolve much of the uncertainty in relation to financing issues.2410 The Revised SGEI Package

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At the end of 2011 the Commission adopted the first three texts of a comprehensive ‘SGEI-package’ consisting of: (i) a revised SGEI Framework,2411 a revised Decision,2412 and a new Communication.2413 The final element of the package – the SGEI-specific de minimis Regulation – was adopted on 25 April 2012.2414

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The 2012 Framework further clarifies the rules on compensation, which may not go further than to cover the ‘net cost’ (including ‘reasonable profit’) required to meet its public service obligation(s). The Framework provides that such costs can be calculated using the ‘net avoided costs’ or ‘cost allocation’ methodologies. It also introduces the obligation for Member States to include clear ‘efficiency incentives’ within its compensation contracts (e.g. setting predetermined efficiency targets that the service provider should meet to become eligible for additional compensation), based on objective and measurable criteria. The Framework further introduces compliance with public procurement rules, additional guidance on when compensation might generate ‘serious competition concerns,’ and strengthened transparency requirements.

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The revised exemption Decision introduces stricter requirements, reducing block exempted aid, by half, to € 15 million per year regardless of turnover. The entrustment act for providing the SGEI must also be for a period of less than 10 years, unless a ‘significant investment’ is required. Member States are also required to submit detailed reports for the Commission’s review every two years. The Decision continues to emphasize a number of social services that it considers can be exempt entirely from the notification thresholds (e.g. social housing, medical/child care facilities, and labour market reintegration services).

2410 2411 2412 2413 2414

Com (2004) 374 and IP/04/638. OJ [2012] C8/15. OJ [2012] L7/3. OJ [2012] C8/4. OJ [2012] L114/8.

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The Communication provides a clarification on its assessment of the Altmark criteria. The Commission reiterates that Member States are in principle free to determine which services they consider to be of ‘general economic interest.’ However, the Commission may still assess whether the Member State has made a manifest error of assessment. In that regard, the Communication highlights the importance of a well-defined public service contract which needs to include: the content, duration, clearly defined exclusive or preferential rights, and geographic coverage of the SGEI, including measures to control and review the level of compensation thereof. In 2013 the Commission published some 226 FAQs in its SWD 2013/53 entitled “Guide to the application of the European Union rules on state aid, public procurement and the internal market to services of general economic interest”.2415

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When the previous SGEI package was in force, only the general de minimis rule applied, which was limited to a ceiling of € 200,000 granted over three years. The SGEI-specific Regulation raises the ceiling for SGEI to € 500,000 (over three fiscal years). This topic is further discussed in Part VI of this book.

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5.3 The energy sector and Article 106(2) TFEU The application of Article 106(2) TFEU to the energy sector has arisen in a number of cases. Given that the Commission’s approach to the application of Article 106(2) TFEU has had to take into account the conflicting interpretations of that Article as handed down by the General Court on the one hand, and the Court of Justice on the other, it is important to bear in mind that its own decision-making practice in the period up to July 2003 may not always seem consistent.

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Two of the “stranded costs” decisions handed down in July 2001 relied in part on the possible application of Article 106(2) TFEU as a possible additional legal base for the exemption to Article 107(3) TFEU. In the Austrian case (see book paragraph 5.390), the sum of € 132 million was to be paid as stranded costs compensation to the lignite-fired plant at Voitsberg. Similarly in the Spanish case (see book paragraph 5.404), the Commission considered that planned compensations for costly electricity production plants, on the one hand, and a premium for the generation of electricity out of indigenous coal on the other hand, might amount to state aid.

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2415 Available at: ec.europa.eu/competition/state_aid/overview/new_guide_eu_rules_procurement_en.pdf.

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In several cases decided after the Court of Justice’s ruling in Ferring in 2001 but before the Altmark ruling of July 2003, the Commission took the view that as long as the state measure in question would not result in over-compensation to the beneficiary, the state aid rules would not apply. Thus it approved an Irish measure requiring the Electricity Supply Board (ESB) to have at its disposal a specific quantity of electricity from generating stations which use peat as their primary energy source. This quantity would not exceed 15% of the overall primary energy necessary to produce the electricity consumed in Ireland on an annual basis. The ESB had a number of options open to it to meet this quota. The most economical option appeared to be to accelerate the closure of six existing peat powered plants and replace them by two new and more efficient ones. Although the new plants would be more efficient, the cost of the electricity which they generated would be in excess of the average electricity market prices, resulting in losses for ESB. The aid measure as notified aimed to compensate the ESB for the difference between the generation costs for electricity produced from peat and the average electricity price on the production market. The compensation scheme would be financed by a levy on consumers connected to the grid network. The Commission decided that in the event the system constituted a state aid, it could be authorised as a compensation for a service of general economic interest as regards security of supply in accordance with Article 106(2) TFEU and in the light of Article 3(2) and 8(4) of Directive 96/92.2416

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In its decision to open proceedings in the context of an existing aid scheme, to require the French government to withdraw the unlimited state guarantee to EDF, the Commission considered whether Article 106(2) TFEU could be relied upon as a justification for the measure. Whilst it recognised that EDF did indeed perform public service functions and was entitled to receive compensation to cover the net costs for the performance of these tasks, it was still necessary to ensure that the compensation was both necessary and proportionate. A guarantee which was unlimited in duration and in amount could not be deemed proportionate. Furthermore, the French authorities had not invoked any evidence to justify the application of Article 106(2) TFEU.2417 On December 16, 2003, the Commission adopted a final (conditional) decision requiring that the unlimited State guarantee enjoyed by EDF had to be withdrawn.2418

2416 B. Allibert, “Ireland”, Competition Policy Newsletter, nr. 1, February 2002, p. 95. 2417 See pts 46-48 of its decision to open proceedings, OJ [2003] C164/7. 2418 OJ [2005] L49/7.

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In its decision concerning the Irish CADA scheme, which concerned a scheme for “capacity payments” to generators who undertook the construction of new capacity, it was held that this scheme was designed to ensure the security of the electricity supply in Ireland. Qualifying generators were selected on the basis of a competitive process. The Commission concluded that all four of the Altmark conditions had been met and ruled that Article 107(1) TFEU did not apply.2419 In more recent cases on capacity payment, the Commission has rejected the application of article 10b(2). See para 5.540-541.

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5.4 The Commission’s guidance notes on Directives 2003/54 and 2003/55 On 16th January 2004, the Commission published a series of non-binding “guidance notes” on various issues relating to the Internal Market Directives 2003/54 (electricity) and 2003/552420 (gas) clarifying the interpretation of certain of their provisions. These notes are available on DG ENER’s website. A separate note deals with public service obligations (PSOs), also known as SGEIs. Directives 2003/54 and 2003/55 make a number of references to Articles 106 – 108 TFEU.

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Article 3 of each Directive recognised that Member States may impose public service obligations relating to security, including security of supply, regularity, quality and price of supplies and environmental protection on electricity and gas undertakings. The text of Article 3 of the 2009 directives that repealed and replaced the 2003 measures remains largely unchanged. The relationship between Article 106(1) TFEU and Article 3 of each Directive is dealt with in detail in Part 6 on Article 106 TFEU (book paragraph 6.26). At this juncture it may be noted that in its Guidance Notes, the Commission observes that only services which cannot be provided by the market can be deemed to be SGEIs. However, as the Directives recognise other objectives as candidates for SGEI (also known as public service obligation or PSO) status – including security and reliability of supply and consumer and environmental protection objectives – the application of Article 106(2) TFEU cannot be ruled out as an eventual justification for financial support in relation to such objectives.

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2419 Case N-475/2003, 16.12.2003. See also its recent decision concerning broadband services in the French Pyrennes Atlantic region (16.11.2004) where it also held that all 4 criteria were met OJ [2005] C162/5. 2420 OJ [2003] L176/57.

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5.437 5.438

Article 3(4) (electricity) stipulates that “when financial compensation, other forms of compensation and exclusive rights which a Member State grants for the fulfilment of the obligations set out in paragraphs 2 and 3 are provided, this shall be done in a non-discriminatory and transparent way”.2421 The Directives themselves cannot therefore be interpreted as affecting in any way the initial question of whether a particular measure is an aid or not. The provisions of Article 3 of the Directives may, however, be of some importance in evaluating the compatibility of a particular national state aid measure in accordance with Article 106(2) TFEU. As noted, the IEM Directives of 2003 and the later IEM directives of 2009 only contain minimum common standards – Member States may take further measures, for example, to ensure security of supply, provided these can be justified and are proportionate and do not unduly distort competition. As the Directives explicitly recognise a number of objectives as legitimate public service obligations (PSOs), albeit in global terms, it will be for a Member State seeking to rely on Article 106(2) TFEU as a justification for a state aid measure to demonstrate that it is necessary and appropriate, proportionate and is the least distortive mechanism available to it to achieve the objective in question.2422

6. 5.439

The Clean Energy Package

The EU is in the process of updating its energy policy framework in a way that will facilitate the clean energy transition and make it fit for the 21st century. Negotiations have now been concluded on all aspects of the new energy legislative framework – the Clean Energy for All Europeans package – and all of the new rules will be formally adopted in the first few months of 2019.2423 2421 See also in this respect Recital 28 of the Preamble which recognises the right of Member States to provide adequate economic incentives using all existing national and Community tools. These tools “may include liability mechanisms to guarantee the necessary investment”. 2422 See further Part VI of this Book, and see also the Opinion of 20 October 2009 of the Advocate General and the Court of Justice ruling of 20 April 2010 in the Federutility case C-265/08, ECR [2010] I-03377., ECR [2010] I-03377. 2423 The package includes eight different legislative texts as shown below (as of December 2018): – Energy Performance in Buildings Directive (press release 17/04/2018, Questions & Answers, Factsheet). – Renewable Energy Directive (press release 14/06/2018, Factsheet). – Energy Efficiency Directive (press release 19/06/2018, Factsheet). – Governance (press release 20/06/2018, Factsheet). – Electricity Directive (press release 18/12/2018). – Electricity Regulation (press release 18/12/2018).

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The Proposal for a Directive of the European Parliament and of the Council on common rules for the internal market in electricity (recast) as provisionally agreed in the final trilogue on 18 December 2018 removes the former Article 3 of Directive 72/2009 (electricity) and restricts the scope of Member States to impose certain types of PSO obligations, essentially to vulnerable customers in respect of electricity supply. 2424 This new approach is explained in the Proposal’s recitals:

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[15] “Member States should maintain a wide discretion to impose public service obligations on electricity undertakings in pursuing objectives of general economic interest. Member States should ensure that household customers and, where Mem‑ ber States deem it appropriate, small enterprises, enjoy the right to be supplied with electricity of a specified quality at clearly comparable, transparent and competitive prices. Nevertheless, public service obligations in the form of supply price regulation constitute a fundamentally distortive measure that often leads to the accumulation of tariff deficits, limitation of consumer choice, poorer incentives for energy saving and energy efficiency investments, lower standards of service, lower levels of consum‑ er engagement and satisfaction, restriction of competition as well as fewer innovative products and services on the market. Consequently, Member States should apply oth‑ er policy tools, and in particular targeted social policy measures, to safeguard the af‑ fordability of electricity supply to their citizens. Interventions in price setting should only be applied as public service obligations and subject to specific conditions specified in this Directive. A fully liberalised, well functioning retail electricity market would stimulate price and non-price competition among existing suppliers and incentivise new market entries therefore improving consumers’ choice and satisfaction.” (15 c) “Interventions in electricity supply price regulation must not lead to cross-sub‑ sidisation between different categories of consumers in a direct manner. According to this principle, price systems must not explicitly make certain categories of consum‑ ers bear the cost of price interventions affecting other categories of consumers. For example, price interventions whose cost is born by suppliers or other operators in a non discriminatory manner should not be considered as direct cross-subsidisation.” These principles are worked out further in Articles 5 and 28 and 29 of the Proposal as agreed on 18 December 2018. The new Directive 2019/244 was formally adopted on 5 June 2019 and must be implemented into national law by 31 december 2020. – Risk-Preparedness Regulation  (press release 22/11/2018). – Rules for the regulator ACER (press release 12/12/2018). 2424 Interinstitutional File: 2016/0380(COD), 11 January 2019.

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CHAPTER 5 State aid for environmental protection 1.

Introduction

The European Union continues to be at the forefront of international endeavours to combat climate change and reduce the emission of greenhouse gases.

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On the legislative front, in 2015, when 195 countries adopted the first-ever universal, legally binding global climate deal at the Paris climate conference (COP21), the EU was instrumental in achieving a successful outcome. Moreover, in 2016 the Commission presented an ambitious legislative package (“Clean Energy for All Europeans”) which, building on the Paris conference, aims at advancing EU’s efforts towards energy efficiency, securing the EU’s global leadership in renewables, and empowering energy consumers. The package includes 8 different legislative acts: (i) Energy Performance in Buildings Directive; (ii) Renewable Energy Directive; (iii) Energy Efficiency Directive; (iv) Governance Regulation; (v) Electricity Directive, (vi) Electricity Regulation; (vii) Risk-Preparedness Regulation; and (viii) Regulation for the Agency for the Cooperation of Energy Regulators (ACER).2425 By December 2018, the political negotiations were successfully concluded on all measures. It is expected that in 2019 the new laws will be published in the Official Journal of the Union, with regulations entering into force immediately and Directives being transposed into national law within 18 months.2426

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2425 See https://ec.europa.eu/energy/en/topics/energy-strategy-and-energy-union/clean-energy-all-europeans. 2426 The Clean Energy Package will replace the current set of measures, which include (i) Directive 2009/72/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in electricity and repealing Directive 2003/54/EC, OJ L 211, 14.8.2009, p. 55 93 (the “Electricity Directive”); (ii) Regulation (EC) No 714/2009 of the European Parliament and of the Council of 13 July 2009 on conditions for access to the network for cross-border exchanges in electricity repealing Regulation (EC) No 1228/2003, OJ L 211, 14.8.2009, p. 15 35 (the “Electricity Regulation”); Regulation (EC) No

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While the legislative framework has been adapted to the needs of the clean energy transition, during the period 2014-2019, the key State aid instruments for the energy sector have remained stable: 1) the General Block Exemption Regulation, published on June 26, 2014 (and replacing the 2008 General Block Exemption Regulation – the “2014 GBER” and “2008 GBER”, respectively),2427 and 2) the Guidelines on State aid for Environmental protection and Energy, published on June 28, 2014 (and replacing the 2008 Guidelines on State aid for environmental protection, the “2014 Guidelines” and “2008 Guidelines”, respectively).2428 In fact, in January 2019 the Commission announced its intention to prolong the GBER and the 2014 Guidelines until 2022.2429

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The 2014 GBER (like its predecessor) is intended to eliminate the obligation on Member States to notify aid measures that do not meet certain minimum thresholds, thereby reducing the administrative burden resulting from the large number of minor aid amounts notified to the Commission. In particular, for energy and environmental aid, the 2014 GBER sets out a number of thresholds based on the amount of the aid.2430 The GBER is therefore designed to afford the Commission greater opportunity for a detailed examination of large amounts of State aid, which have a correspondingly greater potential to distort competition.

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The 2014 GBER has been aligned with the 2014 Guidelines and includes measures such as aid for energy infrastructure, energy efficiency projects in buildings, operating aid to the production of energy from renewable energy sources, decontamination of polluted sites, district heating and cooling, waste recycling and reutilisation. However, aid involved in tradeable permit schemes, carbon capture and storage, relocation of undertakings, reduction in funding support for electricity from renewable energy sources (“RES”) and generation adequacy is only dealt under the 2014 Guidelines, which are therefore more comprehensive. Moreover, measures which fall under the scope of the 2014 GBER can be implemented without a Commission decision authorizing the measure. By contrast, the 2014 Guidelines provide indications on how the Commission will use

2427

2428 2429 2430

713/2009 of the European Parliament and of the Council of 13 July 2009 establishing an Agency for the Cooperation of Energy Regulators. OJ L 211, 14.8.2009, p. 1 14 (the “ACER Regulation”), others Commission Regulation (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty, OJ [2014] L 187/1. The 2014 GBER entered into force on July 1, 2014. For the 2008 GBER, see Commission Regulation (EC) No 800/2008, OJ [2008] L 241/3). See OJ [2014] C 200/1. The 2014 Guidelines entered into force on July 1, 2014 (the same day as the 2014 GBER). For the 2008 Guidelines, see OJ [2008] C 82, p. 1. See Commission press release from January 7, 2019, Commission to prolong EU State aid rules and launch evaluation , available at http://europa.eu/rapid/press-release_IP-19-182_en.htm. 2014 GBER, Article 4(1)(s)-(x).

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its powers in approving aid measures. An assessment of the 2014 Guidelines and the Commission decisions thus provides insights on the application of State aid law in this field. Before discussing the 2014 Guidelines and the Commission practice, the following statistics on Member States’ expenditure for aid in the energy sector are significant:2431 –

According to the national expenditure reports presented by Member States for 2017, Member States spent EUR 116.2 billion, i.e. 0.76% of GDP, on State aid at European Union level.

–

State aid to environmental and energy savings represented about 53% of the total spending (excluding agricultural aid).

–

A large share of this spending is linked to aid for RES.

Thus, based on 2017 data, State aid to the energy sector accounts for over 50% of total aid expenditure in the EU, with aid to RES projects taking the lion’s share.

2.

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The 2014 Guidelines on State aid for environmental protection and energy

2.1 Introduction The review of the 2008 Guidelines started in 2012 and included three public consultations and numerous contacts with Member States and stakeholders. For the first time, the Commission decided to adopt Guidelines that would not only cover RES and energy efficiency, but would be targeted more generally to aid measures in the energy field. The new 2014 Guidelines were adopted in principle in April 2014 and have been applicable since July 1, 2014.

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In 2019, the Commission has started a “fitness check” of the 2014 Guidelines (together with the 2014 GBER and other instruments), with a view to assess “to which extent the rules reached the envisaged objectives under the SAM package (plus objectives under the other rules subject to the fitness check), to which extent consistency has been ensured and whether there is scope for further updates in view of the EU priorities under the new Multiannual financial framework, new EU

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2431 See State aid scoreboard 2018 (available at http://ec.europa.eu/competition/state_aid/scoreboard/index_ en.html).

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legislation or developments on the internal and global market”.2432 As noted, the 2014 Guidelines will remain in force until 2022.

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The 2014 Guidelines are intended to promote a gradual move to market-based support for renewable energy. They also provide criteria on how Member States can meet their ambitious energy and climate targets at the least possible cost for European citizens and companies.2433

2.1.1 Legal basis and common assessment principles 5.451

The 2014 Guidelines are based on Article 107(3)(c) TFEU. Article 107(3)(c) provides for derogations from the general prohibition on State aid in respect of measures intended to “ facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest”. The provision is sufficiently flexible to envisage an exemption from the State aid prohibition for a range of measures such as power generation, emissions trading schemes, and waste management.

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The 2014 Guidelines first set out the general compatibility conditions (in Sections 3.1 and 3.2). In particular, (i) aid for environmental studies; (ii) aid for the remediation of contaminated sites; (iii) aid for undertakings going beyond Union standards or increasing environmental protection in the absence of Union standards; and (iv) aid for the early adaptation to future Union standards, are covered exclusively by the general compatibility conditions. Sections 3.33.11 set out more specific compatibility conditions for a number of measures including: (a) aid for energy from renewable sources; (b) aid for energy efficiency measures, including cogeneration and district heating and district cooling; (c) aid for resource efficiency and, in particular, for waste management; (d) aid for CO2 capture, transport and storage including individual elements of the Carbon Capture Storage (‘CCS’) chain; (e) aid in the form of reductions in or exemptions from environmental taxes; (f ) aid in the form of reductions in funding support for electricity from renewable sources; (g) aid for energy infrastructure; (h) aid for generation adequacy measures; (i) aid in the form of tradable permits; and (j) aid for the relocation of undertakings. 2432 See 2012 State aid modernisation package, railways guidelines and short-term export credit insurance – fitness check, available at https://ec.europa.eu/info/law/better-regulation/initiatives/ares-2018-6623981_ en. 2433 See Commission press release, State aid: Commission adopts new rules on public support for environmental protection and energy , 9 April 2014, Brussels.

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2.1.2 The General Compatibility provisions The 2014 Guidelines set out a number of requirements to determine whether the design of the aid measure ensures that the positive impact of the aid towards a competitive, sustainable and secure energy system in a well-functioning Union energy market exceeds its potential negative effects on trade and competition. In line with the principles of the SAM Communication,2434 the general compatibility requirements are the following:

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(a) contribution to a well-defined objective of common interest (Section 3.2.1); (b) need for State intervention (Section 3.2.2); (c)

appropriateness of the aid measure(Section 3.2.3);

(d) incentive effect (Section 3.2.4); (e)

proportionality of the aid (aid kept to the minimum) (Section 3.2.5);

(f ) avoidance of undue negative effects on competition and trade between Member States (Section 3.2.6); and (g) transparency of aid (Section 3.2.7). Within the general compatibility conditions, there are more stringent rules, depending on whether the measure is defined as “individually notifiable aid”, which includes aid above a certain amount, granted without a competitive bidding process.2435 The amounts vary depending on the type of aid (investment or operating aid) and the type of measure. More specifically:

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For investment aid, the threshold is EUR 15 million for one undertaking;

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Based on the type of measure, the thresholds are as follows:

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2434 COM/2012/0209 final. 2435 See 2014 Guidelines, point 20.

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–

For operating aid for the production of renewable electricity and/or combined production of renewable heat: where the aid is granted to renewable electricity installations at sites where the resulting renewable electricity generation capacity per site exceeds 250 megawatts (“MW”);

–

For operating aid for the production of biofuel: where the aid is granted to a biofuel production installation at sites where the resulting production exceeds 150 000 tonnes (“t”) per year;

–

For operating aid for cogeneration: where aid is granted to cogeneration installation with the resulting cogeneration electricity capacity exceeding 300 MW;2436

–

For aid for energy infrastructure: where the aid amount exceeds €50 million for one undertaking, per investment project;

–

For aid for Carbon Capture and Storage: where the aid amount exceeds €50 million per investment project;

–

For aid in the form of a generation adequacy measure: where the aid amount exceeds EUR 15 million per project per undertaking.

2.2 Key features in the 2014 Guidelines 5.457

When the 2014 Guidelines were issued, the Commission highlighted four key features:2437 (i) the changes in the mechanisms for renewable energy support; (ii) aid to secure adequate electricity generation, so-called “capacity mechanisms”, which is largely the consequence of the increasingly large share of renewable energy in the electricity system; (iii) promoting competitiveness of European industry by allowing a reduction in the charges levied on energy-intensive companies for the funding of renewable energy support; and (iv) supporting cross-border energy infrastructure to further the Single European Energy Market. The sections below touch upon each of these features, before analysing the provisions in detail.

2436 Aid for the production of heat from cogeneration will be assessed in the context of notification based on electricity capacity; 2437 See http://europa.eu/rapid/press-release_IP-14-400_en.htm.

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2.2.1 Changes in the mechanisms for renewable energy support Much of the aid granted under the 2008 Guidelines has served to promote renewable energy sources (RES): out of a total of €10 billion granted in environmental protection measures between 2008 and 2012, Member States granted €8 billion to RES (and CHP). The 2008 Guidelines left a large discretion to Member States as to how to design their support schemes. This has led to a wide variety of support schemes across Member States. One of the aims of the 2014 Guidelines was thus to introduce certain key principles applicable across all Member States.

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In particular, the 2014 Guidelines sought to influence design of support schemes in four ways: first, the 2014 Guidelines required Member States to use tenders to grant aid for mature technologies, while new technologies could still benefit from ad hoc support. Second, to promote market integration, RES producers should sell their electricity directly to the market and receive a feed-in premiums (i.e., a top-up of the market price, while feed- in tariffs would in principle not be possible). Third, RES producers should be subject to standard balancing responsibility.2438 Fourth, while national RES targets have led to support systems promoting almost exclusively national production, the 2014 Guidelines for the first time take into account the cross-border dimension. Thus, for instance, foreign RES producers should be able to participate in the tenders for the allocation of support (although the 2014 Guidelines caution that Member States “may want to have a cooperation mechanism in place” before opening up their schemes).

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2.2.2 Aid for generation adequacy The increased supply of intermittent RES has caused concern in some Member States about the ability of “energy-only” markets to ensure stability of the network. In an “energy-only” market, producers and importers sell their output through a bidding process to suppliers, traders, and large industrial customers. Bids are arranged in ascending order, according to the marginal costs of gen2438 While production by conventional generators depends essentially only on the normal operation of the thermal power plant, production by RES generators is intrinsically linked to weather conditions (sunshine hours and intensity for solar producers, wind strength and direction for wind generators). As a consequence, RES generators were traditionally exempted from balancing obligations, due to the objective difference between thermal and RES generators as regards their ability to forecast output. However, technological developments have made predicting output less difficult. As a consequence, the 2014 Guidelines require Member States to submit RES producers to balancing responsibilities (if they cannot match their prediction with actual production, RES producers should thus bear the costs incurred by the Transmission System Operator for sourcing the electricity necessary to cover the shortfall).

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erating units (the so-called merit order), and the price is set at the level of the marginal cost of the most expensive unit dispatched in order to meet demand. However, this model suffers from a notable failure: demand and supply do not necessarily meet at times of extreme scarcity, i.e. there is no guarantee of the market clearing.

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Thus, the energy-only market may not provide the price signal which would guarantee an adequate level of generation. This situation is commonly described as the missing money problem, because of the failure to provide high enough returns to maintain the level of capacity adequate to meet demand. Capacity mechanisms address this failure by providing the payments deemed necessary to support an appropriate level of generation adequacy, in addition to the revenues from the energy-only market. The integration of large stocks of RES contributes to the generation adequacy problem in two ways. First, RES capacity exacerbates the traditional missing money problem. Second, by displacing thermal generation units in the merit order, RES generators impact the ability of thermal generators to sell electricity in the market, to the point that they are not able to cover their fixed costs. However, due to its intermittent nature, RES capacity development must go hand in hand with a suitable stock of back-up capacity. This backup capacity is normally provided by thermal units. Thus, the capacity which is pushed out of the market by the increasing share of RES is precisely the capacity that can guarantee the secure integration of RES in the electricity system.

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Against this background, some Member States started to consider that capacity mechanisms were one way to avoid temporary power shortages or black-outs. The 2014 Guidelines for the first time introduced rules covering capacity mechanisms with a view to promote certain harmonized principles. In particular, the 2014 Guidelines require Member States to undertake a number of steps to show the need for capacity mechanisms, including assessing the ability of imports and demand-side response2439 measures to address such concerns. Second, Member States should allow the participation of generators using different technologies (principle of technological neutrality). Third, Member States should also allow the participation of generators in other Member States (with the provision that “the obligations [imposed on the selected foreign generator] can be enforced”.2440 Finally, capacity mechanisms should have a positive bias in favour of “low-carbon generators”.2441 2439 One example of a demand-side measure is interruptible electricity contracts. Such contracts allow the supplier to cut the electric service to a customer in exchange for either an overall reduction in the price of electricity delivered or for financial compensation at the time of interruption. 2440 2014 Guidelines, paragraph 232. 2441 2014 Guidelines, paragraph 232, under (e).

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Reflecting the heightened importance of this type of measure, in April 2015 the Commission launched the first State aid sector inquiry into Member States’ capacity mechanisms. In 2016 the Commission adopted a final report,2442 where it struck a rather critical note. In the words of Commissioner Vestager “Capacity mechanisms need to match a problem in the market and be open to all technologies and to operators from other EU countries. They must not be backdoor subsidies for a specific technology, such as fossil fuels, or come at too high a price for electricity consumers. The sector inquiry report will help the Commission and Member States introduce better targeted capacity mechanisms, and only if there is a genuine need for them”.2443 The findings of the Sector Inquiry informed the new legislation on market design.

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2.2.3 Competitiveness of European Industry and the exemption from funding of RES Another side-effect of the ambitious RES targets is the burden on consumers, who provide the necessary means to finance the support mechanisms. In particular, energy-intensive consumers may suffer from a loss of competitiveness, to the point of being forced to relocate to countries having less ambitious environmental policies (within or even outside the EU). Such relocation would not only lead to “carbon leakage”, but would also put into question the financing of the support to RES, as a significant part of contributors would have disappeared.

5.464

The 2014 Guidelines thus provide for the first time that the aid should be limited to sectors that are exposed to a risk of harming their competitive positions due to the costs resulting from the funding of support to energy from renewable sources as a function of their electro-intensity and their exposure to international trade. Accordingly, the aid can only be granted if the undertaking belongs to the sectors listed in a specific Annex to the 2014 Guidelines. Finally, as will be explained in more detail below, the rules on exemption from RES funding have a wide temporal scope.

5.465

2442 See COM(2016) 752 final, available at http://ec.europa.eu/competition/sectors/energy/capacity_mechanisms_final_report_en.pdf. 2443 See Commission press release, November 30, 2016, available at http://europa.eu/rapid/press-release_IP-164021_en.htm.

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2.2.4 Cross-border energy infrastructure 5.466

Infrastructure, and in particular electricity infrastructure is an essential element to integrate RES into the EU internal market and, in principle, has a low risk for distortion of competition. Since the 2008 Guidelines did not have any specific provisions covering infrastructure, State aid for traditional infrastructure measures (such as interconnections, gas storage, transmission and distribution networks) was assessed on a case-by-case basis following the general principles established by the Treaty. This made it burdensome to gain State aid approval for infrastructure investments. The lack of clear regulation also hampered support for new technological developments that could be highly beneficial to the internal energy market and help the integration of energy networks. The 2014 Guidelines thus extend the scope of the 2008 Guidelines to include energy infrastructure i.e. mainly electricity networks and their components.

2.2.5 Individual aid measures covered by the 2014 Guidelines 5.467

The 2014 Guidelines cover a number of environmental protection aid measures that were previously covered by the 2008 Guidelines: – – – – – –

5.468

Aid for cogeneration and district heating Aid for waste management Aid for energy efficiency Aid in the form of reductions or exemption from environmental taxes Aid for environmental studies Aid for early adaptation to/going beyond EU standards, or for higher environmental protection in their absence (incl. new transport vehicles) Aid for remediation of contaminated sites Aid in the form of tradable permit schemes Aid for carbon capture and storage Aid for relocation of undertakings

– – – – In addition to the measures covered by the 2008 Guidelines, the 2014 Guidelines (i) introduce changes to aid for promotion of renewable energy sources and (ii) provide for the compatibility with the Treaty of the following additional measures: –

Aid in the form of reductions in funding support for electricity from renewable sources;

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–

Aid for energy infrastructure; and

–

Aid for generation adequacy.

These aid measures are discussed in greater detail below. Consistent with the structure of the 2014 Guidelines, before discussing each of these measures, the Section below outlines the general compatibility provisions, which constitute a common basis for the assessment of all measures.

5.469

2.2.6 (a) Objective of common interest Environmental aid pursues an objective of common interest where it aims to increase the level of environmental protection compared to the level that would be achieved in the absence of the aid.2444 For individually notifiable aid, Member States should make use of quantifiable indicators to gauge the level of such increase (reduction in emission, reference to Union standards, etc.).2445 For energy measures, Member States should show the way in which the aid contributes to a competitive, sustainable and secure energy system in a well-functioning Union energy market.2446

5.470

2.2.7 (b) Need for State intervention Having defined the objective of a given measure, in a second step the Member State must show the existence of market failures preventing the desired outcome in terms of an increased level of environmental protection or a well-functioning, secure, affordable, and sustainable internal energy market.2447 The 2014 Guidelines set out a number of market failures commonly associated with certain environmental or energy measures.

5.471

For instance, negative externalities commonly arise when pollution is not adequately priced, hence they may warrant environmental aid.2448 Positive externalities and information asymmetry, on the other hand, may beset energy infrastructure projects.2449

5.472

2444 2445 2446 2447 2448 2449

2014 Guidelines, paragraph 30. 2014 Guidelines, paragraph 33. 2014 Guidelines, paragraph 30. 2014 Guidelines, paragraphs 34-35. 2014 Guidelines, paragraph 35, lett. a). 2014 Guidelines, paragraph 35, lett. b) and c).

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5.473

Sometimes other policies may already be in place to address a given market failure, such as a mandatory environmental standard in the case of pollution. In this case, State aid may only address the market failure that remains unaddressed by any such measure (if any).2450 Moreover the State aid needs to reinforce such other measures.2451 For individually notifiable aid, in particular, the Commission will assess whether such other policies “already sufficiently address the market failure”.2452

2.2.8 (c) appropriateness of the aid measure (Section 3.2.3); 5.474

Under this heading the Commission will check whether “the same positive contribution to the common objective is achievable through other less distortive policy instruments or other less distortive types of aid instruments”.2453 For instance, regulation, market-based instruments, and voluntary eco-labels can all deliver environmental and/or energy objectives, but entail less distortions. In addition, the Commission will also assess the extent to which environmental or energy aid measures are coordinated with other policies.

5.475

For instance, the “generation adequacy problem needs to be balanced with the environmental objective of phasing out environmentally or economically harmful subsidies, including for fossil fuels”.2454 Similarly the ‘polluter pays principle’ (‘PPP’) normally bars State aid when “the beneficiary of the aid could be held liable for the pollution under existing Union or national law”.2455

5.476

“Appropriateness” also requires balancing the different forms in which an aid may be granted, and choosing the least distortive measure. For instance, repayable advances are usually less distortive than direct grants.2456

2.2.9 (d) incentive effect (Section 3.2.4); 5.477

A general principle of EU State aid law requires that the aid must create an incentive effect to be compatible with the common market. An incentive effect occurs when a project would not be done absent the incentives. To prove the incentive effect it is necessary to describe the situation without the aid as a coun2450 2451 2452 2453 2454 2455 2456

2014 Guidelines, paragraph 36. Ibid. 2014 Guidelines, paragraph 39, let. a). 2014 Guidelines, paragraph 40. 2014 Guidelines, paragraph 43. 2014 Guidelines, paragraph 44. 2014 Guidelines, paragraph 45

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terfactual and explain why the aid delivers the required change. For instance, for RES generation, without the aid a project would not be built because the investments costs are higher than the revenues, based on market prices. In essence, this is tantamount to checking the profitability of a project in the absence of the aid. Accepted methodologies to this effect include net present value (‘NPV’) calculation, the internal rate of return (‘IRR’) or the average return on capital employed (‘ROCE’). For notifiable aid, the Commission will exact Member States to a high standard of proof.2457 The 2014 Guidelines set out detailed guidance as follows: –

The profitability of the project is to be compared with normal rates of return applied by the company in other investment projects of a similar kind. Where those rates are not available, the profitability of the project is to be compared with the cost of capital of the company as a whole or with the rates of return commonly observed in the industry concerned.

–

In case no specific counterfactual scenario is known, the incentive effect can be assumed when there is a funding gap (i.e. when the investment costs exceed the NPV of the expected operating profits of the investment on the basis of an ex ante business plan).

–

The calculation must use contemporary, relevant and credible evidence including, for example official board documents, credit committee reports, risk assessments financial reports, internal business plans, expert opinions and other studies related to the investment project under assessment.

–

The Commission will conduct a benchmarking of the company data against those of the industry.

The incentive effect is lost if the beneficiary already started the necessary works prior to applying for the aid (which implies that Member States must have an application procedure).2458 Similarly, aid will not be approved in cases where it appears that the same activities would still be pursued without the aid.2459

5.478

For the specific rules on the incentive effect and adaptation to Union standards, see infra.

5.479

2457 2014 Guidelines, paragraphs 61-64. 2458 2014 Guidelines, paragraphs 50-51. 2459 2014 Guidelines, paragraph 68.

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2.2.10 (e) proportionality of the aid (aid kept to the minimum) (Section 3.2.5); 5.480

Identifying the counterfactual scenario is key also for ensuring proportionality of the aid because, if the aid corresponds to the net extra cost necessary to meet the objective, compared to the counterfactual scenario in the absence of aid, the aid will be considered proportional.2460

5.481

For measures which are not subject to individual notification, Annex 2 identifies the relevant counterfactual scenario. For instance, in the case of RES generation, the counterfactual is the construction of a conventional power plant with the same capacity. The aid can thus cover the extra cost compared to the counterfactual. The aid may cover all or part of such extra costs. This is measured in terms of aid intensity. Aid intensities vary depending on the type of measure and recipients. For instance, small and medium-size enterprises enjoy higher aid intensities than large undertakings; similarly, aid awarded following a competitive bidding process can have a higher intensity compared to other allocation methods. Annex 1 sets out the relevant aid intensities.

5.482

For individually notifiable aid, the Member State will have to provide evidence that the aid is kept to a minimum. The same evidence used for the incentive effect can also be used.2461

5.483

Finally, an undertaking may cumulate aid under several aid schemes, provided that the total amount of State aid for an activity or project does not exceed the limits fixed by the aid ceilings set out in the Guidelines.2462

2.2.11 (f ) avoidance of undue negative effects on competition and trade between Member States (Section 3.2.6); 5.484

Aid by its very nature is distortive of competition. However, in assessing its compatibility, the Commission will take into account, for instance, the overall environmental effect of the measure in relation to its negative impact on the market position, and thus on the profits, of non-aided firms.2463 A measure of aid with a limited environmental impact benefitting a dominant firm is likely to attract criticism. If the aid is proportionate, nevertheless, it is more likely than 2460 2461 2462 2463

2014 Guidelines, paragraph 70. 2014 Guidelines, paragraph 86. 2014 Guidelines, paragraph 81. 2014 Guidelines, paragraph 90.

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not that, even if granted to a dominant firm, the distortive impact of the aid is not ‘undue’.2464 For individually notifiable aid, the Commission will in particular pay attention to the following negative effects of the aid:

5.485

(a) supporting inefficient production, thereby impeding productivity growth in the sector; (b) distorting dynamic incentives; (c)

creating or enhancing market power or exclusionary practices; and

(d) artificially altering trade flows or the location of production.2465 As regards the locational impact, the Commission is concerned that the aid may artificially reduce production costs or improve productivity, thus distorting location decisions by other firms or delivering additional benefits to the aid recipient. Thus, the Commission cautions that it will “take into account any evidence that the aid beneficiary has considered alternative locations”.2466

5.486

2.2.12 (g) transparency of aid (Section 3.2.7) Finally, the 2014 Guidelines provide that each Member State should maintain a State aid website with information on: the full text of an approved aid scheme or the individual aid granting decision and its implementing provisions, or a link to it, the identity of the granting authority/(ies), the identity of the individual beneficiaries, the form and amount of aid granted to each beneficiary, the date of granting, the type of undertaking (SME/large company), the region in which the beneficiary is located (at NUTS level II), and the principal economic sector in which the beneficiary exploits its activities (at NACE group level).2467 This information should be available to the general public for a period of 10 years.2468

2464 2465 2466 2467 2468

2014 Guidelines, paragraph 98. 2014 Guidelines, paragraph 101. 2014 Guidelines, paragraph 103. 2014 Guidelines, paragraph 104. 2014 Guidelines, paragraph 106.

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2.3 Measures previously covered by the 2008 Guidelines 2.3.1 Aid for efficiency measures, including cogeneration and district heating and cooling 5.488

While cogeneration has long been a preoccupation of the Commission,2469 the 2008 Guidelines covered new ground by providing for aid in respect of a related area, namely the use of waste heat from industry or utilities in district heating. The 2014 Guidelines further extend the scope of permissible aid, by including district cooling and, more generally, energy efficiency measures.2470 In this respect, the 2014 Guidelines corroborate the EU 20/20/20 strategy, which aims at achieving a 20% improvement in the EU’s energy efficiency compared to 1990.

5.489

Moreover, the 2014 Guidelines’ provisions on aid for energy efficiency must be read together with Directive 2012/27/EU (the “Energy Efficiency Directive”),2471 which establishes a set of binding measures to help the EU reach its 20% energy efficiency target by 2020.2472 In particular, to qualify for aid, the generation and distribution process for heating and cooling must satisfy the requirements under the Energy Efficiency Directive.2473 As regards the incentive effect, the 2014 Guidelines clarify that the Energy Efficiency Directive puts an obligation on Member States to achieve the targets therein, but not on undertakings.2474 As a consequence, State aid can deliver the desired incentive effect and may be, in fact, needed to achieve the Directive’s targets.

2469 For instance, in 1997 the Commission outlined its cogeneration strategy, whereby the Commission aimed to double the share of electricity production derived from cogeneration to 18% by 2010. 2470 In a similar vein, the 2008 Guidelines included measures for energy saving (paragraphs 47 and 94-100). 2471 See Directive 2012/27/EU of the European Parliament and the Council of 25 October 2012 on energyefficiency, amending Directives 2009/125/EC and 2010/30/EU and repealing Directives 2004/8/EC and 2006/32/EC OJ [2012] L 315, p. 1). 2472 Under the Energy Efficiency Directive, all EU countries are required to use energy more efficiently at all stages of the energy chain from its production to its final consumption. More specifically, energy distributors or retail energy sales companies have to achieve 1.5% energy savings per year through the implementation of energy efficiency measures; every year, EU governments must carry out energy efficient renovations on at least 3% of the buildings they own and occupy by floor area; and large companies must make audits of their energy consumption to help them identify ways to reduce it. 2473 See 2014 Guidelines, paragraph 19 (definitions), point 13 (high-efficiency cogeneration) and 14 (energyefficient district heating and cooling); and paragraph 139. These provisions in turn make reference to definitions and formulas in the Energy Efficiency Directive. 2474 See 2014 Guidelines, paragraph 143.

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As regards proportionality, and in particular eligible costs for investment aid, the rules under the common assessment principles apply.2475 By contrast, there are specific rules for operating aid.

5.490

More specifically, for energy efficiency measures, the aid must be limited to compensating for the net extra production costs resulting from the investment, taking into account the benefits resulting from energy saving (production costs also includes a normal level of profit); moreover, the aid must be limited to a five year duration.

5.491

For combined production of electric power and heat, the 2014 Guidelines adopt an approach similar to that for the production of electricity from RES insofar as aid is permissible where the costs of producing electric power or heat exceed its market price or, for the industrial use of the combined production of electric power and heat, where it can be shown that the production cost of one unit of energy using that technique exceeds the market price of one unit of conventional energy.2476

5.492

The decision on the reform of support for cogeneration in Germany, dated October 24, 2016, is illustrative of the Commission’s approach.2477

5.493

In 2016 Germany adopted new rules (Kraft-Wärme-Kopplungsgesetz – KWKG 2016 or Heat and Power Cogeneration Act 2016) granting state aid to operators of new and modernised highly efficient cogeneration (“CHP”) plants (except coal and lignite-fired CHP).2478 The main feature of the scheme – which aligned with the 2014 Guidelines – were as follows:

5.494

2475 See 2014 Guidelines, paragraphs 148-149, referring to paragraphs 73, 75 and to Annex 1 for aid intensity thresholds. 2476 See 2014 Guidelines, paragraphs 150-151. Similar rules applies under the 2008 Guidelines (see paragraph 119, lett. a) and b)). 2477 See case SA.42393. The Commission decision assessed several measures. All of them were financed by a levy (the “CHP-surcharge”) imposed on electricity consumption collected by network operators as a supplement to network charges. Users with high yearly energy consumption and certain energy-intensive industrial users benefitted from a reduction from the CHP-surcharge. The Commission decided to open a formal State aid investigation procedure on these reductions. The Commission took a final (positive) position on this matter with the decision from May 23, 2017 (available at http://ec.europa.eu/competition/state_aid/ cases/266576/266576_1926537_68_2.pdf ). 2478 The KWKG also supported the construction and expansion of energy-efficient district heating/cooling network as well as the construction and retrofitting of heating/cooling storage facilities, which the Commission also found in line with the 2014 Guidelines.

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5.495

–

Operators of installations have to offer their electricity on the market and receive their support in the form of a fixed premium on top of the market price.

–

CHP plants have an incentive to operate when they are needed, i.e. at times of higher electricity demand, because they only receive the fixed premium for a limited number of operating hours (so-called full load operating hours). Therefore, the plants have an incentive to operate when the market price is higher. (CHP plants do not receive any support when electricity prices are negative, i.e. when supply exceeds demand).

–

There are tenders to allocate support to new CHP plants with installed capacity between 1 and 50 megawatt (MW). Given that the participation of CHP plants with installed capacity of more than 50 MW in tenders could render those uncompetitive (large bidders would be able to cover the entire tender capacity and thus would have an incentive to resort to strategic bidding leading to higher prices and preventing smaller suppliers from competing), these large plants receive premiums as set out in the KWKG 2016.

The KWKG 2016 also provides for state aid for existing gas-fired high-efficient CHP plants used for district heating, such aid to be paid also for the period after the plant has been depreciated, which is a departure from the standard rule (operating aid for CHP installations should be limited to the duration of their depreciation). However, Germany demonstrated specific circumstances (higher level of production costs and low electricity prices), which warranted an exception. The Commission thus examined the support directly under the Treaty (Article 107(3)(c) TFEU) and found it compatible. Importantly, the Commission announced its intention to amend the 2014 Guidelines “to expressly provide for the possibility to approve operating aid to depreciated CHP installations in a comparable factual and economic situation as the installations examined under this section [of the German decision, ndr]…” (para. 196). The Commission also committed to apply the same criteria to any similar case, pending the announced revision.

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2.3.2 Aid for resource efficiency and in particular for waste management In line with the flagship “Resource Efficient Europe” initiative, the 2014 Guidelines – like the 2008 Guidelines provide for the granting of lawful investment aid in connection with waste management.2479

5.496

The 2014 Guidelines recall that aid must be consistent with the principles of the Waste Framework Directive,2480 setting the following hierarchy for waste management across the EU: (a) prevention; (b) preparing for re-use; (c) recycling; (d) other recovery (for instance energy recovery).

5.497

In addition, the aid must meet the following conditions: (i) the investment is targeted towards reducing pollution generated by other undertakings and does not extend to pollution generated by the beneficiary of the aid; (ii) the aid does not indirectly relieve the polluters from a burden that should be borne by them under Community law, or from a burden that should be considered a normal company cost for the polluters; (iii) the investment is innovative – either because it goes beyond the “state of the art” or because it uses conventional technologies in an innovative manner; (iv) the materials treated would otherwise be disposed of, or be treated in a less environmentally friendly manner; and, (v) the investment does not merely increase demand for the materials to be recycled without increasing collection of those materials.2481

5.498

The 2014 Guidelines go on to clarify that aid for the beneficiary’s own waste will be assessed under different provisions, namely those for undertakings going beyond Union standards or increasing environmental protection in the absence of Union standards.2482

5.499

2479 The rules under the 2008 Guidelines were very similar to those under the 2014 Guidelines. See, e.g., Commission Decision of May 5, 2014, case SA.37380, concerning aid to waste management by Denmark (available at http://ec.europa.eu/competition/state_aid/cases/249982/249982_1562944_119_2.pdf ). The measure was notified in 2013 and thus it fell within the scope of the 2008 Guidelines. However, in light of a number of information requests, it was only approved in May 2014. The Commission carried out the assessment under the 2008 Guidelines, but noted that “The Commission notes that the new rules are similar to the present conditions and that this scheme also complies with the conditions set out in the new Guidelines” (paragraph 36). 2480 See Directive 2008/98/EC of the European Parliament and of the Council 19 November 2008 on waste and repealing certain Directives (Waste Framework Directive) (OJ L 312, 22.11.2008, p. 3). 2481 2014 Guidelines, paragraph 158. The 2008 Guidelines set out identical principles (see paragraph 52). 2482 The 2008 Guidelines entailed a certain ambiguity as they permitted the granting of investment aid for waste management to the producer of the waste, but recalled that the PPP must not be circumvented (paragraph 52, in fine).

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5.500

Finally, as regards proportionality, the calculation of the eligible costs and the aid intensities are those set out in Annexes 1 and 2, except that higher intensities (up to 10 percentage points) may be justified in the case of eco-innovation.2483

2.3.3 Aid for environmental studies 5.501

5.502

The 2008 Guidelines permitted aid for environmental studies directly linked to certain types of aid permitted therein, specifically: –

Studies of potential investments that would achieve standards of environmental protection exceeding the minimum level required by Community standards, or which would raise the level of environmental protection in the absence of Community standards.

–

Studies for the production of renewable energy by large, medium and small companies. 2484

The 2014 Guidelines continue to list aid for environmental studies as a measure for which aid may be compatible with Article 107(3)(c) TFEU.2485 However, the studies must be directly linked to investments eligible under the 2014 Guidelines (even if following the findings of a preparatory study, the investment under investigation is not undertaken).2486 The eligible costs and aid intensities are set out in Annexes 1 and 2.

2.3.4 Aid for early adaptation/ going beyond Union standards or for higher environmental protection in the absence of Union standards (including aid for the acquisition of new transport vehicles) 5.503

While an undertaking must comply with mandatory environmental protection standards, the undertaking may have little incentive to go beyond the minimum effort necessary to meet these standards. The 2008 Guidelines therefore provided that States may grant aid to undertakings that surpass EU standards or increase the level of environmental protection in the absence of EU standards. 2483 See 2014 Guidelines, paragraph 78, let. c). Under paragraph 19, point 4, “eco-innovation” means all forms of innovation activities resulting in or aimed at significantly improving environmental protection, including new production processes, new products or services, and new management and business methods, the use or implementation of which is likely to prevent or substantially reduce the risks for the environment, pollution and other negative impacts resulting from the use of resources, throughout the life cycle of related activities”. 2484 2008 Guidelines, paragraph 91. 2485 2014 Guidelines, paragraph 18, let. c). 2486 2014 Guidelines, paragraph 32.

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The 2014 Guidelines follow the same approach.2487 Union standards comprise both mandatory Union standards setting the level of environmental protection that an undertaking must attain, and the obligation to use the “best available techniques” set out in Directive 2010/75/EU.2488 Member States remain free to adopt national standards that are more stringent than Union standards, but undertakings that go beyond Union standards can still be eligible for aid.2489 Eligible costs and aid intensities are set out in Annexes 1 and 2.

5.504

In Lucchini,2490 the General Court had an occasion to rule on “ improvement of Community standards” as a requirement of compatibility of aid.2491 The General Court criticized the Commission decision for failing to properly assess the existence of a significant improvement and annulled the Commission decision on this ground, thus indicating that it will hold the Commission to a high burden of proof. Further to this ruling, in 2008 the Commission adopted a new decision conforming to the General Court’s indications and approving the relevant portion of the aid as compatible with the Treaty.2492

5.506

5.505

2.3.5 Aid for the remediation of contaminated sites The provisions in the 2014 Guidelines relating to aid for the remediation of contaminated sites – like those in the 2008 Guidelines –2493 address the shortfall in the PPP, i.e., those instances where it is not possible to identify a polluter in order to make that polluter pay the cost of repairing the environmental damage caused.2494 2487 2014 Guidelines, paragraphs 53-55. 2488 See Directive 2010/75/EU of 24 November 2010 on industrial emissions (integrated pollution prevention and control) OJ [2010] L 334, p. 17). 2489 2014 Guidelines, paragraph 55. 2490 Case T-166/01 Lucchini v. Commission [2006] ECR II-2875. 2491 See Case T-166/01, cit., paragraphs 107 et seq. “The ruling concerned the version of the environmental aid guidelines applicable ratione temporis (i.e., the 1994 environmental aid guidelines).” However, since no material change has occurred in this regard in the 2008 Guidelines, the judgment remains of relevance. 2492 See Commission Decision of 16 July 2008 in Case C 25/2000 (ex N 149/1999), on the aid which Italy proposes to grant to the steel company Lucchini Siderurgica SpA OJ [2009] L 123. 2493 2008 Guidelines, paragraph 53. 2494 2014 Guidelines, paragraph 44 and fn 40. Where a polluter can be identified, the PPP will apply, and no State aid will be granted. The identity of the “polluter” is determined according to applicable Member State law. For instance, in its decision of August 8, 2014, case SA.38258 concerning aid by the Czech Republic for remediation of oil pollution, the Commission accepted that, under applicable law, no polluter could be made liable, hence the aid was justified (paragraph 67 – the decision is available at http://ec.europa.eu/ competition/state_aid/cases/251659/251659_1665462_160_2.pdf ).

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5.508

The eligible costs are calculated by subtracting the increase in the value of the remediated land from the costs of the remediation work carried out.2495

2.3.6 Aid for the relocation of undertakings 5.509

Investment aid for the relocation of undertakings is intended to create individual incentives to reduce negative externalities by relocating undertakings that create major pollution to areas where the pollution will produce a less damaging effect.

5.510

The provision is limited to high-risk establishments identified in the Seveso III Directive2496 on the control of major accident hazards involving dangerous substances, and major polluting undertakings (which nevertheless are in compliance with all applicable environmental standards) located in either urban areas or special areas of conservation,2497 that are required to move from such location.

5.511

Seveso III applies to any establishment where dangerous substances are present, or likely to be produced as a result of an accident, in the threshold quantities enumerated in Seveso III. Seveso III establishes the duty of the operator of a facility to adopt all measures necessary to prevent or limit the consequences of major accidents and places the burden on the operator to demonstrate that all such necessary measures have been taken.

5.512

To ensure that undertakings do not conceal strategic business relocations as relocations for environmental protection reasons, the conditions for application of aid are stringent. For investment aid to an undertaking for environmental relocation to be lawful, the undertaking must produce either an administrative or judicial decision issued by a competent public authority ordering the relocation of the undertaking, or an agreement between a competent public authority and the undertaking to relocate the firm.2498

2495 2014 Guidelines, Annex 2. Aid intensities are high (100% - see Annex 1). 2496 Directive 2012/18/EU of 4 July 2012 on the control of major-accident hazards involving dangerous substances, amending and subsequently repealing Council Directive 96/82/EC, OJ [2010] L 197, , p. 1). 2497 As defined by Council Directive 92/43/EEC on the conservation of natural habitats and of wild fauna and flora, OJ [1992] L 206/7, as amended by Council Directive 2006/105/EC, OJ [2006] L 368. 2498 2014 Guidelines, paragraph 238. The 2008 Guidelines add similar provisions (see paragraphs 54, 135 a).

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For instance, in case SA.38495,2499 the Flemish authorities demonstrated that, in the past, there have been severe environmental issues and situations hazardous to human health as a result of the beneficiary undertaking’s presence near a residential neighbourhood and protected natural habitat. In particular, in 1992 17.000 litres of thinner (xylene and toluene) were discharged in the surface water following a heavy environmental accident at the beneficiary’s plant. The Flemish authorities also explained that, in addition to the soil pollution caused by the discharge, the incident created a situation with a high risk of explosions for the residents in the vicinity of the plant. Finally, the Flemish authorities showed that the relocation was the consequence of a decision by the authorities as its presence due to the hazardous activities of the undertaking in the vicinity of a residential area will always cause an inevitable source of nuisance to both the population and the environment.

5.513

The 2014 Guidelines explicitly require that the undertaking comply with the strictest environmental standards applicable in the new site location.

5.514

Aid intensity is available to large undertakings for up to 50% of their eligible costs (or 60% and 70% for medium and small enterprises respectively). In order to ensure that the undertaking receiving the investment aid is not over compensated, benefits that the undertaking may realize, and costs that the undertaking may incur as a result of the relocation are taken into account in assessing the costs eligible for compensation.

5.515

It might be argued that relocating polluting undertakings merely displaces, rather than prevents pollution, and that as a result, this activity is not a suitable candidate for aid. Nevertheless, the approval of the aid is subject to the beneficiary complying with stricter environmental standard at the new location. Thus, the aid does entail an environmental benefit – albeit partial.

5.516

2499 Commission Decision of June 11, 2014. Although rendered under the 2008 Guidelines, this decision is illustrative of the approach under the 2014 as well, as the criteria are essentially identical. The decision is available at http://ec.europa.eu/competition/state_aid/cases/252169/252169_1580081_102_2.pdf.

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2.3.7 Aid involved in tradable permit schemes 5.517

The 2014 Guidelines recall that tradable permit schemes2500 may involve aid when Member States grant permits and allowances below their market value. The 2014 Guidelines go on to specify under which conditions such State aid can be compatible.2501

5.518

The 2014 Guidelines also require that a trading scheme’s objectives surpass the mandatory Community standards applicable to the undertakings concerned, and that allowances be allocated to undertakings in a fair and transparent manner.2502

5.519

In addition, as regards the necessity and proportionality of the measures, a number of conditions are imposed on the grant of aid through a tradable permit scheme. –

Beneficiaries of aid must be chosen according to objective and transparent criteria, and the aid granted in a non-discriminatory manner for all competitors in the same factual situation and market / sector.

–

Full auctioning must lead to a substantial increase in production costs for each sector or category of individual beneficiaries, and this increase may not be passed on to customers without leading to substantial reductions in sales.

2500 Emissions trading schemes involve a central authority setting a limit or cap on the overall levels of pollution that market actors may generate. The central authority allocates credits to companies and other entities designated as participants in the scheme. These credits correspond to a volume of pollution that the undertakings are authorized to generate. At the end of the stipulated trading period, undertakings are required to account for their emissions with a corresponding volume of allowances. Companies that keep their emissions below the level of their allowances can sell their excess allowance. If an undertaking has been unable to limit its pollution within the cap, it must purchase credits from other undertakings participating in the trading scheme, creating a secondary market for the trade of pollution credits. To produce an overall positive effect on the level of environmental protection in the Community, the number of permits involved in tradable permit schemes should be less than the global amount of permits granted by the Member State, thereby forcing a polluting undertaking to either buy supplementary permits or reduce its pollution levels. The scheme therefore, in theory, reconciles a number of competing and sometimes conflicting aims: limiting the overall level of externalities (in the form of emissions pollution), creating an incentive for undertakings to reduce their polluting emissions, and allowing for the fact that undertakings less able to reduce their emissions (e.g., because they are engaged in an inherently high polluting activity) may merit differential treatment. 2501 The Commission has also reviewed certain national schemes operating outside the EU ETS. See Commission Decision of 20 July 2005 in Case NN 12/2004 United Kingdom “Horticulture” Climate Change Level, OJ [2005] C 262/9; Commission Decision of 16 March 2005 in Case C 35/2003 (ex N 90/2002) Italy Lazio – Reduction of greenhouse gas emissions, OJ [2006 ] L 244/8; Commission Decision of 23 November 2005 in Case C 44/2004 (ex N 402/2004) Slovenia – Modification of Case SI 1/03 (The Reduction of Burdening of the Environment of Emissions with Carbon Dioxide), OJ [2006] L 268/19. 2502 2014 Guidelines, paragraph 235, lett. a) and b).

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Finally it must be impossible for individual undertakings in the sector to reduce emission levels in order to be able to support the price of the certificates. The benchmark for the irreducible consumption level is the emission level derived from best performing technique in the EEA, and any undertaking reaching that level is permitted to benefit from an allowance up to the level of the increase in production cost that results from use of the best performance technique(less any production costs that might be passed on to consumers).2503

5.520

These provisions must be read together with the 2012 Guidelines on certain State aid measures in the context of the greenhouse gas emission allowance trading scheme post-2012.2504 This is because, as regards greenhouse gas emission, as of 2013, emission permits are allocated by means of an auction process, with the total volume of emissions credits available throughout the Common Market capped centrally by the Commission. However, the 2012 Guidelines allow Member States to grant free allowances to certain industries at risk of ‘carbon leakage’. Thus, in practice, the 2014 Guidelines provisions on aid in the form of tradable permit schemes apply to schemes for other pollutants, such as NOx, which, however, remain fairly limited in the EU.

5.521

2.3.8 Aid for carbon capture and storage Carbon capture and geological storage (CCS) is a technique for trapping carbon dioxide emitted from large point sources such as power plants, compressing it, and transporting it to a suitable storage site where it is injected into the ground. As recognised by Directive 2009/31/EC and the Commission Communication on the future of CCS in Europe, this technology has significant potential to help mitigate climate change both in Europe and internationally, particularly in countries with large reserves of fossil fuels and a fast-increasing energy demand.

5.522

However, the cost of capture and storage remains an important barrier to the take-up of CCS. The capture component in particular is an expensive part of the process. As flue gas from coal or gas-fired power plants contains relatively low concentrations of CO2 (10-12% for coal and around 3-6% for gas), the amount of energy needed to capture the gas makes the process costly.

5.523

To promote the long term decarbonisation objectives, the 2014 Guidelines permit both investment and operating aid for CCS. As regards proportionality, though, the aid must is limited to the additional costs for capture, transport

5.524

2503 2014 Guidelines, paragraph 236. 2504 OJ 2012, C 158/4.

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and storage of the CO2 emitted. For the calculation of the eligible costs, it is generally accepted that the counterfactual scenario would consist in a situation where the project is not carried out, as CCS is similar to additional infrastructure which is not needed to operate an installation. Thus, the eligible costs are defined as the funding gap, but all revenues, including for instance cost savings from a reduced need for ETS allowances, NER300 funding and EEPR funding need to be taken into account.

2.4 New Measures under the 2014 Guidelines 5.525

Further to the 2009 Renewable Energy Directive, increasing the production of electricity from RES to reach the targets set therein –or even exceeding them- has automatically become an objective of common interest. RES support measures normally enjoy, therefore, a benign State aid scrutiny. For instance, paragraph 115 grants a positive presumption as regards the existence of a market failure justifying the need for State intervention in the production of RES.

5.526

Nonetheless, on appropriateness, incentive effect, proportionality, and effect on competition, the 2014 Guidelines do entail significant changes to existing – more permissive – rules, in particular through the progressive introduction of a bidding process for the selection of beneficiaries.

5.527

More specifically, the 2014 Guidelines introduce the following cumulative requirements as from January 1, 2016

5.528

–

the aid must be granted as a premium in addition to the market price;

–

the beneficiaries must be subject to standard balancing responsibilities (unless no liquid intraday balancing markets exist); and

–

measures are put in place to ensure that generators have no incentive to generate electricity under negative prices.

These conditions do not apply in case of aid granted to installations with an installed electricity capacity of less than 500 kW (for all technologies except wind), of not more than 3 MW or 3 generation units (for wind energy) and demonstration projects.2505

2505 See 2014 Guidelines, paragraphs 124-125.

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In addition, from January 1, 2017, aid must be granted following a competitive bidding process. Two types of exceptions apply, though.

5.529

First, Member States can demonstrate that the bidding process is not suitable for a number of reasons set out in the Guidelines;2506 Second, the requirement to conduct a competitive bidding process is not mandatory for installations with less than 1 MW of capacity (all technologies except wind energy) of not more than 6 MW of 6 generation units for wind energy, or demonstration projects.2507

5.530

The use of auctions has an impact on the proportionality assessment. In case of auctions, the Commission will presume that the aid is proportional.2508 Otherwise, the aid per unit of energy does not exceed the difference between the total levelized costs of producing energy (LCOE) from the particular technology in question and the market price of the form of energy concerned.2509 The LCOE may include a normal return on capital. Investment aid is deducted from the total investment amount in calculating the LCOE.

5.531

There are far less rules on investment aid for RES generation; Annex I sets out aid intensities (which can reach up to 100 % in case of auctions) and Annex II sets out the counterfactual (which is the construction of a conventional power plant with the same capacity).

5.532

The decision on the Spanish rules for aid to RES generation, dated November 10, 2017 is illustrative of the Commission’s approach.2510

5.533

Spanish had been an early promoter of RES generation, with support measures being in place since 2007, but without any Commission decision authorizing the aid.

5.534

As RES technology became cheaper, the level of support in the legislation became quickly too generous. In 2013 Spain thus acted to change the level of support and in 2014 it replaced the old scheme with a new one. Also in 2014,

5.535

2506 See 2014 Guidelines, paragraph 126 (“(a) only one or a very limited number of projects or sites could be eligible; or (b) Member States demonstrate that a competitive bidding process would lead to higher support levels (for example to avoid strategic bidding); or (c) Member States demonstrate that a competitive bidding process would result in low project realisation rates (avoid underbidding)”). 2507 See 2014 Guidelines, paragraph 127. 2508 See 2014 Guidelines, paragraph 126. 2509 See 2014 Guidelines, paragraphs 128 and 131. Paragraph 129 further provide that aid can be granted only until the plant has been fully depreciated according to normal accounting rules in order to avoid that operating aid based on LCOE exceeds the depreciation of the investment. 2510 See case SA.40348.

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Spain notified the new aid scheme pursuant to Article 108(3) TFEU. However, the Commission considered that Spain had violated the stand-still obligation. Therefore, the case was registered as unlawful aid.

5.536

One of the main effects of the legislative change in 2014 was that RES operators receiving support under the old scheme were automatically qualified for the new one, but the amounts received under the previous scheme were taken into account in the calculation of compensation under the scheme. As a result of this calculation, a RES operator could find that, with the amounts already received, it had already reached the target level of return on investment which the Spanish legislation considered reasonable (7.3%), hence it was not entitled to any support any more under the new scheme.

5.537

In sum, the legislative change applied to existing and new plants, but it limited the support for existing ones, compared to the previous regime. This regulatory change sparked international arbitration and the Commission decision itself has been challenged for having waived through Spain’s legislation as far the treatment of existing RES installations was concerned.2511 The decision deals with the arbitral awards (paras. 154 et seq.), setting out the following points: –

‘No right to State aid’. “A Member State may always decide not to grant an aid, or to put an end to an aid scheme. Where the aid has not been authorized by the Commission, the Member State is obliged to suspend the scheme until the Commission has declared it compatible with the internal market pursuant to Article 108(3) TFEU”.

–

Legitimate expectations. “…where a Member State grants State aid to investors, without respecting the notification and stand-still obligation of Article 108(3) TFEU, legitimate expectations with regard to those State aid payments are excluded. That is because according to the case-law of the Court of Justice, a recipient of State aid cannot, in principle, have legitimate expectations in the lawfulness of aid that has not been notified to the Commission”.

2511 In case T-190/18, the applicant seeks annulment of the decision on the following grounds: (i) the applicant alleges that there is evidence of serious difficulties relating to the length and the circumstances of the preliminary investigation procedure. Thus, in the applicant’s opinion, the Commission infringed its obligation to initiate the formal investigation procedure. (ii) According to the applicant, the Commission erred in law and committed a manifest error of assessment regarding the assessment of payments received by existing facilities under the previous scheme. (iii) Finally, according to the applicant, the Commission failed to fulfil its duty to state reasons regarding the alleged existence of aid in relation to the payments received by existing facilities under the previous scheme. By order dated March 25, 2019, the General Court dismissed the action for lack of interest in bringing proceedings.

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–

Energy Charter Treaty arbitration. “The Commission considers that any provision that provides for investor-State arbitration between two Member States is contrary to Union law”.

–

Enforcement of arbitral awards. “… any compensation which an Arbitration Tribunal were to grant to an investor on the basis that Spain has modified the premium economic scheme by the notified scheme would constitute in and of itself State aid. However, the Arbitration Tribunals are not competent to authorise the granting of State aid. That is an exclusive competence of the Commission. If they award compensation, such as in Eiser v Spain, or were to do so in the future, this compensation would be notifiable State aid pursuant to Article 108(3) TFEU and be subject to the standstill obligation”.

As regards the Commission’s assessment of the Spanish scheme under the 2014 Guidelines, the main elements which contributed to the authorization decision were the following: (i) the support takes the form of a a premium on top of the market price of electricity, so that beneficiaries have to respond to market signals. (ii) Since 2016, support to new facilities is granted through competitive auctions. The auctions delivered a very low level of support. In essence, beneficiaries will receive compensation only if, in the coming years, the market price dropped to a level significantly below today’s market prices.

5.538

The Spanish scheme has been authorized until 2024 (i.e. ten years since the new legislation from 2014).

5.539

2.4.1 Capacity mechanisms The 2014 Guidelines provide guidance in Section 3.9 on when state support for capacity mechanisms may or may not be compatible with the internal market, but they do not address – in contrast to other State aid Guidelines2512 – the question whether the EU state aid rules are applicable to such support measures in the first place. This is relevant because national capacity mechanisms are often based on auction procedures or award a compensation which does not even cover the costs of the obligations imposed on undertakings, hence they could potentially meet the fourth Altmark condition.

2512 See, e.g., the 2014 Risk Capital Guidelines.

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5.541

As regards the first Altmark condition, i.e. whether Member States are entitled to define the obligations inherent in capacity remuneration schemes as a Service of General Economic Interest, it seems that the wide discretion traditionally accorded to Member States in this ambit, together with the wording of Article 194 TFEU, makes it more likely than not that the answer would be in the affirmative.2513 Thus, capacity remuneration schemes could fall outside the State aid rules altogether. However, in the decision opening a formal State aid investigation on the French capacity market,2514 the Commission has refuted this position, essentially because the capacity providers would not have received the remuneration they receive through the capacity mechanisms, had they continued to operate in the electricity market on normal economic conditions selling electricity and ancillary services only.2515

5.542

Assuming that capacity remuneration schemes were to meet the conditions for a measure to constitute aid ex Article 107(1) TFEU, the 2014 Guidelines set out the following rules.

5.543

On the necessity requirement, the 2014 Guidelines place emphasis on the demonstration of the market failure. In particular, the Commission will pay attention to (i) the impact of demand-side participation and (ii) the actual or potential existence of interconnectors, including a description of projects under construction and planned.2516

5.544

On the appropriateness requirement, the Commission stresses that the measures should only remunerate the service of pure availability and not for the sale of electricity. Moreover, the measures should be open and provide adequate incentives to both existing and future generators as well as substitutable technologies, such as demand response and storage solutions. Once again, the extent to which interconnection capacity could remedy any possible problem of generation adequacy should be take into account.2517 2513 For a fuller discussion of this and other aspects of capacity mechanisms, see Hancher et al., Capacity Mechanisms in EU Energy Markets, OUP, 2015; see also Hancher, de Hauteclocque and Salerno, State aid and the Energy Sector, Hart, 2018, chapter 6. “Capacity Mechanisms and Auctions”. 2514 Case SA.39621 (the decision is only available in French). 2515 See paras. 133-134 (“En ce qui concerne l’argument des autorités françaises que les garanties de capacité sont attribuées en contrepartie d’un service rendu par les exploitants de capacité, la Commission considère que ce service n’est pas autrement rendu ni valorisé par le marché. En effet, les autorités françaises ont dû créer un marché afin que la disponibilité soit valorisée. En effet, grâce à l’ instauration de ce marché de capacité, les exploitants de capacité obtiendront des fonds qu ils n auraient pas reçus autrement, et obtiendront donc un avantage qu’ ils n’auraient pas obtenus en l’absence du marché créé par les autorités”). 2516 See 2014 Guidelines, paragraph 224. 2517 See 2014 Guidelines, paragraph 225.

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On the incentive effect, there is a renvoi to the general assessment principles, whereas on proportionality the 2014 Guidelines encourage the use of auction procedures as “ leading to reasonable rates of return under normal circumstance”.2518

5.545

Finally, for the balancing test, i.e. the avoidance of negative effects on competition and trade, the Commission will take into account technological neutrality as well as the inclusion of demand response mechanisms, interconnectors and storage and the guarantee of participation by a sufficient number of generators to establish a competitive price for the capacity. Furthermore, the measure should give preference to low-carbon generators in case of equivalent technical and economic parameters. As regards the participation of foreign operators, the 2014 Guidelines do mention it as a positive element, but with the important proviso that “the capacity can be physically provided to the Member State implementing the measure and the obligations set out in the measure can be enforced”.2519

5.546

To date the Commission has adopted several decisions authorizing capacity mechanisms.2520 And the first of these decisions – the decision on the UK capacity mechanism-2521 has been annulled for failure to open the formal investigation procedure.2522 The decision on the Italian capacity remuneration mechanisms, dated February 7, 2018, is illustrative of the Commission’s approach.2523

5.547

–

First, the Commission accepted that Italy had correctly identified and quantified the security of supply risks, also taking into account possible imports from neighbouring countries.

–

Second, the Commission also verified that the Italian mechanism was open to all types of capacity providers, including demand response, existing and new capacities, domestic and foreign.

2518 See 2014 Guidelines, paragraphs 227 and 229. 2519 See 2014 Guidelines, paragraphs 232-233. 2520 See an updated list at http://ec.europa.eu/competition/sectors/energy/state_aid_to_secure_electricity_ supply_en.html. 2521 Commission Decision of 23 July 2014 in Case SA.35980 (United Kingdom Electricity market reform – Capacity market). 2522 See case T-793/14 Tempus Energy and Tempus Energy Technology v Commission. On February 21, 2019, the Commission duly opened the formal investigation procedure (see Commission press release available at http://europa.eu/rapid/press-release_IP-19-1348_en.htm). Also, the Commission has appealed the judgment in first instance (see case C-57/19). 2523 See case SA.42011.

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–

Third, the Commission also assessed the auction design and found that it was adequately, so that there was no risk of overcompensation.

5.548

Finally, the Commission also took into account Italy’s commitment to implementing reforms to the functioning of the electricity markets.

5.549

The Electricity Market Regulation, one of the measures in the Clean Energy Package, sets out (in chapter IV) new provisions on capacity mechanisms, with a view to develop a harmonized approach, based on a common resource adequacy assessment , market-compatible design principles, as well as rules for the participation of capacity located in another Member State and for interconnection usage.

2.4.2 Tax reductions or exemptions and in particular exemptions from RES funding 5.550

As in the 2008 Guidelines, the 2014 Guidelines provide for aid in the form of reductions from environmental taxes. However, the 2014 Guidelines contain an important innovation insofar as they also provide for aid in the form of reductions from the payments of other charges, namely those directed to fund aid for RES production. In other words, the 2014 Guidelines lay down rules on aid designed to offset the negative impact of another aid measure. Aid in the form of reductions from environmental taxes

5.551

Environmental taxes are imposed upon activities that have an unequivocally negative impact on the environment. Such “eco-taxes” are a “stick,” creating incentives for undertakings to adopt more environmentally friendly business activities by financially penalizing their failure to adopt environmentally friendly methods. As noted by commentators, while eco-taxes are common, the considerable variation between the number, variety and intensity of such taxes across Member States creates considerable scope for the differential treatment to obstruct the development of the Common Market.2524 The Commission and European Courts have taken the view that national “eco-taxes” meet the selectivity criterion, and that as such where an undertaking is exempted from such a tax, the exemption will qualify as State aid unless the relevant exemption is inherent in the nature and logic of the tax system.2525 2524 E. Kutenicova, AT Seinen, Environmental Aid, in W. Mederer, N. Pesaresi, M. Van Hoof (eds.), EU Competition Law : Vol IV : State Aid, September 2008, paragraph 4.496 2525 Case C-143/99 Adria-Wien Pipeline [2001] ECR I-8365.

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Eco-taxation schemes may contribute to the promotion of environmental protection and recognise the risk that such taxes may temporarily diminish the international competitiveness of participating firms (given that there is no harmonisation of eco-taxation at the European level). As identified by certain commentators, environmental tax exemptions are of two types – those that safeguard the theoretical consistency of the tax (e.g., by exempting the undertaking from taxation for externalities that result inevitably from the technical adjustments required by the more environmentally friendly business activity2526), and those introduced in order to avoid punishing companies which, while high polluters, have little feasible ability to reduce their pollution.2527

5.552

The 2014 Guidelines lay down specific rules on necessity and proportionality, based on the distinction between the following scenarios

5.553

Scenario 1: harmonized environmental taxes When the beneficiaries pay at least the Union minimum tax level set by the relevant applicable Directive,2528 the Commission’s assessment will be limited to ascertaining whether: (i) the choice of beneficiaries is based on objective and transparent criteria; and (ii) the aid is granted in principle in the same way for all competitors in the same sector, if they are in a similar factual situation.2529 Scenario 2: Non-harmonised environmental taxes and specific situations of harmo‑ nised taxes For non-harmonised environmental taxes and in the case of harmonised taxes below the Union minimum levels, the Member State should clearly define the scope of the tax reductions by providing information on (i) the respective sector(s) or categories of beneficiaries covered by the exemptions or reductions; (ii) the situation of the main beneficiaries in each sector concerned, including through a list setting out turnover, market shares and size of the tax base; and 2526 See, e.g., Commission Decision of 2 February 2005 in Case N 574/2004 Netherlands – Exemption for the waste tax for dredging sludge, OJ [2005] C 68/27; Commission Decision of 17 September 2003 in Case C 12/2003 Climate change levy exemption for coal mine methane, OJ [2004 ]L 10/54; Commission Decision of 17 June 2009 in Case C 41/2006 (ex N 318/A/04) Denmark – Modification of the CO² tax for quotaregulated fuel consumption in the industry, OJ [2009] L 345/18. 2527 E. Kutenicova, AT Seinen, Environmental Aid, in W. Mederer, N. Pesaresi, M. Van Hoof (eds.) EU Competition Law : Vol IV : State Aid, September 2008, paragraph 4.496. 2528 See Directive 2003/96/EC restructuring the Community framework for the taxation of energy products and electricity (OJ L 283, 31.10.2003 p. 51). 2529 See 2014 Guidelines, paragraph 173.

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(iii) how the taxation may contribute to environmental protection.

5.556

The requirements for necessity and proportionality are strict. In particular, for proportionality, the Member State must demonstrate that aid beneficiaries pay at least 20 % of the national environmental tax; or that “the tax reduction is conditional on the conclusion of agreements between the Member State and the beneficiaries or associations of beneficiaries whereby the beneficiaries or associations of beneficiaries commit themselves to achieve environmental protection objectives which have the same effect as if beneficiaries pay at least 20 % of the national tax”, setting out a number of requirements such agreements must fulfil.2530 Aid in the form of reductions from funding for RES

5.557

The high level of surcharges needed to support RES generators may lead to “carbon leakage”. In turn, this might reduce the financing base to the point of undermining RES objectives. To strike a balance between RES targets and competitiveness, the 2014 Guidelines provide for the first time rules on the exemptions from the financing of RES. The key rules refer to eligibility: Annex 3 sets out a list of the sectors which might benefit from the aid, given their electro-intensity and exposure to international trade. Member States have a flexibility to include an undertaking in their national scheme granting reductions from costs resulting from renewable support if the undertaking has an electro-intensity of at least 20 % and belongs to a sector with a trade intensity of at least 4 % at Union.

5.558

The proportionality test is met if the aid beneficiaries pay at least 15 % of the additional costs without reduction , although, once again, there is room for Member States to grant further reductions.2531

5.559

From the temporal perspective, two provisions are noteworthy: –

First, the 2014 Guidelines provide for a transitional regime as follows:2532



The eligibility and proportionality criteria apply (at the latest) from January 1, 2019.



Aid granted before 2019 which already satisfies the criteria in the Guidelines can be declared compatible. Otherwise, Member States need to

2530 See 2014 Guidelines, paragraph 178. 2531 See 2014 Guidelines, paragraphs 188-189. 2532 See 2014 Guidelines, paragraphs 193-200.

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adopt an adjustment plan, entailing a progressive adjustment to the compatibility criteria set out in the Guidelines.

If the aid pre-dates the period of application of the 2014 Guidelines, i.e. July 1, 2014, a Member State has the option to include it in the adjustment plan, which should, however, be notified to the Commission for approval at the latest 12 months after the date of application of the 2014 Guidelines, i.e. July 1, 2015.

–

Second, as regards unlawful aid in the form of a reduction from the funding for RES,2533 instead of the standard rule whereby aid is assessed in accordance with the rules in force when the aid was granted, the 2014 Guidelines provide for the application of the provisions therein, but the Member State must draw up an adjustment plan for the period starting from January 1, 2011.2534 In addition, such adjustment plan must also foresee that the beneficiaries pay.

To date the Commission has adopted a number of decisions on aid in the form of reductions from RES funding. The following interlinked decisions on Germany are illustrative of the Commissions approach.2535

5.560

In December 2013, the Commission started an in-depth investigation on a 2012 measure which granted support for RES producers, and, at the same time, relieved energy-intensive users from part of the charges necessary for funding the RES support system (so-called EEG-surcharge).2536 In 2014 Germany amended the measures and in July of the same year the Commission approved the reformed measures, i.e. those for the period starting in 2014, without objections.2537

5.561

In November 2014, the Commission adopted a partially negative decision with recovery for the aid granted on the basis of the 2012 act for the period 2013 and 2014.2538 Even if this aid was granted for a period prior to the date of application

5.562

2533 See 2014 Guidelines, paragraph 248. 2534 For aid granted prior to 2011 there is a presumption of compatibility mainly because the Commission considers that amounts at stake rather limited. See fn 103. 2535 See also State aid SA.39042 (2014/N) – Romania RES support reduction for energy-intensive users. In this case, as in the two German cases mentioned in the text, the Commission dwelled at length on the existence of State resources as part of its assessment on the aid nature of the measure. For a fuller treatment of this aspect, see [CROSS REFERENCE TO CHAPTER 3]. 2536 OJ [2014] C 37/73, and OJ [2014] C 250/15. 2537 See State aid case SA.38632 (2014/N) – Germany: EEG 2014 – Reform of the Renewable Energy Law. 2538 See COMMISSION DECISION of 25.11.2014 ON THE AID SCHEME SA.33995 (2013/C) (ex 2013/NN)

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of the 2014 Guidelines, the Commission following the rules on unlawful aid set out in the 2014 Guidelines, applied the provisions therein. Interested parties objected to what they considered a retroactive application of detrimental rules. The Commission rejected this criticism, arguing, among other things, that, had it applied the 2008 Guidelines, the Commission could have not authorized the aid.2539 In addition, the Commission invoked the principle of immediate application of a new rule to future effects of an on-going situation – given that unlawful State aid constitutes an on-going situation.2540 In the end, the Commission authorized as compatible aid the amounts under the adjustment plan; since the reductions went beyond what would be permissible under such adjustment plan, the Commission ordered recovery of such excessive amounts. The decision is subject to appeal and a judgment could be expected in 2019.2541

5.563

In 2017, Germany notified a modification of the reductions of the EEG-surcharge granted for self-consumption (which had already been approved by the Commission with the decision from 2014 in State aid file SA.38632 mentioned above).2542 The Commission noted that the EEG surcharge is in principle to be levied on each kWh of electricity consumed. The Commission confirmed its finding in the 2014 Decision that, for electricity produced by EEG electricity operators, it is within the logic of the system that no surcharge or only a reduced surcharge is levied on electricity produced from renewable energy sources by the self-suppliers that did not benefit from support under the EEG for the selfsupplied electricity because the RES-E is not fed into the grid. Therefore, as regards new self-suppliers (i.e. having entered into operation as of August 2014) using renewable energy sources, the exemptions and reductions from the EEG surcharge were considered not to qualify as State aid as they were in the logic of the German renewable energy surcharge system.

5.564

By contrast, as regards existing self-suppliers, the Commission found that exemptions or reductions of the EEG surcharge constituted an advantage for the operators of those installations because, as mentioned, the EEG rests on the principle that the EEG surcharge is levied on all electricity consumed in Germany, including EEG electricity, and that its proceeds are used to finance the production of EEG electricity. The Commission did not consider that operators of existing self-supply installations (that are not fuelled on the basis of renewable 2539 See Case SA.33995, paragraphs 173-189. 2540 Joined Cases C-465/09 to C-470/09, Diputación Foral de Vizcaya and Others v Commission, ECLI: EU:C:2011:372, paragraphs 125, 128. 2541 See Case T-103/15 (pending before the General Court). 2542 Case SA.46526.

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energy sources) would be in a different legal and factual situation in the light of the purpose of the EEG-surcharge system. They use fossil fuels and not renewable energy sources but equally benefit from a more sustainable electricity supply in Germany (CO2 emission reductions, back up function of the grid itself supplied with more sustainable electricity) in the same way as other final consumers which will need to pay the full EEG-surcharge. Also, in the light of the objective of the EEG-surcharge (spreading the costs among all actors of the electricity supply system in Germany, which includes all end consumers), the Commission found that they were no different from self-suppliers using new self-supply installations and which, however are subject in principle to a full EEG. The Commission therefore went on to assess whether the exemption from the EEG surcharge could be authorized as compatible aid. Unlike reductions of renewable surcharges that are granted to electro-intensive undertakings exposed to international trade, the exemptions for existing self-suppliers stemmed from a different issue: the consequences on existing self-supply installations of a Member State’s decision to change the base of EEG-surcharge from the system based on electricity procured from the grid (transmission) to another system based on electricity consumption, including self-supply. While under the EEG-surcharge system based on electricity procured from the grid (transmission) the self-supply installations were not subject to EEG-surcharge, they became subject under the consumption-based system. The Commission therefore assessed the exemptions under the Treaty directly (107(3)(c) TFEU).

5.565

In so doing, the Commission followed the well-settled framework, whereby the measure must be (i) aimed at a well-defined objective of common interest, (ii) necessary to reach this objective; in addition the measure must (iii) have an incentive effect, (iv) be proportionate and (v) the positive effects for the common objective must outweigh the negative effects on competition and trade. The Commission was satisfied (without opening a formal investigation procedure) that the exemptions were aimed at a well-defined objective of common interest (providing for an equitable RES-E financing base while avoiding undue hardship), necessary to reach this objective and had an incentive effect. As regards proportionality, Germany introduced the principle that existing and older existing installations were to be subject to a 20% EEG surcharge as of the moment that the concerned installation was being modernized or replaced. In the end, the aid was authorized.

5.566

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2.4.3 Exemption from network charges for large electricity consumers 5.567

In May 2018, the Commission adopted a negative decision with recovery on the German measure exempting large electricity consumers from network charges (Case SA.34045).

5.568

Between 2011 and 2013, electricity users that had an annual consumption above 10 gigawatt hours and a particularly stable electricity consumption were fully exempted from paying network charges under German law (§19(2) of the German Network Charges Ordinance). According to the Commission, in 2012, thanks to this provision, these users avoided paying an estimated E 300 million in network charges. These costs were instead financed by a special levy imposed on final electricity consumers (the so-called §19-surcharge), which Germany introduced in 2012.

5.569

The Commission rejected contentions to the effect that the full exemption corresponded to the behaviour of a market operator, given that the large electricity consumers provided a service to the network, by helping the TSO to stabilize the grid due to their steady patterns of consumption. In essence, the Commission found that no market operator would have allowed a full exemption, but rather limited the exemption to the minimum necessary for achieving a similar level of stabilization.

5.570

The Commission then went on to assess whether the aid consisting of the full exemption could be authorized under the Treaty, given that the provisions of the 2014 Guidelines are not applicable. This assessment followed the well-settled framework pursuant to which the Commission, first, determines whether the measure is appropriate to reach the attainment of a common interest objective, in casu the objectives of security of supply and the promotion of renewable electricity. According to the Commission the “ full exemption leads to contradictory results in terms of the objectives attained and could even constitute a hindrance for the attainment of the objectives concerned” (para. 174). The Commission therefore concluded that there was no objective justification under EU State aid rules for a full exemption from network charges for electricity users, even if they have a stable electricity consumption. However, given that Germany demonstrated that large and stable electricity users generated fewer costs than other users in 2012 and 2013 (thanks to their stable and predictable consumption), the Commission admitted that these users were entitled to a partial reduction of the network charges for these two years. It is up to Germany to calculate the costs that each users should pay and determine the amount of recovery accordingly. 856

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Against this decision there are a number of appeals pending, for which a ruling could be expected in 2020-2021.2543

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2.4.4 Aid for energy infrastructure The 2014 Guidelines set out a benign approach to aid for energy infrastructure, considering that it is “beneficial to the internal market and thus contributes to an objective of common interest”.2544

5.572

As regards the necessity test, the 2014 Guidelines provide Member States with more clarity as regards the possible justification for the State aid insofar as they acknowledge that a market failure may arise, e.g., when investors fear that future users will not be willing to pay the price for the use of the infrastructure (meaning the investor would not have any return on investment). In this respect, projects of common interest , smart grids, and infrastructure investments in assisted areas enjoy a positive presumption as regards the existence of such a market failure and the need for State aid,2545 provided they are subject to regulated third-party access under the sector-specific EU rules. Otherwise, the Commission will carry out a case-by-case assessment, which is the standard rule for all other projects.2546 By contrast, oil infrastructure suffers from a negative presumption (the Commission will presume that there is no need for State aid, save in exceptional circumstances). The standard assessment entails addressing the following questions: (i) to what extent a market failure leads to a sub-optimal provision of the necessary infrastructure; (ii) to what extent the infrastructure is open to third party access and subject to tariff regulation; and (iii) to what extent the project contributes to the Union’s security of energy supply.

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On appropriateness, the 2014 Guidelines point out that the market failures at issue may prevent the full implementation of the 857 users pay principle – hence justify State aid.2547 On proportionality, the 2014 Guidelines state that “the counterfactual scenario is presumed to be the situation in which the project would not take place. The eligible cost is therefore the funding gap”.2548

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2543 See http://ec.europa.eu/competition/elojade/isef/index.cfm?fuseaction=dsp_result&policy_area_id=3 2544 See 2014 Guidelines, paragraph 202. 2545 Energy infrastructure projects of common interest are identified pursuant Regulation (EU) No 347/2013 on Guidelines for trans-European energy infrastructure. See http://ec.europa.eu/energy/infrastructure/ pci/pci_en.htm. 2546 See 2014 Guidelines, paragraph 206. 2547 See 2014 Guidelines, paragraph 209. 2548 See 2014 Guidelines, paragraph 2011.

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5.575

Finally, on the avoidance of negative effects, the 2014 Guidelines emphasize that compliance with EU energy legislation affords a presumption of undue distortive effects. Infrastructures wholly or partially exempted from such legislation will be subject to a case-by-case assessment, focusing on “ distortions of competition taking into account, in particular, the degree of third party access to the aided infrastructure, access to alternative infrastructure and the market share of the beneficiary”.2549

5.576

The Commission decision on aid for gas pipelines in Poland is illustrative of the Commission’s approach.2550

5.577

The measures will benefit nine gas projects, five of which will connect European gas supply sources from the Baltic, Adriatic and the Black Sea to the rest of Europe via Poland (as part of the “North South Gas interconnection priority corridor”). Therefore, they will increase the diversification of gas supply in Poland. The rest of the projects will contribute to an increase in the overall level of security of supply in Poland by eliminating bottlenecks and providing additional capacity to the existing gas networks. The total investments are estimated at PLN 4,909.4 million (e1,191.6 million); the aid will cover 64% of the total investment costs.

5.578

On the necessity of the aid, the nine projects will be carried out in assisted areas, hence they benefitted from the positive presumption as to the existence of a market failure. In addition, the Polish authorities showed that transmission tariffs would have to increase by an unsustainable 22.34%.2551 On proportionality, the Commission was satisfied that the aid covered the funding gap.2552

5.579

Finally, on the balancing test, the new infrastructure must be subject to regulated third-party access, hence it benefits from the presumption of the absence of undue distortive effects.

5.580

The 2016 decision on aid to build a small scale liquefied natural gas (LNG) terminal at Hamina, on Finland’s South-East coast, is also illustrative of the Commission’s approach.2553 Similarly to the Polish case, the LNG terminal in Finland 2549 See 2014 Guidelines, paragraph 215. 2550 See Commission Decision of July 17, 2015 in Case SA.39050 (2015/N) – Poland Individual Aid Measure for Gas Infrastructure in Poland (available at http://ec.europa.eu/competition/state_aid/cases/258373/258373_1677603_157_2.pdf ). 2551 See State Aid SA.39050 (2015/N), para. 23. 2552 See State Aid SA.39050 (2015/N), paras. 26-27. 2553 SA.42889. In September 2015, the Commission had already approved aid for another small scale LNG

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will end the energy isolation of the Baltic Sea Region, integrating it fully into EU energy markets: there are currently no LNG terminals in Finland and the country is on one source for its gas imports. Pursuant to the 2014 Guidelines, the Commission was satisfied that the project contributed to environmental protection and to the security of gas supply in Finland whilst maintaining competition in the Single Market. In addition, the operator of the infrastructure will be under an obligation to provide access to interested users at a regulated price.

3. Concluding remarks In 2009, the EU embraced ambitious climate change and energy policy goals. With the 2014 Guidelines, the Commission equipped itself with “the means to fulfil these ambitions”, as they provide a suitable tool to deal with many instances of aid in the sector. The enlarged scope of the 2014 Guidelines also shows that as time goes by, State aid becomes more – not less-central to these ambitions. For instance, the need to tackle the effects of State aid to one part of the value chain – production through RES – triggered the need to include a chapter on aid in the form of reduction from RES funding. In addition, the procedural architecture of State aid, with the need for prior Commission approval, could give to the Commission added leverage in energy policy-making. However, this movement is not without friction. In the next few years, the Commission will have to marry its State aid powers with the newly approved Clean Energy Package.

terminal: the Pori terminal on the West coast of Finland (see Case SA.39515).

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CHAPTER 6 State aid procedure 1.

Introduction

This chapter will summarise a number of the main aspects of the procedural rules applying to state aid under the Treaty. The intention is to give a broad outline of the main elements of the procedural regime and to focus on a number of issues which are of particular importance to the energy sector. The chapter is restricted to the administrative procedures before the European Commission, recovery of illegal state aid and the role of the national courts. For a full analysis reference should be made to relevant handbooks and articles.2554

2.

5.582

The Treaty regime

Article 108 TFEU provides the Commission with certain procedural powers to review the legality of state aid within the meaning of Article 107 TFEU. In the course of the last fifty five years the Treaty rules have been interpreted and clarified in numerous Court rulings. To a considerable extent this jurisprudence has been further clarified and developed in Council Regulation 659/992555 (hereafter the ‘Procedural Regulation’) which is supplemented by an accompanying Regulation 794/2004,2556 and a Best Practice Guideline on state aid control pro2554 See for example, L. Flynn, Remedies in the European Courts in Biondi et al., op. cit. OUP, 2002, pp 283301; see also Hancher, Ottervanger and Slot, EC State Aids (5rd edition, Sweet & Maxwell, 2016). C. Quigley, European State Aid Law and Policy, (3rd ed, Hart Publishing. Oxford, 2015). 2555 Council Regulation (EC) No 659/1999 of 22.03.1999 laying down detailed rules for the application of Article 93 of the EC Treaty, OJ 1999 L083, 27.03.1999, p. 1-9. 2556 Commission Regulation (EC) No 794/2004 of 21.04.2004 implementing Council Regulation (EC) No 659/1999 laying down detailed rules for the application of Article 93 of the EC Treaty, OJ 2004, L 140, 30.04.2004, p. 1-134.

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cedures, adopted in 2009.2557 The Best Practice Guideline has been replaced by a new set of Guidelines (Code) adopted in July 2018. The new Code replaces the 2009 Code and integrates the Simplified Procedure Notice of 2009.

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In July 2013 the Procedural Regulation was amended as part of the State Aid Modernisation exercise. The final codified version was adopted in 2015. The amended Regulation of 2015 confers new powers on the Commission to request information directly from third parties and to launch sector inquiries in the field of state aid. References to the Procedural Regulation in this chapter are to the amended Regulation of 2015.2558

3. 5.585

New aid

Member States are obliged to notify new aid (any plan to grant or alter aid), to the Commission in sufficient time to allow the latter to submit its comments. New aid should not be put into effect until the Commission has given its decision – this is often known as the ‘standstill obligation’. The Procedural Regulation provides an extensive procedure for notified new aid. Following notification, the Commission must conduct a preliminary investigation (see below), and if this leads it to believe that Article 107 applies and that it has doubts as to the compatibility of the proposed measure with Article 107(2) or (3) or Article 106(2) TFEU, it must open the so-called formal or contentious phase and give third parties and other Member States an opportunity to submit their comments.2559 The Commission’s decision on whether to proceed or not to the formal phase is an ‘act’ within the meaning of Article 263 TFEU and is subject to judicial review2560. If a competitor can establish that the Commission ought to have had serious doubts about the compatibility of the aid, but had approved the measure without a formal investigation, the Courts are entitled to annul the Commission’s decision.2561

2557 OJ 2009 C136/12. 2558 Council Regulation (EU) 2015/1589 of 13 July 2015 laying down detailed rules for the application of Article 108 of the Treaty on the Functioning of the European Union, OJ L 248, 24.9.2015, p. 9-29. 2559 It may be noted that while Article 108(2) refers to 862 serious doubts, the Procedural Regulation at Article 4(4) states that “Where the Commission ... finds that doubts are raised as to the compatibility ...”. 2560 Case C-198/91 William Cook plc v Commission of the European Communities ECR [1993] I-02487. 2561 See Case T-388/03 Deutsche Post AG v Commission ECR [2009] II-00199, 10 Feb 2009; C-148/09P, Belgium v Commission, ECR [2011] I-08573, 22 Sep 2011; and Case T-304/08 Smurfit Kappa Group plc v Commission ECR [2012] II-0000.

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A recent example of a successful challenge to the Commission’s failure to open a formal investigation is provided by Case T-793/14 Tempus Energy v Commission.2562 The Commission had approved the UK’s capacity remuneration scheme after a lengthy ‘pre-notification’ followed by an initial investigation. The GC held that this scheme is “significant, complex and novel”. Indeed this assessment by the Commission was the first assessment of a generation adequacy measure under the EEAG 2014 rendering it “novel in terms of both its subject matter and its implications for the future”. The Court also noted that the measure involved “particularly high” levels of aid.

5.586

On the length of the discussions, the UK and the Commission highlighted that the preliminary investigation phase itself lasted only a month. They argued that such a short investigation period indicates that there were no doubts present on the measure’s compatibility at that time. The Court did not accept, however, that this one month investigation period was a reliable indication that there were no doubts on compatibility at this stage given the length and the content of the contact between the Commission and the UK before the preliminary investigation phase, i.e. during pre-notification talks. The Tempus ruling suggests that where there is an absence of independent evidence the Court expects that the Commission will conduct its own assessments, and use its powers under the formal investigation procedure to do so.

5.587

The Commission may not close the initial investigation with a negative decision, nor does the Regulation permit it to impose obligations or conditions when taking a positive decision at the end of this phase (see Article 4).

5.588

Non-notified new aid Non-notified new aid shall according to Article 108(3) last sentence, not be put into effect until the procedures referred to in Article 108(3) or 108(2) TFEU have been concluded, resulting in a final decision. The Commission cannot declare an aid to be illegal merely because it has not been notified: it must first investigate the aid.2563 The fact that Article 108(3) has direct effect does not relieve the Commission of the duty to examine the aid and test its compatibility with Article 107 TFEU. However, if the aid has not been notified, the Commission is not bound to respect the time limits imposed by Article 4(5) of the Regula-

2562 ECLI:EU:T:2018:790 2563 Case C-301/87 French Republic v Commission of the European Communities ECR [1990], I-00307.

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tion.2564 In Case 354/902565 the Court of Justice ruled that a national court may apply Article 108(3) TFEU and declare an aid which was not properly notified to be illegal, even though the Commission subsequently determines that the aid is compatible with Article 107(2) or (3) TFEU. Chapter III of the Regulation sets out detailed rules for non-notified aid or new aid which is put into effect before the Commission has taken a decision, including rules to allow the Commission to issue injunctions for the recovery and/or the suspension of the aid. Further rules are provided to deal with the misuse of aid (Article 20). The burden of proof that aid has been misused will generally lie with the Commission.2566

4. 5.590

Existing aid

Article 1(b) of the Regulation defines “existing aid” as follows: “(1) All aid which existed prior to the entry into force of the Treaty in the respec‑ tive Member States, that is to say aid schemes and individual aid which were put into effect before, and are still applicable after the entry into force of the Treaty. (2) Authorised aid, that is to say, aid schemes and individual aid which have been authorised by the Commission or the Council. (3) Aid which the Commission has proved by default, i.e. where it has failed to adopt a decision within two months of notification. (4) Aid which is deemed to be existing aid because the 10 year limitation period laid down in Article 15 has expired. (5) Aid which was put into effect at a time when it did not constitute an aid and subsequently became an aid due to the evolution of the common market and without having being altered by the Member State. Where certain measures become aid following the liberalisation of an activity by Community law, such measures shall not be considered as existing aid after the date fixed for liberalisation.” 2564 There is however one exception: Article 1x(2) provides that the Commission shall take a decision within the time-limit applicable to notified aid after recovery pursuant to a recovery injunction. 2565 Case C-354/90 Fédération Nationale du Commerce Extérieur des Produits Alimentaires and Syndicat National des Négociants et Transformateurs de Saumon v French Republic ECR [1991], I-05505. 2566 Case T- 111/01 Saxonia Edelmetalle GmbH and T-133/01 Zeitzer Machinen, Anlagen Geräte (ZEMAG) GmbH v Commission of the European Communities ECR [2005] II-01579.

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Article 108 (1) TFEU requires the Commission to keep under constant review all existing systems of aid. It must propose to Member States any appropriate measure required by the progressive development or functioning of the common market. Such proposals are not binding, but are of legal relevance as a mandatory step in the process for initiating the formal contentious procedure laid down in Article 108(2) TFEU and Article 6 of the Regulation. If the Commission finds the aid is no longer compatible it must decide that the State concerned must abolish or alter the aid within such period of time as the Commission determines.

5.591

Finally, Article 108(2), third paragraph, provides for a Member State to apply to the Council for a decision permitting the aid, on the ground that it is justified by exceptional circumstances, notwithstanding its compatibility with Article 107 (1) TFEU. If the Commission has initiated the contentious procedure, the very act of notification to the Council serves to suspend Commission proceedings until the Council has ‘made its attitude known’. The latter has three months in which to do so, after which the Commission may proceed to give its decision. This procedure, which had hitherto been confined largely to agricultural aid cases, has become of more importance in recent years.

5.592

Despite the clarifications provided in the Procedural Regulation, the distinction between ‘existing aid’ and ‘new aid’ continues to be a matter of controversy and has resulted in considerable case law. In particular the extent to which a specific aid can be said to be governed by a particular aid scheme which is deemed to be an existing system of aid can give rise to dispute.2567

5.593

Measures intended to grant aid or alter existing aid constitute new aid.2568 In particular if the alteration of the aid affects the actual substance of the original scheme the latter is transformed into new aid. However if the new element is clearly severable from the initial scheme, this is not considered to be a substantive alteration. The initial scheme remains classified as existing aid.2569

5.594

2567 Case T-109/01 Fleuren Compost BV v. Commission of the European Communities [2004] ECR II-127. An aid would have been an existing aid in this case if it had been granted during the time period initially approved by the Commission. Where however aid was granted subsequent to the expiry of that time period it was deemed to be 865 ‘new aid’. 2568 Case C-510/16 Carrefour: ECLI:EU:C:2018:751. 2569 Joined Cases T-195/01 and T-207/01 Gibraltar v Commission [2002] ECR II-2309. See also on appeal, Case C-106/09 Commission and Spain v Government of Gibraltar and United Kingdom [2011] ECR, I- 11113.

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5.595

In its judgments of 11 June 2009 concerning the classification of an Italian fiscal measure relating to municipal undertakings, the Court had to determine whether the Commission had correctly classified the measure as new aid. The Italian municipal companies providing electricity distribution and production services had been restructured in the early 1990s so that local authorities could manage these services by setting up independent limited companies with a majority public shareholding. Subsequent laws granted various tax exemptions for these new companies – including the exemption from transfer taxes in connection with the conversion of special and municipal undertakings into companies and a three year exemption from income tax. The first measure was found to be justified by the general logic of the system – as transfer taxes are normally payable on the transfer of assets between different economic entities. The municipal undertakings and the companies set up as a result of the restructuring were essentially the same economic entities. The three-year exemption from income tax was deemed to be new aid, and to be incompatible.2570

5.596

On appeal, the municipal undertakings claimed that the provision of such services had been exempted from tax since well before Italy had become a member of the European Communities and should have been considered as existing aid within the meaning of Article 1(b)(i) of the Procedural Regulation. The General Court rejected this argument on the grounds that the companies had been set up as a result of the restructuring in the 1990s and hence the extension of existing tax advantages enjoyed by the old municipal undertakings to a new class of beneficiaries – that is the new limited liability companies, is severable from the initial scheme. In particular these new companies were not subject to the same territorial and substantive restrictions as their predecessor. Hence even though these companies assumed the rights and obligations of the municipal undertakings, the legislation which defined their substantive sphere of activity and the geographical area in which they could operate changed substantially. Hence the Commission had correctly classified the income tax exemption as new aid.2571 These judgements were upheld on appeal before the ECJ.2572

2570 Decision 2003/193 of 5 June 2002, OJ 2003 L27/21. 2571 Case T-297/02 ACEA v Commission [2009] ECR II-01683; T-189/03 ASM Brescia v Commission [2009] ECR. 2572 See for example, Case C-319/09P ACEA v Commission [2011] ECR I-00209; Case C-318/09P A2A SpA v Commission [2011] ECR I-00207.

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4.1 Existing or New Aid and Preferential Tariffs In its decision of November 2007 on a preferential tariff to certain energy intensive users in Italy, the Commission was required to consider whether the extension to the tariff scheme at issue constituted existing or new aid.2573 It held that it was settled case law that an amendment to the duration of an existing aid should be regarded as new aid.2574 Furthermore a detailed analysis of the measures demonstrated that the differences between the old and new measures were substantive. Under the later Italian law the price formation mechanism was fundamentally altered. The Commission relied on the Opinion of AG Fennelly in Joined Cases C-15/98 and C-105/99 Italy and Sardegna Lines v Commission at para 74. The AG considered that the introduction of a wholly new method of providing effectively the same level of aid constituted a significant amendment of the original regime.

5.597

In the Alcoa case, the Court was asked to determine whether a decision of 1996 concerning a number of preferential tariffs for Alumix rendered further modifications of those tariffs as existing or new aid. In its 1996 Decision,2575 the Commission essentially concluded that the tariff which ENEL charged to the aluminium plants acquired by Alcoa did not constitute State aid because, by charging a tariff for the production of primary aluminium that covers marginal costs and a contribution to fixed costs, ENEL behaved like a normal operator under market conditions since these tariffs permitted the supply of electricity to its biggest industrial consumer in a region where there was serious oversupply. Subsequently, in 2006 the Commission initiated a new procedure concerning preferential tariffs to energy intensive users in Italy.2576 This procedure concerned a law which had extended the preferential tariffs granted through an equalisation fund for the electricity sector up to December 2010. The relevant administrative decision implementing the tariff provided that the plant would pay a tariff identical to that which would have applied in 2004 if the decision had not been adopted and in the event that annual reference prices at the power exchanges in Frankfurt and Amsterdam increased, the tariff would be capped at 4% per annum.

5.598

The Commission took the provisional position that the decision amounted to new aid which was not compatible with the common market and invited the Italian government to submit comments. The applicant Alcoa, relying on the

5.599

2573 Commission Decision C36A/2006 – State aid in favour of ThyssenKrupp, Cementir and Nuova Terni, 20 Nov 2007, JOCE L/144/2008; Joined Cases C-448/10 P to C-450/10; ECLI:EU:C:2011:642. 2574 Joined Cases T-127/99 and T-148/99 Diputacion Foral de Alava, [2002] ECR II -012575, paras 173-5. 2575 OJ 1996 C288/4. 2576 OJ 2006 C214/5.

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first sentence of Article 1(b)(v) of the Procedural Regulation, challenged the decision to open the formal procedures under Article 108(2) on the ground that the measure at issue was existing aid. The Commission should have treated the measure as existing aid since the Commission considered the measure to have become aid due to the evolution of the common market.

5.600

The General Court recalled its earlier rulings to the effect that in the event of an alteration to an existing aid, it is only where the alteration affects the actual substance of the of the original scheme that this scheme is transformed into a new aid. There can be no question of a substantive alteration where the new element is clearly severable from the initial scheme. However as regards the extension of aid already in the course of implementation, because of the amendment to the duration of the aid, it should be considered as new aid. The Court held that the measure could not be considered to be existing aid, not only because it covers a period different from that examined in the earlier Alumix decision but also because it consists no longer in ENEL applying the tariff laid down in the 1995 Law, but in the grant of a reimbursement by the Equalisation Fund, in order to offset the difference between the tariff charged by ENEL and that laid down in the 1995 Law as extended by the 2005 Law.2577 On appeal the ECJ upheld the GC’s ruling.2578

4.2 Existing aid in the new Member States 5.601

It follows from the above legal principles as set out in Article 108(1) TFEU and the Procedural Regulation that with respect to the ten Member States which acceded to the European Union on 1 May 2004, all aid granted in these States prior to accession would be qualified as ‘existing aid’. As explained below, the Commission has only limited powers to deal with existing aid. In fact the Accession Treaty reverses the presumption in Article 108(1): all aid granted in a new Member State prior to accession is considered new aid, unless it was specifically qualified as existing aid in Annex IV to the Accession Treaty. A measure was included in Annex IV if it satisfied two conditions: (i) the measure had been reviewed and cleared by the national state aid control authorities; and (ii) the Commission did not object to the measure in the framework of the information and consultation mechanisms put in place by the Europe Agreements. Annex IV was closed in November 2002, although a further transitional period was established up to 1 May 2004. Four categories of aid are dealt with outside the two-tier review procedure: (a) aid granted prior to 10 December 1994 is per se 2577 Case T-332/06 Alcoa v Commission [2009] ECR II-00029. 2578 Case C-194/09P Alcoa Trasformazioni v Commission [2011] ECR I-06311.

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deemed to be “existing aid”; (b) aid measures granted subject to specific transitional arrangements, and special arrangements (c) agricultural aid and (d) transport aids. Included in the second category are special transitional arrangements applying to state aid through tax, environmental and investment schemes. Under the transitional arrangements, these programmes will have to be amended or phased out as provided for, by 2011 at the latest.2579 Disputes arose as to the scope of the category of ‘existing aid’ in Hungary and Poland.

5.602

4.3 Existing versus New Aid in the Hungarian and Polish PPA cases A key question in both these cases was whether the PPAs contain existing or new aid on the basis of the provision of the Accession Act and the Procedural Regulation. Obviously, this had major implications for the requirement of recovery of any state aid.

5.603

According to Chapter 3 of Annex IV to the Accession Act, all State aid measures that entered into force before accession, that are still applicable after that date and do not fall under one of the categories of existing aid listed in the Annex IV shall be regarded, as of accession, as new aid within the meaning of Article 108(3) TFEU.

5.604

As the Commission had already observed in its opening decisions, the PPAs entered into force before the accession of Hungary and Poland to the EU (1 May 2004).2580 But no PPAs were submitted to the Commission under the so-called interim procedure. None of the PPAs in general nor any individual PPAs were included in the Appendix to Annex IV of the Accession Act referred to in point 1(b), Chapter 3, Annex IV, which contains the list of existing aid measures.2581

5.605

In view of the fact that the PPAs do not belong to any of the categories of existing aid enumerated in the Accession Act, they constituted new aid as of the date of accession. The Commission claimed that this categorisation is also in line with the last sentence of Article 1(b)(v) of the Procedural Regulation. This Article states that where measures become aid following liberalisation under Community law (in this case liberalisation of the energy market pursuant to

5.606

2579 See further, P. Schutterle, “State Aid Control – An Accession Criterion”, in Common Market Law Review 2002, vol. 39, nr. 3, p. 577-590. 2580 OJ 2009 L83/1. 2581 OJ 2009 L225/53.

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Directive 96/92/EC, which entered into force in Hungary when it joined the European Union), such measures are not deemed to be existing aid after the date fixed for liberalisation, i.e. they are treated as new aid.

5.607

The Polish and Hungarian generators protested that this last sentence of Article 1(b)(v) of the Procedural Regulation should not apply. Relying on the Alzetta Mauro judgment,2582 it was argued that aid awarded in a market which was initially closed to competition before its liberalisation is to be regarded as existing aid from the date of liberalisation.

5.608

The Commission however, replied that the purpose of the state aid provisions contained in the Accession Act was precisely to ensure that all measures which might distort competition between Member States as of the date of accession were reviewed by the Commission. In contrast to the accession treaties prior to 1 May 2004, the Accession Act is designed to restrict measures deemed to constitute existing aid to the three specific cases described above.

5.609

In the Hunagrian PPA cases, the General Court ultimately sided with the Commission and held that the only possible categories of aid that could be viewed as “existing aid” were those defined in one of the three categories mentioned the Appendix of the Accession Act.2583 With regard to the parties’ reliance on the Alzetta Mauro judgment, the Court took a restrictive approach by arguing that Hungary had already signed the association agreement with the EU before signing the PPAs. Therefore, in the Court’s words “at the time when the PPAs were concluded, Hungary was already under an obligation, pursuant to Article 62 of the Europe Agreement … to harmonise its competition rules with the EC Treaty”.2584 The Italian aluminium excise duty cases

5.610

Joined Cases T-50/03, T-56/03 and T-60/03 and T-62/03 concerned the alleged non- application by the Commission of Article 1(v) (b) of the Procedural Regulation in a situation where various aluminium producers had benefited from an exemption from tax. Article 8(4) of Council Directive 92/81 allowed the Council to authorise a Member State to introduce exemptions or reductions of the rates of excise duty other than those expressly laid down in that directive. 2582 Joined Cases T-298/97 etc, [2000] ECR II -2319. 2583 Cases T-80/06 and T-182/04 Budapesti, para. 53. 2584 Cases T-80/06 and T-182/04 Budapesti, paras. 59-61. See also the appeal to the ECJ in C-357/14P Dunamenti v Commission C:2015.642.

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However Council Directive 2003/96/EC of 27 October 2003 restructuring the Community framework for the taxation of energy products and electricity repealed Directives 92/81 and 92/82 with effect from 31 December 2003.2585

5.611

Article 2(4)(b) of Directive 2003/96 excludes tax on the use of energy products having a dual use. The use of energy products in electrolytic and metallurgical processes is to be regarded as dual use. Therefore, as of 1 January 2004, there was no longer any minimum rate of excise duty on heavy fuel oil used for the production of alumina. Moreover, Article 18(1) of Directive 2003/96 provides that, subject to a prior review by the Council, on the basis of a proposal from the Commission, the Member States are authorised to continue to apply the reductions in the levels of taxation or exemptions until 31 December 2006. Although the Commission treated the aid as ‘existing aid’ for a certain period, it also held that new aid had subsequently been granted and ordered partial recovery.

5.612

In its ruling in Joined Cases T-50/03, T56/03, T-60/03 and T-52/03, the General Court held that the Commission was required, to ascertain whether the ‘contested exemptions’ from the excise duty could be regarded as existing aid by reason of the fact that at the time they were put into effect they did not constitute aid, but that subsequently they became aid due to the evolution of the common market and without having been altered by the Member States concerned, in accordance with Article 1(b)(v) of Regulation No 659/1999.

5.613

The Court ruled that the Commission was required to give adequate reasons for the contested decision with regard to the applicability of that article, and could not merely make the statement that it did not apply in this case. This ruling was subsequently overturned by the ECJ in Case C-89/08P of December 20092586 – the ECJ held that the Commission should have had a fair opportunity to give its views on the applicability of Article 1(b v) and in any event the application of this article was of no relevance given that the exemptions in question had been granted by the Council. The test of ‘aid’ is an objective one and the acts of the Union institutions are therefore irrelevant.

5.614

2585 OJ 2003 L 283, p. 51. 2586 Case C-89/08P [2009] ECR I-11245, 2 Dec 2009.

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4.4 New aid 4.4.1 Formal notification is often preceded by an informal pre-notification procedure. 4.4.1.1 Pre-Notification 5.615

5.616

The Best Practices Guidance of 2016 provides detailed information on the socalled pre-notification phase: –

The EC strongly recommends to use the pre-notification phase for cases with novel aspects, features or complexity. Pre-notification discussions can also be useful for projects of common interest with high EU relevance, e.g. the Trans-European Network for Transport (TEN-T) (see Book, Part V, Chap 4).

–

For particularly complex cases the EC recommends that the Member State initiates pre-notification contacts as early as possible. The pre-notification contacts should, however, not last longer than 6 months.

–

As was the case under the old 2009 Code, in cases with major technical, financial and project-related implications, the EC recommends involving beneficiaries of individual measures in the pre-notification phase, albeit that the decision of whether to involve the beneficiary in the pre-notification contacts lies with the Member States.

In Case T-793/14, Tempus Energy and Tempus Energy Technology v Commission, the GC seems to have concluded that the duration of the preliminary investigation may serve to indicate that the Commission has serious doubts as to the compatibility of a measure and should therefore open the formal investigation.

4.4.1.2 The preliminary investigation 5.617

In accordance with Article 4 of the Procedural Regulation, the preliminary investigation must be completed within two months of the formal notification of a new aid. Where the investigation is commenced into a non-notified aid as a result of a complaint by a competitor, the Commission is under a duty to conclude the procedure in a reasonable period of time.2587 A preliminary examination 2587 Case T-95/96 Getevision v Commission [1998] ECR, II-03407, at paragraph 73.

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must result in a decision pursuant to Art. 4(2), (3) or (4) that the measure does not constitute state aid, or that the measure is compatible with the common market, or that a formal investigation shall be initiated. In its Deutsche Bahn judgment2588 the GC ruled that in addition to the abovementioned decisions, the Commission can also inform the complainant that “there are insufficient grounds for taking a view on the case” pursuant to Art. 24 of the Regulation. The distinction between a decision under Art. 4(2) that a measure does not constitute an aid and a decision under Art. 24) stating that there are insufficient grounds for taking a view on the case is not very clear-cut. It is usually a matter of interpretation of letters sent by the Commission. However, the outcome has a serious impact upon the rights of complainant. The complainant can only challenge the decision before the Court taken under Art. 4(2) resorting to the procedure under Art 263 TFEU, while in the case of the decision taken under Art. 24, it was not obvious that the complainant has such a right. A complainant could file an action for failure to act with the General Court. In the DB case the GC seemed to indicate that the Commission did not have sufficient grounds for taking a view – in other words that it had insufficient information or facts. It did not appear to address the situation where the Commission believes it has no legal case. In the latter situation it should take a substantive view in the form of one of the three types of decisions listed in Article 4 of the Procedural Regulation. The Commission is not entitled to exclude its decision from judicial review by declaring that it did not take a decision.

5.618

In Case C-521/06P Athanoiki Techniki AE v Commission, the Court however, held that competitors who had complained of alleged aid in a privatisation process, were entitled to a formal, actionable decision rejecting a complaint against which they could appeal.2589 Hence competitors could appeal against a Commission decision to close the procedures albeit that the decision took the form of an ‘Article 20(24) letter’.

5.619

In Case T-152/06, NDSHT Nya Destination Stockholm Hotell & Teaterpaket AB v Commission, the General Court had stated that, when a complaint concerns a measure that the Commission deems existing aid, the complainant is not entitled to a formal decision since the obligation to do so only arises in case of ‘unlawful’ aid, which does not happen in case of existing aid. The ECJ subsequently reversed this ruling in its judgement in Case C- 322/09.2590

5.620

2588 Case T-351/02 [2006] ECR II-01047, ECLI:EU:T:2006:104. 2589 Judgement of 17 July 2008, ECR 1-582a. 2590 ECLI:EU:C:2010:70

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The Streamlined Procedure

5.621

The Best Practices Guidance 2018 provide details on the possibility of a streamlined procedure for cases which are unlikely to distort competition. –

A measure may qualify for a streamlined procedure if it is  sufficiently similar to other measures that were approved in at least 3 EC decisions in the last 10 years. With regard to the “sufficiently similar” test the EC will look at substantive and procedural conditions of the measure, including the objectives and overall set-up of the measure, the types of beneficiaries, eligible costs and individual notification ceilings.

–

The EC will only accept a streamlined procedure if pre-notification has taken place and the notification form is, in principle, considered to be complete (standard notification forms are to be used pursuant to Annex I of the Implementing Regulation).

–

After the EC has received the notification, interested parties have  10 working days to comment following the publication of a summary of the notification on DG COMP’s website. If an interested party raises concerns, which seem prima facie well founded, the EC will switch to the normal procedure.

–

The EC will “endeavour” to adopt a short-form decision within 25 working days from the date of notification (para 45); 

The amended Procedural Regulation

5.622

The amended Procedural Regulation purports to restrict the rights of competitors. However the new Regulation and the implementing Regulation of 2014 do not clarify further the right of the Commission to reject complaints nor indicate if and how the Commission might reject a complaint for want of priority or Union interest. This is because Articles 10(1) and 20(2) of the amended Procedural Regulation introduce the term “complaint” for the first time, but do not clarify whether a definitive closure or rejection letter in principle constitutes a challengeable act for the complainant. Article 20(2) now refers to a ‘prima facie examination’ as opposed to a definitive position. The complainant must then react and submit additional evidence or comments within the time period stated in the Commission letter. The subsequent steps in the rejection procedures are to be laid down in a Commission implementing act (on the basis of Article 27). 874

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On 9 April 2014 the Commission adopted Commission Regulation (EU) No 372/2014 of 9 April 2014 amending Regulation (EC) No 794/2004 as regards the calculation of certain time limits, the handling of complaints, and the identification and protection of confidential information.2591 Although this measure clarifies the time limits it does not further specify the procedures for the rejection of a complaint.

5.623

The three formal conditions laid down in the amended Regulation 734/2013 for a complaint to be validly made could be instrumental to filtering complaints and focusing its priorities. The three conditions are:

5.624

(1)

The complainant completes the compulsory complaint form in which a certain amount of compulsory information must be submitted by the complainant. If not the complaint may be treated as general market information and should not necessarily lead to an ex officio investigation.

(2)

The complaint will be deemed to be withdrawn if the complainant fails to make known its views within the prescribed period of time.

(3)

The complainant must demonstrate that it has a legitimate interest that is equivalent to its status as an interested party within the meaning of Article 108(2) TFEU and Article 1(h) of Regulation 659/1999.

With respect to the final and arguably the most important condition, the CJEU has already confirmed that the notion of ‘interested party’ is potentially wide in scope.2592 Second, it is doubtful that the Commission can deem a complaint to be withdrawn as long as the complainant has put forward some information – even if the Commission considers it insufficient. In fact, the evolution of the case law shows that the Commission maybe bound to issue a decision. As already noted, the Courts have qualified a Commission letter rejecting a complaint as a challengeable decision in Case T-351/02 Deutsche Bahn2593 and more decisively, in Case C-521/06 Athinaki in 2008.2594 As a consequence, once a party has lodged comments replying to a Commission letter, the Commission is obliged to close the preliminary investigation by means of a challengeable deci2591 Commission Regulation 372/2014 of 9 April 2014 amending European Commission Regulation 794/2004 as regards the calculation of certain time limits, the handling of complaints, and the identification and protection of confidential information Text with EEA relevance, [2014] OJ L 109/14. 2592 See Case C-83/09 Kronoply, at paras 63-65, “For that purpose, it is necessary for that undertaking to establish, to the requisite legal standard, that the aid is likely to have a specific effect on its situation”. 2593 [2006] ECR I-1047. 2594 [2008] ECR I-5829. See also Case C-322/09 P NDSHT v Commission [2010] ECR 1-1191.

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sion setting out that the aid does not exists, raising no objections, or initiating the formal investigation procedure. The subsequent rulings in Case C-615/11 P Commission v Ryanair 2595 and Case T-182/10 Aiscat, also show that the Commission is under a duty to adopt a final decision, irrespective of the quality of information supplied.2596 Thus, despite the Commission’s apparent intention to avoid the constraints imposed by the Courts in Case C-521/06 Athenaiki, and its subsequent developments, it appears likely that notwithstanding the revised text of Article 24, complainants will be able to invoke such case law and to ask for judicial review in case the Commission fails to take appropriate action. The Preliminary investigation and the rights of third parties

5.626

Third parties do not have any formal rights to intervene at the first stage of the procedure beyond the right to inform the Commission of any alleged unlawful aid or alleged misuse of aid. As the 2018 Best Practice Guideline states: “The Member State may decide to involve the beneficiary of a potential (individual) State aid measure in the ‘state of play’ contacts with the Commission, especially in cases with major technical, financial and project-related implications. The Commission services recommend the beneficiary becomes involved in such contacts. Nevertheless, the decision on whether or not to involve the beneficiary rests with the Member State” [at para 36].

5.627

If it is recognised that the parties concerned have standing, then they may however seek annulment of the Commission’s decision not to open proceedings2597 in order to protect their procedural rights – that is the right to submit observations in the formal investigation.

5.628

Furthermore a recipient of an aid may not contest the Commission’s decision to open the formal phase merely because neither the Commission nor the Member State concerned had not informed it of the opening of this phase. The Commission’s decision to classify the aid as new aid and to open the formal procedure is published in the Official Journal and must be supported by reasons. If these reasons are not appropriate the recipient could seek annulment of the decision.2598

5.629

Finally the recent Case T-793/14 Tempus seems to suggest that where there is an absence of independent evidence in a novel case the European Court expects 2595 Case C-615/11, Commission v Ryanair [2013] ECLI:EU:C:2013:310. 2596 15 Jan 2013, at paras 28-30. See also Case C-615/11, Commission v Ryanair [2013] LI:EU:C:2013:310, at para. 37. 2597 Case C-198/91 William Cook plc v Commission of the European Communities ECR [1993] I-02487. 2598 Case T-109/01 Fleuren Compost BV v Commission of the European Communities [2004] ECR II-127.

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that the Commission will conduct its own assessments, and use its powers under the formal investigation procedure to do so.

4.4.2 The formal or contentious phase Article 6 of the Regulation provides detailed rules on this phase of the procedure which is considered adversarial. The Commission must ensure the right to a fair hearing and must communicate to the Member State concerned its opinion on the observations presented by third parties and on which the Commission intends to base its decision. Third parties, including competitors and potential aid recipients, do not however have a right to an oral hearing nor do they have any right to examine the correspondence received from the Member State or sent to the latter by the Commission. Nor may they have access to any expert reports on which the Commission has based its assessment.2599

5.630

In his opinion in case Case C-290/07 P European Commission v Scott SA,2600 Advocate General Mengozzi held that this approach was “markedly formalistic” and acknowledged the criticism against the premise on which the approach is built, namely that “the interests of the State which granted the aid are the same as the interests of the aid recipient”. The Advocate General thus asked the Court to take “a middle way”, based on the principle of good administration. The ECJ annulled the decision of the General Court on other grounds.2601

5.631

In principle this second phase of the investigation should be completed within 18 months after the opening of the formal procedure, but this may be extended by common agreement between the Commission and the Member State concerned. After expiry of the time limit the Member State may request the Commission to take a decision within two months. Article 9(7) states that the Commission decision shall be taken on the basis of the information available to it. If the Commission does not have sufficient information to establish compatibility, the Commission shall adopt a negative decision. Of the twenty most recent State aid decisions adopted under the EEAG 2014 none were subject to a formal investigation before the adoption of the Commission’s Decision.

5.632

2599 Case C-119/97P. Union française de l’express (Ufex), formerly Syndicat Francais de l’express international (SFEI), DHL International and Service CRIE v Commission of the European Communities and May Courier, ECR [1999], I-01341. 2600 Opinion of 23 February 2010. 2601 C-318/09P 2 September 2010. [2011] ECR -00000.

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Standstill

5.633

The standstill clause applies throughout the different procedural phases and will only lapse if the Commission fails to take a decision under the preliminary procedure within two months, but on the condition that the Member State has given the Commission prior notice of its intention to implement the aid.2602 According to Article 4(6) of the Regulation, the Commission has 15 working days to formulate a reaction.

5.634

The standstill clause will continue to apply throughout the formal procedure but there is no provision in the Regulation dealing with a case where the Commission fails to take a decision. It is assumed that the Member State should request the Commission to take a decision – but there is no obligation on the former to give notice as such. There had been some uncertainty about the status of the standstill clause where the Commission’s decision is annulled in Court proceedings. If a negative decision is annulled, it is assumed that the standstill clause continues to apply. If a positive decision is annulled the picture is more complex, but the prevailing view is that a court ruling will be non-retroactive so that the standstill clause will be revived on the date of the Court’s judgment. This is confirmed by the CELF case.2603

5.635

4.4.3 Information requirements 5.636

The time-limits applying to notified new aid are predicated on the Commission having received sufficient information to reach the necessary decisions. If the Commission has not received adequate information from the Member State then the clock does not start to tick. However in accordance with Article 12 of the Regulation, the Commission can issue an ‘information injunction’ to a Member State. The Commission is not required to request information from third parties such as the recipient of the aid.2604

5.637

Under Article 12 of the Procedural Regulation, the Commission is empowered to obtain from the Member State concerned all the documents, information and data necessary for the examination of the compatibility of the aid with the 2602 See for example the notice given by the UK in relation to its notification of the proposed restructuring aid for British Energy (discussed in book paragraphs 5.73 and 5.150). 2603 Case C-199/06 CELF v SIDE [2008] ECR I-469. 2604 Case T-109/01 Fleuren Compost BV v Commission. [2004] ECR II-127.

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common market. Until the recent reforms of 2013, this was the only power of investigation conferred on the Commission in the context of the procedure for reviewing State aid. It is a graduated power. The Commission may request such information from the Member State concerned by sending it, if necessary, a reminder and allowing an additional period. Where appropriate, it may issue an injunction to it.2605 Although case law indicates that aid beneficiaries are also subject to a duty of cooperation and to provide information to assist the investigation, the Commission could not take any further action if that party failed to do so.2606 The Commission can use its power of injunction only in the context of a procedure regarding unlawful aid, where the Member State fails to notify a plan to grant new aid or where, despite a notification, it does not provide the additional information requested by the Commission, in accordance with Article 5(3) of the Procedural Regulation. Where the Member State fails to comply with an information injunction, the Commission is entitled to decide solely on the basis of the information available to it. Furthermore, where following a Commission decision, that State refuses to suspend or provisionally recover aid, the Commission is authorised to refer the matter to the Court directly.

5.638

The amended Procedural Regulation In the interest of procedural efficiency and economy, and as initially explained in the Commission’s draft of the new Procedural Regulation, the 2013 reforms seek to empower the Commission “to reach the appropriate parties directly and simultaneously” and to guarantee “more transparent, accurate and swift information flows” (see recitals 1 and 13).

5.639

Moreover, the Commission has successfully persuaded the Council that these new powers would lead to a reduction of the administrative burden for Member States and would not further disturb the bilateral nature of the State aid procedure, and that these new powers would not change the role of third parties as a source of information.2607 The Commission’s powers to require market information from any Member State, undertaking or association of undertakings have

5.640

2605 Article 12(3) provides: “Where, despite a reminder pursuant to Article 5(2), the Member State concerned does not provide the information requested within the period prescribed by the Commission, or where it provides incomplete information, the Commission shall by decision require the information to be provided (hereinafter referred to as an ‘ information injunction’). The decision shall specify what information is required and prescribe an appropriate period within which it is to be supplied”. 2606 Case T-25/07 Iride v Commission [2009] ECR II-245, paras 100-101. 2607 See its draft proposal, Com (2012) 725, at pp 9 -10.

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been confirmed in Article 7, with the intention of strengthening Commission supervision.2608 Powers to obtain market information

5.641

This new power allows the Commission to request any other Member State or undertaking or association of undertakings to provide it with ‘market information’ necessary to complete its assessment of the national measure at stake. The exercise of this power is subject to a number of conditions as listed in Article 7(2): first, it can only be used during the formal investigation and second, if the Commission has taken the view that the information provided by a Member State during the preliminary investigation is not sufficient. In addition Article 7(2)(b) stipulates that the information is limited to formal investigation procedures that have been identified by the Commission as ineffectual to date, and further, and most importantly, in so far as beneficiaries are concerned, only if the Member State concerned consents.

5.642

The Commission may by simple request require any undertaking to provide information at its disposal, and specify the information required and a time limit within which it must be provided (see Article 7(6)). It may also adopt a decision requiring the information. Fines not exceeding 1% of total turnover in the proceeding turnover can be imposed on undertaking) for supplying misleading information or for failure to provide information (Article 7(7)) and periodic penalty payments of up to 5% of the average daily turnover in the proceeding business year for each working day of delay, can also be imposed (Article 8). Member States are however not exposed to fines or penalty payments should they fail to provide information as requested.

5.643

It should be noted that prior to imposing any penalties, the Commission must set a final deadline of two weeks to receive the missing market information and to hear the parties concerned prior to the adoption of any sanction addressed to them.

5.644

The Courts have unlimited jurisdiction within the meaning of Article 261 TFEU to review such fines or periodic penalty payments, including the power to cancel reduce or increase the fine or periodic payment. Article 18(1) establishes a limitation period of 3 years for the imposition of fines and penalty payments while Article 19(1) foresees a limitation period of five years for the enforcement of fines and penalty payments. 2608 See Recital 1 of Regulation 734/2013.

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Undertakings must submit the market information simultaneously to the Commission and the Member State concerned, to the extent that this is not confidential. The Commission shall ‘steer and monitor’ the information flows and shall verify confidentiality. Article 9(10) states that as a matter of principle the Commission shall take due account of the legitimate interests of undertakings in the protection of their business secrets and other confidential information, but Article 9(9) provides for a specific procedure allowing the Commission exceptionally to use confidential information that cannot be aggregated or otherwise anonymised, even without the consent of the party submitting the information. That procedure culminates in a decision, notified to the undertakings concerned, and setting a date after the information will be disclosed. This would presumably be classified as an ‘act’, subject to appeal to the European courts.2609

5.645

Finally, according to Article 9(8) Member States but not third parties would be granted the opportunity to make their views known its views before the adoption of its final decision.

5.646

Sector inquiries Article 25 provides for the power to commence investigations into sectors of the economy and into aid instruments – in other words a form of sector inquiry – where the Commission has information that substantiates a reasonable suspicion2610 that a State aid measure in a particular sector or based on a particular aid instrument may materially restrict or distort competition within the internal market in several Member States, or that existing aid measures in a particular sector in several Member States are not or no longer compatible. The Commission may request the Member States and/or undertakings concerned to supply the necessary information. This investigation will culminate the production of a report, which will be open to comment from the Member States and undertakings according to Articles 25(1) – (3). Information so obtained can then be used in any further procedures under the Regulation. Fines and periodic payments can be imposed on undertakings (and not on Member States) for failure to submit the requested information. It may be noted that these powers are not fully comparable with those conferred on the Commission by Regulation 1/2003,2611 2609 Article 11b of the implementing Regulation 372/14 merely provides that: “Any person submitting information pursuant to Regulation (EC) No 659/1999 shall clearly indicate which information it considers to be confidential, stating the reasons for such confidentiality, and provide the Commission with a separate nonconfidential version of the submission. When information must be provided by a certain deadline, the same deadline shall apply for providing the non-confidential version”. 2610 See also Recital 17 of Regulation 734/2013. 2611 OJ 2003 C1/1.

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as there are no equivalent powers to take statements from natural or legal persons or to inspect business or private premises. 2612

5.648

The Commission relied on this power to open a sector-wide inquiry into capacity market mechanisms in April 2015.2613 The inquiry is discussed further at Book V chapter 5. Information injunctions as challengeable acts

5.649

In Joined Cases C-463/10P and C-475/10P Deutsche Post and Germany v Commission, the CJEU has recognised the right of an alleged aid beneficiary to challenge the Commission information injunction based on Article 10 of the Procedural Regulation and addressed to the Member State.2614

4.4.4 Procedures in relation to existing aid schemes 5.650

Chapter V of the Procedural Regulation lays down procedural rules for existing aid schemes but not aid measures. The term ‘existing aid scheme’ is defined in Article 1(g) of the Regulation and can apply to (i) any act on the basis of which, without further implementing measures being required, individual aid awards may be made to undertakings defined within the act in a general and abstract manner and (ii) any act on the basis of which aid which is not linked to a specific project but can be awarded for an indefinite period of time and/or for an indefinite amount.

5.651

The Commission commences its review with a request for information to the Member State. If it finds existing aids to be no longer compatible with the common market, it shall inform the Member State of its preliminary view and give the Member State an opportunity to submit comments within one month. If in the light of this information the Commission concludes that the aid is not or is no longer compatible with the common market, it shall issue a recommen-

2612 The Best Practices Guidelines of 2018 additionally mentions: that the EC will at the end of such inquiry publish a report on the results of the investigation and give Member States and other parties concerned the opportunity to comment within 1 month. The information obtained through the sector inquiry can be used by the EC in State aid procedures. The EC can, based on EU case law, issue information requests to sources other than the Member State after the initiation of the formal investigation procedure. The EC will send the Member State a non-confidential version of the comments received from interested parties to which the Member State can reply within 1 month. 2613 See the final report at:ec.europa.eu/energy/sites/ener/files/documents/com2016752.en_.pdf 2614 Joined Cases C-463/10 P and C-475/10 P Deutsche Post and Germany v Commission [2011] ECR 1-09639, 13 October 2011, annulling the GC’s orders in Case T-570/08 Deutsche Post v Commission [2010] ECR II-00151 and T-571/08 Germany v Commission [2010] ECR II-00152, both of 14 July 2010.

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dation. This recommendation may propose substantive amendments to the aid or the introduction of procedural requirements or the abolition of the aid. If the Member State accepts the proposals, it shall inform the Commission and is bound to implement them. If however the Member State does not accept the Commission’s proposals for amendment, then the Commission must initiate the formal procedure. There is no specific procedure laid down in the Regulation for the amendment of frameworks or guidelines. The Commission relied upon Article 108(1) TFEU to require the French government to put an end to the unlimited guarantee enjoyed by EDF on all its loans and commitments by virtue of its status as a public enterprise, which renders bankruptcy and insolvency legislation inapplicable. A state guarantee such as the one provided to EDF was unlimited in amount and duration and hence could be classified as an aid scheme. As the French government did not accept the Commission’s recommendations, the Commission commenced the procedures under Article 19(2) of the Regulation and opened a formal investigation on 4 April 2003.2615 The Commission considered that the measure conferred a selective benefit on EDF and that since the gradual opening up of the internal electricity market as a result of the adoption of EC Directive 96/92, the measure affected inter-state trade.2616 The Commission subsequently adopted a negative decision requiring termination of the state guarantee scheme.

5.652

4.5 Recovery of unlawful aid 4.5.1 Introduction Although the case law of the European courts had confirmed the Commission’s power to order that the Member State that has granted unlawful aid recovers it from the recipient(s), the Commission was probably not under a duty to do so: recovery is a matter of discretion. Article 16 (1) of the Procedural Regulation requires that the Commission must recover unlawful aid or aid which has been misused; it does not however give the Commission any powers to recover existing aid, only new aid (see above, book paragraph 5.585). The Commission set out its policy on recovery in a Communication of 2007 – “Towards an effective implementation of Commission Decision ordering Member States to recover unlawful and incompatible State aid”.2617

2615 O.J. 2003, C164/7. 2616 See book paragraphs 5.59 regarding the substance of this case. 2617 OJ 2007 C272/4.

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5.654

Article 17 of the Regulation limits the Commission’s powers of recovery to 10 years. This limitation period begins on the day on which the unlawful aid is awarded. The limitation period shall be suspended if action is taken by the Commission or a Member state with regard to the unlawful aid and as long as the Commission’s decision is subject to proceedings before the Court of Justice. Since Article 18(2) excludes proceedings before the Court from having any suspensory effect; it is only an action by Member States that can have such an effect. In Case T-366/00 Scott SA,2618 confirmed on appeal,2619 the Courts have confirmed that the 10 year limitation period may be interrupted by any action of the Commission, including a letter sent by the Commission to the Member State. The Scott case has also confirmed that the 10 year limitation period also applies to aid granted before the entry into force of the Regulation.

5.655

It is also established case law that the Commission when ordering recovery of an individual aid measure, does not have to specify the amounts to be recovered. Furthermore, in the case of an aid scheme, the Commission may confine itself to examining the characteristics of the scheme in question and need not provide an analysis of the aid granted in individual cases under the scheme.2620

5.656

At the recovery stage however the Commission should examine the individual situation of each undertaking concerned,2621 but it would seem that its failure to do so cannot be a ground for a member State to argue that the recovery order is void.2622 The Commission can order the aid to be recovered with compound interest2623. The question whether the Commission must take into account the fact that the recipient paid corporation tax on the state aid in question when ordering recovery was considered in Case T-459/93 Siemens.2624 The Court ruled that this was a matter for the national authorities to take into account.

5.657

2618 Judgment of the Court of First Instance of 10.04.2003, ECR [2003], II-01763 at paragraph 60. Case C276/03P [2005] ECR 1-8437. 2619 Case C-276/03P [2005] ECR I-8437. 2620 See further, for an extensive discussion, J. Derenne, “State Aid Recovery and the Energy Sector”, in Hancher et al., 2018. 2621 C-310/99 Commission v Italy, [2000] ECR para 91. 2622 T-222/04 Italy v Commission, OJ C 180, June 11, 2009. 2623 Commission Communication on the interest rates to be applied when aid granted unlawfully is being recovered, OJ 2003, C110/21. Commission Notice on State aid recovery interest rates as from 1 May 2009 (O J 2009 C68/11). Certain Member States prohibit the recovery of compound interest and this could raise contractual problems at national level. 2624 Case T-459/93 Siemens SA v Commission of the European Communities [1995] ECR II-1675.

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The current rules on recovery, and the relatively weak position of the recipient to participate in the Commission’s administrative procedures have been the subject of mounting criticism in recent years. In particular, it is argued that the Member State which has granted illegal aid is placed in a “win-win” situation. If the unlawful grant of aid is not detected, the grantor State simply achieves the object that led it to grant the aid, albeit at a cost to the tax-payer. Alternatively, if the unlawful grant is detected, the state gets back the aid, with interest at a commercial rate, and perhaps with an additional bonus and at the same time: it may also achieve its original objective in granting the aid, relevant national legal provisions, a Member State cannot invoke a rule of domestic law to oppose recovery of aid: the recovery obligation is strictly interpreted by the European Courts and Member States may only plead absolute impossibility in defence of their failure to recover.

5.658

In this respect the Member State should also establish that it has complied with the principle of loyal cooperation as laid down in Article 4 TEU, and has worked together with the Commission in good faith to overcome the difficulties in full compliance with the provisions of the Treaty. Thus the condition of absolute impossibility is not fulfilled where the defendant government merely informs the Commission of the legal, political or practical difficulties involved in implementing the recovery decision, without taking any real step to recover the aid from the undertakings concerned, and without proposing to the Commission any alternative arrangements for implementing the decision which could have enabled the difficulties to be overcome, such as the liquidation of the company involved.2625

5.659

4.5.2 Recovery in the Hungary PPA case In accordance with Article 4(1) of the Commission’s decision of June 2008, the amount of aid to be recovered by Hungary is to be calculated on the basis of an appropriate simulation of the wholesale market as it would have stood if none of the PPAs as referred to in Article 1(1) had been in force since 1 May 2004. Recovery is not therefore limited to the amount of aid arising from the “purchase obligations” referred to in Article 1(1) to (3) of the decision, but is based on a market simulation as if the PPAs did not exist. The Commission required the Hungarian authorities to calculate the difference between the revenues that the generators earned with the PPAs and the revenues that they would have earned by selling their output on a competitive spot market. These counter factual revenues were to be simulated using a complex ‘dispatch’ model.2626 2625 Case C-499/99 Commission v Spain (“Magfesa”) [2002] ECR I-06031. See also Case C-622/16 Montesori, 6 Nov 2018. 2626 OJ 2009 L225/53.

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5.661

The Commission’s approach to determining the amount to be recovered in the Hungarian case is unusual and merits comment. It diverges from its approach to recovery of illegal state aid in general. Market simulations or the construction of counterfactual scenarios have not been used usually in the past. As the European courts have frequently stressed, the purpose of recovery is a restoration of the status quo ex ante – that is to the situation before the aid in question was granted. How does one fit the aid element in a long term contract into this approach? Normally the Commission identifies the nature of the advantage at issue – usually a tax advantage or a loan on terms well below market rates or other form of grant or subsidy – quantifies that advantage, and requires its repayment, with interest. It does not normally look at the impact of the aid “on the market” and require a market simulation as if the aid did not exist.

5.662

Arguably this approach could be relevant in more “straightforward” cases where for example, a major player is given as large subsidy to pursue research and development, thus crowding out potential (or actual) competitors. If the subsidy is illegal – the beneficiary repays it, plus interest. Any anti-competitive distortion and resulting economic damage to other parties would be not be “costed out” and included in the recovery order. That third parties such as competitors could subsequently sue the member state or indeed the beneficiary in separate proceedings for the damage they have suffered, is not ruled out – providing of course, that at the very least, that the substantial hurdle of establishing causation can be overcome.2627 Damages awards in state aid cases before national courts are very rare. The General Court nevertheless upheld the Commission decision in Joined Cases T 80/06 and T-182/09, and in case T-179/09.2628

4.5.3 Contractual termination 5.663

By effectively requiring the Hungarian government to remove all the so-called “purchase obligations”, and to execute recovery as if the contracts did not exist, the Commission in its decision on the Hungarian PPAs effectively required Hungary to ensure the termination of the various PPAs. In the Polish PPA decision, the Commission categorically ordered the termination of the PPAs.

2627 Case C- 39/94 SFEI, [1996] ECR I-3547. 2628 Case T-179/09 Dunamenti Erömü v Commission [2014]. Confirmed on appeal in Case C-357/14 P: C:2015.642.

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This in turn raises the fascinating legal question of whether the Commission has the power to cause the termination of a private contract. It would seem that neither Article 108 TFEU nor Regulation 14 of the Procedural Regulation can be read as entitling the Commission to order the effective termination of an entire contract. At most, the Commission is entitled to recommend to Member States to “abolish” existing aid schemes under the conditions set out in Article 18 of the Regulation. Article 14 only entitles the Commission to take necessary measures to recover the aid from the beneficiary.

5.664

4.5.4 International Law aspects Both Poland and Hungary, are signatories to the Energy Charter Treaty. The European Union is also a contracting party to the ECT. This Treaty contains several provisions on investor protection and is unusual in that it allows an investor to initiate legal action against a state Party in the event of a breach of these provisions. The application of the ECT was briefly considered by the Commission in the Polish case but dismissed as only protecting legitimate rights of investors. A ‘right to state aid’ could not be considered as a legitimate right.

5.665

Subsequently a number of international arbitrations were commenced against Hungary for breach of its obligations under the ECT. As yet no such action has been initiated against the European Union. Interestingly, however, the Commission has used the possibility to submit so-called ‘third party observations’ in several arbitration procedures against Hungary. The Commission considered that the arbitration panels should be aware of the impact of the EC state aid regime on any potential damages award against the Hungarian government. And indeed (although unrelated to the ECT), following a formal investigation it has ruled on the incompatibility of an ICSID arbitral award against Romania, which granted ca. 178 million euros in damages to Ioan Micula, Viorel Micula, SC European Food SA, SC Starmill SRI, and SC Multipack SRL for breaching article 2 of the Sweden- Romania Bilateral Investment Treaty.2629

5.666

In November 2008 the international tribunal appointed to hear a case brought by the UK registered company, AES Summit and its Hungarian subsidiary, AES Tisza, against Hungary under the Energy Charter Treaty allowed the European Commission to file a submission pursuant to ICSID Arbitration Rule 37. The Tribunal was appointed to deal with an investor-state dispute pursuant to Articles 10 and 13 of the ECT and prior to the adoption of the Commission’s

5.667

2629 Case SA.38517 Romania Implementation of Arbitral award Micula v Romania, 11 December 2013. Annulled on appeal in Case T-646/15 Micula and Others v Commission, EU:T:2019:4.23.

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5.668

negative state aid decision. Nevertheless the dispute before the Tribunal was alleged to have some connection with the Commission’s Decision of June 2008. As such, the Commission was invited to express its views ‘as an expert on Community law’. The Commission appears to have taken the view that the pending arbitration posed a risk of conflict to the EC state aid rules. Similar requests have be submitted by the Commission in an ICSID arbitration under Article 10 and 13 ECT between Electrabel versus Hungary and in an ad hoc UNCITRAL arbitration under Article 10 and 13 ECT between EDF and Hungary.2630

5.669

On November 30, 2012, in the Electrabel case, the arbitral tribunal acknowledged that when conflicts arise between EU Member States that are individual signatories to the ECT, both texts should be interpreted in line with EU law. It therefore held that Hungary should not be held liable before an arbitral body for adhering to Commission decisions.2631

5.670

Article 26(6) ECT requires the Tribunal to decide the issues in dispute in accordance with ‘this Treaty and the rules and principles of international law’. The ECT itself contains no rules on state subsidies, The question thus arises as to whether EC law should be considered to be applicable if one of the parties to the dispute is an EC Member State, and subject to the EC Treaty provisions on state aids. Furthermore, discussion is likely to centre on the applicable rules for an EU Member State in the event of a conflict between an arbitral award under the ECT and obligations under the EC Treaty. In this respect Article 16 ECT contains a conflict rule which accords priority to its own regime over any subsequent inter-se agreement between Contracting Parties. As Hungary acceded to the European Union some years after it had entered into the ECT, Article 16 would dictate that the ECT prevails. This approach obviously fits uneasily with the European legal principle of supremacy of European law and creates complex issues with regard to recovery decisions on the part of the Commission and arbitration awards on the part of an international tribunal adjudicating on an investor-state dispute, where the state is also an EU member state.

2630 ICSID Case No. ARB/07/19, Electrabel S.A. v Hungary, Decision on Jurisdiction, Applicable law and Liability, 30 November 2012; Ad hoc UNCITRAL Arbitration Ruling EDF International S.A. v Hungary (Award rendered on December 4, 2014, not publicly available). 2631 In the tribunal’s words “[t]he Tribunal considers that it would be absurd if Hungary could be liable under the ECT for doing precisely that which it was ordered to do by a supra-national authority whose decisions the ECT itself recognises as legally binding on Hungary”. ICSID Case No. ARB/07/19, Electrabel S.A. v Hungary, para. 6.72.

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The ECT gives rise to further complications. Contrary to the New York Convention, Article 54(1) of the 1965 ICSID Convention provides for automatic recognition of an ICSID award and enforcement of the pecuniary obligations imposed by that award within its territories as if it were a final judgment of a court of that State. The terms of the ICSID Convention do not allow the EC to become a contracting party to it. Thus, it is by no means clear how the approach taken in ‘Eco-Suisse’ can be applied to a self-enforcing award: that case dealt with a national arbitration procedure, the legality of which in turn was reviewed by national courts who could take account of the public policy exception recognised by the 1958 New York Convention.2632

5.671

Spanish and Czech RES Decisions In two decisions of 2017 the Commission warned the Member State concerned that any damages awarded by an arbitral tribunal for the cancellation and/or retroactive amendment of RES support schemes would be considered to be new aid and would have to be notified for clearance by it. In both cases the Commission cleared the amended aid schemes that had replaced earlier and more generous support to RES producers.

5.672

In November 2017, the Commission approved the Spanish scheme supporting electricity generation from RES, high efficiency cogeneration of heat and power and waste. Beneficiaries receive support through a premium on top of the market price of electricity. The scheme reduces substantially the amount of subsidies granted under the earlier scheme. The latter scheme had never been notified and, in its 2017 decision,2633 the Commission only took account of the old scheme under the proportionality test, to control whether existing installations might have received overcompensation over the lifetime of the investments. It then went on to state that any provisions that provide for investor-State arbitration between two Member States is contrary to EU law and that it would consider as State aid any compensation awarded by an Arbitration Tribunal to an investor because of the modification of the old scheme.

5.673

In the meantime a number of these producers have successfully sued the Spanish authorities for retroactive cancellation of RES support schemes and have been awarded substantial damages. The question now arises as to whether these awards can be enforced if they are deemed to substitute non-notified and therefore illegal state aid. This is an ongoing debate and it has been made more com-

5.674

2632 See chap 12, Hancher, De Hauteclocque and Salerno (2018) op. cit. 2633 SA.40348, Spain, 10 November 2017.

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plex by the recent ruling in Case C-284/16 Achmea in which the ECJ ruled that intra-EU investment treaties could be null and void insofar as they contained investor-state dispute clauses which undermined the autonomy of European law.2634 However, as several tribunals in numerous post-Achmea ECT awards have pointed out, Achmea applies to intra-EU BITs, but is silent on the question of its applicability to Energy Charter Treaty, which is a multilateral treaty to which the EU itself is party.2635 However, this question has now been referred to the CJEU on Spain’s application to the Svea Court of Appeal in Sweden in the context of the Novenergia case.2636

4.5.5 Legitimate expectations 5.675

Both Member States and recipient undertakings have met with little success in their attempts to invoke the doctrine of legitimate expectations in order to resist recovery. A recent exception to this rule is Case T‑68/15, HH Ferries et al. v Commission2637

5.676

Although the European courts have recognised that this principle forms part of the Community legal order, it is now established jurisprudence that a Member State may not plead provisions, practices or circumstances in its own internal legal system as a reason for not complying with its obligations under the Treaty.2638 A Member State may not rely on the recipient’s legitimate expectations as this would frustrate the process of recovery by allowing it to rely on its own unlawful conduct. Furthermore a recipient of an illegal aid may not invoke the principle of legitimate expectations except in limited circumstances.2639 A diligent businessman is expected to verify that the procedure laid down in the Treaty has been followed, and even if the Member State itself has provided insufficient information to the Commission, leading to an negative decision and a recovery obligation, the recipient cannot challenge the legality of the recovery requirement.2640 2634 Case C-284/16, Slovak Republic v Achmea BV, EU:C:2018:158. 2635 Artibtration tribunals in Masdar Solar & Wind Cooperatief U.A. v Spain; Antin Infrastructure v Spain; and Vattenfall AB and others v Federal Republic of Germany concluded that Achmea did not apply to arbitrations under the ECT 2636 Novenergia II – Energy & Environment (SCA) (Grand Duchy of Luxembourg), SICAR v The Kingdom of Spain (SCC Case No. 2015/063). 2637 Paras 303 et seq. ECLI:T: 2018: 563. 2638 For an extensive analysis of the issues involved see the Opinion of Advocate General Cosmas in Case C-83/98 P. France v Ladbroke Racing and Commission [2000] ECR I-03271. 2639 See for example the various Italian municipal tax cases, decided on June 11, 2009 for a recent example of the CFI rejecting the pleas of legitimate expectations. 2640 Case T-109/01 Fleuren Compost BV v Commission of the European Communities, [2004] ECR II-127.

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4.5.6 Recovery from a subsequent owner Several cases have been decided concerning the instances where the beneficiary of the illegal state aid, or its assets, has been sold before the Commission has issued a recovery order, raising the question of whether the new owner was liable for the repayment obligation, even if he or she paid a market price for the company or the assets in question. This case law is of particular interest in the energy sector where assets may have been transferred subsequent to privatisation programmes, or in more recent times, subsequent to the impending bankruptcy of the original aid recipient.

5.677

In Case 305/89 Italy v Commission (Alfa Romeo) 2641 the Court indicated that the focus should be on the legal entity which had received the aid, and not the economic activity for which the aid had been granted. This approach was essentially confirmed in Case C-390/98 HJ Banks where the fact that the state coal companies were subsequently acquired in the context of an open and competitive tendering procedure under market conditions, suggested that the element of aid enjoyed by British Coal and those state companies did not exist in relation to the private undertakings which won tenders, such as RJB.2642

5.678

In subsequent decisions the Commission took the approach that the aid benefit would not be ‘transferred’ to a subsequent purchaser if an open, transparent and unconditional tender procedure had taken place. However, if the new owner continues to use the assets for the same economic activities, the Commission has adopted the practice of distinguishing ‘normal asset deals’ from “circumvention deals” and has developed criteria, in part focussing on economic continuity between the original seller and subsequent purchaser, to detect “circumvention”. In Joined Cases C-328/99 SIM 2 Multimedia and C-399/00 Seleco2643 the Court cast some light on the matter, but chose not to follow its Advocate General’s more detailed approach and in a short judgement it annulled the Commission’s decision for lack of sufficient reasoning. It did not accept the argument that the price of the transfer was influenced by the circumstances and that the price of the sale was not relevant in the present case, since it (also) concerned an operation relating to the purchase of shares. Unfortunately, the Court did not clarify the fundamental question of whether the liability of the purchaser for repay-

5.679

2641 Case C-305/89 Italy v. Commission (Alfa Romeo) [1991] ECR I-01603. 2642 Case C-390/98 H.J. Banks & Co. Ltd v The Coal Authority and Secretary of State for Trade and Industry, [2001] ECR I-06117. 2643 Case C-328/99 and C-399/00 Italian Republic and SIM 2 Multimedia Spa v Commission of the European Communities [2003] ECR I- 04035.

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ment is excluded if the latter has paid a market price for the assets. Nor did it deal with the related issue of whether, in cases where it appeared that transfers took place to shell companies apparently created for the purpose of avoiding liability for recovery, these circumstances would be sufficient to transfer liability to the recipient irrespective of the price paid. Furthermore the Court did not seem to draw any distinction between share and asset deals, although it is generally argued that in the case of the former, as the legal entity remains in tact, a share deal should not have any impact on the determination of the addressee of the recovery order.2644

5.680

In its judgment in Case C-277/00 System Microelectronic GmbH (SMI) of 2004, the Court annulled a negative Commission decision concerning a former State-owned company in the former German Democrat Republic. SMI had received a number of aid measures in the course of privatisation. In April 1997 it was declared bankrupt. In June 1997 the receiver set up a successor company, SiMI, which received further aid, and in July 1997 it also set up a wholly owned subsidiary of SiMI, called MD& D. In July 1999 MD&D bought the shares of SiMI as well as its main assets. The Commission had ruled that the beneficiaries of the illegal aid included SMI, SiMI, MD&D as well as any other firm to which SMI’s, SiMI’s or MD&D’s assets had been or would be transferred in order to evade the consequences of this decision. In order to justify this conclusion the Commission focussed on the issue of asset deals and drew a distinction between ‘intra-group’ asset deals and sales of assets to third companies. In the case of the former, a joint liability was established between the original beneficiary and each company within the group, which may have received a part of the illegal advantage. If the assets were sold to a third party, and as long as the assets were sold individually and at market price, the buyer would not be liable for eventual recovery as the subsidised activity has ceased to exist. However if the assets are sold as a going concern, the buyer can continue the subsidised activity, which results in the distortion of competition. There is a further added risk that the asset transfer was intended to circumvent the recovery obligation unless it can be established that the buyer acquires the going concern at a market price, and preferably as a result of an open and unconditional tender procedure.

5.681

The Court essentially confirmed the logic of the Commission’s approach but annulled the Commission’s decision in this particular case primarily because it concluded that the Commission had not proven either that SiMI (the successor 2644 C. Koenig, “Determining the Addressee of a Decision Ordering the Recovery of State Aid after the Sale of Substantial Assets of the Undertaking in Receipt of Aid”, in: European Competition Law Review 2001, vol. 22 nr. 6 p. 238-248.

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company) had leased the assets originally belonging to SMI at below market value or that SiMI had been set up in order to circumvent the recovery decision. With respect to MD&D, the transaction concerned the sale of shares and the sale of assets. The Commission was held not to have proved that MD&D had bought the shares at below their market value. Similarly, with respect to the sale of assets to MD&D, the Commission had not established that the transfer had taken place below market value. The Court did not appear to endorse entirely the logic of the Commission’s distinction between sale of individual assets and the sale of a going concern.2645

5.682

The General Court also adopted a similar approach in, Operator ARP sp. zo.o v Commission, Case T-291/062646, and Judgment of 1 July 2009, ISD Polska v Commission, Case T-273/06 and T-297/06.2647

5.683

In the Polish and Hungarian PPA decisions discussed above at para 5.601-5.604, the Commission considered that the price at which the generators had bought the privatised assets was immaterial. The ‘assets’ had already benefited from aid and therefore that aid remained with the assets on transfer of ownership, irrespective of the price paid by the buyer. The Hungarian decision was subsequently upheld in Joined Cases T-80/06 and T-182/09, and in T-179/09.2648

5.684

The Commission has concluded in several recent decisions that aid should not be recovered from a company acquiring a bankrupt recipient of state aid on the latter’s liquidation.2649 However its decision on the absence of economic continuity in the Sernam case was appealed in Case T-242/12 and the GC’s ruling finding the Commission decision to be in line with the case law has been subsequently appealed to the ECJ in C-127/16 P.2650

5.685

2645 But see C-399/00, Italy and SIM v Commission, para. 83: “As regards the second statement, while it is correct that the sale of shares in a company which is the beneficiary of unlawful aid by a shareholder to a third party does not affect the requirement for recovery”. 2646 ECLI:EU:T:2009:235, paras. 66-67. 2647 ECLI:EU:T:2009:233, para. 112. 2648 Upheld on appeal – “the main purpose of the repayment of unlawfully paid State aid is to eliminate the distortion of competition caused by the competitive advantage afforded” – Electrabel and Dunamenti ErQmq v Commission, C-357/14 P, EU:C:2015:642, paragraph 111 2649 SA.38810 VSL, of 31 July 2015. 2650 ECLI:EU:C:2018:165

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4.5.7 The ‘Deggendorf ’ Principle 5.686

The ECJ has endorsed the principle originally established in the TWD Deggendorf case-law according to which, the grant of new aid which in itself is judged to be compatible with the common market may, in certain circumstances, be suspended until previous unlawful aid paid to the same undertaking has been reimbursed.2651 This principle will be applied, as in Case T-25/07 Iride v Commission, irrespective of whether the earlier aid is granted as individual aid or as part of an aid scheme.2652

5.687

Although the Commission applies this principle as a matter of standard procedure,2653 the application of the “Deggendorf principle” in the energy sector arose in Case T-303/05 ACEAElectrabel which concerned the recovery of unlawful aid received by the previous owner of ACEA and the suspension of further, compatible aid to the new owner.

5.688

AceaElectrabel Produzione SpA (‘AEP’) appealed the ruling of the GC insofar as that Court rejected the plea in law relating to the failure properly to identify the recipient of the aid. AEP also challenged the GC judgment insofar as it failed to declare the decision unlawful, notwithstanding the serious error of identifying AEP (the recipient of the new aid) with the ACEA Group (the recipient of the aid which was not reimbursed), based on the incorrect application of the concept of an economic unit of a group of undertakings developed in the case-law. AEP disputed that such a concept can be applied to the case of a joint venture controlled jointly by two separate groups. The ECJ however upheld the lower court’s ruling in Case C-480/09P.2654

4.5.8 Para-fiscal charges and recovery 5.689

An interesting and as yet unresolved issue may arise in the context of a state aid which has been financed by a para-fiscal levy which is in turn deemed to infringe Articles 30 and 101 TFEU. It may well be that the objective of the scheme in question can be deemed compatible with Article 107(2) or 107(3) but the method of financing that scheme is contrary to these provisions. Such charges are not uncommon methods of financing various measures of support in the energy sector, for example to ensure the use of domestic fuels in electricity pro2651 Case C-355/95P TWD v Commission [1997] ECR I-2549. See also Case T-115/09 Whirlpool v Commission. 2652 [2009] ECR II 245, para 88. 2653 See its 2007 Notice on Recovery, para 75, OJ [2007] C272/4. 2654 C-480/09P [2010] ECR I-3355.

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duction, to finance stranded costs, to contribute to the extra costs involved in dispatching renewable forms of energy or as in the case of the UK market, to finance strike price payments and capacity mechanism payments.2655 Is it possible for the recipient to contend that the only element of illegality in the scheme is the financing mechanism and not the aid itself ? If this is possible, it could be argued that the liability for the breach of European law involved should rest with the Member State which had instigated the system of charges and that this should rule out recovery from the recipients. A further problem in respect of para-fiscal charges it that the resources in question may not in fact originate from the state but from the sector itself: they are considered to be state aid because the state has sufficient control over them to require a certain degree of re-allocation of resources within the sector. If recovery is to be accomplished in this situation it is clear that the state cannot require the funds to be “re-paid” to itself as it never paid out these monies in the first place. Although questions in relation to recovery in this type of situation were raised before the Court in the Case C-345/02 Pearle,2656 the Court did not choose to respond.

5.690

A subsequent case F.J. Pape v Minister van Landbouw2657 concerned national proceedings brought against levies imposed on the claimants; the purpose of these levies was to finance aid granted to another company. The actions were based on a breach of Art 108(3) TFEU). The key question was whether the prohibition on implementation laid down in the last sentence of Article 108(3) of the Treaty can preclude the imposition of a tax intended to finance an aid measure. The Court answered that taxes can fall within the scope of the Treaty provisions on State aid only when they constitute the means of financing such an aid measure and hence are an integral part of the measure. The Court further argued that “For a tax, or part of a tax, to be regarded as forming an integral part of an aid measure, it must be hypothecated to the aid measure under the relevant national rules. In the event of such hypothecation, the revenue from the tax has a direct impact on the amount of the aid and, consequently, on the assessment of the compatibility of the aid with the common market.” In other words, for taxes to be deemed a method of financing of a given state aid measure, national legislation must provide an explicit link between the tax and the financing of State aid measure concerned. In the discussed case such hypothecation was absent.

5.691

2655 SA.35980 United Kingdom Electricity market reform – Capacity market, of 23 July 2014. 2656 [2004] ECR I-7139. 2657 Case C-175/02 F. J. Pape v Minister van Landbouw, Natuurbeheer en Visserij [2005], ECR I-127.

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4.6 Judicial review 4.6.1 Introduction 5.692

The Commission, the European and national courts have complementary and separate roles in the application of the EC state aid rules. The Commission has exclusive powers to decide whether aid is compatible with the internal market, under the supervision of the General Court and the Court of Justice. The extent of judicial review by the European Courts varies in accordance with the discretion allowed to the Commission in reaching its decisions. In Case C-83/98P Ladbroke the Court confirmed that as the concept of aid was an objective one, the Courts have the power to exercise full judicial review over the Commission’s decision to classify a measure as aid or not. In cases challenging the Commission’s interpretation of Article 107(3) however, the Courts have recognised their power to control the Commission’s discretion to be limited to reviewing manifest error and error of law. That said, the General Court has frequently demonstrated its willingness to examine in considerable detail the economic reasoning behind a Commission decision as well as its preparedness to scrutinize in depth the expert reports on which the Commission has relied.2658 In Case C-533/12P Corsica Ferries of 4 September 2014 the ECJ confirmed that the General Court had not been wrong to dismiss an expert report relied upon by the applicant.

5.693

Nevertheless in the recent ruling in Case T-365/17 Austria v Commission the GC considered that it should only conduct a marginal review as to whether the Commission’s decision on the compatibility of aid to Hinkley Point was manifestly wrong.

5.694

The GC held that: “ it should be recalled that the Commission has a wide discretion when applying Article 107(3) TFEU, the exercise of which involves complex economic and social assessments. Judicial review of the manner in which that discretion is exercised is therefore confined to establishing that the rules of procedure and the rules relating to the duty to give reasons have been complied with and to verifying the accuracy of the facts and that there has been no manifest error of assessment or misuse of powers”. ... In order to establish that the Commission made a manifest error in assessing the facts such as to justify the annulment of the contested decision, the evidence adduced by the applicant must be sufficient to make the factual assessments used in the decision implausible” (at paras 161-170).

2658 For example, with respect to valuation of land in T-274/01 Valmont [2004] ECR II-3145. See also on regional aid, Case T-27/02 Kronofrance v Commission [2004] ECR II-4177.

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4.6.2 Locus Standi An important issue with regard to the judicial review of Commission decisions is the question of who has standing to bring an action for annulment (Article 263 TFEU) or for failure to act (Article 238 TFEU. Member States are recognised as privileged applicants but both (potential) aid recipients and their competitors must prove direct and individual concern. Nevertheless the Member Sate must still establish that it has a legal interest to sue. If the Commission has adopted a positive decision on the measure, this may not be entirely obvious. But if the Member State’s challenge concerns the qualification of the measure as aid, then the Courts has recognised admissibility. An example is provided in Case T-233/04 The Netherlands v the Commission, discussed above at book para 5.129. The General Court and the ECJ held that the finding that the measure constituted aid could have consequences as the classification of the measure as existing aid entails legal obligations including reporting requirements, and on the rules on cumulation.2659

5.695

Again the distinctions between new individual aids and schemes and existing aid measures and schemes are of primary relevance in relation to standing as the right to challenge decisions with respect to aid schemes is more limited than the right to challenge an individual measure. Furthermore, even in the context of the latter category, the case law of the Courts indicates that the concept of “ individually concerned” may be narrowly interpreted. A further distinction which must be taken into account is whether the Commission decision under challenge concerns a decision pursuant to Article 4 or to Article 9 of the Procedural Regulation. A challenge to the former category will usually be based on failure to respect procedural rights whereas a challenge to a final decision adopted on the basis of Article 9 will usually be based on substantive grounds. As will be explained below, the tests for standing have also been slightly relaxed if the challenge is based on procedural grounds.

5.696

4.6.3 The “Plaumann” Test In order to challenge an act of the Commission that is not addressed to it, but to a Member State, the applicant must demonstrate direct and individual concern. This test, originally interpreted by the Court in Plaumann, is relatively strict and both conditions must be met.2660

2659 [2008] ECR II – 591. 2660 Case 25/62 [1963] ECR 95.

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5.698

The Court has held that the applicant must show that it is affected by the decision by reason of certain attributes which are peculiar to them or by reason of circumstances which differentiate them from all other persons Failure to show that the applicant is distinguished individually will therefore result in the action being declared inadmissible.

5.699

In general, with regard to individual aid measures, an aid recipient may not have too much difficulty in establishing its direct and individual concern in cases where the Commission adopts either a negative or a conditional decision, especially if it has taken an active part in the administrative proceedings before the Commission.2661 Potential recipients of aid will usually also have few difficulties in establishing standing.

5.700

The situation is different with respect to an aid scheme that contemplates the grant of aid to numerous (and perhaps unidentified) aid recipients.2662 Nevertheless the ECJ has held that a general measure, such as a tax scheme could still give rise to individual concern where the applicants comprised an identifiable closed class.2663

5.701

With regard to competitors the situation is slightly different. Again the distinction between aid measures and aid schemes is of relevance although the Court again seems to becoming less strict in assessing admissibility. In British Aggregates the ECJ held that a measure could be of individual concern even if the measure was general in nature as long as the applicant could show that it has status in accordance with the Plaumann doctrine. Thus if a competitor can show that its competitive position is substantially affected by the aid scheme, the fact that an undefined number of other competitors may also allege that they have suffered similar harm does not constitute an obstacle to admissibility.2664

5.702

In Air One SpA2665 Air One submitted a complaint to the Commission alleging unlawful new aid granted by the Italian authorities to Ryanair in the form of reduced prices for the use of airport and ground handling services. The Commission argued that the complainant as a potential competitor does not have standing to bring proceedings. In its judgment of May 2006 the GC concluded that since the applicant already operates in the Italian market, it could not be denied a status of a party merely on the grounds that the routes which the appli2661 2662 2663 2664 2665

Case C-323/82 Intermills v Commission [1984] ECR 3809. Case T-398/94 Kahn Scheepvaart BV v. Commission [1996] ECR II-00477. Cases C-182/03 and C-217/03 Belgium and Forum 187 [2006] ECR 1-5479. Case C-487/06P [2008] ECR I-10505. Case T-395/04. [2006] ECR II-1343.

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cant operates are not exactly the ones operated by Ryanair. For Air One to have a locus standi it was sufficient that it is a competitor of the recipient of aid.2666

4.6.4 Trade associations and NGOs In general the recent jurisprudence of the General Court seems to indicate a tendency towards an increasingly strict approach to standing requirements especially if the party seeking review of a Commission decision is a trade association or a representative organisation2667. For instance, in the case Commission v Germany and the Aktiongemeinschaft Recht und Eigentum (ARE) 2668 the ECJ has ruled that the mere exercise of a procedural right does not give an association standing to challenge a decision adopted by the Commission under Article 108(2) or Article 108(3) and addressed to a person other than association. However, the association which is responsible for collective interests of its members may bring an action for the annulment of a decision substituting itself for the members it represents given that those members were themselves in a position to bring an action.2669 This approach has been confirmed in case law involving the rights to trade unions to challenge a Commission decision.2670

5.703

Applicants must show that their legitimate interests have been affected by the granting of an aid. It should also be noted that the finding of admissibility may be affected by the grounds of appeal. If a decision not to open the contentious or formal phase of the inquiry is challenged on procedural grounds, the rules on standing are more liberal than those which apply to challenges on substantive grounds.2671 If a third party challenges the decision not to open the formal phase on its merits, the more traditional restrictive “Plaumann” test applies. This is in

5.704

2666 See para. 38 of T-395/04: “In the present case, since the applicant already operates in the Italian market providing scheduled air transport of passengers, it cannot be denied the status of party concerned merely on the ground that the routes it operates directly do not coincide exactly with those operated by the recipient of the contested measures. For the purposes of admissibility, it is sufficient to find that the applicant is a competitor of the recipient of the contested State measures insofar as those two undertakings operate, directly or indirectly, services providing scheduled air transport of passengers from or to Italian airports and, in particular, regional airports.” 2667 Case T-86/96 ADLU and Hapag Lloyd v. Commission [1999] ECR II-179. 2668 Case C-73/03P Commission v Germany and the Aktiongemeinschaft Recht und Eigentum (ARE), [2005] ECR I-10737. 2669 Case T-380/94 Aiuffas/AKT v Commission [1996] E.C.R. II-2170; Joined Cases T-447/93, T-448/93 and T-449/93 AITEC v Commission [1995] ECR II-1971, where the professional organisation had protected the interests of its members during the procedure of Art. 88(2) EC, now 108(2) TFEU and where the decision was of direct and individual concern to those members, as a result of which also the organisation was “ individually concerned”. 2670 Case C-319/07P 3F v Commission [2009] ECR I-5963. 2671 See Case C-78/03P, ARE, loc. cit.

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fact the same test which applies in the formal phase – the party must demonstrate a particular status, i.e. that its market position is substantially affected by the aid in question.2672 The application to annul the Commission’s final decision in Hinkley point was unsuccessfully challenged by Greenpeace as inadmissible.2673 Access to the File

5.705

Competitors seeking to challenge positive decisions or the conditions attached to such decisions may also face considerable hurdles given that they enjoy limited procedural rights in general and in particular in relation to access to the file in state aid cases. The Courts have consistently refused to extend third party rights in this respect, although they initially appeared to be more sympathetic to the use of the European rules on access to information in state aid cases.2674 The ECJ has however taken a strict approach in Case C-139/07P Commission v TGI, and annulled the General Court’s ruling.2675 Regulatory acts

5.706

The final sentence of Article 263(4) TFEU provides that non-privileged applicants may have standing to appeal against a 900 regulatory act, if they can show that they are directly concerned by that act. The Treaty does not define the category of acts to which this provision applies, but recent case law has confirmed that this term applies to all non-legislative acts.2676 Early attempts to rely on this provision to annul a Commission decision on Article 107 (1) TFEU met with little success, as the Court has ruled that the measures in question required further implementing measures at national level, measures which in turn could be challenged in national courts.2677 The recent C-622/16 Scuola Montessori the ECJ recognised that competitors may rely on Article 263(4) if they can show direct concern and if the challenged act requires no further implementing measures.2678

2672 See also Case T-395/04 Air One [2006] ECR II-1343. 2673 Order of the General Court (Fifth Chamber) of 26 September 2016 – Greenpeace Energy and Others v Commission (Case T-382/15). 2674 Case T-237/02 TGI v Commission [2006] ECR II-5131. 2675 2010 I-05885. 2676 Inuit Tapiriit Kanatami, C583/11 P, para 57, 2677 Telefónica/Commissie, C-274/12 P, 19 december 2013, para 19. C-133/12 P Stichting Woonlinie, 27 Feb 2014. 2678 November 2018.

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4.6.5 The role of the national courts National courts are responsible for the protection of directly effective rights – including Article 108(3) TFEU. Hence a national court may rule that a measure should be classified as an aid within the meaning of Article 107(1) TFEU and further that it is illegal for lack of notification and/or respect for the standstill provisions.2679 Similarly, national courts must give effect to Commission decisions based on Article 108(3) TFEU. Thus, even if the Commission is concurrently considering a non-notified aid there is nothing to prevent the national court, on the application of a competitor deemed to have the requisite standing under national law, from ruling on the legality of that aid and making an appropriate finding. This may include an order for recovery of past aid, for suspension of future aid, and possibly also damages against the grantor and/or the recipient of the illegal aid. Even if the Commission subsequently finds that the aid in question is compatible with Article 107(2) or (3) TFEU, this does not remove the initial illegality of the measure up to the date of the Commission’s final decision.2680

5.707

Furthermore, the national courts have an important role to play in the recovery of illegal aid. In 2009 the Commission published a Notice on the Enforcement of State Aid Law by National Courts.2681 Finally the national courts have a role to play in the interpretation of block exemptions for state aids. If a national court doubts that a certain aid measure meets the requirements of the General Block Exemption Regulation, it may request a Commission opinion.2682

5.708

The amended Procedural Regulation The amended Procedural Regulation introduces new powers for the Commission in respect of its co-operation with the national courts, and allows it to participate more actively as an amicus curia in national proceedings for the purpose of applying the EU State aid rules, in particular the standstill clause pursuant to Article 108(3) TFEU, and for implementing recovery orders, in accordance with Article 16(1) of Regulation 659/1999. The amended Regulation 2679 See also Case C-284/12 Lufthansa [2013], 2.C:2013:755. 2680 Case C-39/94 Syndicat français de l’Express international (SFEI) and others v La Poste and others ECR [1996], I-03547; Case C-354/90 Fédération Nationale du Commerce Extérieur des Produits Alimentaires and Syndicat National des Négociants et Transformateurs de Saumon v French Republic ECR [1991], I-05505. 2681 IP/09/316. 2682 See further chapters 11 (Recovery) and 13 (Private Enforcement), in: Hancher, De Hauteclocque and Salerno (2018) op cit.

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introduces a new power for the Commission to submit amicus curia opinions on its own initiative as well as right for national courts to ask the Commission to transmit to them information in its possession or its 902 opinion – on questions concerning the application of the EU State aid rules.2683 In addition, and with the court’s permission, the Commission may submit oral observations.2684 To that end, and for the purpose of preparing its observations, the Commission may also request the national court to transmit documents at its proposals that are necessary for the Commission’s assessment of the matter.2685 Recital 19 of the Regulation makes it clear that these observations and opinions are without prejudice to the courts – powers and duties under Article 267 TFEU. Nor do these opinions or observations have any binding effect on the national courts. They are to be used in full respect of the national courts – independence within the framework of the relevant national procedural rules, including those safeguarding the rights of the parties.

5.710

In several high profile cases prior to the recent reforms however the Commission appears to have been reluctant to provide a sufficient level of guidance to national courts to allow them to avoid making a reference under Article 267 TFEU.2686 Now that it also has power to request documents for the purpose of preparing its observations, the Commission may be in a better position to provide meaningful guidance.

5.711

A summary of the Commission’s cooperation with national courts is published in its annual Report on Competition Policy. National courts can of course also refer matters concerning the interpretation of the state aid rules to the European Court of Justice by way of preliminary reference proceedings.

4.6.6 Energy cases 5.712

In 1996 Austria had granted undertakings engaged in the production of goods a rebate on energy tax, but did not notify the measure to the Commission. The Constitutional Court of Austria referred questions to the ECJ for a preliminary ruling including, inter alia, the question whether the measures constituted state aid. In 2001, in the Adrian-Wien case, the ECJ found the measures selective and hence aid. In 2002 the Commission authorised the aid under Art. 107(3)(c) as compatible with the EC Treaty. The ECJ in its subsequent judgment of 5 Oc2683 2684 2685 2686

Council Regulation 1589/2015 Article 23. Ibid., Article 23a (2). Ibid., Article 23 a (2)(3). See most notably Case C-284/12 Lufthansa [2013], paras 17-18.

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tober 2006 (Transalpine Ölleitung & ors v Finanzlandesdirektion für Tirol and ors) held that the 2002 decision of the Commission does not have the effect of regularising ex post facto measures implementing the aid which at the time of their adoption were invalid because they had been taken in disregard of the prohibition referred to in the last sentence of Article 108(3) EC.2687 Thus, according to the ECJ a national court may be required to rule on an application for compensation for the damage caused by reason of the unlawful nature of the aid.2688 In the CELF case the ECJ clarified that the national court s obligation to order full recovery of unlawful aid ceases if, by the time the national court renders its judgment, the Commission has already decided that the aid is compatible with the common market. The national court may however order the recovery of so called 903 illegality interest – from the date the measure was put at the disposal of the beneficiary until the date of the Commission’s positive decision. This 903 illegality interest must also be applied for the periods between the adoption of positive Commission decision and the subsequent annulment of that decision by the Community Courts.2689

5.713

As already noted in Chapter 4, the Commission is not only required to assess the compatibility of an aid but also its method of financing, and if the latter is contrary to another Treaty provision such as Articles 30 and 101 TFEU, this may raise further problems at national level.

5.714

In Case C-206/06 Essent the Court held that the national court would have to establish to what extent imported energy had been subject to the levy in question and deduct it from the sums due to be paid by the applicant.2690

5.715

Can those required to pay the levy even if it is held to be compatible aid by the Commission invoke the legality of its method of financing before the national courts to avoid an obligation to pay? It should be recalled that a taxpayer cannot normally claim that it should be absolved from paying a tax or levy merely because another category of taxpayers have been exempted (illegally) from that tax. In Banks2691 the Court had held that those liable to pay a tax cannot rely on the argument that the exemption enjoyed by other businesses constitutes state aid in order to avoid payment of the tax – Article 107(1) TFEU relates to the

5.716

2687 Case C-368/04, para 41. 2688 For a discussion of the follow up at national level, see chap 17, in: Hancher, de Hauteclocque and Salerno, 2018, op. cit. 2689 See Case C-199/06 CELF [2008] I 469. 2690 [2008] ECR I-5497. 2691 Case C-390/98 Banks [2001] ECR I-6117.

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legality of the exemption, not the tax. Further, the extension of the circle of potential recipients to other tax payers does not render the exemption legal.

5.717

The ECJ has also recognised that it would be otherwise if the tax and the exemption were an integral part of an aid measure, i.e. that the tax would be hypothecated to an aid measure. In Air Liquide the ECJ held that the motor tax had not been hypothecated to the envisaged exemptions for other uses so that the possible unlawful exemption cold not affect the legality of the tax itself and thus the tax duties of the applicants.2692

5.718

A further energy case – Case C-384/07 Wienstrom of 18 December 2008 – concerned an Austrian law requiring the use of 904 green electricity required Austrian consumers and companies to use a certain quota of green energy and also provided for support to green energy production and use. An initial version of the legislation excluded imported energy from the subsidy scheme but following eventual notification and approval, this discriminatory element was removed. Wienstrom was required to repay subsidies received under the earlier version of the law. The Court held however that Wienstrom could not be required to repay all the aid received but only the so called 904 recovery interest given that it had received the aid prior to the Commission declared its compatibility.2693

5.

Ex Post Monitoring

5.1 Evaluation Plans 5.719

The EC encourages an effective ex post evaluation of aid schemes which could lead to substantial distortions of competition (incl. those schemes with large budgets or novel characteristics); the EC will decide in the pre-notification phase whether such evaluation is necessary. For schemes that must be evaluated on the basis of the GBER the Member State must notify the EC within 20 working days from the scheme’s entry into force the EC will approve the scheme as soon as possible. For notified schemes that must be evaluated the Member State must submit its evaluation plan to the EC at the time of the notification – the EC’s decision will cover both the plan and the scheme.   2692 Joined Cases C-393/04 and C-41/05 [2006] ECR I-5293. 2693 2008 I-10393. See also chapter 17 in Hancher et al. (2018), op. cit.

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5.2 Monitoring of Aid Schemes The Best Practices Guidelines 2018 also contains guidance on the monitoring of existing or exempted aid schemes. The EC has set up an annual monitoring process during which it selects a sample of State aid cases for further scrutiny (as under the GBER Member States have greater possibilities to grant aid without notifying it to the EC). The EC obtains the necessary information for the monitoring process through information requests; these normally have to be answered by the Member State within 20 working days. The EC tries to complete the monitoring within 12 months from the first information request issued.  

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Part 6 Article 106 TFEU

Chapter 1 Special and exclusive rights 1.

Introduction

Article 106 TFEU has been of considerable importance in the application of the rules on free movement and competition, as well as state aid to the energy sector. Its application continues to be of major significance despite the adoption of a series of Directives on the internal gas and electricity markets.2694 Furthermore the importance of the organisation and provision of “services of general economic interest” for the European Union, for which Article 106 creates in many respects a special regime with regard to the Treaty rules on free movement and competition, is underlined by the reference to these same services in Article 14 TFEU. As will be discussed below, the provisions of the Lisbon Treaty and the Protocol on SGIs, further underline the importance of these types of services.

6.1

This chapter will first examine the general structure of Article 106 TFEU and discuss its three separate sub-articles. It will then consider the case law of the European Courts on the application of Article 106 TFEU to the energy sector. Finally it will analyse the interaction of the relevant provisions of the internal electricity and gas market Directives with this Article.

6.2

2694 See Case C-265/08, Federutility [2010] ECR I-03377.

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2.

The Treaty Article

6.3

Article 106 TFEU consists of three sub-articles.

6.4

Article 106(1) provides that: “In the case of public undertakings and undertakings to which Member States grant special or exclusive rights, Member States shall neither enact nor maintain in force any measure contrary to the rules contained in this Treaty, in particular those rules provided for in Article and Articles 81 to 89.”

6.5

Article 106(2) provides that: “Undertakings entrusted with the operation of services of general economic interest … shall be subject to the rules contained in this Treaty in so far as the application of those rules does not obstruct the performance in law or in fact, of the particular tasks assigned to them. The development of trade must not be affected contrary to the public interest.”

6.6

Article 106(3) provides that: “The Commission shall ensure the application of the provisions of this Article and shall, where necessary address appropriate directives or decisions to the Member States.”

3.

Article 106(1) TFEU

3.1 Introduction 6.7

Article 106(1) TFEU is addressed to Member States. It requires them not to take any measures contrary to the Treaty rules in favour of certain undertakings. The purpose of Article 106(1) TFEU is to ensure that Member States do not use the close relationship which can arise either through ownership rights or the grant of special or exclusive rights to “national” companies to create or preserve market distortions to the detriment of other undertakings. Article 106(1) TFEU can be seen as a further specification of the general duty imposed by Article Art 4 TFEU on Member States to abstain from any measures which could jeopardise the attainment of the objectives of the Treaty.2695 Article 106(1) TFEU 2695 See generally for a review of the case law, the Opinion of Advocate General Jacobs in Case C-67/96 Albany

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applies to all national, provincial, regional and local public authorities.2696 A ‘measure’ is generally an act of the public authorities which permits or forces a public undertaking or a privileged undertaking to act in a certain way. Acts of public undertakings or privileged undertakings may also constitute ‘measures’ for the purposes of Article 106(1) TFEU. The scope of the term ‘measure’ is wide enough to include all forms of legal, regulatory and administrative rulings or decisions and although a measure generally takes the form of a positive act, it may also include the failure of the Member State to take action to prevent a continued distortion of competition. There are two general categories of ‘measures’ which can be contrary to Article 106(1) TFEU: measures which govern the relationship between the state and a public or privileged undertaking and third parties, and measures which consist in granting an undertaking special or exclusive rights (i.e. privileged undertakings). In the former category are laws or rulings which permit public or privileged undertakings to act in a way contrary to the Treaty rules – for example, to impose unfair charges on their customers. The latter category may cover state measures which confer an exclusive right on an undertaking and as such reduce the effect of the Treaty rules on competition and free movement or their effectiveness. However, as we shall see below, the Courts have confirmed that the mere creation or granting of a special or exclusive right is not always per se contrary to the Treaty.

6.8

It should also be borne in mind that the applicability or even the infringement of Article 106(1) TFEU has no automatic consequences as to the applicability of the Treaty competition rules to the undertakings involved. Undertakings enjoying exclusive rights still remain subject to the latter set of rules. The only exception to that rule is where the actual conduct at issue is not attributable to the undertaking itself, but where the anti-competitive conduct is required by national legislation or where that legislation creates a legal framework which itself eliminates any possibility of competitive activity.2697

6.9

3.2 Public undertakings Article 106(1) TFEU applies to both public undertakings and to undertakings to which Member States have entrusted exclusive or special rights, irrespective of whether these are publicly or privately owned. This latter category of firms is [1999] ECR I-5751 at paragraph 371. 2696 See Article 2 of the Transparency Directive 2000/52, OJ, L 193, 29.07.2000, p. 0075-0078., as amended 2697 Case C-198/01 CIF [2003] ECR I-08055.

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often referred to as “privileged undertakings”. The concept of a “public undertaking” as defined in Article 2 of the Transparency Directive2698 is now taken to be the appropriate definition for the purposes of Article 106(1) TFEU.2699 Hence the most important element in determining whether an undertaking is public is the control or dominant influence exercised over the undertaking by one or various public authorities of a Member State.

6.11

The concept of “undertaking” is taken to be a common concept for the purposes of the Treaty competition rules. If the entity to which an exclusive or special right is granted as not ‘an undertaking’ for the purposes of Article 101 or 102 TFEU, then the competition rules – including Article 106 – do not apply to the state measures in question. The concept of ‘undertaking’ may be of relevance in determining whether the competition rules apply to public sector bodies engaged in certain activities in the energy sector. For example, suppose a particular body is given the exclusive right to issue green certificates or to compile or register CO² emission data – would such a body be considered to be an “undertaking” for the purposes of Article 106 so that the grant of an exclusive right to perform certain tasks would fall within its purview? The answer to this question lies in the nature of the activities of the body in question – are these activities to be considered as economic activities or the exercise of public prerogatives?

6.12

The European courts have ruled that the legal status of the body and the manner of its financing is irrelevant to determining whether the body is an undertaking. This is equally the case regarding the public interest motive in conferring the exclusive rights to provide certain services. Hence the crucial determining factor is whether the activity in question is ‘economic’ or not. Unfortunately the Courts have offered few substantive criteria which can be of use in defining what is economic and have generally preferred a functional, case-by-case approach. This approach is also echoed in recent Commission documents. Thus in Cali the environmental protection activities in the port of Genoa had been exclusively entrusted by the public authorities to a limited company (SEPG) owned by the State. The Court confirmed that the substantive non-economic nature of the activities prevailed over the legal form of the operator and accordingly, Article 102 and Article 106 TFEU did not apply to the exclusive rights to carry out anti-pollution surveillance activities entrusted to the SEPG.2700 2698 OJ [2000] L 193, p. 0075 – 0078, as amended by Directive 2006/811/EC OJ L 3128/17. 2699 Case 188-190/80 France et al. v Commission [1982] ECR at 2578. 2700 Case C-343/95 Cali [1997] ECR I-1547; see also Case T-319/99 Fenin [2003] ECR II-00357 and on appeal, registered as Case C-205/03P and Joined Cases C- 264/01, C-306/01, C-354/01 and 355/01 AOKBundesverband et al. [2004] ECR I-2493.

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The fact that an entity may have one of its tasks the economic development of a particular system may not in itself suffice to turn it into an ‘undertaking’ for the purposes of the Treaty rules on competition.2701 In January 2012 the Commission published a Communication to provide clarification of key concepts in the field of State aid for SGEI, including the concept of economic activity.2702

3.3 Special and exclusive rights The concept of an exclusive right can generally be taken to refer to a right which confers a monopoly on a public or privileged undertaking to carry out a particular activity. The exclusive right in question may relate to a particular activity – for example, to distribute or transport gas or electricity as well as to a particular geographic area – either a particular region or nation-wide. The concept of an exclusive right also implies a sole beneficiary.2703 In Case C-157/94 Commission v Netherlands, the Court held that the Dutch electricity company SEP enjoyed an exclusive right to import electricity destined for commercial use despite the fact that imports of electricity realised directly by certain undertakings (large consumers) for their own use had been liberalised.2704 An exclusive right could be conferred by a variety of legal instruments, including a legal act or regulation, a license or concession or other form of authorisation.2705 It would seem however that the Court may look at the formal instrument conferring or creating the exclusive right in question as opposed to its effect. In Case C-160/94 Commission v Spain, the Commission took the view that although the relevant Spanish electricity legislation did not expressly confer exclusive rights or monopoly rights on the Spanish undertaking RED Electrica to carry out imports and exports, it was impossible for third parties to carry out such activities.2706 The Court took a more formalistic view and held that no legal monopoly had been formally conferred. However in the earlier La Crespelle ruling, the Court looked at the effects of the relevant legislation as a whole, and ruled that by making the operation of insemination centres subject to authorisation, and providing that each centre should have the exclusive right to service a defined area, the national legislation granted those centres exclusive rights.2707 2701 2702 2703 2704 2705

Case C-222/04 Cassa di Risparmio, [2006]ECR I-0289. OJ 2012 C8, p 4-14. But see also Case 66/86 Saeed [1989] ECR 803. Case C-157/94 Commission v. Netherlands [1997] ECR I-5699. In Case C-347/88 Commission v Greece (Greek Oil Monopoly) [1990] ECR I-4747 at p. 4789 a quota on production was also deemed to be a form of exclusive right. 2706 Case C-160/94 Commission v. Spain [1997] ECR I-5851. 2707 Case C-323/93 la Crespelle [1994] ECR 1-5104, paragraph 17.

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6.14

The concept of a ‘special right’ proved more problematic and although it was first viewed as synonymous with that of an ‘exclusive right’ the Court of Justice held in its ruling in Cases C-271, 281 and 289/90 Italy, France v Commission that the Commission had not properly defined the concept of “special rights” in the Telecommunications Services Directive.2708 In subsequent directives the Commission has defined the concept more carefully so that special rights are those granted to a limited number of undertakings otherwise than according to objective, proportional and non-discriminatory criteria, through any legislative, regulatory or administrative measure which, within a given geographical area, limits the number of undertakings authorised to provide a service or to undertake an activity. In essence a special right is one which is accorded to a limited category of undertakings chosen by discretionary or subjective means by the state concerned. It is submitted that a right to operate as supplier of last resort within the meaning of Article 3 of the EC gas and electricity Directives would not amount to the conferral of a “special right” so long as the right was conferred in accordance with objective, proportional and non-discriminatory criteria.

3.4 The scope of Article 106(1) TFEU 6.15

There has been considerable academic debate as to whether Article 106(1) outlaws the granting of special and exclusive rights per se, subject only to their possible exemption under Article 106(2). To a certain extent this debate has now been put to rest by the European Courts. A strict ‘per se’ interpretation of Article 106(1) has been rejected, as has the more liberal interpretation under which Member States could be allowed to grant such rights to undertakings so long as the exercise of those rights did not infringe the Treaty rules on for example, free movement or competition.

6.16

In order to understand the Court’s approach to Article 106(1) it is necessary to recall that its application must be considered in conjunction with the substantive Treaty rule which is considered to be infringed. In this respect, Article 106(1) is often referred to as an “article de renvoi” (send-back provision).2709 Hence the Court has held that: “[…] even although [Article 86(1)] presupposes the existence of undertakings which have certain special or exclusive rights, it does not follow that all the special and exclusive rights are necessarily compatible with the Treaty. That depends on the dif‑ ferent rules to which [Article 86(1)] refers.” 2708 [1992] ECR I-5833. 2709 See Case C-295/5, Asociaccon Nacional de Empresas Foresaciles [2007] ECR I-2999.

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In the Case C-553/12 P, Commission v. Dimosia Epicheirisi Ilektrismou AE for example, the ECJ repeated its well established case-law, according to which a Member State may be found to have infringed Article 106(1) TFEU if its measures create a situation in which a public undertaking or an undertaking on which it has conferred special or exclusive rights, merely by exercising the preferential rights conferred upon it, is led to abuse its dominant position, or when those rights are liable to create a situation in which that undertaking is led to commit such abuses.2710

6.17

In the following paragraphs a distinction will be drawn, first with respect to the case law on the application of Article 106(1) in conjunction with the rules on the four freedoms, and second with respect to the application of Article 106(1) TFEU in conjunction with the competition rules, which are of course addressed to undertakings.

6.18

3.4.1 Article 106(1) TFEU and Treaty rules on the four freedoms With respect to the application of Article 106(1) together with other relevant Treaty rules, the Court has had few problems in condemning state measures granting exclusive rights which also contravene other Treaty provisions.2711 Thus in Case T-266/97 Vlaamse TV, the Court held that:

6.19

“Article 90(1) [now Article 106(1)] of the Treaty, read in conjunction with Article 52 [now Article 49] TFEU] thereof must be applied where a measure adopted by a Member State constitutes a restriction on the freedom of establishment of nationals of another Member State in its territory and at the same time, gives an undertaking advantages by granting it an exclusive right unless that state measure is pursuing a legitimate objective compatible with the Treaty and is permanently justified by overriding reasons relating to the public interest.” In Case C-209/98 Sydhavnens,2712 the Advocate General considered that Danish regulations which created a monopoly over waste collection could restrict the pattern of exports and establish a difference in treatment between domestic and export trade in such a way as to provide a special advantage to the domestic companies. As such that legislation could infringe Article 106(1) in conjunction with Article 37 TFEU and would have to be justified either on the grounds of Article 36 TFEU or Article 106(2). 2710 C:2014:2083. 2711 [1999] ECR II-2329. 2712 [2000] ECR I-3742.

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6.21

The relevant question with respect to the legality of an exclusive right which contravenes another fundamental Treaty rule, such as one of the four freedoms, is whether Article 106(2) TFEU can be invoked to justify the grant of that right in cases where neither the express exceptions to the rule in question as provided in the Treaty itself or a “rule of reason” type of exception are available. Although the Court’s earlier case law was not entirely clear on this matter,2713 its rulings in the four ‘electricity cases’ of 1997 seem to have laid all doubts to rest. The Court has confirmed that Article 106(2) EC may still be invoked to justify exclusive import and export rights which would otherwise infringe Articles 34, 36 and 37 TFEU. It clearly rejected the arguments put forward by the Commission that Article 106(2) could not apply to state measures which were contrary to the articles on free movement.

6.22

Although in each of the four cases, discussed in detail below at book paragraphs 6.73-6.85, the Court declined to rule on the application of Article 36 to Article 37 TFEU, which requires Member States to adjust their state monopolies of a commercial character and as such to remove any exclusive import rights conferred on such monopolies, it went on to consider whether the exclusive rights at issue might be justified under Article 106(2) TFEU.

6.23

In Sydhavnens,2714 the Advocate General held that neither Article 30 or Article 174 EC could be construed as justifying restrictions on the competition rules and of the principle of free movement of goods in so far as the Member State concerned justified the measures adopted by the need to ensure the waste treatment capacity and hence the economic viability of the approved undertakings. Although the application of Article 106(2) TFEU was not ruled out, it was for the national court to establish that the granting of the exclusive rights would be necessary for the performance of the particular tasks assigned to the undertakings, and that without the contested measure, the undertakings would be unable to carry out the task assigned to it. The Court followed this approach and held that the restrictions on exports were contrary to Article 37 and could not be justified under either Article 36 or Article 192 TFEU. Although it did not rule on the applicability of Article 106(2) to justify the restriction on the free movement of goods, it indicated that this provision could justify the granting of the exclusive rights at issue in this case.

2713 See for example its ruling in Case 72/83 Campus Oil and Others [1984] ECR 2727. 2714 [2000] ECR I-3743.

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The Commission applied Art 106(1) in conjunction with Art 49 TFEU to assess the legality of exclusive distribution rights granted to Banque Postale concerning savings accounts in the Credit Mutuel decision of 2007 (C2007 2110 final, 10.5.2007). At the same time it assessed the brokerage fee paid by the state to Credit Mutuel for the distribution of the saving product under the state aid rules.2715

6.24

The question of whether a public service obligation defence can be relied on to justify restrictions on free movement in the context of a reprivatisation of a state company (in this case the Portuguese state owned airline, TAP) is currently before the Court. The Advocate General in his opinion of 21 November has considered that certain restrictions on freedom of establishment and free movement of capital are necessary and proportionate.2716

6.25

3.4.2 Article 106 (1) and Article 102 EC In a series of cases the Court has held that Article 106(1) TFEU applied in conjunction with Article 102 TFEU cannot be interpreted as leading to the condemnation of an exclusive or special right granting a monopoly. The mere creation of a dominant position does not infringe Article 102 TFEU – it is the abuse of a dominant position that is outlawed by that Article. Nevertheless the right of the Member State to confer an exclusive right which creates a dominant position is not without limitations. Unfortunately the Court of Justice has not been entirely consistent in setting the boundaries of Member States’ freedom to grant exclusive or special rights which create dominance and could lead to an abuse of dominance. It has however developed a number of different approaches to this issue in its case law.

6.26

3.4.2.1 Accumulation of rights In several cases the Court has condemned the accumulation of two or more exclusive rights for the benefit of a single undertaking. An exclusive right to produce national TV programmes combined with a monopoly over imports of programmes was seen to lead to a conflict of interest as the monopolist would inevitably abuse its dominant position and favour its own domestic programmes over and above imports. In other words the exclusive rights combined with certain structural features of the market at issue made abuse more or less inevita-

2715 T-345/07 Banque Postale v Commission, case removed from the register. 2716 Case C-563/17 C:2018:937.

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ble.2717 Although it is not necessary to prove actual abuse, it must be demonstrated that abuse would be likely. This case law could therefore, at least in theory, be invoked to justify unbundling requirements even in the absence of harmonisation rules such as those provided in the internal energy market Directives: an energy company which enjoyed exclusive rights of transmission would be likely to favour its own production over imported energy.

3.4.2.2 Manifest failure to satisfy demand 6.28

Article 102(b) TFEU provides that an abuse of a dominant position may in particular consist in limiting production or the provision of a service to the prejudice of those seeking to avail themselves of it, such as consumers. A Member State may create a situation in which the provision of a service is limited when the undertaking to which it grants an exclusive right extends to certain activities where it is manifestly not in a position to satisfy demand, but at the same time the effective pursuit of such activities by private companies is rendered impossible by the maintenance in force of statutory provisions which prohibit the latter from providing such services.2718

6.29

Although the initial case law of the Court suggested that it would look closely at the specific economic context and the nature of the services involved, later case law has indicated that the Court will only exercise a marginal review of the legality of monopolies: the undertaking enjoying the exclusive right must be manifestly not in a position to satisfy demand. Furthermore a Member State cannot be held to have infringed Article 106 in conjunction with Article 102 TFEU if the only reason for the failure to satisfy demand lies in the bad investment policy or poor management of the undertaking concerned. An example of the application of this approach to the energy sector is provided by the Commission decision in the SPEGNN case in 1999. At the relevant time GDF had a monopoly over gas distribution in France although several local municipal distribution companies were legally entitled to distribute gas in certain areas. GDF contested this right and the local companies complained to the Commission that GDF had abused its dominant position by preventing them from expanding into areas where GDF was not present. The Commission considered that France had violated Article 106(1) in conjunction with Article 102 TFEU as it had led GDF to abuse its dominant position as the State had prohibited independent municipal companies from satisfying demand in areas where the State 2717 Case C-260/89 ERT v Dimotiki [1991] ECR I-2925, Case C-55/96 Job Centre [1997] ECR I-07119, Case C-163/96 Raso [1998] ECR I-00533. 2718 Case C-41/90 Hofner [1991] ECR I-01979.

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monopolist was unable or unwilling to do so. This decision was however never formally executed as the French government adjusted the relevant national legislation allowing operators other than GDF to build distribution networks.2719

3.4.2.3 The Corbeau-type cases In certain cases the Court has condemned the granting of exclusive rights conferring monopolies but has gone on to examine the justifications for the monopoly at issue without ruling on a prima facie infringement of Article 106(1) TFEU. The leading case in this category is Corbeau2720 – which concerned the legality of the exclusive rights conferred on the Belgian Post Office. In later cases – including Corsica Ferries2721 – the Court followed the same approach. It is however difficult to offer any clear rationale for its stricter, more pro-competition approach to certain cases as opposed to the more deferential treatment of state intervention in others. In any event it would appear that in its more recent case law, and especially in cases where sensitive economic and social considerations are at issue, the Court is reluctant to apply the ‘Corbeau’ type approach and move directly to a balancing test under Article 106(2) TFEU: a prima facie breach of Article 106(1) TFEU in conjunction with Article 102 must first be established.2722

6.30

In Case C-553/12 P, Commission v. Dimosia Epicheirisi Ilektrismou AE,2723 the ECJ, overturning a ruling of the General Court, and upholding the Commission’s original decision2724, held that the existence of an equality of opportunity between the economic operators is a fundamental element of the principle of undistorted competition. If a State measure creates such inequality, it will be regarded as giving rise to an infringement of Article 106(1) TFEU, read together with Article 102 TFEU.

6.31

2719 IP/99/291. See also the SHG case where the Commission ruled that as EDF had not exercised its exclusive rights to distribute electricity in certain regions but had required a local producer to deliver its electricity to the Italian grid and to this end had concluded agreements with the Italian state monopoly, ENEL, that latter agreement was void under Article 81(2) – IP/92/668. 2720 C 320/91 [1993] ECR 1-2533. 2721 Case C-18/93 Corsica Ferries [1994] ECR I-01783. 2722 See in this respect Case C-67/96 Albany [1999] ECR I-5751, Joined cases C-180/98 to C-184/98 Pavel Pavlov and Others [2000] ECR I-06451, but see however C-209/98 Sydhavnens [2000] ECR 1-374. 2723 Judgment of 14 July 2014,C:2014:2083. 2724 Case C (2008) Final of 5 March 2008, concerning the grant or maintenance by the Hellenic Republic of rights in favour of DEI for the extraction of lignite.

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6.32

In concurrence with the Opinion of the Advocate General, the ECJ concluded that the relevant Treaty rules may be infringed irrespective of whether any abuse is shown to have actually occurred. An infringement may be established where the State measure at issue affects the structure of the market by creating unequal conditions of competition between competitors, thereby allowing the public undertaking or the undertaking which was granted special or exclusive rights to maintain, strengthen or extend its dominant position over another market. The General Court subsequently applied this approach and upheld the Commission decision.2725

4.

Article 106(2) TFEU

4.1 Introduction 6.33

Article 106(2) TFEU provides a potential derogation from the application of all the Treaty rules for undertakings entrusted with a service of general economic interest or for undertakings having the character of a revenue producing monopoly in the event that the derogation (i.e. maintenance of the special or exclusive rights in question) is essential to achieve the service of general economic interest attributed to it. The European courts have consistently held that as derogation, this provision must be interpreted strictly. Thus it is insufficient for the purposes of this article that the undertaking in question is entrusted with public service tasks: it must be demonstrated that the performance of those tasks through the grant of special or exclusive rights would be obstructed by the application of the relevant Treaty rules, such as those relating to free movement or competition, for example. Furthermore even if such obstruction is manifest, (i.e. the public service objective could not be achieved without infringing the other Treaty rules, the last sentence of Article 106(2) TFEU requires that this factor must be balanced against the Community interest in developing trade. Particularly important in this latter respect is whether or not relevant harmonising legislation has been adopted, such as the electricity and gas internal market Directives that provide for detailed harmonising measures regarding public service objectives in Article 3.2726

6.34

Following the adoption and entry into force of the Amsterdam Treaty, Article 16 of the EC Treaty included a specific reference to “services of general economic interest”, although it did not define that concept. 2725 T-169/08 RENV: T:2016:733. 2726 See further in this respect, Case C-265/08 Federutility et al., loc. cit., and discussed below.

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Article 16 EC is now subsumed into Art 14 TFEU. That Article confirms the place of such services among the shared values of the Union and their role in promoting social and territorial cohesion against the background of the completion of the internal market which itself brings about increasing pressure to open new sectors to competition.

6.35

4.2 Article 14 TFEU and the Protocol 26 on SGIs Services of general economic interest are a key element in the European model of society embraced by the new Treaty. A commitment to preserve such services at a required minimum level, accessible to all, is presented as a shared value within the EU and the availability of such services at a reasonable price plays an important role in promoting social and territorial cohesion. Prior to the drafting of the Convention which led to the drafting of the aborted Constitutional Treaty, the Commission announced in 2003 that it would seek to build upon Article 14 TFEU to create a proactive policy at European level in partnership with local, regional and national authorities to ensure that all the citizens of Europe have access to the best public services. Its Green Paper on Services of General Interest launched this initiative. This was followed up by a White Paper published in 2004. However the Commission remains reluctant to come up with a true horizontal approach to defining SGEIs.

6.36

As noted Article 14 TFEU is broadly similar in scope to Art 16 EC but it further adds that European laws shall define the principles and conditions on which such services shall operate, thus allowing the Union to adopt framework legislation at European level. Although the Union has competence to adopt such legislation, it does not necessarily follow that it has a duty to do so.

6.37

It is important to note that the final text of Article 14 TFEU expressly recognises the continued competences of the Member States to provide and finance such services, albeit without prejudice to the state aid rules.

6.38

Article 14 TFEU reads as follows: “Without prejudice to Article 4 of the Treaty on European Union or to Articles 93, 106 and 107 of this Treaty, and given the place occupied by services of general economic interest in the shared values of the Union as well as their role in promot‑ ing social and territorial cohesion, the Union and the Member States, each within their respective powers and within the scope of application of the Treaties, shall take care that such services operate on the basis of principles and conditions, particularly 919

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economic and financial conditions, which enable them to fulfil their missions. The European Parliament and the Council, acting by means of regulations in accord‑ ance with the ordinary legislative procedure, shall establish these principles and set these conditions without prejudice to the competence of Member States, in compli‑ ance with the Treaties, to provide, to commission and to fund such services.”

6.40

Protocol 26 on SGIs – which has equal legal status to the Treaty itself – consists of two Articles.

6.41

The first recognises:

6.42

–

the essential role and the wide discretion of national, regional and local authorities in providing, commissioning and organising services of general economic interest as closely as possible to the needs of the users; the diversity between various services of general economic interest and the differences in the needs and preferences of users that may result from different geographical, social or cultural situations;

–

a high level of quality, safety and affordability, equal treatment and the promotion of universal access and of user rights.

According to its Article 2 “The provisions of the Treaties do not affect in any way the competence of Member States to provide, commission and organise non-economic services of general inter‑ est”.

6.43

The text of the Protocol does not seem therefore to impact upon the financing of such services – these remain fully subject to the Treaty state aid regime discussed in Part V of this book.

4.3 What are services of general economic interest? 6.44

In various communications dealing with this subject the Commission has emphasised that in principle it is for Member States to designate which services they deem to be services of general economic interest (SGEIs) also known as public service obligations (PSOs). A strong preference remains for a sector-specific approach as well as for continued deference to the principle of subsidiarity.2727 In so far as harmonising legislation has not been adopted, the Courts have 2727 See generally, Commission Staff Working Paper, Report on Public Consultation on the Green Paper on

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recognised that there is no such thing as a European or Union-wide definition of an SGEI.2728 The Commission’s Communication of 2012 provides further clarification on the certain aspects of the concept.2729 It recalls that a PSO cannot be imposed for an activity which is already or can be provided satisfactorily by the market under conditions consistent with the public interest.

4.4 The requirements of Article 106(2) TFEU In order to be able to rely upon Article 106(2) TFEU to justify the existence of a special or exclusive right an undertaking or the Member State in question must establish the following: –

the undertaking must have been given or entrusted with a specific task;

–

the task must have been granted by the State pursuant to a measure of the public authorities, i.e. a public act;

–

the task in question can only be performed if the relevant Treaty Articles are not applied and;

–

the Union interest must not be adversely affected.2730

6.45

4.4.1 Specific task or mission An undertaking that manages certain services or provides certain services subject to regulation by a government body will not necessarily be regarded as having been entrusted with a specific task. The tasks in question must have special or specific characteristics as compared with other economic activities. In Case T- 289/03 BUPA the GC held that if the SGEI is entrusted to a plurality of undertakings and there is no grant of special or exclusive rights, it is not necessary that each operator subject to the SGEI obligations be separately entrusted with a mission by an individual mandate or act (see para. 183).

Services of General Interest, SEC (2004) 326, 15.03.2004. 2728 Case T-289 /03 BUPA et al. v Commission [2005] ECR II-741. See also Case T-57/11 Castelnou, 3 December 2013, T:2014:1021, paras 127 et seq. See also Case C706/17 Achema, C:2019.407 2729 Loc. cit. 2730 See also AG Leger in C-280/00 Altmark [2003] ECR I-7747 at para 87.

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6.47

If no exclusive or specific rights or obligations have been conferred on the undertaking in question, its agreements as well as its conduct will be subject to the full application of Articles 101 and 102 TFEU and not Article 106 TFEU.

4.4.2 Task entrusted by a public measure 6.48

The specific task in question must be entrusted by a public measure or an act of a public authority which clearly designates the obligations to be performed.2731 It is not necessary that the obligations are enacted in a law or regulation, it is however sufficient that there is an “act of a public authority” which may be the grant of a concession or the approval by the state of a particular set of arrangements2732 or contracts.2733 In Case C-159/94 Commission v France concerning the legality of exclusive import/export rights for EDF/GDF, the Court further specified that: “[…] for obligations imposed on an undertaking entrusted with the operation of services of general economic interest to be regarded as falling within the particular tasks entrusted to it , they must be linked to the subject matter of the service of general economic interest in question and designed to make a direct contribution to satisfying that interest.” (paragraph 68)2734

6.49

Hence the Court held that the obligations imposed on GDF and EDF regarding environmental and regional policy objectives were not specifically entrusted to these companies – these were general obligations applicable to all companies operating in the sector. Furthermore, the Court held that the French government had not produced the necessary legal texts of relevant acts that established that either company was under a specific obligation to charge the lowest possible tariffs. The Court only considered the necessity of maintaining EDF and GDF’s exclusive import and export rights in relation to the public service obligations of which the French government had proved the existence, namely the obligations of supply, continuity of supply and equal treatment between customers or consumers. It is therefore necessary to show that measures in question create an obligation for the operator to provide the services concerned.2735

2731 Joined cases C-34/01 to C-38/01 Enirisorse [2003] ECR I-14243 and Joined cases C-261/01 and C-262/01 Van Calster and Cleeren [2003] ECR I-13349. See also Cases T-80/06 and T-182/04 Budapesti, 13 February 2012, at para 90 – 93. 2732 See Case C-67/96 Albany [1999] ECR I-5751. 2733 Case T-17/02 Fred Olsen SA v Commission [2005] ECR II-2031. 2734 Case C-159/94 Commission v France [1997] ECR I-5815 at para 68. 2735 See T-289/03 BUPA et al. v Commission [2005] ECR II-74 at para 178.

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4.4.3 The Necessity and Proportionality Tests As stated above, Article 106(2) TFEU allows a derogation from the Treaty rules if it can be established that the performance of the entrusted tasks would be obstructed in law or in fact by the full application of the Treaty rules. The interpretation of this phrase appears to have varied over time, and the European Courts have tended in more recent years towards a less strict interpretation of this requirement, combined however with a stricter application of Article 106(1) EC. As with any derogation from a Treaty rule, the relevant national law must meet both a necessity and a proportionality test. The measure in question must be demonstrated to be necessary in order to allow the holder of the exclusive or special right to perform the entrusted tasks in the general economic interest, and it must be proportionate in that the measure should be the least restrictive method of achieving the objective in question.2736

6.50

At the same time, nothing prevents Member States from applying general interest requirements to all operators in a given market. However public service obligations must be specific to the undertakings entrusted with the SGEI, as opposed to general obligations of the economic activity in question. The Courts and the Commission have therefore rejected claims that electricity generators are entrusted with SGEIs because they are required to comply with environmental obligations or security of supply obligations which apply to the sector as a whole.2737 See also Case 706/17 Achema at para 115.

6.51

Nevertheless Article 106(2) by its very nature provides a wider derogation than many of the specific exemptions envisaged in the Treaty rules, for example in relation to the four freedoms. Whereas it has been the consistent jurisprudence of the European Courts that these specific exemptions cannot be invoked to justify economic objectives, Article 106(2) can be invoked to justify economic goals. In Corbeau the Court held that it had to be established that the restriction on competition at issue had to be demonstrated to be necessary in order to allow the Belgian PTT to carry out its legal duties under economically acceptable conditions (at paragraph 14). Thus the necessity test is based on economic considerations. In the later Almelo case, the Court of Justice confirmed that:

6.52

2736 Case C-209/98 Sydhavnens Sten & Grus, [2000] ECR I-3743 paragraph 80. 2737 See further, the Commissions decisions on the Polish and Hungarian PPAs, OJ [2009] L-83/1 and OJ [2009] L-225/53 discussed above at Part 5, Chapter 3. The General Court upheld the legality of the Commission’s decision that the Hungarian generators had not been entrusted with the performance of an SGEI – see para 90 of its ruling in Cases T-80/06 and T-182/04 Budapesti, 13 February 2012.

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“Restrictions on competition from other economic operators must be allowed in so far as they are necessary to enable the undertaking entrusted with such a task of gen‑ eral economic interest to perform it. In that regard, it is necessary to take into con‑ sideration the economic conditions in which the undertaking operates, in particular the costs which it has to bear and the legislation, particularly on the environment to which it is subject” (at paragraph 49).2738

6.53

As both Corbeau and Almelo were cases which had been referred by national courts for a preliminary ruling, it was left to the national judge to determine whether these conditions were met. In the subsequent ‘electricity cases’ which concerned infringement proceedings brought by the Commission against four Member States for maintaining import/export monopolies, the Court provided further guidance on the economic necessity test. It made it clear that it did not consider it necessary for the conditions of Article 106(2) TFEU to be fulfilled, that the survival, economic viability or financial balance of the undertaking should be threatened by the application of the competition rules. It is enough that in the absence of the special or exclusive rights conferred by the state, that performance could not be guaranteed under conditions of economic equilibrium.

4.4.4 The Union interest 6.54

In general, the Court has not attached much importance to the last phrase of Article 106(2) TFEU. Attempts to argue that its inclusion meant that the Article could not be interpreted as being directly effective have failed before the Courts. At the same time arguments to the effect that its inclusion confers an exclusive competence on the Commission – which can be interpreted as compelling it to act on the basis of its powers under Article 106(3) TFEU in certain situations, have also failed to convince the European Courts (see below, at paragraph 6.61).

6.55

In the “electricity cases” however, the relationship between this phrase and the proportionality test was considered further and the Court held that for the exclusive import and export rights at issue to escape application of the Treaty rules under Article 106(2) TFEU, the development of trade must not be affected to such an extent as would be contrary to the interests of the internal market. The Court held that the Commission should have demonstrated that the exclusive import rights at issue had impeded and would continue to impede the development of intra-Union trade in electricity. 2738 Case C 393/94 Almelo [1994] ECR 1-1477.

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It may also be noted that a number of Advocate Generals2739 have interpreted this last sentence as imposing a higher burden of proof on the Commission – in the sense that a public service obligation should generally be considered capable of being justified under Article 106(2) TFEU, provided that all the relevant conditions discussed above are met, unless the Commission can demonstrate it would lead to a substantial and unreasonable restriction of trade.2740 In BUPA the General Court held that this requirement does not mean that the Commission is an obligation to ascertain, definitively and comprehensively, whether the notified measure infringes other provisions of European law.2741

5.

6.56

Article 106(3) TFEU

Article 106(3) TFEU imposes a supervisory duty on the Commission in relation to Articles 106(1) and (2) TFEU. It furthermore gives it the power to issue both Directives and Decisions of a supervisory, normative and prescriptive nature (requiring Member States to adjust national measures which the Commission considers to conflict with Article 106(1) and (2) TFEU). The European Courts have recognised that the Commission enjoys a wide discretion in the fields covered by Article 106 both in relation to the action which it considers necessary to be taken and in relation to the means appropriate for that purpose.2742 Hence the Commission cannot be required to investigate a complaint that a Member State has acted in breach of a Treaty Article and to take a position or a decision on the basis of Article 106(3) TFEU. The Court has ruled that there is no general principle of European law that requires that an undertaking be recognised as having standing before the European courts to challenge a refusal by the Commission to bring proceedings against a Member State on the basis of Article 106(3) TFEU. Nor can an individual claim a right to bring an action pursuant to Regulation 1/2003, which is not applicable to Article 106 TFEU of the Treaty.2743

6.57

The Commission has used its powers under this Article to adopt a number of Directives, including the so-called Transparency Directive as amended, and a number of sector-specific Directives, particularly in the telecommunications

6.58

2739 See for example the Opinion of Advocate General Cosmas in the electricity cases discussed at paragraphs 6.66 et seq. below. See also the Opinion of the Advocate General in Case C-265/08, 20 October 2009. 2740 See also Case T-17/02, loc. cit. 2741 Case T-289/03 at para 318. 2742 Case C-10795P Bundesverband der Bilanzbuchhalter v Commission [1997] ECR I-947, paragraph 27 and Case T-266/97 Vlaamse TV v Commission [1999] ECR II-02329. 2743 See Case C-141/02P Commission v T- Mobile Austria, [2005] ECR I-1283.

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sector. Furthermore the Court has held that the Commission may not use communications or other instruments of “soft law” to impose new or additional obligations to supplement those already imposed under existing directives – a new directive or an amendment to an existing directive would be required.2744

6.59

To date the Commission has not resorted to Article 106(3) TFEU as a legal basis for a sector-specific directive in the energy sector. It has however considered in the past that this article could provide a sufficient legal basis for energy market liberalisation measures.2745 The Commission had not issued a decision based on Article 106(3) TFEU in relation to the energy sector prior to its decision in the Greek lignite case in 2008.2746 It had also adopted a number of Decisions condemning measures in various Member States which have conflicted with the rules of free movement, the prohibition against discrimination on the basis of nationality, as well as measures which have allowed certain public or privileged enterprises to engage in anti-competitive practices.

6.60

It is established practice for the Commission not only to condemn the state measures in question but also to indicate what measures a state should take in order to comply with its obligations under European law.2747 In its decision of 5 March 2008, concerning the grant or maintenance by the Hellenic Republic of rights in favour of DEI for the extraction of lignite, the Commission required that some 40% of the total exploitable reserves should be available to DEI’s competitors on the Greece electricity market. The Court of Justice has previously endorsed the Commission’s power in this respect.2748

6.61

Although there appears to be no particular legal restrictions on the Commission’s competence to use Article 106(3) TFEU in the energy market, policy considerations may have dictated a certain reticence to use its powers, particularly to adopt directives.

6.62

The application of Article 106 TFEU is not affected by the adoption of the Commission’s competition law modernisation package – i.e. Regulation 1/2003 and the implementing Regulation. The application of this Article remains the exclu2744 Case C-325/91 France v Commission, [1993] ECR I-3283. Decision 2012/12 granting exemption from the EU State rules for certain states is based on Art. 106(3) TFEU, OJ 2012 L713. 2745 Hancher, EC Electricity Law. 1991 London: Chancery Law Publishing. 2746 Case C (2008) Final of 5 March 2008, concerning the grant or maintenance by the Hellenic Republic of rights in favour of DEI for the extraction of lignite, and a short summary of the decision can be found in the Commission’s Competition Policy Newsletter, 2008, nr 3, p 37. 2747 Decisions include telecommunications, post, and airports. See Buendia Sierra, Exclusive Rights and State Monopolies under EC Law, OUP Oxford, 2000 at xxxi for a list of the relevant decisions. 2748 Case C-163/99 Portugal v Commission [2001] ECR I-02613.

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sive competence of the Commission. Nevertheless in Case C-198/01 CIF2749 the Court of Justice interpreted Article 101 and Art 4 TFEU) to conclude that a national competition authority had, in the light of the primacy of European law, a duty to disapply any national measure that is contrary to EC competition rules. Thus even if national competition law does not give national competition authorities powers equivalent to Article 106(3) TFEU to set aside state measures as contrary to the European competition rules (or national competition rules), an equivalent power to do so in cases where the national rules infringe a Community provision may arise from the duties incumbent on the National Competition Authority (and in relevant circumstances an National Regulatory Authority) by virtue of Article 4 (3) TFEU.2750

6.

Services of general economic interest in the energy sector

6.1 Introduction As already indicated, the term ‘service of general economic interest’ (SGEI) is nowhere defined in the Treaty. The Commission has generally declined to provide an exhaustive definition but has rather sought to distinguish between the various concepts of public service, services of general interest, services of general economic interest and universal service. In so far as a particular sector is not subject to harmonising legislation the Commission’s powers to review a national definition of an SGEI are restricted to ensuring that there has been no manifest error.2751 Prior to the adoption of the first package of Directives on the internal electricity and gas markets in 1996 and 1998 respectively, both the Commission and the Courts had occasion to address the application of Article 106(2) TFEU to the energy sector.

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In its Decision 91/50 in IJsselcentrale the Commission concluded that the Dutch generating and management company SEP and its shareholders (the production companies) were entrusted with services of general economic interest, but found that the application of the competition rules to it would not obstruct SEP in the performance of the task entrusted to it. The Commission considered that a failure to apply the competition rules would result in the community interest being adversely affected – the community interest being defined as the objective of achieving a single internal market in energy. Nevertheless the Com-

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2749 [2003] ECR I-. 2750 See also Joined Cases C-184/13- C-187/13 API, 4 September 2014. 2751 See Case T-238/03 BUPA, loc. cit. See also Case T-57/11, loc cit.

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mission recognised that in principle an undertaking entrusted with the reliable and efficient operation of the national electricity supply at costs which were as low as possible and in a socially responsible manner was entrusted with services of general economic interest within the meaning of Article 106(2) TFEU. In its ruling in Case C-393/92 Almelo the Court accepted that uninterrupted supply of electricity throughout a territory in sufficient quantities to meet demand at any given time at uniform rates, save in accordance with objective criteria applicable to all customers, is a task of general economic interest.2752 This ruling was recalled in the later ‘electricity cases’ in 1997. It is noteworthy that the Court also stressed the importance of environmental objectives in its ruling in Almelo. Furthermore in Case C-158/94 Commission v Italy,2753 it accepted that ensuring at a minimum management cost the availability of electrical energy of a quantity and at a price appropriate to the requirements of a balanced economic development of the country could also be qualified as a service of general economic interest.

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Further guidance as to the scope of a Member State’s right to take measures to guarantee specific public service objectives, such as security of supply, may be derived from the four cases decided by the Court in 1997 on the basis of Article 31 EC, now Article 37 TFEU. These cases involved the conferral of exclusive rights to import or export which resulted in certain undertakings enjoying monopoly privileges. As indicated in the introduction to this chapter, the adoption of Directives 96/92 and 98/30 has required the effective withdrawal of these particular legal instruments, but even the Directives 2009/72 and 2009/73 still recognize that the conferral of other (unspecified) forms of exclusive rights may be acceptable at the distribution level. Furthermore Article 3 of each of the Directives recognises that Member States may still impose public service obligations on undertakings relating to “security, including security of supply, regularity, quality and price of supplies and environmental protection, including energy efficiency and climate protection”, and may have recourse to Article 106 TFEU. The pertinent legal question is: “under what conditions”? 2754

2752 [1994] ECR I-1477. 2753 [1997] ECR I-5789. 2754 See Chapter 6 of Volume I of EU Energy Law for a further explanation of the possibility to impose public service obligations in the light of the electricity and gas Directives.

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In Case C-157/94 Commission v Netherlands,2755 the Commission had commenced enforcement proceedings against the Dutch government on the grounds that the grant of exclusive import rights for electricity intended for public distribution infringed Articles 28 and 31 EC (now Articles 34 & 37 TFEU). At that time, the right to import electricity was reserved exclusively to SEP, a company that also exercised substantial control over the pooling and dispatch of production units and which held a monopoly of transmission of electricity. The Commission argued that these exclusive import rights were measures having an equivalent effect to a quantitative restriction on imports, contrary to Article 30 and further constituted discrimination within the meaning of Article 37 TFEU, not only as regards exporters established in other Member States but also as regards customers established in the Netherlands.

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The Court recalled that Article 37 TFEU does not require the abolition of state trading monopolies but requires that they must be adjusted in such a way as to ensure that any discrimination against imports has ceased to exist.2756 In Case C-347/88 Commission v Greece2757 exclusive import rights had been held to give rise to discrimination against importers. Since SEP’s exclusive import rights were found contrary to Article 37 the Court did not go on to deal with the possible application of Article 36 to justify such exclusivity.2758 It did however consider in detail whether the conferral of such exclusive rights could be justified on the basis of Article 106(2) TFEU. The Commission had contended that Article could not be relied upon to justify state measures incompatible with the Treaty rules on free movement. The Court rejected this argument: Article 106(1) TFEU necessarily implies that Member States may grant certain exclusive rights and thereby grant certain undertakings a monopoly. It went on to consider the scope of Article 106(2) to the relationship between Member States and undertakings on which they conferred tasks relating to the operation of services of general economic interest.

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Article 106(1) TFEU must therefore be interpreted as being intended to ensure that the Member States do not take advantage of their relations with undertakings in order to evade the prohibitions laid down by other Treaty rules addressed directly to them, such as those in Articles 34, 35 and 37 TFEU, by obliging or

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2755 2756 2757 2758

[1997] ECR I-5699. See Case 59/75 Manghera [1976] ECR 91. [1990] ECR I-4747 (paragraph 44). Advocate General Cosmas in his Opinion had considered that the rights infringed Article 28 EC as well and had examined whether the measures could be justified under Article 30 EC on public security grounds. In his view the Court’s earlier jurisprudence on this article could not be relied upon to justify measures whose object was to bring about favorable conditions of supply from the viewpoint of costs.

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encouraging those undertakings to engage in conduct which, if engaged in by the Member States, would be contrary to those rules. It is against that background that Article 106(2) TFEU lays down the conditions in which undertakings entrusted with the operation of services of general economic interest may exceptionally not be subject to the Treaty rules (paragraphs 30 and 31).2759

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The Commission argued that this provision could only be relied upon to the extent it was necessary to enable the undertakings concerned to perform their public interest duties under acceptable economic conditions, and therefore, only if the measures are necessary for the financial equilibrium of the undertaking itself. In the Commission’s view the burden of proof to establish that both the necessity and proportionality tests had been fulfilled and fell firmly on the party relying on the exemption.

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The Court rejected both the narrow interpretation of Article 106(2) TFEU and the Commission’s analysis of the burden of proof. It stressed first that the purpose of the Article is to seek to reconcile the interests of Member States in using certain undertakings as instruments of economic policy with the Community’s interest in ensuring compliance with the rules on free movement and competition. Member States must be able to take account of objectives pertaining to their national policy and must be in a position to adopt the necessary instruments to achieve those objectives.2760 It is not necessary that the survival of the undertaking itself be threatened. It followed from the Corbeau case2761 that the conditions for the application of Article 106(2)TFEU are fulfilled if the maintenance of the rights in question are necessary for the holder of them to perform its tasks under “economically acceptable conditions” (paragraph 51).

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In the Court’s view the Commission had not attempted to deal with the Dutch government’s argument that the conferral of the exclusive rights on SEP were an integral part of its national system of ensuring security of supply at low cost to the consumer. Instead the Commission had listed a number of general, alternative means to achieve the stated objective, which would have been less restrictive, but had not attempted to examine how they might work in the specific national context. Thus, it was not possible for the Court to examine the proportionality issue. The Court’s reasoning in the Dutch electricity case has been 2759 It may also be pointed out that in its ruling on the Swedish alcohol monopoly case – Case C-189/95 Franzen ([1997] ECR I-5909) – the Court held that exclusive import rights did not infringe Article 31 EC as such although they could infringe Article 28 EC. 2760 The Court had already accepted that the duty to ensure an uninterrupted supply of electricity to all consumers was a task of general economic interest in Case C-393/94 Almelo. [1994] ECR I-1477. 2761 Case C-320/91 [1993] ECR I-2533.

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the subject of considerable critical commentary – not least because it seemed to endorse the view that national governments have considerable discretion in determining what types of tasks could be entrusted to undertakings as general economic interest or public service tasks, but also because it left considerable discretion to Member States to determine the instruments to be selected to realize those objectives. The onus of proving that the measures were neither necessary nor proportional and that they adversely affected trade was placed firmly on the Commission. Nevertheless it remains incumbent on the Member State to set out in detail the reasons why, in the event of the elimination of the contested measure, the undertaking in question would be unable to fulfil the tasks entrusted to it.2762

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Case C-157/94, was decided in late October 1997 at a stage when the Council Directive 96/92 was already officially adopted. As the Court was well aware, exclusive import rights would in any event have to be adjusted in order to comply with the Directive itself.2763

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In Case C-159/94 Commission v France, the Court addressed similar arguments put forward by the Commission to the effect that the national rules reserving exclusive rights to import and to export electricity (and gas) to the state-owned company EDF (and in the case of gas, GDF) infringed Articles 34 and 37 TFEU. Of importance in this case was the fact that certain obligations imposed on EDF and GDF with respect to environmental protection, regional policy and tariffs were not considered to have been ‘entrusted’ to these companies and as such were excluded from the public service obligations whose performance the exclusive rights at issue were necessary to protect. Case C-158/94 Commission v Italy,2764 also concerned the same subject-matter. As with the French case, the Court devoted very little attention to the exclusive rights to export electricity which were conferred at the relevant time on the state undertaking, ENEL. It merely pointed out that ENEL could reserve available national production as a matter of priority for users in Italy. This was therefore considered to be sufficient to conclude that its exclusive export rights had at least

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2762 See paragraph 82 of the judgment in Case C-463/00, cited above. 2763 See further on this point, Advocate General Cosmas at p. 5706 of Case C-157/94 Commission v. Netherlands – where he points out that the Commission itself had still much to gain from a favourable ruling from the Court with respect to the removal of other exclusive rights which were not at issue as such in the present cases. He went on however to make the express point that it is a matter of the Commission’s legitimate exercise of its discretion to chose to bring enforcement proceedings even if at the same time it is negotiating harmonizing measures covering the same issues (at p. 5711). 2764 [1997] ECR I-5789.

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the effect of establishing a difference in treatment between domestic trade and export trade so as to provide a special advantage for the Italian market. Hence these exclusive import and export rights infringed Article 37 TFEU. The Court went on to apply Article 106(2)TFEU. The Court dealt with the necessity and proportionality of the import and export rights together, notwithstanding the fact that Italy had primarily defended the exclusive import rights and appeared to have made little real attempt to justify its export rights. Finally, in C-160/94 Commission v Spain2765 the Court followed the Advocate General and ruled that the relevant legislation of 1984 did not confer upon REDESA the exclusive right to either import or export electricity. The legislation merely gave the company a duty to ensure the unified management of the national system, which according to the Commission, amounted to the same thing. Furthermore, no other company had been able to export or import electricity. The Court held that the Commission had failed to distinguish between REDESA’s right to co-ordinate the system from the supposed concentration of those rights in the organization. In fact the law of 1984 only provided for the former. Hence the Spanish legislation was not contrary to Article 37 TFEU. It is noteworthy that in its later case law on Article 106(2) TFEU, albeit in the context of the Treaty rules on free movement of capital (Article 63 TFEU), the Court has placed the onus of proof on the Member State invoking the Article 106(2) TFEU exemption, and not on the Commission. In Case C-463/00 Commission v Spain, a national measure laying down rules concerning the privatization of certain undertakings in the Spanish public sector, including the electricity company Endesa and the oil company Repsol, was found to be in conflict with Article 63 TFEU given that in this particular case the government’s right of veto over a transfer of shares was not subject to any defined conditions.2766 Although the Spanish government sought to rely on Article 106(2) TFEU to justify the measure at issue, the Court held that the Member State must set out in detail the reasons for which, in the event of elimination of the contested measures, the performance under economically acceptable conditions of the tasks of general economic interest which it has entrusted to an undertaking would, in its view, be jeopardized (paragraph 82).2767 2765 [1977] ECR I-5851. 2766 It may also be noted that in Case C-174/04 Commission v Italy [2005] ECR I-4933, the Italian government has not sought to rely upon Article 106(2) to justify a measure restricting the voting rights attached to shares acquired by public companies in newly privatised electricity and gas companies but argued that the rules are non-discriminatory and do not create an obstacle to market access, or alternatively that they are justified as guaranteeing the creation of a true internal market. The Court and its Advocate General rejected both arguments in its ruling [2005] ECR I -4933. 2767 [2003] ECR I-4581. See also the AG Opinion in Case C-563/17 TAP. 21 November 2018, C:2018:937 and the ruling of the ECJ of Febraury 2019, C:2019:144.

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6.3 Article 106(2) and the IEM Directives It can be argued that as a result of the adoption and entry into force of the internal market Directives 96/92 and 98/30, and 2004/54 and 2004/55, followed by the ‘Third Package’ directives and regulations of 2009, that there are important limitations on the scope for Member States to define as public service obligations tasks which are not expressly mentioned in Article 3 of the Directives.2768,2769

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However it should also be borne in mind that the IEM directives, unlike for example the Directives and related measures adopted for the postal and telecommunications sectors, do not designate particular services as universal services while others are treated as competitive services. Thus it has been held by the Court of Justice that a Member State is now excluded from designating a service which is not defined as a universal service in the Postal Directive 96/97 as a service of general economic interest.2770 The Electricity and Gas Directives do however recognize in their recitals that Member States can take appropriate measures to take certain measures to guarantee public services for households and small enterprises (see now recital 42 of Directive 2009/72; recital 47, Directive 2009/73).2771

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In the electricity and gas sectors, however, it is clear from the text of Article 3(2) of Directive 2009/72 and 2009/73 that Member States can impose on any undertaking operating in the relevant sector a public service obligation, irrespective of the type of service, or class of customers to whom that service is provided. Obligations with respect to environmental protection, for example, can apply to all undertakings supplying all categories of customers, whether eligible or captive customers.

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More importantly, Member States are now restricted in how they organise the provision of public services and in their choice of instruments with regard to the entrustment of these tasks. Certain monopoly rights as well as exclusive import

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2768 See in this respect Chapter 6 of EU Energy Law Volume I, and in particular book paragraph 6.10, which concludes: “ in practical terms, this means that it will be very rarely, if ever, necessary to derogate from the Directives to achieve a public service obligation, because in practice all the public service objectives mentioned in Article 3(2) can be achieved without doing so. For example, the Commission has not indicated that any such derogation was granted by a Member State under the first electricity and gas Directives. This can be more clearly seen by an analysis of the individual public service criteria listed in Article 3(2)”. 2769 See Volume I of the EU Energy Law, at book paragraphs 6.04-6.35. 2770 Case C-240/02 Assempre, [2004] ECR I-246. 2771 See for an assessment of similar recitals in the IEM Directives of 2003, the Advocate General’s Opinion in Case C-265/08, Federutility et al., loc cit.

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and export rights can no longer be maintained.2772 The accumulation of certain exclusive rights is also no longer possible given the provisions on unbundling. Furthermore, the Directives already explicitly provide for specific exemptions from their rules with a view to the realisation of legitimate public service obligations. It may therefore be difficult for Member States to justify the adoption of measures which go beyond these specific exemptions or derogations.

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Finally, account must be taken of the Union interest – the last sentence of Article 106(2) TFEU. As from 1st July 2007 the Union interest included compliance with full competition and liberalisation of gas and electricity markets.

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As a result of the entry into force of the IEM directives, the Commission is likely to scrutinize in closer detail the actual instruments and procedures for designating undertakings which are to perform the tasks listed in Article 3(2) of the electricity and gas directives. This same Article 3(2) is also maintained in full in the new Directive 2009/72 (electricity) and Directive 2009/73 (gas).2773 That Article makes it clear that the obligations must be clearly defined, transparent, non-discriminatory, and verifiable and should guarantee equality of access to national consumers for all EU electricity companies. Given the emphasis on transparency, non-discrimination and equality of access, the Commission will increasingly expect a PSO to be well defined and verifiable and put out to competitive tender in so far as possible.2774 Obviously this is not possible in so far as such obligations are entrusted to transmission system operators, as these are (usually) natural monopolies.

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The Commission’s policy on competitive tenders as summarisied in its 2012 Communication on SGEIs can no doubt be put into effect in the energy sector as a result of the more extensive requirement on Member States to notify to the Commission all measures taken to carry out public service obligations irrespective of whether derogation from a provision of the Directive is requested.

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It may be noted that this obligation requires a separate notification of the relevant instruments imposing the PSO and related information as well as an assessment of the methods of calculating possible financial compensation. To fulfil the notification requirements, it is not sufficient simply to notify the legislation implementing the Directives as such to the Commission (see Art 3(15) of Di2772 See also the ruling on the Greek lignite monopoly in Case C-553/12 P, Commission v. Dimosia Epicheirisi Ilektrismou AE. , loc. cit. 2773 OJ [2009] L211/55 and L211/94. 2774 See further the Opinion of the Advocate General in Case C-507/03 Commission v Ireland [2007] ECR I-9777.

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rective 2009/72 and Art 3(11) of Directive 2009/73). In the recent case concerning the Lithuanian LNG Terminal, the Lithuanian authorities notified the relevant measures to the Commission for clearance as compatible state aid, and furthermore given that the measures involved the conferral of PSOs, under Article 3(11) of Directive 2009/73.2775 The text Proposal for a Directive on common rules for the internal electricity market (recast) as agreed on 18 December 2018 in a final trilogue limits the scope of Member States to maintain PSOs for the electricity market. In particular PSOs in the form of price regulation will now be subject to specific conditions, as specified in the new directive once it enters into force on 31 December 2020 (see recitals 15, 22, 23 and 26 of Directive 2019/944 (OJ 2019 158/125).

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6.4 Federutility, v Autorità per l’energia elettrica e il gas (C-265/08) This reference from Italy concerned the ability of public authorities to continue to set prices for the supply of gas in the absence of competition. Directive 2003/55 brought about the liberalisation of the gas market in the EU from 1 July 2007. A few days before this, an Italian law was adopted granting the Italian Gas and Electricity Authority (the “Authority”) the power to fix “reference prices” for the sale of gas to certain customers. Such reference prices were to appear in the offer made by a supplier to a customer in the context of its universal service obligations. The Authority extended the application of existing rules on calculating such amounts beyond the 1 July 2007 deadline for implementation of the Directive. A number of suppliers applied to the Italian administrative courts to have this measure annulled, resulting in a reference for a preliminary ruling to the ECJ. The Advocate General and the Court both considered the purposes of the Directive, which included introducing free competition into the market while protecting consumers, particularly those who are vulnerable.2776 The Court held that if the conditions for effective competition had not been met on the market in question, a reference price could be set by the public authority responsible. It ruled that the Directive allowed for state intervention as the Directive only lays down minimum commons rules on PSOs, and provided certain conditions 2775 SA.36740, 20 November 2013, at para 212. 2776 In Case C-437/17 Repsol Butano, the AG has opined that: “Directive  2009/73/ .. concerning common rules for the internal market in natural gas and repealing as interpreted by the judgment of 20 April 2010, Federutility and Others (C-265/08, EU:C:2010:205), and subsequent case-law, does not preclude a measure setting a maximum price for cylinders of bottled liquefied petroleum gas, in so far as it is a measure for the protection of socially vulnerable users…”. The ECJ has confirmed this approach, C:2019:308.

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were met, and in particular the conditions listed in its Article 3(2). The mechanism in question must be must not go beyond what is necessary to achieve the objective in question, and must also be proportionate in terms of its duration, its substance and those who are subject to it. Lastly the measure should not substantially disturb the functioning of the internal market or constitute discrimination between market operators..2777 Interestingly, the referring Italian court went on to apply the principles and conditions set out in the Court’s ruling and found that the measure could not be considered as necessary to meet its stated objective. The Italian regulator appealed this ruling to the Council of State, and that Court in turn upheld the measure as suitable and proportionate in the light of its aims.2778

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In its subsequent case-law the Court has applied the ‘Federutility’ criteria on which to assess national price controls.2779 In Case C-121/15 ANODE2780 the ECJ considered a State regulation consisting in requiring certain undertakings to offer natural gas in the market, to certain categories of customers, at prices that derive from a calculation performed in accordance with criteria and with the use of tables drawn up by the public authorities. It held that “the tariffs established pursuant to that legislation are regulated prices which are not in any way the result of a free determination deriving from the play of supply and demand in the market. Quite the contrary, those tariffs are the result of a determination made on the basis of criteria imposed by the public authorities, which is thus outside the dynamics of market forces” (at 29).

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However, it concluded that “Article 3(2) of Directive 2009/73, read in the light of Articles 14 TFEU and 106 TFEU and Protocol No 26, must be interpreted as allowing the Member States to assess whether, in the general economic interest, public service obligations relating to the price of supply of natural gas should be imposed on undertakings operating in the gas sector, in order in particular to ensure security of supply and territorial cohesion, provided that, first, all the conditions set out in Article 3(2) of the directive are satisfied, specifically the nondiscriminatory nature of such obligations, and, secondly, that the imposition of those obligations complies with the principle of proportionality” (at para 73).

2777 Case C-265/08 Federutility et al. [2010] ECR I-03377. : C:2010:205. 2778 F.M. Salerno and A. Setari, ‘Whatever Happened to Federuitility’, Utilities Law Review, vol 19, nr 6, 239. 2779 See judgments of 21  December 2011, Enel Produzione, C-242/10, EU:C:2011:861, and 10  September 2015, Commission v Poland, C-36/14 EU:C:2015:570. 2780 C:2016:637.

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6.5 Financing public service obligations and Article 106(2) TFEU Given the increasingly restricted possibilities for Member States to adopt a number of traditional instruments – such as exclusive and special rights – as a result of the adoption of the relevant harmonisation measures, it is likely that subsidisation of certain uneconomic activities will become an increasing important instrument in national energy policies.

6.92

The IEM Directives 2009/72 (electricity) and 2009/73 (gas) endorse the possibility of providing financial incentives and support to undertakings in order for them to carry out security of supply goals as well as related services of general economic interest. This is explicitly recognized in recital 25 and Article 3(10) of Directive 72/2009, and recital 28 and Article 3(7) of Directive 73/2009.2781 Any such financial support must of course be compatible with the Treaty State Aid regime – Articles 107 and Articles 108 TFEU. The 2014 Energy and Environmental Guidelines now set out detailed rules on the compatibility of various financial support mechanisms to the energy sector – see above at Book, Part 5, Chapter 5.

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In 2001 the Commission published a Methodology on State Aid to finance “Stranded Assets” in the electricity sector, and has adopted a series of decisions declaring various national financial support measures to compensate owners of such assets to be compatible with the interests of the internal market, relying on Article 107(3)(c)2782 and Article 106(2) TFEU (see book paragraphs 5.412 to 5.416 for a full discussion). A state aid measure may also be justified on the basis of Article 106(2) TFEU2783 As discussed at book paragraphs 5.448-5.506, recent case law on the scope of Article 107(1) TFEU in the context of public service obligations or services of general economic interest has raised the issue of whether a financial transfer (including foregone tax revenue) to selected groups of undertakings which nevertheless do not enjoy any specific economic benefit or advantage can fall within the scope of the Treaty state aid regime. Commission practice in this respect has not been entirely consistent. In some cases, however, the Commission has held

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2781 The importance of diversification of gas routes and of sources of supply for the Union for improving security of supply of the Union as a whole and its Member States individually has further been recognized by the Union in Regulation 994/2010 (recital 7), OJ 2010 L 295/1. Within the context of measures taken to achieve security of energy supply, Member States enjoy a wide discretion in providing for, commissioning and organising public service obligations (recital 48 of Regulation 994/2010). 2782 July 2001. Decisions on the Netherlands, Austria and Spain were handed down on the same day. 2783 Case T-106/95 FFSA and others [1997] ECR II-229; Case T-46/97 SIC [2000] ECR II-2125.

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that a state support scheme even if it is justifiable on the basis of Article 106(2) TFEU is still a state aid and must be notified to it in accordance with Article 108 TFEU.2784 In other cases the Commission has recognized that the measure in question falls outside the scope of the state aid regime as it only represents a form of payment or consideration by the State for the services performed.2785 The 2009 Electricity and Gas Directives recall the notification requirement for measures taken by Member States to fulfil public service obligations if these constitute state aid under Article 107(1) TFEU.2786 This line of case law, which has become known as the ‘compensation’ category of measures, was initiated by the Court of Justice’s analysis of the French tax exemptions in favour of wholesale pharmacies. In its judgment in Ferring, the Court first established that the tax on direct sales as such – leaving aside the public service obligations imposed on wholesale distributors – conferred an economic advantage in so far as it only applied to pharmaceutical laboratories and thus de facto constituted the grant of a tax exemption on the wholesale distributors. The Court held that provided that the tax on direct sales imposed on pharmaceutical laboratories merely corresponds to the additional costs actually incurred by the wholesale distributors in carrying out their public service obligations - such a tax could be regarded as compensation for the service provided and was not therefore state aid within the meaning of Article 107(1) TFEU. The latter would not enjoy any real advantage, as the only effect of the tax exemption would be to put them on an equal competitive footing with other market players.2787 In its subsequent ruling in Case C-280/00 Altmark of 20032788 the Court of Justice further refined the ‘compensation’ approach in Ferring, by introducing certain strict and cumulative conditions as set out at paragraphs 89 to 93 of its judgment. Hence (i) the recipient undertaking must actually be entrusted with public service obligations which are clearly defined, (ii) the parameters on 2784 See for example Commission Decision 2003/193 of 5.06.2002 on State aid granted by Italy in the form of tax exemptions and subsidized loans to public utilities with a majority public capital holding, OJ 2003 L77/21. See also paragraphs 17 and 28- 31 of the Commission’s Communication on the application of the state aid rules to public broadcasting, O.J. 2001 C171/4 and its decisions in Phoenix/Kinderkanal, of 22.03.1999 and BBC News 24, 29.09.1999. For contrasting approaches to the treatment of waste recycling measures as state aid, see A. Seinin, “Waste Treatment, Recycling and State Aid”, EC Commission, Competition Policy Newsletter, nr. 1, February 2002, pp 87–89. 2785 See for example Commission Decision C(2002) 3967 of 11.12.2001, upheld on appeal before the General Court, Case T-92/02 Stadtwerke Schabisch v Commission and the ECJ – Case C176/06P [2007] ECR 1-170. 2786 Directive 2009/72 (‘Electicity Directive’) Recital 28, Directive 2009/73 (‘Gas Directive’) Recital 29, OJ L 211; See also Chapter 6 of Part 5. 2787 Case C-53/00 Ferring [2001] ECR I-9067 at paragraph 27. 2788 [2003] ECR I-7747.

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the basis of which compensation is calculated must be established in advance in an objective and transparent manner, (iii) that compensation must not exceed what is necessary to cover all or part of the costs incurred in the discharge of the public service obligations, and (iv) where the undertaking in question is not chosen pursuant to a public procurement procedure which would allow for the selection of the tenderer capable of providing those services at lowest cost to the community, the level of compensation needed must be determined on the basis of an analysis of the costs which a typical, well-run and efficient undertaking would have incurred in discharging those obligations.2789 Altmark may thus provide useful guidance to Member States who seek for example, to “compensate” private or public operators for the provision of the services “ in the general public interest” as listed in Article 3(2) of the 2009 IEM Directives. Although for public service obligations carried out by a transmission or distribution system operator it is unlikely that recipient will be chosen by way of a public procurement or tender procedure, it will still be possible to rely on the “Altmark tests” if it can be established that the level of costs compensated are based on those which a typical undertaking would have incurred, in order to avoid the constraints of the Community state aid regime – and in particular the requirement of notification.2790

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With respect to Art 3(6) of the 2009 Directives, it is expressly stipulated that any financial or other compensations and exclusive rights for the fulfilment of public service obligations must be non-discriminatory and transparent. In order to meet these conditions the Commission has indicated that a water-tight system should be set up which ensures that the subsidised part of the sector does not allow predatory commercial behaviour in the part of the sector which is liberalised and/or not subject to a public service obligation. The Commission interprets the requirements of Article 3(2) of the Directives to further require full compliance with the provisions of the Commission Directive 2000/52 – the Transparency Directive, as amended in 2006.2791 Furthermore the IEM directives expressly required that separate accounts are maintained for supply activities for eligible and non-eligible customers (see Article 31(3) of Directive 2009/72 and 2009/73).

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2789 This approach has been advocated by Judge Vesterdorf in “A New Model drafted by the Community Courts’. New developments in European State Aid Law” (2003), pp. 13-22. 2790 See also in this respect Case T-238/03 BUPA, loc cit []. 2791 Directive 2000/52, OJ 2000 L193/75, as amended in 2005 by Directive 2005/81/EC, and again in 2006 by Directive 2006/111.

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6.100

It may also be noted that in accordance with Commission Decision 2012/21 the ‘SGEI Exemption Decision’, compensation granted to undertakings in connection with services of general economic interest of less than EUR 15 million is declared compatible with “the common market and is exempt from prior notification under Article 108(3) TFEU provided that the conditions set down in Articles 4 and 5 of the Decision are met.” 2792

6.101

If the compensation does not meet the four strict, cumulative ‘Altmark’ criteria and does not fall within the scope of the Exemption Decision, it must be notified. In 2005 the Commission published a first Community Framework for State aid in the form of public service compensation2793 in which it sets out the criteria it will apply to assess on the basis of Article 106(2) TFEU the compatibility of state aid measures duly notified to it This Framework was subsequently updated in 2011,2794 and has been applied in the Commission’s Decision on the compatibility of operating aid for the Lithuanian LNG Terminal, discussed below.

6.102

In its decision on EDF, which predated the 2005 Framework, but post-dated Altmark, the Commission noted that even although the French authorities had stressed that EDF performs public service tasks, they had not provided any assessment of the costs incurred by EDF in carrying out those tasks. The Commission was therefore unable to determine whether or not measures such as tax concessions and unlimited state guarantees compensate for any additional costs linked to the public service tasks entrusted to EDF.2795

6.103

As discussed above at Book, Part 5, the Commission has applied Article 106(2) TFEU to a number of national measures in the energy sector with a view to establishing whether the measure is aid within the meaning of Art 107(1) TFEU and if so, if Article 106(2) TFEU can nevertheless be relied upon to justify the measure. It is for the Member State to show that the measure is both necessary and proportionate to the tasks entrusted as SGEIs to the undertakings in question.

2792 2793 2794 2795

OJ [2012] L7/3. OJ [2005] C297/04. OJ [2012] C8/15. Commission Decision 2005/194, OJ [2005] L49/9.

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6.6 Trends in Commission Practice before and after Altmark The Courts have confirmed in a number of recent rulings that in the Altmark the Court of Justice did not place any temporal limitation on the scope of its ruling in Altmark. In the absence of such a limitation ratione temporis on the interpretation of Article 107(1) TFEU, the four criteria are therefore fully applicable to the factual and legal situation of the case as it presented itself to the Commission when it adopts a decision even if this decision was prior to the date of the Altmark ruling.2796

6.104

Hence, the Courts have examined Commission decisions taken prior to Altmark in the light of those criteria, and if these criteria have not been taken properly into account, the Courts are prepared to annul the Commission’s decision. In Case T-388/03 Deutsche Post v Commission, the GC held at para 115 -116.2797

6.105

“It is apparent both from the contested decision and from the exchange of letters and the minutes of the meetings between the Commission and the Belgian authori‑ ties that the Commission never verified that the services of general interest which La Poste provided were at a cost which would have been borne by a typical under‑ taking which was well run, in accordance with the principle laid down by Altmark, […] The Commission merely relied on the negative balance of all the items of over‑ compensation and undercompensation in respect of the additional cost of the SGEIs for its finding that the measures examined did not constitute State aid within the meaning of Article 87(1) EC. […] Thus, on the basis of those factors, it must be concluded that the Commission did not carry out an examination of the cost of the services of general interest provided by La Poste compared with the costs which a typical undertaking would have borne, an appraisal which might have enabled it to find that the measures examined did not constitute State aid.” Following the Court’s ruling of 2004, the Commission has tended to assess the application of the four ‘Altmark’ criteria to national measures very strictly, as for example in its decision on Hinkley Point C,2798 discussed in Book Pt 5, chap 2, and below, and very few measures are held not to amount to notifiable aid. Nevertheless, in so far as the Member State has contended that the service in question is an SGEI, the Commission must consider whether Article 106(2) TFEU can be relied upon to justify the aid measure in question.

2796 See, Case T-289/03 BUPA and Others v Commission [2008] ECR II -741, paragraph 158. 2797 Case T-388/03, [2009] ECR II-199. 2798 SA 34947.

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6.107

The conditions under which the Commission applies Article 106(2) TFEU to compensation for the provision of SGEIs are laid down in the Framework for State aid in the form of public service compensation (hereinafter “the 2012 Framework”).2799 Several decisions illustrate the application of the Framework in the energy sector. The Lithuanian LNG Terminal Case

6.108

In its decision SA.36740 of 20 November 2013, the Commission held that the various support measures to be granted by Lithuania to support the construction of an LNG Terminal could be justified on the basis of Article 106(2) and the 2012 Framework. First the Commission considered that the SGEIs as entrusted to various gas market actors in Lithuania who would have an obligation to buy gas from the Terminal were genuine. Even although the Commission took the view that market forces should guarantee security of gas supply in a competitive market, Lithuania was dependent entirely on one foreign gas supplier and this made its situation specific. The failure of the market to invest in energy infrastructure in the Baltic region was already recognised in Commission studies. Furthermore merely building the Terminal would not ensure its operation, and therefore additional SGEIs were necessary to ensure that gas purchasers would source a minimum quantity of their needs from the LNG terminal. The obligations on the gas purchasers had been conferred in accordance with the requirements of Article 3(2) of Directive 2009/72 (see recital 212). Notably the operator of the Terminal had not been selected on the basis of the procurement rules – a requirement under the 2012 Framework. However the Commission considered that given the specific situation in Lithuania and its dependence on a single supplier, an exemption from the procurement rules was justified on grounds of security considerations (at recital 236). The compensation to be granted to the operator was calculated to cover all fixed operating costs and would be payable for a duration of 10 years subject to regular reviews by the National Energy Regulator, and although the level of compensation was not calculated in accordance with the so called ‘net avoided cost methodology’, nor in accordance with the standard methodology for calculating a reasonable return on capital, as provided by the 2012 Framework, the Commission nevertheless considered the rates to be paid to be reasonable given the specificities of the project (at recital 249).

2799 Communication from the Commission on the European Union framework for State aid in the form of public service compensation, OJ C 8/15 of 11.1.2012.

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Pursuant to the 2013 Decision, the Obliged Purchasers had to purchase from LITGAS all the LNG Mandatory Quantity, which would ensure technical ability to maintain the LNG Terminal operational at all times. The price paid by the Obliged Purchasers for the LNG is regulated by the national regulatory authority (“NRA”) and included all costs incurred by LITGAS in the delivery of such LNG Mandatory Quantity. This model intended to place all the additional costs of supplying the LNG Mandatory Quantity on the Obliged Purchasers, which subsequently would be able to pass-on such burden to the ultimate consumers of their products. However, this model appeared to be inefficient, when demand for natural gas decreased dramatically and costs of maintenance of the LNG Terminal were distributed among the Obliged Purchasers in proportion to their declining demand for natural gas. In effect, due to the reduced demand for natural gas the unit price for the Obliged Purchasers, covering the costs of operation of the LNG Terminal increased significantly. In this context, Lithuania realised that the burden of maintaining the LNG Terminal operational should be distributed on all consumers of the natural gas system which are benefiting from the security of supply guaranteed by the LNG Terminal. Lithuanian therefore amended the earlier measures and notified a new model to the Commission. In 2016 it entrusted LITGAS with the SGEI for the provision of the LNG Mandatory Quantity and introduced a LNG Supplement for the benefit of LITGAS to be financed by all gas customers (see section 4.6.2 of the Commission Decision). As of 1 January 2019, the Purchase Obligation will be transformed into a delivery obligation placed on LITGAS. LITGAS will remain bound to deliver the LNG Mandatory Quantity, which are needed to keep the LNG Terminal operational irrespective of market conditions (“Delivery Obligation”). The Delivery Obligation should apply for the same period and on the same conditions, which applied to the Purchase Obligation.

6.109

In the meantime a complaint was lodged by a major consumer (Achema) alleging in particular that the LNG Supplement paid to LITGAS since 1 January 2016 constitutes a direct grant, suggesting the presence of State aid as it provides economic advantage to LITGAS. Achema also claims that LITGAS is guaranteed to be compensated even beyond the quota relating to the Purchase Obligation, since the compensation includes additional cost elements. In its Decision of 31 October 2018, the Commission has concluded that LITGAS obligation to keep the LNG Terminal operational by delivering the LNG Mandatory Quantity to the LNG Terminal constitutes a genuine SGEI as referred to in Article 106 TFEU (at para 128). – The Commission applied the SGEI Framework of 2012. This decision is now the subject of an action for annulment; Case T-193/19.

6.110

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6.111

Achema has also challenged a levy (referred to as PIS monies) which it is obliged to pay to cover the SGEI costs of electricity producers incurred in developing various new renewable projects and a new interconnector – the NordBalt project – before the Lithuanian courts and the Supreme Court of Lithuania has in turn referred a number of questions to the ECJ. The Advocate General in his Opinion of 17 January 2019 in Case C-706/172800 doubted whether the beneficiaries of the PIS compensation have in fact been entrusted with an SGEI. There was not sufficient evidence that the beneficiaries are required to supply services on the basis of some degree of universality and compulsion (see para 84 of the Opinion). The ECJ has subsequently endorsed its Advocate General, C:2019:407.

6.112

In Case C-238/17 Renerga, which also concerns Lithuanian PIS levies, the Advocate General concluded that: “Regardless of the question whether, in principle, a private-law contract can contain a public service obligation imposed by a Member State, I fail to detect a public service obligation in the contract. Indeed, the contracts, which were concluded freely, without, as it appears, intervention by the public authorities, merely provide that Renerga undertakes to sell to the defendants, who undertake to buy from it, the electricity it produces in its power stations and supplies to the grid, which is energy from renewable sources. It appears that Renerga merely exercised its contractual freedom and thus entered into an obligation on a voluntary basis. Such actions cannot in my view be construed as an obligation within the meaning of Article 3(2) of Directive 2009/72.” (para 34).2801 Hinkley Point

6.113

In decision SA.34947 of 8 October 2014 the Commission rejected the UK government’s claims that two forms of support – a Contract for Diffences and a Credit Guarantee – for the construction of a nuclear power plant could be deemed to satisfy the four cumulative “Altmark” criteria. The Commission also considered that the planned measures would not meet the conditions set out in the 2012 Framework. In particular, the Commission concluded that the first Altmark criterion was not met as ensuring the investment in new generation nuclear capacity to be delivered within a specific timeframe does not constitute a genuine SGEI and the operator – NNBG – was not entrusted with public

2800 C:2019:38, C:2019:407. 2801 C:2018:571. The request was finally dismissed, C:2018:905.

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service obligations by the United Kingdom.2802 As the Commission had concluded that the notified measure does not entail the provision of a genuine SGEI “which is an essential condition for an assessment of the measure under Article 106(2) TFEU” it did not consider it necessary to assess the rest of the requirements provided by the SGEI Framework for it to conclude that the notified measure cannot be found compatible with the internal market on the basis of the requirements of Article 106(2) TFEU (at recital 343).

7.

Conclusion

It may be observed that in assessing state measures in relation to Article 106(2) TFEU, the Commission often applies the same tests twice. First of all it establishes whether the four cumulative Altmark tests have been met, and if the compensation to be paid to the undertaking does not appear to meet the second and third criteria, or the SGEI has not been awarded in accordance with the fourth criterion, it will then have to establish in relation to the compatibility test, whether or not there is a risk of overcompensation for the costs of performing the SGEI.2803 The Member State will be obliged to demonstrate that the measure meets the necessity and proportionality tests in this respect. Thus it may be possible to establish that the even if the compensation might exceed the costs necessary to provide the service, taking into account relevant receipts and a reasonable profit, it may nevertheless be justifiable.2804 The Court has confirmed this approach in its ruling in Case T-354/05 TFI v Commission.2805

2802 See Chapter VII.4 of the Commission Decision 2803 See however the ruling of the ECJ in C-660/15 P Viasat – on the relevance of the Altmark conditions to the compatibility of an aid measure granted to an SGEI provider (C:2017:999). 2804 See for an example, Commission Decision C49/2006, Poste Italiane, OJ [2007] C31/11 and SA.36740, on the Lithuanian LNG Terminal, loc. cit. 2805 In Case T-354/5 TFI, [2009] ECR II-471, the General Court has confirmed that even if the Altmark tests are not met, the Commission is entitled to (a) make a finding of aid and (b) declare that aid compatible on the basis of Article 106(2) TFEU.

945

6.114

Appendix 1 TFEU Articles

Appendix 1 TFEU Articles

1.

Anti-trust Law

1.1 Article 101 (ex Article 81 TEC) 1.

The following shall be prohibited as incompatible with the internal market: all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the internal market, and in particular those which: (a) directly or indirectly fix purchase or selling prices or any other trading conditions; (b) limit or control production, markets, technical development, or investment; (c)

share markets or sources of supply;

(d) apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage; (e)

make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.

2.

Any agreements or decisions prohibited pursuant to this Article shall be automatically void.

3.

The provisions of paragraph 1 may, however, be declared inapplicable in the case of: 947

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–

any agreement or category of agreements between undertakings,

–

any decision or category of decisions by associations of undertakings,

–

any concerted practice or category of concerted practices,

which contributes to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit, and which does not: (a) impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives; (b) afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question.

1.2 Article 102 (ex Article 82 TEC) Any abuse by one or more undertakings of a dominant position within the internal market or in a substantial part of it shall be prohibited as incompatible with the internal market in so far as it may affect trade between Member States. Such abuse may, in particular, consist in: (a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions; (b) limiting production, markets or technical development to the prejudice of consumers; (c)

applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;

(d) making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts. 948

Appendix 1 TFEU Articles

1.3 Article 103 (ex Article 83 TEC) 1.

The appropriate regulations or directives to give effect to the principles set out in Articles 101 and 102 shall be laid down by the Council, on a proposal from the Commission and after consulting the European Parliament.

2.

The regulations or directives referred to in paragraph 1 shall be designed in particular: (a) to ensure compliance with the prohibitions laid down in Article 101(1) and in Article 102 by making provision for fines and periodic penalty payments; (b) to lay down detailed rules for the application of Article 101(3), taking into account the need to ensure effective supervision on the one hand, and to simplify administration to the greatest possible extent on the other; (c)

to define, if need be, in the various branches of the economy, the scope of the provisions of Articles 101 and 102;

(d) to define the respective functions of the Commission and of the Court of Justice of the European Union in applying the provisions laid down in this paragraph; (e)

to determine the relationship between national laws and the provisions contained in this Section or adopted pursuant to this Article.

1.4 Article 104 (ex Article 84 TEC) Until the entry into force of the provisions adopted in pursuance of Article 103, the authorities in Member States shall rule on the admissibility of agreements, decisions and concerted practices and on abuse of a dominant position in the internal market in accordance with the law of their country and with the provisions of Article 101, in particular paragraph 3, and of Article 102.

949

Appendix 1 TFEU Articles

1.5 Article 105 (ex Article 85 TEC) 1.

Without prejudice to Article 104, the Commission shall ensure the application of the principles laid down in Articles 101 and 102. On application by a Member State or on its own initiative, and in cooperation with the competent authorities in the Member States, which shall give it their assistance, the Commission shall investigate cases of suspected infringement of these principles. If it finds that there has been an infringement, it shall propose appropriate measures to bring it to an end.

2.

If the infringement is not brought to an end, the Commission shall record such infringement of the principles in a reasoned decision. The Commission may publish its decision and authorise Member States to take the measures, the conditions and details of which it shall determine, needed to remedy the situation.

3.

The Commission may adopt regulations relating to the categories of agreement in respect of which the Council has adopted a regulation or a directive pursuant to Article 103(2)(b).

1.6 Article 106 (ex Article 86 TEC) 1.

In the case of public undertakings and undertakings to which Member States grant special or exclusive rights, Member States shall neither enact nor maintain in force any measure contrary to the rules contained in the Treaties, in particular to those rules provided for in Article 18 and Articles 101 to 109.

2.

Undertakings entrusted with the operation of services of general economic interest or having the character of a revenue-producing monopoly shall be subject to the rules contained in the Treaties, in particular to the rules on competition, in so far as the application of such rules does not obstruct the performance, in law or in fact, of the particular tasks assigned to them. The development of trade must not be affected to such an extent as would be contrary to the interests of the Union.

3.

The Commission shall ensure the application of the provisions of this Article and shall, where necessary, address appropriate directives or decisions to Member States.

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Appendix 1 TFEU Articles

2. State Aid 2.1 Article 14 (ex Article 16 TEC) Without prejudice to Article 4 of the Treaty on European Union or to Articles 93, 106 and 107 of this Treaty, and given the place occupied by services of general economic interest in the shared values of the Union as well as their role in promoting social and territorial cohesion, the Union and the Member States, each within their respective powers and within the scope of application of the Treaties, shall take care that such services operate on the basis of principles and conditions, particularly economic and financial conditions, which enable them to fulfil their missions. The European Parliament and the Council, acting by means of regulations in accordance with the ordinary legislative procedure, shall establish these principles and set these conditions without prejudice to the competence of Member States, in compliance with the Treaties, to provide, to commission and to fund such services.

2.2. Article 42 (ex Article 36 TEC) The provisions of the Chapter relating to rules on competition shall apply to production of and trade in agricultural products only to the extent determined by the European Parliament and the Council within the framework of Article 43(2) and in accordance with the procedure laid down therein, account being taken of the objectives set out in Article 39. The Council, on a proposal from the Commission, may authorise the granting of aid: (a) for the protection of enterprises handicapped by structural or natural conditions; (b) within the framework of economic development programmes.

2.3 Article 93 (ex Article 73 TEC) Aids shall be compatible with the Treaties if they meet the needs of coordination of transport or if they represent reimbursement for the discharge of certain obligations inherent in the concept of a public service.

951

Appendix 1 TFEU Articles

2.4 Article 106 (ex Article 86 TEC) 1.

In the case of public undertakings and undertakings to which Member States grant special or exclusive rights, Member States shall neither enact nor maintain in force any measure contrary to the rules contained in the Treaties, in particular to those rules provided for in Article 18 and Articles 101 to 109.

2.

Undertakings entrusted with the operation of services of general economic interest or having the character of a revenue-producing monopoly shall be subject to the rules contained in the Treaties, in particular to the rules on competition, in so far as the application of such rules does not obstruct the performance, in law or in fact, of the particular tasks assigned to them. The development of trade must not be affected to such an extent as would be contrary to the interests of the Union.

3.

The Commission shall ensure the application of the provisions of this Article and shall, where necessary, address appropriate directives or decisions to Member States.

2.5 Article 107 (ex Article 87 TEC) 1.

Save as otherwise provided in the Treaties, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market.

2.

The following shall be compatible with the internal market: (a) aid having a social character, granted to individual consumers, provided that such aid is granted without discrimination related to the origin of the products concerned; (b) aid to make good the damage caused by natural disasters or exceptional occurrences; (c)

aid granted to the economy of certain areas of the Federal Republic of Germany affected by the division of Germany, in so far as such aid is required in order to compensate for the economic dis952

Appendix 1 TFEU Articles

advantages caused by that division. Five years after the entry into force of the Treaty of Lisbon, the Council, acting on a proposal from the Commission, may adopt a decision repealing this point. 3.

The following may be considered to be compatible with the internal market: (a) aid to promote the economic development of areas where the standard of living is abnormally low or where there is serious underemployment, and of the regions referred to in Article 349, in view of their structural, economic and social situation; (b) aid to promote the execution of an important project of common European interest or to remedy a serious disturbance in the economy of a Member State; (c)

aid to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest;

(d) aid to promote culture and heritage conservation where such aid does not affect trading conditions and competition in the Union to an extent that is contrary to the common interest; (e)

such other categories of aid as may be specified by decision of the Council on a proposal from the Commission.

2.6 Article 108 (ex Article 88 TEC) 1.

The Commission shall, in cooperation with Member States, keep under constant review all systems of aid existing in those States. It shall propose to the latter any appropriate measures required by the progressive development or by the functioning of the internal market.

2.

If, after giving notice to the parties concerned to submit their comments, the Commission finds that aid granted by a State or through State resources is not compatible with the internal market having regard to Article 107, or that such aid is being misused, it shall decide that the State concerned shall abolish or alter such aid within a period of time to be determined by the Commission. 953

Appendix 1 TFEU Articles



If the State concerned does not comply with this decision within the prescribed time, the Commission or any other interested State may, in derogation from the provisions of Articles 258 and 259, refer the matter to the Court of Justice of the European Union direct.



On application by a Member State, the Council may, acting unanimously, decide that aid which that State is granting or intends to grant shall be considered to be compatible with the internal market, in derogation from the provisions of Article 107 or from the regulations provided for in Article 109, if such a decision is justified by exceptional circumstances. If, as regards the aid in question, the Commission has already initiated the procedure provided for in the first subparagraph of this paragraph, the fact that the State concerned has made its application to the Council shall have the effect of suspending that procedure until the Council has made its attitude known.



If, however, the Council has not made its attitude known within three months of the said application being made, the Commission shall give its decision on the case.

3.

The Commission shall be informed, in sufficient time to enable it to submit its comments, of any plans to grant or alter aid. If it considers that any such plan is not compatible with the internal market having regard to Article 107, it shall without delay initiate the procedure provided for in paragraph 2. The Member State concerned shall not put its proposed measures into effect until this procedure has resulted in a final decision.

4.

The Commission may adopt regulations relating to the categories of State aid that the Council has, pursuant to Article 109, determined may be exempted from the procedure provided for by paragraph 3 of this Article.

2.7 Article 109 (ex Article 89 TEC) The Council, on a proposal from the Commission and after consulting the European Parliament, may make any appropriate regulations for the application of Articles 107 and 108 and may in particular determine the conditions in which Article 108(3) shall apply and the categories of aid exempted from this procedure.

954

Appendix 2 Implementation of the rules on competition

Appendix 2 Implementation of the rules on competition I (Acts whose publication is obligatory) COUNCIL REGULATION (EC) No 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty (Text with EEA relevance)

THE COUNCIL OF THE EUROPEAN UNION, Having regard to the Treaty establishing the European Community, and in particular Article 83 thereof, Having regard to the proposal from the Commission1, Having regard to the opinion of the European Parliament2, Having regard to the opinion of the European Economic and Social Committee 3, Whereas: (1) In order to establish a system which ensures that competition in the common market is not distorted, Articles 81 and 82 of the Treaty must be applied effectively and uniformly in the Commu­nity. Council Regulation No 17 of 6 February 1962, First Regulation implementing Articles 81 and 82 (*) of the Treaty4, has allowed a Community competition policy to develop that has helped to disseminate a competition culture within 955

Appendix 2 Implementation of the rules on competition

the Community. In the light of experience, however, that Regulation should now be replaced by legislation designed to meet the challenges of an integrated market and a future enlargement of the Community. (2) In particular, there is a need to rethink the arrangements for applying the exception from the prohi­bition on agreements, which restrict competition, laid down in Article 81(3) of the Treaty. Under Article 83(2)(b) of the Treaty, account must be taken in this regard of the need to ensure effective supervision, on the one hand, and to simplify administration to the greatest possible extent, on the other. (3) The centralised scheme set up by Regulation No 17 no longer secures a balance between those two objectives. It hampers application of the Community competition rules by the courts and competi­tion authorities of the Member States, and the system of notification it involves prevents the Commission from concentrating its resources on curbing the most serious infringements. It also imposes considerable costs on undertakings. (4) The present systemshould therefore be replaced by a directly applicable exception systemin which the competition authorities and courts of the Member States have the power to apply not only Article 81(1) and Article 82 of the Treaty, which have direct applicability by virtue of the case-law of the Court of Justice of the European Communities, but also Article 81(3) of the Treaty. . (5) In order to ensure an effective enforcement of the Community competition rules and at the same time the respect of fundamental rights of defence, this Regulation should regulate the burden of proof under Articles 81 and 82 of the Treaty. It should be for the party or the authority alleging an infringement of Article 81(1) and Article 82 of the Treaty to prove the existence thereof to the required legal standard. It should be for the undertaking or association of undertakings invoking the benefit of a defence against a finding of an infringement to demonstrate to the required legal stan­dard that the conditions for applying such defence are satisfied. This Regulation affects neither national rules on the standard of proof nor obligations of competition authorities and courts of the Member States to ascertain the relevant facts of a case, provided that such rules and obligations are compatible with general principles of Community law.

956

Appendix 2 Implementation of the rules on competition

(6) In order to ensure that the Community competition rules are applied effectively, the competition authorities of the Member States should be associated more closely with their application. To this end, they should be empowered to apply Community law. (7) National courts have an essential part to play in applying the Community competition rules. When deciding disputes between private individuals, they protect the subjective rights under Community law, for example by awarding damages to the victims of infringements. The role of the national courts here complements that of the competition authorities of the Member States. They should therefore be allowed to apply Articles 81 and 82 of the Treaty in full. (8) In order to ensure the effective enforcement of the Community competition rules and the proper functioning of the cooperation mechanisms contained in this Regulation, it is necessary to oblige the competition authorities and courts of the Member States to also apply Articles 81 and 82 of the Treaty where they apply national competition law to agreements and practices which may affect trade between Member States. In order to create a level playing field for agreements, decisions by associations of undertakings and concerted practices within the internal market, it is also necessary to determine pursuant to Article 83(2)(e) of the Treaty the relationship between national laws and Community competition law. To that effect it is necessary to provide that the application of national competition laws to agreements, decisions or concerted practices within the meaning of Article 81(1) of the Treaty may not lead to the prohibition of such agreements, decisions and concerted practices if they are not also prohibited under Community competition law. The notions of agree­ments, decisions and concerted practices are autonomous concepts of Community competition law covering the coordination of behaviour of undertakings on the market as interpreted by the Community Courts. Member States should not under this Regulation be precluded from adopting and applying on their territory stricter national competition laws which prohibit or impose sanc­tions on unilateral conduct engaged in by undertakings. These stricter national laws may include provisions which prohibit or impose sanctions on abusive behaviour toward economically depen­dent undertakings. Furthermore, this Regulation does not apply to national laws which impose crim­inal sanctions on natural persons except to the extent that such sanctions are the means whereby competition rules applying to undertakings are enforced. 957

Appendix 2 Implementation of the rules on competition

(9) Articles 81 and 82 of the Treaty have as their objective the protection of competition on the market. This Regulation, which is adopted for the implementation of these Treaty provisions, does not preclude Member States from implementing on their territory national legislation, which protects other legitimate interests provided that such legislation is compatible with general principles and other provisions of Community law. In so far as such national legislation pursues predominantly an objective different from that of protecting competition on the market, the competition authorities and courts of the Member States may apply such legislation on their territory. Accordingly, Member States may under this Regulation implement on their territory national legislation that prohibits or imposes sanctions on acts of unfair trading practice, be they unilateral or contractual. Such legisla­tion pursues a specific objective, irrespective of the actual or presumed effects of such acts on competition on the market. This is particularly the case of legislation which prohibits undertakings from imposing on their trading partners, obtaining or attempting to obtain from them terms and conditions that are unjustified, disproportionate or without consideration. (10) Regulations such as 19/65/EEC5, (EEC) No 2821/716, (EEC) No 3976/877, (EEC) No 1534/ 918, or (EEC) No 479/929 empower the Commission to apply Article 81(3) of the Treaty by Regulation to certain categories of agreements, decisions by associations of undertakings and concerted practices. In the areas defined by such Regulations, the Commission has adopted and may continue to adopt so called ‘block’ exemption Regulations by which it declares Article 81(1) of the Treaty inapplicable to categories of agreements, decisions and concerted practices. Where agree­ments, decisions and concerted practices to which such Regulations apply nonetheless have effects that are incompatible with Article 81(3) of the Treaty, the Commission and the competition authori­ties of the Member States should have the power to withdraw in a particular case the benefit of the block exemption Regulation. (11) For it to ensure that the provisions of the Treaty are applied, the Commission should be able to address decisions to undertakings or associations of undertakings for the purpose of bringing to an end infringements of Articles 81 and 82 of the Treaty. Provided there is a legitimate interest in doing so, the Commission should also be able to adopt decisions which find that an infringement has been committed in the past even if it does not impose a fine. This Regulation should also make explicit provision for 958

Appendix 2 Implementation of the rules on competition

the Commission’s power to adopt decisions ordering interim measures, which has been acknowledged by the Court of Justice. (12) This Regulation should make explicit provision for the Commission’s power to impose any remedy, whether behavioural or structural, which is necessary to bring the infringement effectively to an end, having regard to the principle of proportionality. Structural remedies should only be imposed either where there is no equally effective behavioural remedy or where any equally effective beha­vioural remedy would be more burdensome for the undertaking concerned than the structural remedy. Changes to the structure of an undertaking as it existed before the infringement was committed would only be proportionate where there is a substantial risk of a lasting or repeated infringement that derives from the very structure of the undertaking. (13) Where, in the course of proceedings which might lead to an agreement or practice being prohibited, undertakings offer the Commission commitments such as to meet its concerns, the Commission should be able to adopt decisions which make those commitments binding on the undertakings concerned. Commitment decisions should find that there are no longer grounds for action by the Commission without concluding whether or not there has been or still is an infringement. Commit­ment decisions are without prejudice to the powers of competition authorities and courts of the Member States to make such a finding and decide upon the case. Commitment decisions are not appropriate in cases where the Commission intends to impose a fine. (14) In exceptional cases where the public interest of the Community so requires, it may also be expe­dient for the Commission to adopt a decision of a declaratory nature finding that the prohibition in Article 81 or Article 82 of the Treaty does not apply, with a view to clarifying the law and ensuring its consistent application throughout the Community, in particular with regard to new types of agreements or practices that have not been settled in the existing case-law and administrative prac­tice. (15) The Commission and the competition authorities of the Member States should form together a network of public authorities applying the Community competition rules in close cooperation. For that purpose it is necessary to set up arrangements for information and consultation. Further modal­ities for the cooperation within the network will be laid down and revised by the Commission, in close cooperation with the Member States. 959

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(16) Notwithstanding any national provision to the contrary, the exchange of information and the use of such information in evidence should be allowed between the members of the network even where the information is confidential. This information may be used for the application of Articles 81 and 82 of the Treaty as well as for the parallel application of national competition law, provided that the latter application relates to the same case and does not lead to a different outcome. When the infor­ mation exchanged is used by the receiving authority to impose sanctions on undertakings, there should be no other limit to the use of the information than the obligation to use it for the purpose for which it was collected given the fact that the sanctions imposed on undertakings are of the same type in all systems. The rights of defence enjoyed by undertakings in the various systems can be considered as sufficiently equivalent. However, as regards natural persons, they may be subject to substantially different types of sanctions across the various systems. Where that is the case, it is necessary to ensure that information can only be used if it has been collected in a way which respects the same level of protection of the rights of defence of natural persons as provided for under the national rules of the receiving authority. (17) If the competition rules are to be applied consistently and, at the same time, the network is to be managed in the best possible way, it is essential to retain the rule that the competition authorities of the Member States are automatically relieved of their competence if the Commission initiates its own proceedings. Where a competition authority of a Member State is already acting on a case and the Commission intends to initiate proceedings, it should endeavour to do so as soon as possible. Before initiating proceedings, the Commission should consult the national authority concerned. (18) To ensure that cases are dealt with by the most appropriate authorities within the network, a general provision should be laid down allowing a competition authority to suspend or close a case on the ground that another authority is dealing with it or has already dealt with it, the objective being that each case should be handled by a single authority. This provision should not prevent the Commis­sion from rejecting a complaint for lack of Community interest, as the case-law of the Court of Justice has acknowledged it may do, even if no other competition authority has indicated its inten­tion of dealing with the case.

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(19) The Advisory Committee on Restrictive Practices and Dominant Positions set up by Regulation No 17 has functioned in a very satisfactory manner. It will fit well into the new system of decentralised application. It is necessary, therefore, to build upon the rules laid down by Regulation No 17, while improving the effectiveness of the organisational arrangements. To this end, it would be expedient to allow opinions to be delivered by written procedure. The Advisory Committee should also be able to act as a forumfor discussing cases that are being handled by the competition authorities of the Member States, so as to help safeguard the consistent application of the Community competition rules. (20) The Advisory Committee should be composed of representatives of the competition authorities of the Member States. For meetings in which general issues are being discussed, Member States should be able to appoint an additional representative. This is without prejudice to members of the Committee being assisted by other experts from the Member States. (21) Consistency in the application of the competition rules also requires that arrangements be estab­lished for cooperation between the courts of the Member States and the Commission. This is rele­vant for all courts of the Member States that apply Articles 81 and 82 of the Treaty, whether applying these rules in lawsuits between private parties, acting as public enforcers or as review courts. In particular, national courts should be able to ask the Commission for information or for its opinion on points concerning the application of Community competition law. The Commission and the competition authorities of the Member States should also be able to submit written or oral observations to courts called upon to apply Article 81 or Article 82 of the Treaty. These observa­tions should be submitted within the framework of national procedural rules and practices including those safeguarding the rights of the parties. Steps should therefore be taken to ensure that the Commission and the competition authorities of the Member States are kept sufficiently well informed of proceedings before national courts. (22) In order to ensure compliance with the principles of legal certainty and the uniform application of the Community competition rules in a system of parallel powers, conflicting decisions must be avoided. It is therefore necessary to clarify, in accordance with the case-law of the Court of Justice, the effects of Commission decisions and proceedings on courts and 961

Appendix 2 Implementation of the rules on competition

competition authorities of the Member States. Commitment decisions adopted by the Commission do not affect the power of the courts and the competition authorities of the Member States to apply Articles 81 and 82 of the Treaty. (23) The Commission should be empowered throughout the Community to require such information to be supplied as is necessary to detect any agreement, decision or concerted practice prohibited by Article 81 of the Treaty or any abuse of a dominant position prohibited by Article 82 of the Treaty. When complying with a decision of the Commission, undertakings cannot be forced to admit that they have committed an infringement, but they are in any event obliged to answer factual questions and to provide documents, even if this information may be used to establish against them or against another undertaking the existence of an infringement. (24) The Commission should also be empowered to undertake such inspections as are necessary to detect any agreement, decision or concerted practice prohibited by Article 81 of the Treaty or any abuse of a dominant position prohibited by Article 82 of the Treaty. The competition authorities of the Member States should cooperate actively in the exercise of these powers. (25) The detection of infringements of the competition rules is growing ever more difficult, and, in order to protect competition effectively, the Commission’s powers of investigation need to be supple­mented. The Commission should in particular be empowered to interview any persons who may be in possession of useful information and to record the statements made. In the course of an inspec­tion, officials authorised by the Commission should be empowered to affix seals for the period of time necessary for the inspection. Seals should normally not be affixed for more than 72 hours. Offi­cials authorised by the Commission should also be empowered to ask for any information relevant to the subject matter and purpose of the inspection. (26) Experience has shown that there are cases where business records are kept in the homes of directors or other people working for an undertaking. In order to safeguard the effectiveness of inspections, therefore, officials and other persons authorised by the Commission should be empowered to enter any premises where business records may be kept, including private 962

Appendix 2 Implementation of the rules on competition

homes. However, the exercise of this latter power should be subject to the authorisation of the judicial authority. (27) Without prejudice to the case-law of the Court of Justice, it is useful to set out the scope of the control that the national judicial authority may carry out when it authorises, as foreseen by national law including as a precautionary measure, assistance from law enforcement authorities in order to overcome possible opposition on the part of the undertaking or the execution of the decision to carry out inspections in non-business premises. It results from the case-law that the national judicial authority may in particular ask the Commission for further information which it needs to carry out its control and in the absence of which it could refuse the authorisation. The case-law also confirms the competence of the national courts to control the application of national rules governing the implementation of coercive measures. (28) In order to help the competition authorities of the Member States to apply Articles 81 and 82 of the Treaty effectively, it is expedient to enable themto assist one another by carrying out inspections and other fact-finding measures. (29) Compliance with Articles 81 and 82 of the Treaty and the fulfilment of the obligations imposed on undertakings and associations of undertakings under this Regulation should be enforceable by means of fines and periodic penalty payments. To that end, appropriate levels of fine should also be laid down for infringements of the procedural rules. (30) In order to ensure effective recovery of fines imposed on associations of undertakings for infringe­ments that they have committed, it is necessary to lay down the conditions on which the Commis­sion may require payment of the fine from the members of the association where the association is not solvent. In doing so, the Commission should have regard to the relative size of the undertakings belonging to the association and in particular to the situation of small and medium-sized enterprises. Payment of the fine by one or several members of an association is without prejudice to rules of national law that provide for recovery of the amount paid from other members of the association. (31) The rules on periods of limitation for the imposition of fines and periodic penalty payments were laid down in Council Regulation (EEC) No 963

Appendix 2 Implementation of the rules on competition

2988/7410, which also concerns penalties in the field of transport. In a system of parallel powers, the acts, which may interrupt a limitation period, should include procedural steps taken independently by the competition authority of a Member State. To clarify the legal framework, Regulation (EEC) No 2988/74 should therefore be amended to prevent it applying to matters covered by this Regulation, and this Regulation should include provisions on periods of limitation. (32) The undertakings concerned should be accorded the right to be heard by the Commission, third parties whose interests may be affected by a decision should be given the opportunity of submitting their observations beforehand, and the decisions taken should be widely publicised. While ensuring the rights of defence of the undertakings concerned, in particular, the right of access to the file, it is essential that business secrets be protected. The confidentiality of information exchanged in the network should likewise be safeguarded. (33) Since all decisions taken by the Commission under this Regulation are subject to review by the Court of Justice in accordance with the Treaty, the Court of Justice should, in accordance with Article 229 thereof be given unlimited jurisdiction in respect of decisions by which the Commission imposes fines or periodic penalty payments. (34) The principles laid down in Articles 81 and 82 of the Treaty, as they have been applied by Regula­tion No 17, have given a central role to the Community bodies. This central role should be retained, whilst associating the Member States more closely with the application of the Community competi­tion rules. In accordance with the principles of subsidiarity and proportionality as set out in Article 5 of the Treaty, this Regulation does not go beyond what is necessary in order to achieve its objec­tive, which is to allow the Community competition rules to be applied effectively. (35) In order to attain a proper enforcement of Community competition law, Member States should designate and empower authorities to apply Articles 81 and 82 of the Treaty as public enforcers. They should be able to designate administrative as well as judicial authorities to carry out the various functions conferred upon competition authorities in this Regulation. This Regulation recog­nises the wide variation which exists in the public enforcement systems of Member States. The effects of Article 11(6) of this Regulation should apply to all competition authorities. As 964

Appendix 2 Implementation of the rules on competition

an excep­tion to this general rule, where a prosecuting authority brings a case before a separate judicial authority, Article 11(6) should apply to the prosecuting authority subject to the conditions in Article 35(4) of this Regulation. Where these conditions are not fulfilled, the general rule should apply. In any case, Article 11(6) should not apply to courts insofar as they are acting as review courts. (36) As the case-law has made it clear that the competition rules apply to transport, that sector should be made subject to the procedural provisions of this Regulation. Council Regulation No 141 of 26 November 1962 exempting transport from the application of Regulation No 1711 should therefore be repealed and Regulations (EEC) No 1017/6812, (EEC) No 4056/8613 and (EEC) No 3975/8714 should be amended in order to delete the specific procedural provisions they contain. (37) This Regulation respects the fundamental rights and observes the principles recognised in particular by the Charter of Fundamental Rights of the European Union. Accordingly, this Regulation should be interpreted and applied with respect to those rights and principles. (38) Legal certainty for undertakings operating under the Community competition rules contributes to the promotion of innovation and investment. Where cases give rise to genuine uncertainty because they present novel or unresolved questions for the application of these rules, individual undertakings may wish to seek informal guidance from the Commission. This Regulation is without prejudice to the ability of the Commission to issue such informal guidance,

HAS ADOPTED THIS REGULATION:

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CHAPTER I PRINCIPLES Article 1 Application of Articles 81 and 82 of the Treaty Agreements, decisions and concerted practices caught by Article 81(1) of the Treaty which do not satisfy the conditions of Article 81(3) of the Treaty shall be prohibited, no prior decision to that effect being required. Agreements, decisions and concerted practices caught by Article 81(1) of the Treaty which satisfy the conditions of Article 81(3) of the Treaty shall not be prohibited, no prior decision to that effect being required. The abuse of a dominant position referred to in Article 82 of the Treaty shall be prohibited, no prior decision to that effect being required. Article 2 Burden of proof In any national or Community proceedings for the application of Articles 81 and 82 of the Treaty, the burden of proving an infringement of Article 81(1) or of Article 82 of the Treaty shall rest on the party or the authority alleging the infringement. The undertaking or association of undertakings claiming the benefit of Article 81(3) of the Treaty shall bear the burden of proving that the conditions of that paragraph are fulfilled. Article 3 Relationshipbetween Articles 81 and 82 of the Treaty and national competition laws Where the competition authorities of the Member States or national courts apply national competi­tion law to agreements, decisions by associations of undertakings or concerted practices within the meaning of Article 81(1) of the Treaty 966

Appendix 2 Implementation of the rules on competition

which may affect trade between Member States within the meaning of that provision, they shall also apply Article 81 of the Treaty to such agreements, decisions or concerted practices. Where the competition authorities of the Member States or national courts apply national competition law to any abuse prohibited by Article 82 of the Treaty, they shall also apply Article 82 of the Treaty. The application of national competition law may not lead to the prohibition of agreements, decisions by associations of undertakings or concerted practices which may affect trade between Member States but which do not restrict competition within the meaning of Article 81(1) of the Treaty, or which fulfil the conditions of Article 81(3) of the Treaty or which are covered by a Regulation for the application of Article 81(3) of the Treaty. Member States shall not under this Regulation be precluded from adopting and applying on their territory stricter national laws which prohibit or sanction unilateral conduct engaged in by undertakings. Without prejudice to general principles and other provisions of Community law, paragraphs 1 and 2 do not apply when the competition authorities and the courts of the Member States apply national merger control laws nor do they preclude the application of provisions of national law that predominantly pursue an objective different fromthat pursued by Articles 81 and 82 of the Treaty. CHAPTER II POWERS Article 4 Powers of the Commission For the purpose of applying Articles 81 and 82 of the Treaty, the Commission shall have the powers provided for by this Regulation.

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Article 5 Powers of the competition authorities of the Member States The competition authorities of the Member States shall have the power to apply Articles 81 and 82 of the Treaty in individual cases. For this purpose, acting on their own initiative or on a complaint, they may take the following decisions: –

requiring that an infringement be brought to an end,

–

accepting commitments,

–

imposing fines, periodic penalty payments or any other penalty provided for in their national law.

—

ordering interimmeasures, Where on the basis of the information in their possession the conditions for prohibition are not met they may likewise decide that there are no grounds for action on their part. Article 6 Powers of the national courts

National courts shall have the power to apply Articles 81 and 82 of the Treaty. CHAPTER III COMMISSION DECISIONS Article 7 Finding and termination of infringement 1.

Where the Commission, acting on a complaint or on its own initiative, finds that there is an infringe­ment of Article 81 or of Article 82 of the Treaty, it may by decision require the undertakings and associa­tions of undertakings concerned to bring such infringement to an end. For this purpose, it may impose on them any behavioural or structural remedies 968

Appendix 2 Implementation of the rules on competition

which are proportionate to the infringement committed and necessary to bring the infringement effectively to an end. Structural remedies can only be imposed either where there is no equally effective behavioural remedy or where any equally effective behavioural remedy would be more burdensome for the undertaking concerned than the structural remedy. If the Commission has a legitimate interest in doing so, it may also find that an infringement has been committed in the past. 2.

Those entitled to lodge a complaint for the purposes of paragraph 1 are natural or legal persons who can show a legitimate interest and Member States. Article 8 Interim measures

1.

In cases of urgency due to the risk of serious and irreparable damage to competition, the Commis­sion, acting on its own initiative may by decision, on the basis of a prima facie finding of infringement, order interimmeasures.

2.

A decision under paragraph 1 shall apply for a specified period of time and may be renewed in so far this is necessary and appropriate. Article 9 Commitments

1.

Where the Commission intends to adopt a decision requiring that an infringement be brought to an end and the undertakings concerned offer commitments to meet the concerns expressed to them by the Commission in its preliminary assessment, the Commission may by decision make those commitments binding on the undertakings. Such a decision may be adopted for a specified period and shall conclude that there are no longer grounds for action by the Commission.

2.

The Commission may, upon request or on its own initiative, reopen the proceedings: 969

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(a) where there has been a material change in any of the facts on which the decision was based; (b) where the undertakings concerned act contrary to their commitments; or (c)

where the decision was based on incomplete, incorrect or misleading information provided by the parties. Article 10 Finding of inapplicability

Where the Community public interest relating to the application of Articles 81 and 82 of the Treaty so requires, the Commission, acting on its own initiative, may by decision find that Article 81 of the Treaty is not applicable to an agreement, a decision by an association of undertakings or a concerted practice, either because the conditions of Article 81(1) of the Treaty are not fulfilled, or because the conditions of Article 81(3) of the Treaty are satisfied. The Commission may likewise make such a finding with reference to Article 82 of the Treaty. CHAPTER IV COOPERATION Article 11 Cooperation between the Commission and the competition authorities of the Member States 1.

The Commission and the competition authorities of the Member States shall apply the Community competition rules in close cooperation.

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2.

The Commission shall transmit to the competition authorities of the Member States copies of the most important documents it has collected with a view to applying Articles 7, 8, 9, 10 and Article 29(1). At the request of the competition authority of a Member State, the Commission shall provide it with a copy of other existing documents necessary for the assessment of the case.

3.

The competition authorities of the Member States shall, when acting under Article 81 or Article 82 of the Treaty, inform the Commission in writing before or without delay after commencing the first formal investigative measure. This information may also be made available to the competition authorities of the other Member States.

4.

No later than 30 days before the adoption of a decision requiring that an infringement be brought to an end, accepting commitments or withdrawing the benefit of a block exemption Regulation, the competi­tion authorities of the Member States shall inform the Commission. To that effect, they shall provide the Commission with a summary of the case, the envisaged decision or, in the absence thereof, any other docu­ment indicating the proposed course of action. This information may also be made available to the compe­tition authorities of the other Member States. At the request of the Commission, the acting competition authority shall make available to the Commission other documents it holds which are necessary for the assessment of the case. The information supplied to the Commission may be made available to the compe­tition authorities of the other Member States. National competition authorities may also exchange between themselves information necessary for the assessment of a case that they are dealing with under Article 81 or Article 82 of the Treaty.

5.

The competition authorities of the Member States may consult the Commission on any case involving the application of Community law.

6.

The initiation by the Commission of proceedings for the adoption of a decision under Chapter III shall relieve the competition authorities of the Member States of their competence to apply Articles 81 and 82 of the Treaty. If a competition authority of a Member State is already acting on a case, the Commission shall only initiate proceedings after consulting with that national competition authority.

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Article 12 Exchange of information 1.

For the purpose of applying Articles 81 and 82 of the Treaty the Commission and the competition authorities of the Member States shall have the power to provide one another with and use in evidence any matter of fact or of law, including confidential information.

2.

Information exchanged shall only be used in evidence for the purpose of applying Article 81 or Article 82 of the Treaty and in respect of the subject-matter for which it was collected by the transmitting authority. However, where national competition law is applied in the same case and in parallel to Commu­nity competition law and does not lead to a different outcome, information exchanged under this Article may also be used for the application of national competition law.

3.

Information exchanged pursuant to paragraph 1 can only be used in evidence to impose sanctions on natural persons where: –

the law of the transmitting authority foresees sanctions of a similar kind in relation to an infringement of Article 81 or Article 82 of the Treaty or, in the absence thereof,

–

the information has been collected in a way which respects the same level of protection of the rights of defence of natural persons as provided for under the national rules of the receiving authority. However, in this case, the information exchanged cannot be used by the receiving authority to impose custodial sanctions. Article 13 Suspension or termination of proceedings

1.

Where competition authorities of two or more Member States have received a complaint or are acting on their own initiative under Article 81 or Article 82 of the Treaty against the same agreement, decision of an association or practice, the fact that one authority is dealing with the case shall be sufficient grounds for the others to suspend the proceedings be972

Appendix 2 Implementation of the rules on competition

fore them or to reject the complaint. The Commission may likewise reject a complaint on the ground that a competition authority of a Member State is dealing with the case. 2.

Where a competition authority of a Member State or the Commission has received a complaint against an agreement, decision of an association or practice which has already been dealt with by another competition authority, it may reject it. Article 14 Advisory Committee

1.

The Commission shall consult an Advisory Committee on Restrictive Practices and Dominant Posi­tions prior to the taking of any decision under Articles 7, 8, 9, 10, 23, Article 24(2) and Article 29(1).

2.

For the discussion of individual cases, the Advisory Committee shall be composed of representatives of the competition authorities of the Member States. For meetings in which issues other than individual cases are being discussed, an additional Member State representative competent in competition matters may be appointed. Representatives may, if unable to attend, be replaced by other representatives.

3.

The consultation may take place at a meeting convened and chaired by the Commission, held not earlier than 14 days after dispatch of the notice convening it, together with a summary of the case, an indi­cation of the most important documents and a preliminary draft decision. In respect of decisions pursuant to Article 8, the meeting may be held seven days after the dispatch of the operative part of a draft decision. Where the Commission dispatches a notice convening the meeting which gives a shorter period of notice than those specified above, the meeting may take place on the proposed date in the absence of an objec­tion by any Member State. The Advisory Committee shall deliver a written opinion on the Commission’s preliminary draft decision. It may deliver an opinion even if some members are absent and are not repre­sented. At the request of one or several members, the positions stated in the opinion shall be reasoned.

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4.

Consultation may also take place by written procedure. However, if any Member State so requests, the Commission shall convene a meeting. In case of written procedure, the Commission shall determine a time-limit of not less than 14 days within which the Member States are to put forward their observations for circulation to all other Member States. In case of decisions to be taken pursuant to Article 8, the time­limit of 14 days is replaced by seven days. Where the Commission determines a time-limit for the written procedure which is shorter than those specified above, the proposed time-limit shall be applicable in the absence of an objection by any Member State.

5.

The Commission shall take the utmost account of the opinion delivered by the Advisory Committee. It shall inform the Committee of the manner in which its opinion has been taken into account.

6.

Where the Advisory Committee delivers a written opinion, this opinion shall be appended to the draft decision. If the Advisory Committee recommends publication of the opinion, the Commission shall carry out such publication taking into account the legitimate interest of undertakings in the protection of their business secrets.

7.

At the request of a competition authority of a Member State, the Commission shall include on the agenda of the Advisory Committee cases that are being dealt with by a competition authority of a Member State under Article 81 or Article 82 of the Treaty. The Commission may also do so on its own initiative. In either case, the Commission shall inform the competition authority concerned.



A request may in particular be made by a competition authority of a Member State in respect of a case where the Commission intends to initiate proceedings with the effect of Article 11(6).



The Advisory Committee shall not issue opinions on cases dealt with by competition authorities of the Member States. The Advisory Committee may also discuss general issues of Community competition law.

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Article 15 Cooperation with national courts 1.

In proceedings for the application of Article 81 or Article 82 of the Treaty, courts of the Member States may ask the Commission to transmit to them information in its possession or its opinion on ques­tions concerning the application of the Community competition rules.

2.

Member States shall forward to the Commission a copy of any written judgment of national courts deciding on the application of Article 81 or Article 82 of the Treaty. Such copy shall be forwarded without delay after the full written judgment is notified to the parties.

3.

Competition authorities of the Member States, acting on their own initiative, may submit written observations to the national courts of their Member State on issues relating to the application of Article 81 or Article 82 of the Treaty. With the permission of the court in question, they may also submit oral obser­vations to the national courts of their Member State. Where the coherent application of Article 81 or Article 82 of the Treaty so requires, the Commission, acting on its own initiative, may submit written observations to courts of the Member States. With the permission of the court in question, it may also make oral observations.



For the purpose of the preparation of their observations only, the competition authorities of the Member States and the Commission may request the relevant court of the Member State to transmit or ensure the transmission to them of any documents necessary for the assessment of the case.

4.

This Article is without prejudice to wider powers to make observations before courts conferred on competition authorities of the Member States under the law of their Member State.

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Article 16 Uniform application of Community competition law 1.

When national courts rule on agreements, decisions or practices under Article 81 or Article 82 of the Treaty which are already the subject of a Commission decision, they cannot take decisions running counter to the decision adopted by the Commission. They must also avoid giving decisions which would conflict with a decision contemplated by the Commission in proceedings it has initiated. To that effect, the national court may assess whether it is necessary to stay its proceedings. This obligation is without prejudice to the rights and obligations under Article 234 of the Treaty.

3.

When competition authorities of the Member States rule on agreements, decisions or practices under Article 81 or Article 82 of the Treaty which are already the subject of a Commission decision, they cannot take decisions which would run counter to the decision adopted by the Commission. CHAPTER V POWERS OF INVESTIGATION Article 17

Investigations into sectors of the economy and into types of agreements 1.

Where the trend of trade between Member States, the rigidity of prices or other circumstances suggest that competition may be restricted or distorted within the common market, the Commission may conduct its inquiry into a particular sector of the economy or into a particular type of agreements across various sectors. In the course of that inquiry, the Commission may request the undertakings or associations of undertakings concerned to supply the information necessary for giving effect to Articles 81 and 82 of the Treaty and may carry out any inspections necessary for that purpose.

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The Commission may in particular request the undertakings or associations of undertakings concerned to communicate to it all agreements, decisions and concerted practices.



The Commission may publish a report on the results of its inquiry into particular sectors of the economy or particular types of agreements across various sectors and invite comments from interested parties.

2.

Articles 14, 18, 19, 20, 22, 23 and 24 shall apply mutatis mutandis. Article 18 Requests for information

1.

In order to carry out the duties assigned to it by this Regulation, the Commission may, by simple request or by decision, require undertakings and associations of undertakings to provide all necessary infor­mation.

2.

When sending a simple request for information to an undertaking or association of undertakings, the Commission shall state the legal basis and the purpose of the request, specify what information is required and fix the time-limit within which the information is to be provided, and the penalties provided for in Article 23 for supplying incorrect or misleading information.

3.

Where the Commission requires undertakings and associations of undertakings to supply information by decision, it shall state the legal basis and the purpose of the request, specify what information is required and fix the time-limit within which it is to be provided. It shall also indicate the penalties provided for in Article 23 and indicate or impose the penalties provided for in Article 24. It shall further indicate the right to have the decision reviewed by the Court of Justice.

4.

The owners of the undertakings or their representatives and, in the case of legal persons, companies or firms, or associations having no legal personality, the persons authorised to represent them by law or by their constitution shall supply the information requested on behalf of the undertaking or the association of undertakings concerned. Lawyers duly authorised to act may supply the information on behalf of their clients. The latter shall 977

Appendix 2 Implementation of the rules on competition

remain fully responsible if the information supplied is incomplete, incorrect or misleading. 5.

The Commission shall without delay forward a copy of the simple request or of the decision to the competition authority of the Member State in whose territory the seat of the undertaking or association of undertakings is situated and the competition authority of the Member State whose territory is affected.

6.

At the request of the Commission the governments and competition authorities of the Member States shall provide the Commission with all necessary information to carry out the duties assigned to it by this Regulation. Article 19 Power to take statements

1.

In order to carry out the duties assigned to it by this Regulation, the Commission may interview any natural or legal person who consents to be interviewed for the purpose of collecting information relating to the subject-matter of an investigation.

2.

Where an interview pursuant to paragraph 1 is conducted in the premises of an undertaking, the Commission shall inform the competition authority of the Member State in whose territory the interview takes place. If so requested by the competition authority of that Member State, its officials may assist the officials and other accompanying persons authorised by the Commission to conduct the interview. Article 20 The Commission’s powers of inspection

1.

In order to carry out the duties assigned to it by this Regulation, the Commission may conduct all necessary inspections of undertakings and associations of undertakings.

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Appendix 2 Implementation of the rules on competition

2.

The officials and other accompanying persons authorised by the Commission to conduct an inspec­tion are empowered: (a) to enter any premises, land and means of transport of undertakings and associations of undertakings; (b) to examine the books and other records related to the business, irrespective of the medium on which they are stored; (c)

to take or obtain in any formcopies of or extracts fromsuch books or records;

(d) to seal any business premises and books or records for the period and to the extent necessary for the inspection; (e)

to ask any representative or member of staff of the undertaking or association of undertakings for explanations on facts or documents relating to the subject-matter and purpose of the inspection and to record the answers.



The officials and other accompanying persons authorised by the Commission to conduct an inspec­tion shall exercise their powers upon production of a written authorisation specifying the subject matter and purpose of the inspection and the penalties provided for in Article 23 in case the production of the required books or other records related to the business is incomplete or where the answers to questions asked under paragraph 2 of the present Article are incorrect or misleading. In good time before the inspec­tion, the Commission shall give notice of the inspection to the competition authority of the Member State in whose territory it is to be conducted.



Undertakings and associations of undertakings are required to submit to inspections ordered by deci­sion of the Commission. The decision shall specify the subject matter and purpose of the inspection, appoint the date on which it is to begin and indicate the penalties provided for in Articles 23 and 24 and the right to have the decision reviewed by the Court of Justice. The Commission shall take such decisions after consulting the competition authority of the Member State in whose territory the inspection is to be conducted.

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5.

Officials of as well as those authorised or appointed by the competition authority of the Member State in whose territory the inspection is to be conducted shall, at the request of that authority or of the Commission, actively assist the officials and other accompanying persons authorised by the Commission. To this end, they shall enjoy the powers specified in paragraph 2.

6.

Where the officials and other accompanying persons authorised by the Commission find that an undertaking opposes an inspection ordered pursuant to this Article, the Member State concerned shall afford themthe necessary assistance, requesting where appropriate the assistance of the police or of an equivalent enforcement authority, so as to enable them to conduct their inspection.

7.

If the assistance provided for in paragraph 6 requires authorisation froma judicial authority according to national rules, such authorisation shall be applied for. Such authorisation may also be applied for as a precautionary measure.

8.

Where authorisation as referred to in paragraph 7 is applied for, the national judicial authority shall control that the Commission decision is authentic and that the coercive measures envisaged are neither arbitrary nor excessive having regard to the subject matter of the inspection. In its control of the propor­tionality of the coercive measures, the national judicial authority may ask the Commission, directly or through the Member State competition authority, for detailed explanations in particular on the grounds the Commission has for suspecting infringement of Articles 81 and 82 of the Treaty, as well as on the seriousness of the suspected infringement and on the nature of the involvement of the undertaking concerned. However, the national judicial authority may not call into question the necessity for the inspec­tion nor demand that it be provided with the information in the Commission’s file. The lawfulness of the Commission decision shall be subject to review only by the Court of Justice.

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Article 21 Inspection of other premises 1.

If a reasonable suspicion exists that books or other records related to the business and to the subject­matter of the inspection, which may be relevant to prove a serious violation of Article 81 or Article 82 of the Treaty, are being kept in any other premises, land and means of transport, including the homes of directors, managers and other members of staff of the undertakings and associations of undertakings concerned, the Commission can by decision order an inspection to be conducted in such other premises, land and means of transport.

2.

The decision shall specify the subject matter and purpose of the inspection, appoint the date on which it is to begin and indicate the right to have the decision reviewed by the Court of Justice. It shall in particular state the reasons that have led the Commission to conclude that a suspicion in the sense of para­graph 1 exists. The Commission shall take such decisions after consulting the competition authority of the Member State in whose territory the inspection is to be conducted.

3.

A decision adopted pursuant to paragraph 1 cannot be executed without prior authorisation from the national judicial authority of the Member State concerned. The national judicial authority shall control that the Commission decision is authentic and that the coercive measures envisaged are neither arbitrary nor excessive having regard in particular to the seriousness of the suspected infringement, to the impor­tance of the evidence sought, to the involvement of the undertaking concerned and to the reasonable likeli­hood that business books and records relating to the subject matter of the inspection are kept in the premises for which the authorisation is requested. The national judicial authority may ask the Commission, directly or through the Member State competition authority, for detailed explanations on those elements which are necessary to allow its control of the proportionality of the coercive measures envisaged.

3.

However, the national judicial authority may not call into question the necessity for the inspection nor demand that it be provided with information in the Commission’s file. The lawfulness of the Commission decision shall be subject to review only by the Court of Justice.

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4.

The officials and other accompanying persons authorised by the Commission to conduct an inspec­tion ordered in accordance with paragraph 1 of this Article shall have the powers set out in Article 20(2)(a), (b) and (c). Article 20(5) and (6) shall apply mutatis mutandis. Article 22 Investigations by competition authorities of Member States

1.

The competition authority of a Member State may in its own territory carry out any inspection or other fact-finding measure under its national law on behalf and for the account of the competition authority of another Member State in order to establish whether there has been an infringement of Article 81 or Article 82 of the Treaty. Any exchange and use of the information collected shall be carried out in accordance with Article 12.

2.

At the request of the Commission, the competition authorities of the Member States shall undertake the inspections which the Commission considers to be necessary under Article 20(1) or which it has ordered by decision pursuant to Article 20(4). The officials of the competition authorities of the Member States who are responsible for conducting these inspections as well as those authorised or appointed by themshall exercise their powers in accordance with their national law.

3.

If so requested by the Commission or by the competition authority of the Member State in whose territory the inspection is to be conducted, officials and other accompanying persons authorised by the Commission may assist the officials of the authority concerned.

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CHAPTER VI PENALTIES Article 23 Fines 1.

The Commission may by decision impose on undertakings and associations of undertakings fines not exceeding 1 % of the total turnover in the preceding business year where, intentionally or negligently: (a) they supply incorrect or misleading information in response to a request made pursuant to Article 17 or Article 18(2); (b) in response to a request made by decision adopted pursuant to Article 17 or Article 18(3), they supply incorrect, incomplete or misleading information or do not supply information within the required time-limit; (c)

they produce the required books or other records related to the business in incomplete form during inspections under Article 20 or refuse to submit to inspections ordered by a decision adopted pursuant to Article 20(4);

(d) in response to a question asked in accordance with Article 20(2) (e), –

they give an incorrect or misleading answer,

–

they fail to rectify within a time-limit set by the Commission an incorrect, incomplete or misleading answer given by a member of staff, or

–

they fail or refuse to provide a complete answer on facts relating to the subject-matter and purpose of an inspection ordered by a decision adopted pursuant to Article 20(4);

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Appendix 2 Implementation of the rules on competition

(e)

2.

seals affixed in accordance with Article 20(2)(d) by officials or other accompanying persons authorised by the Commission have been broken.

The Commission may by decision impose fines on undertakings and associations of undertakings where, either intentionally or negligently: (a) they infringe Article 81 or Article 82 of the Treaty; or (b) they contravene a decision ordering interimmeasures under Article 8; or (c)

they fail to comply with a commitment made binding by a decision pursuant to Article 9.



For each undertaking and association of undertakings participating in the infringement, the fine shall not exceed 10 % of its total turnover in the preceding business year.



Where the infringement of an association relates to the activities of its members, the fine shall not exceed 10 % of the sum of the total turnover of each member active on the market affected by the infringement of the association.

3.

In fixing the amount of the fine, regard shall be had both to the gravity and to the duration of the infringement.

4.

When a fine is imposed on an association of undertakings taking account of the turnover of its members and the association is not solvent, the association is obliged to call for contributions from its members to cover the amount of the fine.



Where such contributions have not been made to the association within a time-limit fixed by the Commis­sion, the Commission may require payment of the fine directly by any of the undertakings whose represen­tatives were members of the decision-making bodies concerned of the association.



After the Commission has required payment under the second subparagraph, where necessary to ensure full payment of the fine, the Commis984

Appendix 2 Implementation of the rules on competition

sion may require payment of the balance by any of the members of the association which were active on the market on which the infringement occurred.

However, the Commission shall not require payment under the second or the third subparagraph from undertakings which show that they have not implemented the infringing decision of the association and either were not aware of its existence or have actively distanced themselves from it before the Commission started investigating the case.



The financial liability of each undertaking in respect of the payment of the fine shall not exceed 10 % of its total turnover in the preceding business year.

5.

Decisions taken pursuant to paragraphs 1 and 2 shall not be of a criminal law nature. Article 24 Periodic penalty payments

1.

The Commission may, by decision, impose on undertakings or associations of undertakings periodic penalty payments not exceeding 5 % of the average daily turnover in the preceding business year per day and calculated from the date appointed by the decision, in order to compel them: (a) to put an end to an infringement of Article 81 or Article 82 of the Treaty, in accordance with a deci­sion taken pursuant to Article 7; (b) to comply with a decision ordering interim measures taken pursuant to Article 8; (c)

to comply with a commitment made binding by a decision pursuant to Article 9;

(d) to supply complete and correct information which it has requested by decision taken pursuant to Article 17 or Article 18(3);

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Appendix 2 Implementation of the rules on competition

(e) 2.

to submit to an inspection which it has ordered by decision taken pursuant to Article 20(4).

Where the undertakings or associations of undertakings have satisfied the obligation which the peri­odic penalty payment was intended to enforce, the Commission may fix the definitive amount of the peri­odic penalty payment at a figure lower than that which would arise under the original decision. Article 23(4) shall apply correspondingly. CHAPTER VII LIMITATION PERIODS Article 25 Limitation periods for the imposition of penalties

1.

The powers conferred on the Commission by Articles 23 and 24 shall be subject to the following limitation periods: (a) three years in the case of infringements of provisions concerning requests for information or the conduct of inspections; (b) five years in the case of all other infringements.



Time shall begin to run on the day on which the infringement is committed. However, in the case of continuing or repeated infringements, time shall begin to run on the day on which the infringement ceases.



Any action taken by the Commission or by the competition authority of a Member State for the purpose of the investigation or proceedings in respect of an infringement shall interrupt the limitation period for the imposition of fines or periodic penalty payments. The limitation period shall be interrupted with effect fromthe date on which the action is notified to at least one undertaking or association of undertakings which has participated in the infringement. Actions which interrupt the running of the period shall include in particular the following:

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Appendix 2 Implementation of the rules on competition

(a) written requests for information by the Commission or by the competition authority of a Member State; (b) written authorisations to conduct inspections issued to its officials by the Commission or by the competition authority of a Member State; (c)

the initiation of proceedings by the Commission or by the competition authority of a Member State;

(d) notification of the statement of objections of the Commission or of the competition authority of a Member State.

The interruption of the limitation period shall apply for all the undertakings or associations of under­takings which have participated in the infringement.



Each interruption shall start time running afresh. However, the limitation period shall expire at the latest on the day on which a period equal to twice the limitation period has elapsed without the Commis­sion having imposed a fine or a periodic penalty payment. That period shall be extended by the time during which limitation is suspended pursuant to paragraph 6.



The limitation period for the imposition of fines or periodic penalty payments shall be suspended for as long as the decision of the Commission is the subject of proceedings pending before the Court of Justice. Article 26 Limitation period for the enforcement of penalties

1.

The power of the Commission to enforce decisions taken pursuant to Articles 23 and 24 shall be subject to a limitation period of five years.

2.

Time shall begin to run on the day on which the decision becomes final.

3.

The limitation period for the enforcement of penalties shall be interrupted: 987

Appendix 2 Implementation of the rules on competition

(a) by notification of a decision varying the original amount of the fine or periodic penalty payment or refusing an application for variation; (b) by any action of the Commission or of a Member State, acting at the request of the Commission, designed to enforce payment of the fine or periodic penalty payment. 4.

Each interruption shall start time running afresh.

5.

The limitation period for the enforcement of penalties shall be suspended for so long as: (a) time to pay is allowed; (b) enforcement of payment is suspended pursuant to a decision of the Court of Justice. CHAPTER VIII HEARINGS AND PROFESSIONAL SECRECY Article 27 Hearing of the parties, complainants and others

1.

Before taking decisions as provided for in Articles 7, 8, 23 and Article 24(2), the Commission shall give the undertakings or associations of undertakings which are the subject of the proceedings conducted by the Commission the opportunity of being heard on the matters to which the Commission has taken objection. The Commission shall base its decisions only on objections on which the parties concerned have been able to comment. Complainants shall be associated closely with the proceedings.

2.

The rights of defence of the parties concerned shall be fully respected in the proceedings. They shall be entitled to have access to the Commission’s file, subject to the legitimate interest of undertakings in the protection of their business secrets. The right of access to the file shall not extend to confidential informa­tion and internal documents of the Commission 988

Appendix 2 Implementation of the rules on competition

or the competition authorities of the Member States. In particular, the right of access shall not extend to correspondence between the Commission and the compe­tition authorities of the Member States, or between the latter, including documents drawn up pursuant to Articles 11 and 14. Nothing in this paragraph shall prevent the Commission from disclosing and using information necessary to prove an infringement. 3.

If the Commission considers it necessary, it may also hear other natural or legal persons. Applications to be heard on the part of such persons shall, where they show a sufficient interest, be granted. The competition authorities of the Member States may also ask the Commission to hear other natural or legal persons.

4.

Where the Commission intends to adopt a decision pursuant to Article 9 or Article 10, it shall publish a concise summary of the case and the main content of the commitments or of the proposed course of action. Interested third parties may submit their observations within a time limit which is fixed by the Commission in its publication and which may not be less than one month. Publication shall have regard to the legitimate interest of undertakings in the protection of their business secrets. Article 28 Professional secrecy

1.

Without prejudice to Articles 12 and 15, information collected pursuant to Articles 17 to 22 shall be used only for the purpose for which it was acquired.

2.

Without prejudice to the exchange and to the use of information foreseen in Articles 11, 12, 14, 15 and 27, the Commission and the competition authorities of the Member States, their officials, servants and other persons working under the supervision of these authorities as well as officials and civil servants of other authorities of the Member States shall not disclose information acquired or exchanged by them pursuant to this Regulation and of the kind covered by the obligation of professional secrecy. This obliga­tion also applies to all representatives and experts of Member States attending meetings of the Advisory Committee pursuant to Article 14. 989

Appendix 2 Implementation of the rules on competition

CHAPTER IX EXEMPTION REGULATIONS Article 29 Withdrawal in individual cases 1.

Where the Commission, empowered by a Council Regulation, such as Regulations 19/65/EEC, (EEC) No 2821/71, (EEC) No 3976/87, (EEC) No 1534/91 or (EEC) No 479/92, to apply Article 81(3) of the Treaty by regulation, has declared Article 81(1) of the Treaty inapplicable to certain categories of agree­ments, decisions by associations of undertakings or concerted practices, it may, acting on its own initiative or on a complaint, withdraw the benefit of such an exemption Regulation when it finds that in any parti­cular case an agreement, decision or concerted practice to which the exemption Regulation applies has certain effects which are incompatible with Article 81(3) of the Treaty.

2.

Where, in any particular case, agreements, decisions by associations of undertakings or concerted practices to which a Commission Regulation referred to in paragraph 1 applies have effects which are incompatible with Article 81(3) of the Treaty in the territory of a Member State, or in a part thereof, which has all the characteristics of a distinct geographic market, the competition authority of that Member State may withdraw the benefit of the Regulation in question in respect of that territory. CHAPTER X GENERAL PROVISIONS Article 30 Publication of decisions

1.

The Commission shall publish the decisions, which it takes pursuant to Articles 7 to 10, 23 and 24.

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Appendix 2 Implementation of the rules on competition

2.

The publication shall state the names of the parties and the main content of the decision, including any penalties imposed. It shall have regard to the legitimate interest of undertakings in the protection of their business secrets. Article 31 Review by the Court of Justice

The Court of Justice shall have unlimited jurisdiction to review decisions whereby the Commission has fixed a fine or periodic penalty payment. It may cancel, reduce or increase the fine or periodic penalty payment imposed. Article 32 Exclusions This Regulation shall not apply to: (a) international tramp vessel services as defined in Article 1(3)(a) of Regulation (EEC) No 4056/86; (b) a maritime transport service that takes place exclusively between ports in one and the same Member State as foreseen in Article 1(2) of Regulation (EEC) No 4056/86; (c)

air transport between Community airports and third countries. Article 33 Implementing provisions

1.

The Commission shall be authorised to take such measures as may be appropriate in order to apply this Regulation. The measures may concern, inter alia:

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Appendix 2 Implementation of the rules on competition

(a) the form, content and other details of complaints lodged pursuant to Article 7 and the procedure for rejecting complaints; (b) the practical arrangements for the exchange of information and consultations provided for in Article 11; (c) 2.

the practical arrangements for the hearings provided for in Article 27.

Before the adoption of any measures pursuant to paragraph 1, the Commission shall publish a draft thereof and invite all interested parties to submit their comments within the time-limit it lays down, which may not be less than one month. Before publishing a draft measure and before adopting it, the Commis­sion shall consult the Advisory Committee on Restrictive Practices and Dominant Positions. CHAPTER XI TRANSITIONAL, AMENDING AND FINAL PROVISIONS Article 34 Transitional provisions

1.

Applications made to the Commission under Article 2 of Regulation No 17, notifications made under Articles 4 and 5 of that Regulation and the corresponding applications and notifications made under Regu­lations (EEC) No 1017/68, (EEC) No 4056/86 and (EEC) No 3975/87 shall lapse as fromthe date of appli­cation of this Regulation.

2.

Procedural steps taken under Regulation No 17 and Regulations (EEC) No 1017/68, (EEC) No 4056/ 86 and (EEC) No 3975/87 shall continue to have effect for the purposes of applying this Regulation.

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Appendix 2 Implementation of the rules on competition

Article 35 Designation of competition authorities of Member States 1.

The Member States shall designate the competition authority or authorities responsible for the appli­cation of Articles 81 and 82 of the Treaty in such a way that the provisions of this regulation are effec­tively complied with. The measures necessary to empower those authorities to apply those Articles shall be taken before 1 May 2004. The authorities designated may include courts.

2.

When enforcement of Community competition law is entrusted to national administrative and judi­cial authorities, the Member States may allocate different powers and functions to those different national authorities, whether administrative or judicial.

3.

The effects of Article 11(6) apply to the authorities designated by the Member States including courts that exercise functions regarding the preparation and the adoption of the types of decisions foreseen in Article 5. The effects of Article 11(6) do not extend to courts insofar as they act as review courts in respect of the types of decisions foreseen in Article 5.

4.

Notwithstanding paragraph 3, in the Member States where, for the adoption of certain types of deci­sions foreseen in Article 5, an authority brings an action before a judicial authority that is separate and different from the prosecuting authority and provided that the terms of this paragraph are complied with, the effects of Article 11(6) shall be limited to the authority prosecuting the case which shall withdraw its claim before the judicial authority when the Commission opens proceedings and this withdrawal shall bring the national proceedings effectively to an end. Article 36 Amendment of Regulation (EEC) No 1017/68

Regulation (EEC) No 1017/68 is amended as follows: 1.

Article 2 is repealed;

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Appendix 2 Implementation of the rules on competition

2.

in Article 3(1), the words ‘The prohibition laid down in Article 2’ are replaced by the words ‘The prohi­bition in Article 81(1) of the Treaty’;

3.

Article 4 is amended as follows: (a) In paragraph 1, the words ‘The agreements, decisions and concerted practices referred to in Article 2’ are replaced by the words ‘Agreements, decisions and concerted practices pursuant to Article 81(1) of the Treaty’; (b) Paragraph 2 is replaced by the following:

‘2. If the implementation of any agreement, decision or concerted practice covered by paragraph 1 has, in a given case, effects which are incompatible with the requirements of Article 81(3) of the Treaty, undertakings or associations of undertakings may be required to make such effects cease.’

4.

Articles 5 to 29 are repealed with the exception of Article 13(3) which continues to apply to decisions adopted pursuant to Article 5 of Regulation (EEC) No 1017/68 prior to the date of application of this Regulation until the date of expiration of those decisions;

5.

in Article 30, paragraphs 2, 3 and 4 are deleted. Article 37 Amendment of Regulation (EEC) No 2988/74

In Regulation (EEC) No 2988/74, the following Article is inserted:

‘Article 7a



Exclusion This Regulation shall not apply to measures taken under Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty (*).



(*) OJ L 1, 4.1.2003, p. 1.’ 994

Appendix 2 Implementation of the rules on competition

Article 38 Amendment of Regulation (EEC) No 4056/86 Regulation (EEC) No 4056/86 is amended as follows: 1.

Article 7 is amended as follows: (a) Paragraph 1 is replaced by the following:

‘1. Breach of an obligation



Where the persons concerned are in breach of an obligation which, pursuant to Article 5, attaches to the exemption provided for in Article 3, the Commission may, in order to put an end to such breach and under the conditions laid down in Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty (*) adopt a decision that either prohibits themfromcarrying out or requires themto performcertain specific acts, or withdraws the benefit of the block exemption which they enjoyed.



(*) OJ L 1, 4.1.2003, p. 1.’

(b) Paragraph 2 is amended as follows: (i)

In point (a), the words ‘under the conditions laid down in Section II’ are replaced by the words ‘under the conditions laid down in Regulation (EC) No 1/2003’;

(ii) The second sentence of the second subparagraph of point (c)(i) is replaced by the following:

‘At the same time it shall decide, in accordance with Article 9 of Regulation (EC) No 1/2003, whether to accept commitments offered by the undertakings concerned with a view, inter alia, to obtaining access to the market for non-conference lines.’

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Appendix 2 Implementation of the rules on competition

2.

Article 8 is amended as follows: (a) Paragraph 1 is deleted. (b) In paragraph 2 the words ‘pursuant to Article 10’ are replaced by the words ‘pursuant to Regulation (EC) No 1/2003’. (c)

3.

Paragraph 3 is deleted;

Article 9 is amended as follows: (a) In paragraph 1, the words ‘Advisory Committee referred to in Article 15’ are replaced by the words ‘Advisory Committee referred to in Article 14 of Regulation (EC) No 1/2003’; (b) In paragraph 2, the words ‘Advisory Committee as referred to in Article 15’ are replaced by the words ‘Advisory Committee referred to in Article 14 of Regulation (EC) No 1/2003’;

4.

Articles 10 to 25 are repealed with the exception of Article 13(3) which continues to apply to decisions adopted pursuant to Article 81(3) of the Treaty prior to the date of application of this Regulation until the date of expiration of those decisions;

5.

in Article 26, the words ‘the form, content and other details of complaints pursuant to Article 10, appli­cations pursuant to Article 12 and the hearings provided for in Article 23(1) and (2)’ are deleted. Article 39 Amendment of Regulation (EEC) No 3975/87

Articles 3 to 19 of Regulation (EEC) No 3975/87 are repealed with the exception of Article 6(3) which continues to apply to decisions adopted pursuant to Article 81(3) of the Treaty prior to the date of applica­tion of this Regulation until the date of expiration of those decisions.

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Article 40 Amendment of Regulations No 19/65/EEC, (EEC) No 2821/71 and (EEC) No 1534/91 Article 7 of Regulation No 19/65/EEC, Article 7 of Regulation (EEC) No 2821/71 and Article 7 of Regula­tion (EEC) No 1534/91 are repealed. Article 41 Amendment of Regulation (EEC) No 3976/87 Regulation (EEC) No 3976/87 is amended as follows: 1.

Article 6 is replaced by the following:



‘Article 6



The Commission shall consult the Advisory Committee referred to in Article 14 of Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty (*) before publishing a draft Regulation and before adopting a Regula­tion.



(*) OJ L 1, 4.1.2003, p. 1.’

2.

Article 7 is repealed. Article 42 Amendment of Regulation (EEC) No 479/92

Regulation (EEC) No 479/92 is amended as follows: 1.

Article 5 is replaced by the following:



‘Article 5

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Appendix 2 Implementation of the rules on competition



Before publishing the draft Regulation and before adopting the Regulation, the Commission shall consult the Advisory Committee referred to in Article 14 of Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty (*).



(*) OJ L 1, 4.1.2003, p. 1.’

2.

Article 6 is repealed. Article 43 Repeal of Regulations No 17 and No 141

1.

Regulation No 17 is repealed with the exception of Article 8(3) which continues to apply to decisions adopted pursuant to Article 81(3) of the Treaty prior to the date of application of this Regulation until the date of expiration of those decisions.

2.

Regulation No 141 is repealed.

3.

References to the repealed Regulations shall be construed as references to this Regulation. Article 44 Report on the application of the present Regulation

1.

Five years from the date of application of this Regulation, the Commission shall report to the European Parliament and the Council on the functioning of this Regulation, in particular on the application of Article 11(6) and Article 17.

2.

On the basis of this report, the Commission shall assess whether it is appropriate to propose to the Council a revision of this Regulation.

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Article 45 Entry into force This Regulation shall enter into force on the 20th day following that of its publication in the Official Journal of the European Communities. It shall apply from1 May 2004. This Regulation shall be binding in its entirety and directly applicable in all Member States. Done at Brussels, 16 December 2002. For the Council The President M. FISCHER BOEL

Notes 1

OJ C 365 E, 19.12.2000, p. 284.

2

OJ C 72 E, 21.3.2002, p. 305.

3

OJ C 155, 29.5.2001, p. 73.

*

The title of Regulation No 17 has been adjusted to take account of the renumbering of the Articles of the EC Treaty, in accordance with Article 12 of the Treaty of Amsterdam; the original reference was to Articles 85 and 86 of the Treaty.

4

OJ 13, 21.2.1962, p. 204/62. Regulation as last amended by Regulation (EC) No 1216/1999 (OJ L 148, 15.6.1999, p. 5).

5

Council Regulation No 19/65/EEC of 2 March 1965 on the application of Article 81(3) (The titles of the Regulations have been adjusted to take account of the renumbering of the Articles of the EC Treaty, in accordance with Article 12 of the Treaty of Amsterdam; the original reference was to Article 85(3) of the Treaty) of the Treaty to certain cate­gories of agreements and concerted practices (OJ 36, 6.3.1965, p. 533). Regulation as last amended by Regulation (EC) No 1215/1999 (OJ L 148, 15.6.1999, p. 1).

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Appendix 2 Implementation of the rules on competition

6

Council Regulation (EEC) No 2821/71 of 20 December 1971 on the application of Article 81(3) (The titles of the Regulations have been adjusted to take account of the renumbering of the Articles of the EC Treaty, in accordance with Article 12 of the Treaty of Amsterdam; the original reference was to Article 85(3) of the Treaty) of the Treaty to categories of agreements, decisions and concerted practices (OJ L 285, 29.12.1971, p. 46). Regulation as last amended by the Act of Accession of 1994.

7

Council Regulation (EEC) No 3976/87 of 14 December 1987 on the application of Article 81(3) (The titles of the Regulations have been adjusted to take account of the renumbering of the Articles of the EC Treaty, in accordance with Article 12 of the Treaty of Amsterdam; the original reference was to Article 85(3) of the Treaty) of the Treaty to certain categories of agreements and concerted practices in the air transport sector (OJ L 374, 31.12.1987, p. 9). Regulation as last amended by the Act of Accession of 1994.

8

Council Regulation (EEC) No 1534/91 of 31 May 1991 on the application of Article 81(3) (The titles of the Regula­tions have been adjusted to take account of the renumbering of the Articles of the EC Treaty, in accordance with Article 12 of the Treaty of Amsterdam; the original reference was to Article 85(3) of the Treaty) of the Treaty to certain categories of agreements, decisions and concerted practices in the insurance sector (OJ L 143, 7.6.1991, p. 1).

9

Council Regulation (EEC) No 479/92 of 25 February 1992 on the application of Article 81(3) (The titles of the Regu­lations have been adjusted to take account of the renumbering of the Articles of the EC Treaty, in accordance with Article 12 of the Treaty of Amsterdam; the original reference was to Article 85(3) of the Treaty) of the Treaty to certain categories of agreements, decisions and concerted practices between liner shipping companies (Consortia) (OJ L 55, 29.2.1992, p. 3). Regulation amended by the Act of Accession of 1994.

10

Council Regulation (EEC) No 2988/74 of 26 November 1974 concerning limitation periods in proceedings and the enforcement of sanctions under the rules of the European Economic Community relating to transport and competi­tion (OJ L 319, 29.11.1974, p. 1).

11

OJ 124, 28.11.1962, p. 2751/62; Regulation as last amended by Regulation No 1002/67/EEC (OJ 306,

12

Council Regulation (EEC) No 1017/68 of 19 July 1968 applying rules of competition to transport by rail,

16.12.1967, p. 1).

road and inland waterway (OJ L 175, 23.7.1968, p. 1). Regulation as last amended by the Act of Accession of 1994. 13

Council Regulation (EEC) No 4056/86 of 22 December 1986 laying down detailed rules for the application of Arti­cles 81 and 82 (The title of the Regulation has been adjusted to take account of the renumbering of the Articles of the EC Treaty, in accordance with Article 12 of the Treaty of Amsterdam; the original reference was to Articles 85 and 86 of the Treaty) of the Treaty to maritime transport (OJ L 378, 31.12.1986, p. 4). Regulation as last amended by the Act of Accession of 1994.

14

Council Regulation (EEC) No 3975/87 of 14 December 1987 laying down the procedure for the application of the rules on competition to undertakings in the air transport sector (OJ L 374, 31.12.1987, p. 1). Regulation as last amended by Regulation (EEC) No 2410/92 (OJ L 240, 24.8.1992, p. 18).

15

OJ L 1, 4.1.2003, p. 1.

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Appendix 3

COMMUNICATION FROM THE COMMISSION Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements (Text with EEA relevance) 2011/C 11/01

1.    INTRODUCTION 1.1 Purpose and scope 1.

These guidelines set out the principles for the assessment under Article 101 of the Treaty on the Functioning of the European Union1 (‘Article 101’) of agreements between undertakings, decisions by associations of undertakings and concerted practices (collectively referred to as ‘agreements’) pertaining to horizontal co-operation. Co-operation is of a ‘horizontal nature’ if an agreement is entered into between actual or potential competitors. In addition, these guidelines also cover horizontal co-operation agreements between non-competitors, for example, between two companies active in the same product markets but in different geographic markets without being potential competitors.

2.

Horizontal co-operation agreements can lead to substantial economic benefits, in particular if they combine complementary activities, skills or assets. Horizontal co-operation can be a means to share risk, save costs, increase investments, pool know-how, enhance product quality and variety, and launch innovation faster.

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3.

On the other hand, horizontal co-operation agreements may lead to competition problems. This is, for example, the case if the parties agree to fix prices or output or to share markets, or if the co-operation enables the parties to maintain, gain or increase market power and thereby is likely to give rise to negative market effects with respect to prices, output, product quality, product variety or innovation.

4.

The Commission, while recognising the benefits that can be generated by horizontal co-operation agreements, has to ensure that effective competition is maintained. Article 101 provides the legal framework for a balanced assessment taking into account both adverse effects on competition and pro-competitive effects.

5.

The purpose of these guidelines is to provide an analytical framework for the most common types of horizontal co-operation agreements; they deal with research and development agreements, production agreements including subcontracting and specialisation agreements, purchasing agreements, commercialisation agreements, standardisation agreements including standard contracts, and information exchange. This framework is primarily based on legal and economic criteria that help to analyse a horizontal co-operation agreement and the context in which it occurs. Economic criteria such as the market power of the parties and other factors relating to the market structure form a key element of the assessment of the market impact likely to be caused by a horizontal co-operation agreement and, therefore, for the assessment under Article 101.

6.

These guidelines apply to the most common types of horizontal cooperation agreements irrespective of the level of integration they entail with the exception of operations constituting a concentration within the meaning of Article 3 of Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings2 (‘the Merger Regulation’) as would be the case, for example, with joint ventures performing on a lasting basis all the functions of an autonomous economic entity (‘full-function joint ventures’).3

7.

Given the potentially large number of types and combinations of horizontal co-operation and market circumstances in which they operate, it is difficult to provide specific answers for every possible scenario. These guidelines will nevertheless assist businesses in assessing the compatibility of an individual co-operation agreement with Article 101. Those criteria 1002

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do not, however, constitute a ‘checklist’ which can be applied mechanically. Each case must be assessed on the basis of its own facts, which may require a flexible application of these guidelines. 8.

The criteria set out in these guidelines apply to horizontal co-operation agreements concerning both goods and services (collectively referred to as ‘products’). These guidelines complement Commission Regulation (EU) No […] of […] on the application of Article 101(3) of the Treaty on the Functioning of the European Union to certain categories of research and development agreements4 (‘the R&D Block Exemption Regulation’) and Commission Regulation (EU) No […] of […] on the application of Article 101(3) of the Treaty on the Functioning of the European Union to certain categories of specialisation agreements5 (‘the Specialisation Block Exemption Regulation’).

9.

Although these guidelines contain certain references to cartels, they are not intended to give any guidance as to what does and does not constitute a cartel as defined by the decisional practice of the Commission and the case-law of the Court of Justice of the European Union.

10.

The term ‘competitors’ as used in these guidelines includes both actual and potential competitors. Two companies are treated as actual competitors if they are active on the same relevant market. A company is treated as a potential competitor of another company if, in the absence of the agreement, in case of a small but permanent increase in relative prices it is likely that the former, within a short period of time,6 would undertake the necessary additional investments or other necessary switching costs to enter the relevant market on which the latter is active. This assessment has to be based on realistic grounds, the mere theoretical possibility to enter a market is not sufficient (see Commission Notice on the definition of the relevant market for the purposes of Community competition law)7 (‘the Market Definition Notice’).

11.

Companies that form part of the same ‘undertaking’ within the meaning of Article 101(1) are not considered to be competitors for the purposes of these guidelines. Article 101 only applies to agreements between independent undertakings. When a company exercises decisive influence over another company they form a single economic entity and, hence, are part of the same undertaking.8 The same is true for sister companies, that is to say, companies over which decisive influence is exercised by the same 1003

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parent company. They are consequently not considered to be competitors even if they are both active on the same relevant product and geographic markets. 12.

Agreements that are entered into between undertakings operating at a different level of the production or distribution chain, that is to say, vertical agreements, are in principle dealt with in Commission Regulation (EU) No 330/2010 of 20 April 2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices9 (‘the Block Exemption Regulation on Vertical Restraints’) and the Guidelines on Vertical Restraints.10 However, to the extent that vertical agreements, for example, distribution agreements, are concluded between competitors, the effects of the agreement on the market and the possible competition problems can be similar to horizontal agreements. Therefore, vertical agreements between competitors fall under these guidelines.11 Should there be a need to also assess such agreements under the Block Exemption Regulation on Vertical Restraints and the Guidelines on Vertical Restraints, this will be specifically stated in the relevant chapter of these guidelines. In the absence of such a reference, only these guidelines will be applicable to vertical agreements between competitors.

13.

Horizontal co-operation agreements may combine different stages of co-operation, for example research and development (‘R&D’) and the production and/or commercialisation of its results. Such agreements are generally also covered by these guidelines. When using these guidelines for the analysis of such integrated co-operation, as a general rule, all the chapters pertaining to the different parts of the co-operation will be relevant. However, where the relevant chapters of these guidelines contain graduated messages, for example with regard to safe harbours or whether certain conduct will normally be considered a restriction of competition by object or by effect, what is set out in the chapter pertaining to that part of an integrated co-operation which can be considered its ‘centre of gravity’ prevails for the entire co-operation.12

14.

Two factors are in particular relevant for the determination of the centre of gravity of integrated co-operation: firstly, the starting point of the co-operation, and, secondly, the degree of integration of the different functions which are combined. For example, the centre of gravity of a horizontal co-operation agreement involving both joint R&D and joint 1004

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production of the results would thus normally be the joint R&D, as the joint production will only take place if the joint R&D is successful. This implies that the results of the joint R&D are decisive for the subsequent joint production. The assessment of the centre of gravity would change if the parties would have engaged in the joint production in any event, that is to say, irrespective of the joint R&D, or if the agreement provided for a full integration in the area of production and only a partial integration of some R&D activities. In this case, the centre of gravity of the cooperation would be the joint production. 15.

Article 101 only applies to those horizontal co-operation agreements which may affect trade between Member States. The principles on the applicability of Article 101 set out in these guidelines are therefore based on the assumption that a horizontal co-operation agreement is capable of affecting trade between Member States to an appreciable extent.

16.

The assessment under Article 101 as described in these guidelines is without prejudice to the possible parallel application of Article 102 of the Treaty to horizontal co-operation agreements.13

17.

These guidelines are without prejudice to the interpretation the Court of Justice of the European Union may give to the application of Article 101 to horizontal co-operation agreements.

18.

These guidelines replace the Commission guidelines on the applicability of Article 81 of the EC Treaty to horizontal co-operation agreements14 which were published by the Commission in 2001 and do not apply to the extent that sector specific rules apply as is the case for certain agreements with regard to agriculture,15 transport16 or insurance.17 The Commission will continue to monitor the operation of the R&D and Specialisation Block Exemption Regulations and these guidelines based on market information from stakeholders and national competition authorities and may revise these guidelines in the light of future developments and of evolving insight.

19.

The Commission guidelines on the application of Article 81(3) of the Treaty18 (‘the General Guidelines’) contain general guidance on the interpretation of Article 101. Consequently, these guidelines have to be read in conjunction with the General Guidelines.

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1.2.   Basic principles for the assessment under Article 101 20.

The assessment under Article 101 consists of two steps. The first step, under Article 101(1), is to assess whether an agreement between undertakings, which is capable of affecting trade between Member States, has an anti-competitive object or actual or potential19 restrictive effects on competition. The second step, under Article 101(3), which only becomes relevant when an agreement is found to be restrictive of competition within the meaning of Article 101(1), is to determine the pro-competitive benefits produced by that agreement and to assess whether those pro-competitive effects outweigh the restrictive effects on competition.20 The balancing of restrictive and pro-competitive effects is conducted exclusively within the framework laid down by Article 101(3).21 If the procompetitive effects do not outweigh a restriction of competition, Article 101(2) stipulates that the agreement shall be automatically void.

21.

The analysis of horizontal co-operation agreements has certain common elements with the analysis of horizontal mergers pertaining to the potential restrictive effects, in particular as regards joint ventures. There is often only a fine line between full-function joint ventures that fall under the Merger Regulation and non-full-function joint ventures that are assessed under Article 101. Hence, their effects can be quite similar.

22.

In certain cases, companies are encouraged by public authorities to enter into horizontal co-operation agreements in order to attain a public policy objective by way of self-regulation. However, companies remain subject to Article 101 if a national law merely encourages or makes it easier for them to engage in autonomous anti-competitive conduct.22 In other words, the fact that public authorities encourage a horizontal cooperation agreement does not mean that it is permissible under Article 101.23 It is only if anti-competitive conduct is required of companies by national legislation, or if the latter creates a legal framework which precludes all scope for competitive activity on their part, that Article 101 does not apply.24 In such a situation, the restriction of competition is not attributable, as Article 101 implicitly requires, to the autonomous conduct of the companies and they are shielded from all the consequences of an infringement of that article.25 Each case must be assessed on its own facts according to the general principles set out in these guidelines.

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1.2.1   Article 101(1) 23. Article 101(1) prohibits agreements the object or effect of which is to restrict26 competition. (i)    Restrictions of competition by object 24.

Restrictions of competition by object are those that by their very nature have the potential to restrict competition within the meaning of Article 101(1).27 It is not necessary to examine the actual or potential effects of an agreement on the market once its anti-competitive object has been established.28

25.

According to the settled case-law of the Court of Justice of the European Union, in order to assess whether an agreement has an anti-competitive object, regard must be had to the content of the agreement, the objectives it seeks to attain, and the economic and legal context of which it forms part. In addition, although the parties’ intention is not a necessary factor in determining whether an agreement has an anti-competitive object, the Commission may nevertheless take this aspect into account in its analysis.29 Further guidance with regard to the notion of restrictions of competition by object can be obtained in the General Guidelines. (ii)    Restrictive effects on competition

26.

If a horizontal co-operation agreement does not restrict competition by object, it must be examined whether it has appreciable restrictive effects on competition. Account must be taken of both actual and potential effects. In other words, the agreement must at least be likely to have anticompetitive effects.

27.

For an agreement to have restrictive effects on competition within the meaning of Article 101(1) it must have, or be likely to have, an appreciable adverse impact on at least one of the parameters of competition on the market, such as price, output, product quality, product variety or innovation. Agreements can have such effects by appreciably reducing competition between the parties to the agreement or between any one of them and third parties. This means that the agreement must reduce the parties’ decision-making independence,30 either due to obligations contained in the agreement which regulate the market conduct of at least one of the 1007

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parties or by influencing the market conduct of at least one of the parties by causing a change in its incentives. 28.

Restrictive effects on competition within the relevant market are likely to occur where it can be expected with a reasonable degree of probability that, due to the agreement, the parties would be able to profitably raise prices or reduce output, product quality, product variety or innovation. This will depend on several factors such as the nature and content of the agreement, the extent to which the parties individually or jointly have or obtain some degree of market power, and the extent to which the agreement contributes to the creation, maintenance or strengthening of that market power or allows the parties to exploit such market power.

29.

The assessment of whether a horizontal co-operation agreement has restrictive effects on competition within the meaning of Article 101(1) must be made in comparison to the actual legal and economic context in which competition would occur in the absence of the agreement with all of its alleged restrictions (that is to say, in the absence of the agreement as it stands (if already implemented) or as envisaged (if not yet implemented) at the time of assessment). Hence, in order to prove actual or potential restrictive effects on competition, it is necessary to take into account competition between the parties and competition from third parties, in particular actual or potential competition that would have existed in the absence of the agreement. This comparison does not take into account any potential efficiency gains generated by the agreement as these will only be assessed under Article 101(3).

30.

Consequently, horizontal co-operation agreements between competitors that, on the basis of objective factors, would not be able to independently carry out the project or activity covered by the co-operation, for instance, due to the limited technical capabilities of the parties, will normally not give rise to restrictive effects on competition within the meaning of Article 101(1) unless the parties could have carried out the project with less stringent restrictions.31

31.

General guidance with regard to the notion of restrictions of competition by effect can be obtained in the General Guidelines. These guidelines provide additional guidance specific to the competition assessment of horizontal co-operation agreements.

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Nature and content of the agreement

32.

The nature and content of an agreement relates to factors such as the area and objective of the co-operation, the competitive relationship between the parties and the extent to which they combine their activities. Those factors determine which kinds of possible competition concerns can arise from a horizontal co-operation agreement.

33.

Horizontal co-operation agreements may limit competition in several ways. The agreement may: —

be exclusive in the sense that it limits the possibility of the parties to compete against each other or third parties as independent economic operators or as parties to other, competing agreements;

—

require the parties to contribute such assets that their decisionmaking independence is appreciably reduced; or

—

affect the parties’ financial interests in such a way that their decision-making independence is appreciably reduced. Both financial interests in the agreement and also financial interests in other parties to the agreement are relevant for the assessment.

34.

The potential effect of such agreements may be the loss of competition between the parties to the agreement. Competitors can also benefit from the reduction of competitive pressure that results from the agreement and may therefore find it profitable to increase their prices. The reduction in those competitive constraints may lead to price increases in the relevant market. Factors such as whether the parties to the agreement have high market shares, whether they are close competitors, whether the customers have limited possibilities of switching suppliers, whether competitors are unlikely to increase supply if prices increase, and whether one of the parties to the agreement is an important competitive force, are all relevant for the competitive assessment of the agreement.

35.

A horizontal co-operation agreement may also: —

lead to the disclosure of strategic information thereby increasing the likelihood of coordination among the parties within or outside the field of the co-operation; 1009

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—

achieve significant commonality of costs (that is to say, the proportion of variable costs which the parties have in common), so the parties may more easily coordinate market prices and output.

36.

Significant commonality of costs achieved by a horizontal co-operation agreement can only allow the parties to more easily coordinate market prices and output where the parties have market power, the market characteristics are conducive to such coordination, the area of co-operation accounts for a high proportion of the parties’ variable costs in a given market, and the parties combine their activities in the area of co-operation to a significant extent. This could, for instance, be the case, where they jointly manufacture or purchase an important intermediate product or jointly manufacture or distribute a high proportion of their total output of a final product.

37.

A horizontal agreement may therefore decrease the parties’ decisionmaking independence and as a result increase the likelihood that they will coordinate their behaviour in order to reach a collusive outcome but it may also make coordination easier, more stable or more effective for parties that were already coordinating before, either by making the coordination more robust or by permitting them to achieve even higher prices.

38.

Some horizontal co-operation agreements, for example production and standardisation agreements, may also give rise to anti-competitive foreclosure concerns.



Market power and other market characteristics

39.

Market power is the ability to profitably maintain prices above competitive levels for a period of time or to profitably maintain output in terms of product quantities, product quality and variety or innovation below competitive levels for a period of time.

40.

In markets with fixed costs undertakings must price above their variable costs of production in order to ensure a competitive return on their investment. The fact that undertakings price above their variable costs is therefore not in itself a sign that competition in the market is not functioning well and that undertakings have market power that allows them to price above the competitive level. It is when competitive constraints are insufficient to maintain prices, output, product quality, product va1010

Appendix 3 Horizontal cooperation agreements

riety and innovation at competitive levels that undertakings have market power in the context of Article 101(1). 41.

The creation, maintenance or strengthening of market power can result from superior skill, foresight or innovation. It can also result from reduced competition between the parties to the agreement or between any one of the parties and third parties, for example, because the agreement leads to anticompetitive foreclosure of competitors by raising competitors’ costs and limiting their capacity to compete effectively with the contracting parties.

42.

Market power is a question of degree. The degree of market power required for the finding of an infringement under Article 101(1) in the case of agreements that are restrictive of competition by effect is less than the degree of market power required for a finding of dominance under Article 102, where a substantial degree of market power is required.

43.

The starting point for the analysis of market power is the position of the parties on the markets affected by the co-operation. To carry out this analysis the relevant market(s) have to be defined by using the methodology of the Commission’s Market Definition Notice. Where specific types of markets, such as purchasing or technology markets, are concerned these guidelines will provide additional guidance.

44.

If the parties have a low combined market share, the horizontal co-operation agreement is unlikely to give rise to restrictive effects on competition within the meaning of Article 101(1) and, normally, no further analysis will be required. What is considered to be a ‘low combined market share’ depends on the type of agreement in question and can be inferred from the ‘safe harbour’ thresholds set out in various chapters of these guidelines and, more generally, from the Commission Notice on agreements of minor importance which do not appreciably restrict competition under Article 81(1) of the Treaty establishing the European Community (de minimis)32 (‘the De Minimis Notice’). If one of just two parties has only an insignificant market share and if it does not possess important resources, even a high combined market share normally cannot be seen as indicating a likely restrictive effect on competition in the market.33 Given the variety of horizontal co-operation agreements and the different effects they may cause in different market situations, it is not possible to give a general market share threshold above which sufficient market power for causing restrictive effects on competition can be assumed. 1011

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45.

Depending on the market position of the parties and the concentration in the market, other factors such as the stability of market shares over time, entry barriers and the likelihood of market entry, and the countervailing power of buyers/suppliers also have to be considered.

46.

Normally, the Commission uses current market shares in its competitive analysis.34 However, reasonably certain future developments may also be taken into account, for instance in the light of exit, entry or expansion in the relevant market. Historic data may be used if market shares have been volatile, for instance when the market is characterised by large, lumpy orders. Changes in historic market shares may provide useful information about the competitive process and the likely future importance of the various competitors, for instance, by indicating whether undertakings have been gaining or losing market shares. In any event, the Commission interprets market shares in the light of likely market conditions, for instance, if the market is highly dynamic in character and if the market structure is unstable due to innovation or growth.

47.

When entering a market is sufficiently easy, a horizontal co-operation agreement will normally not be expected to give rise to restrictive effects on competition. For entry to be considered a sufficient competitive constraint on the parties to a horizontal co-operation agreement, it must be shown to be likely, timely and sufficient to deter or defeat any potential restrictive effects of the agreement. The analysis of entry may be affected by the presence of horizontal co-operation agreements. The likely or possible termination of a horizontal co-operation agreement may influence the likelihood of entry.

1.2.2 Article 101(3) 48.

The assessment of restrictions of competition by object or effect under Article 101(1) is only one side of the analysis. The other side, which is reflected in Article 101(3), is the assessment of the pro-competitive effects of restrictive agreements. The general approach when applying Article 101(3) is presented in the General Guidelines. Where in an individual case a restriction of competition within the meaning of Article 101(1) has been proven, Article 101(3) can be invoked as a defence. According to Article 2 of Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty,35 the burden of proof under Article 101(3) rests 1012

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on the undertaking(s) invoking the benefit of this provision. Therefore, the factual arguments and the evidence provided by the undertaking(s) must enable the Commission to arrive at the conviction that the agreement in question is sufficiently likely to give rise to pro-competitive effects or that it is not.36 49.

50.

The application of the exception rule of Article 101(3) is subject to four cumulative conditions, two positive and two negative: —

the agreement must contribute to improving the production or distribution of products or contribute to promoting technical or economic progress, that is to say, lead to efficiency gains;

—

the restrictions must be indispensable to the attainment of those objectives, that is to say, the efficiency gains;

—

consumers must receive a fair share of the resulting benefits, that is to say, the efficiency gains, including qualitative efficiency gains, attained by the indispensable restrictions must be sufficiently passed on to consumers so that they are at least compensated for the restrictive effects of the agreement; hence, efficiencies only accruing to the parties to the agreement will not suffice; for the purposes of these guidelines, the concept of ‘consumers’ encompasses the customers, potential and/or actual, of the parties to the agreement;37 and

—

the agreement must not afford the parties the possibility of eliminating competition in respect of a substantial part of the products in question.

In the area of horizontal co-operation agreements there are block exemption regulations based on Article 101(3) for research and development38 and specialisation (including joint production)39 agreements. Those Block Exemption Regulations are based on the premise that the combination of complementary skills or assets can be the source of substantial efficiencies in research and development and specialisation agreements. This may also be the case for other types of horizontal co-operation agreements. The analysis of the efficiencies of an individual agreement under Article 101(3) is therefore to a large extent a question of identifying the complementary skills and assets that each of the parties brings to the 1013

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agreement and evaluating whether the resulting efficiencies are such that the conditions of Article 101(3) are fulfilled. 51.

Complementarities may arise from horizontal co-operation agreements in various ways. A research and development agreement may bring together different research capabilities that allow the parties to produce better products more cheaply and shorten the time for those products to reach the market. A production agreement may allow the parties to achieve economies of scale or scope that they could not achieve individually.

52.

Horizontal co-operation agreements that do not involve the combination of complementary skills or assets are less likely to lead to efficiency gains that benefit consumers. Such agreements may reduce duplication of certain costs, for instance because certain fixed costs can be eliminated. However, fixed cost savings are, in general, less likely to result in benefits to consumers than savings in, for instance, variable or marginal costs.

53.

Further guidance regarding the Commission’s application of the criteria of Article 101(3) can be obtained in the General Guidelines.

1.3 Structure of these guidelines 54.

Chapter 2 will first set out some general principles for the assessment of the exchange of information, which are applicable to all types of horizontal co-operation agreements entailing the exchange of information. The subsequent chapters of these guidelines will each address one specific type of horizontal co-operation agreement. Each chapter will apply the analytical framework described in section 1.2 as well as the general principles on the exchange of information to the specific type of co-operation in question.

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2.    GENERAL PRINCIPLES ON THE COMPETITIVE ASSESSMENT OF INFORMATION EXCHANGE 2.1 Definition and scope 55.

The purpose of this chapter is to guide the competitive assessment of information exchange. Information exchange can take various forms. Firstly, data can be directly shared between competitors. Secondly, data can be shared indirectly through a common agency (for example, a trade association) or a third party such as a market research organisation or through the companies’ suppliers or retailers.

56.

Information exchange takes place in different contexts. There are agreements, decisions by associations of undertakings, or concerted practices under which information is exchanged, where the main economic function lies in the exchange of information itself. Moreover, information exchange can be part of another type of horizontal co-operation agreement (for example, the parties to a production agreement share certain information on costs). The assessment of the latter type of information exchanges should be carried out in the context of the assessment of the horizontal co-operation agreement itself.

57.

Information exchange is a common feature of many competitive markets and may generate various types of efficiency gains. It may solve problems of information asymmetries,40 thereby making markets more efficient. Moreover, companies may improve their internal efficiency through benchmarking against each other’s best practices. Sharing of information may also help companies to save costs by reducing their inventories, enabling quicker delivery of perishable products to consumers, or dealing with unstable demand etc. Furthermore, information exchanges may directly benefit consumers by reducing their search costs and improving choice.

58.

However, the exchange of market information may also lead to restrictions of competition in particular in situations where it is liable to enable undertakings to be aware of market strategies of their competitors.41 The competitive outcome of information exchange depends on the characteristics of the market in which it takes place (such as concentration, transparency, stability, symmetry, complexity etc.) as well as on the type of information that is exchanged, which may modify the relevant market environment towards one liable to coordination. 1015

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59.

Moreover, communication of information among competitors may constitute an agreement, a concerted practice, or a decision by an association of undertakings with the object of fixing, in particular, prices or quantities. Those types of information exchanges will normally be considered and fined as cartels. Information exchange may also facilitate the implementation of a cartel by enabling companies to monitor whether the participants comply with the agreed terms. Those types of exchanges of information will be assessed as part of the cartel.



Concerted practice

60.

Information exchange can only be addressed under Article 101 if it establishes or is part of an agreement, a concerted practice or a decision by an association of undertakings. The existence of an agreement, a concerted practice or decision by an association of undertakings does not prejudge whether the agreement, concerted practice or decision by an association of undertakings gives rise to a restriction of competition within the meaning of Article 101(1). In line with the case-law of the Court of Justice of the European Union, the concept of a concerted practice refers to a form of coordination between undertakings by which, without it having reached the stage where an agreement properly so-called has been concluded, practical cooperation between them is knowingly substituted for the risks of competition.42 The criteria of coordination and cooperation necessary for determining the existence of a concerted practice, far from requiring an actual plan to have been worked out, are to be understood in the light of the concept inherent in the provisions of the Treaty on competition, according to which each company must determine independently the policy which it intends to adopt on the internal market and the conditions which it intends to offer to its customers.43

61.

This does not deprive companies of the right to adapt themselves intelligently to the existing or anticipated conduct of their competitors. It does, however, preclude any direct or indirect contact between competitors, the object or effect of which is to create conditions of competition which do not correspond to the normal competitive conditions of the market in question, regard being had to the nature of the products or services offered, the size and number of the undertakings, and the volume of the said market.44 This precludes any direct or indirect contact between competitors, the object or effect of which is to influence conduct on the market of an actual or potential competitor, or to disclose to such competitor 1016

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the course of conduct which they themselves have decided to adopt or contemplate adopting on the market, thereby facilitating a collusive outcome on the market.45 Hence, information exchange can constitute a concerted practice if it reduces strategic uncertainty46 in the market thereby facilitating collusion, that is to say, if the data exchanged is strategic. Consequently, sharing of strategic data between competitors amounts to concertation, because it reduces the independence of competitors’ conduct on the market and diminishes their incentives to compete. 62.

A situation where only one undertaking discloses strategic information to its competitor(s) who accept(s) it can also constitute a concerted practice.47 Such disclosure could occur, for example, through contacts via mail, emails, phone calls, meetings etc. It is then irrelevant whether only one undertaking unilaterally informs its competitors of its intended market behaviour, or whether all participating undertakings inform each other of the respective deliberations and intentions. When one undertaking alone reveals to its competitors strategic information concerning its future commercial policy, that reduces strategic uncertainty as to the future operation of the market for all the competitors involved and increases the risk of limiting competition and of collusive behaviour.48 For example, mere attendance at a meeting49 where a company discloses its pricing plans to its competitors is likely to be caught by Article 101, even in the absence of an explicit agreement to raise prices.50 When a company receives strategic data from a competitor (be it in a meeting, by mail or electronically), it will be presumed to have accepted the information and adapted its market conduct accordingly unless it responds with a clear statement that it does not wish to receive such data.51

63.

Where a company makes a unilateral announcement that is also genuinely public, for example through a newspaper, this generally does not constitute a concerted practice within the meaning of Article 101(1).52 However, depending on the facts underlying the case at hand, the possibility of finding a concerted practice cannot be excluded, for example in a situation where such an announcement was followed by public announcements by other competitors, not least because strategic responses of competitors to each other’s public announcements (which, to take one instance, might involve readjustments of their own earlier announcements to announcements made by competitors) could prove to be a strategy for reaching a common understanding about the terms of coordination. 1017

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2.2    Assessment under Article 101(1) 2.2.1 Main competition concerns53 64.

Once it has been established that there is an agreement, concerted practice or decision by an association of undertakings, it is necessary to consider the main competition concerns pertaining to information exchanges.



Collusive outcome

65.

By artificially increasing transparency in the market, the exchange of strategic information can facilitate coordination (that is to say, alignment) of companies’ competitive behaviour and result in restrictive effects on competition. This can occur through different channels.

66.

One way is that through information exchange companies may reach a common understanding on the terms of coordination, which can lead to a collusive outcome on the market. Information exchange can create mutually consistent expectations regarding the uncertainties present in the market. On that basis companies can then reach a common understanding on the terms of coordination of their competitive behaviour, even without an explicit agreement on coordination. Exchange of information about intentions concerning future conduct is the most likely means to enable companies to reach such a common understanding.

67.

Another channel through which information exchange can lead to restrictive effects on competition is by increasing the internal stability of a collusive outcome on the market. In particular, it can do so by enabling the companies involved to monitor deviations. Namely, information exchange can make the market sufficiently transparent to allow the colluding companies to monitor to a sufficient degree whether other companies are deviating from the collusive outcome, and thus to know when to retaliate. Both exchanges of present and past data can constitute such a monitoring mechanism. This can either enable companies to achieve a collusive outcome on markets where they would otherwise not have been able to do so, or it can increase the stability of a collusive outcome already present on the market (see Example 3, paragraph 107).

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68.

A third channel through which information exchange can lead to restrictive effects on competition is by increasing the external stability of a collusive outcome on the market. Information exchanges that make the market sufficiently transparent can allow colluding companies to monitor where and when other companies are attempting to enter the market, thus allowing the colluding companies to target the new entrant. This may also tie into the anti-competitive foreclosure concerns discussed in paragraphs 69 to 71. Both exchanges of present and past data can constitute such a monitoring mechanism.



Anti-competitive foreclosure

69.

Apart from facilitating collusion, an exchange of information can also lead to anti-competitive foreclosure.54

70.

An exclusive exchange of information can lead to anti-competitive foreclosure on the same market where the exchange takes place. This can occur when the exchange of commercially sensitive information places unaffiliated competitors at a significant competitive disadvantage as compared to the companies affiliated within the exchange system. This type of foreclosure is only possible if the information concerned is very strategic for competition and covers a significant part of the relevant market.

71.

It cannot be excluded that information exchange may also lead to anticompetitive foreclosure of third parties in a related market. For instance, by gaining enough market power through an information exchange, parties exchanging information in an upstream market, for instance vertically integrated companies, may be able to raise the price of a key component for a market downstream. Thereby, they could raise the costs of their rivals downstream, which could result in anti-competitive foreclosure in the downstream market.

2.2.2 Restriction of competition by object 72.

Any information exchange with the objective of restricting competition on the market will be considered as a restriction of competition by object. In assessing whether an information exchange constitutes a restriction of competition by object, the Commission will pay particular attention to the legal and economic context in which the information exchange takes place.55 To this end, the Commission will take into account whether the 1019

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information exchange, by its very nature, may possibly lead to a restriction of competition.56 73.

Exchanging information on companies’ individualised intentions concerning future conduct regarding prices or quantities57 is particularly likely to lead to a collusive outcome. Informing each other about such intentions may allow competitors to arrive at a common higher price level without incurring the risk of losing market share or triggering a price war during the period of adjustment to new prices (see Example 1, paragraph 105). Moreover, it is less likely that information exchanges concerning future intentions are made for pro-competitive reasons than exchanges of actual data.

74.

Information exchanges between competitors of individualised data regarding intended future prices or quantities should therefore be considered a restriction of competition by object58,59 In addition, private exchanges between competitors of their individualised intentions regarding future prices or quantities would normally be considered and fined as cartels because they generally have the object of fixing prices or quantities. Information exchanges that constitute cartels not only infringe Article 101(1), but, in addition, are very unlikely to fulfil the conditions of Article 101(3).

2.2.3 Restrictive effects on competition 75.

The likely effects of an information exchange on competition must be analysed on a case-by-case basis as the results of the assessment depend on a combination of various case specific factors. The assessment of restrictive effects on competition compares the likely effects of the information exchange with the competitive situation that would prevail in the absence of that specific information exchange.60 For an information exchange to have restrictive effects on competition within the meaning of Article 101(1), it must be likely to have an appreciable adverse impact on one (or several) of the parameters of competition such as price, output, product quality, product variety or innovation. Whether or not an exchange of information will have restrictive effects on competition depends on both the economic conditions on the relevant markets and the characteristics of information exchanged.

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76.

Certain market conditions may make coordination easier to achieve, sustain internally, or sustain externally.61 Exchanges of information in such markets may have more restrictive effects compared to markets with different conditions. However, even where market conditions are such that coordination may be difficult to sustain before the exchange, the exchange of information may change the market conditions in such a way that coordination becomes possible after the exchange – for example by increasing transparency in the market, reducing market complexity, buffering instability or compensating for asymmetry. For this reason it is important to assess the restrictive effects of the information exchange in the context of both the initial market conditions, and how the information exchange changes those conditions. This will include an assessment of the specific characteristics of the system concerned, including its purpose, conditions of access to the system and conditions of participation in the system. It will also be necessary to examine the frequency of the information exchanges, the type of information exchanged (for example, whether it is public or confidential, aggregated or detailed, and historical or current), and the importance of the information for the fixing of prices, volumes or conditions of service.62 The following factors are relevant for this assessment. (i)

77.

Market characteristics

Companies are more likely to achieve a collusive outcome in markets which are sufficiently transparent, concentrated, non-complex, stable and symmetric. In those types of markets companies can reach a common understanding on the terms of coordination and successfully monitor and punish deviations. However, information exchange can also enable companies to achieve a collusive outcome in other market situations where they would not be able to do so in the absence of the information exchange. Information exchange can thereby facilitate a collusive outcome by increasing transparency in the market, reducing market complexity, buffering instability or compensating for asymmetry. In this context, the competitive outcome of an information exchange depends not only on the initial characteristics of the market in which it takes place (such as concentration, transparency, stability, complexity etc.), but also on how the type of the information exchanged may change those characteristics.63

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78.

Collusive outcomes are more likely in transparent markets. Transparency can facilitate collusion by enabling companies to reach a common understanding on the terms of coordination, or/and by increasing internal and external stability of collusion. Information exchange can increase transparency and hence limit uncertainties about the strategic variables of competition (for example, prices, output, demand, costs etc.). The lower the pre-existing level of transparency in the market, the more value an information exchange may have in achieving a collusive outcome. An information exchange that contributes little to the transparency in a market is less likely to have restrictive effects on competition than an information exchange that significantly increases transparency. Therefore it is the combination of both the pre-existing level of transparency and how the information exchange changes that level that will determine how likely it is that the information exchange will have restrictive effects on competition. The pre-existing degree of transparency, inter alia, depends on the number of market participants and the nature of transactions, which can range from public transactions to confidential bilateral negotiations between buyers and sellers. When evaluating the change in the level of transparency in the market, the key element is to identify to what extent the available information can be used by companies to determine the actions of their competitors.

79.

Tight oligopolies can facilitate a collusive outcome on the market as it is easier for fewer companies to reach a common understanding on the terms of coordination and to monitor deviations. A collusive outcome is also more likely to be sustainable with fewer companies. With more companies coordinating, the gains from deviating are greater because a larger market share can be gained through undercutting. At the same time, gains from the collusive outcome are smaller because, when there are more companies, the share of the rents from the collusive outcome declines. Exchanges of information in tight oligopolies are more likely to cause restrictive effects on competition than in less tight oligopolies, and are not likely to cause such restrictive effects on competition in very fragmented markets. However, by increasing transparency, or modifying the market environment in another way towards one more liable to coordination, information exchanges may facilitate coordination and monitoring among more companies than would be possible in its absence.

80.

Companies may find it difficult to achieve a collusive outcome in a complex market environment. However, to some extent, the use of informa1022

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tion exchange may simplify such environments. In a complex market environment more information exchange is normally needed to reach a common understanding on the terms of coordination and to monitor deviations. For example, it is easier to achieve a collusive outcome on a price for a single, homogeneous product, than on numerous prices in a market with many differentiated products. It is nonetheless possible that to circumvent the difficulties involved in achieving a collusive outcome on a large number of prices, companies may exchange information to establish simple pricing rules (for example, pricing points). 81.



Collusive outcomes are more likely where the demand and supply conditions are relatively stable.64 In an unstable environment it may be difficult for a company to know whether its lost sales are due to an overall low level of demand or due to a competitor offering particularly low prices, and therefore it is difficult to sustain a collusive outcome. In this context, volatile demand, substantial internal growth by some companies in the market, or frequent entry by new companies, may indicate that the current situation is not sufficiently stable for coordination to be likely.65



Information exchange in certain situations can serve the purpose of increasing stability in the market, and thereby may enable a collusive outcome in the market. Moreover, in markets where innovation is important, coordination may be more difficult since particularly significant innovations may allow one company to gain a major advantage over its rivals. For a collusive outcome to be sustainable, the reactions of outsiders, such as current and future competitors not participating in the coordination, as well as customers, should not be capable of jeopardising the results expected from the collusive outcome. In this context, the existence of barriers to entry makes it more likely that a collusive outcome on the market is feasible and sustainable.

82.

A collusive outcome is more likely in symmetric market structures. When companies are homogenous in terms of their costs, demand, market shares, product range, capacities etc., they are more likely to reach a common understanding on the terms of coordination because their incentives are more aligned. However, information exchange may in some situations also allow a collusive outcome to occur in more heterogeneous market structures. Information exchange could make companies aware of their differences and help them to design means to accommodate for their heterogeneity in the context of coordination. 1023

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83.

The stability of a collusive outcome also depends on the companies’ discounting of future profits. The more companies value the current profits that they could gain from undercutting versus all the future ones that they could gain by the collusive outcome, the less likely it is that they will be able to achieve a collusive outcome.

84.

By the same token, a collusive outcome is more likely among companies that will continue to operate in the same market for a long time, as in such a scenario they will be more committed to coordinate. If a company knows that it will interact with the others for a long time, it will have a greater incentive to achieve the collusive outcome because the stream of future profits from the collusive outcome will be worth more than the short term profit it could have if it deviated, that is to say, before the other companies detect the deviation and retaliate.

85.

Overall, for a collusive outcome to be sustainable, the threat of a sufficiently credible and prompt retaliation must be likely. Collusive outcomes are not sustainable in markets in which the consequences of deviation are not sufficiently severe to convince coordinating companies that it is in their best interest to adhere to the terms of the collusive outcome. For example, in markets characterised by infrequent, lumpy orders, it may be difficult to establish a sufficiently severe deterrence mechanism, since the gain from deviating at the right time may be large, certain and immediate, whereas the losses from being punished small and uncertain, and only materialise after some time. The credibility of the deterrence mechanism also depends on whether the other coordinating companies have an incentive to retaliate, determined by their short-term losses from triggering a price war versus their potential long-term gain in case they induce a return to a collusive outcome. For example, companies’ ability to retaliate may be reinforced if they are also interrelated by vertical commercial relationships which they can use as a threat of punishment for deviations. (ii)

Characteristics of the information exchange



Strategic information

86.

The exchange between competitors of strategic data, that is to say, data that reduces strategic uncertainty in the market, is more likely to be caught by Article 101 than exchanges of other types of information. Sharing of strategic data can give rise to restrictive effects on competition be1024

Appendix 3 Horizontal cooperation agreements

cause it reduces the parties’ decision-making independence by decreasing their incentives to compete. Strategic information can be related to prices (for example, actual prices, discounts, increases, reductions or rebates), customer lists, production costs, quantities, turnovers, sales, capacities, qualities, marketing plans, risks, investments, technologies and R&D programmes and their results. Generally, information related to prices and quantities is the most strategic, followed by information about costs and demand. However, if companies compete with regard to R&D it is the technology data that may be the most strategic for competition. The strategic usefulness of data also depends on its aggregation and age, as well as the market context and frequency of the exchange.

Market coverage

87.

For an information exchange to be likely to have restrictive effects on competition, the companies involved in the exchange have to cover a sufficiently large part of the relevant market. Otherwise, the competitors that are not participating in the information exchange could constrain any anti-competitive behaviour of the companies involved. For example, by pricing below the coordinated price level companies unaffiliated within the information exchange system could threaten the external stability of a collusive outcome.

88.

What constitutes ‘a sufficiently large part of the market’ cannot be defined in the abstract and will depend on the specific facts of each case and the type of information exchange in question. Where, however, an information exchange takes place in the context of another type of horizontal co-operation agreement and does not go beyond what is necessary for its implementation, market coverage below the market share thresholds set out in the relevant chapter of these guidelines, the relevant block exemption regulation66 or the De Minimis Notice pertaining to the type of agreement in question will usually not be large enough for the information exchange to give rise to restrictive effects on competition.



Aggregated/individualised data

89.

Exchanges of genuinely aggregated data, that is to say, where the recognition of individualised company level information is sufficiently difficult, are much less likely to lead to restrictive effects on competition than exchanges of company level data. Collection and publication of aggre1025

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gated market data (such as sales data, data on capacities or data on costs of inputs and components) by a trade organisation or market intelligence firm may benefit suppliers and customers alike by allowing them to get a clearer picture of the economic situation of a sector. Such data collection and publication may allow market participants to make better-informed individual choices in order to adapt efficiently their strategy to the market conditions. More generally, unless it takes place in a tight oligopoly, the exchange of aggregated data is unlikely to give rise to restrictive effects on competition. Conversely, the exchange of individualised data facilitates a common understanding on the market and punishment strategies by allowing the coordinating companies to single out a deviator or entrant. Nevertheless, the possibility cannot be excluded that even the exchange of aggregated data may facilitate a collusive outcome in markets with specific characteristics. Namely, members of a very tight and stable oligopoly exchanging aggregated data who detect a market price below a certain level could automatically assume that someone has deviated from the collusive outcome and take market-wide retaliatory steps. In other words, in order to keep collusion stable, companies may not always need to know who deviated, it may be enough to learn that ‘someone’ deviated.

Age of data

90.

The exchange of historic data is unlikely to lead to a collusive outcome as it is unlikely to be indicative of the competitors’ future conduct or to provide a common understanding on the market.67 Moreover, exchanging historic data is unlikely to facilitate monitoring of deviations because the older the data, the less useful it would be for timely detection of deviations and thus as a credible threat of prompt retaliation.68 There is no predetermined threshold when data becomes historic, that is to say, old enough not to pose risks to competition. Whether data is genuinely historic depends on the specific characteristics of the relevant market and in particular the frequency of price re-negotiations in the industry. For example, data can be considered as historic if it is several times older than the average length of contracts in the industry if the latter are indicative of price re-negotiations. Moreover, the threshold when data becomes historic also depends on the data’s nature, aggregation, frequency of the exchange, and the characteristics of the relevant market (for example, its stability and transparency).

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Frequency of the information exchange

91.

Frequent exchanges of information that facilitate both a better common understanding of the market and monitoring of deviations increase the risks of a collusive outcome. In more unstable markets, more frequent exchanges of information may be necessary to facilitate a collusive outcome than in stable markets. In markets with long-term contracts (which are indicative of infrequent price re-negotiations) a less frequent exchange of information would normally be sufficient to achieve a collusive outcome. By contrast, infrequent exchanges would not tend to be sufficient to achieve a collusive outcome in markets with short-term contracts indicative of frequent price re-negotiations.69 However, the frequency at which data needs to be exchanged to facilitate a collusive outcome also depends on the nature, age and aggregation of data.70



Public/non-public information

92.

In general, exchanges of genuinely public information are unlikely to constitute an infringement of Article 101.71 Genuinely public information is information that is generally equally accessible (in terms of costs of access) to all competitors and customers. For information to be genuinely public, obtaining it should not be more costly for customers and companies unaffiliated to the exchange system than for the companies exchanging the information. For this reason, competitors would normally not choose to exchange data that they can collect from the market at equal ease, and hence in practice exchanges of genuinely public data are unlikely. In contrast, even if the data exchanged between competitors is what is often referred to as being ‘in the public domain’, it is not genuinely public if the costs involved in collecting the data deter other companies and customers from doing so.72 A possibility to gather the information in the market, for example to collect it from customers, does not necessarily mean that such information constitutes market data readily accessible to competitors.73

93.

Even if there is public availability of data (for example, information published by regulators), the existence of an additional information exchange by competitors may give rise to restrictive effects on competition if it further reduces strategic uncertainty in the market. In that case, it is the incremental information that could be critical to tip the market balance towards a collusive outcome. 1027

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Public/non-public exchange of information

94.

An information exchange is genuinely public if it makes the exchanged data equally accessible (in terms of costs of access) to all competitors and customers.74 The fact that information is exchanged in public may decrease the likelihood of a collusive outcome on the market to the extent that non-coordinating companies, potential competitors, as well as costumers may be able to constrain potential restrictive effect on competition.75 However, the possibility cannot be entirely excluded that even genuinely public exchanges of information may facilitate a collusive outcome in the market.

2.3 Assessment under Article 101(3) 2.3.1 Efficiency gains76 95.

Information exchange may lead to efficiency gains. Information about competitors’ costs can enable companies to become more efficient if they benchmark their performance against the best practices in the industry and design internal incentive schemes accordingly.

96.

Moreover, in certain situations information exchange can help companies allocate production towards high-demand markets (for example, demand information) or low cost companies (for example, cost information). The likelihood of those types of efficiencies depends on market characteristics such as whether companies compete on prices or quantities and the nature of uncertainties on the market. Some forms of information exchanges in this context may allow substantial cost savings where, for example, they reduce unnecessary inventories or enable quicker delivery of perishable products to areas with high demand and their reduction in areas with low demand (see Example 6, paragraph 110).

97.

Exchange of consumer data between companies in markets with asymmetric information about consumers can also give rise to efficiencies. For instance, keeping track of the past behaviour of customers in terms of accidents or credit default provides an incentive for consumers to limit their risk exposure. It also makes it possible to detect which consumers carry a lower risk and should benefit from lower prices. In this context, information exchange can also reduce consumer lock-in, thereby inducing stronger competition. This is because information is generally specific to 1028

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a relationship and consumers would otherwise lose the benefit from that information when switching to another company. Examples of such efficiencies are found in the banking and insurance sectors, which are characterised by frequent exchanges of information about consumer defaults and risk characteristics. 98.

Exchanging past and present data related to market shares may in some situations provide benefits to both companies and consumers by allowing companies to announce it as a signal of quality of their products to consumers. In situations of imperfect information about product quality, consumers often use indirect means to gain information on the relative qualities of products such as price and market shares (for example, consumers use best-selling lists in order to choose their next book).

99.

Information exchange that is genuinely public can also benefit consumers by helping them to make a more informed choice (and reducing their search costs). Consumers are most likely to benefit in this way from public exchanges of current data, which are the most relevant for their purchasing decisions. Similarly, public information exchange about current input prices can lower search costs for companies, which would normally benefit consumers through lower final prices. Those types of direct consumer benefits are less likely to be generated by exchanges of future pricing intentions because companies which announce their pricing intentions are likely to revise them before consumers actually purchase based on that information. Consumers generally cannot rely on companies’ future intentions when making their consumption plans. However, to some extent, companies may be disciplined not to change the announced future prices before implementation when, for example, they have repeated interactions with consumers and consumers rely on knowing the prices in advance or, for example, when consumers can make advance orders. In those situations, exchanging information related to the future may improve customers’ planning of expenditure.

100. Exchanging present and past data is more likely to generate efficiency gains than exchanging information about future intentions. However, in specific circumstances announcing future intentions could also give rise to efficiency gains. For example, companies knowing early the winner of an R&D race could avoid duplicating costly efforts and wasting resources that cannot be recovered.77

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2.3.2 Indispensability 101. Restrictions that go beyond what is necessary to achieve the efficiency gains generated by an information exchange do not fulfil the conditions of Article 101(3). For fulfilling the condition of indispensability, the parties will need to prove that the data’s subject matter, aggregation, age, confidentiality and frequency, as well as coverage, of the exchange are of the kind that carries the lowest risks indispensable for creating the claimed efficiency gains. Moreover, the exchange should not involve information beyond the variables that are relevant for the attainment of the efficiency gains. For instance, for the purpose of benchmarking, an exchange of individualised data would generally not be indispensable because information aggregated in for example some form of industry ranking could also generate the claimed efficiency gains while carrying a lower risk of leading to a collusive outcome (see Example 4, paragraph 108). Finally, it is generally unlikely that the sharing of individualised data on future intentions is indispensable, especially if it is related to prices and quantities. 102. Similarly, information exchanges that form part of horizontal co-operation agreements are also more likely to fulfil the conditions of Article 101(3) if they do not go beyond what is indispensable for the implementation of the economic purpose of the agreement (for example, sharing technology necessary for an R&D agreement or cost data in the context of a production agreement).

2.3.3 Pass-on to consumers 103. Efficiency gains attained by indispensable restrictions must be passed on to consumers to an extent that outweighs the restrictive effects on competition caused by an information exchange. The lower is the market power of the parties involved in the information exchange, the more likely it is that the efficiency gains would be passed on to consumers to an extent that outweighs the restrictive effects on competition.

2.3.4 No elimination of competition 104. The criteria of Article 101(3) cannot be met if the companies involved in the information exchange are afforded the possibility of eliminating competition in respect of a substantial part of the products concerned.

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2.4 Examples 105. Exchange of intended future prices as a restriction of competition by object

Example 1



Situation: A trade association of coach companies in country X disseminates individualised information on intended future prices only to the member coach companies. The information contains several elements, such as the intended fare and the route to which the fare applies, the possible restrictions to this fare, such as which consumers can buy it, if advanced payment or minimum stay is required, the period during which tickets can be sold for the given fare (first and last ticket date), and the time during which the ticket with the given fare can be used for travel (first and last travel dates).



Analysis: This information exchange, which is triggered by a decision by an association of undertakings, concerns pricing intentions of competitors. This information exchange is a very efficient tool for reaching a collusive outcome and therefore restricts competition by object. This is because the companies are free to change their own intended prices as announced within the association at any time if they learn that their competitors intend to charge higher prices. This allows the companies to reach a common higher price level without incurring the cost of losing market share. For example, coach Company A can announce today a price increase on the route from city 1 to city 2 for travel as of the following month. Since this information is accessible to all other coach companies, Company A can then wait and see the reaction of its competitors to this price announcement. If a competitor on the same route, say, Company B, matched the price increase, then Company A’s announcement would be left unchanged and later would likely become effective. However, if Company B did not match the price increase, then Company A could still revise its fare. The adjustment would continue until the companies converged to an increased anti-competitive price level. This information exchange is unlikely to fulfil the conditions of Article 101(3). The information exchange is only confined to competitors, that is to say, customers of the coach companies do not directly benefit from it.

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106. Exchange of current prices with sufficient efficiency gains for consumers

Example 2



Situation: A national tourist office together with the coach companies in small country X agree to disseminate information on current prices of coach tickets through a freely accessible website (in contrast to Example 1, paragraph 105, consumers can already purchase tickets at the prices and conditions which are exchanged, thus they are not intended future prices but present prices of current and future services). The information contains several elements, such as the fare and the route to which the fare is applied, the possible restrictions to this fare, such as which consumers can buy it, if advanced payment or minimum stay is required, and the time during which the ticket with the given fare can be used for travel (first and last travel dates). Coach travel in country X is not in the same relevant market as train and air travel. It is presumed that the relevant market is concentrated, stable and relatively non-complex, and pricing becomes transparent with the information exchange.



Analysis: This information exchange does not constitute a restriction of competition by object. The companies are exchanging current prices rather than intended future prices because they are effectively already selling tickets at these prices (unlike in Example 1, paragraph 105). Therefore, this exchange of information is less likely to constitute an efficient mechanism for reaching a focal point for coordination. Nevertheless, given the market structure and strategic nature of the data, this information exchange is likely to constitute an efficient mechanism for monitoring deviations from a collusive outcome, which would be likely to occur in this type of market setting. Therefore, this information exchange could give rise to restrictive effects on competition within the meaning of Article 101(1). However, to the extent that some restrictive effects on competition could result from the possibility to monitor deviations, it is likely that the efficiency gains stemming from the information exchange would be passed on to consumers to an extent that outweighs the restrictive effects on competition in both their likelihood and magnitude. Unlike in Example 1, paragraph 105, the information exchange is public and consumers can actually purchase tickets at the prices and conditions that are exchanged. Therefore this information exchange is likely to directly benefit consumers by reducing their search costs and improving choice, and thereby also stimulating price competition. Hence, the conditions of Article 101(3) are likely to be met. 1032

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107. Current prices deduced from the information exchanged

Example 3



Situation: The luxury hotels in the capital of country A operate in a tight, non-complex and stable oligopoly, with largely homogenous cost structures, which constitute a separate relevant market from other hotels. They directly exchange individual information about current occupancy rates and revenues. In this case, from the information exchanged the parties can directly deduce their actual current prices.



Analysis: Unless it is a disguised means of exchanging information on future intentions, this exchange of information would not constitute a restriction of competition by object because the hotels exchange present data and not information on intended future prices or quantities. However, the information exchange would give rise to restrictive effects on competition within the meaning of Article 101(1) because knowing the competitors’ actual current prices would be likely to facilitate coordination (that is to say, alignment) of companies’ competitive behaviour. It would be most likely used to monitor deviations from the collusive outcome. The information exchange increases transparency in the market as even though the hotels normally publish their list prices, they also offer various discounts to the list price resulting from negotiations or for early or group bookings, etc. Therefore, the incremental information that is non-publicly exchanged between the hotels is commercially sensitive, that is to say, strategically useful. This exchange is likely to facilitate a collusive outcome on the market because the parties involved constitute a tight, non-complex and stable oligopoly involved in a long-term competitive relationship (repeated interactions). Moreover, the cost structures of the hotels are largely homogeneous. Finally, neither consumers nor market entry can constrain the incumbents’ anti-competitive behaviour as consumers have little buyer power and barriers to entry are high. It is unlikely that in this case the parties would be able to demonstrate any efficiency gains stemming from the information exchange that would be passed on to consumers to an extent that would outweigh the restrictive effects on competition. Therefore it is unlikely that the conditions of Article 101(3) can be met.

=

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108. Benchmarking benefits – criteria of Article 101(3) not fulfilled

Example 4



Situation: Three large companies with a combined market share of 80 % in a stable, non-complex, concentrated market with high barriers to entry, non-publicly and frequently exchange information directly between themselves about a substantial fraction of their individual costs. The companies claim that they do this to benchmark their performance against their competitors and thereby intend to become more efficient.



Analysis: This information exchange does not in principle constitute a restriction of competition by object. Consequently, its effects on the market need to be assessed. Because of the market structure, the fact that the information exchanged relates to a large proportion of the companies’ variable costs, the individualised form of presentation of the data, and its large coverage of the relevant market, the information exchange is likely to facilitate a collusive outcome and thereby gives rise to restrictive effects on competition within the meaning of Article 101(1). It is unlikely that the criteria of Article 101(3) are fulfilled because there are less restrictive means to achieve the claimed efficiency gains, for example by way of a third party collecting, anonymising and aggregating the data in some form of industry ranking. Finally, in this case, since the parties form a very tight, non-complex and stable oligopoly, even the exchange of aggregated data could facilitate a collusive outcome in the market. However, this would be very unlikely if this exchange of information happened in a non-transparent, fragmented, unstable, and complex market.

109. Genuinely public information

Example 5



Situation: The four companies owning all the petrol stations in a large country A exchange current gasoline prices over the telephone. They claim that this information exchange cannot have restrictive effects on competition because the information is public as it is displayed on large display panels at every petrol station.



Analysis: The pricing data exchanged over the telephone is not genuinely public, as in order to obtain the same information in a different way it 1034

Appendix 3 Horizontal cooperation agreements

would be necessary to incur substantial time and transport costs. One would have to travel frequently large distances to collect the prices displayed on the boards of petrol stations spread all over the country. The costs for this are potentially high, so that the information could in practice not be obtained but for the information exchange. Moreover, the exchange is systematic and covers the entire relevant market, which is a tight, non-complex, stable oligopoly. Therefore it is likely to create a climate of mutual certainty as to the competitors’ pricing policy and thereby it is likely to facilitate a collusive outcome. Consequently, this information exchange is likely to give rise to restrictive effects on competition within the meaning of Article 101(1). 110. Improved meeting of demand as an efficiency gain

Example 6



Situation: There are five producers of fresh bottled carrot juice in the relevant market. Demand for this product is very unstable and vary from location to location in different points in time. The juice has to be sold and consumed within one day from the date of production. The producers agree to establish an independent market research company that on a daily basis collects current information about unsold juice in each point of sale, which it publishes on its website the following week in a form that is aggregated per point of sale. The published statistics allow producers and retailers to forecast demand and to better position the product. Before the information exchange was put in place, the retailers had reported large quantities of wasted juice and therefore had reduced the quantity of juice purchased from the producers; that is to say, the market was not working efficiently. Consequently, in some periods and areas there were frequent instances of unmet demand. The information exchange system, which allows better forecasting of oversupply and undersupply, has significantly reduced the instances of unmet consumer demand and increased the quantity sold in the market.



Analysis: Even though the market is quite concentrated and the data exchanged is recent and strategic, it is not very likely that this exchange would facilitate a collusive outcome because a collusive outcome would be unlikely to occur in such an unstable market. Even if the exchange creates some risk of giving rise to restrictive effects on competition, the efficiency gains stemming from increasing supply to places with high de1035

Appendix 3 Horizontal cooperation agreements

mand and decreasing supply in places with low demand is likely to offset potential restrictive effects. The information is exchanged in a public and aggregated form, which carries lower anti-competitive risks than if it were non-public and individualised. The information exchange therefore does not go beyond what is necessary to correct the market failure. Therefore, it is likely that this information exchange meets the criteria of Article 101(3).

3.    RESEARCH AND DEVELOPMENT AGREEMENTS 3.1 Definition 111. R&D agreements vary in form and scope. They range from outsourcing certain R&D activities to the joint improvement of existing technologies and co-operation concerning the research, development and marketing of completely new products. They may take the form of a co-operation agreement or of a jointly controlled company. This chapter applies to all forms of R&D agreements, including related agreements concerning the production or commercialisation of the R&D results.

3.2 Relevant markets 112. The key to defining the relevant market when assessing the effects of an R&D agreement is to identify those products, technologies or R&D efforts that will act as the main competitive constraints on the parties. At one end of the spectrum of possible situations, innovation may result in a product (or technology) which competes in an existing product (or technology) market. This is, for example, the case with R&D directed towards slight improvements or variations, such as new models of certain products. Here possible effects concern the market for existing products. At the other end of the spectrum, innovation may result in an entirely new product which creates its own new product market (for example, a new vaccine for a previously incurable disease). However, many cases concern situations in between those two extremes, that is to say, situations in which innovation efforts may create products (or technology) which, over time, replace existing ones (for example, CDs which have replaced records). A careful analysis of those situations may have to cover both existing markets and the impact of the agreement on innovation.

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Existing product markets

113. Where the co-operation concerns R&D for the improvement of existing products, those existing products and their close substitutes form the relevant market concerned by the co-operation.78 114. If the R&D efforts aim at a significant change of existing products or even at a new product to replace existing ones, substitution with the existing products may be imperfect or long-term. It may be concluded that the old and the potentially emerging new products do not belong to the same relevant market.79 The market for existing products may nevertheless be concerned, if the pooling of R&D efforts is likely to result in the coordination of the parties’ behaviour as suppliers of existing products, for instance because of the exchange of competitively sensitive information relating to the market for existing products. 115. If the R&D concerns an important component of a final product, not only the market for that component may be relevant for the assessment, but also the existing market for the final product. For instance, if car manufacturers co-operate in R&D related to a new type of engine, the car market may be affected by that R&D co-operation. The market for final products, however, is only relevant for the assessment if the component at which the R&D is aimed is technically or economically a key element of those final products and if the parties to the R&D agreement have market power with respect to the final products.

Existing technology markets

116. R&D co-operation may not only concern products but also technology. When intellectual property rights are marketed separately from the products to which they relate, the relevant technology market has to be defined as well. Technology markets consist of the intellectual property that is licensed and its close substitutes, that is to say, other technologies which customers could use as a substitute. 117. The methodology for defining technology markets follows the same principles as product market definition.80 Starting from the technology which is marketed by the parties, those other technologies to which customers could switch in response to a small but non-transitory increase in relative prices need to be identified. Once those technologies are identified, mar1037

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ket shares can be calculated by dividing the licensing income generated by the parties by the total licensing income of all licensors. 118. The parties’ position in the market for existing technology is a relevant assessment criterion where the R&D co-operation concerns a significant improvement to an existing technology or a new technology that is likely to replace the existing technology. The parties’ market shares can, however, only be taken as a starting point for this analysis. In technology markets, particular emphasis must be placed on potential competition. If companies which do not currently license their technology are potential entrants on the technology market they could constrain the ability of the parties to profitably raise the price for their technology. This aspect of the analysis may also be taken into account directly in the calculation of market shares by basing those on the sales of the products incorporating the licensed technology on downstream product markets (see paragraphs 123 to 126).

Competition in innovation (R&D efforts)

119. R&D co-operation may not only affect competition in existing markets, but also competition in innovation and new product markets. This is the case where R&D co-operation concerns the development of new products or technology which either may – if emerging – one day replace existing ones or which are being developed for a new intended use and will therefore not replace existing products but create a completely new demand. The effects on competition in innovation are important in these situations, but can in some cases not be sufficiently assessed by analysing actual or potential competition in existing product/technology markets. In this respect, two scenarios can be distinguished, depending on the nature of the innovative process in a given industry. 120. In the first scenario, which is, for instance, present in the pharmaceutical industry, the process of innovation is structured in such a way that it is possible at an early stage to identify competing R&D poles. Competing R&D poles are R&D efforts directed towards a certain new product or technology, and the substitutes for that R&D, that is to say, R&D aimed at developing substitutable products or technology for those developed by the co-operation and having similar timing. In this case, it can be analysed whether after the agreement there will be a sufficient number of remaining R&D poles. The starting point of the analysis is the R&D of the 1038

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parties. Then credible competing R&D poles have to be identified. In order to assess the credibility of competing poles, the following aspects have to be taken into account: the nature, scope and size of any other R&D efforts, their access to financial and human resources, know-how/patents, or other specialised assets as well as their timing and their capability to exploit possible results. An R&D pole is not a credible competitor if it cannot be regarded as a close substitute for the parties’ R&D effort from the viewpoint of, for instance, access to resources or timing. 121. Besides the direct effect on the innovation itself, the co-operation may also affect a new product market. It will often be difficult to analyse the effects on such a market directly as by its very nature it does not yet exist. The analysis of such markets will therefore often be implicitly incorporated in the analysis of competition in innovation. However, it may be necessary to consider directly the effects on such a market of aspects of the agreement that go beyond the R&D stage. An R&D agreement that includes joint production and commercialisation on the new product market may, for instance, be assessed differently than a pure R&D agreement. 122. In the second scenario, the innovative efforts in an industry are not clearly structured so as to allow the identification of R&D poles. In this situation, in the absence of exceptional circumstances, the Commission would not try to assess the impact of a given R&D co-operation on innovation, but would limit its assessment to existing product and/or technology markets which are related to the R&D co-operation in question.

Calculation of market shares

123. The calculation of market shares, both for the purposes of the R&D Block Exemption Regulation and of these guidelines, has to reflect the distinction between existing markets and competition in innovation. At the beginning of an R&D co-operation the reference point is the existing market for products capable of being improved, substituted or replaced by the products under development. If the R&D agreement only aims at improving or refining existing products, that market includes the products directly concerned by the R&D. Market shares can thus be calculated on the basis of the sales value of the existing products.

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124. If the R&D aims at replacing an existing product, the new product will, if successful, become a substitute for the existing products. To assess the competitive position of the parties, it is again possible to calculate market shares on the basis of the sales value of the existing products. Consequently, the R&D Block Exemption Regulation bases its exemption of those situations on the market share in the relevant market for the products capable of being improved, substituted or replaced by the contract products.81 To fall under the R&D Block Exemption Regulation, that market share may not exceed 25 %.82 125. For technology markets one way to proceed is to calculate market shares on the basis of each technology’s share of total licensing income from royalties, representing a technology’s share of the market where competing technologies are licensed. However, this may often be a mere theoretical and not very practical way to proceed because of lack of clear information on royalties, the use of royalty free cross-licensing, etc. An alternative approach is to calculate market shares on the technology market on the basis of sales of products or services incorporating the licensed technology on downstream product markets. Under that approach all sales on the relevant product market are taken into account, irrespective of whether the product incorporates a technology that is being licensed.83 Also for that market the share may not exceed 25 % (irrespective of the calculation method used) for the benefits of the R&D Block Exemption Regulation to apply. 126. If the R&D aims at developing a product which will create a completely new demand, market shares based on sales cannot be calculated. Only an analysis of the effects of the agreement on competition in innovation is possible. Consequently, the R&D Block Exemption Regulation treats those agreements as agreements between non-competitors and exempts them irrespective of market share for the duration of the joint R&D and an additional period of seven years after the product is first put on the market.84 However, the benefit of the block exemption may be withdrawn if the agreement eliminated effective competition in innovation.85 After the seven year period, market shares based on sales value can be calculated, and the market share threshold of 25 % applies.86

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3.3 Assessment under Article 101(1) 3.3.1 Main competition concerns 127. R&D co-operation can restrict competition in various ways. First, it may reduce or slow down innovation, leading to fewer or worse products coming to the market later than they otherwise would. Secondly, on product or technology markets the R&D co-operation may reduce significantly competition between the parties outside the scope of the agreement or it may make anti-competitive coordination on those markets likely, thereby leading to higher prices. A foreclosure problem may only arise in the context of co-operation involving at least one player with a significant degree of market power (which does not necessarily amount to dominance) for a key technology and the exclusive exploitation of the results.

3.3.2 Restrictions of competition by object 128. R&D agreements restrict competition by object if they do not truly concern joint R&D, but serve as a tool to engage in a disguised cartel, that is to say, otherwise prohibited price fixing, output limitation or market allocation. However, an R&D agreement which includes the joint exploitation of possible future results is not necessarily restrictive of competition.

3.3.3 Restrictive effects on competition 129. Most R&D agreements do not fall under Article 101(1). First, this can be said for many agreements relating to co-operation in R&D at a rather early stage, far removed from the exploitation of possible results. 130. Moreover, R&D co-operation between non-competitors does generally not give rise to restrictive effects on competition.87 The competitive relationship between the parties has to be analysed in the context of affected existing markets and/or innovation. If, on the basis of objective factors, the parties are not able to carry out the necessary R&D independently, for instance, due to the limited technical capabilities of the parties, the R&D agreement will normally not have any restrictive effects on competition. This can apply, for example, to companies bringing together complementary skills, technologies and other resources. The issue of potential competition has to be assessed on a realistic basis. For instance, parties cannot be defined as potential competitors simply because the co-opera1041

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tion enables them to carry out the R&D activities. The decisive question is whether each party independently has the necessary means as regards assets, know-how and other resources. 131. Outsourcing of previously captive R&D is a specific form of R&D cooperation. In such a scenario, the R&D is often carried out by specialised companies, research institutes or academic bodies, which are not active in the exploitation of the results. Normally, such agreements are combined with a transfer of know-how and/or an exclusive supply clause concerning the possible results, which, due to the complementary nature of the co-operating parties in such a scenario, do not give rise to restrictive effects on competition within the meaning of Article 101(1). 132. R&D co-operation which does not include the joint exploitation of possible results by means of licensing, production and/or marketing rarely gives rise to restrictive effects on competition within the meaning of Article 101(1). Those pure R&D agreements can only cause a competition problem if competition with respect to innovation is appreciably reduced, leaving only a limited number of credible competing R&D poles. 133. R&D agreements are only likely to give rise to restrictive effects on competition where the parties to the co-operation have market power on the existing markets and/or competition with respect to innovation is appreciably reduced. 134. There is no absolute threshold above which it can be presumed that an R&D agreement creates or maintains market power and thus is likely to give rise to restrictive effects on competition within the meaning of Article 101(1). However, R&D agreements between competitors are covered by the R&D Block Exemption Regulation provided that their combined market share does not exceed 25 % and that the other conditions for the application of the R&D Block Exemption Regulation are fulfilled. 135. Agreements falling outside the R&D Block Exemption Regulation because the combined market share of the parties exceeds 25  % do not necessarily give rise to restrictive effects on competition. However, the stronger the combined position of the parties on existing markets and/or the more competition in innovation is restricted, the more likely it is that the R&D agreement can cause restrictive effects on competition.88

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136. If the R&D is directed at the improvement or refinement of existing products or technologies, possible effects concern the relevant market(s) for those existing products or technologies. Effects on prices, output, product quality, product variety or innovation in existing markets are, however, only likely if the parties together have a strong position, entry is difficult and few other innovation activities are identifiable. Furthermore, if the R&D only concerns a relatively minor input of a final product, effects on competition in those final products are, if any, very limited. 137. In general, a distinction has to be made between pure R&D agreements and agreements providing for more comprehensive co-operation involving different stages of the exploitation of results (that is to say, licensing, production or marketing). As set out in paragraph 132, pure R&D agreements will only rarely give rise to restrictive effects on competition within the meaning of Article 101(1). This is in particular true for R&D directed towards a limited improvement of existing products or technologies. If, in such a scenario, the R&D co-operation includes joint exploitation only by means of licensing to third parties, restrictive effects such as foreclosure problems are unlikely. If, however, joint production and/or marketing of the slightly improved products or technologies are included, the effects on competition of the co-operation have to be examined more closely. Restrictive effects on competition in the form of increased prices or reduced output in existing markets are more likely if strong competitors are involved in such a situation. 138. If the R&D is directed at an entirely new product (or technology) which creates its own new market, price and output effects on existing markets are rather unlikely. The analysis has to focus on possible restrictions of innovation concerning, for instance, the quality and variety of possible future products or technologies or the speed of innovation. Those restrictive effects can arise where two or more of the few companies engaged in the development of such a new product start to co-operate at a stage where they are each independently rather near to the launch of the product. Such effects are typically the direct result of the agreement between the parties. Innovation may be restricted even by a pure R&D agreement. In general, however, R&D co-operation concerning entirely new products is unlikely to give rise to restrictive effects on competition unless only a limited number of credible alternative R&D poles exist. This principle does not change significantly if the joint exploitation of the results, even joint marketing, is involved. In those situations the issue of joint 1043

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exploitation may only give rise to restrictive effects on competition where foreclosure from key technologies plays a role. Those problems would, however, not arise where the parties grant licences that allow third parties to compete effectively. 139. Many R&D agreements will lie somewhere in between the two situations described in paragraphs 137 and 138. They may therefore have effects on innovation as well as repercussions on existing markets. Consequently, both the existing market and the effect on innovation may be of relevance for the assessment with respect to the parties’ combined positions, concentration ratios, number of players or innovators and entry conditions. In some cases there can be restrictive effects on competition in the form of increased prices or reduced output, product quality, product variety or innovation in existing markets and in the form of a negative impact on innovation by means of slowing down the development. For instance, if significant competitors on an existing technology market co-operate to develop a new technology which may one day replace existing products that co-operation may slow down the development of the new technology if the parties have market power on the existing market and also a strong position with respect to R&D. A similar effect can occur if the major player in an existing market co-operates with a much smaller or even potential competitor who is just about to emerge with a new product or technology which may endanger the incumbent’s position. 140. Agreements may also fall outside the R&D Block Exemption Regulation irrespective of the parties’ market power. This applies for instance to agreements which unduly restrict access of a party to the results of the R&D co-operation  (89). The R&D Block Exemption Regulation provides for a specific exception to this general rule in the case of academic bodies, research institutes or specialised companies which provide R&D as a service and which are not active in the industrial exploitation of the results of R&D (90). Nevertheless, agreements falling outside the R&D Block Exemption Regulation and containing exclusive access rights for the purposes of exploitation may, where they fall under Article 101(1), fulfil the criteria of Article 101(3), particularly where exclusive access rights are economically indispensable in view of the market, risks and scale of the investment required to exploit the results of the research and development.

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3.4.   Assessment under Article 101(3) 3.4.1.   Efficiency gains 141. Many R&D agreements – with or without joint exploitation of possible results – bring about efficiency gains by combining complementary skills and assets, thus resulting in improved or new products and technologies being developed and marketed more rapidly than would otherwise be the case. R&D agreements may also lead to a wider dissemination of knowledge, which may trigger further innovation. R&D agreements may also give rise to cost reductions.

3.4.2 Indispensability 142. Restrictions that go beyond what is necessary to achieve the efficiency gains generated by an R&D agreement do not fulfil the criteria of Article 101(3). In particular, the restrictions listed in Article 5 of the R&D Block Exemption Regulation may mean it is less likely that the criteria of Article 101(3) will be found to be met, following an individual assessment. It will therefore generally be necessary for the parties to an R&D agreement to show that such restrictions are indispensable to the co-operation.

3.4.3 Pass-on to consumers 143. Efficiency gains attained by indispensable restrictions must be passed on to consumers to an extent that outweighs the restrictive effects on competition caused by the R&D agreement. For example, the introduction of new or improved products on the market must outweigh any price increases or other restrictive effects on competition. In general, it is more likely that an R&D agreement will bring about efficiency gains that benefit consumers if the R&D agreement results in the combination of complementary skills and assets. The parties to an agreement may, for instance, have different research capabilities. If, on the other hand, the parties’ skills and assets are very similar, the most important effect of the R&D agreement may be the elimination of part or all of the R&D of one or more of the parties. This would eliminate (fixed) costs for the parties to the agreement but would be unlikely to lead to benefits which would be passed on to consumers. Moreover, the higher the market power of the parties the less likely they are to pass on the efficiency gains to consumers to an extent that would outweigh the restrictive effects on competition. 1045

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3.4.4.   No elimination of competition 144. The criteria of Article 101(3) cannot be met if the parties are afforded the possibility of eliminating competition in respect of a substantial part of the products (or technologies) in question.

3.4.5 Time of the assessment 145. The assessment of restrictive agreements under Article 101(3) is made within the actual context in which they occur and on the basis of the facts existing at any given point in time. The assessment is sensitive to material changes in the facts. The exception rule of Article 101(3) applies as long as the four conditions of Article 101(3) are fulfilled and ceases to apply when that is no longer the case. When applying Article 101(3) in accordance with those principles it is necessary to take into account the initial sunk investments made by any of the parties and the time needed and the restraints required to making and recouping an efficiency enhancing investment. Article 101 cannot be applied without taking due account of such ex ante investment. The risk facing the parties and the sunk investment that must be made to implement the agreement can thus lead to the agreement falling outside Article 101(1) or fulfilling the conditions of Article 101(3), as the case may be, for the period of time needed to recoup the investment. Should the invention resulting from the investment benefit from any form of exclusivity granted to the parties under rules specific to the protection of intellectual property rights, the recoupment period for such an investment will generally be unlikely to exceed the exclusivity period established under those rules. 146. In some cases the restrictive agreement is an irreversible event. Once the restrictive agreement has been implemented the ex ante situation cannot be re-established. In such cases the assessment must be made exclusively on the basis of the facts pertaining at the time of implementation. For instance, in the case of an R&D agreement whereby each party agrees to abandon its respective research project and pool its capabilities with those of another party, it may from an objective point of view be technically and economically impossible to revive a project once it has been abandoned. The assessment of the anti-competitive and pro-competitive effects of the agreement to abandon the individual research projects must therefore be made as of the time of the completion of its implementation. If at that point in time the agreement is compatible with Article 1046

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101, for instance because a sufficient number of third parties have competing R&D projects, the parties’ agreement to abandon their individual projects remains compatible with Article 101, even if at a later point in time the third party projects fail. However, the prohibition of Article 101 may apply to other parts of the agreement in respect of which the issue of irreversibility does not arise. If, for example, in addition to joint R&D, the agreement provides for joint exploitation, Article 101 may apply to that part of the agreement if, due to subsequent market developments, the agreement gives rise to restrictive effects on competition and does not (any longer) satisfy the conditions of Article 101(3) taking due account of ex ante sunk investments.

3.5 Examples 147. Impact of joint R&D on innovation markets/new product market

Example 1



Situation: A and B are the two major companies on the Union-wide market for the manufacture of existing electronic components. Both have a market share of 30 %. They have each made significant investments in the R&D necessary to develop miniaturised electronic components and have developed early prototypes. They now agree to pool those R&D efforts by setting up a joint venture to complete the R&D and produce the components, which will be sold back to the parents, who will commercialise them separately. The remainder of the market consists of small companies without sufficient resources to undertake the necessary investments.



Analysis: Miniaturised electronic components, while likely to compete with the existing components in some areas, are essentially a new technology and an analysis must be made of the poles of research destined towards that future market. If the joint venture goes ahead then only one route to the necessary manufacturing technology will exist, whereas it would appear likely that A and B could reach the market individually with separate products. The agreement therefore reduces product variety. The joint production is also likely to directly limit competition between the parties to the agreement and lead them to agree on output levels, quality or other competitively important parameters. This would limit competition even though the parties will commercialise the products independently. The parties could, for instance, limit the output of the joint venture com1047

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pared to what the parties would have brought to the market if they had decided their output on their own. The joint venture could also charge a high transfer price to the parties, thereby increasing the input costs for the parties which could lead to higher downstream prices. The parties have a large combined market share on the existing downstream market and the remainder of that market is fragmented. This situation is likely to become even more pronounced on the new downstream product market since the smaller competitors cannot invest in the new components. It is therefore quite likely that the joint production will restrict competition. Furthermore, the market for miniaturised electronic components is in the future likely to develop into a duopoly with a high degree of commonality of costs and possible exchange of commercially sensitive information between the parties. There may therefore also be a serious risk of anti-competitive coordination leading to a collusive outcome in the market. The R&D agreement is therefore likely to give rise to restrictive effects on competition within the meaning of Article 101(1). While the agreement could give rise to efficiency gains in the form of bringing a new technology forward quicker, the parties would face no competition at the R&D level, so their incentives to pursue the new technology at a high pace could be severely reduced. Although some of those concerns could be remedied if the parties committed to license key know-how for manufacturing miniature components to third parties on reasonable terms, it seems unlikely that this could remedy all concerns and fulfil the conditions of Article 101(3).

Example 2



Situation: A small research company (Company A) which does not have its own marketing organisation has discovered and patented a pharmaceutical substance based on new technology that will revolutionise the treatment of a certain disease. Company A enters into an R&D agreement with a large pharmaceutical producer Company B of products that have so far been used for treating the disease. Company B lacks any similar expertise and R&D programme and would not be able to build such expertise within a relevant timeframe. For the existing products Company B has a market share of around 75 % in all Member States, but the patents will expire over the next five years. There exist two other poles of research with other companies at approximately the same stage of development using the same basic new technology. Company B will provide considerable funding and know-how for product development, as well as 1048

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future access to the market. Company B is granted a licence for the exclusive production and distribution of the resulting product for the duration of the patent. It is expected that the product could be brought to market in five to seven years.

Analysis: The product is likely to belong to a new relevant market. The parties bring complementary resources and skills to the co-operation, and the probability of the product coming to market increases substantially. Although Company B is likely to have considerable market power on the existing market, that market power will be decreasing shortly. The agreement will not lead to a loss in R&D on the part of Company B, as it has no expertise in this area of research, and the existence of other poles of research are likely to eliminate any incentive to reduce R&D efforts. The exploitation rights during the remaining patent period are likely to be necessary for Company B to make the considerable investments needed and Company A has no marketing resources of its own. The agreement is therefore unlikely to give rise to restrictive effects on competition within the meaning of Article 101(1). Even if there were such effects, it is likely that the conditions of Article 101(3) would be fulfilled.

148. Risk of foreclosure

Example 3



Situation: A small research company (Company A) which does not have its own marketing organisation has discovered and patented a new technology that will revolutionise the market for a certain product for which there is a monopoly producer (Company B) worldwide as no competitors can compete with Company B’s current technology. There exist two other poles of research with other companies at approximately the same stage of development using the same basic new technology. Company B will provide considerable funding and know-how for product development, as well as future access to the market. Company B is granted an exclusive licence for the use of the technology for the duration of the patent and commits to funding only the development of Company A’s technology.



Analysis: The product is likely to belong to a new relevant market. The parties bring complementary resources and skills to the co-operation, and the probability of the product coming to market increases substantially. However, the fact that Company B commits to Company A’s new 1049

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technology may be likely to lead the two competing poles of research to abandon their projects as it could be difficult to receive continued funding once they have lost the most likely potential customer for their technology. In such a situation no potential competitors would be able to challenge Company B’s monopoly position in the future. The foreclosure effect of the agreement would then be likely to be considered to give rise to restrictive effects on competition within the meaning of Article 101(1). In order to benefit from Article 101(3) the parties would have to show that the exclusivity granted would be indispensable to bring the new technology to the market.

Example 4



Situation: Company A has market power on the market of which its blockbuster medicine forms part. A small company (Company B) which is engaged in pharmaceutical R&D and active pharmaceutical ingredient (‘API’) production has discovered and filed a patent application for a new process that makes it possible to produce the API of Company A’s blockbuster in a more economic fashion and continues to develop the process for industrial production. The compound (API) patent of the blockbuster expires in a little less than three years; thereafter there will remain a number of process patents relating to the medicine. Company B considers that the new process developed by it would not infringe the existing process patents of Company A and would allow the production of a generic version of the blockbuster once the API patent has expired. Company B could either produce the product itself or license the process to interested third parties, for example, generic producers or Company A. Before concluding its research and development in this area, Company B enters into an agreement with Company A, in which Company A makes a financial contribution to the R&D project being carried out by Company B on condition that it acquires an exclusive licence for any of Company B’s patents related to the R&D project. There exist two other independent poles of research to develop a non-infringing process for the production of the blockbuster medicine, but it is not yet clear that they will reach industrial production.



Analysis: The process covered by Company B’s patent application does not allow for the production of a new product. It merely improves an existing production process. Company A has market power on the existing market of which the blockbuster medicine forms part. Whilst that 1050

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market power would decrease significantly with the actual market entry of generic competitors, the exclusive licence makes the process developed by Company B unavailable to third parties and is thus liable to delay generic entry (not least as the product is still protected by a number of process patents) and, consequently, restricts competition within the meaning of Article 101(1). As Company A and Company B are potential competitors, the R&D Block Exemption Regulation does not apply because Company A’s market share on the market of which the blockbuster medicine forms part is above 25 %. The cost savings based on the new production process for Company A are not sufficient to outweigh the restriction of competition. In any event, an exclusive licence is not indispensable to obtain the savings in the production process. Therefore, the agreement is unlikely to fulfil the conditions of Article 101(3). 149. Impact of R&D co-operation on dynamic product and technology markets and the environment

Example 5



Situation: Two engineering companies that produce vehicle components agree to set up a joint venture to combine their R&D efforts to improve the production and performance of an existing component. The production of that component would also have a positive effect on the environment. Vehicles would consume less fuel and therefore emit less CO2. The companies pool their existing technology licensing businesses in the area, but will continue to manufacture and sell the components separately. The two companies have market shares in the Union of 15 % and 20 % on the Original Equipment Manufacturer (‘OEM’) product market. There are two other major competitors together with several in-house research programmes by large vehicle manufacturers. On the world-wide market for the licensing of technology for those products the parties have shares of 20 % and 25 %, measured in terms of revenue generated, and there are two other major technologies. The product life cycle for the component is typically two to three years. In each of the last five years one of the major companies has introduced a new version or upgrade.



Analysis: Since neither company’s R&D effort is aimed at a completely new product, the markets to consider are those for the existing components and for the licensing of relevant technology. The parties’ combined market share on both the OEM market (35 %) and, in particular, on the 1051

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technology market (45 %) are quite high. However, the parties will continue to manufacture and sell the components separately. In addition, there are several competing technologies, which are regularly improved. Moreover, the vehicle manufacturers who do not currently license their technology are also potential entrants on the technology market and thus constrain the ability of the parties to profitably raise prices. To the extent that the joint venture has restrictive effects on competition within the meaning of Article 101(1), it is likely that it would fulfil the criteria of Article 101(3). For the assessment under Article 101(3) it would be necessary to take into account that consumers will benefit from a lower consumption of fuel.

4.    PRODUCTION AGREEMENTS 4.1 Definition and scope 150. Production agreements vary in form and scope. They can provide that production is carried out by only one party or by two or more parties. Companies can produce jointly by way of a joint venture, that is to say, a jointly controlled company operating one or several production facilities or by looser forms of co-operation in production such as subcontracting agreements where one party (the ‘contractor’) entrusts to another party (the ‘subcontractor’) the production of a good. 151. There are different types of subcontracting agreements. Horizontal subcontracting agreements are concluded between companies operating in the same product market irrespective of whether they are actual or potential competitors. Vertical subcontracting agreements are concluded between companies operating at different levels of the market. 152. Horizontal subcontracting agreements comprise unilateral and reciprocal specialisation agreements as well as subcontracting agreements with a view to expanding production. Unilateral specialisation agreements are agreements between two parties which are active on the same product market or markets, by virtue of which one party agrees to fully or partly cease production of certain products or to refrain from producing those products and to purchase them from the other party, which agrees to produce and supply the products. Reciprocal specialisation agreements are agreements between two or more parties which are active on the same 1052

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products market or markets, by virtue of which two or more parties agree, on a reciprocal basis, to fully or partly cease or refrain from producing certain but different products and to purchase those products from the other parties, which agree to produce and supply them. In the case of subcontracting agreements with a view to expanding production the contractor entrusts the subcontractor with the production of a good, while the contractor does not at the same time cease or limit its own production of the good. 153. These guidelines apply to all forms of joint production agreements and horizontal subcontracting agreements. Subject to certain conditions, joint production agreements as well as unilateral and reciprocal specialisation agreements may benefit from the Specialisation Block Exemption Regulation. 154. Vertical subcontracting agreements are not covered by these guidelines. They fall within the scope of the Guidelines on Vertical Restraints and, subject to certain conditions, may benefit from the Block Exemption Regulation on Vertical Restraints. In addition, they may be covered by the Commission notice of 18 December 1978 concerning its assessment of certain subcontracting agreements in relation to Article 85(1) of the EEC Treaty91 (‘the Subcontracting Notice’).

4.2 Relevant markets 155. In order to assess the competitive relationship between the co-operating parties, it is necessary first to define the relevant market or markets directly concerned by the co-operation in production, that is to say, the markets to which the products manufactured under the production agreement belong. 156. A production agreement can also have spill-over effects in markets neighbouring the market directly concerned by the co-operation, for instance upstream or downstream to the agreement (the so-called ‘spill-over markets’) (92). The spill-over markets are likely to be relevant if the markets are interdependent and the parties are in a strong position on the spillover market.

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4.3 Assessment under Article 101(1) 4.3.1 Main competition concerns 157. Production agreements can lead to a direct limitation of competition between the parties. Production agreements, and in particular production joint ventures, may lead the parties to directly align output levels and quality, the price at which the joint venture sells on its products, or other competitively important parameters. This may restrict competition even if the parties market the products independently. 158. Production agreements may also result in the coordination of the parties’ competitive behaviour as suppliers leading to higher prices or reduced output, product quality, product variety or innovation, that is to say, a collusive outcome. This can happen, subject to the parties having market power and the existence of market characteristics conducive to such coordination, in particular when the production agreement increases the parties’ commonality of costs (that is to say, the proportion of variable costs which the parties have in common) to a degree which enables them to achieve a collusive outcome, or if the agreement involves an exchange of commercially sensitive information that can lead to a collusive outcome. 159. Production agreements may furthermore lead to anti-competitive foreclosure of third parties in a related market (for example, the downstream market relying on inputs from the market in which the production agreement takes place). For instance, by gaining enough market power, parties engaging in joint production in an upstream market may be able to raise the price of a key component for a market downstream. Thereby, they could use the joint production to raise the costs of their rivals downstream and, ultimately, force them off the market. This would, in turn, increase the parties’ market power downstream, which could enable them to sustain prices above the competitive level or otherwise harm consumers. Such competition concerns could materialise irrespective of whether the parties to the agreement are competitors on the market in which the co-operation takes place. However, for this kind of foreclosure to have anti-competitive effects, at least one of the parties must have a strong market position in the market where the risks of foreclosure are assessed.

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4.3.2 Restrictions of competition by object 160. Generally, agreements which involve price-fixing, limiting output or sharing markets or customers restrict competition by object. However, in the context of production agreements, this does not apply where: —

the parties agree on the output directly concerned by the production agreement (for example, the capacity and production volume of a joint venture or the agreed amount of outsourced products), provided that the other parameters of competition are not eliminated; or

—

a production agreement that also provides for the joint distribution of the jointly manufactured products envisages the joint setting of the sales prices for those products, and only those products, provided that that restriction is necessary for producing jointly, meaning that the parties would not otherwise have an incentive to enter into the production agreement in the first place.

161. In these two cases an assessment is required as to whether the agreement gives rise to likely restrictive effects on competition within the meaning of Article 101(1). In both scenarios the agreement on output or prices will not be assessed separately, but in the light of the overall effects of the entire production agreement on the market.

4.3.3 Restrictive effects on competition 162. Whether the possible competition concerns that production agreements can give rise to are likely to materialise in a given case depends on the characteristics of the market in which the agreement takes place, as well as on the nature and market coverage of the co-operation and the product it concerns. These variables determine the likely effects of a production agreement on competition and thereby the applicability of Article 101(1). 163. Whether a production agreement is likely to give rise to restrictive effects on competition depends on the situation that would prevail in the absence of the agreement with all its alleged restrictions. Consequently, production agreements between companies which compete on markets on which the co-operation occurs are not likely to have restrictive effects 1055

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on competition if the co-operation gives rise to a new market, that is to say, if the agreement enables the parties to launch a new product or service, which, on the basis of objective factors, the parties would otherwise not have been able to do, for instance, due to the technical capabilities of the parties. 164. In some industries where production is the main economic activity, even a pure production agreement can in itself eliminate key dimensions of competition, thereby directly limiting competition between the parties to the agreements. 165. Alternatively, a production agreement can lead to a collusive outcome or anti-competitive foreclosure by increasing the companies’ market power or their commonality of costs or if it involves the exchange of commercially sensitive information. On the other hand, a direct limitation of competition between the parties, a collusive outcome or anti-competitive foreclosure is not likely to occur if the parties to the agreement do not have market power in the market in which the competition concerns are assessed. It is only market power that can enable them to profitably maintain prices above the competitive level, or profitably maintain output, product quality or variety below what would be dictated by competition. 166. In cases where a company with market power in one market co-operates with a potential entrant, for example, with a supplier of the same product in a neighbouring geographic or product market, the agreement can potentially increase the market power of the incumbent. This can lead to restrictive effects on competition if actual competition in the incumbent’s market is already weak and the threat of entry is a major source of competitive constraint. 167. Production agreements which also involve commercialisation functions, such as joint distribution or marketing, carry a higher risk of restrictive effects on competition than pure joint production agreements. Joint commercialisation brings the co-operation closer to the consumer and usually involves the joint setting of prices and sales, that is to say, practices that carry the highest risks for competition. However, joint distribution agreements for products which have been jointly produced are generally less likely to restrict competition than stand-alone joint distribution agreements. Also, a joint distribution agreement that is necessary for the joint production agreement to take place in the first place is less likely to restrict competition than if it were not necessary for the joint production. 1056

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Market power

168. A production agreement is unlikely to lead to restrictive effects on competition if the parties to the agreement do not have market power in the market on which a restriction of competition is assessed. The starting point for the analysis of market power is the market share of the parties. This will normally be followed by the concentration ratio and the number of players in the market as well as by other dynamic factors such as potential entry, and changing market shares. 169. Companies are unlikely to have market power below a certain level of market share. Therefore, unilateral or reciprocal specialisation agreements as well as joint production agreements including certain integrated commercialisation functions such as joint distribution are covered by the Specialisation Block Exemption Regulation if they are concluded between parties with a combined market share not exceeding 20 % in the relevant market or markets, provided that the other conditions for the application of the Specialisation Block Exemption Regulation are fulfilled. Moreover, as regards horizontal subcontracting agreements with a view to expanding production, in most cases it is unlikely that market power exists if the parties to the agreement have a combined market share not exceeding 20 %. In any event, if the parties’ combined market share does not exceed 20 % it is likely that the conditions of Article 101(3) are fulfilled. 170. However, if the parties’ combined market share exceeds 20 %, the restrictive effects have to be analysed as the agreement does not fall within the scope of the Specialisation Block Exemption Regulation or the safe harbour for horizontal subcontracting agreements with a view to expanding production referred to in sentences 3 and 4 of paragraph 169. A moderately higher market share than allowed for in the Specialisation Block Exemption Regulation or the safe harbour referred to in sentences 3 and 4 of paragraph 169 does not necessarily imply a highly concentrated market, which is an important factor in the assessment. A combined market share of the parties of slightly more than 20 % may occur in a market with a moderate concentration. Generally, a production agreement is more likely to lead to restrictive effects on competition in a concentrated market than in a market which is not concentrated. Similarly, a production agreement in a concentrated market may increase the risk of a collusive outcome even if the parties only have a moderate combined market share. 1057

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171. Even if the market shares of the parties to the agreement and the market concentration are high, the risks of restrictive effects on competition may still be low if the market is dynamic, that is to say, a market in which entry occurs and market positions change frequently. 172. In the analysis of whether the parties to a production agreement have market power, the number and intensity of links (for example, other cooperation agreements) between the competitors in the market are relevant to the assessment. 173. Factors such as whether the parties to the agreement have high market shares, whether they are close competitors, whether the customers have limited possibilities of switching suppliers, whether competitors are unlikely to increase supply if prices increase, and whether one of the parties to the agreement is an important competitive force, are all relevant for the competitive assessment of the agreement.

Direct limitation of competition between the parties

174. Competition between the parties to a production agreement can be directly limited in various ways. The parties to a production joint venture could, for instance, limit the output of the joint venture compared to what the parties would have brought to the market if each of them had decided their output on their own. If the main product characteristics are determined by the production agreement this could also eliminate the key dimensions of competition between the parties and, ultimately, lead to restrictive effects on competition. Another example would be a joint venture charging a high transfer price to the parties, thereby increasing the input costs for the parties which could lead to higher downstream prices. Competitors may find it profitable to increase their prices as a response, thereby contributing to price increases in the relevant market.

Collusive outcome

175. The likelihood of a collusive outcome depends on the parties’ market power as well as the characteristics of the relevant market. A collusive outcome can result in particular (but not only) from commonality of costs or an exchange of information brought about by the production agreement.

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176. A production agreement between parties with market power can have restrictive effects on competition if it increases their commonality of costs (that is to say, the proportion of variable costs which the parties have in common) to a level which enables them to collude. The relevant costs are the variable costs of the product with respect to which the parties to the production agreement compete. 177. A production agreement is more likely to lead to a collusive outcome if prior to the agreement the parties already have a high proportion of variable costs in common, as the additional increment (that is to say, the production costs of the product subject to the agreement) can tip the balance towards a collusive outcome. Conversely, if the increment is large, the risk of a collusive outcome may be high even if the initial level of commonality of costs is low. 178. Commonality of costs increases the risk of a collusive outcome only if production costs constitute a large proportion of the variable costs concerned. This is, for instance, not the case where the co-operation concerns products which require costly commercialisation. An example would be new or heterogeneous products requiring expensive marketing or high transport costs. 179. Another scenario where commonality of costs can lead to a collusive outcome could be where the parties agree on the joint production of an intermediate product which accounts for a large proportion of the variable costs of the final product with respect to which the parties compete downstream. The parties could use the production agreement to increase the price of that common important input for their products in the downstream market. This would weaken competition downstream and would be likely to lead to higher final prices. The profit would be shifted from downstream to upstream to be then shared between the parties through the joint venture. 180. Similarly, commonality of costs increases the anti-competitive risks of a horizontal subcontracting agreement where the input which the contractor purchases from the subcontractor accounts for a large proportion of the variable costs of the final product with which the parties compete.

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181. Any negative effects arising from the exchange of information will not be assessed separately but in the light of the overall effects of the agreement. A production agreement can give rise to restrictive effects on competition if it involves an exchange of commercially strategic information that can lead to a collusive outcome or anti-competitive foreclosure. Whether the exchange of information in the context of a production agreement is likely to lead to restrictive effects on competition should be assessed according to the guidance given in Chapter 2. 182. If the information exchange does not exceed the sharing of data necessary for the joint production of the goods subject to the production agreement, then even if the information exchange had restrictive effects on competition within the meaning of Article 101(1), the agreement would be more likely to meet the criteria of Article 101(3) than if the exchange went beyond what was necessary for the joint production. In this case the efficiency gains stemming from producing jointly are likely to outweigh the restrictive effects of the coordination of the parties’ conduct. Conversely, in the context of a production agreement the sharing of data which is not necessary for producing jointly, for example the exchange of information related to prices and sales, is less likely to fulfil the conditions of Article 101(3).

4.4 Assessment under Article 101(3) 4.4.1 Efficiency gains 183. Production agreements can be pro-competitive if they provide efficiency gains in the form of cost savings or better production technologies. By producing together companies can save costs that otherwise they would duplicate. They can also produce at lower costs if the co-operation enables them to increase production where marginal costs decline with output, that is to say, by economies of scale. Producing jointly can also help companies to improve product quality if they put together their complementary skills and know-how. Co-operation can also enable companies to increase product variety, which they could not have afforded, or would not have been able to achieve, otherwise. If joint production allows the parties to increase the number of different types of products, it can also provide cost savings by means of economies of scope.

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4.4.2 Indispensability 184. Restrictions that go beyond what is necessary to achieve the efficiency gains generated by a production agreement do not fulfil the criteria of Article 101(3). For instance, restrictions imposed in a production agreement on the parties’ competitive conduct with regard to output outside the co-operation will normally not be considered to be indispensable. Similarly, setting prices jointly will not be considered indispensable if the production agreement does not also involve joint commercialisation.

4.4.3 Pass-on to consumers 185. Efficiency gains attained by indispensable restrictions need to be passed on to consumers in the form of lower prices or better product quality or variety to an extent that outweighs the restrictive effects on competition. Efficiency gains that only benefit the parties or cost savings that are caused by output reduction or market allocation are not sufficient to meet the criteria of Article 101(3). If the parties to the production agreement achieve savings in their variable costs they are more likely to pass them on to consumers than if they reduce their fixed costs. Moreover, the higher the market power of the parties, the less likely they will pass on the efficiency gains to consumers to an extent that would outweigh the restrictive effects on competition.

4.4.4 No elimination of competition 186. The criteria of Article 101(3) cannot be met if the parties are afforded the possibility of eliminating competition in respect of a substantial part of the products in question. This has to be analysed in the relevant market to which the products subject to the co-operation belong and in any possible spill-over markets.

4.5 Examples 187. Commonality of costs and collusive outcomes

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Example 1



Situation: Companies A and B, two suppliers of a product X decide to close their current old production plants and build a larger, modern and more efficient production plant run by a joint venture, which will have a higher capacity than the total capacity of the old plants of Companies A and B. No other such investments are planned by competitors, which are using their facilities at full capacity. Companies A and B have market shares of 20 % and 25 % respectively. Their products are the closest substitutes in a specific segment of the market, which is concentrated. The market is transparent and rather stagnant, there is no entry and the market shares have been stable over time. Production costs constitute a major part of Company A and Company B’s variable costs for product X. Commercialisation is a minor economic activity in terms of costs and strategic importance compared to production: marketing costs are low as product X is homogenous and established and transport is not a key driver of competition.



Analysis: If Companies A and B share all or most of their variable costs, this production agreement could lead to a direct limitation of competition between them. It may lead the parties to limit the output of the joint venture compared to what they would have brought to the market if each of them had decided their output on their own. In the light of the capacity constraints of the competitors this reduction output could lead to higher prices.



Even if Companies A and B were not sharing most of their variable costs, but only a significant part thereof, this production agreement could lead to a collusive outcome between Companies A and B, thereby indirectly eliminating competition between the two parties. The likelihood of this depends not only on the issue of commonality of costs (which are high in this case) but also on the characteristics of the relevant market such as, for example, transparency, stability and level of concentration.



In either of the two situations mentioned above, it is likely, in the market configuration of this example, that the production joint venture of Companies A and B would give rise to restrictive effects on competition within the meaning of Article 101(1) on the market of X.

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The replacement of two smaller old production plants by the larger, modern and more efficient one may lead the joint venture to increase output at lower prices to the benefits of consumers. However, the production agreement could only meet the criteria of Article 101(3) if the parties provided substantiated evidence that the efficiency gains would be passed on to consumers to such an extent that they would outweigh the restrictive effects on competition.

188. Links between competitors and collusive outcomes

Example 2



Analysis: The market is characterised by very few players and rather symmetric structures. Co-operation between Companies A and B would add an additional link in the market, de facto increasing the concentration in the market, as it would also link Company D to Companies A and B. This co-operation is likely to increase the risk of a collusive outcome and thereby likely to give rise to restrictive effects on competition within the meaning of Article 101(1). The criteria of Article 101(3) could only be fulfilled in the presence of significant efficiency gains which are passed on to consumers to such an extent that they would outweigh the restrictive effects on competition.

Situation: Two suppliers, Companies A and B, form a production joint venture with respect to product Y. Companies A and B each have a 15 % market share on the market for Y. There are 3 other players on the market: Company C with a market share of 30 %, Company D with 25 % and Company E with 15 %. Company B already has a joint production plant with Company D.

189. Anti-competitive foreclosure on a downstream market

Example 3



Situation: Companies A and B set up a production joint venture for the intermediate product X which covers their entire production of X. The production costs of X account for 70 % of the variable costs of the final product Y with respect to which Companies A and B compete downstream. Companies A and B each have a share of 20 % on the market for Y, there is limited entry and the market shares have been stable over time. 1063

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In addition to covering their own demand for X, both Companies A and B each have a market share of 40 % on the market for X. There are high barriers to entry on the market for X and existing producers are operating near full capacity. On the market for Y, there are two other significant suppliers, each with a 15 % market share, and several smaller competitors. This agreement generates economies of scale.

Analysis: By virtue of the production joint venture, Companies A and B would be able to largely control supplies of the essential input X to their competitors in the market for Y. This would give Companies A and B the ability to raise their rivals’ costs by artificially increasing the price of X, or by reducing the output. This could foreclose the competitors of Companies A and B in market for Y. Because of the likely anti-competitive foreclosure downstream, this agreement is likely to give rise to restrictive effects on competition within the meaning of Article 101(1). The economies of scale generated by the production joint venture are unlikely to outweigh the restrictive effects on competition and therefore this agreement would most likely not meet the criteria of Article 101(3).

190. Specialisation agreement as market allocation

Example 4



Situation: Companies A and B each manufacture both products X and Y. Company A’s market share of X is 30 % and of Y 10 %. B’s market share of X is 10 % and of Y 30 %. To obtain economies of scale they conclude a reciprocal specialisation agreement under which Company A will only produce X and Company B only Y. They do not cross-supply the products to each other so that Company A only sells X and Company B sells only Y. The parties claim that by specialising in this way they save costs due to the economies of scale and by focusing on only one product will improve their production technologies, which will lead to better quality products.



Analysis: With regard to its effects on competition in the market, this specialisation agreement is close to a hardcore cartel where parties allocate the market among themselves. Therefore, this agreement restricts competition by object. Because the claimed efficiencies in the form of economies of scale and improving production technology are only linked to the market allocation, they are unlikely to outweigh the restrictive ef1064

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fects, and therefore the agreement would not meet the criteria of Article 101(3). In any event, if Company A or B believes that it would be more efficient to focus on only one product, it can simply take the unilateral decision to only produce X or Y without at the same time agreeing that the other company will focus on producing the respective other product. The analysis would be different if Companies A and B supplied each other with the product they focus on so that they both continue to sell X and Y. In such a case Companies A and B could still compete on price on both markets, especially if production costs (which become common through the production agreement) did not constitute a major share of the variable costs of their products. The relevant costs in this context are the commercialisation costs. Hence, the specialisation agreement would be unlikely to restrict competition if X and Y were largely heterogeneous products with a very high proportion of marketing and distribution costs (for example, 65–70 % or more of total costs). In such a scenario the risks of a collusive outcome would not be high and the criteria of Article 101(3) may be fulfilled, provided that the efficiency gains would be passed on to consumers to such an extent that they would outweigh the restrictive effects on competition of the agreement.

191. Potential competitors

Example 5



Situation: Company A produces final product X and Company B produces final product Y. X and Y constitute two separate product markets, in which Companies A and B respectively have strong market power. Both companies use Z as an input for their production of X and Y and they both produce Z for captive use only. X is a low added value product for which Z is an essential input (X is quite a simple transformation of Z). Y is a high value added product, for which Z is one of many inputs (Z constitutes a small part of variable costs of Y). Companies A and B agree to jointly produce Z, which generates modest economies of scale.



Analysis: Companies A and B are not actual competitors with regard to X, Y or Z. However, since X is a simple transformation of input Z, it is likely that Company B could easily enter the market for X and thus challenge Company A’s position on that market. The joint production agreement with regard to Z might reduce Company B’s incentives to do so as the joint production might be used for side payments and limit the 1065

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probability of Company B selling product X (as Company A is likely to have control over the quantity of Z purchased by Company B from the joint venture). However, the probability of Company B entering the market for X in the absence of the agreement depends on the expected profitability of the entry. As X is a low added value product, entry might not be profitable and thus entry by Company B could be unlikely in the absence of the agreement. Given that Companies A and B already have market power, the agreement is likely to give rise to restrictive effects on competition within the meaning of Article 101(1) if the agreement does indeed decrease the likelihood of entry of Company B into Company A’s market, that is to say, the market for X. The efficiency gains in the form of economies of scale generated by the agreement are modest and therefore unlikely to outweigh the restrictive effects on competition. 192. Information exchange in a production agreement

Example 6



Situation: Companies A and B with high market power decide to produce together to become more efficient. In the context of this agreement they secretly exchange information about their future prices. The agreement does not cover joint distribution.



Analysis: This information exchange makes a collusive outcome likely and is therefore likely have as its object the restriction of competition within the meaning of Article 101(1). It would be unlikely to meet the criteria of Article 101(3) because the sharing of information about the parties’ future prices is not indispensable for producing jointly and attaining the corresponding cost savings.

193. Swaps and information exchange

Example 7



Situation: Companies A and B both produce Z, a commodity chemical. Z is a homogenous product which is manufactured according to a European standard which does not allow for any product variations. Production costs are a significant cost factor regarding Z. Company A has a market share of 20 % and Company B of 25 % on the Union-wide market for Z. There are four other manufacturers on the market for Z, with 1066

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respective market shares of 20 %, 15 %, 10 % and 10 %. The production plant of Company A is located in Member State X in northern Europe whereas the production plant of Company B is located in Member State Y in southern Europe. Even though the majority of Company A’s customers are located in northern Europe, Company A also has a number of customers in southern Europe. The majority of Company B’s customers are in southern Europe, although it also has a number of customers located in northern Europe. Currently, Company A provides its southern European customers with Z manufactured in its production plant in Member State X and transports it to southern Europe by truck. Similarly, Company B provides its northern European customers with Z manufactured in Member State Y and transports it to northern Europe by truck. Transport costs are quite high, but not so high as to make the deliveries by Company A to southern Europe and Company B to northern Europe unprofitable. Transport costs from Member State X to southern Europe are lower than from Member State Y to northern Europe. Companies A and B decide that it would be more efficient if Company A stopped transporting Z from Member State X to southern Europe and if Company B stopped transporting the Z from Member State Y to northern Europe although, at the same time, they are keen on retaining their customers. To do so, Companies A and B intend to enter into a swap agreement which allows them to purchase an agreed annual quantity of Z from the other party’s plant with a view to selling the purchased Z to those of their customers which are located closer to the other party’s plant. In order to calculate a purchase price which does not favour one party over the other and which takes due account of the parties’ different production costs and different savings on transport costs, and in order to ensure that both parties can achieve an appropriate margin, they agree to disclose to each other their main costs with regard to Z (that is to say, production costs and transport costs). Analysis: The fact that Companies A and B – who are competitors – swap parts of their production does not in itself give rise to competition concerns. However, the envisaged swap agreement between Companies A and B provides for the exchange of both parties’ production and transport costs with regard to Z. Moreover, Companies A and B have a strong combined market position in a fairly concentrated market for a homogenous commodity product. Therefore, due to the extensive information exchange on a key parameter of competition with regard to Z, it is likely 1067

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that the swap agreement between Companies A and B will give rise to restrictive effects on competition within the meaning of Article 101(1) as it can lead to a collusive outcome. Even though the agreement will give rise to significant efficiency gains in the form of cost savings for the parties, the restrictions on competition generated by the agreement are not indispensable for their attainment. The parties could achieve similar cost savings by agreeing on a price formula which does not entail the disclosure of their production and transport costs. Consequently, in its current form the swap agreement does not fulfil the criteria of Article 101(3).

5.    PURCHASING AGREEMENTS 5.1 Definition 194. This chapter focuses on agreements concerning the joint purchase of products. Joint purchasing can be carried out by a jointly controlled company, by a company in which many other companies hold non-controlling stakes, by a contractual arrangement or by even looser forms of co-operation (collectively referred to as ‘joint purchasing arrangements’). Joint purchasing arrangements usually aim at the creation of buying power which can lead to lower prices or better quality products or services for consumers. However, buying power may, under certain circumstances, also give rise to competition concerns. 195. Joint purchasing arrangements may involve both horizontal and vertical agreements. In these cases a two-step analysis is necessary. First, the horizontal agreements between the companies engaging in joint purchasing have to be assessed according to the principles described in these guidelines. If that assessment leads to the conclusion that the joint purchasing arrangement does not give rise to competition concerns, a further assessment will be necessary to examine the relevant vertical agreements. The latter assessment will follow the rules of the Block Exemption Regulation on Vertical Restraints and the Guidelines on Vertical Restraints. 196. A common form of joint purchasing arrangement is an ‘alliance’, that is to say an association of undertakings formed by a group of retailers for the joint purchasing of products. Horizontal agreements concluded between the members of the alliance or decisions adopted by the alliance first have to be assessed as a horizontal co-operation agreement according to these 1068

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guidelines. Only if that assessment does not reveal any competition concerns does it become relevant to assess the relevant vertical agreements between the alliance and an individual member thereof and between the alliance and suppliers. Those agreements are covered – subject to certain conditions – by the Block Exemption Regulation on Vertical Restraints. Vertical agreements not covered by that Block Exemption Regulation are not presumed to be illegal but require individual examination.

5.2 Relevant markets 197. There are two markets which may be affected by joint purchasing arrangements. First, the market or markets with which the joint purchasing arrangement is directly concerned, that is to say, the relevant purchasing market or markets. Secondly, the selling market or markets, that is to say, the market or markets downstream where the parties to the joint purchasing arrangement are active as sellers. 198. The definition of relevant purchasing markets follows the principles described in the Market Definition Notice and is based on the concept of substitutability to identify competitive constraints. The only difference from the definition of ‘selling markets’ is that substitutability has to be defined from the viewpoint of supply and not from the viewpoint of demand. In other words, the suppliers’ alternatives are decisive in identifying the competitive constraints on purchasers. Those alternatives could be analysed, for instance, by examining the suppliers’ reaction to a small but non-transitory price decrease. Once the market is defined, the market share can be calculated as the percentage of the purchases by the parties out of the total sales of the purchased product or products in the relevant market. 199. If the parties are, in addition, competitors on one or more selling markets, those markets are also relevant for the assessment. The selling markets have to be defined by applying the methodology described in the Market Definition Notice.

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5.3 Assessment under Article 101(1) 5.3.1 Main competition concerns 200. Joint purchasing arrangements may lead to restrictive effects on competition on the purchasing and/or downstream selling market or markets, such as increased prices, reduced output, product quality or variety, or innovation, market allocation, or anti-competitive foreclosure of other possible purchasers. 201. If downstream competitors purchase a significant part of their products together, their incentives for price competition on the selling market or markets may be considerably reduced. If the parties have a significant degree of market power (which does not necessarily amount to dominance) on the selling market or markets, the lower purchase prices achieved by the joint purchasing arrangement are likely not to be passed on to consumers. 202. If the parties have a significant degree of market power on the purchasing market (buying power) there is a risk that they may force suppliers to reduce the range or quality of products they produce, which may bring about restrictive effects on competition such as quality reductions, lessening of innovation efforts, or ultimately sub-optimal supply. 203. Buying power of the parties to the joint purchasing arrangement could be used to foreclose competing purchasers by limiting their access to efficient suppliers. This is most likely if there are a limited number of suppliers and there are barriers to entry on the supply side of the upstream market. 204. In general, however, joint purchasing arrangements are less likely to give rise to competition concerns when the parties do not have market power on the selling market or markets.

5.3.2 Restrictions of competition by object 205. Joint purchasing arrangements restrict competition by object if they do not truly concern joint purchasing, but serve as a tool to engage in a disguised cartel, that is to say, otherwise prohibited price fixing, output limitation or market allocation. 1070

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206. Agreements which involve the fixing of purchase prices can have the object of restricting competition within the meaning of Article 101(1).93 However, this does not apply where the parties to a joint purchasing arrangement agree on the purchasing prices the joint purchasing arrangement may pay to its suppliers for the products subject to the supply contract. In that case an assessment is required as to whether the agreement is likely to give rise to restrictive effects on competition within the meaning of Article 101(1). In both scenarios the agreement on purchase prices will not be assessed separately, but in the light of the overall effects of the purchasing agreement on the market.

5.3.3 Restrictive effects on competition 207. Joint purchasing arrangements which do not have as their object the restriction of competition must be analysed in their legal and economic context with regard to their actual and likely effects on competition. The analysis of the restrictive effects on competition generated by a joint purchasing arrangement must cover the negative effects on both the purchasing and the selling markets.

Market power

208. There is no absolute threshold above which it can be presumed that the parties to a joint purchasing arrangement have market power so that the joint purchasing arrangement is likely to give rise to restrictive effects on competition within the meaning of Article 101(1). However, in most cases it is unlikely that market power exists if the parties to the joint purchasing arrangement have a combined market share not exceeding 15 % on the purchasing market or markets as well as a combined market share not exceeding 15 % on the selling market or markets. In any event, if the parties’ combined market shares do not exceed 15 % on both the purchasing and the selling market or markets, it is likely that the conditions of Article 101(3) are fulfilled. 209. A market share above that threshold in one or both markets does not automatically indicate that the joint purchasing arrangement is likely to give rise to restrictive effects on competition. A joint purchasing arrangement which does not fall within that safe harbour requires a detailed assessment of its effects on the market involving, but not limited to, factors such as market concentration and possible countervailing power of strong suppliers. 1071

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210. Buying power may, under certain circumstances, cause restrictive effects on competition. Anti-competitive buying power is likely to arise if a joint purchasing arrangement accounts for a sufficiently large proportion of the total volume of a purchasing market so that access to the market may be foreclosed to competing purchasers. A high degree of buying power may indirectly affect the output, quality and variety of products on the selling market. 211. In the analysis of whether the parties to a joint purchasing arrangement have buying power, the number and intensity of links (for example, other purchasing agreements) between the competitors in the market are relevant. 212. If, however, competing purchasers co-operate who are not active on the same relevant selling market (for example, retailers which are active in different geographic markets and cannot be regarded as potential competitors), the joint purchasing arrangement is unlikely to have restrictive effects on competition unless the parties have a position in the purchasing markets that is likely to be used to harm the competitive position of other players in their respective selling markets.

Collusive outcome

213. Joint purchasing arrangements may lead to a collusive outcome if they facilitate the coordination of the parties’ behaviour on the selling market. This can be the case if the parties achieve a high degree of commonality of costs through joint purchasing, provided the parties have market power and the market characteristics are conducive to coordination. 214. Restrictive effects on competition are more likely if the parties to the joint purchasing arrangement have a significant proportion of their variable costs in the relevant downstream market in common. This is, for instance, the case if retailers, which are active in the same relevant retail market or markets, jointly purchase a significant amount of the products they offer for resale. It may also be the case if competing manufacturers and sellers of a final product jointly purchase a high proportion of their input together.

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215. The implementation of a joint purchasing arrangement may require the exchange of commercially sensitive information such as purchase prices and volumes. The exchange of such information may facilitate coordination with regard to sales prices and output and thus lead to a collusive outcome on the selling markets. Spill-over effects from the exchange of commercially sensitive information can, for example, be minimised where data is collated by a joint purchasing arrangement which does not pass on the information to the parties thereto. 216. Any negative effects arising from the exchange of information will not be assessed separately but in the light of the overall effects of the agreement. Whether the exchange of information in the context of a joint purchasing arrangement is likely to lead to restrictive effects on competition should be assessed according to the guidance given in Chapter 2. If the information exchange does not exceed the sharing of data necessary for the joint purchasing of the products by the parties to the joint purchasing arrangement, then even if the information exchange has restrictive effects on competition within the meaning of Article 101(1), the agreement is more likely to meet the criteria of Article 101(3) than if the exchange goes beyond what was necessary for the joint purchasing.

5.4 Assessment under Article 101(3) 5.4.1 Efficiency gains 217. Joint purchasing arrangements can give rise to significant efficiency gains. In particular, they can lead to cost savings such as lower purchase prices or reduced transaction, transportation and storage costs, thereby facilitating economies of scale. Moreover, joint purchasing arrangements may give rise to qualitative efficiency gains by leading suppliers to innovate and introduce new or improved products on the markets. 5.4.2 Indispensability 218. Restrictions that go beyond what is necessary to achieve the efficiency gains generated by a purchasing agreement do not meet the criteria of Article 101(3). An obligation to purchase exclusively through the cooperation may, in certain cases, be indispensable to achieve the necessary volume for the realisation of economies of scale. However, such an obligation has to be assessed in the context of the individual case. 1073

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5.4.3 Pass-on to consumers 219. Efficiency gains, such as cost efficiencies or qualitative efficiencies in the form of the introduction of new or improved products on the market, attained by indispensable restrictions must be passed on to consumers to an extent that outweighs the restrictive effects of competition caused by the joint purchasing arrangement. Hence, cost savings or other efficiencies that only benefit the parties to the joint purchasing arrangement will not suffice. Cost savings need to be passed on to consumers, that is to say, the parties’ customers. To take a notable example, this pass-on may occur through lower prices on the selling markets. Lower purchasing prices resulting from the mere exercise of buying power are not likely to be passed on to consumers if the purchasers together have market power on the selling markets, and thus do not meet the criteria of Article 101(3). Moreover, the higher the market power of the parties on the selling market or markets the less likely they will pass on the efficiency gains to consumers to an extent that would outweigh the restrictive effects on competition.

5.4.4 No elimination of competition 220. The criteria of Article 101(3) cannot be fulfilled if the parties are afforded the possibility of eliminating competition in respect of a substantial part of the products in question. That assessment has to cover both purchasing and selling markets.

5.5 Examples 221. Joint purchasing by small companies with moderate combined market shares

Example 1



Situation: 150 small retailers conclude an agreement to form a joint purchasing organisation. They are obliged to purchase a minimum volume through the organisation, which accounts for roughly 50 % of each retailer’s total costs. The retailers can purchase more than the minimum volume through the organisation, and they may also purchase outside the co-operation. They have a combined market share of 23 % on both the purchasing and the selling markets. Company A and Company B are their two large competitors. Company A has a 25 % share on both the 1074

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purchasing and selling markets, Company B 35 %. There are no barriers which would prevent the remaining smaller competitors from also forming a purchasing group. The 150 retailers achieve substantial cost savings by virtue of purchasing jointly through the purchasing organisation.

Analysis: The retailers have a moderate market position on the purchasing and the selling markets. Furthermore, the co-operation brings about some economies of scale. Even though the retailers achieve a high degree of commonality of costs, they are unlikely to have market power on the selling market due to the market presence of Companies A and B, which are both individually larger than the joint purchasing organisation. Consequently, the retailers are unlikely to coordinate their behaviour and reach a collusive outcome. The formation of the joint purchasing organisation is therefore unlikely to give rise to restrictive effects on competition within the meaning of Article 101(1).

222. Commonality of costs and market power on the selling market

Example 2



Situation: Two supermarket chains conclude an agreement to jointly purchase products which account for roughly 80 % of their variable costs. On the relevant purchasing markets for the different categories of products the parties have combined market shares between 25 % and 40 %. On the relevant selling market they have a combined market share of 60 %. There are four other significant retailers each with a 10 % market share. Market entry is not likely.



Analysis: It is likely that this purchasing agreement would give the parties the ability to coordinate their behaviour on the selling market, thereby leading to a collusive outcome. The parties have market power on the selling market and the purchasing agreement gives rise to a significant commonality of costs. Moreover, market entry is unlikely. The incentive for the parties to coordinate their behaviour would be reinforced if their cost structures were already similar prior to concluding the agreement. Moreover, similar margins of the parties would further increase the risk of a collusive outcome. This agreement also creates the risk that by the parties’ withholding demand and, consequently, as a result of reduced quantity, downstream selling prices would increase. Hence, the purchasing agreement is likely to give rise to restrictive effects on competition within the 1075

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meaning of Article 101(1). Even though the agreement is very likely to give rise to efficiency gains in the form of cost savings, due to the parties’ significant market power on the selling market, these are unlikely to be passed on to consumers to an extent that would outweigh the restrictive effects on competition. Therefore, the purchasing agreement is unlikely to fulfil the criteria of Article 101(3). 223. Parties active in different geographic markets

Example 3



Situation: Six large retailers, which are each based in a different Member State, form a purchasing group to buy several branded durum wheat flour-based products jointly. The parties are allowed to purchase other similar branded products outside the co-operation. Moreover, five of them also offer similar private label products. The members of the purchasing group have a combined market share of approximately 22 % on the relevant purchasing market, which is Union-wide. In the purchasing market there are three other large players of similar size. Each of the parties to the purchasing group has a market share between 20 % and 30 % on the national selling markets on which they are active. None of them is active in a Member State where another member of the group is active. The parties are not potential entrants to each other’s markets.



Analysis: The purchasing group will be able to compete with the other existing major players on the purchasing market. The selling markets are much smaller (in turnover and geographic scope) than the Unionwide purchasing market and in those markets some of the members of the group may have market power. Even if the members of the purchasing group have a combined market share of more than 15 % on the purchasing market, the parties are unlikely to coordinate their conduct and collude on the selling markets since they are neither actual nor potential competitors on the downstream markets. Consequently, the purchasing group is not likely to give rise to restrictive effects on competition within the meaning of Article 101(1).

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224. Information exchange

Example 4



Situation: Three competing manufacturers A, B and C entrust an independent joint purchasing organisation with the purchase of product Z, which is an intermediary product used by the three parties for their production of the final product X. The costs of Z are not a significant cost factor for the production of X. The joint purchasing organisation does not compete with the parties on the selling market for X. All information necessary for the purchases (for example quality specifications, quantities, delivery dates, maximum purchase prices) is only disclosed to the joint purchasing organisation, not to the other parties. The joint purchasing organisation agrees the purchasing prices with the suppliers. A, B and C have a combined market share of 30  % on each of the purchasing and selling markets. They have six competitors in the purchasing and selling markets, two of which have a market share of 20 %.



Analysis: Since there is no direct information exchange between the parties, the transfer of the information necessary for the purchases to the joint purchasing organisation is unlikely to lead to a collusive outcome. Consequently, the exchange of information is unlikely to give rise to restrictive effects on competition within the meaning of Article 101(1).

6.    AGREEMENTS ON COMMERCIALISATION 6.1    Definition 225. Commercialisation agreements involve co-operation between competitors in the selling, distribution or promotion of their substitute products. This type of agreement can have widely varying scope, depending on the commercialisation functions which are covered by the co-operation. At one end of the spectrum, joint selling agreements may lead to a joint determination of all commercial aspects related to the sale of the product, including price. At the other end, there are more limited agreements that only address one specific commercialisation function, such as distribution, after-sales service, or advertising.

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226. An important category of those more limited agreements is distribution agreements. The Block Exemption Regulation on Vertical Restraints and Guidelines on Vertical Restraints generally cover distribution agreements unless the parties to the agreement are actual or potential competitors. If the parties are competitors, the Block Exemption Regulation on Vertical Restraints only covers non-reciprocal vertical agreements between competitors, if (a) the supplier is a manufacturer and a distributor of goods, while the buyer is a distributor and not a competing undertaking at the manufacturing level or, (b) the supplier is a provider of services at several levels of trade, while the buyer provides its goods or services at the retail level and does not provide competing services at the level of trade where it purchases the contract services.94 227. If competitors agree to distribute their substitute products on a reciprocal basis (in particular if they do so on different geographic markets) there is a possibility in certain cases that the agreements have as their object or effect the partitioning of markets between the parties or that they lead to a collusive outcome. The same can be true for non-reciprocal agreements between competitors. Reciprocal agreements and non-reciprocal agreements between competitors thus have first to be assessed according to the principles set out in this Chapter. If that assessment leads to the conclusion that co-operation between competitors in the area of distribution would in principle be acceptable, a further assessment will be necessary to examine the vertical restraints included in such agreements. That second step of the assessment should be based on the principles set out in the Guidelines on Vertical Restraints. 228. A further distinction should be drawn between agreements where the parties agree only on joint commercialisation and agreements where the commercialisation is related to another type of co-operation upstream, such as joint production or joint purchasing. When analysing commercialisation agreements combining different stages of co-operation it is necessary to determine the centre of gravity of the co-operation in accordance with paragraphs 13 and 14.

6.2 Relevant markets 229. To assess the competitive relationship between the parties, the relevant product and geographic market or markets directly concerned by the cooperation (that is to say, the market or markets to which the products sub1078

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ject to the agreement belong) have to be defined. As a commercialisation agreement in one market may also affect the competitive behaviour of the parties in a neighbouring market which is closely related to the market directly concerned by the co-operation, any such neighbouring market also needs to be defined. The neighbouring market may be horizontally or vertically related to the market where the co-operation takes place.

6.3 Assessment under Article 101(1) 6.3.1 Main competition concerns 230. Commercialisation agreements can lead to restrictions of competition in several ways. First, and most obviously, commercialisation agreements may lead to price fixing. 231. Secondly, commercialisation agreements may also facilitate output limitation, because the parties may decide on the volume of products to be put on the market, therefore restricting supply. 232. Thirdly, commercialisation agreements may become a means for the parties to divide the markets or to allocate orders or customers, for example in cases where the parties’ production plants are located in different geographic markets or when the agreements are reciprocal. 233. Finally, commercialisation agreements may also lead to an exchange of strategic information relating to aspects within or outside the scope of the co-operation or to commonality of costs – in particular with regard to agreements not encompassing price fixing – which may result in a collusive outcome.

6.3.2 Restrictions of competition by object 234. Price fixing is one of the major competition concerns arising from commercialisation agreements between competitors. Agreements limited to joint selling generally have the object of coordinating the pricing policy of competing manufacturers or service providers. Such agreements may not only eliminate price competition between the parties on substitute products but may also restrict the total volume of products to be delivered by the parties within the framework of a system for allocating orders. Such agreements are therefore likely to restrict competition by object. 1079

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235. That assessment does not change if the agreement is non-exclusive (that is to say, where the parties are free to sell individually outside the agreement), as long as it can be concluded that the agreement will lead to an overall coordination of the prices charged by the parties. 236. Another specific competition concern related to distribution arrangements between parties which are active in different geographic markets is that they can be an instrument of market partitioning. If the parties use a reciprocal distribution agreement to distribute each other’s products in order to eliminate actual or potential competition between them by deliberately allocating markets or customers, the agreement is likely to have as its object a restriction of competition. If the agreement is not reciprocal, the risk of market partitioning is less pronounced. It is necessary, however, to assess whether the non-reciprocal agreement constitutes the basis for a mutual understanding to avoid entering each other’s markets.

6.3.3 Restrictive effects on competition 237. A commercialisation agreement is normally not likely to give rise to competition concerns if it is objectively necessary to allow one party to enter a market it could not have entered individually or with a more limited number of parties than are effectively taking part in the co-operation, for example, because of the costs involved. A specific application of this principle would be consortia arrangements that allow the companies involved to participate in projects that they would not be able to undertake individually. As the parties to the consortia arrangement are therefore not potential competitors for implementing the project, there is no restriction of competition within the meaning of Article 101(1). 238. Similarly, not all reciprocal distribution agreements have as their object a restriction of competition. Depending on the facts of the case at hand, some reciprocal distribution agreements may, nevertheless, have restrictive effects on competition. The key issue in assessing an agreement of this type is whether the agreement in question is objectively necessary for the parties to enter each other’s markets. If it is, the agreement does not create competition problems of a horizontal nature. However, if the agreement reduces the decision-making independence of one of the parties with regard to entering the other parties’ market or markets by limiting its incentives to do so, it is likely to give rise to restrictive effects on competition.

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The same reasoning applies to non-reciprocal agreements, where the risk of restrictive effects on competition is, however, less pronounced.

239. Moreover, a distribution agreement can have restrictive effects on competition if it contains vertical restraints, such as restrictions on passive sales, resale price maintenance, etc.

Market power

240. Commercialisation agreements between competitors can only have restrictive effects on competition if the parties have some degree of market power. In most cases, it is unlikely that market power exists if the parties to the agreement have a combined market share not exceeding 15 %. In any event, if the parties’ combined market share does not exceed 15 % it is likely that the conditions of Article 101(3) are fulfilled. 241. If the parties’ combined market share is greater than 15 %, their agreement will fall outside the safe harbour of paragraph 240 and thus the likely impact of the joint commercialisation agreement on the market must be assessed.

Collusive outcome

242. A joint commercialisation agreement that does not involve price fixing is also likely to give rise to restrictive effects on competition if it increases the parties’ commonality of variable costs to a level which is likely to lead to a collusive outcome. This is likely to be the case for a joint commercialisation agreement if prior to the agreement the parties already have a high proportion of their variable costs in common as the additional increment (that is to say, the commercialisation costs of the product subject to the agreement) can tip the balance towards a collusive outcome. Conversely, if the increment is large, the risk of a collusive outcome may be high even if the initial level of commonality of costs is low. 243. The likelihood of a collusive outcome depends on the parties’ market power and the characteristics of the relevant market. Commonality of costs can only increase the risk of a collusive outcome if the parties have market power and if the commercialisation costs constitute a large proportion of the variable costs related to the products concerned. This is, for example, not the case for homogeneous products for which the highest 1081

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cost factor is production. However, commonality of commercialisation costs increases the risk of a collusive outcome if the commercialisation agreement concerns products which entail costly commercialisation, for example, high distribution or marketing costs. Consequently, joint advertising or joint promotion agreements can also give rise to restrictive effects on competition if those costs constitute a significant cost factor. 244. Joint commercialisation generally involves the exchange of sensitive commercial information, particularly on marketing strategy and pricing. In most commercialisation agreements, some degree of information exchange is required in order to implement the agreement. It is therefore necessary to verify whether the information exchange can give rise to a collusive outcome with regard to the parties’ activities within and outside the co-operation. Any negative effects arising from the exchange of information will not be assessed separately but in the light of the overall effects of the agreement. 245. For example, where the parties to a joint advertising agreement exchange pricing information, this may lead to a collusive outcome with regard to the sale of the jointly advertised products. In any event, the exchange of such information in the context of a joint advertising agreement goes beyond what would be necessary to implement that agreement. The likely restrictive effects on competition of information exchange in the context of commercialisation agreements will depend on the characteristics of the market and the data shared, and should be assessed in the light of the guidance given in Chapter 2.

6.4 Assessment under Article 101(3) 6.4.1 Efficiency gains 246. Commercialisation agreements can give rise to significant efficiency gains. The efficiencies to be taken into account when assessing whether a commercialisation agreement fulfils the criteria of Article 101(3) will depend on the nature of the activity and the parties to the co-operation. Price fixing can generally not be justified, unless it is indispensable for the integration of other marketing functions, and this integration will generate substantial efficiencies. Joint distribution can generate significant efficiencies, stemming from economies of scale or scope, especially for smaller producers. 1082

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247. In addition, the efficiency gains must not be savings which result only from the elimination of costs that are inherently part of competition, but must result from the integration of economic activities. A reduction of transport cost which is only a result of customer allocation without any integration of the logistical system can therefore not be regarded as an efficiency gain within the meaning of Article 101(3). 248. Efficiency gains must be demonstrated by the parties to the agreement. An important element in this respect would be the contribution by the parties of significant capital, technology, or other assets. Cost savings through reduced duplication of resources and facilities can also be accepted. However, if the joint commercialisation represents no more than a sales agency without any investment, it is likely to be a disguised cartel and as such unlikely to fulfil the conditions of Article 101(3).

6.4.2 Indispensability 249. Restrictions that go beyond what is necessary to achieve the efficiency gains generated by a commercialisation agreement do not fulfil the criteria of Article 101(3). The question of indispensability is especially important for those agreements involving price fixing or market allocation, which can only under exceptional circumstances be considered indispensable.

6.4.3 Pass-on to consumers 250. Efficiency gains attained by indispensable restrictions must be passed on to consumers to an extent that outweighs the restrictive effects on competition caused by the commercialisation agreement. This can happen in the form of lower prices or better product quality or variety. The higher the market power of the parties, however, the less likely it is that efficiency gains will be passed on to consumers to an extent that outweighs the restrictive effects on competition. Where the parties have a combined market share of below 15 %, it is likely that any demonstrated efficiency gains generated by the agreement will be sufficiently passed on to consumers.

6.4.4 No elimination of competition 251. The criteria of Article 101(3) cannot be fulfilled if the parties are afforded the possibility of eliminating competition in respect of a substantial part 1083

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of the products in question. This has to be analysed in the relevant market to which the products subject to the co-operation belong and in possible spill-over markets. 6.5

Examples

252. Joint commercialisation necessary to enter a market

Example 1



Situation: Four companies providing laundry services in a large city close to the border of another Member State, each with a 3 % market share of the overall laundry market in that city, agree to create a joint marketing arm for the selling of laundry services to institutional customers (that is to say, hotels, hospitals and offices), whilst keeping their independence and freedom to compete for local, individual clients. In view of the new segment of demand (the institutional customers) they develop a common brand name, a common price and common standard terms including, inter alia, a maximum period of 24 hours before deliveries and schedules for delivery. They set up a common call centre where institutional clients can request their collection and/or delivery service. They hire a receptionist (for the call centre) and several drivers. They further invest in vans for dispatching, and in brand promotion, to increase their visibility. The agreement does not fully reduce their individual infrastructure costs (since they are keeping their own premises and still compete with each other for the individual local clients), but it increases their economies of scale and allows them to offer a more comprehensive service to other types of clients, which includes longer opening hours and dispatching to a wider geographic coverage. In order to ensure the viability of the project, it is indispensable that all four of them enter into the agreement. The market is very fragmented, with no individual competitor having more than 15 % market share.



Analysis: Although the joint market share of the parties is below 15 %, the fact that the agreement involves price fixing means that Article 101(1) could apply. However, the parties would not have been in a position to enter the market for providing laundry services to institutional customers, either individually or in co-operation with a fewer number of parties than the four currently taking part in the agreement. As such, the agreement would not create competition concerns, irrespective of the price1084

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fixing restriction, which in this case can be considered as indispensable to the promotion of the common brand and the success of the project. 253. Commercialisation agreement by more parties than necessary to enter a market

Example 2



Situation: The same facts as in Example 1, paragraph 252, apply with one main difference: in order to ensure the viability of the project, the agreement could have been implemented by only three of the parties (instead of the four actually taking part in the co-operation).



Analysis: Although the joint market share of the parties is below 15 %, the fact that the agreement involves price fixing and could have been carried out by fewer than the four parties means that Article 101(1) applies. The agreement thus needs to be assessed under Article 101(3). The agreement gives rise to efficiency gains as the parties are now able to offer improved services for a new category of customers on a larger scale (which they would not otherwise have been able to service individually). In the light of the parties’ combined market share of below 15 %, it is likely that they will sufficiently pass-on any efficiency gains to consumers. It is further necessary to consider whether the restrictions imposed by the agreement are indispensable to achieve the efficiencies and whether the agreement eliminates competition. Given that the aim of the agreement is to provide a more comprehensive service (including dispatch, which was not offered before) to an additional category of customers, under a single brand with common standard terms, the price fixing can be considered as indispensable to the promotion of the common brand and, consequently, the success of the project and the resulting efficiencies. Additionally, taking into account the market fragmentation, the agreement will not eliminate competition. The fact that there are four parties to the agreement (instead of the three that would have been strictly necessary) allows for increased capacity and contributes to simultaneously fulfilling the demand of several institutional customers in compliance with the standard terms (that is to say, meeting maximum delivery time terms). As such, the efficiency gains are likely to outweigh the restrictive effects arising from the reduction of competition between the parties and the agreement is likely to fulfil the conditions of Article 101(3).

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254. Joint internet platform

Example 3



Situation: A number of small specialty shops throughout a Member State join an electronic web-based platform for the promotion, sale and delivery of gift fruit baskets. There are a number of competing web-based platforms. By means of a monthly fee, they share the running costs of the platform and jointly invest in brand promotion. Through the webpage, where a wide range of different types of gift baskets are offered, customers order (and pay for) the type of gift basket they want to be delivered. The order is then allocated to the specialty shop closest to the address of delivery. The shop individually bears the costs of composing the gift basket and delivering it to the client. It reaps 90 % of the final price, which is set by the web-based platform and uniformly applies to all participating specialty shops, whilst the remaining 10 % is used for the common promotion and the running costs of the web-based platform. Apart from the payment of the monthly fee, there are no further restrictions for specialty shops to join the platform, throughout the national territory. Moreover, specialty shops having their own company website are also able to (and in some cases do) sell gift fruit baskets on the internet under their own name and thus can still compete among themselves outside the co-operation. Customers purchasing over the web-based platform are guaranteed same day delivery of the fruit baskets and they can also choose a delivery time convenient to them.



Analysis: Although the agreement is of a limited nature, since it only covers the joint selling of a particular type of product through a specific marketing channel (the web-based platform), since it involves price-fixing, it is likely to restrict competition by object. The agreement therefore needs to be assessed under Article 101(3). The agreement gives rise to efficiency gains such as greater choice and higher quality service and the reduction of search costs, which benefit consumers and are likely to outweigh the restrictive effects on competition the agreement brings about. Given that the specialty stores taking part in the co-operation are still able to operate individually and to compete one with another, both through their shops and the internet, the price-fixing restriction could be considered as indispensable for the promotion of the product (since when buying through the web-based platform consumers do not know where they are buying the gift basket from and do not want to deal with a multitude of different 1086

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prices) and the ensuing efficiency gains. In the absence of other restrictions, the agreement fulfils the criteria of Article 101(3). Moreover, as other competing web-based platforms exist and the parties continue to compete with each other, through their shops or over the internet, competition will not be eliminated. 255. Sales joint venture

Example 4



Situation: Companies A and B, located in two different Member States, produce bicycle tyres. They have a combined market share of 14 % on the Union-wide market for bicycle tyres. They decide to set up a (non fullfunction) sales joint venture for marketing the tyres to bicycle producers and agree to sell all their production through the joint venture. The production and transport infrastructure remains separate within each party. The parties claim considerable efficiency gains stem from the agreement. Such gains mainly relate to increased economies of scale, being able to fulfil the demands of their existing and potential new customers and better competing with imported tyres produced in third countries. The joint venture negotiates the prices and allocates orders to the closest production plant, as a way to rationalise transport costs when further delivering to the customer.



Analysis: Even though the combined market share of the parties is below 15 %, the agreement falls under Article 101(1). It restricts competition by object since it involves customer allocation and the setting of prices by the joint venture. The claimed efficiencies deriving from the agreement do not result from the integration of economic activities or from common investment. The joint venture would have a very limited scope and would only serve as an interface for allocating orders to the production plants. It is therefore unlikely that any efficiency gains would be passed on to consumers to such an extent that they would outweigh the restrictive effects on competition brought about by the agreement. Thus, the conditions of Article 101(3) would not be fulfilled.

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256. Non-poaching clause in agreement on outsourcing of services

Example 5



Situation: Companies A and B are competing providers of cleaning services for commercial premises. Both have a market share of 15  %. There are several other competitors with market shares between 10 and 15 %. A has taken the (unilateral) decision to only focus on large customers in the future as servicing large and small customers has proved to require a somewhat different organisation of the work. Consequently, Company A has decided to no longer enter into contracts with new small customers. In addition, Companies A and B enter into an outsourcing agreement whereby Company B would directly provide cleaning services to Company A’s existing small customers (which represent 1/3 of its customer base). At the same time, Company A is keen not to lose the customer relationship with those small customers. Hence, Company A will continue to keep its contractual relationships with the small customers but the direct provision of the cleaning services will be done by Company B. In order to implement the outsourcing agreement, Company A will necessarily need to provide Company B with the identities of Company A’s small customers which are subject to the agreement. As Company A is afraid that Company B may try to poach those customers by offering cheaper direct services (thereby bypassing Company A), Company A insists that the outsourcing agreement contain a ‘non-poaching clause’. According to that clause, Company B may not contact the small customers falling under the outsourcing agreements with a view to providing direct services to them. In addition, Companies A and B agree that Company B may not even provide direct services to those customers if Company B is approached by them. Without the ‘non-poaching clause’ Company A would not enter into an outsourcing agreement with Company B or any other company.



Analysis: The outsourcing agreement removes Company B as an independent supplier of cleaning services for Company A’s small customers as they will no longer be able to enter into a direct contractual relationship with Company B. However, those customers only represent 1/3 of Company A’s customer base, that is to say, 5 % of the market. They will still be able to turn to Company A and Company B’s competitors, which represent 70 % of the market. Hence, the outsourcing agreement will not enable Company A to profitably raise the prices charged to the customers subject to the outsourcing agreement. In addition, the outsourcing 1088

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agreement is not likely to give rise to a collusive outcome as Companies A and B only have a combined market share of 30 % and they are faced with several competitors that have market shares similar to Company A’s and Company B’s individual market shares. Moreover, the fact that servicing large and small customers is somewhat different minimises the risk of spill-over effects from the outsourcing agreement to Company A’s and Company B’s behaviour when competing for large customers. Consequently, the outsourcing agreement is not likely to give rise to restrictive effects on competition within the meaning of Article 101(1).

7.    STANDARDISATION AGREEMENTS 7.1 Definition

Standardisation agreements

257. Standardisation agreements have as their primary objective the definition of technical or quality requirements with which current or future products, production processes, services or methods may comply.95 Standardisation agreements can cover various issues, such as standardisation of different grades or sizes of a particular product or technical specifications in product or services markets where compatibility and interoperability with other products or systems is essential. The terms of access to a particular quality mark or for approval by a regulatory body can also be regarded as a standard. Agreements setting out standards on the environmental performance of products or production processes are also covered by this chapter. 258. The preparation and production of technical standards as part of the execution of public powers are not covered by these guidelines.96 The European standardisation bodies recognised under Directive 98/34/EC of the European Parliament and of the Council of 22 June 1998 laying down a procedure for the provision of information in the field of technical standards and regulations and on rules on Information Society services97 are subject to competition law to the extent that they can be considered to be an undertaking or an association of undertakings within the meaning of Articles 101 and 102.98 Standards related to the provision of professional services, such as rules of admission to a liberal profession, are not covered by these guidelines. 1089

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Standard terms

259. In certain industries companies use standard terms and conditions of sale or purchase elaborated by a trade association or directly by the competing companies (‘standard terms’).99 Such standard terms are covered by these guidelines to the extent that they establish standard conditions of sale or purchase of goods or services between competitors and consumers (and not the conditions of sale or purchase between competitors) for substitute products. When such standard terms are widely used within an industry, the conditions of purchase or sale used in the industry may become de facto aligned.100 Examples of industries in which standard terms play an important role are the banking (for example, bank account terms) and insurance sectors. 260. Standard terms elaborated individually by a company solely for its own use when contracting with its suppliers or customers are not horizontal agreements and are therefore not covered by these guidelines.

7.2 Relevant markets 261. Standardisation agreements may produce their effects on four possible markets, which will be defined according to the Market Definition Notice. First, standard-setting may have an impact on the product or service market or markets to which the standard or standards relates. Second, where the standard-setting involves the selection of technology and where the rights to intellectual property are marketed separately from the products to which they relate, the standard can have effects on the relevant technology market.101 Third, the market for standard-setting may be affected if different standard-setting bodies or agreements exist. Fourth, where relevant, a distinct market for testing and certification may be affected by standard-setting. 262. As regards standard terms, the effects are, in general, felt on the downstream market where the companies using the standard terms compete by selling their product to their customers.

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7.3 Assessment under Article 101(1) 7.3.1 Main competition concerns

Standardisation agreements

263. Standardisation agreements usually produce significant positive economic effects (102), for example by promoting economic interpenetration on the internal market and encouraging the development of new and improved products or markets and improved supply conditions. Standards thus normally increase competition and lower output and sales costs, benefiting economies as a whole. Standards may maintain and enhance quality, provide information and ensure interoperability and compatibility (thus increasing value for consumers). 264. Standard-setting can, however, in specific circumstances, also give rise to restrictive effects on competition by potentially restricting price competition and limiting or controlling production, markets, innovation or technical development. This can occur through three main channels, namely reduction in price competition, foreclosure of innovative technologies and exclusion of, or discrimination against, certain companies by prevention of effective access to the standard. 265. First, if companies were to engage in anti-competitive discussions in the context of standard-setting, this could reduce or eliminate price competition in the markets concerned, thereby facilitating a collusive outcome on the market.103 266. Second, standards that set detailed technical specifications for a product or service may limit technical development and innovation. While a standard is being developed, alternative technologies can compete for inclusion in the standard. Once one technology has been chosen and the standard has been set, competing technologies and companies may face a barrier to entry and may potentially be excluded from the market. In addition, standards requiring that a particular technology is used exclusively for a standard or preventing the development of other technologies by obliging the members of the standard-setting organisation to exclusively use a particular standard, may lead to the same effect. The risk of limitation of innovation is increased if one or more companies are unjustifiably excluded from the standard-setting process. 1091

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267. In the context of standards involving intellectual property rights (‘IPR’) (104), three main groups of companies with different interests in standard-setting can be distinguished in the abstract.105 First, there are upstream-only companies that solely develop and market technologies. Their only source of income is licensing revenue and their incentive is to maximise their royalties. Secondly, there are downstream-only companies that solely manufacture products or offer services based on technologies developed by others and do not hold relevant IPR. Royalties represent a cost for them, and not a source of revenue, and their incentive is to reduce or avoid royalties. Finally, there are vertically integrated companies that both develop technology and sell products. They have mixed incentives. On the one hand, they can draw licensing revenue from their IPR. On the other hand, they may have to pay royalties to other companies holding IPR essential to the standard. They might therefore cross-license their own essential IPR in exchange for essential IPR held by other companies. 268. Third, standardisation may lead to anti-competitive results by preventing certain companies from obtaining effective access to the results of the standard-setting process (that is to say, the specification and/or the essential IPR for implementing the standard). If a company is either completely prevented from obtaining access to the result of the standard, or is only granted access on prohibitive or discriminatory terms, there is a risk of an anti-competitive effect. A system where potentially relevant IPR is disclosed up-front may increase the likelihood of effective access being granted to the standard since it allows the participants to identify which technologies are covered by IPR and which are not. This enables the participants to both factor in the potential effect on the final price of the result of the standard (for example choosing a technology without IPR is likely to have a positive effect on the final price) and to verify with the IPR holder whether they would be willing to license if their technology is included in the standard. 269. Intellectual property laws and competition laws share the same objectives106 of promoting innovation and enhancing consumer welfare. IPR promote dynamic competition by encouraging undertakings to invest in developing new or improved products and processes. IPR are therefore in general pro-competitive. However, by virtue of its IPR, a participant holding IPR essential for implementing the standard, could, in the specific context of standard-setting, also acquire control over the use of a standard. When the standard constitutes a barrier to entry, the company 1092

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could thereby control the product or service market to which the standard relates. This in turn could allow companies to behave in anti-competitive ways, for example by ‘holding-up’ users after the adoption of the standard either by refusing to license the necessary IPR or by extracting excess rents by way of excessive107 royalty fees thereby preventing effective access to the standard. However, even if the establishment of a standard can create or increase the market power of IPR holders possessing IPR essential to the standard, there is no presumption that holding or exercising IPR essential to a standard equates to the possession or exercise of market power. The question of market power can only be assessed on a case by case basis.

Standard terms

270. Standard terms can give rise to restrictive effects on competition by limiting product choice and innovation. If a large part of an industry adopts the standard terms and chooses not to deviate from them in individual cases (or only deviates from them in exceptional cases of strong buyerpower), customers might have no option other than to accept the conditions in the standard terms. However, the risk of limiting choice and innovation is only likely in cases where the standard terms define the scope of the end-product. As regards classical consumer goods, standard terms of sale generally do not limit innovation of the actual product or product quality and variety. 271. In addition, depending on their content, standard terms might risk affecting the commercial conditions of the final product. In particular, there is a serious risk that standard terms relating to price would restrict price competition. 272. Moreover, if the standard terms become industry practice, access to them might be vital for entry into the market. In such cases, refusing access to the standard terms could risk causing anti-competitive foreclosure. As long as the standard terms remain effectively open for use for anyone that wishes to have access to them, they are unlikely to give rise to anti-competitive foreclosure.

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7.3.2 Restrictions of competition by object

Standardisation agreements

273. Agreements that use a standard as part of a broader restrictive agreement aimed at excluding actual or potential competitors restrict competition by object. For instance, an agreement whereby a national association of manufacturers sets a standard and puts pressure on third parties not to market products that do not comply with the standard or where the producers of the incumbent product collude to exclude new technology from an already existing standard108 would fall into this category. 274. Any agreements to reduce competition by using the disclosure of most restrictive licensing terms prior to the adoption of a standard as a cover to jointly fix prices either of downstream products or of substitute IPR or technology will constitute restrictions of competition by object.109

Standard terms

275. Agreements that use standard terms as part of a broader restrictive agreement aimed at excluding actual or potential competitors also restrict competition by object. An example would be where a trade association does not allow a new entrant access to its standards terms, the use of which is vital to ensure entry to the market. 276. Any standard terms containing provisions which directly influence the prices charged to customers (that is to say, recommended prices, rebates, etc.) would constitute a restriction of competition by object.

7.3.3 Restrictive effects on competition

Standardisation agreements



Agreements normally not restrictive of competition

277. Standardisation agreements which do not restrict competition by object must be analysed in their legal and economic context with regard to their actual and likely effect on competition. In the absence of market power,110 a standardisation agreement is not capable of producing restrictive effects on competition. Therefore, restrictive effects are most unlikely in a situa1094

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tion where there is effective competition between a number of voluntary standards. 278. For those standard-setting agreements which risk creating market power, paragraphs 280 to 286 set out the conditions under which such agreements would normally fall outside the scope of Article 101(1). 279. The non-fulfilment of any or all of the principles set out in this section will not lead to any presumption of a restriction of competition within Article 101(1). However, it will necessitate a self-assessment to establish whether the agreement falls under Article 101(1) and, if so, if the conditions of Article 101(3) are fulfilled. In this context, it is recognised that there exist different models for standard-setting and that competition within and between those models is a positive aspect of a market economy. Therefore, standard-setting organisations remain entirely free to put in place rules and procedures that do not violate competition rules whilst being different to those described in paragraphs 280 to 286. 280. Where participation in standard-setting is unrestricted and the procedure for adopting the standard in question is transparent, standardisation agreements which contain no obligation to comply111 with the standard and provide access to the standard on fair, reasonable and non-discriminatory terms will normally not restrict competition within the meaning of Article 101(1). 281. In particular, to ensure unrestricted participation the rules of the standard-setting organisation would need to guarantee that all competitors in the market or markets affected by the standard can participate in the process leading to the selection of the standard. The standard-setting organisations would also need to have objective and non-discriminatory procedures for allocating voting rights as well as, if relevant, objective criteria for selecting the technology to be included in the standard. 282. With respect to transparency, the relevant standard-setting organisation would need to have procedures which allow stakeholders to effectively inform themselves of upcoming, on-going and finalised standardisation work in good time at each stage of the development of the standard. 283. Furthermore, the standard-setting organisation’s rules would need to ensure effective access to the standard on fair, reasonable and non discriminatory terms.112 1095

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284. In the case of a standard involving IPR, a clear and balanced IPR policy,113 adapted to the particular industry and the needs of the standard-setting organisation in question, increases the likelihood that the implementers of the standard will be granted effective access to the standards elaborated by that standard-setting organisation. 285. In order to ensure effective access to the standard, the IPR policy would need to require participants wishing to have their IPR included in the standard to provide an irrevocable commitment in writing to offer to license their essential IPR to all third parties on fair, reasonable and nondiscriminatory terms (‘FRAND commitment’).114 That commitment should be given prior to the adoption of the standard. At the same time, the IPR policy should allow IPR holders to exclude specified technology from the standard-setting process and thereby from the commitment to offer to license, providing that exclusion takes place at an early stage in the development of the standard. To ensure the effectiveness of the FRAND commitment, there would also need to be a requirement on all participating IPR holders who provide such a commitment to ensure that any company to which the IPR owner transfers its IPR (including the right to license that IPR) is bound by that commitment, for example through a contractual clause between buyer and seller. 286. Moreover, the IPR policy would need to require good faith disclosure, by participants, of their IPR that might be essential for the implementation of the standard under development. This would enable the industry to make an informed choice of technology and thereby assist in achieving the goal of effective access to the standard. Such a disclosure obligation could be based on ongoing disclosure as the standard develops and on reasonable endeavours to identify IPR reading on the potential standard.115 It is also sufficient if the participant declares that it is likely to have IPR claims over a particular technology (without identifying specific IPR claims or applications for IPR). Since the risks with regard to effective access are not the same in the case of a standard-setting organisation with a royalty-free standards policy, IPR disclosure would not be relevant in that context.

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FRAND Commitments

287. FRAND commitments are designed to ensure that essential IPR protected technology incorporated in a standard is accessible to the users of that standard on fair, reasonable and non-discriminatory terms and conditions. In particular, FRAND commitments can prevent IPR holders from making the implementation of a standard difficult by refusing to license or by requesting unfair or unreasonable fees (in other words excessive fees) after the industry has been locked-in to the standard or by charging discriminatory royalty fees. 288. Compliance with Article 101 by the standard-setting organisation does not require the standard-setting organisation to verify whether licensing terms of participants fulfil the FRAND commitment. Participants will have to assess for themselves whether the licensing terms and in particular the fees they charge fulfil the FRAND commitment. Therefore, when deciding whether to commit to FRAND for a particular IPR, participants will need to anticipate the implications of the FRAND commitment, notably on their ability to freely set the level of their fees. 289. In case of a dispute, the assessment of whether fees charged for access to IPR in the standard-setting context are unfair or unreasonable should be based on whether the fees bear a reasonable relationship to the economic value of the IPR.116 In general, there are various methods available to make this assessment. In principle, cost-based methods are not well adapted to this context because of the difficulty in assessing the costs attributable to the development of a particular patent or groups of patents. Instead, it may be possible to compare the licensing fees charged by the company in question for the relevant patents in a competitive environment before the industry has been locked into the standard (ex ante) with those charged after the industry has been locked in (ex post). This assumes that the comparison can be made in a consistent and reliable manner.117 290. Another method could be to obtain an independent expert assessment of the objective centrality and essentiality to the standard at issue of the relevant IPR portfolio. In an appropriate case, it may also be possible to refer to ex ante disclosures of licensing terms in the context of a specific standard-setting process. This also assumes that the comparison can be made in a consistent and reliable manner. The royalty rates charged for the same IPR in other comparable standards may also provide an indica1097

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tion for FRAND royalty rates. These guidelines do not seek to provide an exhaustive list of appropriate methods to assess whether the royalty fees are excessive. 291. However, it should be emphasised that nothing in these Guidelines prejudices the possibility for parties to resolve their disputes about the level of FRAND royalty rates by having recourse to the competent civil or commercial courts.

Effects based assessment for standardisation agreements

292. The assessment of each standardisation agreement must take into account the likely effects of the standard on the markets concerned. The following considerations apply to all standardisation agreements that depart from the principles as set out in paragraphs 280 to 286. 293. Whether standardisation agreements may give rise to restrictive effects on competition may depend on whether the members of a standard-setting organisation remain free to develop alternative standards or products that do not comply with the agreed standard.118 For example, if the standardsetting agreement binds the members to only produce products in compliance with the standard, the risk of a likely negative effect on competition is significantly increased and could in certain circumstances give rise to a restriction of competition by object.119 In the same vein, standards only covering minor aspects or parts of the end-product are less likely to lead to competition concerns than more comprehensive standards. 294. The assessment whether the agreement restricts competition will also focus on access to the standard. Where the result of a standard (that is to say, the specification of how to comply with the standard and, if relevant, the essential IPR for implementing the standard) is not at all accessible, or only accessible on discriminatory terms, for members or third parties (that is to say, non-members of the relevant standard-setting organisation) this may discriminate or foreclose or segment markets according to their geographic scope of application and thereby is likely to restrict competition. However, in the case of several competing standards or in the case of effective competition between the standardised solution and non-standardised solution, a limitation of access may not produce restrictive effects on competition.

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295. If participation in the standard-setting process is open in the sense that it allows all competitors (and/or stakeholders) in the market affected by the standard to take part in choosing and elaborating the standard, this will lower the risks of a likely restrictive effect on competition by not excluding certain companies from the ability to influence the choice and elaboration of the standard.120 The greater the likely market impact of the standard and the wider its potential fields of application, the more important it is to allow equal access to the standard-setting process. However, if the facts at hand show that there is competition between several such standards and standard-setting organisations (and it is not necessary that the whole industry applies the same standards) there may be no restrictive effects on competition. Also, if in the absence of a limitation on the number of participants it would not have been possible to adopt the standard, the agreement would not be likely to lead to any restrictive effect on competition under Article 101(1).121 In certain situations the potential negative effects of restricted participation may be removed or at least lessened by ensuring that stakeholders are kept informed and consulted on the work in progress.122 The more transparent the procedure for adopting the standard, the more likely it is that the adopted standard will take into account the interests of all stakeholders. 296. To assess the effects of a standard-setting agreement, the market shares of the goods or services based on the standard should be taken into account. It might not always be possible to assess with any certainty at an early stage whether the standard will in practice be adopted by a large part of the industry or whether it will only be a standard used by a marginal part of the relevant industry. In many cases the relevant market shares of the companies having participated in developing the standard could be used as a proxy for estimating the likely market share of the standard (since the companies participating in setting the standard would in most cases have an interest in implementing the standard).123 However, as the effectiveness of standardisation agreements is often proportional to the share of the industry involved in setting and/or applying the standard, high market shares held by the parties in the market or markets affected by the standard will not necessarily lead to the conclusion that the standard is likely to give rise to restrictive effects on competition. 297. Any standard-setting agreement which clearly discriminates against any of the participating or potential members could lead to a restriction of competition. For example, if a standard-setting organisation explicitly ex1099

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cludes upstream only companies (that is to say, companies not active on the downstream production market), this could lead to an exclusion of potentially better technologies. 298. As regards standard-setting agreements with different types of IPR disclosure models from the ones described in paragraph 286, it would have to be assessed on a case by case basis whether the disclosure model in question (for example a disclosure model not requiring but only encouraging IPR disclosure) guarantees effective access to the standard. In other words, it needs to be assessed whether, in the specific context, an informed choice between technologies and associated IPR is in practice not prevented by the IPR disclosure model. 299. Finally, standard-setting agreements providing for ex ante disclosures of most restrictive licensing terms, will not, in principle, restrict competition within the meaning of Article 101(1). In that regard, it is important that parties involved in the selection of a standard be fully informed not only as to the available technical options and the associated IPR, but also as to the likely cost of that IPR. Therefore, should a standard-setting organisation’s IPR policy choose to provide for IPR holders to individually disclose their most restrictive licensing terms, including the maximum royalty rates they would charge, prior to the adoption of the standard, this will normally not lead to a restriction of competition within the meaning of Article 101(1).124 Such unilateral ex ante disclosures of most restrictive licensing terms would be one way to enable the standard-setting organisation to take an informed decision based on the disadvantages and advantages of different alternative technologies, not only from a technical perspective but also from a pricing perspective.

Standard terms

300. The establishment and use of standard terms must be assessed in the appropriate economic context and in the light of the situation on the relevant market in order to determine whether the standard terms at issue are likely to give rise to restrictive effects on competition. 301. As long as participation in the actual establishment of standard terms is unrestricted for the competitors in the relevant market (either by participation in the trade association or directly), and the established standard terms are non-binding and effectively accessible for anyone, such agree1100

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ments are not likely to give rise to restrictive effects on competition (subject to the caveats set out in paragraphs 303, 304, 305 and 307). 302. Effectively accessible and non-binding standard terms for the sale of consumer goods or services (on the presumption that they have no effect on price) thus generally do not have any restrictive effect on competition since they are unlikely to lead to any negative effect on product quality, product variety or innovation. There are, however, two general exceptions where a more in-depth assessment would be required. 303. Firstly, standard terms for the sale of consumer goods or services where the standard terms define the scope of the product sold to the customer, and where therefore the risk of limiting product choice is more significant, could give rise to restrictive effects on competition within the meaning of Article 101(1) where their common application is likely to result in a de facto alignment. This could be the case when the widespread use of the standard terms de facto leads to a limitation of innovation and product variety. For instance, this may arise where standard terms in insurance contracts limit the customer’s practical choice of key elements of the contract, such as the standard risks covered. Even if the use of the standard terms is not compulsory, they might undermine the incentives of the competitors to compete on product diversification. 304. When assessing whether there is a risk that the standard terms are likely to have restrictive effects by way of a limitation of product choice, factors such as existing competition on the market should be taken into account. For example if there is a large number of smaller competitors, the risk of a limitation of product choice would seem to be less than if there are only a few bigger competitors.125 The market shares of the companies participating in the establishment of the standard terms might also give a certain indication of the likelihood of uptake of the standard terms or of the likelihood that the standard terms will be used by a large part of the market. However, in this respect, it is not only relevant to analyse whether the standard terms elaborated are likely to be used by a large part of the market, but also whether the standard terms only cover part of the product or the whole product (the less extensive the standard terms, the less likely that they will lead, overall, to a limitation of product choice). Moreover, in cases where in the absence of the establishment of the standard terms it would not have been possible to offer a certain product, there would not be likely to be any restrictive effect on competition within the meaning of 1101

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Article 101(1). In that scenario, product choice is increased rather than decreased by the establishment of the standard terms. 305. Secondly, even if the standard terms do not define the actual scope of the end-product they might be a decisive part of the transaction with the customer for other reasons. An example would be online shopping where customer confidence is essential (for example, in the use of safe payment systems, a proper description of the products, clear and transparent pricing rules, flexibility of the return policy, etc). As it is difficult for customers to make a clear assessment of all those elements, they tend to favour widespread practices and standard terms regarding those elements could therefore become a de facto standard with which companies would need to comply to sell in the market. Even though non-binding, those standard terms would become a de facto standard, the effects of which are very close to a binding standard and need to be analysed accordingly. 306. If the use of standard terms is binding, there is a need to assess their impact on product quality, product variety and innovation (in particular if the standard terms are binding on the entire market). 307. Moreover, should the standard terms (binding or non-binding) contain any terms which are likely to have a negative effect on competition relating to prices (for example terms defining the type of rebates to be given), they would be likely to give rise to restrictive effects on competition within the meaning of Article 101(1).

7.4 Assessment under Article 101(3) 7.4.1 Efficiency gains

Standardisation agreements

308. Standardisation agreements frequently give rise to significant efficiency gains. For example, Union wide standards may facilitate market integration and allow companies to market their goods and services in all Member States, leading to increased consumer choice and decreasing prices. Standards which establish technical interoperability and compatibility often encourage competition on the merits between technologies from different companies and help prevent lock-in to one particular supplier. Furthermore, standards may reduce transaction costs for sellers and buy1102

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ers. Standards on, for instance, quality, safety and environmental aspects of a product may also facilitate consumer choice and can lead to increased product quality. Standards also play an important role for innovation. They can reduce the time it takes to bring a new technology to the market and facilitate innovation by allowing companies to build on top of agreed solutions. 309. To achieve those efficiency gains in the case of standardisation agreements, the information necessary to apply the standard must be effectively available to those wishing to enter the market.126 310. Dissemination of a standard can be enhanced by marks or logos certifying compliance thereby providing certainty to customers. Agreements for testing and certification go beyond the primary objective of defining the standard and would normally constitute a distinct agreement and market. 311. While the effects on innovation must be analysed on a case-by-case basis, standards creating compatibility on a horizontal level between different technology platforms are considered to be likely to give rise to efficiency gains.

Standard terms

312. The use of standard terms can entail economic benefits such as making it easier for customers to compare the conditions offered and thus facilitate switching between companies. Standard terms might also lead to efficiency gains in the form of savings in transaction costs and, in certain sectors (in particular where the contracts are of a complex legal structure), facilitate entry. Standard terms may also increase legal certainty for the contract parties. 313. The higher the number of competitors on the market, the greater the efficiency gain of facilitating the comparison of conditions offered.

7.4.2 Indispensability 314. Restrictions that go beyond what is necessary to achieve the efficiency gains that can be generated by a standardisation agreement or standard terms do not fulfil the criteria of Article 101(3).

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Standardisation agreements

315. The assessment of each standardisation agreement must take into account its likely effect on the markets concerned, on the one hand, and the scope of restrictions that possibly go beyond the objective of achieving efficiencies, on the other.127 316. Participation in standard-setting should normally be open to all competitors in the market or markets affected by the standard unless the parties demonstrate significant inefficiencies of such participation or recognised procedures are foreseen for the collective representation of interests.128 317. As a general rule standardisation agreements should cover no more than what is necessary to ensure their aims, whether this is technical interoperability and compatibility or a certain level of quality. In cases where having only one technological solution would benefit consumers or the economy at large that standard should, be set on a non-discriminatory basis. Technology neutral standards can, in certain circumstances, lead to larger efficiency gains. Including substitute IPR129 as essential parts of a standard while at the same time forcing the users of the standard to pay for more IPR than technically necessary would go beyond what is necessary to achieve any identified efficiency gains. In the same vein, including substitute IPR as essential parts of a standard and limiting the use of that technology to that particular standard (that is to say, exclusive use) could limit inter-technology competition and would not be necessary to achieve the efficiencies identified. 318. Restrictions in a standardisation agreement making a standard binding and obligatory for the industry are in principle not indispensable. 319. In a similar vein, standardisation agreements that entrust certain bodies with the exclusive right to test compliance with the standard go beyond the primary objective of defining the standard and may also restrict competition. The exclusivity can, however, be justified for a certain period of time, for example by the need to recoup significant start-up costs (130). The standardisation agreement should in that case include adequate safeguards to mitigate possible risks to competition resulting from exclusivity. This concerns, inter alia, the certification fee which needs to be reasonable and proportionate to the cost of the compliance testing.

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Standard terms

320. It is generally not justified to make standard terms binding and obligatory for the industry or the members of the trade association that established them. The possibility cannot, however, be ruled out that making standard terms binding may, in a specific case, be indispensable to the attainment of the efficiency gains generated by them.

7.4.3 Pass-on to consumers

Standardisation agreements

321. Efficiency gains attained by indispensable restrictions must be passed on to consumers to an extent that outweighs the restrictive effects on competition caused by a standardisation agreement or by standard terms. A relevant part of the analysis of likely pass-on to consumers is which procedures are used to guarantee that the interests of the users of standards and end consumers are protected. Where standards facilitate technical interoperability and compatibility or competition between new and already existing products, services and processes, it can be presumed that the standard will benefit consumers.

Standard terms

322. Both the risk of restrictive effects on competition and the likelihood of efficiency gains increase with the companies’ market shares and the extent to which the standard terms are used. Hence, it is not possible to provide any general ‘safe harbour’ within which there is no risk of restrictive effects on competition or which would allow the presumption that efficiency gains will be passed on to consumers to an extent that outweighs the restrictive effects on competition. 323. However, certain efficiency gains generated by standard terms, such as increased comparability of the offers on the market, facilitated switching between providers, and legal certainty of the clauses set out in the standard terms, are necessarily beneficial for the consumers. As regards other possible efficiency gains, such as lower transaction costs, it is necessary to make an assessment on a case-by-case basis and in the relevant economic context whether these are likely to be passed on to consumers.

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7.4.4 No elimination of competition 324. Whether a standardisation agreement affords the parties the possibility of eliminating competition depends on the various sources of competition in the market, the level of competitive constraint that they impose on the parties and the impact of the agreement on that competitive constraint. While market shares are relevant for that analysis, the magnitude of remaining sources of actual competition cannot be assessed exclusively on the basis of market share except in cases where a standard becomes a de facto industry standard  (131). In the latter case competition may be eliminated if third parties are foreclosed from effective access to the standard. Standard terms used by a majority of the industry might create a de facto industry standard and thus raise the same concerns. However, if the standard or the standard terms only concern a limited part of the product or service, competition is not likely to be eliminated.

7.5 Examples 325. Setting standards competitors cannot satisfy

Example 1



Situation: A standard-setting organisation sets and publishes safety standards that are widely used by the relevant industry. Most competitors of the industry take part in the setting of the standard. Prior to the adoption of the standard, a new entrant has developed a product which is technically equivalent in terms of the performance and functional requirements and which is recognised by the technical committee of the standard-setting organisation. However, the technical specifications of the safety standard are, without any objective justification, drawn up in such a way as to not allow for this or other new products to comply with the standard.



Analysis: This standardisation agreement is likely to give rise to restrictive effects on competition within the meaning of Article 101(1) and is unlikely to meet the criteria of Article 101(3). The members of the standards development organisation have, without any objective justification, set the standard in such a way that products of their competitors which are based on other technological solutions cannot satisfy it, even though they have equivalent performance. Hence, this standard, which has not 1106

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been set on a non-discriminatory basis, will reduce or prevent innovation and product variety. It is unlikely that the way the standard is drafted will lead to greater efficiency gains than a neutral one. 326. Non-binding and transparent standard covering a large part of the market

Example 2



Situation: A number of consumer electronics manufacturers with substantial market shares agree to develop a new standard for a product to follow up the DVD.



Analysis: Provided that (a) the manufacturers remain free to produce other new products which do not conform to the new standard, (b) participation in the standard-setting is unrestricted and transparent, and (c) the standardisation agreement does not otherwise restrict competition, Article 101(1) is not likely to be infringed. If the parties agreed to only manufacture products which conform to the new standard, the agreement would limit technical development, reduce innovation and prevent the parties from selling different products, thereby creating restrictive effects on competition within the meaning of Article 101(1).

327. Standardisation agreement without IPR disclosure

Example 3



Situation: A private standard-setting organisation active in standardisation in the ICT (information and communication technology) sector has an IPR policy which neither requires nor encourages disclosures of IPR which could be essential for the future standard. The standard-setting organisation took the conscious decision not to include such an obligation in particular considering that in general all technologies potentially relevant for the future standard are covered by many IPR. Therefore the standard-setting organisation considered that an IPR disclosure obligation would, on the one hand, not lead to the benefit of enabling the participants to choose a solution with no or little IPR and, on the other, would lead to additional costs in analysing whether the IPR would be potentially essential for the future standard. However, the IPR policy of the standard-setting organisation requires all participants to make a commitment to license any IPR that might read on the future standard 1107

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on FRAND terms. The IPR policy allows for opt-outs if there is specific IPR that an IPR holder wishes to put outside the blanket licensing commitment. In this particular industry there are several competing private standard-setting organisations. Participation in the standard-setting organisation is open to anyone active in the industry.

Analysis: In many cases an IPR disclosure obligation would be pro-competitive by increasing competition between technologies ex ante. In general, such an obligation allows the members of a standard-setting organisation to factor in the amount of IPR reading on a particular technology when deciding between competing technologies (or even to, if possible, choose a technology which is not covered by IPR). The amount of IPR reading on a technology will often have a direct impact on the cost of access to the standard. However, in this particular context, all available technologies seem to be covered by IPR, and even many IPR. Therefore, any IPR disclosure would not have the positive effect of enabling the members to factor in the amount of IPR when choosing technology since regardless of what technology is chosen, it can be presumed that there is IPR reading on that technology. IPR disclosure would be unlikely to contribute to guaranteeing effective access to the standard which in this scenario is sufficiently guaranteed by the blanket commitment to license any IPR that might read on the future standard on FRAND terms. On the contrary, an IPR disclosure obligation might in this context lead to additional costs for the participants. The absence of IPR disclosure might also, in those circumstances, lead to a quicker adoption of the standard which might be important if there are several competing standard-setting organisations. It follows that the agreement is unlikely to give rise to any negative effects on competition within the meaning of Article 101(1).

328. Standards in the insurance sector

Example 4



Situation: A group of insurance companies comes together to agree nonbinding standards for the installation of certain security devices (that is to say, components and equipment designed for loss prevention and reduction and systems formed from such elements). The non-binding standards set by the insurance companies (a) are agreed in order to address a specific need and to assist insurers to manage risk and offer risk-appropriate premiums; (b) are discussed with the installers (or their representatives) and 1108

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their views are taken on board prior to finalisation of the standards; (c) are published by the relevant insurance association on a dedicated section of its website so that any installer or other interested party can access them easily.

Analysis: The process for setting these standards is transparent and allows for the participation of interested parties. In addition, the result is easily accessible on a reasonable and non-discriminatory basis for anyone that wishes to have access to it. Provided that the standard does not have negative effects on the downstream market (for example by excluding certain installers through very specific and unjustified requirements for installations) it is not likely to lead to restrictive effects on competition. However, even if the standards led to restrictive effects on competition, the conditions set out in Article 101(3) would seem to be fulfilled. The standards would assist insurers in analysing to what extent such installation systems reduce relevant risk and prevent losses so that they can manage risks and offer risk-appropriate premiums. Subject to the caveat regarding the downstream market, they would also be more efficient for installers, allowing them to comply with one set of standards for all insurance companies rather than be tested by every insurance company separately. They could also make it easier for consumers to switch between insurers. In addition, they could be beneficial for smaller insurers who may not have the capacity to test separately. As regards the other conditions of Article 101(3), it seems that the non-binding standards do not go beyond what is necessary to achieve the efficiencies in question, that benefits would be passed on to the consumers (some would even be directly beneficial for the consumers) and that the restrictions would not lead to an elimination of competition.

329. Environmental standards

Example 5



Situation: Almost all producers of washing machines agree, with the encouragement of a public body, to no longer manufacture products which do not comply with certain environmental criteria (for example, energy efficiency). Together, the parties hold 90 % of the market. The products which will be thus phased out of the market account for a significant proportion of total sales. They will be replaced by more environmentally friendly, but also more expensive products. Furthermore, the agreement 1109

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indirectly reduces the output of third parties (for example, electric utilities and suppliers of components incorporated in the products phased out). Without the agreement, the parties would not have shifted their production and marketing efforts to the more environmentally friendly products.

Analysis: The agreement grants the parties control of individual production and concerns an appreciable proportion of their sales and total output, whilst also reducing third parties’ output. Product variety, which is partly focused on the environmental characteristics of the product, is reduced and prices will probably rise. Therefore, the agreement is likely to give rise to restrictive effects on competition within the meaning of Article 101(1). The involvement of the public authority is irrelevant for that assessment. However, newer, more environmentally friendly products are more technically advanced, offering qualitative efficiencies in the form of more washing machine programmes which can be used by consumers. Furthermore, there are cost efficiencies for the purchasers of the washing machines resulting from lower running costs in the form of reduced consumption of water, electricity and soap. Those cost efficiencies are realised on markets which are different from the relevant market of the agreement. Nevertheless, those efficiencies may be taken into account as the markets on which the restrictive effects on competition and the efficiency gains arise are related and the group of consumers affected by the restriction and the efficiency gains is substantially the same. The efficiency gains outweigh the restrictive effects on competition in the form of increased costs. Other alternatives to the agreement are shown to be less certain and less cost-effective in delivering the same net benefits. Various technical means are economically available to the parties in order to manufacture washing machines which do comply with the environmental characteristics agreed upon and competition will still take place for other product characteristics. Therefore, the criteria of Article 101(3) would appear to be fulfilled.

330. Government encouraged standardisation

Example 6



Situation: In response to the findings of research into the recommended levels of fat in certain processed food conducted by a government-funded think tank in one Member State, several major manufacturers of the 1110

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processed foods in the same Member State agree, through formal discussions at an industry trade association, to set recommended fat levels for the products. Together, the parties represent 70 % of sales of the products within the Member State. The parties’ initiative will be supported by a national advertising campaign funded by the think tank highlighting the dangers of a high fat content in processed foods.

Analysis: Although the fat levels are recommendations and therefore voluntary, as a result of the wide publicity resulting from the national advertising campaign, the recommended fat levels are likely to be implemented by all manufacturers of the processed foods in the Member State. It is therefore likely to become a de facto maximum fat level in the processed foods. Consumer choice across the product markets could therefore be reduced. However, the parties will be able to continue to compete with regard to a number of other characteristics of the products, such as price, product size, quality, taste, other nutritional and salt content, balance of ingredients, and branding. Moreover, competition regarding the fat levels in the product offering may increase where parties seek to offer products with the lowest levels. The agreement is therefore unlikely to give rise to restrictive effects on competition within the meaning of Article 101(1).

331. Open standardisation of product packaging

Example 7



Situation: The major manufacturers of a fast-moving consumer product in a competitive market in a Member State – as well as manufacturers and distributors in other Member States who sell the product into the Member State (‘importers’) – agree with the major packaging suppliers to develop and implement a voluntary initiative to standardise the size and shape of the packaging of the product sold in that Member State. There is currently a wide variation in packaging sizes and materials within and across the Member States. This reflects the fact that the packaging does not represent a high proportion of total production costs and that switching costs for packaging producers are not significant. There is no actual or pending European standard for the packaging. The agreement has been entered into by the parties voluntarily in response to pressure from the Member State’s government to meet environmental targets. Together, the manufacturers and importers represent 85 % of sales of the product within the Member State. The voluntary initiative will give rise 1111

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to a uniform-sized product for sale within the Member State that uses less packaging material, occupies less shelf space, has lower transport and packaging costs, and is more environmentally friendly through reduced packaging waste. It also reduces the recycling costs of producers. The standard does not specify that particular types of packaging materials must be used. The specifications of the standard have been agreed between manufacturers and importers in an open and transparent manner, with the draft specifications having been published for open consultation on an industry website in a timely manner prior to adoption. The final specifications adopted are also published on an industry trade association website that is freely accessible to any potential entrants, even if they are not members of the trade association.

Analysis: Although the agreement is voluntary, the standard is likely to become a de facto industry practice because the parties together represent a high proportion of the market for the product in the Member State and retailers are also being encouraged by the government to reduce packaging waste. As such, the agreement could in theory create barriers to entry and give rise to potential anti-competitive foreclosure effects in the Member State market. This would in particular be a risk for importers of the product in question who may need to repackage the product to meet the de facto standard in order to sell in the Member State if the pack size used in other Member States does not meet the standard. However, significant barriers to entry and foreclosure are unlikely to occur in practice because (a) the agreement is voluntary, (b) the standard has been agreed with major importers in an open and transparent manner, (c) switching costs are low, and (d) the technical details of the standard are accessible to new entrants, importers and all packaging suppliers. In particular, importers will have been aware of potential changes to packaging at an early stage of development and will have had the opportunity through the open consultation on the draft standards to put forward their views before the standard was eventually adopted. The agreement therefore may not give rise to restrictive effects on competition within the meaning of Article 101(1).



In any event, it is likely that the conditions of Article 101(3) will be fulfilled in this case: (i) the agreement will give rise to quantitative efficiencies through lower transport and packaging costs, (ii) the prevailing conditions of competition on the market are such that these costs reductions are likely to be passed on to consumers, (iii) the agreement includes only 1112

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the minimum restrictions necessary to achieve the packaging standard and is unlikely to result in significant foreclosure effects and (iv) competition will not be eliminated in a substantial part of the products in question. 332. Closed standardisation of product packaging

Example 8



Situation: The situation is the same as in Example 7, paragraph 331, except the standard is agreed only between manufacturers of the fastmoving consumer product located within the Member State (who represent 65 % of the sales of the product in the Member State), there was no open consultation on the specifications adopted (which include detailed standards on the type of packaging material that must be used) and the specifications of the voluntary standard are not published. This resulted in higher switching costs for producers in other Member States than for domestic producers.





Analysis: Similar to Example 7, paragraph 331, although the agreement is voluntary, it is very likely to become de facto standard industry practice since retailers are also being encouraged by the government to reduce packaging waste and the domestic manufacturers account for 65 % of sales of the product within the Member State. The fact that relevant producers in other Member States were not consulted resulted in the adoption of a standard which imposes higher switching costs on them compared to domestic producers. The agreement may therefore create barriers to entry and give rise to potential anti-competitive foreclosure effects on packaging suppliers, new entrants and importers – all of whom were not involved in the standard-setting process – as they may need to repackage the product to meet the de facto standard in order to sell in the Member State if the pack size used in other Member States does not meet the standard. Unlike in Example 7, paragraph 331, the standardisation process has not been carried out in an open and transparent manner. In particular, new entrants, importers and packaging suppliers have not been given the opportunity to comment on the proposed standard and may not even be aware of it until a late stage, creating the possibility that they may not be able to change their production methods or switch suppliers quickly and effectively. Moreover, new entrants, importers and packaging suppli1113

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ers may not be able to compete if the standard is unknown or difficult to comply with. Of particular relevance here is the fact that the standard includes detailed specifications on the packaging materials to be used which, because of the closed nature of the consultation and the standard, importers and new entrants will struggle to comply with. The agreement may therefore restrict competition within the meaning of Article 101(1). This conclusion is not affected by the fact the agreement has been entered into in order to meet underlying environmental targets agreed with the Member State’s government.

It is unlikely that the conditions of Article 101(3) will be fulfilled in this case. Although the agreement will give rise to similar quantitative efficiencies as arise under Example 7, paragraph 331, the closed and private nature of the standardisation agreement and the non-published detailed standard on the type of packaging material that must be used are unlikely to be indispensable to achieving the efficiencies under the agreement.

333. Non-binding and open standard terms used for contracts with end-users

Example 9



Situation: A trade association for electricity distributors establishes nonbinding standard terms for the supply of electricity to end-users. The establishment of the standard terms is made in a transparent and nondiscriminatory manner. The standard terms cover issues such as the specification of the point of consumption, the location of the connection point and the connection voltage, provisions on service reliability as well as the procedure for settling the accounts between the parties to the contract (for example, what happens if the customer does not provide the supplier with the readings of the measurement devices). The standard terms do not cover any issues relating to prices, that is to say, they contain no recommended prices or other clauses related to price. Any company active within the sector is free to use the standard terms as it sees fit. About 80 % of the contracts concluded with end-users in the relevant market are based on these standard terms.



Analysis: These standard terms are not likely to give rise to restrictive effects on competition within the meaning of Article 101(1). Even if they have become industry practice, they do not seem to have any appreciable negative impact on prices, product quality or variety. 1114

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334. Standard terms used for contracts between companies

Example 10



Situation: Construction companies in a certain Member State come together to establish non-binding and open standard terms and conditions for use by a contractor when submitting a quotation for construction work to a client. A form of quotation is included together with terms and conditions suitable for building or construction. Together, the documents create the construction contract. Clauses cover such matters as contract formation, general obligations of the contractor and the client and non-price related payment conditions (for example, a provision specifying the contractor’s right to give notice to suspend the work for non-payment), insurance, duration, handover and defects, limitation of liability, termination, etc. In contrast to Example 9, paragraph 333, these standard terms would often be used between companies, one active upstream and one active downstream.



Analysis: These standard terms are not likely to have restrictive effects on competition within the meaning of Article 101(1). There would normally not be any significant limitation in the customer’s choice of the endproduct, namely the construction work. Other restrictive effects on competition do not seem likely. Indeed, several of the clauses above (handover and defects, termination, etc.) would often be regulated by law.

335. Standard terms facilitating the comparison of different companies’ products

Example 11



Situation: A national association for the insurance sector distributes non-binding standard policy conditions for house insurance contracts. The conditions give no indication of the level of insurance premiums, the amount of the cover or the excesses payable by the insured. They do not impose comprehensive cover including risks to which a significant number of policyholders are not simultaneously exposed and do not require the policyholders to obtain cover from the same insurer for different risks. While the majority of insurance companies use standard policy conditions, not all their contracts contain the same conditions as they are adapted to each client’s individual needs and therefore there is no de facto 1115

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standardisation of insurance products offered to consumers. The standard policy conditions enable consumers and consumer organisations to compare the policies offered by the different insurers. A consumer association is involved in the process of laying down the standard policy conditions. They are also available for use by new entrants, on a non-discriminatory basis. Analysis: These standard policy conditions relate to the composition of the final insurance product. If the market conditions and other factors would show that there might be a risk of limitation in product variety as a result of insurance companies using such standard policy conditions, it is likely that such possible limitation would be outweighed by efficiencies such as facilitation of comparison by consumers of conditions offered by insurance companies. Those comparisons in turn facilitate switching between insurance companies and thus enhance competition. Furthermore the switching of providers, as well as market entry by competitors, constitutes an advantage for consumers. The fact that the consumer association has participated in the process could, in certain instances, increase the likelihood of those efficiencies which do not automatically benefit the consumers being passed on. The standard policy conditions are also likely to reduce transaction costs and facilitate entry for insurers on a different geographic and/or product markets. Moreover, the restrictions do not seem to go beyond what is necessary to achieve the identified efficiencies and competition would not be eliminated. Consequently, the criteria of Article 101(3) are likely to be fulfilled.

Notes (1)   With effect from 1 December 2009, Article 81 of the EC Treaty has become Article 101 of the Treaty on the Functioning of the European Union (‘TFEU’). The two Articles are, in substance, identical. For the purposes of these guidelines, references to Article 101 of the TFEU should be understood as references to Article 81 of the EC Treaty where appropriate. The TFEU also introduced certain changes in terminology, such as the replacement of ‘Community’ by ‘Union’ and ‘common market’ by ‘internal market’. The terminology of the TFEU will be used throughout these guidelines. (2)   OJ L 24, 29.1.2004, p. 1. (3)   See Article 3(4) of the Merger Regulation. However, in assessing whether there is a full-function joint venture, the Commission examines whether the joint venture is autonomous in an operational sense. This does not mean that it enjoys autonomy from its parent companies as regards the adoption of its strategic decisions (see Commission Consolidated Jurisdictional Notice under Council Regulation (EC) No 139/2004 on the control of concentrations between undertakings, OJ C 95, 16.4.2008, p. 1, paragraphs 91–109 (‘Consoli-

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dated Jurisdictional Notice’)). It also needs to be recalled that if the creation of a joint venture constituting a concentration under Article 3 of the Merger Regulation has as its object or effect the coordination of the competitive behaviour of undertakings that remain independent, then that coordination will be appraised under Article 101 of the Treaty (see Article 2(4) of the Merger Regulation). (4)   OJ L […], […], p. […]. (5)   OJ L […], […], p. […]. (6)   What constitutes a ‘short period of time’ depends on the facts of the case at hand, its legal and economic context, and, in particular, on whether the company in question is a party to the agreement or a third party. In the first case, that is to say, where it is analysed whether a party to an agreement should be considered a potential competitor of the other party, the Commission would normally consider a longer period to be a ‘short period of time’ than in the second case, that is to say, where the capacity of a third party to act as a competitive constraint on the parties to an agreement is analysed. For a third party to be considered a potential competitor, market entry would need to take place sufficiently fast so that the threat of potential entry is a constraint on the parties’ and other market participants’ behaviour. For these reasons, both the R&D and the Specialisation Block Exemption Regulations consider a period of not more than three years a ‘short period of time’. (7)   OJ C 372, 9.12.1997, p. 5, paragraph 24; see also the Commission’s Thirteenth Report on Competition Policy, point 55 and Commission Decision in Case IV/32.009, Elopak/Metal Box-Odin, OJ L 209, 8.8.1990, p. 15. (8)   See, for example, Case C-73/95, Viho, [1996] ECR I-5457, paragraph 51. The exercise of decisive influence by the parent company over the conduct of a subsidiary can be presumed in case of wholly-owned subsidiaries; see, for example, Case 107/82, AEG, [1983] ECR-3151, paragraph 50; Case C-286/98 P, Stora, [2000] ECR-I 9925, paragraph 29; or Case C-97/08 P, Akzo, [2009] ECR I-8237, paragraphs 60 et seq. (9)   OJ L 102, 23.4.2010, p. 1. (10)   OJ C 130, 19.5.2010, p. 1. (11)   This does not apply where competitors enter into a non-reciprocal vertical agreement and (i) the supplier is a manufacturer and a distributor of goods, while the buyer is a distributor and not a competing undertaking at the manufacturing level, or (ii) the supplier is a provider of services at several levels of trade, while the buyer provides its goods or services at the retail level and is not a competing undertaking at the level of trade where it purchases the contract services. Such agreements are exclusively assessed under the Block Exemption Regulation and the Guidelines on Vertical Restraints (see Article 2(4) of the Block Exemption Regulation on Vertical Restraints). (12)   It should be noted that this test only applies to the relationship between the different chapters of these guidelines, not to the relationship between different block exemption regulations. The scope of a block exemption regulation is defined by its own provisions. (13)   See Case T-51/89, Tetra Pak I, [1990] ECR-II 309, paragraphs 25 et seq. and Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings, OJ C 45, 24.2.2009, p. 7 (‘Article 102 Guidance Paper’). (14)   OJ C 3, 6.1.2001, p. 2. These guidelines do not contain a separate chapter on ‘environmental agreements’ as was the case in the previous guidelines. Standard-setting in the environment sector, which was the main fo-

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cus of the former chapter on environmental agreements, is more appropriately dealt with in the standardisation chapter of these guidelines. In general, depending on the competition issues ‘environmental agreements’ give rise to, they are to be assessed under the relevant chapter of these guidelines, be it the chapter on R&D, production, commercialisation or standardisation agreements. (15)   Council Regulation (EC) No 1184/2006 of 24 July 2006 applying certain rules of competition to the production of, and trade in, agricultural products, OJ L 214, 4.8.2006, p. 7. (16)   Council Regulation (EC) No 169/2009 of 26 February 2009 applying rules of competition to transport by rail, road and inland waterway, OJ L 61, 5.3.2009, p. 1; Council Regulation (EC) No 246/2009 of 26 February 2009 on the application of Article 81(3) of the Treaty to certain categories of agreements and concerted practices between liner shipping companies (consortia), OJ L 79, 25.3.2009, p. 1; Commission Regulation (EC) No 823/2000 of 19 April 2000 on the application of Article 81(3) of the Treaty to certain categories of agreements, decisions and concerted practices between liner shipping companies (consortia), OJ L 100, 20.4.2000, p. 24; Guidelines on the application of Article 81 of the EC Treaty to maritime transport services, OJ C 245, 26.9.2008, p. 2. (17)   Commission Regulation (EU) No 267/2010 of 24 March 2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to certain categories of agreements, decisions and concerted practices in the insurance sector, OJ L 83, 31.3.2010, p. 1. (18)   OJ C 101, 27.4.2004, p. 97. (19)   Article 101(1) prohibits both actual and potential anti-competitive effects; see for example Case C-7/95 P, John Deere, [1998] ECR I-3111, paragraph 77; Case C-238/05, Asnef-Equifax, [2006] ECR I-11125, paragraph 50. (20)   See Joined Cases C-501/06 P and others, GlaxoSmithKline, [2009] ECR I-9291, paragraph 95. (21)   See Case T-65/98, Van den Bergh Foods, [2003] ECR II-4653, paragraph 107; Case T-112/99, Métropole télévision (M6) and others, [2001] ECR II-2459, paragraph 74; Case T-328/03, O2, [2006] ECR II-1231, paragraphs 69 et seq., where the General Court held that it is only in the precise framework of Article 101(3) that the pro- and anti-competitive aspects of a restriction may be weighed. (22)   See judgment of 14 October 2010 in Case C-280/08 P, Deutsche Telekom, ECR I not yet reported, paragraph 82 and the case-law cited therein. (23)   See Case C-198/01, CIF, [2003] ECR I-8055, paragraphs 56–58; Joined Cases T-217/03 and T-245/03, French Beef, [2006] ECR II-4987, paragraph 92; Case T-7/92, Asia Motor France II, [1993] ECR II-669, paragraph 71; and Case T-148/89, Tréfilunion, [1995] ECR II-1063, paragraph 118. (24)   See Case C-280/08 P, Deutsche Telekom, paragraph 80-81. This possibility has been narrowly interpreted; see, for example, Joined Cases 209/78 and others, Van Landewyck, [1980] ECR 3125, paragraphs 130-134; Joined Cases 240/82 and others, Stichting Sigarettenindustrie, [1985] ECR 3831, paragraphs 27-29; and Joined Cases C-359/95 P and C-379/95 P, Ladbroke Racing, [1997] ECR I-6265, paragraphs 33 et seq. (25)   At least until a decision to disapply the national legislation has been adopted and that decision has become definitive; see Case C-198/01, CIF, paragraphs 54 et seq. (26)   For the purpose of these guidelines, the term ‘restriction of competition’ includes the prevention and distortion of competition. (27)   See, for example, Case C-209/07, BIDS, [2008] ECR I-8637, paragraph 17.

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(28)  See, for example, Joined Cases C-501/06 P and others, GlaxoSmithKline, paragraph 55; Case C-209/07, BIDS, paragraph 16; Case C-8/08, T-Mobile Netherlands, ECR [2009] I-4529, paragraph 29 et seq.; Case C-7/95 P, John Deere, paragraph 77. (29)  See, for example, Joined Cases C-501/06 P and others, GlaxoSmithKline, paragraph 58; Case C-209/07, BIDS, paragraphs 15 et seq. (30)   See Case C-7/95 P, John Deere, paragraph 88; Case C-238/05, Asnef-Equifax, paragraph 51. (31)   See also paragraph 18 of the General Guidelines. (32)   OJ C 368, 22.12.2001, p. 13. (33)   If there are more than two parties, then the collective share of all co-operating competitors has to be significantly greater than the share of the largest single participating competitor. (34)   As to the calculation of market shares, see also Market Definition Notice, paragraphs 54-55. (35)   OJ L 1, 4.1.2003, p. 1. (36)   See, for example, Joined Cases C-501/06 P and others, GlaxoSmithKline, paragraphs 93-95. (37)   More detail on the concept of consumer is provided in paragraph 84 of the General Guidelines. (38)   R&D Block Exemption Regulation. (39)   Specialisation Block Exemption Regulation. (40)   Economic theory on information asymmetries deals with the study of decisions in transactions where one party has more information than the other. (41)   See Case C-7/95 P, John Deere, paragraph 88. (42)   See for example Case C-8/08, T-Mobile Netherlands, paragraph 26; Joined Cases C-89/85 and others, Wood Pulp, [1993] ECR 1307, paragraph 63. (43)   See Case C-7/95 P, John Deere, paragraph 86. (44)   Case C-7/95 P, John Deere, paragraph 87. (45)   See Cases 40/73 and others, Suiker Unie, [1975] ECR 1663, paragraph 173 et seq. (46)   Strategic uncertainty in the market arises as there is a variety of possible collusive outcomes available and because companies cannot perfectly observe past and current actions of their competitors and entrants. (47)   See for example Joined Cases T-25/95 and others, Cimenteries, [2000] ECR II-491, paragraph 1849: ‘[…] the concept of concerted practice does in fact imply the existence of reciprocal contacts […]. That condition is met where one competitor discloses its future intentions or conduct on the market to another when the latter requests it or, at the very least, accepts it’. (48)   See Opinion of Advocate General Kokott, Case C-8/08, T-Mobile Netherlands, [2009] ECR I-4529, paragraph 54. (49)   See Case C-8/08, T-Mobile Netherlands, paragraph 59: ‘Depending on the structure of the market, the possibility cannot be ruled out that a meeting on a single occasion between competitors, such as that in question in the main proceedings, may, in principle, constitute a sufficient basis for the participating undertakings to concert their market conduct and thus successfully substitute practical cooperation between them for competition and the risks that that entails.’ (50)   See Joined Cases T-202/98 and others, Tate & Lyle v Commission, [2001] ECR II-2035, paragraph 54. (51)   See Case C-199/92 P, Hüls, [1999] ECR I-4287, paragraph 162; Case C-49/92 P, Anic Partezipazioni, [1999] ECR I-4125, paragraph 121.

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(52)   This would not cover situations where such announcements involve invitations to collude. (53)   The use of the term ‘main competition concerns’ means that the ensuing description of competition concerns is neither exclusive nor exhaustive. (54)   With regard to foreclosure concerns that vertical agreements can give rise to, see paragraphs 100 et seq. of the Guidelines on Vertical Restraints. (55)   See, for example, Joined Cases C-501/06 P and others, GlaxoSmithKline, paragraph 58; Case C-209/07, BIDS, paragraphs 15 et seq. (56)   See also General Guidelines, paragraph 22. (57)   Information regarding intended future quantities could for instance include intended future sales, market shares, territories, and sales to particular groups of consumers. (58)   The notion of ‘intended future prices’ is illustrated in Example 1. In specific situations where companies are fully committed to sell in the future at the prices that they have previously announced to the public (that is to say, they can not revise them), such public announcements of future individualised prices or quantities would not be considered as intentions, and hence would normally not be found to restrict competition by object. This could occur, for example, because of the repeated interactions and the specific type of relationship companies may have with their customers, for instance since it is essential that the customers know future prices in advance or because they can already take advanced orders at these prices. This is because in these situations the information exchange would be a more costly means for reaching a collusive outcome in the market than exchanging information on future intentions, and would be more likely to be done for pro-competitive reasons. However, this does not imply that in general price commitment towards customers is necessarily pro-competitive. On the contrary, it could limit the possibility of deviating from a collusive outcome and hence render it more stable. (59)   This is without prejudice to the fact that public announcements of intended individualised prices may give rise to efficiencies and that the parties to such exchange would have a possibility to rely on Article 101(3). (60)   Case C-7/95 P, John Deere v Commission, paragraph 76. (61)   Information exchange may restrict competition in a similar way to a merger if it leads to more effective, more stable or more likely coordination in the market; see Case C-413/06 P, Sony, [2008] ECR I-4951, paragraph 123, where the Court of Justice endorsed the criteria established by the General Court in Case T-342/99, Airtours, [2002] ECR II-2585, paragraph 62. (62)   Case C-238/05, Asnef-Equifax, paragraph 54. (63)   It should be noted that the discussion in paragraphs 78 to 85 is not a complete list of relevant market characteristics. There may be other characteristics of the market which are important in the setting of certain information exchanges. (64)   See Case T-35/92, John Deere v Commission, [1994] ECR II-957, paragraph 78. (65)   See Commission Decision in Cases IV/31.370 and 31.446, UK Agricultural Tractor Registration Exchange, OJ L 68, 13.3.1992, p. 19, paragraph 51 and Case T-35/92, John Deere v Commission, paragraph 78. It is not necessary that absolute stability be established or fierce competition excluded. (66)   Exchanges of information in the context of an R&D agreement, if they do not exceed what is necessary for implementation of the agreement, can benefit from the safe harbour of 25 % set out in the R&D Block Exemption Regulation. For the Specialisation Block Exemption Regulation, the relevant safe harbour is 20 %.

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(67)   The collection of historic data can also be used to convey a sector association’s input to or analysis of a review of public policy. (68)   For example, in past cases the Commission has considered the exchange of individual data which was more than one year old as historic and as not restrictive of competition within the meaning of Article 101(1), whereas information less than one year old has been considered as recent; Commission Decision in Case IV/31.370, UK Agricultural Tractor Registration Exchange, paragraph 50; Commission Decision in Case IV/36.069, Wirtschaftsvereinigung Stahl, OJ L 1, 3.1.1998, p. 10, paragraph 17. (69)   However, infrequent contracts could decrease the likelihood of a sufficiently prompt retaliation. (70)   However, depending on the structure of the market and the overall context of the exchange, the possibility cannot be excluded that an isolated exchange may constitute a sufficient basis for the participating undertakings to concert their market conduct and thus successfully substitute practical co-operation between them for competition and the risks that that entails; see Case C-8/08, T-Mobile Netherlands, paragraph 59. (71)   Joined Cases T-191/98 and others, Atlantic Container Line (TACA), [2003] ECR II-3275, paragraph 1154. This may not be the case if the exchange underpins a cartel. (72)   Moreover, the fact that the parties to the exchange have previously communicated the data to the public (for example through a daily newspaper or on their websites) does not imply that a subsequent non-public exchange would not infringe Article 101. (73)   See Joined Cases T-202/98 and others, Tate & Lyle v Commission, paragraph 60. (74)   This does not preclude that a database be offered at a lower price to customers which themselves have contributed data to it, as by doing so they normally would have also incurred costs. (75)   Assessing barriers to entry and countervailing ‘buyer power’ in the market would be relevant for determining whether outsiders to the information exchange system would be able to jeopardise the outcomes expected from coordination. However, increased transparency to consumers may either decrease or increase scope for a collusive outcome because with increased transparency to consumers, as price elasticity of demand is higher, pay-offs from deviation are higher but retaliation is also harsher. (76)   The discussion of potential efficiency gains from information exchange is neither exclusive nor exhaustive. (77)   Such efficiencies need to be weighed against the potential negative effects of, for example, limiting competition for the market which stimulates innovation. (78)   For market definition, see the Market Definition Notice. (79)   See also Commission Guidelines on the application of Article 81 of the EC Treaty to technology transfer agreements, OJ C 101, 27.4.2004, p. 2 (‘Technology Transfer Guidelines’), paragraph 33. (80)   See Market Definition Notice; see also Technology Transfer Guidelines, paragraphs 19 et seq. (81)   Point (u) of Article 1(1) of the R&D Block Exemption Regulation. (82)   Article 4(2) of the R&D Block Exemption Regulation. (83)   See also Technology Transfer Guidelines, paragraph 23. (84)   Article 4(1) of the R&D Block Exemption Regulation. (85)   See recitals 19, 20 and 21 in the preamble to the R&D Block Exemption Regulation. (86)   Article 4(3) of the R&D Block Exemption Regulation. (87)   R&D co-operation between non-competitors can, however, produce foreclosure effects under Article 101(1) if it relates to an exclusive exploitation of results and if it is concluded between companies, one of

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which has a significant degree of market power (which does not necessarily amount to dominance) with respect to a key technology. (88)   This is without prejudice to the analysis of potential efficiency gains, including those that regularly exist in publicly co-funded R&D. (89)   See Article 3(2) of the R&D Block Exemption Regulation. (90)   See Article 3(2) of the R&D Block Exemption Regulation. (91)   OJ C 1, 3.1.1979, p. 2. (92)   As also referred to in Article 2(4) of the Merger Regulation. (93)   See Article 101(1)(a); Joined Cases T-217/03 and T-245/03, French Beef, paragraphs 83 et seq.; Case C-8/08, T-Mobile Netherlands, paragraph 37. (94)   Article 2(4) of the Block Exemption Regulation on Vertical Restraints. (95)   Standardisation can take different forms, ranging from the adoption of consensus based standards by the recognised European or national standards bodies, through consortia and fora, to agreements between independent companies. (96)   See Case C-113/07, SELEX, [2009] ECR I-2207, paragraph 92. (97)   OJ L 204, 21.7.1998, p. 37. (98)   See judgment of 12 May 2010 in Case T-432/05, EMC Development AB v. Commission, not yet reported. (99)   Such standard terms might cover only a very small part of the clauses contained in the final contract or a large part thereof. (100) This refers to a situation where (legally non-binding) standard terms in practice are used by most of the industry and/or for most aspects of the product/service thus leading to a limitation or even lack of consumer choice. (101) See Chapter 3 on R&D agreements. (102) See also paragraph 308. (103) Depending on the circle of participants in the standard-setting process, restrictions can occur either on the supplier or on the purchaser side of the market for the standardised product. (104) In the context of this chapter IPR in particular refers to patent(s) (excluding non-published patent applications). However, in case any other type of IPR in practice gives the IPR holder control over the use of the standard the same principles should be applied. (105) In practice, many companies use a mix of these business models. (106) See Technology Transfer Guidelines, paragraph 7. (107) High royalty fees can only be qualified as excessive if the conditions for an abuse of a dominant position as set out in Article 102 of the Treaty and the case-law of the Court of Justice of the European Union are fulfilled. See for example Case 27/76, United Brands, [1978] ECR 207. (108) See for example Commission Decision in Case IV/35.691, Pre-insulated pipes, OJ L 24, 30.1.1999, p. 1, where part of the infringement of Article 101 consisted in ‘using norms and standards in order to prevent or delay the introduction of new technology which would result in price reductions’ (paragraph 147). (109) This paragraph should not prevent unilateral ex ante disclosures of most restrictive licensing terms as described in paragraph 299. It also does not prevent patent pools created in accordance with the principles set out in the Technology Transfer Guidelines or the decision to license IPR essential to a standard on royaltyfree terms as set out in this Chapter.

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(110) See by analogy paragraph 39 et seq. As regards market shares see also paragraph 296. (111) See also paragraph 293 in this regard. (112) For example effective access should be granted to the specification of the standard. (113) As specified in paragraphs 285 and 286. (114) It should be noted that FRAND can also cover royalty-free licensing. (115) To obtain the sought after result a good faith disclosure does not need to go as far as to require participants to compare their IPR against the potential standard and issue a statement positively concluding that they have no IPR reading on the potential standard. (116) See Case 27/76, United Brands, paragraph 250; see also Case C-385/07 P, Der Grüne Punkt – Duales System Deutschland GmbH, [2009] ECR I-6155, paragraph 142. (117) See Case 395/87, Ministère public v Jean-Louis Tournier, [1989] ECR 2521, paragraph 38; Joined Cases 110/88, 241/88 and 242/88, Francois Lucazeau v SACEM, [1989] ECR 2811, paragraph 33. (118) See Commission Decision in Case IV/29/151, Philips/VCR, OJ L 47, 18.2.1978, p. 42, paragraph 23: ‘As these standards were for the manufacture of VCR equipment, the parties were obliged to manufacture and distribute only cassettes and recorders conforming to the VCR system licensed by Philips. They were prohibited from changing to manufacturing and distributing other video cassette systems … This constituted a restriction of competition under Article 85(1)(b)’. (119) See Commission Decision in Case IV/29/151, Philips/VCR, paragraph 23. (120) In Commission Decision in Case IV/31.458, X/Open Group, OJ L 35, 6.2.1987, p. 36, the Commission considered that even if the standards adopted were made public, the restricted membership policy had the effect of preventing non-members from influencing the results of the work of the group and from getting the know-how and technical understanding relating to the standards which the members were likely to acquire. In addition, non-members could not, in contrast to the members, implement the standard before it was adopted (see paragraph 32). The agreement was therefore in these circumstances seen to constitute a restriction under Article 101(1). (121) Or if the adoption of the standard would have been heavily delayed by an inefficient process, any initial restriction could be outweighed by efficiencies to be considered under Article 101(3). (122) See Commission Decision of 14 October 2009 in Case 39.416, Ship Classification. The Decision can be found at: http://ec.europa.eu/competition/antitrust/cases/index/by_nr_78.html#i39_416 (123) See paragraph 261. (124) Any unilateral ex ante disclosures of most restrictive licensing terms should not serve as a cover to jointly fix prices either of downstream products or of substitute IPR/technologies which is, as outlined in paragraph 274, a restriction of competition by object. (125) If previous experience with standard terms on the relevant market shows that the standard terms did not lead to lessened competition on product differentiation, this might also be an indication that the same type of standard terms elaborated for a neighbouring product will not lead to a restrictive effect on competition. (126) See Commission Decision in Case IV/31.458, X/Open Group, paragraph 42: ‘The Commission considers that the willingness of the Group to make available the results as quickly as possible is an essential element in its decision to grant an exemption’. (127) In Case IV/29/151, Philips/VCR, compliance with the VCR standards led to the exclusion of other, perhaps

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better systems. Such exclusion was particularly serious in view of the pre-eminent market position enjoyed by Philips ‘… [R]restrictions were imposed upon the parties which were not indispensable to the attainment of these improvements. The compatibility of VCR video cassettes with the machines made by other manufacturers would have been ensured even if the latter had to accept no more than an obligation to observe the VCR standards when manufacturing VCR equipment’ (paragraph 31). (128) See Commission Decision in Case IV/31.458, X/Open Group, paragraph 45: ‘[T]he aims of the Group could not be achieved if any company willing to commit itself to the Group objectives had a right to become a member. This would create practical and logistical difficulties for the management of the work and possibly prevent appropriate proposals being passed.’ See also Commission Decision of 14 October 2009 in Case 39.416, Ship Classification, paragraph 36: ‘the Commitments strike an appropriate balance between maintaining demanding criteria for membership of IACS on the one hand, and removing unnecessary barriers to membership of IACS on the other hand. The new criteria will ensure that only technically competent CSs are eligible to become member of IACS, thus preventing that the efficiency and quality of IACS’ work is unduly impaired by too lenient requirements for participation in IACS. At the same time, the new criteria will not hinder CSs, who are technically competent and willing to do so from joining IACS’. (129) Technology which is regarded by users or licensees as interchangeable with or substitutable for another technology, by reason of the characteristics and intended use of the technologies. (130) In this context see Commission Decision in Cases IV/34.179, 34.202, 216, Dutch Cranes (SCK and FNK), OJ L 312, 23.12.1995, p. 79, paragraph 23: ‘The ban on calling on firms not certified by SCK as subcontractors restricts the freedom of action of certified firms. Whether a ban can be regarded as preventing, restricting or distorting competition within the meaning of Article 85(1) must be judged in the legal and economic context. If such a ban is associated with a certification system which is completely open, independent and transparent and provides for the acceptance of equivalent guarantees from other systems, it may be argued that it has no restrictive effects on competition but is simply aimed at fully guaranteeing the quality of the certified goods or services’. (131) De facto standardisation refers to a situation where a (legally non-binding) standard, is, in practice, used by most of the industry.

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Appendix 4

COMMISSION NOTICE Guidelines on Vertical Restraints (Text with EEA relevance) (2010/C 130/01)

I.

INTRODUCTION

1.

Purpose of the Guidelines

(1)

These Guidelines set out the principles for the assessment of vertical agreements under Article 101 of the Treaty on the Functioning of the European Union* (hereinafter “Article 101”).1 Article 1(1)(a) of Commission Regulation (EU) No 330/2010 of 20 April 2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices2 (hereinafter referred to as the “Block Exemption Regulation”) (see paragraphs (24) to (46)) defines the term “vertical agreement”. These Guidelines are without prejudice to the possible parallel application of Article 102 of the Treaty on the Functioning of the European Union (hereinafter “Article 102”) to vertical agreements. These Guidelines are structured in the following way: –

Section II (paragraphs (8) to (22)) describes vertical agreements which generally fall outside Article 101(1);

–

Section III (paragraphs (23) to (73)) clarifies the conditions for the application of the Block Exemption Regulation;

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–

Section IV (paragraphs (74) to (85)) describes the principles concerning the withdrawal of the block exemption and the disapplication of the Block Exemption Regulation;

–

Section V (paragraphs (86) to (95)) provides guidance on how to define the relevant market and calculate market shares;

–

Section VI (paragraphs (96) to (229)) describes the general framework of analysis and the enforcement policy of the Commission in individual cases concerning vertical agreements.

(2)

Throughout these Guidelines, the analysis applies to both goods and services, although certain vertical restraints are mainly used in the distribution of goods. Similarly, vertical agreements can be concluded for intermediate and final goods and services. Unless otherwise stated, the analysis and arguments in these Guidelines apply to all types of goods and services and to all levels of trade. Thus, the term “products” includes both goods and services. The terms “supplier” and “buyer” are used for all levels of trade. The Block Exemption Regulation and these Guidelines do not apply to agreements with final consumers where the latter are not undertakings, since Article 101 only applies to agreements between undertakings.

(3)

By issuing these Guidelines, the Commission aims to help companies conduct their own assessment of vertical agreements under EU competition rules. The standards set forth in these Guidelines cannot be applied mechanically, but must be applied with due consideration for the specific circumstances of each case. Each case must be evaluated in the light of its own facts.

(4)

These Guidelines are without prejudice to the case-law of the General Court and the Court of Justice of the European Union concerning the application of Article 101 to vertical agreements. The Commission will continue to monitor the operation of the Block Exemption Regulation and Guidelines based on market information from stakeholders and national competition authorities and may revise this notice in the light of future developments and of evolving insight.

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2.

Applicability of Article 101 to vertical agreements

(5)

Article 101 applies to vertical agreements that may affect trade between Member States and that prevent, restrict or distort competition (“vertical restraints”).3 Article 101 provides a legal framework for the assessment of vertical restraints, which takes into consideration the distinction between anti-competitive and pro‑competitive effects. Article  101(1) prohibits those agreements which appreciably restrict or distort competition, while Article 101(3) exempts those agreements which confer sufficient benefits to outweigh the anti-competitive effects.4

(6)

For most vertical restraints, competition concerns can only arise if there is insufficient competition at one or more levels of trade, that is, if there is some degree of market power at the level of the supplier or the buyer or at both levels. Vertical restraints are generally less harmful than horizontal restraints and may provide substantial scope for efficiencies.

(7)

The objective of Article 101 is to ensure that undertakings do not use agreements – in this context, vertical agreements – to restrict competition on the market to the detriment of consumers. Assessing vertical restraints is also important in the context of the wider objective of achieving an integrated internal market. Market integration enhances competition in the European Union. Companies should not be allowed to re-establish private barriers between Member States where State barriers have been successfully abolished.

II.

VERTICAL AGREEMENTS WHICH GENERALLY FALL OUTSIDE THE SCOPE OF ARTICLE 101(1)

1.

Agreements of minor importance and SMEs

(8)

Agreements that are not capable of appreciably affecting trade between Member States or of appreciably restricting competition by object or effect do not fall within the scope of Article 101(1). The Block Exemption Regulation applies only to agreements falling within the scope of application of Article 101(1). These Guidelines are without prejudice to the application of Commission Notice on agreements of minor importance which do not appreciably restrict competition under Article 81(1) of the Treaty establishing the European Community (de minimis)5 or any future de minimis notice. 1127

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(9)

Subject to the conditions set out in the de minimis notice concerning hardcore restrictions and cumulative effect issues, vertical agreements entered into by non-competing undertakings whose individual market share on the relevant market does not exceed 15 % are generally considered to fall outside the scope of Article 101(1)6. There is no presumption that vertical agreements concluded by undertakings having more than 15 % market share automatically infringe Article 101(1). Agreements between undertakings whose market share exceeds the 15 % threshold may still not have an appreciable effect on trade between Member States or may not constitute an appreciable restriction of competition.7 Such agreements need to be assessed in their legal and economic context. The criteria for the assessment of individual agreements are set out in paragraphs (96) to (229).

(10) As regards hardcore restrictions referred to in the de minimis notice, Article 101(1) may apply below the 15 % threshold, provided that there is an appreciable effect on trade between Member States and on competition. The applicable case-law of the Court of Justice and the General Court is relevant in this respect.8 Reference is also made to the possible need to assess positive and negative effects of hardcore restrictions as described in particular in paragraph (47) of these Guidelines. (11) In addition, the Commission considers that, subject to cumulative effect and hardcore restrictions, vertical agreements between small and medium-sized undertakings as defined in the Annex to Commission Recommendation of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises9 are rarely capable of appreciably affecting trade between Member States or of appreciably restricting competition within the meaning of Article 101(1), and therefore generally fall outside the scope of Article 101(1). In cases where such agreements nonetheless meet the conditions for the application of Article 101(1), the Commission will normally refrain from opening proceedings for lack of sufficient interest for the European Union unless those undertakings collectively or individually hold a dominant position in a substantial part of the internal market.

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2.

Agency agreements

2.1 Definition of agency agreements (12) An agent is a legal or physical person vested with the power to negotiate and/or conclude contracts on behalf of another person (the principal), either in the agent’s own name or in the name of the principal, for the: –

purchase of goods or services by the principal, or

–

sale of goods or services supplied by the principal.

(13) The determining factor in defining an agency agreement for the application of Article  101(1) is the financial or commercial risk borne by the agent in relation to the activities for which it has been appointed as an agent by the principal.10 In this respect it is not material for the assessment whether the agent acts for one or several principals. Neither is material for this assessment the qualification given to their agreement by the parties or national legislation. (14) There are three types of financial or commercial risk that are material to the definition of an agency agreement for the application of Article 101(1). First, there are the contract-specific risks which are directly related to the contracts concluded and/or negotiated by the agent on behalf of the principal, such as financing of stocks. Secondly, there are the risks related to market-specific investments. These are investments specifically required for the type of activity for which the agent has been appointed by the principal, that is, which are required to enable the agent to conclude and/or negotiate this type of contract. Such investments are usually sunk, which means that upon leaving that particular field of activity the investment cannot be used for other activities or sold other than at a significant loss. Thirdly, there are the risks related to other activities undertaken on the same product market, to the extent that the principal requires the agent to undertake such activities, but not as an agent on behalf of the principal but for its own risk. (15) For the purposes of applying Article 101(1), the agreement will be qualified as an agency agreement if the agent does not bear any, or bears only insignificant, risks in relation to the contracts concluded and/or negotiated on behalf of the principal, in relation to market-specific investments 1129

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for that field of activity, and in relation to other activities required by the principal to be undertaken on the same product market. However, risks that are related to the activity of providing agency services in general, such as the risk of the agent’s income being dependent upon its success as an agent or general investments in for instance premises or personnel, are not material to this assessment. (16) For the purpose of applying Article 101(1), an agreement will thus generally be considered an agency agreement where property in the contract goods bought or sold does not vest in the agent, or the agent does not himself supply the contract services and where the agent: (a)

does not contribute to the costs relating to the supply/purchase of the contract goods or services, including the costs of transporting the goods. This does not preclude the agent from carrying out the transport service, provided that the costs are covered by the principal;

(b)

does not maintain at its own cost or risk stocks of the contract goods, including the costs of financing the stocks and the costs of loss of stocks and can return unsold goods to the principal without charge, unless the agent is liable for fault (for example, by failing to comply with reasonable security measures to avoid loss of stocks);

(c)

does not undertake responsibility towards third parties for damage caused by the product sold (product liability), unless, as agent, it is liable for fault in this respect;

(d)

does not take responsibility for customers’ non-performance of the contract, with the exception of the loss of the agent’s commission, unless the agent is liable for fault (for example, by failing to comply with reasonable security or anti-theft measures or failing to comply with reasonable measures to report theft to the principal or police or to communicate to the principal all necessary information available to him on the customer’s financial reliability);

(e)

is not, directly or indirectly, obliged to invest in sales promotion, such as contributions to the advertising budgets of the principal;

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(f )

does not make market-specific investments in equipment, premises or training of personnel, such as for example the petrol storage tank in the case of petrol retailing or specific software to sell insurance policies in case of insurance agents, unless these costs are fully reimbursed by the principal;

(g)

does not undertake other activities within the same product market required by the principal, unless these activities are fully reimbursed by the principal.

(17) This list is not exhaustive. However, where the agent incurs one or more of the  risks or costs mentioned in paragraphs (14), (15) and (16), the agreement between agent and principal will not be qualified as an agency agreement. The question of risk must be assessed on a case-by-case basis, and with regard to the economic reality of the situation rather than the legal form. For practical reasons, the risk analysis may start with the assessment of the contract-specific risks. If contract-specific risks are incurred by the agent, it will be enough to conclude that the agent is an independent distributor. On the contrary, if the agent does not incur contract-specific risks, then it will be necessary to continue further the analysis by assessing the risks related to market-specific investments. Finally, if the agent does not incur any contract-specific risks and risks related to market-specific investments, the risks related to other required activities within the same product market may have to be considered.

2.2 The application of Article 101(1) to agency agreements (18) In the case of agency agreements as defined in section 2.1, the selling or purchasing function of the agent forms part of the principal’s activities. Since the principal bears the commercial and financial risks related to the selling and purchasing of the contract goods and services all obligations imposed on the agent in relation to the contracts concluded and/or negotiated on behalf of the principal fall outside Article 101(1). The following obligations on the agent’s part will be considered to form an inherent part of an agency agreement, as each of them relates to the ability of the principal to fix the scope of activity of the agent in relation to the contract goods or services, which is essential if the principal is to take the risks and therefore to be in a position to determine the commercial strategy:

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(a)

limitations on the territory in which the agent may sell these goods or services;

(b)

limitations on the customers to whom the agent may sell these goods or services;

(c)

the prices and conditions at which the agent must sell or purchase these goods or services.

(19) In addition to governing the conditions of sale or purchase of the contract goods or services by the agent on behalf of the principal, agency agreements often contain provisions which concern the relationship between the agent and the principal. In particular, they may contain a provision preventing the principal from appointing other agents in respect of a given type of transaction, customer or territory (exclusive agency provisions) and/or a provision preventing the agent from acting as an agent or distributor of undertakings which compete with the principal (single branding provisions). Since the agent is a separate undertaking from the principal, the provisions which concern the relationship between the agent and the principal may infringe Article 101(1). Exclusive agency provisions will in general not lead to anti-competitive effects. However, single branding provisions and post-term non-compete provisions, which concern inter-brand competition, may infringe Article  101(1) if they lead to or contribute to a (cumulative) foreclosure effect on the relevant market where the contract goods or services are sold or purchased (see in particular Section VI.2.1). Such provisions may benefit from the Block Exemption Regulation, in particular when the conditions provided in Article 5 of that Regulation are fulfilled. They can also be individually justified by efficiencies under Article 101(3) as for instance described in paragraphs (144) to (148). (20) An agency agreement may also fall within the scope of Article 101(1), even if the principal bears all the relevant financial and commercial risks, where it facilitates collusion. That could, for instance, be the case when a number of principals use the same agents while collectively excluding others from using these agents, or when they use the agents to collude on marketing strategy or to exchange sensitive market information between the principals.

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(21) Where the agent bears one or more of the relevant risks as described in paragraph (16), the agreement between agent and principal does not constitute an agency agreement for the purpose of applying Article 101(1). In that situation, the agent will be treated as an independent undertaking and the agreement between agent and principal will be subject to Article 101(1) as any other vertical agreement.

3.

Subcontracting agreements

(22) Subcontracting concerns a contractor providing technology or equipment to a subcontractor that undertakes to produce certain products on the basis thereof (exclusively) for the contractor. Subcontracting is covered by Commission notice of 18 December 1978 concerning the assessment of certain subcontracting agreements in relation to Article 85(1) of the EEC Treaty11 (hereinafter “subcontracting notice”). According to that notice, which remains applicable, subcontracting agreements whereby the subcontractor undertakes to produce certain products exclusively for the contractor generally fall outside the scope of Article 101(1) provided that the technology or equipment is necessary to enable the subcontractor to produce the products. However, other restrictions imposed on the subcontractor such as the obligation not to conduct or exploit its own research and development or not to produce for third parties in general may fall within the scope of Article 101.12

III. APPLICATION OF THE BLOCK EXEMPTION REGULATION 1.

Safe harbour created by the Block Exemption Regulation

(23) For most vertical restraints, competition concerns can only arise if there is insufficient competition at one or more levels of trade, that is, if there is some degree of market power at the level of the supplier or the buyer or at both levels. Provided that they do not contain hardcore restrictions of competition, which are restrictions of competition by object, the Block Exemption Regulation creates a presumption of legality for vertical agreements depending on the market share of the supplier and the buyer. Pursuant to Article 3 of the Block Exemption Regulation, it is the supplier’s market share on the market where it sells the contract goods or services and the buyer’s market share on the market where it purchases 1133

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the contract goods or services which determine the applicability of the block exemption. In order for the block exemption to apply, the supplier’s and the buyer’s market share must each be 30 % or less. Section V of these Guidelines provides guidance on how to define the relevant market and calculate the market shares. Above the market share threshold of 30 %, there is no presumption that vertical agreements fall within the scope of Article 101(1) or fail to satisfy the conditions of Article 101(3) but there is also no presumption that vertical agreements falling within the scope of Article 101(1) will usually satisfy the conditions of Article 101(3).

2.

Scope of the Block Exemption Regulation

2.1 Definition of vertical agreements (24) Article  1(1)(a) of the Block Exemption Regulation defines a “vertical agreement” as “an agreement or concerted practice entered into between two or more undertakings each of which operates, for the purposes of the agreement or the concerted practice, at a different level of the production or distribution chain, and relating to the conditions under which the parties may purchase, sell or resell certain goods or services”. (25) The definition of “vertical agreement” referred to in paragraph (24) has four main elements: (a)

The Block Exemption Regulation applies to agreements and concerted practices. The Block Exemption Regulation does not apply to unilateral conduct of the undertakings concerned. Such unilateral conduct can fall within the scope of Article 102 which prohibits abuses of a dominant position. For there to be an agreement within the meaning of Article 101 it is sufficient that the parties have expressed their joint intention to conduct themselves on the market in a specific way. The form in which that intention is expressed is irrelevant as long as it constitutes a faithful expression of the parties’ intention. In case there is no explicit agreement expressing the concurrence of wills, the Commission will have to prove that the unilateral policy of one party receives the acquiescence of the other party. For vertical agreements, there are two ways in which acquiescence with a particular unilateral policy can be established. First, the acquiescence can be deduced from the powers conferred upon the parties in a general agreement drawn up in advance. If the claus1134

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es of the agreement drawn up in advance provide for or authorise a party to adopt subsequently a specific unilateral policy which will be binding on the other party, the acquiescence of that policy by the other party can be established on the basis thereof.13 Secondly, in the absence of such an explicit acquiescence, the Commission can show the existence of tacit acquiescence. For that it is necessary to show first that one party requires explicitly or implicitly the cooperation of the other party for the implementation of its unilateral policy and second that the other party complied with that requirement by implementing that unilateral policy in practice.14 For instance, if after a supplier’s announcement of a unilateral reduction of supplies in order to prevent parallel trade, distributors reduce immediately their orders and stop engaging in parallel trade, then those distributors tacitly acquiesce to the supplier’s unilateral policy. This can however not be concluded if the distributors continue to engage in parallel trade or try to find new ways to engage in parallel trade. Similarly, for vertical agreements, tacit acquiescence may be deduced from the level of coercion exerted by a party to impose its unilateral policy on the other party or parties to the agreement in combination with the number of distributors that are actually implementing in practice the unilateral policy of the supplier. For instance, a system of monitoring and penalties, set up by a supplier to penalise those distributors that do not comply with its unilateral policy, points to tacit acquiescence with the supplier’s unilateral policy if this system allows the supplier to implement in practice its policy. The two ways of establishing acquiescence described in this paragraph can be used jointly; (b)

The agreement or concerted practice is between two or more undertakings. Vertical agreements with final consumers not operating as an undertaking are not covered by the Block Exemption Regulation. More generally, agreements with final consumers do not fall under Article 101(1), as that article applies only to agreements between undertakings, decisions by associations of undertakings and concerted practices of undertakings. This is without prejudice to the possible application of Article 102;

(c)

The agreement or concerted practice is between undertakings each operating, for the purposes of the agreement, at a different level of the production or distribution chain. This means for instance 1135

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that one undertaking produces a raw material which the other undertaking uses as an input, or that the first is a manufacturer, the second a wholesaler and the third a retailer. This does not preclude an undertaking from being active at more than one level of the production or distribution chain; (d)

The agreements or concerted practices relate to the conditions under which the parties to the agreement, the supplier and the buyer, “may purchase, sell or resell certain goods or services”. This reflects the purpose of the Block Exemption Regulation to cover purchase and distribution agreements. These are agreements which concern the conditions for the purchase, sale or resale of the goods or services supplied by the supplier and/or which concern the conditions for the sale by the buyer of the goods or services which incorporate these goods or services. Both the goods or services supplied by the supplier and the resulting goods or services are considered to be contract goods or services under the Block Exemption Regulation. Vertical agreements relating to all final and intermediate goods and services are covered. The only exception is the automobile sector, as long as this sector remains covered by a specific block exemption such as that granted by Commission Regulation (EC) No 1400/2002 of 31 July 2002 on the application of Article 81(3) of the Treaty to categories of vertical agreements and concerted practices in the motor vehicle sector15 or its successor. The goods or services provided by the supplier may be resold by the buyer or may be used as an input by the buyer to produce its own goods or services.

(26) The Block Exemption Regulation also applies to goods sold and purchased for renting to third parties. However, rent and lease agreements as such are not covered, as no good or service is sold by the supplier to the buyer. More generally, the Block Exemption Regulation does not cover restrictions or obligations that do not relate to the conditions of purchase, sale and resale, such as an obligation preventing parties from carrying out independent research and development which the parties may have included in an otherwise vertical agreement. In addition, Article 2(2) to (5) of the Block Exemption Regulation directly or indirectly excludes certain vertical agreements from the application of that Regulation.

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2.2 Vertical agreements between competitors (27) Article 2(4) of the Block Exemption Regulation explicitly excludes “vertical agreements entered into between competing undertakings” from its application. Vertical agreements between competitors are dealt with, as regards possible collusion effects, in the Commission Guidelines on the applicability of Article 81 of the EC  Treaty to horizontal cooperation agreements.16 However, the vertical aspects of such agreements need to be assessed under these Guidelines. Article 1(1)(c) of the Block Exemption Regulation defines a competing undertaking as “an actual or potential competitor”. Two companies are treated as actual competitors if they are active on the same relevant market. A company is treated as a potential competitor of another company if, absent the agreement, in case of a small but permanent increase in relative prices it is likely that this first company, within a short period of time normally not longer than one year, would undertake the necessary additional investments or other necessary switching costs to enter the relevant market on which the other company is active. That assessment must be based on realistic grounds; the mere theoretical possibility of entering a market is not sufficient.17 A distributor that provides specifications to a manufacturer to produce particular goods under the distributor’s brand name is not to be considered a manufacturer of such own-brand goods. (28) Article 2(4) of the Block Exemption Regulation contains two exceptions to the general exclusion of vertical agreements between competitors. These exceptions concern non-reciprocal agreements. Non-reciprocal agreements between competitors are covered by the Block Exemption Regulation where  (a) the supplier is a manufacturer and distributor of goods, while the buyer is only a distributor and not also a competing undertaking at the manufacturing level, or (b) the supplier is a provider of services operating at several levels of trade, while the buyer operates at the retail level and is not a competing undertaking at the level of trade where it purchases the contract services. The first exception covers situations of dual distribution, that is, the manufacturer of particular goods also acts as a distributor of the goods in competition with independent distributors of its goods. In case of dual distribution it is considered that in general any potential impact on the competitive relationship between the manufacturer and retailer at the retail level is of lesser importance than the potential impact of the vertical supply agreement on competition in general at the manufacturing or retail level. The second exception 1137

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covers similar situations of dual distribution, but in this case for services, when the supplier is also a provider of products at the retail level where the buyer operates.

2.3 Associations of retailers (29) Article 2(2) of the Block Exemption Regulation includes in its application vertical agreements entered into by an association of undertakings which fulfils certain conditions and thereby excludes from the Block Exemption Regulation vertical agreements entered into by all other associations. Vertical agreements entered into between an association and its members, or between an association and its suppliers, are covered by the Block Exemption Regulation only if all the members are retailers of goods (not services) and if each individual member of the association has a turnover not exceeding EUR 50 million. Retailers are distributors reselling goods to final consumers. Where only a limited number of the members of the association have a turnover exceeding the EUR 50  million threshold and where these members together represent less than 15 % of the collective turnover of all the members combined, the assessment under Article 101 will normally not be affected. (30) An association of undertakings may involve both horizontal and vertical agreements. The horizontal agreements must be assessed according to the principles set out in the Guidelines on the applicability of Article 81 of the EC Treaty to horizontal cooperation agreements.18 If that assessment leads to the conclusion that a cooperation between undertakings in the area of purchasing or selling is acceptable, a further assessment will be necessary to examine the vertical agreements concluded by the association with its suppliers or its individual members. The latter assessment will follow the rules of the Block Exemption Regulation and these Guidelines. For instance, horizontal agreements concluded between the members of the association or decisions adopted by the association, such as the decision to require the members to purchase from the association or the decision to allocate exclusive territories to the members must first be assessed as a horizontal agreement. Once that assessment leads to the conclusion that the horizontal agreement is not anticompetitive, an assessment of the vertical agreements between the association and individual members or between the association and suppliers is necessary.

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2.4 Vertical agreements containing provisions on intellectual property rights (IPRs) (31) Article 2(3) of the Block Exemption Regulation includes vertical agreements containing certain provisions relating to the assignment of IPRs to or use of IPRs by the buyer in its application and thereby excludes all other vertical agreements containing IPR provisions from the Block Exemption Regulation. The Block Exemption Regulation applies to vertical agreements containing IPR provisions where five conditions are fulfilled: (a)

The IPR provisions must be part of a vertical agreement, that is, an agreement with conditions under which the parties may purchase, sell or resell certain goods or services;

(b)

The IPRs must be assigned to, or licensed for use by, the buyer;

(c)

The IPR provisions must not constitute the primary object of the agreement;

(d)

The IPR provisions must be directly related to the use, sale or resale of goods or services by the buyer or its customers. In the case of franchising where marketing forms the object of the exploitation of the IPRs, the goods or services are distributed by the master franchisee or the franchisees;

(e)

The IPR provisions, in relation to the contract goods or services, must not contain restrictions of competition having the same object as vertical restraints which are not exempted under the Block Exemption Regulation.

(32) Such conditions ensure that the Block Exemption Regulation applies to vertical agreements where the use, sale or resale of goods or services can be performed more effectively because IPRs are assigned to or licensed for use by the buyer. In other words, restrictions concerning the assignment or use of IPRs can be covered when the main object of the agreement is the purchase or distribution of goods or services. (33) The first condition makes clear that the context in which the IPRs are provided is an agreement to purchase or distribute goods or an agreement to purchase or provide services and not an agreement concerning the as1139

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signment or licensing of IPRs for the manufacture of goods, nor a pure licensing agreement. The Block Exemption Regulation does not cover for instance: (a)

agreements where a party provides another party with a recipe and licenses the other party to produce a drink with this recipe;

(b)

agreements under which one party provides another party with a mould or master copy and licenses the other party to produce and distribute copies;

(c)

the pure licence of a trade mark or sign for the purposes of merchandising;

(d)

sponsorship contracts concerning the right to advertise oneself as being an official sponsor of an event;

(e)

copyright licensing such as broadcasting contracts concerning the right to record and/or broadcast an event.

(34) The second condition makes clear that the Block Exemption Regulation does not apply when the IPRs are provided by the buyer to the supplier, no matter whether the IPRs concern the manner of manufacture or of distribution. An agreement relating to the transfer of IPRs to the supplier and containing possible restrictions on the sales made by the supplier is not covered by the Block Exemption Regulation. That means, in particular, that subcontracting involving the transfer of know-how to a subcontractor19 does not fall within the scope of application of the Block Exemption Regulation (see also paragraph (22)). However, vertical agreements under which the buyer provides only specifications to the supplier which describe the goods or services to be supplied fall within the scope of application of the Block Exemption Regulation. (35) The third condition makes clear that in order to be covered by the Block Exemption Regulation, the primary object of the agreement must not be the assignment or licensing of IPRs. The primary object must be the purchase, sale or resale of goods or services and the IPR provisions must serve the implementation of the vertical agreement.

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(36) The fourth condition requires that the IPR provisions facilitate the use, sale or resale of goods or services by the buyer or its customers. The goods or services for use or resale are usually supplied by the licensor but may also be purchased by the licensee from a third supplier. The IPR provisions will normally concern the marketing of goods or services. An example would be a franchise agreement where the franchisor sells goods for resale to the franchisee and licenses the franchisee to use its trade mark and know-how to market the goods or where the supplier of a concentrated extract licenses the buyer to dilute and bottle the extract before selling it as a drink. (37) The fifth condition highlights the fact that the IPR provisions should not have the same object as any of the hardcore restrictions listed in Article 4 of the Block Exemption Regulation or any of the restrictions excluded from the coverage of the Block Exemption Regulation by Article 5 of that Regulation (see paragraphs (47) to (69) of these Guidelines). (38) Intellectual property rights relevant to the implementation of vertical agreements within the meaning of Article 2(3) of the Block Exemption Regulation generally concern three main areas: trade marks, copyright and know-how. Trade mark (39) A trade mark licence to a distributor may be related to the distribution of the licensor’s products in a particular territory. If it is an exclusive licence, the agreement amounts to exclusive distribution. Copyright (40) Resellers of goods covered by copyright (books, software, etc.) may be obliged by the copyright holder only to resell under the condition that the buyer, whether another reseller or the end user, shall not infringe the copyright. Such obligations on the reseller, to the extent that they fall under Article 101(1) at all, are covered by the Block Exemption Regulation. (41) Agreements, under which hard copies of software are supplied for resale and where the reseller does not acquire a licence to any rights over the software but only has the right to resell the hard copies, are to be regarded as agreements for the supply of goods for resale for the purpose of the 1141

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Block Exemption Regulation. Under that form of distribution, licensing the software only occurs between the copyright owner and the user of the software. It may take the form of a “shrink wrap” licence, that is, a set of conditions included in the package of the hard copy which the end user is deemed to accept by opening the package. (42) Buyers of hardware incorporating software protected by copyright may be obliged by the copyright holder not to infringe the copyright, and must therefore not make copies and resell the software or make copies and use the software in combination with other hardware. Such use-restrictions, to the extent that they fall within Article 101(1) at all, are covered by the Block Exemption Regulation. Know-how (43) Franchise agreements, with the exception of industrial franchise agreements, are the most obvious example of where know-how for marketing purposes is communicated to the buyer.20 Franchise agreements contain licences of intellectual property rights relating to trade marks or signs and know-how for the use and distribution of goods or the provision of services. In addition to the licence of IPR, the franchisor usually provides the franchisee during the life of the agreement with commercial or technical assistance, such as procurement services, training, advice on real estate, financial planning etc. The licence and the assistance are integral components of the business method being franchised. (44) Licensing contained in franchise agreements is covered by the Block Exemption Regulation where all five conditions listed in paragraph (31) are fulfilled. Those conditions are usually fulfilled as under most franchise agreements, including master franchise agreements, the franchisor provides goods and/or services, in particular commercial or technical assistance services, to the franchisee. The IPRs help the franchisee to resell the products supplied by the franchisor or by a supplier designated by the franchisor or to use those products and sell the resulting goods or services. Where the franchise agreement only or primarily concerns licensing of IPRs, it is not covered by the Block Exemption Regulation, but the Commission will, as a general rule, apply the principles set out in the Block Exemption Regulation and these Guidelines to such an agreement.

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(45) The following IPR-related obligations are generally considered necessary to protect the franchisor’s intellectual property rights and are, where these obligations fall under Article 101(1), also covered by the Block Exemption Regulation: (a)

an obligation on the franchisee not to engage, directly or indirectly, in any similar business;

(b)

an obligation on the franchisee not to acquire financial interests in the capital of a competing undertaking such as would give the franchisee the power to influence the economic conduct of such undertaking;

(c)

an obligation on the franchisee not to disclose to third parties the know-how provided by the franchisor as long as this know-how is not in the public domain;

(d)

an obligation on the franchisee to communicate to the franchisor any experience gained in exploiting the franchise and to grant the franchisor, and other franchisees, a non-exclusive licence for the know-how resulting from that experience;

(e)

an obligation on the franchisee to inform the franchisor of infringements of licensed intellectual property rights, to take legal action against infringers or to assist the franchisor in any legal actions against infringers;

(f )

an obligation on the franchisee not to use know-how licensed by the franchisor for purposes other than the exploitation of the franchise;

(g)

an obligation on the franchisee not to assign the rights and obligations under the franchise agreement without the franchisor’s consent.

2.5 Relationship to other block exemption regulations (46) Article 2(5) states that the Block Exemption Regulation does “not apply to vertical agreements the subject matter of which falls within the scope of any other block exemption regulation, unless otherwise provided for in 1143

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such a regulation”. The Block Exemption Regulation does not therefore apply to vertical agreements covered by Commission Regulation (EC) No 772/2004 of 27 April 2004 on the application of Article 81(3) of the Treaty to categories of technology transfer agreements,21 Regulation 1400/2002 on the application of Article 81(3) of the Treaty to categories of vertical agreements and concerted practices in the motor vehicle sector22 or Commission Regulation (EC) No 2658/2000 of 29 November 2000 on the application of Article 81(3) of the Treaty to categories of specialisation agreements23 and Commission Regulation (EC) No 2659/2000 of 29 November 2000 on the application of Article 81(3) of the Treaty to categories of research and development agreements24 exempting vertical agreements concluded in connection with horizontal agreements, or any future regulations of that kind, unless otherwise provided for in such a regulation.

3.

Hardcore restrictions under the Block Exemption Regulation

(47) Article 4 of the Block Exemption Regulation contains a list of hardcore restrictions which lead to the exclusion of the whole vertical agreement from the scope of application of the Block Exemption Regulation.25 Where such a hardcore restriction is included in an agreement, that agreement is presumed to fall within Article 101(1). It is also presumed that the agreement is unlikely to fulfil the conditions of Article 101(3), for which reason the block exemption does not apply. However, undertakings may demonstrate pro-competitive effects under Article 101(3) in an individual case.26 Where the undertakings substantiate that likely efficiencies result from including the hardcore restriction in the agreement and demonstrate that in general all the conditions of Article 101(3) are fulfilled, the Commission will be required to effectively assess the likely negative impact on competition before making an ultimate assessment of whether the conditions of Article 101(3) are fulfilled.27 (48) The hardcore restriction set out in Article 4(a) of the Block Exemption Regulation concerns resale price maintenance (RPM), that is, agreements or concerted practices having as their direct or indirect object the establishment of a fixed or minimum resale price or a fixed or minimum price level to be observed by the buyer. In the case of contractual provisions or concerted practices that directly establish the resale price, the restriction is clear cut. However, RPM can also be achieved through indirect means. Examples of the latter are an agreement fixing the distribution margin, 1144

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fixing the maximum level of discount the distributor can grant from a prescribed price level, making the grant of rebates or reimbursement of promotional costs by the supplier subject to the observance of a given price level, linking the prescribed resale price to the resale prices of competitors, threats, intimidation, warnings, penalties, delay or suspension of deliveries or contract terminations in relation to observance of a given price level. Direct or indirect means of achieving price fixing can be made more effective when combined with measures to identify price-cutting distributors, such as the implementation of a price monitoring system, or the obligation on retailers to report other members of the distribution network that deviate from the standard price level. Similarly, direct or indirect price fixing can be made more effective when combined with measures which may reduce the buyer’s incentive to lower the resale price, such as the supplier printing a recommended resale price on the product or the supplier obliging the buyer to apply a most-favoured-customer clause. The same indirect means and the same “supportive” measures can be used to make maximum or recommended prices work as RPM. However, the use of a particular supportive measure or the provision of a list of recommended prices or maximum prices by the supplier to the buyer is not considered in itself as leading to RPM. (49) In the case of agency agreements, the principal normally establishes the sales price, as the agent does not become the owner of the goods. However, where such an agreement cannot be qualified as an agency agreement for the purposes of applying Article 101(1) (see paragraphs (12) to (21)) an obligation preventing or restricting the agent from sharing its commission, fixed or variable, with the customer would be a hardcore restriction under Article 4(a) of the Block Exemption Regulation. In order to avoid including such a hardcore restriction in the agreement, the agent should thus be left free to lower the effective price paid by the customer without reducing the income for the principal.28 (50) The hardcore restriction set out in Article 4(b) of the Block Exemption Regulation concerns agreements or concerted practices that have as their direct or indirect object the restriction of sales by a buyer party to the agreement or its customers, in as far as those restrictions relate to the territory into which or the customers to whom the buyer or its customers may sell the contract goods or services. This hardcore restriction relates to market partitioning by territory or by customer group. That may be the result of direct obligations, such as the obligation not to sell to certain 1145

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customers or to customers in certain territories or the obligation to refer orders from these customers to other distributors. It may also result from indirect measures aimed at inducing the distributor not to sell to such customers, such as refusal or reduction of bonuses or discounts, termination of supply, reduction of supplied volumes or limitation of supplied volumes to the demand within the allocated territory or customer group, threat of contract termination, requiring a higher price for products to be exported, limiting the proportion of sales that can be exported or profit pass-over obligations. It may further result from the supplier not providing a Union-wide guarantee service under which normally all distributors are obliged to provide the guarantee service and are reimbursed for this service by the supplier, even in relation to products sold by other distributors into their territory.29 Such practices are even more likely to be viewed as a restriction of the buyer’s sales when used in conjunction with the implementation by the supplier of a monitoring system aimed at verifying the effective destination of the supplied goods, such as the use of differentiated labels or serial numbers. However, obligations on the reseller relating to the display of the supplier’s brand name are not classified as hardcore. As Article 4(b) only concerns restrictions of sales by the buyer or its customers, this implies that restrictions of the supplier’s sales are also not a hardcore restriction, subject to what is stated in paragraph (59) regarding sales of spare parts in the context of Article 4(e) of the Block Exemption Regulation. Article 4(b) applies without prejudice to a restriction on the buyer’s place of establishment. Thus, the benefit of the Block Exemption Regulation is not lost if it is agreed that the buyer will restrict its distribution outlet(s) and warehouse(s) to a particular address, place or territory. (51) There are four exceptions to the hardcore restriction in Article 4(b) of the Block Exemption Regulation. The first exception in Article 4(b)(i) allows a supplier to restrict active sales by a buyer party to the agreement to a territory or a customer group which has been allocated exclusively to another buyer or which the supplier has reserved to itself. A territory or customer group is exclusively allocated when the supplier agrees to sell its product only to one distributor for distribution in a particular territory or to a particular customer group and the exclusive distributor is protected against active selling into its territory or to its customer group by all the other buyers of the supplier within the Union, irrespective of sales by the supplier. The supplier is allowed to combine the allocation of an exclusive territory and an exclusive customer group by for instance appoint1146

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ing an exclusive distributor for a particular customer group in a certain territory. Such protection of exclusively allocated territories or customer groups must, however, permit passive sales to such territories or customer groups. For the application of Article 4(b) of the Block Exemption Regulation, the Commission interprets “active” and “passive” sales as follows: –

“Active” sales mean actively approaching individual customers by for instance direct mail, including the sending of unsolicited emails, or visits; or actively approaching a specific customer group or customers in a specific territory through advertisement in media, on the internet or other promotions specifically targeted at that customer group or targeted at customers in that territory. Advertisement or promotion that is only attractive for the buyer if it (also) reaches a specific group of customers or customers in a specific territory, is considered active selling to that customer group or customers in that territory.

–

“Passive” sales mean responding to unsolicited requests from individual customers including delivery of goods or services to such customers. General advertising or promotion that reaches customers in other distributors’ (exclusive) territories or customer groups but which is a reasonable way to reach customers outside those territories or customer groups, for instance to reach customers in one’s own territory, are considered passive selling. General advertising or promotion is considered a reasonable way to reach such customers if it would be attractive for the buyer to undertake these investments also if they would not reach customers in other distributors’ (exclusive) territories or customer groups.

(52) The internet is a powerful tool to reach a greater number and variety of customers than by more traditional sales methods, which explains why certain restrictions on the use of the internet are dealt with as (re)sales restrictions. In principle, every distributor must be allowed to use the internet to sell products. In general, where a distributor uses a website to sell products that is considered a form of passive selling, since it is a reasonable way to allow customers to reach the distributor. The use of a website may have effects that extend beyond the distributor’s own territory and customer group; however, such effects result from the technology allowing easy access from everywhere. If a customer visits the web site of a distributor and contacts the distributor and if such contact leads 1147

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to a sale, including delivery, then that is considered passive selling. The same is true if a customer opts to be kept (automatically) informed by the distributor and it leads to a sale. Offering different language options on the website does not, of itself, change the passive character of such selling. The Commission thus regards the following as examples of hardcore restrictions of passive selling given the capability of these restrictions to limit the distributor’s access to a greater number and variety of customers: (a)

an agreement that the (exclusive) distributor shall prevent customers located in another (exclusive) territory from viewing its website or shall automatically re-rout its customers to the manufacturer’s or other (exclusive) distributors’ websites. This does not exclude an agreement that the distributor’s website shall also offer a number of links to websites of other distributors and/or the supplier;

(b)

an agreement that the (exclusive) distributor shall terminate consumers’ transactions over the internet once their credit card data reveal an address that is not within the distributor’s (exclusive) territory;

(c)

an agreement that the distributor shall limit its proportion of overall sales made over the internet. This does not exclude the supplier requiring, without limiting the online sales of the distributor, that the buyer sells at least a certain absolute amount (in value or volume) of the products offline to ensure an efficient operation of its brick and mortar shop (physical point of sales), nor does it preclude the supplier from making sure that the online activity of the distributor remains consistent with the supplier’s distribution model (see paragraphs (54) and (56)). This absolute amount of required offline sales can be the same for all buyers, or determined individually for each buyer on the basis of objective criteria, such as the buyer’s size in the network or its geographic location;

(d)

an agreement that the distributor shall pay a higher price for products intended to be resold by the distributor online than for products intended to be resold offline. This does not exclude the supplier agreeing with the buyer a fixed fee (that is, not a variable fee where the sum increases with the realised offline turnover as this would amount indirectly to dual pricing) to support the latter’s offline or online sales efforts. 1148

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(53) A restriction on the use of the internet by distributors that are party to the agreement is compatible with the Block Exemption Regulation to the extent that promotion on the internet or use of the internet would lead to active selling into, for instance, other distributors’ exclusive territories or customer groups. The Commission considers online advertisement specifically addressed to certain customers as a form of active selling to those customers. For instance, territory-based banners on third party websites are a form of active sales into the territory where these banners are shown. In general, efforts to be found specifically in a certain territory or by a certain customer group is active selling into that territory or to that customer group. For instance, paying a search engine or online advertisement provider to have advertisements displayed specifically to users in a particular territory is active selling into that territory. (54) However, under the Block Exemption the supplier may require quality standards for the use of the internet site to resell its goods, just as the supplier may require quality standards for a shop or for selling by catalogue or for advertising and promotion in general. This may be relevant in particular for selective distribution. Under the Block Exemption, the supplier may, for example, require that its distributors have one or more brick and mortar shops or showrooms as a condition for becoming a member of its distribution system. Subsequent changes to such a condition are also possible under the Block Exemption, except where those changes have as their object to directly or indirectly limit the online sales by the distributors. Similarly, a supplier may require that its distributors use third party platforms to distribute the contract products only in accordance with the standards and conditions agreed between the supplier and its distributors for the distributors’ use of the internet. For instance, where the distributor’s website is hosted by a third party platform, the supplier may require that customers do not visit the distributor’s website through a site carrying the name or logo of the third party platform. (55) There are three further exceptions to the hardcore restriction set out in Article 4(b) of the Block Exemption Regulation. All three exceptions allow for the restriction of both active and passive sales. Under the first exception, it is permissible to restrict a wholesaler from selling to end users, which allows a supplier to keep the wholesale and retail level of trade separate. However, that exception does not exclude the possibility that the wholesaler can sell to certain end users, such as bigger end users, while not allowing sales to (all) other end users. The second exception allows 1149

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a supplier to restrict an appointed distributor in a selective distribution system from selling, at any level of trade, to unauthorised distributors located in any territory where the system is currently operated or where the supplier does not yet sell the contract products (referred to as “the territory reserved by the supplier to operate that system” in Article 4(b)(iii)). The third exception allows a supplier to restrict a buyer of components, to whom the components are supplied for incorporation, from reselling them to competitors of the supplier. The term “component” includes any intermediate goods and the term “incorporation” refers to the use of any input to produce goods. (56) The hardcore restriction set out in Article 4(c) of the Block Exemption Regulation excludes the restriction of active or passive sales to end users, whether professional end users or final consumers, by members of a selective distribution network, without prejudice to the possibility of prohibiting a member of the network from operating out of an unauthorised place of establishment. Accordingly, dealers in a selective distribution system, as defined in Article 1(1)(e) of the Block Exemption Regulation, cannot be restricted in the choice of users to whom they may sell, or purchasing agents acting on behalf of those users except to protect an exclusive distribution system operated elsewhere (see paragraph (51)). Within a selective distribution system the dealers should be free to sell, both actively and passively, to all end users, also with the help of the internet. Therefore, the Commission considers any obligations which dissuade appointed dealers from using the internet to reach a greater number and variety of customers by imposing criteria for online sales which are not overall equivalent to the criteria imposed for the sales from the brick and mortar shop as a hardcore restriction. This does not mean that the criteria imposed for online sales must be identical to those imposed for offline sales , but rather that they should pursue the same objectives and achieve comparable results and that the difference between the criteria must be justified by the different nature of these two distribution modes. For example, in order to prevent sales to unauthorised dealers, a supplier can restrict its selected dealers from selling more than a given quantity of contract products to an individual end user. Such a requirement may have to be stricter for online sales if it is easier for an unauthorised dealer to obtain those products by using the internet. Similarly, it may have to be stricter for offline sales if it is easier to obtain them from a brick and mortar shop. In order to ensure timely delivery of contract products, a 1150

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supplier may impose that the products be delivered instantly in the case of offline sales. Whereas an identical requirement cannot be imposed for online sales, the supplier may specify certain practicable delivery times for such sales. Specific requirements may have to be formulated for an online after-sales help desk, so as to cover the costs of customers returning the product and for applying secure payment systems. (57) Within the territory where the supplier operates selective distribution, this system may not be combined with exclusive distribution as that would lead to a hardcore restriction of active or passive selling by the dealers under Article 4(c) of the Block Exemption Regulation, with the exception that restrictions can be imposed on the dealer’s ability to determine the location of its business premises. Selected dealers may be prevented from operating their business from different premises or from opening a new outlet in a different location. In that context, the use by a distributor of its own website cannot be considered to be the same thing as the opening of a new outlet in a different location. If the dealer’s outlet is mobile , an area may be defined outside which the mobile outlet cannot be operated. In addition, the supplier may commit itself to supplying only one dealer or a limited number of dealers in a particular part of the territory where the selective distribution system is applied. (58) The hardcore restriction set out in Article 4(d) of the Block Exemption Regulation concerns the restriction of cross-supplies between appointed distributors within a selective distribution system. Accordingly, an agreement or concerted practice may not have as its direct or indirect object to prevent or restrict the active or passive selling of the contract products between the selected distributors. Selected distributors must remain free to purchase the contract products from other appointed distributors within the network, operating either at the same or at a different level of trade. Consequently, selective distribution cannot be combined with vertical restraints aimed at forcing distributors to purchase the contract products exclusively from a given source. It also means that within a selective distribution network, no restrictions can be imposed on appointed wholesalers as regards their sales of the product to appointed retailers. (59) The hardcore restriction set out in Article 4(e) of the Block Exemption Regulation concerns agreements that prevent or restrict end-users, independent repairers and service providers from obtaining spare parts directly from the manufacturer of those spare parts. An agreement between 1151

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a manufacturer of spare parts and a buyer that incorporates those parts into its own products (original equipment manufacturer (OEM)), may not, either directly or indirectly, prevent or restrict sales by the manufacturer of those spare parts to end users, independent repairers or service providers. Indirect restrictions may arise particularly when the supplier of the spare parts is restricted in supplying technical information and special equipment which are necessary for the use of spare parts by users, independent repairers or service providers. However, the agreement may place restrictions on the supply of the spare parts to the repairers or service providers entrusted by the original equipment manufacturer with the repair or servicing of its own goods. In other words, the original equipment manufacturer may require its own repair and service network to buy spare parts from it.

4.

Individual cases of hardcore sales restrictions that may fall outside the scope of Article 101(1) or may fulfil the conditions of Article 101(3)

(60) Hardcore restrictions may be objectively necessary in exceptional cases for an agreement of a particular type or nature30 and therefore fall outside Article 101(1). For example, a hardcore restriction may be objectively necessary to ensure that a public ban on selling dangerous substances to certain customers for reasons of safety or health is respected. In addition, undertakings may plead an efficiency defence under Article 101(3) in an individual case. This section provides some examples for (re)sales restrictions, whereas for RPM this is dealt with in section VI.2.10. (61) A distributor which will be the first to sell a new brand or the first to sell an existing brand on a new market, thereby ensuring a genuine entry on the relevant market, may have to commit substantial investments where there was previously no demand for that type of product in general or for that type of product from that producer. Such expenses may often be sunk and in such circumstances the distributor may not enter into the distribution agreement without protection for a certain period of time against (active and) passive sales into its territory or to its customer group by other distributors. For example such a situation may occur where a manufacturer established in a particular national market enters another national market and introduces its products with the help of an exclusive distributor and where this distributor needs to invest in launching and establishing the brand on this new market. Where substantial investments by the distributor to 1152

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start up and/or develop the new market are necessary, restrictions of passive sales by other distributors into such a territory or to such a customer group which are necessary for the distributor to recoup those investments generally fall outside the scope of Article 101(1) during the first two years that the distributor is selling the contract goods or services in that territory or to that customer group, even though such hardcore restrictions are in general presumed to fall within the scope of Article 101(1). (62) In the case of genuine testing of a new product in a limited territory or with a limited customer group and in the case of a staggered introduction of a new product, the distributors appointed to sell the new product on the test market or to participate in the first round(s) of the staggered introduction may be restricted in their active selling outside the test market or the market(s) where the product is first introduced without falling within the scope of Article 101(1) for the period necessary for the testing or introduction of the product. (63) In the case of a selective distribution system, cross supplies between appointed distributors must normally remain free (see paragraph (58)). However, if appointed wholesalers located in different territories are obliged to invest in promotional activities in ‘their’ territories to support the sales by appointed retailers and it is not practical to specify in a contract the required promotional activities, restrictions on active sales by the wholesalers to appointed retailers in other wholesalers’ territories to overcome possible free riding may, in an individual case, fulfil the conditions of Article 101(3). (64) In general, an agreement that a distributor shall pay a higher price for products intended to be resold by the distributor online than for products intended to be resold offline (“dual pricing”) is a hardcore restriction (see paragraph (52)). However, in some specific circumstances, such an agreement may fulfil the conditions of Article 101(3). Such circumstances may be present where a manufacturer agrees such dual pricing with its distributors, because selling online leads to substantially higher costs for the manufacturer than offline sales. For example, where offline sales include home installation by the distributor but online sales do not, the latter may lead to more customer complaints and warranty claims for the manufacturer. In that context, the Commission will also consider to what extent the restriction is likely to limit internet sales and hinder the distributor to reach more and different customers. 1153

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5.

Excluded restrictions under the Block Exemption Regulation

(65) Article 5 of the Block Exemption Regulation excludes certain obligations from the coverage of the Block Exemption Regulation even though the market share threshold is not exceeded. However, the Block Exemption Regulation continues to apply to the remaining part of the vertical agreement if that part is severable from the non-exempted obligations. (66) The first exclusion is provided for in Article 5(1)(a) of the Block Exemption Regulation and concerns non-compete obligations. Non-compete obligations are arrangements that result in the buyer purchasing from the supplier or from another undertaking designated by the supplier more than 80 % of the buyer’s total purchases of the contract goods and services and their substitutes during the preceding calendar year (as defined by Article 1(1)(d) of the Block Exemption Regulation), thereby preventing the buyer from purchasing competing goods or services or limiting such purchases to less than 20 % of total purchases. Where, in the first year after entering in the agreement, for the year preceding the conclusion of the contract no relevant purchasing data for the buyer are available, the buyer’s best estimate of its annual total requirements may be used. Such non-compete obligations are not covered by the Block Exemption Regulation where the duration is indefinite or exceeds five years. Non-compete obligations that are tacitly renewable beyond a period of five years are also not covered by the Block Exemption Regulation (see the second subparagraph of Article 5(1)). In general, non-compete obligations are exempted under that Regulation where their duration is limited to five years or less and no obstacles exist that hinder the buyer from effectively terminating the non-compete obligation at the end of the five year period. If, for instance, the agreement provides for a five-year non-compete obligation and the supplier provides a loan to the buyer, the repayment of that loan should not hinder the buyer from effectively terminating the non-compete obligation at the end of the five-year period. Similarly, when the supplier provides the buyer with equipment which is not relationshipspecific, the buyer should have the possibility to take over the equipment at its market asset value once the non-compete obligation expires. (67) The five-year duration limit does not apply when the goods or services are resold by the buyer “from premises and land owned by the supplier or leased by the supplier from third parties not connected with the buyer”. In such cases the non-compete obligation may be of the same duration as 1154

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the period of occupancy of the point of sale by the buyer (Article 5(2) of the Block Exemption Regulation). The reason for this exception is that it is normally unreasonable to expect a supplier to allow competing products to be sold from premises and land owned by the supplier without its permission. By analogy, the same principles apply where the buyer operates from a mobile outlet owned by the supplier or leased by the supplier from third parties not connected with the buyer. Artificial ownership constructions, such as a transfer by the distributor of its proprietary rights over the land and premises to the supplier for only a limited period, intended to avoid the five-year limit cannot benefit from this exception. (68) The second exclusion from the block exemption is provided for in Article 5(1)(b) of the Block Exemption Regulation and concerns post term non-compete obligations on the buyer. Such obligations are normally not covered by the Block Exemption Regulation, unless the obligation is indispensable to protect know-how transferred by the supplier to the buyer, is limited to the point of sale from which the buyer has operated during the contract period, and is limited to a maximum period of one year (see Article 5(3) of the Block Exemption Regulation). According to the definition in Article 1(1)(g) of the Block Exemption Regulation the know-how needs to be “substantial”, meaning that the know-how includes information which is significant and useful to the buyer for the use, sale or resale of the contract goods or services. (69) The third exclusion from the block exemption is provided for in Article 5(1)(c) of the Block Exemption Regulation and concerns the sale of competing goods in a selective distribution system. The Block Exemption Regulation covers the combination of selective distribution with a noncompete obligation, obliging the dealers not to resell competing brands in general. However, if the supplier prevents its appointed dealers, either directly or indirectly, from buying products for resale from specific competing suppliers, such an obligation cannot enjoy the benefit of the Block Exemption Regulation. The objective of the exclusion of such an obligation is to avoid a situation whereby a number of suppliers using the same selective distribution outlets prevent one specific competitor or certain specific competitors from using these outlets to distribute their products (foreclosure of a competing supplier which would be a form of collective boycott).31

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6.

Severability

(70) The Block Exemption Regulation exempts vertical agreements on condition that no hardcore restriction, as set out in Article 4 of that Regulation, is contained in or practised with the vertical agreement. If there are one or more hardcore restrictions, the benefit of the Block Exemption Regulation is lost for the entire vertical agreement. There is no severability for hardcore restrictions. (71) The rule of severability does apply, however, to the excluded restrictions set out in Article 5 of the Block Exemption Regulation. Therefore, the benefit of the block exemption is only lost in relation to that part of the vertical agreement which does not comply with the conditions set out in Article 5.

7.

Portfolio of products distributed through the same distribution system

(72) Where a supplier uses the same distribution agreement to distribute several goods/services some of these may, in view of the market share threshold, be covered by the Block Exemption Regulation while others may not. In that case, the Block Exemption Regulation applies to those goods and services for which the conditions of application are fulfilled. (73) In respect of the goods or services which are not covered by the Block  Exemption Regulation, the ordinary rules of competition apply, which means:



(a)

there is no block exemption but also no presumption of illegality;

(b)

if there is an infringement of Article 101(1) which is not exemptible, consideration may be given to whether there are appropriate remedies to solve the competition problem within the existing distribution system;

(c)

if there are no such appropriate remedies, the supplier concerned will have to make other distribution arrangements.

Such a situation can also arise where Article 102 applies in respect of some products but not in respect of others. 1156

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IV. WITHDRAWAL OF THE BLOCK EXEMPTION AND DISAPPLICATION OF THE BLOCK EXEMPTION REGULATION 1.

Withdrawal procedure

(74) The presumption of legality conferred by the Block Exemption Regulation may be withdrawn where a vertical agreement, considered either in isolation or in conjunction with similar agreements enforced by competing suppliers or buyers, comes within the scope of Article 101(1) and does not fulfil all the conditions of Article 101(3). (75) The conditions of Article 101(3) may in particular not be fulfilled when access to the relevant market or competition therein is significantly restricted by the cumulative effect of parallel networks of similar vertical agreements practised by competing suppliers or buyers. Parallel networks of vertical agreements are to be regarded as similar if they contain restraints producing similar effects on the market. Such a situation may arise for example when, on a given market, certain suppliers practise purely qualitative selective distribution while other suppliers practise quantitative selective distribution. Such a situation may also arise when, on a given market, the cumulative use of qualitative criteria forecloses more efficient distributors. In such circumstances, the assessment must take account of the anti-competitive effects attributable to each individual network of agreements. Where appropriate, withdrawal may concern only a particular qualitative criterion or only the quantitative limitations imposed on the number of authorised distributors. (76) Responsibility for an anti-competitive cumulative effect can only be attributed to those undertakings which make an appreciable contribution to it. Agreements entered into by undertakings whose contribution to the cumulative effect is insignificant do not fall under the prohibition provided for in Article 101(1)32 and are therefore not subject to the withdrawal mechanism. The assessment of such a contribution will be made in accordance with the criteria set out in paragraphs (128) to (229). (77) Where the withdrawal procedure is applied, the Commission bears the burden of proof that the agreement falls within the scope of Article 101(1) and that the agreement does not fulfil one or several of the conditions of Article 101(3). A withdrawal decision can only have ex nunc effect, which 1157

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means that the exempted status of the agreements concerned will not be affected until the date at which the withdrawal becomes effective. (78) As referred to in recital 14 of the Block Exemption Regulation, the competition authority of a Member State may withdraw the benefit of the Block Exemption Regulation in respect of vertical agreements whose anti-competitive effects are felt in the territory of the Member State concerned or a part thereof, which has all the characteristics of a distinct geographic market. The Commission has the exclusive power to withdraw the benefit of the Block Exemption Regulation in respect of vertical agreements restricting competition on a relevant geographic market which is wider than the territory of a single Member State. When the territory of a single Member State, or a part thereof, constitutes the relevant geographic market, the Commission and the Member State concerned have concurrent competence for withdrawal.

2.

Disapplication of the Block Exemption Regulation

(79) Article 6 of the Block Exemption Regulation enables the Commission to exclude from the scope of the Block Exemption Regulation, by means of regulation, parallel networks of similar vertical restraints where these cover more than 50  % of a relevant market. Such a measure is not addressed to individual undertakings but concerns all undertakings whose agreements are defined in the regulation disapplying the Block Exemption Regulation. (80) Whereas the withdrawal of the benefit of the Block Exemption Regulation implies the adoption of a decision establishing an infringement of Article 101 by an individual company, the effect of a regulation under Article 6 is merely to remove, in respect of the restraints and the markets concerned, the benefit of the application of the Block Exemption Regulation and to restore the full application of Article 101(1) and (3). Following the adoption of a regulation declaring the Block Exemption Regulation inapplicable in respect of certain vertical restraints on a particular market, the criteria developed by the relevant case-law of the Court of Justice and the General Court and by notices and previous decisions adopted by the Commission will guide the application of Article 101 to individual agreements. Where appropriate, the Commission will take a decision in an individual case, which can provide guidance to all the undertakings operating on the market concerned. 1158

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(81) For the purpose of calculating the 50 % market coverage ratio, account must be taken of each individual network of vertical agreements containing restraints, or combinations of restraints, producing similar effects on the market. Article 6 of the Block Exemption Regulation does not entail an obligation on the part of the Commission to act where the 50 % market-coverage ratio is exceeded. In general, disapplication is appropriate when it is likely that access to the relevant market or competition therein is appreciably restricted. This may occur in particular when parallel networks of selective distribution covering more than 50 % of a market are liable to foreclose the market by using selection criteria which are not required by the nature of the relevant goods or which discriminate against certain forms of distribution capable of selling such goods. (82) In assessing the need to apply Article 6 of the Block Exemption Regulation, the Commission will consider whether individual withdrawal would be a more appropriate remedy. This may depend, in particular, on the number of competing undertakings contributing to a cumulative effect on a market or the number of affected geographic markets within the Union. (83) Any regulation referred to in Article 6 of the Block Exemption Regulation must clearly set out its scope. Therefore, the Commission must first define the relevant product and geographic market(s) and, secondly, must identify the type of vertical restraint in respect of which the Block Exemption Regulation will no longer apply. As regards the latter aspect, the Commission may modulate the scope of its regulation according to the competition concern which it intends to address. For instance, while all parallel networks of single-branding type arrangements shall be taken into account in view of establishing the 50 % market coverage ratio, the Commission may nevertheless restrict the scope of the disapplication regulation only to non-compete obligations exceeding a certain duration. Thus, agreements of a shorter duration or of a less restrictive nature might be left unaffected, in consideration of the lesser degree of foreclosure attributable to such restraints. Similarly, when on a particular market selective distribution is practised in combination with additional restraints such as non-compete or quantity-forcing on the buyer, the disapplication regulation may concern only such additional restraints. Where appropriate, the Commission may also provide guidance by specifying the market share level which, in the specific market context, may be regarded as insufficient to bring about a significant contribution by an individual undertaking to the cumulative effect. 1159

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(84) Pursuant to Regulation No 19/65/EEC of 2 March 1965 of the Council on the application of Article 85(3) of the Treaty to certain categories of agreements and concerted practices,33 the Commission will have to set a transitional period of not less than six months before a regulation disapplying the Block Exemption Regulation becomes applicable. This should allow the undertakings concerned to adapt their agreements to take account of the regulation disapplying the Block Exemption Regulation. (85) A regulation disapplying the Block Exemption Regulation will not affect the exempted status of the agreements concerned for the period preceding its date of application.

V.

MARKET DEFINITION AND MARKET SHARE CALCULATION

1.

Commission Notice on definition of the relevant market

(86) The Commission Notice on definition of the relevant market for the purposes of Community competition law34 provides guidance on the rules, criteria and evidence which the Commission uses when considering market definition issues. That Notice will not be further explained in these Guidelines and should serve as the basis for market definition issues. These Guidelines will only deal with specific issues that arise in the context of vertical restraints and that are not dealt with in that notice.

2.

The relevant market for calculating the 30 % market share ­threshold under the Block Exemption Regulation

(87) Under Article 3 of the Block Exemption Regulation, the market share of both the supplier and the buyer are decisive to determine if the block exemption applies. In order for the block exemption to apply, the market share of the supplier on the market where it sells the contract products to the buyer, and the market share of the buyer on the market where it purchases the contract products, must each be 30 % or less. For agreements between small and medium-sized undertakings it is in general not necessary to calculate market shares (see paragraph (11)). (88) In order to calculate an undertaking’s market share, it is necessary to determine the relevant market where that undertaking sells and purchases, 1160

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respectively, the contract products. Accordingly, the relevant product market and the relevant geographic market must be defined. The relevant product market comprises any goods or services which are regarded by the buyers as interchangeable, by reason of their characteristics, prices and intended use. The relevant geographic market comprises the area in which the undertakings concerned are involved in the supply and demand of relevant goods or services, in which the conditions of competition are sufficiently homogeneous, and which can be distinguished from neighbouring geographic areas because, in particular, conditions of competition are appreciably different in those areas. (89) The product market definition primarily depends on substitutability from the buyers’ perspective. When the supplied product is used as an input to produce other products and is generally not recognisable in the final product, the product market is normally defined by the direct buyers’ preferences. The customers of the buyers will normally not have a strong preference concerning the inputs used by the buyers. Usually, the vertical restraints agreed between the supplier and buyer of the input only relate to the sale and purchase of the intermediate product and not to the sale of the resulting product. In the case of distribution of final goods, substitutes for the direct buyers will normally be influenced or determined by the preferences of the final consumers. A distributor, as reseller, cannot ignore the preferences of final consumers when it purchases final goods. In addition, at the distribution level the vertical restraints usually concern not only the sale of products between supplier and buyer, but also their resale. As different distribution formats usually compete, markets are in general not defined by the form of distribution that is applied. Where suppliers generally sell a portfolio of products, the entire portfolio may determine the product market when the portfolios and not the individual products are regarded as substitutes by the buyers. As distributors are professional buyers, the geographic wholesale market is usually wider than the retail market, where the product is resold to final consumers. Often, this will lead to the definition of national or wider wholesale markets. But retail markets may also be wider than the final consumers’ search area where homogeneous market conditions and overlapping local or regional catchment areas exist. (90) Where a vertical agreement involves three parties, each operating at a different level of trade, each party’s market share must be 30  % or less in order for the block exemption to apply. As specified in Article 3(2) of 1161

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the Block Exemption Regulation, where in a multi party agreement an undertaking buys the contract goods or services from one undertaking party to the agreement and sells the contract goods or services to another undertaking party to the agreement, the block exemption applies only if its market share does not exceed the 30 % threshold both as a buyer and a supplier. If, for instance, in an agreement between a manufacturer, a wholesaler (or association of retailers) and a retailer, a non-compete obligation is agreed, then the market shares of the manufacturer and the wholesaler (or  association of retailers) on their respective downstream markets must not exceed 30 % and the market share of the wholesaler (or association of retailers) and the retailer must not exceed 30 % on their respective purchase markets in order to benefit from the block exemption. (91) Where a supplier produces both original equipment and the repair or replacement parts for that equipment, the supplier will often be the only or the major supplier on the after-market for the repair and replacement parts. This may also arise where the supplier (OEM supplier) subcontracts the manufacturing of the repair or replacement parts. The relevant market for application of the Block Exemption Regulation may be the original equipment market including the spare parts or a separate original equipment market and after-market depending on the circumstances of the case, such as the effects of the restrictions involved, the lifetime of the equipment and importance of the repair or replacement costs.35 In practice, the issue is whether a significant proportion of buyers make their choice taking into account the lifetime costs of the product. If so, it indicates there is one market for the original equipment and spare parts combined. (92) Where the vertical agreement, in addition to the supply of the contract goods, also contains IPR provisions — such as a provision concerning the use of the supplier’s trademark — which help the buyer to market the contract goods, the supplier’s market share on the market where it sells the contract goods is relevant for the application of the Block Exemption Regulation. Where a franchisor does not supply goods to be resold but provides a bundle of services and goods combined with IPR provisions which together form the business method being franchised, the franchisor needs to take account of its market share as a provider of a business method. For that purpose, the franchisor needs to calculate its market share on the market where the business method is exploited, which is 1162

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the market where the franchisees exploit the business method to provide goods or services to end users. The franchisor must base its market share on the value of the goods or services supplied by its franchisees on this market. On such a market, the competitors may be providers of other franchised business methods but also suppliers of substitutable goods or services not applying franchising. For instance, without prejudice to the definition of such market, if there was a market for fast-food services, a franchisor operating on such a market would need to calculate its market share on the basis of the relevant sales figures of its franchisees on this market.

3.

Calculation of market shares under the Block Exemption Regulation

(93) The calculation of market shares needs to be based in principle on value figures. Where value figures are not available substantiated estimates can be made. Such estimates may be based on other reliable market information such as volume figures (see Article 7(a) of the Block Exemption Regulation). (94) In-house production, that is, production of an intermediate product for own use, may be very important in a competition analysis as one of the competitive constraints or to accentuate the market position of a company. However, for the purpose of market definition and the calculation of market share for intermediate goods and services, in-house production will not be taken into account. (95) However, in the case of dual distribution of final goods, that is, where a producer of final goods also acts as a distributor on the market, the market definition and market share calculation need to include sales of their own goods made by the producers through their vertically integrated distributors and agents (see Article 7(c) of the Block Exemption Regulation). “Integrated distributors” are connected undertakings within the meaning of Article 1(2) of the Block Exemption Regulation.36

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VI. ENFORCEMENT POLICY IN INDIVIDUAL CASES 1.

The framework of analysis

(96) Outside the scope of the block exemption, it is relevant to examine whether in the individual case the agreement falls within the scope of Article 101(1) and if so whether the conditions of Article 101(3) are satisfied. Provided that they do not contain restrictions of competition by object and in particular hardcore restrictions of competition, there is no presumption that vertical agreements falling outside the block exemption because the market share threshold is exceeded fall within the scope of Article 101(1) or fail to satisfy the conditions of Article 101(3). Individual assessment of the likely effects of the agreement is required. Companies are encouraged to do their own assessment. Agreements that either do not restrict competition within the meaning of Article 101(1) or which fulfil the conditions of Article 101(3) are valid and enforceable. Pursuant to Article 1(2) of Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty37 no notification needs to be made to benefit from an individual exemption under Article 101(3). In the case of an individual examination by the Commission, the latter will bear the burden of proof that the agreement in question infringes Article 101(1). The undertakings claiming the benefit of Article 101(3) bear the burden of proving that the conditions of that paragraph are fulfilled. When likely anti-competitive effects are demonstrated, undertakings may substantiate efficiency claims and explain why a certain distribution system is indispensable to bring likely benefits to consumers without eliminating competition, before the Commission decides whether the agreement satisfies the conditions of Article 101(3). (97) The assessment of whether a vertical agreement has the effect of restricting competition will be made by comparing the actual or likely future situation on the relevant market with the vertical restraints in place with the situation that would prevail in the absence of the vertical restraints in the agreement. In the assessment of individual cases, the Commission will take, as appropriate, both actual and likely effects into account. For vertical agreements to be restrictive of competition by effect they must affect actual or potential competition to such an extent that on the relevant market negative effects on prices, output, innovation, or the variety or quality of goods and services can be expected with a reasonable degree 1164

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of probability. The likely negative effects on competition must be appreciable.38 Appreciable anticompetitive effects are likely to occur when at least one of the parties has or obtains some degree of market power and the agreement contributes to the creation, maintenance or strengthening of that market power or allows the parties to exploit such market power. Market power is the ability to maintain prices above competitive levels or to maintain output in terms of product quantities, product quality and variety or innovation below competitive levels for a not insignificant period of time. The degree of market power normally required for a finding of an infringement under Article 101(1) is less than the degree of market power required for a finding of dominance under Article 102. (98) Vertical restraints are generally less harmful than horizontal restraints. The main reason for the greater focus on horizontal restraints is that such restraints may concern an agreement between competitors producing identical or substitutable goods or services. In such horizontal relationships, the exercise of market power by one company (higher price of its product) may benefit its competitors. This may provide an incentive to competitors to induce each other to behave anti-competitively. In vertical relationships, the product of the one is the input for the other-, in other words, the activities of the parties to the agreement are complementary to each other. The exercise of market power by either the upstream or downstream company would therefore normally hurt the demand for the product of the other. The companies involved in the agreement therefore usually have an incentive to prevent the exercise of market power by the other. (99) Such self-restraining character should not, however, be over-estimated. When a company has no market power, it can only try to increase its profits by optimising its manufacturing and distribution processes, with or without the help of vertical restraints. More generally, because of the complementary role of the parties to a vertical agreement in getting a product on the market, vertical restraints may provide substantial scope for efficiencies. However, when an undertaking does have market power it can also try to increase its profits at the expense of its direct competitors by raising their costs and at the expense of its buyers and ultimately consumers by trying to appropriate some of their surplus. This can happen when the upstream and downstream company share the extra profits or when one of the two uses vertical restraints to appropriate all the extra profits. 1165

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1.1 Negative effects of vertical restraints (100) The negative effects on the market that may result from vertical restraints which EU competition law aims at preventing are the following: (a)

anticompetitive foreclosure of other suppliers or other buyers by raising barriers to entry or expansion;

(b)

softening of competition between the supplier and its competitors and/or facilitation of collusion amongst these suppliers, often referred to as reduction of inter-brand competition;39

(c)

softening of competition between the buyer and its competitors and/or facilitation of collusion amongst these competitors, often referred to as reduction of intra-brand competition if it concerns distributors’ competition on the basis of the brand or product of the same supplier;

(d)

the creation of obstacles to market integration, including, above all, limitations on the possibilities for consumers to purchase goods or services in any Member State they may choose.

(101) Foreclosure, softening of competition and collusion at the manufacturers’ level may harm consumers in particular by increasing the wholesale prices of the products, limiting the choice of products, lowering their quality or reducing the level of product innovation. Foreclosure, softening of competition and collusion at the distributors’ level may harm consumers in particular by increasing the retail prices of the products, limiting the choice of price-service combinations and distribution formats, lowering the availability and quality of retail services and reducing the level of innovation of distribution. (102) On a market where individual distributors distribute the brand(s) of only one supplier, a reduction of competition between the distributors of the same brand will lead to a reduction of intra-brand competition between these distributors, but may not have a negative effect on competition between distributors in general. In such a case, if inter-brand competition is fierce, it is unlikely that a reduction of intra-brand competition will have negative effects for consumers.

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(103) Exclusive arrangements are generally more anti-competitive than nonexclusive arrangements. Exclusive arrangements, whether by means of express contractual language or their practical effects, result in one party sourcing all or practically all of its demand from another party. For instance, under a non-compete obligation the buyer purchases only one brand. Quantity forcing, on the other hand, leaves the buyer some scope to purchase competing goods. The degree of foreclosure may therefore be less with quantity forcing. (104) Vertical restraints agreed for non-branded goods and services are in general less harmful than restraints affecting the distribution of branded goods and services. Branding tends to increase product differentiation and reduce substitutability of the product, leading to a reduced elasticity of demand and an increased possibility to raise price. The distinction between branded and non-branded goods or services will often coincide with the distinction between intermediate goods and services and final goods and services. (105) In general, a combination of vertical restraints aggravates their individual negative effects. However, certain combinations of vertical restraints are less anti-competitive than their use in isolation. For instance, in an exclusive distribution system, the distributor may be tempted to increase the price of the products as intra-brand competition has been reduced. The use of quantity forcing or the setting of a maximum resale price may limit such price increases. Possible negative effects of vertical restraints are reinforced when several suppliers and their buyers organise their trade in a similar way, leading to so-called cumulative effects.

1.2. Positive effects of vertical restraints (106) It is important to recognise that vertical restraints may have positive effects by, in particular, promoting non-price competition and improved quality of services. When a company has no market power, it can only try to increase its profits by optimising its manufacturing or distribution processes. In a number of situations vertical restraints may be helpful in this respect since the usual arm’s length dealings between supplier and buyer, determining only price and quantity of a certain transaction, can lead to a sub-optimal level of investments and sales.

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(107) While trying to give a fair overview of the various justifications for vertical restraints, these Guidelines do not claim to be complete or exhaustive. The following reasons may justify the application of certain vertical restraints: (a)

To solve a “free-rider” problem. One distributor may free-ride on the promotion efforts of another distributor. That type of problem is most common at the wholesale and retail level. Exclusive distribution or similar restrictions may be helpful in avoiding such free-riding. Free-riding can also occur between suppliers, for instance where one invests in promotion at the buyer’s premises, in general at the retail level, that may also attract customers for its competitors. Non-compete type restraints can help to overcome free-riding.40



For there to be a problem, there needs to be a real free-rider issue. Free-riding between buyers can only occur on pre-sales services and other promotional activities, but not on after-sales services for which the distributor can charge its customers individually. The product will usually need to be relatively new or technically complex or the reputation of the product must be a major determinant of its demand, as the customer may otherwise very well know what it wants, based on past purchases. And the product must be of a reasonably high value as it is otherwise not attractive for a customer to go to one shop for information and to another to buy. Lastly, it must not be practical for the supplier to impose on all buyers, by contract, effective promotion or service requirements.



Free-riding between suppliers is also restricted to specific situations, namely to cases where the promotion takes place at the buyer’s premises and is generic, not brand specific.

(b)

To “open up or enter new markets”. Where a manufacturer wants to enter a new geographic market, for instance by exporting to another country for the first time, this may involve special “first time investments” by the distributor to establish the brand on the market. In order to persuade a local distributor to make these investments, it may be necessary to provide territorial protection to the distributor so that it can recoup these investments by temporarily charging a higher price. Distributors based in other markets 1168

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should then be restrained for a limited period from selling on the new market (see also paragraph (61) in Section III.4). This is a special case of the free-rider problem described under point (a). (c)

The “certification free-rider issue”. In some sectors, certain retailers have a reputation for stocking only “quality” products. In such a case, selling through those retailers may be vital for the introduction of a new product. If the manufacturer cannot initially limit its sales to the premium stores, it runs the risk of being de-listed and the product introduction may fail. There may, therefore, be a reason for allowing for a limited duration a restriction such as exclusive distribution or selective distribution. It must be enough to guarantee introduction of the new product but not so long as to hinder large-scale dissemination. Such benefits are more likely with “experience” goods or complex goods that represent a relatively large purchase for the final consumer.

(d)

The so-called “hold-up problem”. Sometimes there are client-specific investments to be made by either the supplier or the buyer, such as in special equipment or training. For instance, a component manufacturer that has to build new machines and tools in order to satisfy a particular requirement of one of its customers. The investor may not commit the necessary investments before particular supply arrangements are fixed.



However, as in the other free-riding examples, there are a number of conditions that have to be met before the risk of under-investment is real or significant. Firstly, the investment must be relationship-specific. An investment made by the supplier is considered to be relationship-specific when, after termination of the contract, it cannot be used by the supplier to supply other customers and can only be sold at a significant loss. An investment made by the buyer is considered to be relationship-specific when, after termination of the contract, it cannot be used by the buyer to purchase and/or use products supplied by other suppliers and can only be sold at a significant loss. An investment is thus relationship-specific because it can only, for instance, be used to produce a brand-specific component or to store a particular brand and thus cannot be used profitably to produce or resell alternatives. Secondly, it must be a long-term investment that is not recouped in the short run. And 1169

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thirdly, the investment must be asymmetric, that is, one party to the contract invests more than the other party. Where these conditions are met, there is usually a good reason to have a vertical restraint for the duration it takes to depreciate the investment. The appropriate vertical restraint will be of the non-compete type or quantity-forcing type when the investment is made by the supplier and of the exclusive distribution, exclusive customer allocation or exclusive supply type when the investment is made by the buyer. (e)

The “specific hold-up problem that may arise in the case of transfer of substantial know-how”. The know-how, once provided, cannot be taken back and the provider of the know-how may not want it to be used for or by its competitors. In as far as the know-how was not readily available to the buyer, is substantial and indispensable for the operation of the agreement, such a transfer may justify a non-compete type of restriction, which would normally fall outside Article 101(1).

(f )

The “vertical externality issue”. A retailer may not gain all the benefits of its action taken to improve sales; some may go to the manufacturer. For every extra unit a retailer sells by lowering its resale price or by increasing its sales effort, the manufacturer benefits if its wholesale price exceeds its marginal production costs. Thus, there may be a positive externality bestowed on the manufacturer by such retailer’s actions and from the manufacturer’s perspective the retailer may be pricing too high and/or making too little sales efforts. The negative externality of too high pricing by the retailer is sometimes called the “double marginalisation problem” and it can be avoided by imposing a maximum resale price on the retailer. To increase the retailer’s sales efforts selective distribution, exclusive distribution or similar restrictions may be helpful.41

(g)

“Economies of scale in distribution”. In order to have scale economies exploited and thereby see a lower retail price for itsproduct, the manufacturer may want to concentrate the resale of its products on a limited number of distributors. To do so, it could use exclusive distribution, quantity forcing in the form of a minimum purchasing requirement, selective distribution containing such a requirement or exclusive sourcing.

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(h)

“Capital market imperfections”. The usual providers of capital (banks, equity markets) may provide capital sub-optimally when they have imperfect information on the quality of the borrower or there is an inadequate basis to secure the loan. The buyer or supplier may have better information and be able, through an exclusive relationship, to obtain extra security for its investment. Where the supplier provides the loan to the buyer, this may lead to non-compete or quantity forcing on the buyer. Where the buyer provides the loan to the supplier, this may be the reason for having exclusive supply or quantity forcing on the supplier.

(i)

“Uniformity and quality standardisation”. A vertical restraint may help to create a brand image by imposing a certain measure of uniformity and quality standardisation on the distributors, thereby increasing the attractiveness of the product to the final consumer and increasing its sales. This can for instance be found in selective distribution and franchising.

(108) The nine situations listed in paragraph (107) make clear that under certain conditions, vertical agreements are likely to help realise efficiencies and the development of new markets and that this may offset possible negative effects. The case is in general strongest for vertical restraints of a limited duration which help the introduction of new complex products or protect relationship-specific investments. A vertical restraint is sometimes necessary for as long as the supplier sells its product to the buyer (see in particular the situations described in paragraph (107)(a), (e), (f ), (g) and (i)). (109) A large measure of substitutability exists between the different vertical restraints. As a result, the same inefficiency problem can be solved by different vertical restraints. For instance, economies of scale in distribution may possibly be achieved by using exclusive distribution, selective distribution, quantity forcing or exclusive sourcing. However, the negative effects on competition may differ between the various vertical restraints, which plays a role when indispensability is discussed under Article 101(3).

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1.3 Methodology of analysis (110) The assessment of a vertical restraint generally involves the following four steps:42 (a) First, the undertakings involved need to establish the market shares of the supplier and the buyer on the market where they respectively sell and purchase the contract products. (b)

If the relevant market share of the supplier and the buyer each do not exceed the 30 % threshold, the vertical agreement is covered by the Block Exemption Regulation, subject to the hardcore restrictions and excluded restrictions set out in that Regulation.

(c)

If the relevant market share is above the 30 % threshold for supplier and/or buyer, it is necessary to assess whether the vertical agreement falls within Article 101(1).

(d)

If the vertical agreement falls within Article 101(1), it is necessary to examine whether it fulfils the conditions for exemption under Article 101(3).

1.3.1. Relevant factors for the assessment under Article 101(1) (111) In assessing cases above the market share threshold of 30 %, the Commission will undertake a full competition analysis. The following factors are particularly relevant to establish whether a vertical agreement brings about an appreciable restriction of competition under Article 101(1): (a)

nature of the agreement;

(b)

market position of the parties;

(c)

market position of competitors;

(d)

market position of buyers of the contract products;

(e)

entry barriers;

(f )

maturity of the market;

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(g)

level of trade;

(h)

nature of the product;

(i)

other factors.

(112) The importance of individual factors may vary from case to case and depends on all other factors. For instance, a high market share of the parties is usually a good indicator of market power, but in the case of low entry barriers it may not be indicative of market power. It is therefore not possible to provide firm rules on the importance of the individual factors. (113) Vertical agreements can take many shapes and forms. It is therefore important to analyse the nature of the agreement in terms of the restraints that it contains, the duration of those restraints and the percentage of total sales on the market affected by those restraints. It may be necessary to go beyond the express terms of the agreement. The existence of implicit restraints may be derived from the way in which the agreement is implemented by the parties and the incentives that they face. (114) The market position of the parties provides an indication of the degree of market power, if any, possessed by the supplier, the buyer or both. The higher their market share, the greater their market power is likely to be. This is particularly so where the market share reflects cost advantages or other competitive advantages vis-à-vis competitors. Such competitive advantages may, for instance, result from being a first mover on the market (having the best site, etc.), from holding essential patents or having superior technology, from being the brand leader or having a superior portfolio. (115) Such indicators, namely market share and possible competitive advantages, are used to assess the market position of competitors. The stronger the competitors are and the greater their number, the less risk there is that the parties will be able to individually exercise market power and foreclose the market or soften competition. It is also relevant to consider whether there are effective and timely counterstrategies that competitors would be likely to deploy. However, if the number of competitors becomes rather small and their market position (size, costs, R&D potential, etc.) is rather similar, such a market structure may increase the risk of collusion. Fluctuating or rapidly changing market shares are in general an indication of intense competition. 1173

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(116) The market position of the parties’ customers provides an indication of whether or not one or more of those customers possess buyer power. The first indicator of buyer power is the market share of the customer on the purchase market. That share reflects the importance of its demand for possible suppliers. Other indicators focus on the position of the customer on its resale market, including characteristics such as a wide geographic spread of its outlets, own brands including private labels and its brand image amongst final consumers. In some circumstances, buyer power may prevent the parties from exercising market power and thereby solve a competition problem that would otherwise have existed. This is particularly so when strong customers have the capacity and incentive to bring new sources of supply on to the market in the case of a small but permanent increase in relative prices. Where strong customers merely extract favourable terms for themselves or simply pass on any price increase to their customers, their position does not prevent the parties from exercising market power. (117) Entry barriers are measured by the extent to which incumbent companies can increase their price above the competitive level without attracting new entry. In the absence of entry barriers, easy and quick entry would render price increases unprofitable. When effective entry, preventing or eroding the exercise of market power, is likely to occur within one or two years, entry barriers can, as a general rule, be said to be low. Entry barriers may result from a wide variety of factors such as economies of scale and scope, government regulations, especially where they establish exclusive rights, state aid, import tariffs, intellectual property rights, ownership of resources where the supply is limited due to for instance natural limitations43, essential facilities, a first mover advantage and brand loyalty of consumers created by strong advertising over a period of time. Vertical restraints and vertical integration may also work as an entry barrier by making access more difficult and foreclosing (potential) competitors. Entry barriers may be present at only the supplier or buyer level or at both levels. The question whether certain of those factors should be described as entry barriers depends particularly on whether they entail sunk costs. Sunk costs are those costs that have to be incurred to enter or be active on a market but that are lost when the market is exited. Advertising costs to build consumer loyalty are normally sunk costs, unless an exiting firm could either sell its brand name or use it somewhere else without a loss. The more costs are sunk, the more potential entrants have to weigh the risks of entering the market and the more credibly incumbents can threat1174

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en that they will match new competition, as sunk costs make it costly for incumbents to leave the market. If, for instance, distributors are tied to a manufacturer via a non-compete obligation, the foreclosing effect will be more significant if setting up its own distributors will impose sunk costs on the potential entrant. In general, entry requires sunk costs, sometimes minor and sometimes major. Therefore, actual competition is in general more effective and will weigh more heavily in the assessment of a case than potential competition. (118) A mature market is a market that has existed for some time, where the technology used is well known and widespread and not changing very much, where there are no major brand innovations and in which demand is relatively stable or declining. In such a market, negative effects are more likely than in more dynamic markets. (119) The level of trade is linked to the distinction between intermediate and final goods and services. Intermediate goods and services are sold to undertakings for use as an input to produce other goods or services and are generally not recognisable in the final goods or services. The buyers of intermediate products are usually well-informed customers, able to assess quality and therefore less reliant on brand and image. Final goods are, directly or indirectly, sold to final consumers that often rely more on brand and image. As distributors have to respond to the demand of final consumers, competition may suffer more when distributors are foreclosed from selling one or a number of brands than when buyers of intermediate products are prevented from buying competing products from certain sources of supply. (120) The nature of the product plays a role in particular for final products in assessing both the likely negative and the likely positive effects. When assessing the likely negative effects, it is important whether the products on the market are more homogeneous or heterogeneous, whether the product is expensive, taking up a large part of the consumer’s budget, or is inexpensive and whether the product is a one-off purchase or repeatedly purchased. In general, when the product is more heterogeneous, less expensive and resembles more a one-off purchase, vertical restraints are more likely to have negative effects.

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(121) In the assessment of particular restraints other factors may have to be taken into account. Among these factors can be the cumulative effect, that is, the coverage of the market by similar agreements of others, whether the agreement is “imposed” (mainly one party is subject to the restrictions or obligations) or “agreed” (both parties accept restrictions or obligations), the regulatory environment and behaviour that may indicate or facilitate collusion like price leadership, pre-announced price changes and discussions on the “right” price, price rigidity in response to excess capacity, price discrimination and past collusive behaviour.

1.3.2 Relevant factors for the assessment under Article 101(3) (122) Restrictive vertical agreements may also produce pro-competitive effects in the form of efficiencies, which may outweigh their anti-competitive effects. Such an assessment takes place within the framework of Article 101(3), which contains an exception from the prohibition rule of Article 101(1). For that exception to be applicable, the vertical agreement must produce objective economic benefits, the restrictions on competition must be indispensable to attain the efficiencies, consumers must receive a fair share of the efficiency gains, and the agreement must not afford the parties the possibility of eliminating competition in respect of a substantial part of the products concerned.44 (123) The assessment of restrictive agreements under Article 101(3) is made within the actual context in which they occur45 and on the basis of the facts existing at any given point in time. The assessment is sensitive to material changes in the facts. The exception rule of Article 101(3) applies as long as the four conditions are fulfilled and ceases to apply when that is no longer the case.46 When applying Article 101(3) in accordance with these principles it is necessary to take into account the investments made by any of the parties and the time needed and the restraints required to commit and recoup an efficiency enhancing investment. (124) The first condition of Article 101(3) requires an assessment of what are the objective benefits in terms of efficiencies produced by the agreement. In this respect, vertical agreements often have the potential to help realise efficiencies, as explained in section 1.2, by improving the way in which the parties conduct their complementary activities.

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(125) In the application of the indispensability test contained in Article 101(3), the Commission will in particular examine whether individual restrictions make it possible to perform the production, purchase and/or (re) sale of the contract products more efficiently than would have been the case in the absence of the restriction concerned. In making such an assessment, the market conditions and the realities facing the parties must be taken into account. Undertakings invoking the benefit of Article 101(3) are not required to consider hypothetical and theoretical alternatives. They must, however, explain and demonstrate why seemingly realistic and significantly less restrictive alternatives would be significantly less efficient. If the application of what appears to be a commercially realistic and less restrictive alternative would lead to a significant loss of efficiencies, the restriction in question is treated as indispensable. (126) The condition that consumers must receive a fair share of the benefits implies that consumers of the products purchased and/or (re)sold under the vertical agreement must at least be compensated for the negative effects of the agreement.47 In other words, the efficiency gains must fully offset the likely negative impact on prices, output and other relevant factors caused by the agreement. (127) The last condition of Article 101(3), according to which the agreement must not afford the parties the possibility of eliminating competition in respect of a substantial part of the products concerned, presupposes an analysis of remaining competitive pressures on the market and the impact of the agreement on such sources of competition. In the application of the last condition of Article 101(3), the relationship between Article 101(3) and Article 102 must be taken into account. According to settled case law, the application of Article 101(3) cannot prevent the application of Article 102.48 Moreover, since Articles 101 and 102 both pursue the aim of maintaining effective competition on the market, consistency requires that Article 101(3) be interpreted as precluding any application of the exception rule to restrictive agreements that constitute an abuse of a dominant position.49 The vertical agreement may not eliminate effective competition, by removing all or most existing sources of actual or potential competition. Rivalry between undertakings is an essential driver of economic efficiency, including dynamic efficiencies in the form of innovation. In its absence, the dominant undertaking will lack adequate incentives to continue to create and pass on efficiency gains. Where there is no residual competition and no foreseeable threat of entry, the protection 1177

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of rivalry and the competitive process outweighs possible efficiency gains. A restrictive agreement which maintains, creates or strengthens a market position approaching that of a monopoly can normally not be justified on the grounds that it also creates efficiency gains.

2.

Analysis of specific vertical restraints

(128) The most common vertical restraints and combinations of vertical restraints are analysed in the remainder of these Guidelines following the framework of analysis developed in paragraphs (96) to (127). Other restraints and combinations exist for which no direct guidance is provided in these Guidelines. They will, however, be treated according to the same principles and with the same emphasis on the effect on the market.

2.1 Single branding (129) Under the heading of “single branding” fall those agreements which have as their main element the fact that the buyer is obliged or induced to concentrate its orders for a particular type of product with one supplier. That component can be found amongst others in non-compete and quantityforcing on the buyer. A non-compete arrangement is based on an obligation or incentive scheme which makes the buyer purchase more than 80% of its requirements on a particular market from only one supplier. It does not mean that the buyer can only buy directly from the supplier, but that the buyer will not buy and resell or incorporate competing goods or services. Quantity-forcing on the buyer is a weaker form of non-compete, where incentives or obligations agreed between the supplier and the buyer make the latter concentrate its purchases to a large extent with one supplier. Quantity-forcing may for example take the form of minimum purchase requirements, stocking requirements or non-linear pricing, such as conditional rebate schemes or a two-part tariff (fixed fee plus a price per unit). A so-called “English clause”, requiring the buyer to report any better offer and allowing him only to accept such an offer when the supplier does not match it, can be expected to have the same effect as a single branding obligation, especially when the buyer has to reveal who makes the better offer. (130) The possible competition risks of single branding are foreclosure of the market to competing suppliers and potential suppliers, softening of competition and facilitation of collusion between suppliers in case of cumula1178

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tive use and, where the buyer is a retailer selling to final consumers, a loss of in-store inter-brand competition. Such restrictive effects have a direct impact on inter-brand competition. (131) Single branding is exempted by the Block Exemption Regulation where the supplier’s and buyer’s market share each do not exceed 30 % and are subject to a limitation in time of five years for the non-compete obligation. The remainder of this section provides guidance for the assessment of individual cases above the market share threshold or beyond the time limit of five years. (132) The capacity for single branding obligations of one specific supplier to result in anticompetitive foreclosure arises in particular where, without the obligations, an important competitive constraint is exercised by competitors that either are not yet present on the market at the time the obligations are concluded, or that are not in a position to compete for the full supply of the customers. Competitors may not be able to compete for an individual customer’s entire demand because the supplier in question is an unavoidable trading partner at least for part of the demand on the market, for instance because its brand is a ‘must stock item’ preferred by many final consumers or because the capacity constraints on the other suppliers are such that a part of demand can only be provided for by the supplier in question.50 The market position of the supplier is thus of main importance to assess possible anti-competitive effects of single branding obligations. (133) If competitors can compete on equal terms for each individual customer’s entire demand, single branding obligations of one specific supplier are generally unlikely to hamper effective competition unless the switching of supplier by customers is rendered difficult due to the duration and market coverage of the single branding obligations. The higher its tied market share, that is, the part of its market share sold under a single branding obligation, the more significant foreclosure is likely to be. Similarly, the longer the duration of the single branding obligations, the more significant foreclosure is likely to be. Single branding obligations shorter than one year entered into by non-dominant companies are generally not considered to give rise to appreciable anti-competitive effects or net negative effects. Single branding obligations between one and five years entered into by non-dominant companies usually require a proper balancing of pro- and anti-competitive effects, while single branding obligations ex1179

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ceeding five years are for most types of investments not considered necessary to achieve the claimed efficiencies or the efficiencies are not sufficient to outweigh their foreclosure effect. Single branding obligations are more likely to result in anti-competitive foreclosure when entered into by dominant companies. (134) When assessing the supplier’s market power, the market position of its competitors is important. As long as the competitors are sufficiently numerous and strong, no appreciable anti-competitive effects can be expected. Foreclosure of competitors is not very likely where they have similar market positions and can offer similarly attractive products. In such a case, foreclosure may, however, occur for potential entrants when a number of major suppliers enter into single branding contracts with a significant number of buyers on the relevant market (cumulative effect situation). This is also a situation where single branding agreements may facilitate collusion between competing suppliers. If, individually, those suppliers are covered by the Block Exemption Regulation, a withdrawal of the block exemption may be necessary to deal with such a negative cumulative effect. A tied market share of less than 5 % is not considered in general to contribute significantly to a cumulative foreclosure effect. (135) In cases where the market share of the largest supplier is below 30 % and the market share of the five largest suppliers is below 50 %, there is unlikely to be a single or a cumulative anti-competitive effect situation. Where a potential entrant cannot penetrate the market profitably, it is likely to be due to factors other than single branding obligations, such as consumer preferences. (136) Entry barriers are important to establish whether there is anticompetitive foreclosure. Wherever it is relatively easy for competing suppliers to create new buyers or find alternative buyers for their product, foreclosure is unlikely to be a real problem. However, there are often entry barriers, both at the manufacturing and at the distribution level. (137) Countervailing power is relevant, as powerful buyers will not easily allow themselves to be cut off from the supply of competing goods or services. More generally, in order to convince customers to accept single branding, the supplier may have to compensate them, in whole or in part, for the loss in competition resulting from the exclusivity. Where such compensation is given, it may be in the individual interest of a customer to enter 1180

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into a single branding obligation with the supplier. But it would be wrong to conclude automatically from this that all single branding obligations, taken together, are overall beneficial for customers on that market and for the final consumers. It is in particular unlikely that consumers as a whole will benefit if there are many customers and the single branding obligations, taken together, have the effect of preventing the entry or expansion of competing undertakings. (138) Lastly, “the level of trade” is relevant. Anticompetitive foreclosure is less likely in case of an intermediate product. When the supplier of an intermediate product is not dominant, the competing suppliers still have a substantial part of demand that is free. Below the level of dominance an anticompetitive foreclosure effect may however arise in a cumulative effect situation. A cumulative anticompetitive effect is unlikely to arise as long as less than 50 % of the market is tied. (139) Where the agreement concerns the supply of a final product at the wholesale level, the question whether a competition problem is likely to arise depends in large part on the type of wholesaling and the entry barriers at the wholesale level. There is no real risk of anticompetitive foreclosure if competing manufacturers can easily establish their own wholesaling operation. Whether entry barriers are low depends in part on the type of wholesaling, that is, whether or not wholesalers can operate efficiently with only the product concerned by the agreement (for example ice cream) or whether it is more efficient to trade in a whole range of products (for example frozen foodstuffs). In the latter case, it is not efficient for a manufacturer selling only one product to set up its own wholesaling operation. In that case, anti-competitive effects may arise. In addition, cumulative effect problems may arise if several suppliers tie most of the available wholesalers. (140) For final products, foreclosure is in general more likely to occur at the retail level, given the significant entry barriers for most manufacturers to start retail outlets just for their own products. In addition, it is at the retail level that single branding agreements may lead to reduced in-store interbrand competition. It is for these reasons that for final products at the retail level, significant anti-competitive effects may start to arise, taking into account all other relevant factors, if a non-dominant supplier ties 30 % or more of the relevant market. For a dominant company, even a modest tied market share may already lead to significant anti-competitive effects. 1181

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(141) At the retail level, a cumulative foreclosure effect may also arise. Where all suppliers have market shares below 30 %, a cumulative anticompetitive foreclosure effect is unlikely if the total tied market share is less than 40 % and withdrawal of the block exemption is therefore unlikely. That figure may be higher when other factors like the number of competitors, entry barriers etc. are taken into account. Where not all companies have market shares below the threshold of the Block Exemption Regulation but none is dominant, a cumulative anticompetitive foreclosure effect is unlikely if the total tied market share is below 30 %. (142) Where the buyer operates from premises and land owned by the supplier or leased by the supplier from a third party not connected with the buyer, the possibility of imposing effective remedies for a possible foreclosure effect will be limited. In that case, intervention by the Commission below the level of dominance is unlikely. (143) In certain sectors, the selling of more than one brand from a single site may be difficult, in which case a foreclosure problem can better be remedied by limiting the effective duration of contracts. (144) Where appreciable anti-competitive effects are established, the question of a possible exemption under Article  101(3) arises. For non-compete obligations, the efficiencies described in points (a) (free riding between suppliers), (d), (e) (hold-up problems) and (h) (capital market imperfections) of paragraph (107), may be particularly relevant. (145) In the case of an efficiency as described in paragraph (107)(a), (107)(d) and (107)(h), quantity forcing on the buyer could possibly be a less restrictive alternative. A non-compete obligation may be the only viable way to achieve an efficiency as described in paragraph (107)(e), (hold-up problem related to the transfer of know-how). (146) In the case of a relationship-specific investment made by the supplier (see paragraph (107)(d) ), a non-compete or quantity forcing agreement for the period of depreciation of the investment will in general fulfil the conditions of Article 101(3). In the case of high relationship-specific investments, a non-compete obligation exceeding five years may be justified. A relationship-specific investment could, for instance, be the installation or adaptation of equipment by the supplier when this equipment can be used afterwards only to produce components for a particular buyer. Gen1182

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eral or market-specific investments in (extra) capacity are normally not relationship-specific investments. However, where a supplier creates new capacity specifically linked to the operations of a particular buyer, for instance a company producing metal cans which creates new capacity to produce cans on the premises of or next to the canning facility of a food producer, this new capacity may only be economically viable when producing for this particular customer, in which case the investment would be considered to be relationship-specific. (147) Where the supplier provides the buyer with a loan or provides the buyer with equipment which is not relationship-specific, this in itself is normally not sufficient to justify the exemption of an anticompetitive foreclosure effect on the market. In case of capital market imperfection, it may be more efficient for the supplier of a product than for a bank to provide a loan (see paragraph (107)(h)). However, in such a case the loan should be provided in the least restrictive way and the buyer should thus in general not be prevented from terminating the obligation and repaying the outstanding part of the loan at any point in time and without payment of any penalty. (148) The transfer of substantial know-how (paragraph (107)(e)) usually justifies a non-compete obligation for the whole duration of the supply agreement, as for example in the context of franchising. (149) Example of non-compete obligation

The market leader in a national market for an impulse consumer product, with a market share of 40 %, sells most of its products (90 %) through tied retailers (tied market share 36 %). The agreements oblige the retailers to purchase only from the market leader for at least four years. The market leader is especially strongly represented in the more densely populated areas like the capital. Its competitors, 10 in number, of which some are only locally available, all have much smaller market shares, the biggest having 12 %. Those 10 competitors together supply another 10 % of the market via tied outlets. There is strong brand and product differentiation in the market. The market leader has the strongest brands. It is the only one with regular national advertising campaigns. It provides its tied retailers with special stocking cabinets for its product.

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The result on the market is that in total 46 % (36 % + 10 %) of the market is foreclosed to potential entrants and to incumbents not having tied outlets. Potential entrants find entry even more difficult in the densely populated areas where foreclosure is even higher, although it is there that they would prefer to enter the market. In addition, owing to the strong brand and product differentiation and the high search costs relative to the price of the product, the absence of in-store inter-brand competition leads to an extra welfare loss for consumers. The possible efficiencies of the outlet exclusivity, which the market leader claims result from reduced transport costs and a possible hold-up problem concerning the stocking cabinets, are limited and do not outweigh the negative effects on competition. The efficiencies are limited, as the transport costs are linked to quantity and not exclusivity and the stocking cabinets do not contain special knowhow and are not brand specific. Accordingly, it is unlikely that the conditions of Article 101(3) are fulfilled.

(150) Example of quantity forcing

A producer X with a 40 % market share sells 80 % of its products through contracts which specify that the reseller is required to purchase at least 75 % of its requirements for that type of product from X. In return X is offering financing and equipment at favourable rates. The contracts have a duration of five years in which repayment of the loan is foreseen in equal instalments. However, after the first two years buyers have the possibility to terminate the contract with a six-month notice period if they repay the outstanding loan and take over the equipment at its market asset value. At the end of the five-year period the equipment becomes the property of the buyer. Most of the competing producers are small, twelve in total with the biggest having a market share of 20 %, and engage in similar contracts with different durations. The producers with market shares below 10 % often have contracts with longer durations and with less generous termination clauses. The contracts of producer X leave 25 % of requirements free to be supplied by competitors. In the last three years, two new producers have entered the market and gained a combined market share of around 8 %, partly by taking over the loans of a number of resellers in return for contracts with these resellers.



Producer X’s tied market share is 24 % (0,75 × 0,80 × 40 %). The other producers’ tied market share is around 25 %. Therefore, in total around 49 % of the market is foreclosed to potential entrants and to incumbents 1184

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not having tied outlets for at least the first two years of the supply contracts. The market shows that the resellers often have difficulty in obtaining loans from banks and are too small in general to obtain capital through other means like the issuing of shares. In addition, producer X is able to demonstrate that concentrating its sales on a limited number of resellers allows him to plan its sales better and to save transport costs. In the light of the efficiencies on the one hand and the 25 % non-tied part in the contracts of producer X, the real possibility for early termination of the contract, the recent entry of new producers and the fact that around half the resellers are not tied on the other hand, the quantity forcing of 75 % applied by producer X is likely to fulfil the conditions of Article 101(3).

2.2 Exclusive distribution (151) In an exclusive distribution agreement, the supplier agrees to sell its products to only one distributor for resale in a particular territory. At the same time, the distributor is usually limited in its active selling into other (exclusively allocated) territories. The possible competition risks are mainly reduced intra-brand competition and market partitioning, which may facilitate price discrimination in particular. When most or all of the suppliers apply exclusive distribution, it may soften competition and facilitate collusion, both at the suppliers’ and distributors’ level. Lastly, exclusive distribution may lead to foreclosure of other distributors and therewith reduce competition at that level. (152) Exclusive distribution is exempted by the Block Exemption Regulation where both the supplier’s and buyer’s market share each do not exceed 30 %, even if combined with other non-hardcore vertical restraints, such as a non-compete obligation limited to five years, quantity forcing or exclusive purchasing. A combination of exclusive distribution and selective distribution is only exempted by the Block Exemption Regulation if active selling in other territories is not restricted. The remainder of this section provides guidance for the assessment of exclusive distribution in individual cases above the 30 % market share threshold. (153) The market position of the supplier and its competitors is of major importance, as the loss of intra-brand competition can only be problematic if inter-brand competition is limited. The stronger the position of the supplier, the more serious is the loss of intra-brand competition. Above the 30 % market share threshold, there may be a risk of a significant re1185

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duction of intra-brand competition. In order to fulfil the conditions of Article 101(3), the loss of intra-brand competition may need to be balanced with real efficiencies. (154) The position of the competitors can have a dual significance. Strong competitors will generally mean that the reduction in intra-brand competition is outweighed by sufficient inter-brand competition. However, if the number of competitors becomes rather small and their market position is rather similar in terms of market share, capacity and distribution network, there is a risk of collusion and/or softening of competition. The loss of intra-brand competition can increase that risk, especially when several suppliers operate similar distribution systems. Multiple exclusive dealerships, that is, when different suppliers appoint the same exclusive distributor in a given territory, may further increase the risk of collusion and/or softening of competition. If a dealer is granted the exclusive right to distribute two or more important competing products in the same territory, inter-brand competition may be substantially restricted for those brands. The higher the cumulative market share of the brands distributed by the exclusive multiple brand dealers, the higher the risk of collusion and/or softening of competition and the more inter-brand competition will be reduced. If a retailer is the exclusive distributor for a number of brands this may have as result that if one producer cuts the wholesale price for its brand, the exclusive retailer will not be eager to transmit this price cut to the final consumer as it would reduce its sales and profits made with the other brands. Hence, compared to the situation without multiple exclusive dealerships, producers have a reduced interest in entering into price competition with one another. Such cumulative effect situations may be a reason to withdraw the benefit of the Block Exemption Regulation where the market shares of the suppliers and buyers are below the threshold of the Block Exemption Regulation. (155) Entry barriers that may hinder suppliers from creating new distributors or finding alternative distributors are less important in assessing the possible anti-competitive effects of exclusive distribution. Foreclosure of other suppliers does not arise as long as exclusive distribution is not combined with single branding. (156) Foreclosure of other distributors is not an issue where the supplier which operates the exclusive distribution system appoints a high number of exclusive distributors on the same market and those exclusive distributors are not restricted in selling to other non-appointed distributors. Fore1186

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closure of other distributors may however become an issue where there is buying power and market power downstream, in particular in the case of very large territories where the exclusive distributor becomes the exclusive buyer for a whole market. An example would be a supermarket chain which becomes the only distributor of a leading brand on a national food retail market. The foreclosure of other distributors may be aggravated in the case of multiple exclusive dealership. (157) Buying power may also increase the risk of collusion on the buyers’ side when the exclusive distribution arrangements are imposed by important buyers, possibly located in different territories, on one or several suppliers. (158) Maturity of the market is important, as loss of intra-brand competition and price discrimination may be a serious problem in a mature market but may be less relevant on a market with growing demand, changing technologies and changing market positions. (159) The level of trade is important as the possible negative effects may differ between the wholesale and retail level. Exclusive distribution is mainly applied in the distribution of final goods and services. A loss of intrabrand competition is especially likely at the retail level if coupled with large territories, since final consumers may be confronted with little possibility of choosing between a high price/high service and a low price/ low service distributor for an important brand. (160) A manufacturer that chooses a wholesaler to be its exclusive distributor will normally do so for a larger territory, such as a whole Member State. As long as the wholesaler can sell the products without limitation to downstream retailers there are not likely to be appreciable anti-competitive effects. A possible loss of intra-brand competition at the wholesale level may be easily outweighed by efficiencies obtained in logistics, promotion etc., especially when the manufacturer is based in a different country. The possible risks for inter-brand competition of multiple exclusive dealerships are however higher at the wholesale than at the retail level. Where one wholesaler becomes the exclusive distributor for a significant number of suppliers, not only is there a risk that competition between these brands is reduced, but also that there is foreclosure at the wholesale level of trade.

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(161) As stated in paragraph (155), foreclosure of other suppliers does not arise as long as exclusive distribution is not combined with single branding. But even when exclusive distribution is combined with single branding anticompetitive foreclosure of other suppliers is unlikely, except possibly when the single branding is applied to a dense network of exclusive distributors with small territories or in case of a cumulative effect. In such a case it may be necessary to apply the principles on single branding set out in section 2.1. However, when the combination does not lead to significant foreclosure, the combination of exclusive distribution and single branding may be pro-competitive by increasing the incentive for the exclusive distributor to focus its efforts on the particular brand. Therefore, in the absence of such a foreclosure effect, the combination of exclusive distribution with non-compete may very well fulfil the conditions of Article 101(3) for the whole duration of the agreement, particularly at the wholesale level. (162) The combination of exclusive distribution with exclusive sourcing increases the possible competition risks of reduced intra-brand competition and market partitioning which may facilitate price discrimination in particular. Exclusive distribution already limits arbitrage by customers, as it limits the number of distributors and usually also restricts the distributors in their freedom of active selling. Exclusive sourcing, requiring the exclusive distributors to buy their supplies for the particular brand directly from the manufacturer, eliminates in addition possible arbitrage by the exclusive distributors, which are prevented from buying from other distributors in the system. As a result, the supplier’s possibilities to limit intra-brand competition by applying dissimilar conditions of sale to the detriment of consumers are enhanced, unless the combination allows the creation of efficiencies leading to lower prices to all final consumers. (163) The nature of the product is not particularly relevant to the assessment of possible anti-competitive effects of exclusive distribution. It is, however, relevant to an assessment of possible efficiencies, that is, after an appreciable anti-competitive effect is established. (164) Exclusive distribution may lead to efficiencies, especially where investments by the distributors are required to protect or build up the brand image. In general, the case for efficiencies is strongest for new products, complex products, and products whose qualities are difficult to judge before consumption (so-called experience products) or whose qualities are 1188

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difficult to judge even after consumption (so-called credence products). In addition, exclusive distribution may lead to savings in logistic costs due to economies of scale in transport and distribution. (165) Example of exclusive distribution at the wholesale level

On the market for a consumer durable, A is the market leader. A sells its product through exclusive wholesalers. Territories for the wholesalers correspond to the entire Member State for small Member States, and to a region for larger Member States. Those exclusive distributors deal with sales to all the retailers in their territories. They do not sell to final consumers. The wholesalers are in charge of promotion in their markets, including sponsoring of local events, but also explaining and promoting the new products to the retailers in their territories. Technology and product innovation are evolving fairly quickly on this market, and pre-sale service to retailers and to final consumers plays an important role. The wholesalers are not required to purchase all their requirements of the brand of supplier A from the producer himself, and arbitrage by wholesalers or retailers is practicable because the transport costs are relatively low compared to the value of the product. The wholesalers are not under a noncompete obligation. Retailers also sell a number of brands of competing suppliers, and there are no exclusive or selective distribution agreements at the retail level. On the EU market of sales to wholesalers A has around 50 % market share. Its market share on the various national retail markets varies between 40 % and 60 %. A has between 6 and 10 competitors on every national market. B, C and D are its biggest  competitors and are also present on each national market, with market shares varying between 20  % and 5  %. The remaining producers are national  producers, with smaller market shares. B, C and D have similar distribution networks, whereas the local producers tend to sell their products directly to retailers.



On the wholesale market described in this example, the risk of reduced intra-brand competition and price discrimination is low. Arbitrage is not hindered, and the absence of intra-brand competition is not very relevant at the wholesale level. At the retail level, neither intra- nor inter-brand competition are hindered. Moreover, inter-brand competition is largely unaffected by the exclusive arrangements at the wholesale level. Therefore it is likely, even if anti-competitive effects exist, that also the conditions of Article 101(3) are fulfilled. 1189

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(166) Example of multiple exclusive dealerships in an oligopolistic market

On a national market for a final product, there are four market leaders, which each have a market share of around 20 %. Those four market leaders sell their product through exclusive distributors at the retail level. Retailers are given an exclusive territory which corresponds to the town in which they are located or a district of the town for large towns. In most territories, the four market leaders happen to appoint the same exclusive retailer (“multiple dealership”), often centrally located and rather specialised in the product. The remaining 20 % of the national market is composed of small local producers, the largest of these producers having a market share of 5 % on the national market. Those local producers sell their products in general through other retailers, in particular because the exclusive distributors of the four largest suppliers show in general little interest in selling less well-known and cheaper brands. There is strong brand and product differentiation on the market. The four market leaders have large national advertising campaigns and strong brand images, whereas the fringe producers do not advertise their products at the national level. The market is rather mature, with stable demand and no major product and technological innovation. The product is relatively simple.



In such an oligopolistic market, there is a risk of collusion between the four market leaders. That risk is increased through multiple dealerships. Intra-brand competition is limited by the territorial exclusivity. Competition between the four leading brands is reduced at the retail level, since one retailer fixes the price of all four brands in each territory. The multiple dealership implies that, if one producer cuts the price for its brand, the retailer will not be eager to transmit this price cut to the final consumer as it would reduce its sales and profits made with the other brands. Hence, producers have a reduced interest in entering into price competition with one another. Inter-brand price competition exists mainly with the low brand image goods of the fringe producers. The possible efficiency arguments for (joint) exclusive distributors are limited, as the product is relatively simple, the resale does not require any specific investments or training and advertising is mainly carried out at the level of the producers. Even though each of the market leaders has a market share below the threshold, the conditions of Article  101(3) may not be fulfilled and withdrawal of the block exemption may be necessary for the agreements concluded with distributors whose market share is below 30 % of the procurement market.



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(167) Example of exclusive distribution combined with exclusive sourcing

Manufacturer A is the European market leader for a bulky consumer durable, with a market share of between 40 % and 60 % in most national retail markets. In Member States where it has a high market share, it has less competitors with much smaller market shares. The competitors are present on only one or two national markets. A’s long time policy is to sell its product through its national subsidiaries to exclusive distributors at the retail level, which are not allowed to sell actively into each other’s territories. Those distributors are thereby incentivised to promote the product and provide pre-sales services. Recently the retailers are in addition obliged to purchase manufacturer A’s products exclusively from the national subsidiary of manufacturer A in their own country. The retailers selling the brand of manufacturer A are the main resellers of that type of product in their territory. They handle competing brands, but with varying degrees of success and enthusiasm. Since the introduction of exclusive sourcing, A applies price differences of 10 % to 15 % between markets with higher prices in the markets where it has less competition. The markets are relatively stable on the demand and the supply side, and there are no significant technological changes.



In the high price markets, the loss of intra-brand competition results not only from the territorial exclusivity at the retail level but is aggravated by the exclusive sourcing obligation imposed on the retailers. The exclusive sourcing obligation helps to keep markets and territories separate by making arbitrage between the exclusive retailers, the main resellers of that type of product, impossible. The exclusive retailers also cannot sell actively into each other’s territory and in practice tend to avoid delivering outside their own territory. As a result, price discrimination is possible, without it leading to a significant increase in total sales. Arbitrage by consumers or independent traders is limited due to the bulkiness of the product.



While the possible efficiency arguments for appointing exclusive distributors may be convincing, in particular because of the incentivising of retailers, the possible efficiency arguments for the combination of exclusive distribution and exclusive sourcing, and in particular the possible efficiency arguments for exclusive sourcing, linked mainly to economies of scale in transport, are unlikely to outweigh the negative effect of price discrimination and reduced intra-brand competition. Consequently, it is unlikely that the conditions of Article 101(3) are fulfilled. 1191

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2.3 Exclusive customer allocation (168) In an exclusive customer allocation agreement, the supplier agrees to sell its products to only one distributor for resale to a particular group of customers. At the same time, the distributor is usually limited in its active selling to other (exclusively allocated) groups of customers. The Block Exemption Regulation does not limit the way an exclusive customer group can be defined; it could for instance be a particular type of customers defined by their occupation but also a list of specific customers selected on the basis of one or more objective criteria. The possible competition risks are mainly reduced intra-brand competition and market partitioning, which may in particular facilitate price discrimination. Where most or all of the suppliers apply exclusive customer allocation, competition may be softened and collusion, both at the suppliers’ and the distributors’ level, may be facilitated. Lastly, exclusive customer allocation may lead to foreclosure of other distributors and therewith reduce competition at that level. (169) Exclusive customer allocation is exempted by the Block Exemption Regulation when both the supplier’s and buyer’s market share does not exceed the 30  % market share threshold, even if combined with other non-hardcore vertical restraints such as non-compete, quantity-forcing or exclusive sourcing. A combination of exclusive customer allocation and selective distribution is normally a hardcore restriction, as active selling to end-users by the appointed distributors is usually not left free. Above the 30 % market share threshold, the guidance provided in paragraphs (151) to (167) applies also to the assessment of exclusive customer allocation, subject to the specific remarks in the remainder of this section. (170) The allocation of customers normally makes arbitrage by the customers more difficult. In addition, as each appointed distributor has its own class of customers, non-appointed distributors not falling within such a class may find it difficult to obtain the product. Consequently, possible arbitrage by non-appointed distributors will be reduced. (171) Exclusive customer allocation is mainly applied to intermediate products and at the wholesale level when it concerns final products, where customer groups with different specific requirements concerning the product can be distinguished.

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(172) Exclusive customer allocation may lead to efficiencies, especially when the distributors are required to make investments in for instance specific equipment, skills or know-how to adapt to the requirements of their group of customers. The depreciation period of these investments indicates the justified duration of an exclusive customer allocation system. In general the case is strongest for new or complex products and for products requiring adaptation to the needs of the individual customer. Identifiable differentiated needs are more likely for intermediate products, that is, products sold to different types of professional buyers. Allocation of final consumers is unlikely to lead to efficiencies. (173) Example of exclusive customer allocation



A company has developed a sophisticated sprinkler installation. The company has currently a market share of 40  % on the market for sprinkler installations. When it started selling the sophisticated sprinkler it had a market share of 20 % with an older product. The installation of the new type of sprinkler depends on the type of building that it is installed in and on the use of the building (office, chemical plant, hospital etc.). The company has appointed a number of distributors to sell and install the sprinkler installation. Each distributor needed to train its employees for the general and specific requirements of installing the sprinkler installation for a particular class of customers. To ensure that distributors would specialise, the company assigned to each distributor an exclusive class of customers and prohibited active sales to each others’ exclusive customer classes. After five years, all the exclusive distributors will be allowed to sell actively to all classes of customers, thereby ending the system of exclusive customer allocation. The supplier may then also start selling to new distributors. The market is quite dynamic, with two recent entries and a number of technological developments. Competitors, with market shares between 25 % and 5 %, are also upgrading their products. As the exclusivity is of limited duration and helps to ensure that the distributors may recoup their investments and concentrate their sales efforts first on a certain class of customers in order to learn the trade, and as the possible anti-competitive effects seem limited in a dynamic market, the conditions of Article 101(3) are likely to be fulfilled.

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2.4 Selective distribution (174) Selective distribution agreements, like exclusive distribution agreements, restrict the number of authorised distributors on the one hand and the possibilities of resale on the other. The difference with exclusive distribution is that the restriction of the number of dealers does not depend on the number of territories but on selection criteria linked in the first place to the nature of the product. Another difference with exclusive distribution is that the restriction on resale is not a restriction on active selling to a territory but a restriction on any sales to non-authorised distributors, leaving only appointed dealers and final customers as possible buyers. Selective distribution is almost always used to distribute branded final products. (175) The possible competition risks are a reduction in intra-brand competition and, especially in case of cumulative effect, foreclosure of certain type(s) of distributors and softening of competition and facilitation of collusion between suppliers or buyers. To assess the possible anti-competitive effects of selective distribution under Article 101(1), a distinction needs to be made between purely qualitative selective distribution and quantitative selective distribution. Purely qualitative selective distribution selects dealers only on the basis of objective criteria required by the nature of the product such as training of sales personnel, the service provided at the point of sale, a certain range of the products being sold etc.51 The application of such criteria does not put a direct limit on the number of dealers. Purely qualitative selective distribution is in general considered to fall outside Article 101(1) for lack of anti-competitive effects, provided that three conditions are satisfied. First, the nature of the product in question must necessitate a selective distribution system, in the sense that such a system must constitute a legitimate requirement, having regard to the nature of the product concerned, to preserve its quality and ensure its proper use. Secondly, resellers must be chosen on the basis of objective criteria of a qualitative nature which are laid down uniformly for all and made available to all potential resellers and are not applied in a discriminatory manner. Thirdly, the criteria laid down must not go beyond what is necessary52. Quantitative selective distribution adds further criteria for selection that more directly limit the potential number of dealers by, for instance, requiring minimum or maximum sales, by fixing the number of dealers, etc.

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(176) Qualitative and quantitative selective distribution is exempted by the Block  Exemption Regulation as long as the market share of both supplier and buyer each do not exceed 30 %, even if combined with other non-hardcore vertical restraints, such as non-compete or exclusive distribution, provided active selling by the authorised distributors to each other and to end users is not restricted. The Block Exemption Regulation exempts selective distribution regardless of the nature of the product concerned and regardless of the nature of the selection criteria. However, where the characteristics of the product53 do not require selective distribution or do not require the applied criteria, such as for instance the requirement for distributors to have one or more brick and mortar shops or to provide specific services, such a distribution system does not generally bring about sufficient efficiency enhancing effects to counterbalance a significant reduction in intra-brand competition. Where appreciable anti-competitive effects occur, the benefit of the Block Exemption Regulation is likely to be withdrawn. In addition, the remainder of this section provides guidance for the assessment of selective distribution in individual cases which are not covered by the Block Exemption Regulation or in the case of cumulative effects resulting from parallel networks of selective distribution. (177) The market position of the supplier and its competitors is of central importance in assessing possible anti-competitive effects, as the loss of intrabrand competition can only be problematic if inter-brand competition is limited. The stronger the position of the supplier, the more problematic is the loss of intra-brand competition. Another important factor is the number of selective distribution networks present in the same market. Where selective distribution is applied by only one supplier on the market, quantitative selective distribution does not normally create net negative effects provided that the contract goods, having regard to their nature, require the use of a selective distribution system and on condition that the selection criteria applied are necessary to ensure efficient distribution of the goods in question. The reality, however, seems to be that selective distribution is often applied by a number of the suppliers on a given market. (178) The position of competitors can have a dual significance and plays in particular a role in case of a cumulative effect. Strong competitors will mean in general that the reduction in intra-brand competition is easily outweighed by sufficient inter-brand competition. However, when a majority of the main suppliers apply selective distribution, there will 1195

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be a significant loss of intra-brand competition and possible foreclosure of certain types of distributors as well as an increased risk of collusion between those major suppliers. The risk of foreclosure of more efficient distributors has always been greater with selective distribution than with exclusive distribution, given the restriction on sales to non-authorised dealers in selective distribution. That restriction is designed to give selective distribution systems a closed character, making it impossible for nonauthorised dealers to obtain supplies. Accordingly, selective distribution is particularly well suited to avoid pressure by price discounters (whether offline or online-only distributors) on the margins of the manufacturer, as well as on the margins of the authorised dealers. Foreclosure of such distribution formats, whether resulting from the cumulative application of selective distribution or from the application by a single supplier with a market share exceeding 30  %, reduces the possibilities for consumers to take advantage of the specific benefits offered by these formats such as lower prices, more transparency and wider access. (179) Where the Block Exemption Regulation applies to individual networks of selective distribution, withdrawal of the block exemption or disapplication of the Block Exemption Regulation may be considered in case of cumulative effects. However, a cumulative effect problem is unlikely to arise when the share of the market covered by selective distribution is below 50 %. Also, no problem is likely to arise where the market coverage ratio exceeds 50 %, but the aggregate market share of the five largest suppliers (CR5) is below 50 %. Where both the CR5 and the share of the market covered by selective distribution exceed 50 %, the assessment may vary depending on whether or not all five largest suppliers apply selective distribution. The stronger the position of the competitors which do not apply selective distribution, the less likely other distributors will be foreclosed. If all five largest suppliers apply selective distribution, competition concerns may arise with respect to those agreements in particular that apply quantitative selection criteria by directly limiting the number of authorised dealers or that apply qualitative criteria, such as a requirement to have one or more brick and mortar shops or to provide specific services, which forecloses certain distribution formats. The conditions of Article 101(3) are in general unlikely to be fulfilled if the selective distribution systems at issue prevent access to the market by new distributors capable of adequately selling the products in question, especially price discounters or online-only distributors offering lower prices to consumers, thereby limiting distribution to the advantage of certain existing 1196

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channels and to the detriment of final consumers. More indirect forms of quantitative selective distribution, resulting for instance from the combination of purely qualitative selection criteria with the requirement imposed on the dealers to achieve a minimum amount of annual purchases, are less likely to produce net negative effects, if such an amount does not represent a significant proportion of the dealer’s total turnover achieved with the type of products in question and it does not go beyond what is necessary for the supplier to recoup its relationship-specific investment and/or realise economies of scale in distribution. As regards individual contributions, a supplier with a market share of less than 5 % is in general not considered to contribute significantly to a cumulative effect. (180) Entry barriers are mainly of interest in the case of foreclosure of the market to non-authorised dealers. In general, entry barriers will be considerable as selective distribution is usually applied by manufacturers of branded products. It will in general take time and considerable investment for excluded retailers to launch their own brands or obtain competitive supplies elsewhere. (181) Buying power may increase the risk of collusion between dealers and thus appreciably change the analysis of possible anti-competitive effects of selective distribution. Foreclosure of the market to more efficient retailers may especially result where a strong dealer organisation imposes selection criteria on the supplier aimed at limiting distribution to the advantage of its members. (182) Article 5(1)(c) of the Block Exemption Regulation provides that the supplier may not impose an obligation causing the authorised dealers, either directly or indirectly, not to sell the brands of particular competing suppliers. Such a condition aims specifically at avoiding horizontal collusion to exclude particular brands through the creation of a selective club of brands by the leading suppliers. That kind of obligation is unlikely to be exemptible when the CR5 is equal to or above 50 %, unless none of the suppliers imposing such an obligation belongs to the five largest suppliers on the market. (183) Foreclosure of other suppliers is normally not a problem as long as other suppliers can use the same distributors, that is, as long as the selective distribution system is not combined with single branding. In the case of a dense network of authorised distributors or in the case of a cumulative 1197

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effect, the combination of selective distribution and a non-compete obligation may pose a risk of foreclosure to other suppliers. In that case, the principles set out in section 2.1. on single branding apply. Where selective distribution is not combined with a non-compete obligation, foreclosure of the market to competing suppliers may still be a problem where the leading suppliers apply not only purely qualitative selection criteria, but impose on their dealers certain additional obligations such as the obligation to reserve a minimum shelf-space for their products or to ensure that the sales of their products by the dealer achieve a minimum percentage of the dealer’s total turnover. Such a problem is unlikely to arise if the share of the market covered by selective distribution is below 50 % or, where this coverage ratio is exceeded, if the market share of the five largest suppliers is below 50 %. (184) Maturity of the market is important, as loss of intra-brand competition and possible foreclosure of suppliers or dealers may be a serious problem on a mature market but is less relevant on a market with growing demand, changing technologies and changing market positions. (185) Selective distribution may be efficient when it leads to savings in logistical costs due to economies of scale in transport and that may occur irrespective of the nature of the product (paragraph (107)(g)). However, such an efficiency is usually only marginal in selective distribution systems. To help solve a free-rider problem between the distributors (paragraph (107)(a) ) or to help create a brand image (paragraph (107)(i) ), the nature of the product is very relevant. In general, the case is strongest for new products, complex products, products whose qualities are difficult to judge before consumption (so-called experience products) or whose qualities are difficult to judge even after consumption (so-called credence products). The combination of selective distribution with a location clause, protecting an appointed dealer against other appointed dealers opening up a shop in its vicinity, may in particular fulfil the conditions of Article 101(3) if the combination is indispensable to protect substantial and relationshipspecific investments made by the authorised dealer (paragraph (107)(d)). (186) To ensure that the least anti-competitive restraint is chosen, it is relevant to see whether the same efficiencies can be obtained at a comparable cost by for instance service requirements alone.

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(187) Example of quantitative selective distribution

On a market for consumer durables, the market leader (brand A) with a market share of 35 %, sells its product to final consumers through a selective distribution network. There are several criteria for admission to the network: the shop must employ trained staff and provide pre-sales services, there must be a specialised area in the shop devoted to the sales of the product and similar hi-tech products, and the shop is required to sell a wide range of models of the supplier and to display them in an attractive manner. Moreover, the number of admissible retailers in the network is directly limited through the establishment of a maximum number of retailers per number of inhabitants in each province or urban area. Manufacturer A has 6 competitors in that market. Its largest competitors, B, C and D, have market shares of respectively 25, 15 and 10 %, whilst the other producers have smaller market shares. A is the only manufacturer to use selective distribution. The selective distributors of brand A always handle a few competing brands. However, competing brands are also widely sold in shops which are not member of A’s selective distribution network. Channels of distribution are various: for instance, brands B and C are sold in most of A’s selected shops, but also in other shops providing a high quality service and in hypermarkets. Brand D is mainly sold in high service shops. Technology is evolving quite rapidly in this market, and the main suppliers maintain a strong quality image for their products through advertising.



On that market, the coverage ratio of selective distribution is 35 %. Interbrand competition is not directly affected by the selective distribution system of A. Intra-brand competition for brand A may be reduced, but consumers have access to low service/low price retailers for brands B and C, which have a comparable quality image to brand A. Moreover, access to high service retailers for other brands is not foreclosed, since there is no limitation on the capacity of selected distributors to sell competing brands, and the quantitative limitation on the number of retailers for brand A leaves other high service retailers free to distribute competing brands. In this case, in view of the service requirements and the efficiencies these are likely to provide and the limited effect on intra-brand competition the conditions of Article 101(3) are likely to be fulfilled.

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(188) Example of selective distribution with cumulative effects



On a market for a particular sports article, there are seven manufacturers, whose respective market shares are: 25 %, 20 %, 15 %, 15 %, 10 %, 8 % and 7 %. The five largest manufacturers distribute their products through quantitative selective distribution, whilst the two smallest use different types of distribution systems, which results in a coverage ratio of selective distribution of 85 %. The criteria for access to the selective distribution networks are remarkably uniform amongst manufacturers: the distributors are required to have one or more brick and mortar shops, those shops are required to have trained personnel and to provide pre-sale services, there must be a specialised area in the shop devoted to the sales of the article and a minimum size for this area is specified. The shop is required to sell a wide range of the brand in question and to display the article in an attractive manner, the shop must be located in a commercial street, and that type of article must represent at least 30 % of the total turnover of the shop. In general, the same dealer is appointed selective distributor for all five brands. The two brands which do not use selective distribution usually sell through less specialised retailers with lower service levels. The market is stable, both on the supply and on the demand side, and there is strong brand image and product differentiation. The five market leaders have strong brand images, acquired through advertising and sponsoring, whereas the two smaller manufacturers have a strategy of cheaper products, with no strong brand image. On that market, access by general price discounters and online-only distributors to the five leading brands is denied. Indeed, the requirement that this type of article represents at least 30 % of the activity of the dealers and the criteria on presentation and pre-sales services rule out most price discounters from the network of authorised dealers. The requirement to have one or more brick and mortar shops excludes online-only distributors from the network. As a consequence, consumers have no choice but to buy the five leading brands in high service/high price shops. This leads to reduced inter-brand competition between the five leading brands. The fact that the two smallest brands can be bought in low service/low price shops does not compensate for this, because the brand image of the five market leaders is much better. Inter-brand competition is also limited through multiple dealership. Even though there exists some degree of intra-brand competition and the number of retailers is not directly limited, the criteria for admission are strict enough to lead to a small number of retailers for the five leading brands in each territory. 1200

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The efficiencies associated with these quantitative selective distribution systems are low: the product is not very complex and does not justify a particularly high service. Unless the manufacturers can prove that there are clear efficiencies linked to their network of selective distribution, it is probable that the block exemption will have to be withdrawn because of its cumulative effects resulting in less choice and higher prices for consumers.

2.5 Franchising (189) Franchise agreements contain licences of intellectual property rights relating in particular to trade marks or signs and know-how for the use and distribution of goods or services. In addition to the licence of IPRs, the franchisor usually provides the franchisee during the life of the agreement with commercial or technical assistance. The licence and the assistance are integral components of the business method being franchised. The franchisor is in general paid a franchise fee by the franchisee for the use of the particular business method. Franchising may enable the franchisor to establish, with limited investments, a uniform network for the distribution of its products. In addition to the provision of the business method, franchise agreements usually contain a combination of different vertical restraints concerning the products being distributed, in particular selective distribution and/or non-compete and/or exclusive distribution or weaker forms thereof. (190) The coverage by the Block Exemption Regulation of the licensing of IPRs contained in franchise agreements is dealt with in paragraphs (24) to (46). As for the vertical restraints on the purchase, sale and resale of goods and services within a franchising arrangement, such as selective distribution, non-compete obligations or exclusive distribution, the Block Exemption Regulation applies up to the 30 % market share threshold54. The guidance provided in respect of those types of restraints applies also to franchising, subject to the following two specific remarks: (a)

The more important the transfer of know-how, the more likely it is that the restraints create efficiencies and/or are indispensable to protect the know-how and that the vertical restraints fulfil the conditions of Article 101(3);

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(b)

A non-compete obligation on the goods or services purchased by the franchisee falls outside the scope of Article 101(1) where the obligation is necessary to maintain the common identity and reputation of the franchised network. In such cases, the duration of the non-compete obligation is also irrelevant under Article 101(1), as long as it does not exceed the duration of the franchise agreement itself.

(191) Example of franchising

A manufacturer has developed a new format for selling sweets in so-called fun shops where the sweets can be coloured specially on demand from the consumer. The manufacturer of the sweets has also developed the machines to colour the sweets. The manufacturer also produces the colouring liquids. The quality and freshness of the liquid is of vital importance to producing good sweets. The manufacturer made a success of its sweets through a number of own retail outlets all operating under the same trade name and with the uniform fun image (style of lay-out of the shops, common advertising etc.). In order to expand sales the manufacturer started a franchising system. The franchisees are obliged to buy the sweets, liquid and colouring machine from the manufacturer, to have the same image and operate under the trade name, pay a franchise fee, contribute to common advertising and ensure the confidentiality of the operating manual prepared by the franchisor. In addition, the franchisees are only allowed to sell from the agreed premises, to sell to end users or other franchisees and are not allowed to sell other sweets. The franchisor is obliged not to appoint another franchisee nor operate a retail outlet himself in a given contract territory. The franchisor is also under the obligation to update and further develop its products, the business outlook and the operating manual and make these improvements available to all retail franchisees. The franchise agreements are concluded for a duration of 10 years.



Sweet retailers buy their sweets on a national market from either national producers that cater for national tastes or from wholesalers which import sweets from foreign producers in addition to selling products from national producers. On that market the franchisor’s products compete with other brands of sweets. The franchisor has a market share of 30 % on the market for sweets sold to retailers. Competition comes from a number of national and international brands, sometimes produced by large diversified food companies. There are many potential points of sale of sweets in 1202

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the form of tobacconists, general food retailers, cafeterias and specialised sweet shops. The franchisor’s market share of the market for machines for colouring food is below 10 %.

Most of the obligations contained in the franchise agreements can be deemed necessary to protect the intellectual property rights or maintain the common identity and reputation of the franchised network and fall outside Article 101(1). The restrictions on selling (contract territory and selective distribution) provide an incentive to the franchisees to invest in the colouring machine and the franchise concept and, if not necessary to, at least help maintain the common identity, thereby offsetting the loss of intra-brand competition. The non-compete clause excluding other brands of sweets from the shops for the full duration of the agreements does allow the franchisor to keep the outlets uniform and prevent competitors from benefiting from its trade name. It does not lead to any serious foreclosure in view of the great number of potential outlets available to other sweet producers. The franchise agreements of this franchisor are likely to fulfil the conditions for exemption under Article 101(3) in as far as the obligations contained therein fall under Article 101(1).

2.6 Exclusive supply (192) Under the heading of exclusive supply fall those restrictions that have as their main element that the supplier is obliged or induced to sell the contract products only or mainly to one buyer, in general or for a particular use. Such restrictions may take the form of an exclusive supply obligation, restricting the supplier to sell to only one buyer for the purposes of resale or a particular use, but may for instance also take the form of quantity forcing on the supplier, where incentives are agreed between the supplier and buyer which make the former concentrate its sales mainly with one buyer. For intermediate goods or services, exclusive supply is often referred to as industrial supply. (193) Exclusive supply is exempted by the Block Exemption Regulation where both the supplier’s and buyer’s market share does not exceed 30 %, even if combined with other non-hardcore vertical restraints such as non-compete. The remainder of this section provides guidance for the assessment of exclusive supply in individual cases above the market share threshold.

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(194) The main competition risk of exclusive supply is anticompetitive foreclosure of other buyers. There is a similarity with the possible effects of exclusive distribution, in particular when the exclusive distributor becomes the exclusive buyer for a whole market (see section 2.2, in particular paragraph (156)). The market share of the buyer on the upstream purchase market is obviously important for assessing the ability of the buyer to impose exclusive supply which forecloses other buyers from access to supplies. The importance of the buyer on the downstream market is however the factor which determines whether a competition problem may arise. If the buyer has no market power downstream, then no appreciable negative effects for consumers can be expected. Negative effects may arise when the market share of the buyer on the downstream supply market as well as the upstream purchase market exceeds 30 %. Where the market share of the buyer on the upstream market does not exceed 30 %, significant foreclosure effects may still result, especially when the market share of the buyer on its downstream market exceeds 30 % and the exclusive supply relates to a particular use of the contract products. Where a company is dominant on the downstream market, any obligation to supply the products only or mainly to the dominant buyer may easily have significant anti-competitive effects. (195) It is not only the market position of the buyer on the upstream and downstream market that is important but also the extent to and the duration for which it applies an exclusive supply obligation. The higher the tied supply share, and the longer the duration of the exclusive supply, the more significant the foreclosure is likely to be. Exclusive supply agreements shorter than five years entered into by non-dominant companies usually require a balancing of pro- and anti-competitive effects, while agreements lasting longer than five years are for most types of investments not considered necessary to achieve the claimed efficiencies or the efficiencies are not sufficient to outweigh the foreclosure effect of such long-term exclusive supply agreements. (196) The market position of the competing buyers on the upstream market is important as it is likely that competing buyers will be foreclosed for anticompetitive reasons, that is, to increase their costs, if they are significantly smaller than the foreclosing buyer. Foreclosure of competing buyers is not very likely where those competitors have similar buying power and can offer the suppliers similar sales possibilities. In such a case, foreclosure could only occur for potential entrants, which may not be able to secure 1204

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supplies when a number of major buyers all enter into exclusive supply contracts with the majority of suppliers on the market. Such a cumulative effect may lead to withdrawal of the benefit of the Block Exemption Regulation. (197) Entry barriers at the supplier level are relevant to establishing whether there is real foreclosure. In as far as it is efficient for competing buyers to provide the goods or services themselves via upstream vertical integration, foreclosure is unlikely to be a real problem. However, there are often significant entry barriers. (198) Countervailing power of suppliers is relevant, as important suppliers will not easily allow themselves to be cut off from alternative buyers. Foreclosure is therefore mainly a risk in the case of weak suppliers and strong buyers. In the case of strong suppliers, the exclusive supply may be found in combination with non-compete obligations. The combination with noncompete obligations brings in the rules developed for single branding. Where there are relationship-specific investments involved on both sides (hold-up problem) the combination of exclusive supply and non-compete obligations that is, reciprocal exclusivity in industrial supply agreements may often be justified, in particular below the level of dominance. (199) Lastly, the level of trade and the nature of the product are relevant for foreclosure. Anticompetitive foreclosure is less likely in the case of an intermediate product or where the product is homogeneous. Firstly, a foreclosed manufacturer that uses a certain input usually has more flexibility to respond to the demand of its customers than the wholesaler or retailer has in responding to the demand of the final consumer for whom brands may play an important role. Secondly, the loss of a possible source of supply matters less for the foreclosed buyers in the case of homogeneous products than in the case of a heterogeneous product with different grades and qualities. For final branded products or differentiated intermediate products where there are entry barriers, exclusive supply may have appreciable anti-competitive effects where the competing buyers are relatively small compared to the foreclosing buyer, even if the latter is not dominant on the downstream market. (200) Efficiencies can be expected in the case of a hold-up problem (paragraph  (107)(d) and  (107)(e)), and such efficiencies are more likely for intermediate products than for final products. Other efficiencies are less 1205

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likely. Possible economies of scale in distribution (paragraph (107)(g)) do not seem likely to justify exclusive supply. (201) In the case of a hold-up problem and even more so in the case of economies of scale in distribution, quantity forcing on the supplier, such as minimum supply requirements, could well be a less restrictive alternative. (202) Example of exclusive supply

On a market for a certain type of components (intermediate product market) supplier A agrees with buyer B to develop, with its own knowhow and considerable investment in new machines and with the help of specifications supplied by buyer B, a different version of the component. B will have to make considerable investments to incorporate the new component. It is agreed that A will supply the new product only to buyer B for a period of five years from the date of first entry on the market. B is obliged to buy the new product only from A for the same period of five years. Both A and B can continue to sell and buy respectively other versions of the component elsewhere. The market share of buyer B on the upstream component market and on the downstream final goods market is 40 %. The market share of the component supplier is 35 %. There are two other component suppliers with around 20-25 % market share and a number of small suppliers.



Given the considerable investments, the agreement is likely to fulfil the conditions of Article 101(3) in view of the efficiencies and the limited foreclosure effect. Other buyers are foreclosed from a particular version of a product of a supplier with 35  % market share and there are other component suppliers that could develop similar new products. The foreclosure of part of buyer B’s demand to other suppliers is limited to maximum 40 % of the market.

2.7 Upfront access payments (203) Upfront access payments are fixed fees that suppliers pay to distributors in the framework of a vertical relationship at the beginning of a relevant period, in order to get access to their distribution network and remunerate services provided to the suppliers by the retailers. This category includes various practices such as slotting allowances,54 the so called pay-to-stay fees,56 payments to have access to a distributor’s promotion campaigns 1206

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etc. Upfront access payments are exempted under the Block Exemption Regulation when both the supplier’s and buyer’s market share does not exceed 30 %. The remainder of this section provides guidance for the assessment of upfront access payments in individual cases above the market share threshold. (204) Upfront access payments may sometimes result in anticompetitive foreclosure of other distributors if such payments induce the supplier to channel its products through only one or a limited number of distributors. A high fee may make that a supplier wants to channel a substantial volume of its sales through this distributor in order to cover the costs of the fee. In such a case, upfront access payments may have the same downstream foreclosure effect as an exclusive supply type of obligation. The assessment of that negative effect is made by analogy to the assessment of exclusive supply obligations (in particular paragraphs (194) to (199)). (205) Exceptionally, upfront access payments may also result in anticompetitive foreclosure of other suppliers, where the widespread use of upfront access payments increases barriers to entry for small entrants. The assessment of that possible negative effect is made by analogy to the assessment of single branding obligations (in particular paragraphs (132) to (141)). (206) In addition to possible foreclosure effects, upfront access payments may soften competition and facilitate collusion between distributors. Upfront access payments are likely to increase the price charged by the supplier for the contract products since the supplier must cover the expense of those payments. Higher supply prices may reduce the incentive of the retailers to compete on price on the downstream market, while the profits of distributors are increased as a result of the access payments. Such reduction of competition between distributors through the cumulative use of upfront access payments normally requires the distribution market to be highly concentrated. (207) However, the use of upfront access payments may in many cases contribute to an efficient allocation of shelf space for new products. Distributors often have less information than suppliers on the potential for success of new products to be introduced on the market and, as a result, the amount of products to be stocked may be sub-optimal. Upfront access payments may be used to reduce this asymmetry in information between suppliers and distributors by explicitly allowing suppliers to compete for shelf space. The distributor may thus receive a signal of which products 1207

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are most likely to be successful since a supplier would normally agree to pay an upfront access fee if it estimates a low probability of failure of the product introduction. (208) Furthermore, due to the asymmetry in information mentioned in paragraph (207), suppliers may have incentives to free-ride on distributors’ promotional efforts in order to introduce sub-optimal products. If a product is not successful, the distributors will pay part of the costs of the product failure. The use of upfront access fees may prevent such free riding by shifting the risk of product failure back to the suppliers, thereby contributing to an optimal rate of product introductions.

2.8 Category Management Agreements (209) Category management agreements are agreements by which, within a distribution agreement, the distributor entrusts the supplier (the “category captain”) with the marketing of a category of products including in general not only the supplier’s products, but also the products of its competitors. The category captain may thus have an influence on for instance the product placement and product promotion in the shop and product selection for the shop. Category management agreements are exempted under the Block Exemption Regulation when both the supplier’s and buyer’s market share does not exceed 30 %. The remainder of this section provides guidance for the assessment of category management agreements in individual cases above the market share threshold. (210) While in most cases category management agreements will not be problematic, they may sometimes distort competition between suppliers, and finally result in anticompetitive foreclosure of other suppliers, where the category captain is able, due to its influence over the marketing decisions of the distributor, to limit or disadvantage the distribution of products of competing suppliers. While in most cases the distributor may not have an interest in limiting its choice of products, when the distributor also sells competing products under its own brand (private labels), the distributor may also have incentives to exclude certain suppliers, in particular intermediate range products. The assessment of such upstream foreclosure effect is made by analogy to the assessment of single branding obligations (in particular paragraphs (132) to (141)) by addressing issues like the market coverage of these agreements, the market position of competing suppliers and the possible cumulative use of such agreements. 1208

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(211) In addition, category management agreements may facilitate collusion between distributors when the same supplier serves as a category captain for all or most of the competing distributors on a market and provides these distributors with a common point of reference for their marketing decisions. (212) Category management may also facilitate collusion between suppliers through increased opportunities to exchange via retailers sensitive market information, such as for instance information related to future pricing, promotional plans or advertising campaigns.57 (213) However, the use of category management agreements may also lead to efficiencies. Category management agreements may allow distributors to have access to the supplier’s marketing expertise for a certain group of products and to achieve economies of scale as they ensure that the optimal quantity of products is presented timely and directly on the shelves. As category management is based on customers’ habits, category management agreements may lead to higher customer satisfaction as they help to better meet demand expectations. In general, the higher the inter-brand competition and the lower consumers’ switching costs, the greater the economic benefits achieved through category management.

2.9 Tying (214) Tying refers to situations where customers that purchase one product (the tying product) are required also to purchase another distinct product (the tied product) from the same supplier or someone designated by the latter. Tying may constitute an abuse within the meaning of Article 102.58 Tying may also constitute a vertical restraint falling under Article 101 where it results in a single branding type of obligation (see paragraphs (129) to (150)) for the tied product. Only the latter situation is dealt with in these Guidelines. (215) Whether products will be considered as distinct depends on customer demand. Two products are distinct where, in the absence of the tying, a substantial number of customers would purchase or would have purchased the tying product without also buying the tied product from the same supplier, thereby allowing stand-alone production for both the tying and the tied product.59 Evidence that two products are distinct could include direct evidence that, when given a choice, customers purchase the 1209

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tying and the tied products separately from different sources of supply, or indirect evidence, such as the presence on the market of undertakings specialised in the manufacture or sale of the tied product without the tying product,60 or evidence indicating that undertakings with little market power, particularly on competitive markets, tend not to tie or not to bundle such products. For instance, since customers want to buy shoes with laces and it is not practicable for distributors to lace new shoes with the laces of their choice, it has become commercial usage for shoe manufacturers to supply shoes with laces. Therefore, the sale of shoes with laces is not a tying practice. (216) Tying may lead to anticompetitive foreclosure effects on the tied market, the tying market, or both at the same time. The foreclosure effect depends on the tied percentage of total sales on the market of the tied product. On the question of what can be considered appreciable foreclosure under Article 101(1), the analysis for single branding can be applied. Tying means that there is at least a form of quantity-forcing on the buyer in respect of the tied product. Where in addition a non-compete obligation is agreed in respect of the tied product, this increases the possible foreclosure effect on the market of the tied product. The tying may lead to less competition for customers interested in buying the tied product, but not the tying product. If there is not a sufficient number of customers that will buy the tied product alone to sustain competitors of the supplier on the tied market, the tying can lead to those customers facing higher prices. If the tied product is an important complementary product for customers of the tying product, a reduction of alternative suppliers of the tied product and hence a reduced availability of that product can make entry onto the tying market alone more difficult. (217) Tying may also directly lead to prices that are above the competitive level, especially in three situations. Firstly, if the tying and the tied product can be used in variable proportions as inputs to a production process, customers may react to an increase in price for the tying product by increasing their demand for the tied product while decreasing their demand for the tying product. By tying the two products the supplier may seek to avoid this substitution and as a result be able to raise its prices. Secondly, when the tying allows price discrimination according to the use the customer makes of the tying product, for example the tying of ink cartridges to the sale of photocopying machines (metering). Thirdly, when in the case of long-term contracts or in the case of after-markets with original equip1210

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ment with a long replacement time, it becomes difficult for the customers to calculate the consequences of the tying. (218) Tying is exempted under the Block Exemption Regulation when the market share of the supplier, on both the market of the tied product and the market of the tying product, and the market share of the buyer, on the relevant upstream markets, do not exceed 30 %. It may be combined with other vertical restraints, which are not hardcore restrictions under that Regulation, such as non-compete obligations or quantity forcing in respect of the tying product, or exclusive sourcing. The remainder of this section provides guidance for the assessment of tying in individual cases above the market share threshold. (219) The market position of the supplier on the market of the tying product is obviously of central importance to assess possible anti-competitive effects. In general, this type of agreement is imposed by the supplier. The importance of the supplier on the market of the tying product is the main reason why a buyer may find it difficult to refuse a tying obligation. (220) The market position of the supplier’s competitors on the market of the tying product is important in assessing the supplier’s market power. As long as its competitors are sufficiently numerous and strong, no anti-competitive effects can be expected, as buyers have sufficient alternatives to purchase the tying product without the tied product, unless other suppliers are applying similar tying. In addition, entry barriers on the market of the tying product are relevant to establish the market position of the supplier. When tying is combined with a non-compete obligation in respect of the tying product, this considerably strengthens the position of the supplier. (221) Buying power is relevant, as important buyers will not easily be forced to accept tying without obtaining at least part of the possible efficiencies. Tying not based on efficiency is therefore mainly a risk where buyers do not have significant buying power. (222) Where appreciable anti-competitive effects are established, the question whether the conditions of Article 101(3) are fulfilled arises. Tying obligations may help to produce efficiencies arising from joint production or joint distribution. Where the tied product is not produced by the supplier, an efficiency may also arise from the supplier buying large quantities of the tied product. For tying to fulfil the conditions of Ar1211

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ticle 101(3), it must, however, be shown that at least part of these cost reductions are passed on to the consumer, which is normally not the case when the retailer is able to obtain, on a regular basis, supplies of the same or equivalent products on the same or better conditions than those offered by the supplier which applies the tying practice. Another efficiency may exist where tying helps to ensure a certain uniformity and quality standardisation (see paragraph (107)(i)). However, it needs to be demonstrated that the positive effects cannot be realised equally efficiently by requiring the buyer to use or resell products satisfying minimum quality standards, without requiring the buyer to purchase these from the supplier or someone designated by the latter. The requirements concerning minimum quality standards would not normally fall within the scope of Article 101(1). Where the supplier of the tying product imposes on the buyer the suppliers from which the buyer must purchase the tied product, for instance because the formulation of minimum quality standards is not possible, this may also fall outside the scope of Article 101(1), especially where the supplier of the tying product does not derive a direct (financial) benefit from designating the suppliers of the tied product.

2.10 Resale price restrictions (223) As explained in section III.3, resale price maintenance (RPM), that is, agreements or concerted practices having as their direct or indirect object the establishment of a fixed or minimum resale price or a fixed or minimum price level to be observed by the buyer, are treated as a hardcore restriction. Where an agreement includes RPM, that agreement is presumed to restrict competition and thus to fall within Article 101(1). It also gives rise to the presumption that the agreement is unlikely to fulfil the conditions of Article 101(3), for which reason the block exemption does not apply. However, undertakings have the possibility to plead an efficiency defence under Article 101(3) in an individual case. It is incumbent on the parties to substantiate that likely efficiencies result from including RPM in their agreement and demonstrate that all the conditions of Article 101(3) are fulfilled. It then falls to the Commission to effectively assess the likely negative effects on competition and consumers before deciding whether the conditions of Article 101(3) are fulfilled. (224) RPM may restrict competition in a number of ways. Firstly, RPM may facilitate collusion between suppliers by enhancing price transparency on the market, thereby making it easier to detect whether a supplier deviates 1212

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from the collusive equilibrium by cutting its price. RPM also undermines the incentive for the supplier to cut its price to its distributors, as the fixed resale price will prevent it from benefiting from expanded sales. Such a negative effect is particularly plausible where the market is prone to collusive outcomes, for instance if the manufacturers form a tight oligopoly, and a significant part of the market is covered by RPM agreements. Second, by eliminating intra-brand price competition, RPM may also facilitate collusion between the buyers, that is, at the distribution level. Strong or well organised distributors may be able to force or convince one or more suppliers to fix their resale price above the competitive level and thereby help them to reach or stabilise a collusive equilibrium. The resulting loss of price competition seems especially problematic when the RPM is inspired by the buyers, whose collective horizontal interests can be expected to work out negatively for consumers. Third, RPM may more generally soften competition between manufacturers and/or between retailers, in particular when manufacturers use the same distributors to distribute their products and RPM is applied by all or many of them. Fourth, the immediate effect of RPM will be that all or certain distributors are prevented from lowering their sales price for that particular brand. In other words, the direct effect of RPM is a price increase. Fifth, RPM may lower the pressure on the margin of the manufacturer, in particular where the manufacturer has a commitment problem, that is, where it has an interest in lowering the price charged to subsequent distributors. In such a situation, the manufacturer may prefer to agree to RPM, so as to help it to commit not to lower the price for subsequent distributors and to reduce the pressure on its own margin. Sixth, RPM may be implemented by a manufacturer with market power to foreclose smaller rivals. The increased margin that RPM may offer distributors, may entice the latter to favour the particular brand over rival brands when advising customers, even where such advice is not in the interest of these customers, or not to sell these rival brands at all. Lastly, RPM may reduce dynamism and innovation at the distribution level. By preventing price competition between different distributors, RPM may prevent more efficient retailers from entering the market or acquiring sufficient scale with low prices. It also may prevent or hinder the entry and expansion of distribution formats based on low prices, such as price discounters. (225) However, RPM may not only restrict competition but may also, in particular where it is supplier driven, lead to efficiencies, which will be assessed under Article 101(3). Most notably, where a manufacturer introduces a 1213

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new product, RPM may be helpful during the introductory period of expanding demand to induce distributors to better take into account the manufacturer’s interest to promote the product. RPM may provide the distributors with the means to increase sales efforts and if the distributors on this market are under competitive pressure this may induce them to expand overall demand for the product and make the launch of the product a success, also for the benefit of consumers.61 Similarly, fixed resale prices, and not just maximum resale prices, may be necessary to organise in a franchise system or similar distribution system applying a uniform distribution format a coordinated short term low price campaign (2 to 6 weeks in most cases) which will also benefit the consumers. In some situations, the extra margin provided by RPM may allow retailers to provide (additional) pre-sales services, in particular in case of experience or complex products. If enough customers take advantage from such services to make their choice but then purchase at a lower price with retailers that do not provide such services (and hence do not incur these costs), high-service retailers may reduce or eliminate these services that enhance the demand for the supplier’s product. RPM may help to prevent such free-riding at the distribution level. The parties will have to convincingly demonstrate that the RPM agreement can be expected to not only provide the means but also the incentive to overcome possible free riding between retailers on these services and that the pre-sales services overall benefit consumers as part of the demonstration that all the conditions of Article 101(3) are fulfilled. (226) The practice of recommending a resale price to a reseller or requiring the reseller to respect a maximum resale price is covered by the Block Exemption Regulation when the market share of each of the parties to the agreement does not exceed the 30 % threshold, provided it does not amount to a minimum or fixed sale price as a result of pressure from, or incentives offered by, any of the parties. The remainder of this section provides guidance for the assessment of maximum or recommended prices above the market share threshold and for cases of withdrawal of the block exemption. (227) The possible competition risk of maximum and recommended prices is that they will work as a focal point for the resellers and might be followed by most or all of them and/or that maximum or recommended prices may soften competition or facilitate collusion between suppliers.

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(228) An important factor for assessing possible anti-competitive effects of maximum or recommended resale prices is the market position of the supplier. The stronger the market position of the supplier, the higher the risk that a maximum resale price or a recommended resale price leads to a more or less uniform application of that price level by the resellers, because they may use it as a focal point. They may find it difficult to deviate from what they perceive to be the preferred resale price proposed by such an important supplier on the market. (229) Where appreciable anti-competitive effects are established for maximum or recommended resale prices, the question of a possible exemption under Article 101(3) arises. For maximum resale prices, the efficiency described in paragraph  (107)(f ) (avoiding double marginalisation), may be particularly relevant. A maximum resale price may also help to ensure that the brand in question competes more forcefully with other brands, including own label products, distributed by the same distributor.

Notes 1

With effect from 1 December 2009, Articles 81 and 82 of the EC Treaty have become Articles 101 and, 102, respectively, of the Treaty on the Functioning of the European Union (“TFEU”). The two sets of provisions are, in substance, identical. For the purposes of these Guidelines, references to Articles 101 and 102 of the TFEU should be understood as references to Articles 81 and 82, respectively, of the EC Treaty where appropriate. The TFEU also introduced certain changes in terminology, such as the replacement of “Community” by “Union” and “common market” by “internal market”. The terminology of the TFEU will be used throughout these Guidelines.



These Guidelines replace the Commission Notice – Guidelines on Vertical Restraints, OJ C 291, 13.10.2000, p. 1.

2

OJ L 102, 23.4.2010, p. 1.

3

See inter alia judgments of the Court of Justice in Joined Cases 56/64 and 58/64 Grundig-Consten v Commission [1966] ECR 299; Case 56/65 Technique Minière v Maschinenbau Ulm [1966] ECR 235; and judgment of the Court of First Instance in Case T-77/92 Parker Pen v Commission [1994] ECR II‑549.

4

See Communication from the Commission - Notice – Guidelines on the application of Article 81(3) of the Treaty, OJ C 101, 27.4.2004, p. 97 for the Commission’s general methodology and interpretation of the conditions for applying Article 101(1) and in particular Article 101(3).

5

OJ C 368, 22.12.2001, p. 13.

6

For agreements between competing undertakings the de minimis market share threshold is 10 % for their collective market share on each affected relevant market.

7

See judgment of the Court of First Instance in Case T-7/93 Langnese-Iglo v Commission [1995] ECR II1533, paragraph 98.

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8

See judgments of the Court of Justice in Case 5/69 Völk v Vervaecke [1969] ECR 295; Case 1/71 Cadillon v Höss [1971] ECR 351 and Case C-306/96 Javico v Yves Saint Laurent [1998] ECR I-1983, paragraphs 16 and 17.

9

OJ L 124, 20.5.2003, p. 36.

10

See judgment of the Court of First Instance in Case T-325/01 Daimler Chrysler v Commission [2005] ECR II-3319; judgments of the Court of Justice in Case C-217/05 Confederación Espanola de Empresarios de Estaciones de Servicio v CEPSA [2006] ECR I-11987; and Case C‑279/06 CEPSA Estaciones de Servicio SA v LV Tobar e Hijos SL [2008] ECR I-6681.

11

OJ C 1, 3.1.1979, p. 2.

12

See paragraph 3 of the subcontracting notice.

13

Judgment of the Court of Justice in Case C-74/04 P Commission v Volkswagen AG [2006] ECR I-6585.

14

Judgment of the Court of First Instance in Case T-41/96 Bayer AG v Commission [2000] ECR II-3383.

15

OJ L 203, 1.8.2002, p. 30.

16

OJ C 3, 6.1.2001, p. 2. A revision of those Guidelines is forthcoming.

17

See Commission Notice on the definition of the relevant market for the purposes of Community competition law, OJ C 372, 9.12.1997, p. 5, paragraphs 20 to 24, the Commission’s Thirteenth Report on Competition Policy, point  55, and Commission Decision 90/410/EEC in Case No  IV/32.009 — Elopak/Metal Box-Odin, OJ L 209, 8.8.1990, p. 15.

18

See paragraph (27).

19

See the subcontracting notice (referred to in paragraph (22)).

20

Paragraphs 43-45 apply by analogy to other types of distribution agreements which involve the transfer of substantial know-how from supplier to buyer.

21

OJ L 123, 27.4.2004, p. 11.

22

See paragraph (25).

23

OJ L 304, 5.12.2000, p. 3.

24

OJ L 304, 5.12.2000, p. 7.

25

This list of hardcore restrictions applies to vertical agreements concerning trade within the Union. In so far as vertical agreements concern exports outside the Union or imports/re-imports from outside the Union see judgment of the Court of Justice in Case C-306/96 Javico v Yves Saint Laurent [1998] ECR I-1983. In that judgment the ECJ held in paragraph 20 that “an agreement in which the reseller gives to the producer an undertaking that it will sell the contractual products on a market outside the Community cannot be regarded as having the object of appreciably restricting competition within the common market or as being capable of affecting, as such, trade between Member States”.

26

See in particular paragraphs 106 to 109 describing in general possible efficiencies related to vertical restraints and Section VI.2.10 on resale price restrictions. See for general guidance on this the Communication from the Commission - Notice – Guidelines on the application of Article 81(3) of the Treaty, OJ C 101, 27.4.2004, p. 97.

27

Although, in legal terms, these are two distinct steps, they may in practice be an iterative process where the parties and Commission in several steps enhance and improve their respective arguments.

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28

See, for instance, Commission Decision 91/562/EEC in Case No  IV/32.737 — Eirpage, OJ L  306, 7.11.1991, p. 22, in particular recital (6).

29

If the supplier decides not to reimburse its distributors for services rendered under the Union-wide guarantee, it may be agreed with these distributors that a distributor which makes a sale outside its allocated territory, will have to pay the distributor appointed in the territory of destination a fee based on the cost of the services (to be) carried out including a reasonable profit margin. This type of scheme may not be seen as a restriction of the distributors’ sales outside their territory (see judgment of the Court of First Instance in Case T-67/01 JCB Service v Commission [2004] ECR II-49, paragraphs 136 to 145).

30

See paragraph 18 of Communication from the Commission - Notice – Guidelines on the application of Article 81(3) of the Treaty, OJ C 101, 27.4.2004, p. 97.

31

An example of indirect measures having such exclusionary effects can be found in Commission Decision 92/428/EEC in Case No IV/33.542 — Parfum Givenchy, OJ L 236, 19.8.1992, p. 11.

32

Judgment of the Court of Justice of 28 February 1991 in Case C-234/89, Stergios Delimitis v Henninger Bräu AG [1991] ECR I-935.

33

OJ 36, 6.3.1965, p. 533/65, English special edition: OJ Series I Chapter 1965-1966, p. 35.

34

OJ C 372, 9.12.1997, p. 5.

35

See for example Commission Decision in Pelikan/Kyocera (1995), COM(96) 126 (not published), point 87, and Commission Decision 91/595/EEC in Case No IV/M.12 — Varta/Bosch, OJ L 320, 22.11.1991, p. 26, Commission Decision in Case No IV/M.1094 — Caterpillar/Perkins Engines, OJ C 94, 28.3.1998, p. 23, and Commission Decision in Case No IV/M.768 — Lucas/Varity, OJ C 266, 13.9.1996, p. 6. See also point 56 of the Notice on the definition of the relevant market for the purposes of Community competition law (see paragraph 86).

36

For these market definition and market share calculation purposes, it is not relevant whether the integrated distributor sells in addition products of competitors.

37

OJ L 1, 4.1.2003, p. 1.

38

See Section II.1.

39

By collusion is meant both explicit collusion and tacit collusion (conscious parallel behaviour).

40

Whether consumers actually benefit overall from extra promotional efforts depends on whether the extra promotion informs and convinces and thus benefits many new customers or mainly reaches customers who already know what they want to buy and for whom the extra promotion only or mainly implies a price increase.

41

See however the previous footnote.

42

These steps are not intended to present a legal reasoning that the Commission should follow in this order to take a decision.

43

See Commission Decision 97/26/EC (Case No IV/M.619 — Gencor/Lonrho), OJ L 11, 14.1.1997, p. 30.

44

See Communication from the Commission - Notice – Guidelines on the application of Article 81(3) of the Treaty, OJ C 101, 27.4.2004, p. 97.

45

See Judgment of the Court of Justice in Joined Cases 25/84 and 26/84 Ford [1985] ECR 2725.

46

See in this respect for example Commission Decision 1999/242/EC (Case No IV/36.237 – TPS), OJ L 90, 2.4.1999, p. 6. Similarly, the prohibition of Article 101(1) also only applies as long as the agreement has a restrictive object or restrictive effects.

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47

See paragraph 85 of Communication from the Commission - Notice – Guidelines on the application of Article 81(3) of the Treaty, OJ C 101, 27.4.2004, p. 97.

48

See Judgment of the Court of Justice in Joined Cases C-395/96 P and C-396/96 P Compagnie Maritime Belge [2000] ECR I-1365, paragraph 130. Similarly, the application of Article 101(3) does not prevent the application of the Treaty rules on the free movement of goods, services, persons and capital. These provisions are in certain circumstances applicable to agreements, decisions and concerted practices within the meaning of Article 101(1), see to that effect Judgment of the Court of Justice in Case C‑309/99 Wouters [2002] ECR I-1577, paragraph 120.

49

See in this respect Judgment of the Court of First Instance in Case T-51/89 Tetra Pak (I) [1990] ECR II‑309. See also paragraph 106 of Communication from the Commission - Notice – Guidelines on the application of Article 81(3) of the Treaty, OJ C 101, 27.4.2004, p. 97.

50

Judgment of the Court of First Instance in Case T-65/98 Van den Bergh Foods v Commission [2003] ECR II-4653, paragraphs 104 and 156.

51

See for example judgment of the Court of First Instance in Case T-88/92 Groupement d’achat Édouard Leclerc v Commission [1996] ECR II-1961.

52

See judgments of the Court of Justice in Case 31/80 L’Oréal v PVBA [1980] ECR 3775, paragraphs 15 and 16; Case 26/76 Metro I [1977] ECR 1875, paragraphs 20 and 21; Case 107/82 AEG [1983] ECR 3151, paragraph 35; and judgment of the Court of First Instance in Case T-19/91 Vichy v Commission [1992] ECR II-415, paragraph 65.

53

See for example judgments of the Court of First Instance in Case T-19/92, Groupement d’achat Edouard Leclerc v Commission [1996] ECR II-1851, paragraphs 112 to 123; Case T-88/92 Groupement d’achat Edouard Leclerc v Commission [1996] ECR II-1961, paragraphs 106 to 117, and the case law referred to in the preceding footnote.

54

See also paragraphs (86) to (95), in particular paragraph (92).

55

Fixed fees that manufacturers pay to retailers in order to get access to their shelf space.

56

Lump sum payments made to ensure the continued presence of an existing product on the shelf for some further period.

57

Direct information exchange between competitors is not covered by the Block Exemption Regulation, see Article 2(4) of that Regulation and paragraphs 27-28 of these Guidelines.

58

Judgment of the Court of Justice in Case C-333/94 P Tetrapak v Commission [1996] ECR I-5951, paragraph 37. See also Communication from the Commission – Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive conduct by dominant undertakings, OJ C 45, 24.2.2009, p. 7.

59

Judgment of the Court of First Instance in Case T-201/04 Microsoft v Commission [2007] ECR II-3601, paragraphs 917, 921 and 922.

60

Judgment of the Court of First Instance in Case T-30/89 Hilti v Commission [1991] ECR II-1439, paragraph 67.

61

This assumes that it is not practical for the supplier to impose on all buyers by contract effective promotion requirements, see also paragraph 107 point (a).

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Appendix 5 Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings (the EC Merger Regulation) (Text with EEA relevance)

THE COUNCIL OF THE EUROPEAN UNION, Having regard to the Treaty establishing the European Community, and in particular Articles 83 and 308 thereof, Having regard to the proposal from the Commission1, Having regard to the opinion of the European Parliament2, Having regard to the opinion of the European Economic and Social Committee3, Whereas: (1) Council Regulation (EEC) No 4064/89 of 21 December 1989 on the control of concentrations between undertakings4 has been substantially amended. Since further amendments are to be made, it should be recast in the interest of clarity. (2) For the achievement of the aims of the Treaty, Article 3(1)(g) gives the Community the objective of instituting a system ensuring that competition in the internal market is not distorted. Article 4(1) of the Treaty provides that the activities of the Member States and the Community 1219

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are to be conducted in accordance with the principle of an open market economy with free competition. These principles are essential for the further development of the internal market. (3) The completion of the internal market and of economic and monetary union, the enlargement of the European Union and the lowering of international barriers to trade and investment will continue to result in major corporate reorganisations, particularly in the form of concentrations. (4) Such reorganisations are to be welcomed to the extent that they are in line with the requirements of dynamic competition and capable of increasing the competitiveness of European industry, improving the conditions of growth and raising the standard of living in the Community. (5) However, it should be ensured that the process of reorganisation does not result in lasting damage to competition; Community law must therefore include provisions governing those concentrations which may significantly impede effective competition in the common market or in a substantial part of it. (6) A specific legal instrument is therefore necessary to permit effective control of all concentrations in terms of their effect on the structure of competition in the Community and to be the only instrument applicable to such concentrations. Regulation (EEC) No 4064/89 has allowed a Community policy to develop in this field. In the light of experience, however, that Regulation should now be recast into legislation designed to meet the challenges of a more integrated market and the future enlargement of the European Union. In accordance with the principles of subsidiarity and of proportionality as set out in Article 5 of the Treaty, this Regulation does not go beyond what is necessary in order to achieve the objective of ensuring that competition in the common market is not distorted, in accordance with the principle of an open market economy with free competition. (7) Articles 81 and 82, while applicable, according to the case-law of the Court of Justice, to certain concentrations, are not sufficient to control all operations which may prove to be incompatible with the system of undistorted competition envisaged in the Treaty. This Regulation should therefore be based not only on Article 83 but, principally, on Article 308 of the Treaty, under which the Community may give itself the additional 1220

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powers of action necessary for the attainment of its objectives, and also powers of action with regard to concentrations on the markets for agricultural products listed in Annex I to the Treaty. (8) The provisions to be adopted in this Regulation should apply to significant structural changes, the impact of which on the market goes beyond the national borders of any one Member State. Such concentrations should, as a general rule, be reviewed exclusively at Community level, in application of a “one-stop shop” system and in compliance with the principle of subsidiarity. Concentrations not covered by this Regulation come, in principle, within the jurisdiction of the Member States. (9) The scope of application of this Regulation should be defined according to the geographical area of activity of the undertakings concerned and be limited by quantitative thresholds in order to cover those concentrations which have a Community dimension. The Commission should report to the Council on the implementation of the applicable thresholds and criteria so that the Council, acting in accordance with Article 202 of the Treaty, is in a position to review them regularly, as well as the rules regarding pre-notification referral, in the light of the experience gained; this requires statistical data to be provided by the Member States to the Commission to enable it to prepare such reports and possible proposals for amendments. The Commission’s reports and proposals should be based on relevant information regularly provided by the Member States. (10) A concentration with a Community dimension should be deemed to exist where the aggregate turnover of the undertakings concerned exceeds given thresholds; that is the case irrespective of whether or not the undertakings effecting the concentration have their seat or their principal fields of activity in the Community, provided they have substantial operations there. (11) The rules governing the referral of concentrations from the Commission to Member States and from Member States to the Commission should operate as an effective corrective mechanism in the light of the principle of subsidiarity; these rules protect the competition interests of the Member States in an adequate manner and take due account of legal certainty and the “one-stop shop” principle. (12) Concentrations may qualify for examination under a number of national merger control systems if they fall below the turnover thresholds referred 1221

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to in this Regulation. Multiple notification of the same transaction increases legal uncertainty, effort and cost for undertakings and may lead to conflicting assessments. The system whereby concentrations may be referred to the Commission by the Member States concerned should therefore be further developed. (13) The Commission should act in close and constant liaison with the competent authorities of the Member States from which it obtains comments and information. (14) The Commission and the competent authorities of the Member States should together form a network of public authorities, applying their respective competences in close cooperation, using efficient arrangements for information-sharing and consultation, with a view to ensuring that a case is dealt with by the most appropriate authority, in the light of the principle of subsidiarity and with a view to ensuring that multiple notifications of a given concentration are avoided to the greatest extent possible. Referrals of concentrations from the Commission to Member States and from Member States to the Commission should be made in an efficient manner avoiding, to the greatest extent possible, situations where a concentration is subject to a referral both before and after its notification. (15) The Commission should be able to refer to a Member State notified concentrations with a Community dimension which threaten significantly to affect competition in a market within that Member State presenting all the characteristics of a distinct market. Where the concentration affects competition on such a market, which does not constitute a substantial part of the common market, the Commission should be obliged, upon request, to refer the whole or part of the case to the Member State concerned. A Member State should be able to refer to the Commission a concentration which does not have a Community dimension but which affects trade between Member States and threatens to significantly affect competition within its territory. Other Member States which are also competent to review the concentration should be able to join the request. In such a situation, in order to ensure the efficiency and predictability of the system, national time limits should be suspended until a decision has been reached as to the referral of the case. The Commission should have the power to examine and deal with a concentration on behalf of a requesting Member State or requesting Member States.

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(16) The undertakings concerned should be granted the possibility of requesting referrals to or from the Commission before a concentration is notified so as to further improve the efficiency of the system for the control of concentrations within the Community. In such situations, the Commission and national competition authorities should decide within short, clearly defined time limits whether a referral to or from the Commission ought to be made, thereby ensuring the efficiency of the system. Upon request by the undertakings concerned, the Commission should be able to refer to a Member State a concentration with a Community dimension which may significantly affect competition in a market within that Member State presenting all the characteristics of a distinct market; the undertakings concerned should not, however, be required to demonstrate that the effects of the concentration would be detrimental to competition. A concentration should not be referred from the Commission to a Member State which has expressed its disagreement to such a referral. Before notification to national authorities, the undertakings concerned should also be able to request that a concentration without a Community dimension which is capable of being reviewed under the national competition laws of at least three Member States be referred to the Commission. Such requests for pre-notification referrals to the Commission would be particularly pertinent in situations where the concentration would affect competition beyond the territory of one Member State. Where a concentration capable of being reviewed under the competition laws of three or more Member States is referred to the Commission prior to any national notification, and no Member State competent to review the case expresses its disagreement, the Commission should acquire exclusive competence to review the concentration and such a concentration should be deemed to have a Community dimension. Such pre-notification referrals from Member States to the Commission should not, however, be made where at least one Member State competent to review the case has expressed its disagreement with such a referral. (17) The Commission should be given exclusive competence to apply this Regulation, subject to review by the Court of Justice. (18) The Member States should not be permitted to apply their national legislation on competition to concentrations with a Community dimension, unless this Regulation makes provision therefor. The relevant powers of national authorities should be limited to cases where, failing intervention by the Commission, effective competition is likely to be significantly im1223

Appendix 5 Control of concentrations between undertakings

peded within the territory of a Member State and where the competition interests of that Member State cannot be sufficiently protected otherwise by this Regulation. The Member States concerned must act promptly in such cases; this Regulation cannot, because of the diversity of national law, fix a single time limit for the adoption of final decisions under national law. (19) Furthermore, the exclusive application of this Regulation to concentrations with a Community dimension is without prejudice to Article 296 of the Treaty, and does not prevent the Member States from taking appropriate measures to protect legitimate interests other than those pursued by this Regulation, provided that such measures are compatible with the general principles and other provisions of Community law. (20) It is expedient to define the concept of concentration in such a manner as to cover operations bringing about a lasting change in the control of the undertakings concerned and therefore in the structure of the market. It is therefore appropriate to include, within the scope of this Regulation, all joint ventures performing on a lasting basis all the functions of an autonomous economic entity. It is moreover appropriate to treat as a single concentration transactions that are closely connected in that they are linked by condition or take the form of a series of transactions in securities taking place within a reasonably short period of time. (21) This Regulation should also apply where the undertakings concerned accept restrictions directly related to, and necessary for, the implementation of the concentration. Commission decisions declaring concentrations compatible with the common market in application of this Regulation should automatically cover such restrictions, without the Commission having to assess such restrictions in individual cases. At the request of the undertakings concerned, however, the Commission should, in cases presenting novel or unresolved questions giving rise to genuine uncertainty, expressly assess whether or not any restriction is directly related to, and necessary for, the implementation of the concentration. A case presents a novel or unresolved question giving rise to genuine uncertainty if the question is not covered by the relevant Commission notice in force or a published Commission decision. (22) The arrangements to be introduced for the control of concentrations should, without prejudice to Article 86(2) of the Treaty, respect the prin1224

Appendix 5 Control of concentrations between undertakings

ciple of non-discrimination between the public and the private sectors. In the public sector, calculation of the turnover of an undertaking concerned in a concentration needs, therefore, to take account of undertakings making up an economic unit with an independent power of decision, irrespective of the way in which their capital is held or of the rules of administrative supervision applicable to them. (23) It is necessary to establish whether or not concentrations with a Community dimension are compatible with the common market in terms of the need to maintain and develop effective competition in the common market. In so doing, the Commission must place its appraisal within the general framework of the achievement of the fundamental objectives referred to in Article 2 of the Treaty establishing the European Community and Article 2 of the Treaty on European Union. (24) In order to ensure a system of undistorted competition in the common market, in furtherance of a policy conducted in accordance with the principle of an open market economy with free competition, this Regulation must permit effective control of all concentrations from the point of view of their effect on competition in the Community. Accordingly, Regulation (EEC) No 4064/89 established the principle that a concentration with a Community dimension which creates or strengthens a dominant position as a result of which effective competition in the common market or in a substantial part of it would be significantly impeded should be declared incompatible with the common market. (25) In view of the consequences that concentrations in oligopolistic market structures may have, it is all the more necessary to maintain effective competition in such markets. Many oligopolistic markets exhibit a healthy degree of competition. However, under certain circumstances, concentrations involving the elimination of important competitive constraints that the merging parties had exerted upon each other, as well as a reduction of competitive pressure on the remaining competitors, may, even in the absence of a likelihood of coordination between the members of the oligopoly, result in a significant impediment to effective competition. The Community courts have, however, not to date expressly interpreted Regulation (EEC) No 4064/89 as requiring concentrations giving rise to such non-coordinated effects to be declared incompatible with the common market. Therefore, in the interests of legal certainty, it should be made clear that this Regulation permits effective control of all such 1225

Appendix 5 Control of concentrations between undertakings

concentrations by providing that any concentration which would significantly impede effective competition, in the common market or in a substantial part of it, should be declared incompatible with the common market. The notion of “significant impediment to effective competition” in Article 2(2) and (3) should be interpreted as extending, beyond the concept of dominance, only to the anti-competitive effects of a concentration resulting from the non-coordinated behaviour of undertakings which would not have a dominant position on the market concerned. (26) A significant impediment to effective competition generally results from the creation or strengthening of a dominant position. With a view to preserving the guidance that may be drawn from past judgments of the European courts and Commission decisions pursuant to Regulation (EEC) No 4064/89, while at the same time maintaining consistency with the standards of competitive harm which have been applied by the Commission and the Community courts regarding the compatibility of a concentration with the common market, this Regulation should accordingly establish the principle that a concentration with a Community dimension which would significantly impede effective competition, in the common market or in a substantial part thereof, in particular as a result of the creation or strengthening of a dominant position, is to be declared incompatible with the common market. (27) In addition, the criteria of Article 81(1) and (3) of the Treaty should be applied to joint ventures performing, on a lasting basis, all the functions of autonomous economic entities, to the extent that their creation has as its consequence an appreciable restriction of competition between undertakings that remain independent. (28) In order to clarify and explain the Commission’s appraisal of concentrations under this Regulation, it is appropriate for the Commission to publish guidance which should provide a sound economic framework for the assessment of concentrations with a view to determining whether or not they may be declared compatible with the common market. (29) In order to determine the impact of a concentration on competition in the common market, it is appropriate to take account of any substantiated and likely efficiencies put forward by the undertakings concerned. It is possible that the efficiencies brought about by the concentration counteract the effects on competition, and in particular the potential harm to 1226

Appendix 5 Control of concentrations between undertakings

consumers, that it might otherwise have and that, as a consequence, the concentration would not significantly impede effective competition, in the common market or in a substantial part of it, in particular as a result of the creation or strengthening of a dominant position. The Commission should publish guidance on the conditions under which it may take efficiencies into account in the assessment of a concentration. (30) Where the undertakings concerned modify a notified concentration, in particular by offering commitments with a view to rendering the concentration compatible with the common market, the Commission should be able to declare the concentration, as modified, compatible with the common market. Such commitments should be proportionate to the competition problem and entirely eliminate it. It is also appropriate to accept commitments before the initiation of proceedings where the competition problem is readily identifiable and can easily be remedied. It should be expressly provided that the Commission may attach to its decision conditions and obligations in order to ensure that the undertakings concerned comply with their commitments in a timely and effective manner so as to render the concentration compatible with the common market. Transparency and effective consultation of Member States as well as of interested third parties should be ensured throughout the procedure. (31) The Commission should have at its disposal appropriate instruments to ensure the enforcement of commitments and to deal with situations where they are not fulfilled. In cases of failure to fulfil a condition attached to the decision declaring a concentration compatible with the common market, the situation rendering the concentration compatible with the common market does not materialise and the concentration, as implemented, is therefore not authorised by the Commission. As a consequence, if the concentration is implemented, it should be treated in the same way as a non-notified concentration implemented without authorisation. Furthermore, where the Commission has already found that, in the absence of the condition, the concentration would be incompatible with the common market, it should have the power to directly order the dissolution of the concentration, so as to restore the situation prevailing prior to the implementation of the concentration. Where an obligation attached to a decision declaring the concentration compatible with the common market is not fulfilled, the Commission should be able to revoke its decision. Moreover, the Commission should be able to impose appropriate financial sanctions where conditions or obligations are not fulfilled. 1227

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(32) Concentrations which, by reason of the limited market share of the undertakings concerned, are not liable to impede effective competition may be presumed to be compatible with the common market. Without prejudice to Articles 81 and 82 of the Treaty, an indication to this effect exists, in particular, where the market share of the undertakings concerned does not exceed 25 % either in the common market or in a substantial part of it. (33) The Commission should have the task of taking all the decisions necessary to establish whether or not concentrations with a Community dimension are compatible with the common market, as well as decisions designed to restore the situation prevailing prior to the implementation of a concentration which has been declared incompatible with the common market. (34) To ensure effective control, undertakings should be obliged to give prior notification of concentrations with a Community dimension following the conclusion of the agreement, the announcement of the public bid or the acquisition of a controlling interest. Notification should also be possible where the undertakings concerned satisfy the Commission of their intention to enter into an agreement for a proposed concentration and demonstrate to the Commission that their plan for that proposed concentration is sufficiently concrete, for example on the basis of an agreement in principle, a memorandum of understanding, or a letter of intent signed by all undertakings concerned, or, in the case of a public bid, where they have publicly announced an intention to make such a bid, provided that the intended agreement or bid would result in a concentration with a Community dimension. The implementation of concentrations should be suspended until a final decision of the Commission has been taken. However, it should be possible to derogate from this suspension at the request of the undertakings concerned, where appropriate. In deciding whether or not to grant a derogation, the Commission should take account of all pertinent factors, such as the nature and gravity of damage to the undertakings concerned or to third parties, and the threat to competition posed by the concentration. In the interest of legal certainty, the validity of transactions must nevertheless be protected as much as necessary. (35) A period within which the Commission must initiate proceedings in respect of a notified concentration and a period within which it must take a 1228

Appendix 5 Control of concentrations between undertakings

final decision on the compatibility or incompatibility with the common market of that concentration should be laid down. These periods should be extended whenever the undertakings concerned offer commitments with a view to rendering the concentration compatible with the common market, in order to allow for sufficient time for the analysis and market testing of such commitment offers and for the consultation of Member States as well as interested third parties. A limited extension of the period within which the Commission must take a final decision should also be possible in order to allow sufficient time for the investigation of the case and the verification of the facts and arguments submitted to the Commission. (36) The Community respects the fundamental rights and observes the principles recognised in particular by the Charter of Fundamental Rights of the European Union5. Accordingly, this Regulation should be interpreted and applied with respect to those rights and principles. (37) The undertakings concerned must be afforded the right to be heard by the Commission when proceedings have been initiated; the members of the management and supervisory bodies and the recognised representatives of the employees of the undertakings concerned, and interested third parties, must also be given the opportunity to be heard. (38) In order properly to appraise concentrations, the Commission should have the right to request all necessary information and to conduct all necessary inspections throughout the Community. To that end, and with a view to protecting competition effectively, the Commission’s powers of investigation need to be expanded. The Commission should, in particular, have the right to interview any persons who may be in possession of useful information and to record the statements made. (39) In the course of an inspection, officials authorised by the Commission should have the right to ask for any information relevant to the subject matter and purpose of the inspection; they should also have the right to affix seals during inspections, particularly in circumstances where there are reasonable grounds to suspect that a concentration has been implemented without being notified; that incorrect, incomplete or misleading information has been supplied to the Commission; or that the undertakings or persons concerned have failed to comply with a condition or obligation imposed by decision of the Commission. In any event, seals should 1229

Appendix 5 Control of concentrations between undertakings

only be used in exceptional circumstances, for the period of time strictly necessary for the inspection, normally not for more than 48 hours. (40) Without prejudice to the case-law of the Court of Justice, it is also useful to set out the scope of the control that the national judicial authority may exercise when it authorises, as provided by national law and as a precautionary measure, assistance from law enforcement authorities in order to overcome possible opposition on the part of the undertaking against an inspection, including the affixing of seals, ordered by Commission decision. It results from the case-law that the national judicial authority may in particular ask of the Commission further information which it needs to carry out its control and in the absence of which it could refuse the authorisation. The case-law also confirms the competence of the national courts to control the application of national rules governing the implementation of coercive measures. The competent authorities of the Member States should cooperate actively in the exercise of the Commission’s investigative powers. (41) When complying with decisions of the Commission, the undertakings and persons concerned cannot be forced to admit that they have committed infringements, but they are in any event obliged to answer factual questions and to provide documents, even if this information may be used to establish against themselves or against others the existence of such infringements. (42) For the sake of transparency, all decisions of the Commission which are not of a merely procedural nature should be widely publicised. While ensuring preservation of the rights of defence of the undertakings concerned, in particular the right of access to the file, it is essential that business secrets be protected. The confidentiality of information exchanged in the network and with the competent authorities of third countries should likewise be safeguarded. (43) Compliance with this Regulation should be enforceable, as appropriate, by means of fines and periodic penalty payments. The Court of Justice should be given unlimited jurisdiction in that regard pursuant to Article 229 of the Treaty. (44) The conditions in which concentrations, involving undertakings having their seat or their principal fields of activity in the Community, are car1230

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ried out in third countries should be observed, and provision should be made for the possibility of the Council giving the Commission an appropriate mandate for negotiation with a view to obtaining non-discriminatory treatment for such undertakings. (45) This Regulation in no way detracts from the collective rights of employees, as recognised in the undertakings concerned, notably with regard to any obligation to inform or consult their recognised representatives under Community and national law. (46) The Commission should be able to lay down detailed rules concerning the implementation of this Regulation in accordance with the procedures for the exercise of implementing powers conferred on the Commission. For the adoption of such implementing provisions, the Commission should be assisted by an Advisory Committee composed of the representatives of the Member States as specified in Article 23, HAS ADOPTED THIS REGULATION: Article 1 Scope 1. 2.

Without prejudice to Article 4(5) and Article 22, this Regulation shall apply to all concentrations with a Community dimension as defined in this Article. A concentration has a Community dimension where: (a) the combined aggregate worldwide turnover of all the undertakings concerned is more than EUR 5000 million; and (b) the aggregate Community-wide turnover of each of at least two of the undertakings concerned is more than EUR 250 million,



unless each of the undertakings concerned achieves more than two-thirds of its aggregate Community-wide turnover within one and the same Member State.

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3.

A concentration that does not meet the thresholds laid down in paragraph 2 has a Community dimension where: (a) the combined aggregate worldwide turnover of all the undertakings concerned is more than EUR 2500 million; (b) in each of at least three Member States, the combined aggregate turnover of all the undertakings concerned is more than EUR 100 million; (c)

in each of at least three Member States included for the purpose of point (b), the aggregate turnover of each of at least two of the undertakings concerned is more than EUR 25 million; and

(d) the aggregate Community-wide turnover of each of at least two of the undertakings concerned is more than EUR 100 million,

unless each of the undertakings concerned achieves more than two-thirds of its aggregate Community-wide turnover within one and the same Member State.

4.

On the basis of statistical data that may be regularly provided by the Member States, the Commission shall report to the Council on the operation of the thresholds and criteria set out in paragraphs 2 and 3 by 1 July 2009 and may present proposals pursuant to paragraph 5.

5.

Following the report referred to in paragraph 4 and on a proposal from the Commission, the Council, acting by a qualified majority, may revise the thresholds and criteria mentioned in paragraph 3. Article 2 Appraisal of concentrations

1.

Concentrations within the scope of this Regulation shall be appraised in accordance with the objectives of this Regulation and the following provisions with a view to establishing whether or not they are compatible with the common market.

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In making this appraisal, the Commission shall take into account: (a)

the need to maintain and develop effective competition within the common market in view of, among other things, the structure of all the markets concerned and the actual or potential competition from undertakings located either within or outwith the Community;

(b) the market position of the undertakings concerned and their economic and financial power, the alternatives available to suppliers and users, their access to supplies or markets, any legal or other barriers to entry, supply and demand trends for the relevant goods and services, the interests of the intermediate and ultimate consumers, and the development of technical and economic progress provided that it is to consumers’ advantage and does not form an obstacle to competition. 2.

A concentration which would not significantly impede effective competition in the common market or in a substantial part of it, in particular as a result of the creation or strengthening of a dominant position, shall be declared compatible with the common market.

3.

A concentration which would significantly impede effective competition, in the common market or in a substantial part of it, in particular as a result of the creation or strengthening of a dominant position, shall be declared incompatible with the common market.

4.

To the extent that the creation of a joint venture constituting a concentration pursuant to Article 3 has as its object or effect the coordination of the competitive behaviour of undertakings that remain independent, such coordination shall be appraised in accordance with the criteria of Article 81(1) and (3) of the Treaty, with a view to establishing whether or not the operation is compatible with the common market.

5.

In making this appraisal, the Commission shall take into account in particular: –

whether two or more parent companies retain, to a significant extent, activities in the same market as the joint venture or in a market which is downstream or upstream from that of the joint venture or in a neighbouring market closely related to this market, 1233

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–

whether the coordination which is the direct consequence of the creation of the joint venture affords the undertakings concerned the possibility of eliminating competition in respect of a substantial part of the products or services in question. Article 3 Definition of concentration

1.

A concentration shall be deemed to arise where a change of control on a lasting basis results from:

(a) the merger of two or more previously independent undertakings or parts of undertakings, or (b) the acquisition, by one or more persons already controlling at least one undertaking, or by one or more undertakings, whether by purchase of securities or assets, by contract or by any other means, of direct or indirect control of the whole or parts of one or more other undertakings. 2.

Control shall be constituted by rights, contracts or any other means which, either separately or in combination and having regard to the considerations of fact or law involved, confer the possibility of exercising decisive influence on an undertaking, in particular by: (a) ownership or the right to use all or part of the assets of an undertaking; (b) rights or contracts which confer decisive influence on the composition, voting or decisions of the organs of an undertaking.

3.

Control is acquired by persons or undertakings which: (a) are holders of the rights or entitled to rights under the contracts concerned; or (b) while not being holders of such rights or entitled to rights under such contracts, have the power to exercise the rights deriving therefrom. 1234

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4.

The creation of a joint venture performing on a lasting basis all the functions of an autonomous economic entity shall constitute a concentration within the meaning of paragraph 1(b).

5.

A concentration shall not be deemed to arise where: (a) credit institutions or other financial institutions or insurance companies, the normal activities of which include transactions and dealing in securities for their own account or for the account of others, hold on a temporary basis securities which they have acquired in an undertaking with a view to reselling them, provided that they do not exercise voting rights in respect of those securities with a view to determining the competitive behaviour of that undertaking or provided that they exercise such voting rights only with a view to preparing the disposal of all or part of that undertaking or of its assets or the disposal of those securities and that any such disposal takes place within one year of the date of acquisition; that period may be extended by the Commission on request where such institutions or companies can show that the disposal was not reasonably possible within the period set; (b) control is acquired by an office-holder according to the law of a Member State relating to liquidation, winding up, insolvency, cessation of payments, compositions or analogous proceedings; (c)

the operations referred to in paragraph 1(b) are carried out by the financial holding companies referred to in Article 5(3) of Fourth Council Directive 78/660/EEC of 25 July 1978 based on Article 54(3)(g) of the Treaty on the annual accounts of certain types of companies6 provided however that the voting rights in respect of the holding are exercised, in particular in relation to the appointment of members of the management and supervisory bodies of the undertakings in which they have holdings, only to maintain the full value of those investments and not to determine directly or indirectly the competitive conduct of those undertakings.

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Article 4 Prior notification of concentrations and pre-notification referral at the request of the notifying parties 1.

Concentrations with a Community dimension defined in this Regulation shall be notified to the Commission prior to their implementation and following the conclusion of the agreement, the announcement of the public bid, or the acquisition of a controlling interest.



Notification may also be made where the undertakings concerned demonstrate to the Commission a good faith intention to conclude an agreement or, in the case of a public bid, where they have publicly announced an intention to make such a bid, provided that the intended agreement or bid would result in a concentration with a Community dimension.



For the purposes of this Regulation, the term “notified concentration” shall also cover intended concentrations notified pursuant to the second subparagraph. For the purposes of paragraphs 4 and 5 of this Article, the term “concentration” includes intended concentrations within the meaning of the second subparagraph.

2.

A concentration which consists of a merger within the meaning of Article 3(1)(a) or in the acquisition of joint control within the meaning of Article 3(1)(b) shall be notified jointly by the parties to the merger or by those acquiring joint control as the case may be. In all other cases, the notification shall be effected by the person or undertaking acquiring control of the whole or parts of one or more undertakings.

3.

Where the Commission finds that a notified concentration falls within the scope of this Regulation, it shall publish the fact of the notification, at the same time indicating the names of the undertakings concerned, their country of origin, the nature of the concentration and the economic sectors involved. The Commission shall take account of the legitimate interest of undertakings in the protection of their business secrets.

4.

Prior to the notification of a concentration within the meaning of paragraph 1, the persons or undertakings referred to in paragraph 2 may inform the Commission, by means of a reasoned submission, that the concentration may significantly affect competition in a market within a 1236

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Member State which presents all the characteristics of a distinct market and should therefore be examined, in whole or in part, by that Member State.

The Commission shall transmit this submission to all Member States without delay. The Member State referred to in the reasoned submission shall, within 15 working days of receiving the submission, express its agreement or disagreement as regards the request to refer the case. Where that Member State takes no such decision within this period, it shall be deemed to have agreed.



Unless that Member State disagrees, the Commission, where it considers that such a distinct market exists, and that competition in that market may be significantly affected by the concentration, may decide to refer the whole or part of the case to the competent authorities of that Member State with a view to the application of that State’s national competition law.



The decision whether or not to refer the case in accordance with the third subparagraph shall be taken within 25 working days starting from the receipt of the reasoned submission by the Commission. The Commission shall inform the other Member States and the persons or undertakings concerned of its decision. If the Commission does not take a decision within this period, it shall be deemed to have adopted a decision to refer the case in accordance with the submission made by the persons or undertakings concerned.



If the Commission decides, or is deemed to have decided, pursuant to the third and fourth subparagraphs, to refer the whole of the case, no notification shall be made pursuant to paragraph 1 and national competition law shall apply. Article 9(6) to (9) shall apply mutatis mutandis.

5.

With regard to a concentration as defined in Article 3 which does not have a Community dimension within the meaning of Article 1 and which is capable of being reviewed under the national competition laws of at least three Member States, the persons or undertakings referred to in paragraph 2 may, before any notification to the competent authorities, inform the Commission by means of a reasoned submission that the concentration should be examined by the Commission.

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The Commission shall transmit this submission to all Member States without delay.



Any Member State competent to examine the concentration under its national competition law may, within 15 working days of receiving the reasoned submission, express its disagreement as regards the request to refer the case.



Where at least one such Member State has expressed its disagreement in accordance with the third subparagraph within the period of 15 working days, the case shall not be referred. The Commission shall, without delay, inform all Member States and the persons or undertakings concerned of any such expression of disagreement.



Where no Member State has expressed its disagreement in accordance with the third subparagraph within the period of 15 working days, the concentration shall be deemed to have a Community dimension and shall be notified to the Commission in accordance with paragraphs 1 and 2. In such situations, no Member State shall apply its national competition law to the concentration.

6.

The Commission shall report to the Council on the operation of paragraphs 4 and 5 by 1 July 2009. Following this report and on a proposal from the Commission, the Council, acting by a qualified majority, may revise paragraphs 4 and 5. Article 5 Calculation of turnover

1.



Aggregate turnover within the meaning of this Regulation shall comprise the amounts derived by the undertakings concerned in the preceding financial year from the sale of products and the provision of services falling within the undertakings’ ordinary activities after deduction of sales rebates and of value added tax and other taxes directly related to turnover. The aggregate turnover of an undertaking concerned shall not include the sale of products or the provision of services between any of the undertakings referred to in paragraph 4.

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Turnover, in the Community or in a Member State, shall comprise products sold and services provided to undertakings or consumers, in the Community or in that Member State as the case may be.

2.

By way of derogation from paragraph 1, where the concentration consists of the acquisition of parts, whether or not constituted as legal entities, of one or more undertakings, only the turnover relating to the parts which are the subject of the concentration shall be taken into account with regard to the seller or sellers.



However, two or more transactions within the meaning of the first subparagraph which take place within a two-year period between the same persons or undertakings shall be treated as one and the same concentration arising on the date of the last transaction.

3.

In place of turnover the following shall be used: (a) for credit institutions and other financial institutions, the sum of the following income items as defined in Council Directive 86/635/EEC7, after deduction of value added tax and other taxes directly related to those items, where appropriate: (i)

interest income and similar income;

(ii) income from securities: –

income from shares and other variable yield securities,

–

income from participating interests,

–

income from shares in affiliated undertakings;

(iii) commissions receivable; (iv) net profit on financial operations; (v) other operating income. 1239

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The turnover of a credit or financial institution in the Community or in a Member State shall comprise the income items, as defined above, which are received by the branch or division of that institution established in the Community or in the Member State in question, as the case may be;

(b) for insurance undertakings, the value of gross premiums written which shall comprise all amounts received and receivable in respect of insurance contracts issued by or on behalf of the insurance undertakings, including also outgoing reinsurance premiums, and after deduction of taxes and parafiscal contributions or levies charged by reference to the amounts of individual premiums or the total volume of premiums; as regards Article 1(2)(b) and (3)(b), (c) and (d) and the final part of Article 1(2) and (3), gross premiums received from Community residents and from residents of one Member State respectively shall be taken into account. 4.

Without prejudice to paragraph 2, the aggregate turnover of an undertaking concerned within the meaning of this Regulation shall be calculated by adding together the respective turnovers of the following: (a) the undertaking concerned; (b) those undertakings in which the undertaking concerned, directly or indirectly: (i)

owns more than half the capital or business assets, or

(ii) has the power to exercise more than half the voting rights, or (iii) has the power to appoint more than half the members of the supervisory board, the administrative board or bodies legally representing the undertakings, or (iv) has the right to manage the undertakings’ affairs; (c)

those undertakings which have in the undertaking concerned the rights or powers listed in (b);

(d) those undertakings in which an undertaking as referred to in (c) has the rights or powers listed in (b);

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(e) 5.

those undertakings in which two or more undertakings as referred to in (a) to (d) jointly have the rights or powers listed in (b).

Where undertakings concerned by the concentration jointly have the rights or powers listed in paragraph 4(b), in calculating the aggregate turnover of the undertakings concerned for the purposes of this Regulation:

(a) no account shall be taken of the turnover resulting from the sale of products or the provision of services between the joint undertaking and each of the undertakings concerned or any other undertaking connected with any one of them, as set out in paragraph 4(b) to (e); (b) account shall be taken of the turnover resulting from the sale of products and the provision of services between the joint undertaking and any third undertakings. This turnover shall be apportioned equally amongst the undertakings concerned. Article 6 Examination of the notification and initiation of proceedings 1.

The Commission shall examine the notification as soon as it is received. (a) Where it concludes that the concentration notified does not fall within the scope of this Regulation, it shall record that finding by means of a decision. (b) Where it finds that the concentration notified, although falling within the scope of this Regulation, does not raise serious doubts as to its compatibility with the common market, it shall decide not to oppose it and shall declare that it is compatible with the common market.

A decision declaring a concentration compatible shall be deemed to cover restrictions directly related and necessary to the implementation of the concentration.

(c)

Without prejudice to paragraph 2, where the Commission finds 1241

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that the concentration notified falls within the scope of this Regulation and raises serious doubts as to its compatibility with the common market, it shall decide to initiate proceedings. Without prejudice to Article 9, such proceedings shall be closed by means of a decision as provided for in Article 8(1) to (4), unless the undertakings concerned have demonstrated to the satisfaction of the Commission that they have abandoned the concentration. 2.

Where the Commission finds that, following modification by the undertakings concerned, a notified concentration no longer raises serious doubts within the meaning of paragraph 1(c), it shall declare the concentration compatible with the common market pursuant to paragraph 1(b).



The Commission may attach to its decision under paragraph 1(b) conditions and obligations intended to ensure that the undertakings concerned comply with the commitments they have entered into vis-à-vis the Commission with a view to rendering the concentration compatible with the common market.

3.

The Commission may revoke the decision it took pursuant to paragraph 1(a) or (b) where: (a) the decision is based on incorrect information for which one of the undertakings is responsible or where it has been obtained by deceit, or (b) the undertakings concerned commit a breach of an obligation attached to the decision.

4.

In the cases referred to in paragraph 3, the Commission may take a decision under paragraph 1, without being bound by the time limits referred to in Article 10(1).

5.

The Commission shall notify its decision to the undertakings concerned and the competent authorities of the Member States without delay.

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Article 7 Suspension of concentrations 1.

A concentration with a Community dimension as defined in Article 1, or which is to be examined by the Commission pursuant to Article 4(5), shall not be implemented either before its notification or until it has been declared compatible with the common market pursuant to a decision under Articles 6(1)(b), 8(1) or 8(2), or on the basis of a presumption according to Article 10(6).

2.

Paragraph 1 shall not prevent the implementation of a public bid or of a series of transactions in securities including those convertible into other securities admitted to trading on a market such as a stock exchange, by which control within the meaning of Article 3 is acquired from various sellers, provided that: (a) the concentration is notified to the Commission pursuant to Article 4 without delay; and (b) the acquirer does not exercise the voting rights attached to the securities in question or does so only to maintain the full value of its investments based on a derogation granted by the Commission under paragraph 3.

3.

The Commission may, on request, grant a derogation from the obligations imposed in paragraphs 1 or 2. The request to grant a derogation must be reasoned. In deciding on the request, the Commission shall take into account inter alia the effects of the suspension on one or more undertakings concerned by the concentration or on a third party and the threat to competition posed by the concentration. Such a derogation may be made subject to conditions and obligations in order to ensure conditions of effective competition. A derogation may be applied for and granted at any time, be it before notification or after the transaction.

4.

The validity of any transaction carried out in contravention of paragraph 1 shall be dependent on a decision pursuant to Article 6(1)(b) or Article 8(1), (2) or (3) or on a presumption pursuant to Article 10(6).

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This Article shall, however, have no effect on the validity of transactions in securities including those convertible into other securities admitted to trading on a market such as a stock exchange, unless the buyer and seller knew or ought to have known that the transaction was carried out in contravention of paragraph 1. Article 8 Powers of decision of the Commission

1.

Where the Commission finds that a notified concentration fulfils the criterion laid down in Article 2(2) and, in the cases referred to in Article 2(4), the criteria laid down in Article 81(3) of the Treaty, it shall issue a decision declaring the concentration compatible with the common market.



A decision declaring a concentration compatible shall be deemed to cover restrictions directly related and necessary to the implementation of the concentration.

2.

Where the Commission finds that, following modification by the undertakings concerned, a notified concentration fulfils the criterion laid down in Article 2(2) and, in the cases referred to in Article 2(4), the criteria laid down in Article 81(3) of the Treaty, it shall issue a decision declaring the concentration compatible with the common market.



The Commission may attach to its decision conditions and obligations intended to ensure that the undertakings concerned comply with the commitments they have entered into vis-à-vis the Commission with a view to rendering the concentration compatible with the common market.



A decision declaring a concentration compatible shall be deemed to cover restrictions directly related and necessary to the implementation of the concentration.

3.

Where the Commission finds that a concentration fulfils the criterion defined in Article 2(3) or, in the cases referred to in Article 2(4), does not fulfil the criteria laid down in Article 81(3) of the Treaty, it shall issue a 1244

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decision declaring that the concentration is incompatible with the common market. 4.

Where the Commission finds that a concentration: (a) has already been implemented and that concentration has been declared incompatible with the common market, or (b) has been implemented in contravention of a condition attached to a decision taken under paragraph 2, which has found that, in the absence of the condition, the concentration would fulfil the criterion laid down in Article 2(3) or, in the cases referred to in Article 2(4), would not fulfil the criteria laid down in Article 81(3) of the Treaty,



5.

the Commission may: –

require the undertakings concerned to dissolve the concentration, in particular through the dissolution of the merger or the disposal of all the shares or assets acquired, so as to restore the situation prevailing prior to the implementation of the concentration; in circumstances where restoration of the situation prevailing before the implementation of the concentration is not possible through dissolution of the concentration, the Commission may take any other measure appropriate to achieve such restoration as far as possible,

–

order any other appropriate measure to ensure that the undertakings concerned dissolve the concentration or take other restorative measures as required in its decision.

In cases falling within point (a) of the first subparagraph, the measures referred to in that subparagraph may be imposed either in a decision pursuant to paragraph 3 or by separate decision.

The Commission may take interim measures appropriate to restore or maintain conditions of effective competition where a concentration: (a) has been implemented in contravention of Article 7, and a decision as to the compatibility of the concentration with the common market has not yet been taken; 1245

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(b) has been implemented in contravention of a condition attached to a decision under Article 6(1)(b) or paragraph 2 of this Article; (c)

has already been implemented and is declared incompatible with the common market.

6.

The Commission may revoke the decision it has taken pursuant to paragraphs 1 or 2 where:

(a) the declaration of compatibility is based on incorrect information for which one of the undertakings is responsible or where it has been obtained by deceit; or (b) the undertakings concerned commit a breach of an obligation attached to the decision. 7.

The Commission may take a decision pursuant to paragraphs 1 to 3 without being bound by the time limits referred to in Article 10(3), in cases where: (a) it finds that a concentration has been implemented (i)

in contravention of a condition attached to a decision under Article 6(1)(b), or

(ii) in contravention of a condition attached to a decision taken under paragraph 2 and in accordance with Article 10(2), which has found that, in the absence of the condition, the concentration would raise serious doubts as to its compatibility with the common market; or (b) a decision has been revoked pursuant to paragraph 6. 8.

The Commission shall notify its decision to the undertakings concerned and the competent authorities of the Member States without delay.

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Article 9 Referral to the competent authorities of the Member States 1.

The Commission may, by means of a decision notified without delay to the undertakings concerned and the competent authorities of the other Member States, refer a notified concentration to the competent authorities of the Member State concerned in the following circumstances.

2.

Within 15 working days of the date of receipt of the copy of the notification, a Member State, on its own initiative or upon the invitation of the Commission, may inform the Commission, which shall inform the undertakings concerned, that: (a) a concentration threatens to affect significantly competition in a market within that Member State, which presents all the characteristics of a distinct market, or (b) a concentration affects competition in a market within that Member State, which presents all the characteristics of a distinct market and which does not constitute a substantial part of the common market.

3.

If the Commission considers that, having regard to the market for the products or services in question and the geographical reference market within the meaning of paragraph 7, there is such a distinct market and that such a threat exists, either: (a) it shall itself deal with the case in accordance with this Regulation; or (b) it shall refer the whole or part of the case to the competent authorities of the Member State concerned with a view to the application of that State’s national competition law.



If, however, the Commission considers that such a distinct market or threat does not exist, it shall adopt a decision to that effect which it shall address to the Member State concerned, and shall itself deal with the case in accordance with this Regulation.

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In cases where a Member State informs the Commission pursuant to paragraph 2(b) that a concentration affects competition in a distinct market within its territory that does not form a substantial part of the common market, the Commission shall refer the whole or part of the case relating to the distinct market concerned, if it considers that such a distinct market is affected.

4.

A decision to refer or not to refer pursuant to paragraph 3 shall be taken:

(a) as a general rule within the period provided for in Article 10(1), second subparagraph, where the Commission, pursuant to Article 6(1)(b), has not initiated proceedings; or (b) within 65 working days at most of the notification of the concentration concerned where the Commission has initiated proceedings under Article 6(1)(c), without taking the preparatory steps in order to adopt the necessary measures under Article 8(2), (3) or (4) to maintain or restore effective competition on the market concerned. 5.

If within the 65 working days referred to in paragraph 4(b) the Commission, despite a reminder from the Member State concerned, has not taken a decision on referral in accordance with paragraph 3 nor has taken the preparatory steps referred to in paragraph 4(b), it shall be deemed to have taken a decision to refer the case to the Member State concerned in accordance with paragraph 3(b).

6.

The competent authority of the Member State concerned shall decide upon the case without undue delay.



Within 45 working days after the Commission’s referral, the competent authority of the Member State concerned shall inform the undertakings concerned of the result of the preliminary competition assessment and what further action, if any, it proposes to take. The Member State concerned may exceptionally suspend this time limit where necessary information has not been provided to it by the undertakings concerned as provided for by its national competition law.



Where a notification is requested under national law, the period of 45 working days shall begin on the working day following that of the receipt of a complete notification by the competent authority of that Member State. 1248

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7.

The geographical reference market shall consist of the area in which the undertakings concerned are involved in the supply and demand of products or services, in which the conditions of competition are sufficiently homogeneous and which can be distinguished from neighbouring areas because, in particular, conditions of competition are appreciably different in those areas. This assessment should take account in particular of the nature and characteristics of the products or services concerned, of the existence of entry barriers or of consumer preferences, of appreciable differences of the undertakings’ market shares between the area concerned and neighbouring areas or of substantial price differences.

8.

In applying the provisions of this Article, the Member State concerned may take only the measures strictly necessary to safeguard or restore effective competition on the market concerned.

9.

In accordance with the relevant provisions of the Treaty, any Member State may appeal to the Court of Justice, and in particular request the application of Article 243 of the Treaty, for the purpose of applying its national competition law. Article 10 Time limits for initiating proceedings and for decisions

1.

Without prejudice to Article 6(4), the decisions referred to in Article 6(1) shall be taken within 25 working days at most. That period shall begin on the working day following that of the receipt of a notification or, if the information to be supplied with the notification is incomplete, on the working day following that of the receipt of the complete information.



That period shall be increased to 35 working days where the Commission receives a request from a Member State in accordance with Article 9(2)or where, the undertakings concerned offer commitments pursuant to Article 6(2) with a view to rendering the concentration compatible with the common market.

2.

Decisions pursuant to Article 8(1) or (2) concerning notified concentrations shall be taken as soon as it appears that the serious doubts referred to in Article 6(1)(c) have been removed, particularly as a result of modifi1249

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cations made by the undertakings concerned, and at the latest by the time limit laid down in paragraph 3. 3.

Without prejudice to Article 8(7), decisions pursuant to Article 8(1) to (3) concerning notified concentrations shall be taken within not more than 90 working days of the date on which the proceedings are initiated. That period shall be increased to 105 working days where the undertakings concerned offer commitments pursuant to Article 8(2), second subparagraph, with a view to rendering the concentration compatible with the common market, unless these commitments have been offered less than 55 working days after the initiation of proceedings.



The periods set by the first subparagraph shall likewise be extended if the notifying parties make a request to that effect not later than 15 working days after the initiation of proceedings pursuant to Article 6(1)(c). The notifying parties may make only one such request. Likewise, at any time following the initiation of proceedings, the periods set by the first subparagraph may be extended by the Commission with the agreement of the notifying parties. The total duration of any extension or extensions effected pursuant to this subparagraph shall not exceed 20 working days.

4.

The periods set by paragraphs 1 and 3 shall exceptionally be suspended where, owing to circumstances for which one of the undertakings involved in the concentration is responsible, the Commission has had to request information by decision pursuant to Article 11 or to order an inspection by decision pursuant to Article 13.



The first subparagraph shall also apply to the period referred to in Article 9(4)(b).

5.

Where the Court of Justice gives a judgment which annuls the whole or part of a Commission decision which is subject to a time limit set by this Article, the concentration shall be re-examined by the Commission with a view to adopting a decision pursuant to Article 6(1).



The concentration shall be re-examined in the light of current market conditions.



The notifying parties shall submit a new notification or supplement the original notification, without delay, where the original notification be1250

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comes incomplete by reason of intervening changes in market conditions or in the information provided. Where there are no such changes, the parties shall certify this fact without delay.

The periods laid down in paragraph 1 shall start on the working day following that of the receipt of complete information in a new notification, a supplemented notification, or a certification within the meaning of the third subparagraph.



The second and third subparagraphs shall also apply in the cases referred to in Article 6(4) and Article 8(7).

6.

Where the Commission has not taken a decision in accordance with Article 6(1)(b), (c), 8(1), (2) or (3) within the time limits set in paragraphs 1 and 3 respectively, the concentration shall be deemed to have been declared compatible with the common market, without prejudice to Article 9. Article 11 Requests for information

1.

In order to carry out the duties assigned to it by this Regulation, the Commission may, by simple request or by decision, require the persons referred to in Article 3(1)(b), as well as undertakings and associations of undertakings, to provide all necessary information.

2.

When sending a simple request for information to a person, an undertaking or an association of undertakings, the Commission shall state the legal basis and the purpose of the request, specify what information is required and fix the time limit within which the information is to be provided, as well as the penalties provided for in Article 14 for supplying incorrect or misleading information.

3.

Where the Commission requires a person, an undertaking or an association of undertakings to supply information by decision, it shall state the legal basis and the purpose of the request, specify what information is required and fix the time limit within which it is to be provided. It shall also indicate the penalties provided for in Article 14 and indicate or impose 1251

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the penalties provided for in Article 15. It shall further indicate the right to have the decision reviewed by the Court of Justice. 4.

The owners of the undertakings or their representatives and, in the case of legal persons, companies or firms, or associations having no legal personality, the persons authorised to represent them by law or by their constitution, shall supply the information requested on behalf of the undertaking concerned. Persons duly authorised to act may supply the information on behalf of their clients. The latter shall remain fully responsible if the information supplied is incomplete, incorrect or misleading.

5.

The Commission shall without delay forward a copy of any decision taken pursuant to paragraph 3 to the competent authorities of the Member State in whose territory the residence of the person or the seat of the undertaking or association of undertakings is situated, and to the competent authority of the Member State whose territory is affected. At the specific request of the competent authority of a Member State, the Commission shall also forward to that authority copies of simple requests for information relating to a notified concentration.

6.

At the request of the Commission, the governments and competent authorities of the Member States shall provide the Commission with all necessary information to carry out the duties assigned to it by this Regulation.

7.

In order to carry out the duties assigned to it by this Regulation, the Commission may interview any natural or legal person who consents to be interviewed for the purpose of collecting information relating to the subject matter of an investigation. At the beginning of the interview, which may be conducted by telephone or other electronic means, the Commission shall state the legal basis and the purpose of the interview.



Where an interview is not conducted on the premises of the Commission or by telephone or other electronic means, the Commission shall inform in advance the competent authority of the Member State in whose territory the interview takes place. If the competent authority of that Member State so requests, officials of that authority may assist the officials and other persons authorised by the Commission to conduct the interview.

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Article 12 Inspections by the authorities of the Member States 1.

At the request of the Commission, the competent authorities of the Member States shall undertake the inspections which the Commission considers to be necessary under Article 13(1), or which it has ordered by decision pursuant to Article 13(4). The officials of the competent authorities of the Member States who are responsible for conducting these inspections as well as those authorised or appointed by them shall exercise their powers in accordance with their national law.

2.

If so requested by the Commission or by the competent authority of the Member State within whose territory the inspection is to be conducted, officials and other accompanying persons authorised by the Commission may assist the officials of the authority concerned. Article 13 The Commission’s powers of inspection

1.

In order to carry out the duties assigned to it by this Regulation, the Commission may conduct all necessary inspections of undertakings and associations of undertakings.

2.

The officials and other accompanying persons authorised by the Commission to conduct an inspection shall have the power: (a) to enter any premises, land and means of transport of undertakings and associations of undertakings; (b) to examine the books and other records related to the business, irrespective of the medium on which they are stored; (c)

to take or obtain in any form copies of or extracts from such books or records;

(d) to seal any business premises and books or records for the period and to the extent necessary for the inspection; 1253

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(e)

to ask any representative or member of staff of the undertaking or association of undertakings for explanations on facts or documents relating to the subject matter and purpose of the inspection and to record the answers.

3.

Officials and other accompanying persons authorised by the Commission to conduct an inspection shall exercise their powers upon production of a written authorisation specifying the subject matter and purpose of the inspection and the penalties provided for in Article 14, in the production of the required books or other records related to the business which is incomplete or where answers to questions asked under paragraph 2 of this Article are incorrect or misleading. In good time before the inspection, the Commission shall give notice of the inspection to the competent authority of the Member State in whose territory the inspection is to be conducted.

4.

Undertakings and associations of undertakings are required to submit to inspections ordered by decision of the Commission. The decision shall specify the subject matter and purpose of the inspection, appoint the date on which it is to begin and indicate the penalties provided for in Articles 14 and 15 and the right to have the decision reviewed by the Court of Justice. The Commission shall take such decisions after consulting the competent authority of the Member State in whose territory the inspection is to be conducted.

5.

Officials of, and those authorised or appointed by, the competent authority of the Member State in whose territory the inspection is to be conducted shall, at the request of that authority or of the Commission, actively assist the officials and other accompanying persons authorised by the Commission. To this end, they shall enjoy the powers specified in paragraph 2.

6.

Where the officials and other accompanying persons authorised by the Commission find that an undertaking opposes an inspection, including the sealing of business premises, books or records, ordered pursuant to this Article, the Member State concerned shall afford them the necessary assistance, requesting where appropriate the assistance of the police or of an equivalent enforcement authority, so as to enable them to conduct their inspection.

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7.

If the assistance provided for in paragraph 6 requires authorisation from a judicial authority according to national rules, such authorisation shall be applied for. Such authorisation may also be applied for as a precautionary measure.

8.

Where authorisation as referred to in paragraph 7 is applied for, the national judicial authority shall ensure that the Commission decision is authentic and that the coercive measures envisaged are neither arbitrary nor excessive having regard to the subject matter of the inspection. In its control of proportionality of the coercive measures, the national judicial authority may ask the Commission, directly or through the competent authority of that Member State, for detailed explanations relating to the subject matter of the inspection. However, the national judicial authority may not call into question the necessity for the inspection nor demand that it be provided with the information in the Commission’s file. The lawfulness of the Commission’s decision shall be subject to review only by the Court of Justice. Article 14 Fines

1.

The Commission may by decision impose on the persons referred to in Article 3(1)b, undertakings or associations of undertakings, fines not exceeding 1 % of the aggregate turnover of the undertaking or association of undertakings concerned within the meaning of Article 5 where, intentionally or negligently: (a) they supply incorrect or misleading information in a submission, certification, notification or supplement thereto, pursuant to Article 4, Article 10(5) or Article 22(3); (b) they supply incorrect or misleading information in response to a request made pursuant to Article 11(2); (c)

in response to a request made by decision adopted pursuant to Article 11(3), they supply incorrect, incomplete or misleading information or do not supply information within the required time limit; 1255

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(d) they produce the required books or other records related to the business in incomplete form during inspections under Article 13, or refuse to submit to an inspection ordered by decision taken pursuant to Article 13(4); (e)

in response to a question asked in accordance with Article 13(2) (e), –

they give an incorrect or misleading answer,

–

they fail to rectify within a time limit set by the Commission an incorrect, incomplete or misleading answer given by a member of staff, or

–

they fail or refuse to provide a complete answer on facts relating to the subject matter and purpose of an inspection ordered by a decision adopted pursuant to Article 13(4);

(f ) seals affixed by officials or other accompanying persons authorised by the Commission in accordance with Article 13(2)(d) have been broken. 2.

The Commission may by decision impose fines not exceeding 10 % of the aggregate turnover of the undertaking concerned within the meaning of Article 5 on the persons referred to in Article 3(1)b or the undertakings concerned where, either intentionally or negligently, they: (a) fail to notify a concentration in accordance with Articles 4 or 22(3) prior to its implementation, unless they are expressly authorised to do so by Article 7(2) or by a decision taken pursuant to Article 7(3); (b) implement a concentration in breach of Article 7; (c)

implement a concentration declared incompatible with the common market by decision pursuant to Article 8(3) or do not comply with any measure ordered by decision pursuant to Article 8(4) or (5);

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(d) fail to comply with a condition or an obligation imposed by decision pursuant to Articles 6(1)(b), Article 7(3) or Article 8(2), second subparagraph. 3.

In fixing the amount of the fine, regard shall be had to the nature, gravity and duration of the infringement.

4.

Decisions taken pursuant to paragraphs 1, 2 and 3 shall not be of a criminal law nature. Article 15 Periodic penalty payments

1.

The Commission may by decision impose on the persons referred to in Article 3(1)b, undertakings or associations of undertakings, periodic penalty payments not exceeding 5 % of the average daily aggregate turnover of the undertaking or association of undertakings concerned within the meaning of Article 5 for each working day of delay, calculated from the date set in the decision, in order to compel them:

(a) to supply complete and correct information which it has requested by decision taken pursuant to Article 11(3); (b) to submit to an inspection which it has ordered by decision taken pursuant to Article 13(4); (c)

to comply with an obligation imposed by decision pursuant to Article 6(1)(b), Article 7(3) or Article 8(2), second subparagraph; or;

(d) to comply with any measures ordered by decision pursuant to Article 8(4) or (5). 2.

Where the persons referred to in Article 3(1)(b), undertakings or associations of undertakings have satisfied the obligation which the periodic penalty payment was intended to enforce, the Commission may fix the definitive amount of the periodic penalty payments at a figure lower than that which would arise under the original decision.

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Article 16 Review by the Court of Justice The Court of Justice shall have unlimited jurisdiction within the meaning of Article 229 of the Treaty to review decisions whereby the Commission has fixed a fine or periodic penalty payments; it may cancel, reduce or increase the fine or periodic penalty payment imposed. Article 17 Professional secrecy 1.

Information acquired as a result of the application of this Regulation shall be used only for the purposes of the relevant request, investigation or hearing.

2.

Without prejudice to Article 4(3), Articles 18 and 20, the Commission and the competent authorities of the Member States, their officials and other servants and other persons working under the supervision of these authorities as well as officials and civil servants of other authorities of the Member States shall not disclose information they have acquired through the application of this Regulation of the kind covered by the obligation of professional secrecy.

3.

Paragraphs 1 and 2 shall not prevent publication of general information or of surveys which do not contain information relating to particular undertakings or associations of undertakings. Article 18 Hearing of the parties and of third persons

1.

Before taking any decision provided for in Article 6(3), Article 7(3), Article 8(2) to (6), and Articles 14 and 15, the Commission shall give the persons, undertakings and associations of undertakings concerned the opportunity, at every stage of the procedure up to the consultation of the Advisory Committee, of making known their views on the objections against them. 1258

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2.

By way of derogation from paragraph 1, a decision pursuant to Articles 7(3) and 8(5) may be taken provisionally, without the persons, undertakings or associations of undertakings concerned being given the opportunity to make known their views beforehand, provided that the Commission gives them that opportunity as soon as possible after having taken its decision.

3.

The Commission shall base its decision only on objections on which the parties have been able to submit their observations. The rights of the defence shall be fully respected in the proceedings. Access to the file shall be open at least to the parties directly involved, subject to the legitimate interest of undertakings in the protection of their business secrets.

4.

In so far as the Commission or the competent authorities of the Member States deem it necessary, they may also hear other natural or legal persons. Natural or legal persons showing a sufficient interest and especially members of the administrative or management bodies of the undertakings concerned or the recognised representatives of their employees shall be entitled, upon application, to be heard. Article 19 Liaison with the authorities of the Member States

1.

The Commission shall transmit to the competent authorities of the Member States copies of notifications within three working days and, as soon as possible, copies of the most important documents lodged with or issued by the Commission pursuant to this Regulation. Such documents shall include commitments offered by the undertakings concerned vis-àvis the Commission with a view to rendering the concentration compatible with the common market pursuant to Article 6(2) or Article 8(2), second subparagraph.

2.

The Commission shall carry out the procedures set out in this Regulation in close and constant liaison with the competent authorities of the Member States, which may express their views upon those procedures. For the purposes of Article 9 it shall obtain information from the competent authority of the Member State as referred to in paragraph 2 of that Article and give it the opportunity to make known its views at every stage of the 1259

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procedure up to the adoption of a decision pursuant to paragraph 3 of that Article; to that end it shall give it access to the file. 3.

An Advisory Committee on concentrations shall be consulted before any decision is taken pursuant to Article 8(1) to (6), Articles 14 or 15 with the exception of provisional decisions taken in accordance with Article 18(2).

4.

The Advisory Committee shall consist of representatives of the competent authorities of the Member States. Each Member State shall appoint one or two representatives; if unable to attend, they may be replaced by other representatives. At least one of the representatives of a Member State shall be competent in matters of restrictive practices and dominant positions.

5.

Consultation shall take place at a joint meeting convened at the invitation of and chaired by the Commission. A summary of the case, together with an indication of the most important documents and a preliminary draft of the decision to be taken for each case considered, shall be sent with the invitation. The meeting shall take place not less than 10 working days after the invitation has been sent. The Commission may in exceptional cases shorten that period as appropriate in order to avoid serious harm to one or more of the undertakings concerned by a concentration.

6.

The Advisory Committee shall deliver an opinion on the Commission’s draft decision, if necessary by taking a vote. The Advisory Committee may deliver an opinion even if some members are absent and unrepresented. The opinion shall be delivered in writing and appended to the draft decision. The Commission shall take the utmost account of the opinion delivered by the Committee. It shall inform the Committee of the manner in which its opinion has been taken into account.

7.

The Commission shall communicate the opinion of the Advisory Committee, together with the decision, to the addressees of the decision. It shall make the opinion public together with the decision, having regard to the legitimate interest of undertakings in the protection of their business secrets.

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Article 20 Publication of decisions 1.

The Commission shall publish the decisions which it takes pursuant to Article 8(1) to (6), Articles 14 and 15 with the exception of provisional decisions taken in accordance with Article 18(2) together with the opinion of the Advisory Committee in the Official Journal of the European Union.

2.

The publication shall state the names of the parties and the main content of the decision; it shall have regard to the legitimate interest of undertakings in the protection of their business secrets. Article 21 Application of the Regulation and jurisdiction

1.

This Regulation alone shall apply to concentrations as defined in Article 3, and Council Regulations (EC) No 1/20038, (EEC) No 1017/689, (EEC) No 4056/8610 and (EEC) No 3975/8711 shall not apply, except in relation to joint ventures that do not have a Community dimension and which have as their object or effect the coordination of the competitive behaviour of undertakings that remain independent.

2.

Subject to review by the Court of Justice, the Commission shall have sole jurisdiction to take the decisions provided for in this Regulation.

3.

No Member State shall apply its national legislation on competition to any concentration that has a Community dimension.



The first subparagraph shall be without prejudice to any Member State’s power to carry out any enquiries necessary for the application of Articles 4(4), 9(2) or after referral, pursuant to Article 9(3), first subparagraph, indent (b), or Article 9(5), to take the measures strictly necessary for the application of Article 9(8).

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4.

Notwithstanding paragraphs 2 and 3, Member States may take appropriate measures to protect legitimate interests other than those taken into consideration by this Regulation and compatible with the general principles and other provisions of Community law.



Public security, plurality of the media and prudential rules shall be regarded as legitimate interests within the meaning of the first subparagraph.



Any other public interest must be communicated to the Commission by the Member State concerned and shall be recognised by the Commission after an assessment of its compatibility with the general principles and other provisions of Community law before the measures referred to above may be taken. The Commission shall inform the Member State concerned of its decision within 25 working days of that communication. Article 22 Referral to the Commission

1.

One or more Member States may request the Commission to examine any concentration as defined in Article 3 that does not have a Community dimension within the meaning of Article 1 but affects trade between Member States and threatens to significantly affect competition within the territory of the Member State or States making the request.



Such a request shall be made at most within 15 working days of the date on which the concentration was notified, or if no notification is required, otherwise made known to the Member State concerned.

2.

The Commission shall inform the competent authorities of the Member States and the undertakings concerned of any request received pursuant to paragraph 1 without delay.



Any other Member State shall have the right to join the initial request within a period of 15 working days of being informed by the Commission of the initial request.

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All national time limits relating to the concentration shall be suspended until, in accordance with the procedure set out in this Article, it has been decided where the concentration shall be examined. As soon as a Member State has informed the Commission and the undertakings concerned that it does not wish to join the request, the suspension of its national time limits shall end.

3.

The Commission may, at the latest 10 working days after the expiry of the period set in paragraph 2, decide to examine, the concentration where it considers that it affects trade between Member States and threatens to significantly affect competition within the territory of the Member State or States making the request. If the Commission does not take a decision within this period, it shall be deemed to have adopted a decision to examine the concentration in accordance with the request.



The Commission shall inform all Member States and the undertakings concerned of its decision. It may request the submission of a notification pursuant to Article 4.



The Member State or States having made the request shall no longer apply their national legislation on competition to the concentration.

4.

Article 2, Article 4(2) to (3), Articles 5, 6, and 8 to 21 shall apply where the Commission examines a concentration pursuant to paragraph 3. Article 7 shall apply to the extent that the concentration has not been implemented on the date on which the Commission informs the undertakings concerned that a request has been made.



Where a notification pursuant to Article 4 is not required, the period set in Article 10(1) within which proceedings may be initiated shall begin on the working day following that on which the Commission informs the undertakings concerned that it has decided to examine the concentration pursuant to paragraph 3.

5.

The Commission may inform one or several Member States that it considers a concentration fulfils the criteria in paragraph 1. In such cases, the Commission may invite that Member State or those Member States to make a request pursuant to paragraph 1.

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Article 23 Implementing provisions 1.

The Commission shall have the power to lay down in accordance with the procedure referred to in paragraph 2: (a) implementing provisions concerning the form, content and other details of notifications and submissions pursuant to Article 4; (b) implementing provisions concerning time limits pursuant to Article 4(4), (5) Articles 7, 9, 10 and 22; (c)

the procedure and time limits for the submission and implementation of commitments pursuant to Article 6(2) and Article 8(2);

(d) implementing provisions concerning hearings pursuant to Article 18. 2.

The Commission shall be assisted by an Advisory Committee, composed of representatives of the Member States. (a) Before publishing draft implementing provisions and before adopting such provisions, the Commission shall consult the Advisory Committee. (b) Consultation shall take place at a meeting convened at the invitation of and chaired by the Commission. A draft of the implementing provisions to be taken shall be sent with the invitation. The meeting shall take place not less than 10 working days after the invitation has been sent. (c)

The Advisory Committee shall deliver an opinion on the draft implementing provisions, if necessary by taking a vote. The Commission shall take the utmost account of the opinion delivered by the Committee.

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Article 24 Relations with third countries 1.

The Member States shall inform the Commission of any general difficulties encountered by their undertakings with concentrations as defined in Article 3 in a third country.

2.

Initially not more than one year after the entry into force of this Regulation and, thereafter periodically, the Commission shall draw up a report examining the treatment accorded to undertakings having their seat or their principal fields of activity in the Community, in the terms referred to in paragraphs 3 and 4, as regards concentrations in third countries. The Commission shall submit those reports to the Council, together with any recommendations.

3.

Whenever it appears to the Commission, either on the basis of the reports referred to in paragraph 2 or on the basis of other information, that a third country does not grant undertakings having their seat or their principal fields of activity in the Community, treatment comparable to that granted by the Community to undertakings from that country, the Commission may submit proposals to the Council for an appropriate mandate for negotiation with a view to obtaining comparable treatment for undertakings having their seat or their principal fields of activity in the Community.

4.

Measures taken under this Article shall comply with the obligations of the Community or of the Member States, without prejudice to Article 307 of the Treaty, under international agreements, whether bilateral or multilateral. Article 25 Repeal

1.

Without prejudice to Article 26(2), Regulations (EEC) No 4064/89 and (EC) No 1310/97 shall be repealed with effect from 1 May 2004.

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2.

References to the repealed Regulations shall be construed as references to this Regulation and shall be read in accordance with the correlation table in the Annex. Article 26 Entry into force and transitional provisions

1.

This Regulation shall enter into force on the 20th day following that of its publication in the Official Journal of the European Union.



It shall apply from 1 May 2004.

2.

Regulation (EEC) No 4064/89 shall continue to apply to any concentration which was the subject of an agreement or announcement or where control was acquired within the meaning of Article 4(1) of that Regulation before the date of application of this Regulation, subject, in particular, to the provisions governing applicability set out in Article 25(2) and (3) of Regulation (EEC) No 4064/89 and Article 2 of Regulation (EEC) No 1310/97.

3.

As regards concentrations to which this Regulation applies by virtue of accession, the date of accession shall be substituted for the date of application of this Regulation.



This Regulation shall be binding in its entirety and directly applicable in all Member States.



Done at Brussels, 20 January 2004.



For the Council



The President



C. McCreevy

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Notes 1

OJ C 20, 28.1.2003, p. 4.

2

Opinion delivered on 9.10.2003 (not yet published in the Official Journal).

3

Opinion delivered on 24.10.2003 (not yet published in the Official Journal).

4

OJ L 395, 30.12.1989, p. 1. Corrected version in OJ L 257, 21.9.1990, p. 13. Regulation as last amended by Regulation (EC) No 1310/97 (OJ L 180, 9.7.1997, p. 1). Corrigendum in OJ L 40, 13.2.1998, p. 17.

5 6

OJ C 364, 18.12.2000, p. 1. OJ L 222, 14. 8. 1978, p. 11. Directive as last amended by Directive 2003/51/EC of the European Parliament and of the Council (OJ L 178, 17.7.2003, p. 16).

7

OJ L 372, 31. 12. 1986, p. 1. Directive as last amended by Directive 2003/51/EC of the European Parliament and of the Council.

8

OJ L 1, 4.1.2003, p. 1.

9

OJ L 175, 23. 7. 1968, p. 1. Regulation as last amended by Regulation (EC) No 1/2003 (OJ L 1, 4.1.2003, p. 1).

10

OJ L 378, 31. 12. 1986, p. 4. Regulation as last amended by Regulation (EC) No 1/2003.

11

OJ L 374. 31. 12. 1987, p. 1. Regulation as last amended by Regulation (EC) No 1/2003.

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Appendix 6 Guidelines on State aid

Appendix 6

COMMUNICATION FROM THE COMMISSION Guidelines on State aid for environmental protection and energy 2014-2020 2014/C 200/01

Table of Contents INTRODUCTION 1. 1.1. 1.2. 1.3.

SCOPE AND DEFINITIONS Scope of application Aid measures covered by the Guidelines Definitions

2.

NOTIFIABLE ENVIRONMENTAL AND ENERGY AID

3.

COMPATIBILITY ASSESSMENT UNDER ARTICLE 107(3)C OF THE TREATY

3.1. 3.2. 3.3. 3.4.

Common Assessment Principles General compatibility provisions Aid to energy from renewable sources Energy efficiency measures, including cogeneration and district heating and district cooling Aid for resource efficiency and in particular aid to waste management Aid to Carbon Capture and Storage (CCS) Aid in the form of reductions in or exemptions from environmental taxes and in the form of reductions in funding support for electricity from renewable sources Aid to energy infrastructure

3.5. 3.6. 3.7. 3.8.

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3.9. Aid for generation adequacy 3.10. Aid in the form of tradable permit schemes 3.11. Aid for the relocation of undertakings 4.

EVALUATION

5.

APPLICATION

6.

REPORTING AND MONITORING

7.

REVISION

INTRODUCTION (1)

In order to prevent State aid from distorting competition in the internal market and affecting trade between Member States in a way which is contrary to the common interest, Article 107(1) of the Treaty on the Functioning of the European Union (‘the Treaty’) lays down the principle that State aid is prohibited. In certain cases, however, State aid may be compatible with the internal market under Articles 107(2) and (3) of the Treaty.

(2)

On the basis of Article 107(3)(c) of the Treaty, the Commission may consider compatible with the internal market State aid to facilitate the development of certain economic activities within the European Union, where such aid does not adversely affect trading conditions to an extent contrary to the common interest.

(3)

The Europe 2020 strategy1 focuses on creating the conditions for smart, sustainable and inclusive growth. To that end, a number of headline targets have been set, including targets for climate change and energy sustainability: (i) a 20 % reduction in Union greenhouse gas emissions when compared to 1990 levels; (ii) raising the share of Union energy consumption produced from renewable resources to 20 %; and (iii) a 20 % improvement in the EU’s energy-efficiency compared to 1990 levels. The first two of these nationally binding targets were implemented by ‘The climate and energy package’2.

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(4)

On 22 January 2014 the Commission proposed the energy and climate objectives to be met by 2030 in a Communication ‘A policy Framework for climate and energy in the period from 2020 to 2030’3 (the 2030 Framework). The pillars of the 2030 Framework are: i) a reduction in greenhouse gas emissions by 40 % relative to the 1990 level; ii) an EU-wide binding target for renewable energy of at least 27 %; iii) renewed ambitions for energy efficiency policies; and iv) a new governance system and a set of new indicators to ensure a competitive and secure energy system.

(5)

The headline targets mentioned in recital (3) are particularly important for these Guidelines. In order to support achieving those targets, the Europe 2020 strategy put forward the ‘Resource efficient Europe’ as one of the seven flagship initiatives4. That flagship initiative aims to create a framework for policies to support the shift towards a resource-efficient and low-carbon economy which helps to: (a)

boost economic performance while reducing use of resources;

(b)

identify and create new opportunities for economic growth and greater innovation and boost the Union’s competitiveness;

(c)

ensure security of supply of essential resources;

(d)

fight against climate change and limit the environmental impacts of the use resources.

(6)

It should be recalled that the Resource Efficiency Roadmap5  as well as several Council conclusions call for a phasing out of environmentally harmful subsidies6. These Guidelines should therefore consider negative impacts of environmentally harmful subsidies, while taking into account the need to address trade-offs between different areas and policies as recognised by the flagship initiative. Aid for the extraction of fossil fuels is not included in these Guidelines.

(7)

The Roadmap also calls on Member States to address gaps in their performance in delivering the benefits from Union legislation7. To avoid that State aid measures lead to environmental harm, in particular Member States must also ensure compliance with Union environmental legislation and carry out an environmental impact assessment when it is required by Union law and ensure all relevant permits. 1271

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(8)

The Communication ‘Energy 2020 – A strategy for competitive, sustainable and secure energy’8, as part of the ‘Resource efficient Europe’ flagship initiative already concluded that the objectives of a secure, affordable and sustainable energy market will be undermined unless electricity grids are upgraded, obsolete plants are replaced by competitive and cleaner alternatives and energy is used more efficiently throughout the whole energy chain.

(9)

The 2030 Framework calls for an ambitious commitment to reduce greenhouse gas emissions in line with the 2050 roadmap. Delivery of this objective should follow a cost-efficient approach, providing flexibility to Member States to define a low-carbon transition appropriate to their specific circumstances and encourage research and innovation policy to support the post-2020 climate and energy framework. These Guidelines respect those principles and prepare the ground for the 2030 Framework.

(10) In these Guidelines, the Commission sets out the conditions under which aid for energy and environment may be considered compatible with the internal market under Article 107(3)(c) of the Treaty. (11) In the Communication on State aid modernisation9, the Commission announced three objectives pursued through the modernisation of State aid control: (a)

to foster sustainable, smart and inclusive growth in a competitive internal market;

(b)

to focus Commission ex ante scrutiny on cases with the biggest impact on the internal market while strengthening the cooperation with Member States in State aid enforcement;

(c)

to streamline the rules and provide for faster decisions.

(12) In particular, the Communication called for a common approach in the revision of the different Guidelines and frameworks based on strengthening the internal market, promoting more effectiveness in public spending through a better contribution of State aid to the objectives of common interest, greater scrutiny on the incentive effect, on limiting the aid to the minimum necessary, and on avoiding the potential negative effects of the aid on competition and trade. The compatibility conditions set out in these Guidelines are based on these common assessment principles. 1272

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1.    SCOPE AND DEFINITIONS 1.1.    Scope of application (13) These Guidelines apply to State aid granted for environmental protection or energy objectives in all sectors governed by the Treaty in so far as measures are covered by Section 1.2. They therefore also apply to those sectors that are subject to specific Union rules on State aid (transport10, coal, agriculture, forestry, and fisheries and aquaculture) unless such specific rules provide otherwise. (14) For agriculture and fisheries and aquaculture, these Guidelines apply to aid for environmental protection in favour of undertakings active in the processing and marketing of products and, under certain conditions, to undertakings active in primary production. The following conditions apply to these sectors: (a)

for undertakings active in the processing and marketing of fisheries products, if the aid concerns expenses eligible under Council Regulation (EC) No 1198/200611 or its successor12, the maximum aid intensity allowed is the higher of the aid rate provided for in these Guidelines and the aid rate laid down in that Regulation;

(b)

in the field of agricultural primary production and European Agricultural Fund for Rural Development (EAFRD) co-financed measures and forestry aid measures, these Guidelines apply only to the extent that the Community Guidelines for State aid in the agriculture and forestry sector 2007 to 201313 as amended or replaced do not provide any specific rules;

(c)

in the field of fisheries and aquaculture primary production, these Guidelines apply only where no specific provisions dealing with aid for environmental protection or energy objectives exist.

(15) These Guidelines do not apply to: (a)

the design and manufacture of environmentally friendly products, machines or means of transport with a view to operating with fewer natural resources and action taken within plants or other production units with a view to improving safety or hygiene14; 1273

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(b)

the financing of environmental protection measures relating to air, road, railway, inland waterway and maritime transport infrastructure;

(c)

stranded costs as defined in the Commission Communication relating to the methodology for analysing State aid linked to stranded costs15;

(d)

State aid for research, development and innovation16 which is subject to the rules set out in the Community framework for State aid for research and development and innovation17;

(e)

State aid to biodiversity measures18.

(16) Environmental and energy aid may not be awarded to firms in difficulty as defined for the purposes of these Guidelines by the applicable Guidelines on State aid for rescuing and restructuring firms in difficulty19  as amended or replaced. (17) When assessing aid in favour of an undertaking which is subject to an outstanding recovery order following a previous Commission decision declaring an aid illegal and incompatible with the internal market, the Commission will take account of the amount of aid still to be recovered20.

1.2.    Aid measures covered by the Guidelines (18) The Commission has identified a number of environmental and energy measures for which State aid under certain conditions may be compatible with the internal market under Article 107(3)(c) of the Treaty: (a)

aid for going beyond Union standards or increasing the level of environmental protection in the absence of Union standards (including aid for the acquisition of new transport vehicles);

(b)

aid for early adaptation to future Union standards;

(c)

aid for environmental studies;

(d)

aid for the remediation of contaminated sites;

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(e)

aid for energy from renewable sources;

(f )

aid for energy efficiency measures, including cogeneration and district heating and district cooling;

(g)

aid for resource efficiency and, in particular, for waste management;

(h)

aid for CO2  capture, transport and storage including individual elements of the Carbon Capture Storage (‘CCS’) chain;

(i)

aid in the form of reductions in or exemptions from environmental taxes;

(j)

aid in the form of reductions in funding support for electricity from renewable sources;

(k)

aid for energy infrastructure;

(l)

aid for generation adequacy measures;

(m) aid in the form of tradable permits; (n)

aid for the relocation of undertakings.

1.3.    Definitions (19) For the purposes of these Guidelines the following definitions apply: (1)

‘environmental protection’ means any action designed to remedy or prevent damage to physical surroundings or natural resources by a beneficiary’s own activities, to reduce the risk of such damage or to lead to more efficient use of natural resources, including energysaving measures and the use of renewable sources of energy;

(2)

‘energy-efficiency’ means an amount of saved energy determined by measuring and/or estimating consumption before and after implementation of an energy-efficiency improvement measure, whilst ensuring normalisation for external conditions that affect energy consumption; 1275

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(3)

‘Union standard’ means (a)

a mandatory Union standard setting the levels to be attained in environmental terms by individual undertakings21, or

(b)

the obligation under Directive 2010/75/EU22  to use the best available techniques (‘BAT’) and ensure that emission levels of pollutants are not higher than they would be when applying BAT; for the cases where emission levels associated with the BAT have been defined in implementing acts adopted under Directive 2010/75/EU, those levels will be applicable for the purpose of these Guidelines; where those levels are expressed as a range, the limit where the BAT is first achieved will be applicable.

(4)

‘eco-innovation’ means all forms of innovation activities resulting in or aimed at significantly improving environmental protection, including new production processes, new products or services, and new management and business methods, the use or implementation of which is likely to prevent or substantially reduce the risks for the environment, pollution and other negative impacts resulting from the use of resources, throughout the life cycle of related activities.



For the purposes of this definition, the following are not considered innovations: i.

minor changes or improvements;

ii.

an increase in production or service capabilities through the addition of manufacturing or logistical systems which are very similar to those already in use;

iii.

changes in business practices, workplace organisation or external relations that are based on organisational methods already in use in the undertaking;

iv.

changes in management strategy;

v.

mergers and acquisitions; 1276

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vi.

ceasing to use a process;

vii.

simple capital replacement or extension;

viii. changes resulting purely from changes in factor prices, customisation, regular seasonal and other cyclical changes; ix.

trading of new or significantly improved products.

(5)

‘renewable energy sources’ means the following renewable nonfossil energy sources: wind, solar, aerothermal, geothermal, hydrothermal and ocean energy, hydropower, biomass, landfill gas, sewage treatment plant gas and biogases;

(6)

‘biomass’ means the biodegradable fraction of products, waste and residues from agriculture (including vegetal and animal substances), forestry and related industries including fisheries and aquaculture, as well as biogases and the biodegradable fraction of industrial and municipal waste;

(7)

‘biofuel’ means liquid or gaseous fuel for transport produced from biomass;

(8)

‘bioliquid’ means liquid fuel for energy purposes other than for transport, including electricity, and heating and cooling, produced from biomass;

(9)

‘sustainable biofuel’ means a biofuel fulfilling the sustainability criteria set out in Article 17 of Directive 2009/28/EC of the European Parliament and of the Council23 on the promotion of the use of energy from renewable sources and any amendment thereof 24;

(10) ‘cooperation mechanism’ means a mechanism which fulfils the conditions of Article 6, 7 or 8 of Directive 2009/28/EC; (11) ‘energy from renewable energy sources’ means energy produced by plants using only renewable energy sources, as well as the share in terms of calorific value of energy produced from renewable energy sources in hybrid plants which also use conventional energy sources and it includes renewable electricity used for filling storage 1277

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systems, but excludes electricity produced as a result of storage systems; (12) ‘cogeneration’ or combined heat and power (CHP) means the simultaneous generation in one process of thermal energy and electrical and/or mechanical energy; (13) ‘high-efficiency cogeneration’ means cogeneration which satisfies the definition of high-efficiency cogeneration as set out in Article 2(34) of Directive 2012/27/EU25; (14) ‘energy-efficient district heating and cooling’ means district heating and cooling which satisfies the definition of efficient district heating and cooling system as set out in Article 2(41) and (42) of Directive 2012/27/EU26. The definition includes the heating/ cooling production plants and the network (including related facilities) necessary to distribute the heat/cooling from the production units to the customer premises; (15) ‘environmental tax’ means a tax with a specific tax base that has a clear negative effect on the environment or which seeks to tax certain activities, goods or services so that the environmental costs may be included in their price and/or so that producers and consumers are oriented towards activities which better respect the environment; (16) ‘Union minimum tax level’ means the minimum level of taxation provided for in Union legislation; for energy products and electricity it means the minimum level of taxation laid down in Annex I to Council Directive 2003/96/EC27; (17) ‘small and medium-sized enterprise’ (‘SME’), means an undertaking that fulfils the conditions laid down in the Commission recommendation of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises28; (18) ‘large enterprise’ and ‘large undertaking’ mean enterprises which do not fall within the definition of SME;

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(19) ‘individual aid’ means aid granted either on the basis of a scheme or on an ad hoc basis; (20) ‘aid intensity’ means the gross aid amount expressed as a percentage of the eligible costs; all figures used must be taken before any deduction of tax or other charge, where aid is awarded in a form other than a grant, the aid amount must be the grant equivalent of the aid, aid payable in several installments must be calculated at its value at the moment of granting; the interest rate to be used for discounting purposes and for calculating the aid amount in a soft loan must be the reference rate applicable at the time of grant; the aid intensity is calculated per beneficiary; (21) ‘operating benefit’ means, for the purposes of calculating eligible costs, in particular cost savings or additional ancillary production directly linked to the extra investment for environmental protection and, where applicable, benefits accruing from other support measures whether or not they constitute State aid, including operating aid granted for the same eligible costs, feed-in tariffs or other support measures; (22) ‘operating cost’ means, for the purposes of calculating eligible costs, in particular additional production costs such as maintenance costs flowing from the extra investment for environmental protection; (23) ‘tangible asset’ means, for the purposes of calculating eligible costs, investments in land which are strictly necessary in order to meet environmental objectives, investments in buildings, plant and equipment intended to reduce or eliminate pollution and nuisances, and investments to adapt production methods with a view to protecting the environment; (24) ‘intangible asset’ means, for the purposes of calculating eligible costs, spending on technology transfer through the acquisition of operating licenses or of patented and non-patented know-how where such spending complies with the following conditions: (a)

it must be regarded as a depreciable asset;

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(b)

it must be purchased on market terms, from an undertaking in which the acquirer has no power of direct or indirect control;

(c)

it must be included in the assets of the undertaking, and remain in the establishment of the recipient of the aid and be used there for at least five years; this condition does not apply if the intangible asset is technically out of date; if it is sold during those five years, the yield from the sale must be deducted from the eligible costs and all or part of the amount of aid must, where appropriate, be reimbursed;

(25) ‘internalise the costs’ means the principle that all costs associated with the protection of the environment should be included in the production costs of the polluting undertaking; (26) ‘polluter’ means someone who directly or indirectly damages the environment or who creates conditions leading to such damage29; (27) ‘pollution’ means the damage caused by the polluter by directly or indirectly damaging the environment, or by creating conditions leading to such damage to physical surroundings or natural resources; (28) ‘the polluter pays principle’ or ‘PPP’ means that the costs of measures to deal with pollution should be borne by the polluter who causes the pollution.; (29) ‘contaminated site’ means a site where there is a confirmed presence, caused by man, of hazardous substances of such a level that they pose a significant risk to human health or the environment taking into account current and approved future use of the land; (30) ‘ad hoc aid’ means aid not granted on the basis of an aid scheme; (31) ‘energy infrastructure’ means any physical equipment or facility which is located within the Union or linking the Union to one or more third countries and falling under the following categories: (a)

concerning electricity: 1280

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(i)

infrastructure for transmission, as defined in Article 2(3) by Directive 2009/72/EC30;

(ii)

infrastructure for distribution, as defined in Article 2(5) by Directive 2009/72/EC31;

(iii) electricity storage, defined as facilities used for storing electricity on a permanent or temporary basis in above-ground or underground infrastructure or geological sites, provided they are directly connected to high-voltage transmission lines designed for a voltage of 110 kV or more; (iv) any equipment or installation essential for the systems defined in points (i) to (iii) to operate safely, securely and efficiently, including protection, monitoring and control systems at all voltage levels and substations; and (v)

(b)

smart grids, defined as any equipment, line, cable or installation, both at transmission and low and medium voltage distribution level, aiming at two-way digital communication, real-time or close to real-time, interactive and intelligent monitoring and management of electricity generation, transmission, distribution and consumption within an electricity network in view of developing a network efficiently integrating the behaviour and actions of all users connected to it — generators, consumers and those that do both — in order to ensure an economically efficient, sustainable electricity system with low losses and high quality and security of supply and safety;

concerning gas: (i)

transmission and distribution pipelines for the transport of natural gas and bio gas that form part of a network, excluding high-pressure pipelines used for upstream distribution of natural gas;

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(ii)

underground storage facilities connected to the highpressure gas pipelines mentioned in point (i);

(iii) reception, storage and regasification or decompression facilities for liquefied natural gas (‘LNG’) or compressed natural gas (‘CNG’); and (iv) any equipment or installation essential for the system to operate safely, securely and efficiently or to enable bi- directional capacity, including compressor stations; (c)

concerning oil: (i)

pipelines used to transport crude oil;

(ii)

pumping stations and storage facilities necessary for the operation of crude oil pipelines; and

(iii) any equipment or installation essential for the system in question to operate properly, securely and efficiently, including protection, monitoring and control systems and reverse-flow devices; (d)

concerning CO2: networks of pipelines, including associated booster stations, for the transport of CO2 to storage sites, with the aim to inject the CO2 in suitable underground geological formations for permanent storage;

(32) ‘funding gap’ means the difference between the positive and negative cash flows over the lifetime of the investment, discounted to their current value (typically using the cost of capital); (33) ‘Carbon Capture and Storage’ or ‘CCS’ means a set of technologies that captures the carbon dioxide (CO2) emitted from industrial plants based on fossil fuels or biomass, including power plants, transports it to a suitable storage site and injects the CO2 in suitable underground geological formations for the purpose of permanent storage of CO2;

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(34) ‘generation adequacy’ means a level of generated capacity which is deemed to be adequate to meet demand levels in the Member State in any given period, based on the use of a conventional statistical indicator used by organisations which the Union institutions recognise as performing an essential role in the creation of a single market in electricity, for example ENTSO-E; (35) ‘generator’ means an undertaking which produces electrical power for commercial purposes; (36) ‘generation adequacy measure’ means a mechanism which has the aim of ensuring that certain generation adequacy levels are met at national level; (37) ‘balancing responsibility’ means responsibility for deviations between generation, consumption and commercial transactions of a BRP within a given imbalance settlement period; (38) ‘standard balancing responsibilities’ mean non-discriminatory balancing responsibilities across technologies which do not exempt any generator from those responsibilities; (39) ‘balance responsible party (BRP)’ means a market participant or its chosen representative responsible for its imbalances. (40) ‘imbalances’ means deviations between generation, consumption and commercial transactions of a BRP within a given imbalance settlement period. (41) ‘imbalance Settlement’ means a financial settlement mechanism aiming at recovering the costs of balancing applicable to imbalances of BRPs. (42) ‘imbalance Settlement Period’ means time units used for computing BRPs’ imbalances. (43) ‘competitive bidding process’ means a non-discriminatory bidding process that provides for the participation of a sufficient number of undertakings and where the aid is granted on the basis of either the initial bid submitted by the bidder or a clearing price. In addition, the budget or volume related to the bidding process is a binding constraint leading to a situation where not all bidders can receive aid;. 1283

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(44) ‘start of works’ means either the start of construction works on the investment or the first firm commitment to order equipment or other commitment that makes the investment irreversible, whichever is the first in time. Buying of land and preparatory works such as obtaining permits and conducting preliminary feasibility studies are not considered as start of works. For take- overs, ‘start of works’ means the moment of acquiring the assets directly linked to the acquired establishment. (45) ‘demonstration project’ means a project demonstrating a technology as a first of its kind in the Union and representing a significant innovation that goes well beyond the state of the art. (46) ‘assisted areas’ means areas designated in an approved regional aid map for the period 1 July 2014 to 31 December 2020 in application of Articles 107(3)(a) and (c) of the Treaty; (47) ‘regional aid map’ means the list of areas designated by a Member State in accordance with the conditions laid down in the Guidelines on regional State aid for 2014-202032;

2.    NOTIFIABLE ENVIRONMENTAL AND ENERGY AID (20) Individual aid granted on the basis of an aid scheme remains subject to the notification obligation pursuant to Article 108(3) of the Treaty, if the aid exceeds the following notification thresholds 33 and is not granted on the basis of a competitive bidding process: (a)

investment aid: where the aid amount exceeds EUR 15 million for one undertaking;

(b)

operating aid for the production of renewable electricity and/or combined production of renewable heat: where the aid is granted to renewable electricity installations at sites where the resulting renewable electricity generation capacity per site exceeds 250 megawatts (‘MW’);

(c)

operating aid for the production of biofuel: where the aid is granted to a biofuel production installation at sites where the resulting production exceeds 150 000 tonnes (‘t’) per year;

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(d)

operating aid for cogeneration: where aid is granted to cogeneration installation with the resulting cogeneration electricity capacity exceeding 300 MW; Aid for the production of heat from cogeneration will be assessed in the context of notification based on electricity capacity;

(e)

aid for energy infrastructure: where the aid amount exceeds EUR 50 million for one undertaking, per investment project;

(f )

aid for Carbon Capture and Storage: where the aid amount exceeds EUR 50 million per investment project;

(g)

aid in the form of a generation adequacy measure: where the aid amount exceeds EUR 15 million per project per undertaking.

(21) Tax exemptions, reductions from environmental taxes and exemptions from the financing of energy from renewable sources falling under Section 3.7 will not be subject to the conditions for individually notified aid. However, aid granted in the form of fiscal aid not covered by Section 3.7 of these Guidelines will be subject to an individual assessment if the thresholds in that Section are exceeded. This also applies irrespective of whether the individual beneficiary benefits at the same time from a tax exemption or reduction falling under Section 3.7. (22) These Guidelines provide the compatibility criteria for aid schemes and individual aid for environmental protection and energy objectives which are subject to the notification obligation pursuant to Article 108(3) of the Treaty.

3.    COMPATIBILITY ASSESSMENT UNDER ARTICLE 107(3)C OF THE TREATY (23) State aid for environmental protection and energy objectives will be considered compatible with the internal market within the meaning of Article 107(3)(c) of the Treaty if, on the basis of the common assessment principles set out in this Chapter, it leads to an increased contribution to the Union environmental or energy objectives without adversely affecting trading conditions to an extent contrary to the common interest. The specific handicaps of assisted areas will be taken into account. 1285

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(24) This Chapter clarifies how the Commission will apply the common assessment principles set out in Section 3.1 when assessing aid measures falling within the scope of these Guidelines and, where applicable, lays down specific conditions for individual aid (either provided on the basis of a scheme or ad hoc). (25) Section 3.2 sets out the general compatibility conditions applicable to all aid measures falling within the scope of these Guidelines, unless the more specific sections of Chapter 3 specify or amend these general compatibility conditions. Accordingly, Section 3.2 applies in particular to the following measures which are not part of the more specific sections of Chapter 3: (a)

aid for environmental studies;

(b)

aid for the remediation of contaminated sites;

(c)

aid for undertakings going beyond Union standards or increasing environmental protection in the absence of Union standards;

(d)

aid for the early adaptation to future Union standards.

3.1.    Common Assessment Principles (26) To assess whether a notified aid measure can be considered compatible with the internal market, the Commission generally analyses whether the design of the aid measure ensures that the positive impact of the aid towards an objective of common interest exceeds its potential negative effects on trade and competition. (27) The Communication on State aid modernisation of 8 May 201234 called for the identification and definition of common principles applicable to the assessment of compatibility of all aid measures carried out by the Commission. For that purpose, the Commission will consider a State aid measure compatible with the internal market only if it satisfies each of the following criteria: (a)

contribution to a well-defined objective of common interest: a State aid measure aims at an objective of common interest in accordance with Article 107(3) of the Treaty; (Section 3.2.1); 1286

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(b)

need for State intervention: the State aid measure is targeted towards a situation where aid can bring about a material improvement that the market alone cannot deliver, for example by remedying a well-defined market failure; (Section 3.2.2);

(c)

appropriateness of the aid measure: the proposed aid measure is an appropriate policy instrument to address the objective of common interest; (Section 3.2.3);

(d)

incentive effect: the aid changes the behaviour of the undertaking(s) concerned in such a way that it engages in additional activity which it would not carry out without the aid or which it would carry out in a restricted or different manner; (Section 3.2.4);

(e)

proportionality of the aid (aid kept to the minimum): the aid amount is limited to the minimum needed to incentivise the additional investment or activity in the area concerned: (Section 3.2.5);

(f )

avoidance of undue negative effects on competition and trade between Member States: the negative effects of aid are sufficiently limited, so that the overall balance of the measure is positive; (Section 3.2.6);

(g)

transparency of aid: Member States, the Commission, economic operators, and the public, have easy access to all relevant acts and to pertinent information about the aid awarded thereunder; (Section 3.2.7).

(28) Certain categories of schemes may further be made subject to a requirement of ex post evaluation as described in Chapter 4. In such cases, the Commission may limit the duration of those schemes (normally to four years or less) with a possibility to re-notify their prolongation afterwards. (29) Moreover, if a State aid measure or the conditions attached to it, including its financing method when it forms an integral part of it, entail a nonseverable violation of Union law, the aid cannot be declared compatible with the internal market35. For example, in the field of energy, any levy that has the aim of financing a State aid measure needs to comply in particular with Articles 30 and 110 of the Treaty36. 1287

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3.2. General compatibility provisions 3.2.1.  Contribution to an objective of common interest 3.2.1.1. General conditions (30) The general objective of environmental aid is to increase the level of environmental protection compared to the level that would be achieved in the absence of the aid. The Europe 2020 strategy in particular set targets and objectives for sustainable growth to support the shift towards a resourceefficient, competitive low-carbon economy. A low carbon economy with a significant share of variable energy from renewable sources requires an adjustment of the energy system and in particular considerable investments in energy networks37. The primary objective of aid in the energy sector is to ensure a competitive, sustainable and secure energy system in a well-functioning Union energy market38. (31) Member States intending to grant environmental or energy aid will have to define precisely the objective pursued and explain what is the expected contribution of the measure towards this objective. When introducing a measure co-financed by the European Structural and Investments Funds, Member States may rely on the reasoning in the relevant Operational Programmes in indicating the environmental or energy objectives pursued. (32) Environmental studies can contribute to achieving a common objective when they are directly linked to investments eligible under these Guidelines, also if following the findings of a preparatory study, the investment under investigation is not undertaken. 3.2.1.2. Additional conditions for individually notifiable aid (33) To demonstrate the contribution of an individually notifiable aid towards an increased level of environmental protection, the Member State may use, as much as possible in quantifiable terms, a variety of indicators, in particular the ones mentioned below: (a)

abatement technologies: the amount of greenhouse gases or pollutants that are permanently not emitted in the atmosphere (resulting in reduced input from fossil fuels); 1288

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(b)

existing Union standards: the absolute amount and relative size of the increase in the level of environmental protection over and above the standard, that is to say a reduction of pollution that would not be achieved by the standard in the absence of any State aid;

(c)

future Union standards: the increase in the rate at which future standards are implemented, that is to say a reduction of pollution starting at an earlier date.

3.2.2. Need for State intervention 3.2.2.1. General conditions

(34) Whereas it is generally accepted that competitive markets tend to bring about efficient results in terms of prices, output and use of resources, in the presence of market failures39, State intervention may improve the efficient functioning of markets. Indeed State aid measures can under certain conditions, correct market failures and thereby contribute towards achieving the common objective to the extent that the market on its own fails to deliver an efficient outcome. In order to assess whether State aid is effective to achieve the objective, it is necessary first to diagnose and define the problem that needs to be addressed. State aid should be targeted towards situations where aid can bring a material improvement that the market cannot alone deliver. (35) To establish Guidelines ensuring that aid measures achieve the common objective, Member States should identify the market failures hampering an increased level of environmental protection or a well-functioning secure, affordable and sustainable internal energy market. Market failures related to environmental and energy objectives may be different or similar, but can prevent the optimal outcome and can lead to an inefficient outcome for the following reasons: (a)

Negative externalities: they are most common for environmental aid measures and arise when pollution is not adequately priced, that is to say, the firm in question does not face the full cost of pollution. In this case, undertakings acting in their own interest may have insufficient incentives to take the negative externalities arising from production into account either when they decide on a par1289

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ticular production technology or when they decide on the production level. In other words, the production costs that are borne by the undertaking are lower than the costs borne by society. Therefore undertakings typically have insufficient incentive to reduce their level of pollution or to take individual measures to protect the environment. (b)

Positive externalities: the fact that part of the benefit from an investment will accrue to market participants other than the investor, will lead undertakings to underinvest. Positive externalities may occur for instance in case of investments in eco-innovation40, system stability, new and innovative renewable technologies and innovative demand-response measures or in case of energy infrastructures or generation adequacy measures that benefit many Member States (or a wider number of consumers).

(c)

Asymmetric information: this typically arises in markets where there is a discrepancy between the information available to one side of the market and the information available to the other side of the market. This could for instance occur where external financial investors have a lack of information about the likely returns and risks of the project. It may also come up in cross-border infrastructure collaboration where one party has an information disadvantage compared to the other party. Although risk or uncertainty do not in themselves lead to the presence of a market failure, the problem of asymmetric information is linked to the degree of such risk and uncertainty. Both tend to be higher for environmental investments with a typically longer amortisation period. It might reinforce a focus on a short-term horizon that could be aggravated by financing conditions for such investments in particular for SMEs.

(d)

Coordination failures: they may prevent the development of a project or its effective design due to diverging interests and incentives among investors, so called split incentives, the costs of contracting, uncertainty about the collaborative outcome and network effects, for example e.g. uninterrupted supply of electricity. They can arise for example in the relationship between a building owner and a tenant in respect of applying energy efficient solutions. Coordination problems may be further exacerbated by information problems, in particular those related to asymmetric 1290

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information. Coordination problems may also stem from the need to reach a certain critical mass before it is commercially attractive to start a project which may be a particularly relevant aspect in (cross-border) infrastructure projects. (36) The mere existence of market failures in a certain context is not sufficient to justify State intervention. In particular, other policies and measures may already be in place to address some of the market failures identified. Examples include sectorial regulation, mandatory pollution standards, pricing mechanisms such as the Union Emissions Trading System (‘ETS’) and carbon taxes. Additional measures including State aid may only be directed at the residual market failure, that is to say the market failure that remains unaddressed by such other policies and measures. It is also important to show how State aid reinforces other policies and measures in place that aim at remedying the same market failure. Therefore, the case for the necessity of State aid is weaker if it counteracts other policies targeted at the same market failure. (37) The Commission will consider that aid is needed if the Member State demonstrates that the aid effectively targets a (residual) market failure which is not addressed. 3.2.2.2. Additional conditions for individually notifiable aid (38) Whereas market failures may exist in general and aid measures may be, in principle, well-designed to target an efficient market outcome, not all undertakings concerned may be confronted with these market failures to the same extent. Consequently, for notifiable individual aid, the Commission will assess the specific need for aid in the case at hand. It is for the Member State to demonstrate that there is a market failure which is still not addressed with regards to the specific activity supported by the aid and whether the aid is effectively targeted to address that market failure. (39) Depending on the specific market failure addressed, the Commission will take into account the following factors: (a)

whether other policy measures already sufficiently address the market failure, in particular the existence of environmental or other Union standards, the Union ETS or environmental taxes;

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(b)

whether State intervention is needed, taking into account, the cost of implementation of national standards for the aid beneficiary in the absence of aid compared to the costs, or absence thereof, of implementation of those standards for the main competitors of the aid beneficiary;

(c)

in the case of coordination failures, the number of undertakings required to collaborate, diverging interests between collaborating parties and practical problems to coordinate collaboration, such as linguistic issues, sensitivity of information and non-harmonised standards.

3.2.3. Appropriateness of the aid (40) The proposed aid measure must be an appropriate instrument to address the policy objective concerned. An aid measure will not be considered compatible with the internal market if the same positive contribution to the common objective is achievable through other less distortive policy instruments or other less distortive types of aid instruments. 3.2.3.1. Appropriateness among alternative policy instruments (41) State aid is not the only policy instrument available to Member States to promote increased levels of environmental protection or to achieve a well-functioning secure, affordable and sustainable European energy market. It is important to keep in mind that there may be other, better placed instruments to achieve those objectives. Regulation and marketbased instruments are the most important tools to achieve environmental and energy objectives. Soft instruments, such as voluntary eco-labels, and the diffusion of environmentally friendly technologies may also play an important role in achieving a higher level of environmental protection. (42) Different measures to remedy the same market failure may counteract each other. This is the case where an efficient, market-based mechanism has been put in place to deal specifically with the problem of externalities. An additional support measure to address the same market failure risks to undermine the efficiency of the market-based mechanism.

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(43) Different measures to remedy different market failures may also counteract each other. A measure addressing a generation adequacy problem needs to be balanced with the environmental objective of phasing out environmentally or economically harmful subsidies, including for fossil fuels. Similarly, a measure to reduce greenhouse gas emissions can increase the supply of variable power which might negatively affect generation adequacy concerns. (44) Respect for the ‘polluter pays principle’ (‘PPP’) through environmental legislation ensures in principle that the market failure linked to negative externalities will be rectified. Therefore, State aid is not an appropriate instrument and cannot be granted insofar as the beneficiary of the aid could be held liable for the pollution under existing Union or national law41. 3.2.3.2. Appropriateness among different aid instruments (45) Environmental and energy aid can be awarded in various forms. The Member State should however ensure that the aid is awarded in the form that is likely to generate the least distortions of trade and competition. In that respect, the Member State is required to demonstrate why other potentially less distortive forms of aid such as repayable advances as compared to direct grants or tax credits as compared to tax reductions or forms of aid that are based on financial instruments such as debt or equity instruments (for example, low-interest loans or interest rebates, State guarantees, or an alternative provision of capital on favourable terms) are less appropriate. (46) The choice of the aid instrument should be coherent with the market failure that the aid measure aims at addressing. In particular where the actual revenues are uncertain, for instance in case of energy saving measures, a repayable advance may constitute the appropriate instrument. For aid schemes implementing the objectives and priorities of operational programmes, the financing instrument chosen in this programme is in principle presumed to be an appropriate instrument. (47) For operating aid, the Member State must demonstrate that the aid is appropriate to achieve the objective of the scheme to which the aid is targeted. To demonstrate that the aid is appropriate, the Member State may calculate the aid amount ex ante as a fixed sum covering the expected additional costs over a given period, to incentivise undertakings to mini1293

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mise their costs and develop their business in a more efficient manner over time42. (48) For the purpose of demonstrating the appropriateness of schemes, the Member State can also rely on the results of past evaluations as described in Chapter 4. 3.2.4.   Incentive effect 3.2.4.1. General conditions (49) Environmental and energy aid can only be found compatible with the internal market if it has an incentive effect. An incentive effect occurs when the aid induces the beneficiary to change its behaviour to increase the level of environmental protection or to improve the functioning of a secure, affordable and sustainable energy market, a change in behaviour which it would not undertake without the aid. The aid must not subsidise the costs of an activity that an undertaking would anyhow incur and must not compensate for the normal business risk of an economic activity. (50) The Commission considers that aid does not present an incentive effect for the beneficiary in all cases where work on the project had already started prior to the aid application by the beneficiary to the national authorities. In such cases, where the beneficiary starts implementing a project before applying for aid, any aid granted in respect of that project will not be considered compatible with the internal market. (51) Member States must introduce and use an application form for aid. The application form includes at least the applicant’s name and the size of the undertaking, a description of the project, including its location and start and end dates, the amount of aid needed to carry it out and the eligible costs. In the application form, beneficiaries must describe the situation without the aid, i.e., a situation that is referred to as the counterfactual scenario, or the alternative scenario or project. In addition, large undertakings must submit documentary evidence in support of the counterfactual scenario described in the application form. (52) When receiving an application form, the granting authority must carry out a credibility check of the counterfactual scenario and confirm that the aid has the required incentive effect. A counterfactual scenario is credible 1294

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if it is genuine and relates to the decision-making factors prevalent at the time of the decision by the beneficiary regarding the investment. It is not required to meet the conditions of paragraphs (50) and (51) where the aid is awarded on the basis of a competitive bidding process. Incentive effect and adaptation to Union standards (53) The Commission considers that aid granted to adapt to future Union standards has in principle an incentive effect, including when the standard has already been adopted but is not yet in force. However, in the latter case, aid has an incentive effect if it incentivises the realisation of the investment long before the standard enters into force. Aid granted for the adaptation to Union standards already adopted but not yet in force will be considered to have incentive effect if the investment is implemented and finalised at least one year before the Union standards enter into force. (54) As a further exception to paragraph (53), an incentive effect may exist if aid is granted for: (a)

the acquisition of new transport vehicles for road, railway, inland waterway and maritime transport complying with adopted Union standards, provided that the acquisition occurs before those standards enter into force and that, once mandatory, they do not apply to vehicles already purchased; or

(b)

retrofitting operations of existing transport vehicles for road, railway, inland waterway and maritime transport, provided that the Union standards were not yet in force at the date of entry into operation of those vehicles and that, once mandatory, they do not apply to those vehicles.

(55) The Commission considers that aid in support of investments that enable the beneficiary to take measures that go beyond the applicable Union standards contributes positively to the environmental or energy objective. In order not to discourage Member States from setting mandatory national standards which are more stringent than the corresponding Union standards, such positive contribution exists irrespective of the presence of mandatory national standards that are more stringent than the Union standard. This includes for instance measures to improve the 1295

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water and air quality beyond mandatory Union standards. Such positive contribution also exists in the presence of a mandatory national standard adopted in the absence of Union standards. Incentive effect and energy audits (56) Under the Directive 2012/27/EU43 (‘the Energy Efficiency Directive’ or ‘the EED’), large enterprises have to carry out energy audits every four years. Therefore aid for energy audits for large enterprises can have an incentive effect only to the extent that the aid does not compensate an energy audit required by the EED. As the same obligation is not imposed on SMEs, State aid granted to SMEs for carrying out the energy audit can have an incentive effect. (57) The previous paragraph is without prejudice to the assessment of the incentive effect of State aid for energy-efficiency measures prescribed by or carried out as a result of the energy audit or those resulting from other tools, such as energy management systems and environmental management systems. 3.2.4.2. Additional conditions for individually notifiable aid (58) For measures subject to individual notification, the Member States must fully demonstrate to the Commission the incentive effect of the aid. They need to provide clear evidence that the aid has an effective impact on the investment decision in a way that it changes the behaviour of the beneficiary leading the beneficiary to increase the level of environmental protection or leading to a better functioning of the Union energy market. To allow a comprehensive assessment, the Member State must provide not only information concerning the aided project but also a comprehensive description of the counterfactual scenario, in which none of the Member States award aid to the beneficiary. (59) The advantages of new investments or production methods are usually not limited to their direct environmental effects or effects on the energy market. Such advantages may in particular be production advantages44 while the risks relate particularly to the uncertainty about whether the investment will be as productive as expected. 1296

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(60) The incentive effect is, in principle, to be identified through the counterfactual scenario analysis, comparing the levels of intended activity with aid and without aid. Essentially, that amounts to checking the profitability of the project in the absence of the aid, to assess whether it indeed falls short of the profit obtained by the company by implementing the alternative project. (61) In that context, the level of profitability can be evaluated by reference to methodologies which are standard practice in the particular industry concerned, and which may include methods to evaluate the net present value (‘NPV’) of the project45, the internal rate of return (‘IRR’)46 or the average return on capital employed (‘ROCE’). The profitability of the project is to be compared with normal rates of return applied by the company in other investment projects of a similar kind. Where those rates are not available, the profitability of the project is to be compared with the cost of capital of the company as a whole or with the rates of return commonly observed in the industry concerned. (62) Where no specific counterfactual scenario is known, the incentive effect can be assumed when there is a funding gap, that is to say when the investment costs exceed the NPV of the expected operating profits of the investment on the basis of an ex ante business plan. (63) The Member States are, in particular, invited to rely on contemporary, relevant and credible evidence including, for example official board documents, credit committee reports, risk assessments financial reports, internal business plans, expert opinions and other studies related to the investment project under assessment. Documents containing information on demand forecasts, cost forecasts, financial forecasts, documents that are submitted to an investment committee and that elaborate on various investment scenarios, or documents provided to the financial institutions could help to verify the incentive effect. (64) In order to ensure that the incentive effect is established on an objective basis, the Commission may in its assessment of the incentive effect compare company-specific data with data concerning the industry in which the company is active, known as benchmarking. In particular, the Member State should where possible provide industry-specific data demonstrating that the company’s counterfactual scenario, its required level of profitability and its expected cash-flows are reasonable. 1297

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(65) The Commission may find that there is an incentive effect in cases where an undertaking may have an incentive in carrying out a project, with aid, even if the aided project does not achieve the normally required level of profitability. This might be justified for example in view of wider benefits not reflected in the profitability of the project itself. In such circumstances, the evidence provided to support the existence of an incentive effect becomes particularly important. (66) Where an undertaking is adapting to a national standard going beyond Union standards or adopted in the absence of Union standards, the Commission will verify that the aid beneficiary would have been affected substantially in terms of increased costs and would not have been able to bear the costs associated with the immediate implementation of national standards. (67) For investments that bring undertakings above the minimum levels required by Union standards, the Commission can still find no incentive effect, in particular if such investments correspond to the minimum technical standards available in the market. (68) If the aid does not change the behaviour of the beneficiary by stimulating additional activities, that aid does not have incentive effect in terms of promoting environmental behaviour in the Union or strengthening the functioning of the European energy market. Therefore, aid will not be approved in cases where it appears that the same activities would still be pursued without the aid. 3.2.5. Proportionality of the aid 3.2.5.1. General conditions (69) Environmental and energy aid is considered to be proportionate if the aid amount per beneficiary is limited to the minimum needed to achieve the environmental protection or energy objective aimed for. (70) As a general principle, aid will be considered to be limited to the minimum necessary if the aid corresponds to the net extra cost necessary to meet the objective, compared to the counterfactual scenario in the absence of aid. The net extra cost is determined by the difference between the economic benefits and costs (including the investment and opera1298

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tion) of the aided project and those of the alternative investment project which the company would carry out in the absence of aid, that is the counterfactual scenario. (71) However, it might be difficult to fully take into account all economic benefits that a company will derive from an additional investment47. Therefore, for measures, which are not subject to an individual assessment, a simplified method that would focus on calculating the extra investment costs, that is to say not taking into account the operating benefits and costs may be used. Measures which are not subject to an individual assessment will be deemed proportional if the aid amount does not exceed the maximum aid intensity, that is a given percentage of the eligible costs as defined in paragraphs (72) to (76). Those maximum aid intensities also serve as a cap to the aid given for notifiable measures. Eligible costs (72) The eligible costs for environmental aid are the extra investment costs in tangible and/or in intangible assets which are directly linked to the achievement of the common objective. (73) The eligible costs are determined as follows: (a)

where the costs of achieving the common interest objective can be identified in the total investment costs as a separate investment, for instance, because the green element is a readily identifiable ‘add-on component’ to a pre-existing facility, the costs of the separate investment constitute the eligible costs48;

(b)

in all other cases, the eligible costs are the extra investment costs established by comparing the aided investment with the counterfactual situation in the absence of State aid. In principle, reference can be made to the cost of a technically comparable investment49 that would credibly be realised without aid50 and which does not achieve the common interest objective or that only attains that objective to a lesser degree.

(74) Annex 2 contains a list of the relevant counterfactual scenarios or eligible cost calculations reflecting the counterfactual scenario that should be used in similar cases. The Commission may accept alternative counterfactual situations if duly justified by the Member State. 1299

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(75) For measures supporting integrated projects such as integrated energyefficiency measures, or biogas projects, the counterfactual scenario can be difficult to establish. Where a counterfactual scenario cannot credibly be established, the Commission is amenable to consider the total costs of a project as an alternative, which may imply lower aid intensities to reflect the different eligible cost calculation. (76) The rules set out in paragraphs (73) to (75) are applicable to the construction of the production plants in energy efficient district heating or cooling projects. However, the funding gap approach will be applied for aid to the construction of the network, similar to the assessment of energy infrastructure. Maximum aid intensities (77) In order to ensure predictability and a level playing field, the Commission applies maximum aid intensities for aid, set out in Annex 1. These aid intensities reflect the need for State intervention determined, on the one hand, by the relevance of the market failure and, on the other hand, by the expected level of distortion of competition and trade. (78) Higher aid intensities may be allowed for some types of aid or for investments located in an assisted area, but the aid intensity can never exceed 100 % of eligible costs. Higher aid intensities may be allowed as follows: (a)

the aid intensity may be increased by 15 percentage points for energy and environmental investments located in assisted areas fulfilling the conditions of Article 107(3)(a) of the Treaty and by 5 percentage points for energy and environmental investments located in assisted areas fulfilling the conditions of Article 107(3) (c) of the Treaty. The Commission deems those increases to be justified in view of the various handicaps faced by these areas that might be an obstacle to environmental or energy investments;

(b)

the aid intensity can be increased by 10 percentage points for medium sized enterprises and 20 percentage points for small enterprises. With regard to small and medium-sized enterprises which may be faced, on the one hand, with relatively higher costs to achieve environmental or energy objectives compared to the size of their activity and, on the other hand, with capital market imperfections 1300

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which force them to bear such costs, higher aid intensities may also be warranted, as the risk of serious distortions of competition and trade is reduced when the beneficiary is a small or medium-sized enterprise; (c)

higher aid intensities may be justified under certain conditions in case of eco-innovation which can address a double market failure linked to the higher risks of innovation, coupled with the environmental aspect of the project. That applies in particular to resource efficiency measures. The aid intensity may be increased by 10 percentage points, provided that following cumulative conditions are fulfilled: (i)

the eco-innovation asset or project must be new or substantially improved compared to the state of the art in its industry in the Union51;

(ii)

the expected environmental benefit must be significantly higher than the improvement resulting from the general evolution of the state of the art in comparable activities52; and

(iii) the innovative character of the assets or projects involves a clear degree of risk, in technological, market or financial terms, which is higher than the risk generally associated with comparable non-innovative assets or projects53. (79) Therefore, the Commission will consider aid to be compatible with the internal market if the eligible costs are correctly calculated and the maximum aid intensities set out in Annex 1 are respected. (80) Where aid to the beneficiary is granted in a competitive bidding process on the basis of clear, transparent and non-discriminatory criteria, the aid amount may reach 100 % of the eligible costs54. Such a bidding process must be non-discriminatory and provide for the participation of a sufficient number of undertakings. In addition, the budget related to the bidding process must be a binding constraint in the sense that not all participants can receive aid. Finally, the aid must be granted on the basis of the initial bid submitted by the bidder, therefore excluding subsequent negotiations.

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3.2.5.2. Cumulation of aid (81) Aid may be awarded concurrently under several aid schemes or cumulated with ad hoc aid, provided that the total amount of State aid for an activity or project does not exceed the limits fixed by the aid ceilings laid down in these Guidelines. Union funding centrally managed by the Commission that is not directly or indirectly under the control of the Member State55, does not constitute State aid. Where such Union funding is combined with State aid, only the latter is considered for determining whether notification thresholds and maximum aid intensities are respected, provided that the total amount of public funding granted in relation to the same eligible costs must however not exceed the maximum funding rate(s) laid down in the applicable rules of Union law. (82) Aid is not to be cumulated with de minimis aid in respect of the same eligible costs if such cumulation would result in an aid intensity exceeding that laid down in these Guidelines. 3.2.5.3. Additional conditions for individually notifiable investment and operat‑ ing aid (83) For individual aid, compliance with the maximum aid intensities set out in this section and in Annex 1, is not sufficient to ensure proportionality. These maximum aid intensities are used as a cap for individual aid56. (84) As a general rule, individually notifiable aid will be considered to be limited to the minimum if the aid amount corresponds to the net extra costs of the aided investment, compared to the counterfactual scenario in the absence of aid. All relevant costs and benefits must be taken into account over the lifetime of the project. (85) If no specific alternative project can be identified as a counterfactual scenario, the Commission will verify whether the aid amount exceeds the minimum necessary to make the aided project sufficiently profitable, for instance whether it increases its IRR beyond the normal rates of return applied by the undertaking concerned in other investment projects of a similar kind. When that benchmark is not available, the cost of capital of the company as a whole or rates of return commonly observed in the industry concerned may be used for that purpose. 1302

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(86) The Member State should provide evidence that the aid amount is kept to the minimum. Calculations used for the analysis of the incentive effect can also be used to assess whether the aid is proportionate. The Member State must demonstrate the proportionality on the basis of the documentation referred to in paragraph (63). (87) For operating aid granted by way of a competitive bidding process, the proportionality of individual aid is presumed to be met if the general conditions are fulfilled. 3.2.6. Avoidance of undue negative effects on competition and trade 3.2.6.1. General considerations (88) For the aid to be compatible with the internal market, the negative effects of the aid measure in terms of distortions of competition and impact on trade between Member States must be limited and outweighed by the positive effects in terms of contribution to the objective of common interest. (89) The Commission identifies two main potential distortions caused by aid, namely product market distortions and location effects. Both types may lead to allocative inefficiencies which undermine the economic performance of the internal market and to distributional concerns which affect the distribution of economic activity across regions. (90) Aid for environmental purposes will by its very nature, tend to favour environmentally friendly products and technologies at the expense of other, more polluting ones and that effect of the aid will, in principle, not be viewed as an undue distortion of competition, since it is inherently linked to the very objective of the aid, that is to say making the economy greener. When assessing the potential negative effects of environmental aid, the Commission will take into account the overall environmental effect of the measure in relation to its negative impact on the market position, and thus on the profits, of non-aided firms. In doing so, the Commission will consider in particular the distortive effects on competitors that likewise operate on an environmentally friendly basis, even without aid. Likewise, the lower the expected environmental effect of the measure in question, the more important the verification of its effect on competitors’ market shares and profits in the market. 1303

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(91) One potentially harmful effect of State aid for environmental and energy objectives is that it prevents the market mechanism from delivering efficient outcomes by rewarding the most efficient and innovative producers and putting pressure on the least inefficient to improve, restructure or exit the market. That might lead to a situation where, due to the aid granted to some firms, more efficient or innovative competitors, for example competitors with a different, possibly even cleaner technology, that would otherwise be able to enter and expand are unable to do so. In the long run, interfering with the competitive entry and exit process may stifle innovation and slow down industry-wide productivity improvements. (92) Aid may also have distortive effects by strengthening or maintaining substantial market power of the beneficiary. Even where aid does not strengthen substantial market power directly, it may do so indirectly, by discouraging the expansion of existing competitors or inducing their exit or discouraging the entry of new competitors. (93) Apart from distortions on the product markets, aid may also give rise to effects on trade and location choice. Those distortions can arise across Member States, either when firms compete across borders or consider different locations for investment. Aid aimed at preserving economic activity in one region or attracting it away from other regions within the internal market may not lead directly to a distortion in the product market, but it may displace activities or investments from one region into another without any net environmental impact. Manifest negative effects (94) In principle, an aid measure and the context in which it is applied need to be analysed to identify the extent to which it can be deemed distortive. However, there are situations where the negative effects manifestly outweigh any positive effects, meaning that the aid cannot be found compatible with the internal market. (95) The Commission establishes maximum aid intensities which constitute a basic requirement for compatibility, and which have the aim of preventing the use of State aid for projects where the ratio between aid amount and eligible costs is deemed very high and particularly likely to be distortive. 1304

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(96) Likewise, aid for environmental and energy objectives that merely leads to a change in location of the economic activity without improving the existing level of environmental protection in the Member States will not be considered compatible with the internal market. 3.2.6.2. General conditions (97) In assessing the negative effects of the aid measure, the Commission focuses on the distortions resulting from the foreseeable impact of the environmental and energy aid has on competition between undertakings in the product markets affected and the location of economic activity. If State aid measures are well targeted to the market failure they aim to address, the risk that the aid will unduly distort competition is more limited. (98) If the aid is proportionate and limited to the extra investment costs, the negative impact of the aid is in principle softened. However, even where aid is necessary and proportionate, aid may result in a change in behaviour of the beneficiaries which distorts competition. A profit seeking undertaking will normally only increase the level of environmental protection beyond mandatory requirements if it considers that this will result, at least marginally in some sort of advantage for the undertaking. (99) In order to keep the distortions of competition and trade to a minimum, the Commission will place great emphasis on the selection process. Where possible, the selection process should be conducted in a non-discriminatory, transparent and open manner, without unnecessarily excluding companies that may compete with projects to address the same environmental or energy objective. The selection process should lead to the selection of beneficiaries that can address the environmental or energy objectives using the least amount of aid or in the most cost-effective way. (100) The Commission will in particular assess the negative effects of the aid by considering the following elements: (a)

reduction in or compensation for production unit costs: if the new equipment57  will lead to reduced costs per unit produced compared to the situation without the aid or if the aid compensates a part of the operating cost, it is likely that the beneficiaries will increase sales. The more price elastic the product, the greater the potential of the aid for distorting competition; 1305

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(b)

new product: if the beneficiaries obtain a new or a higher quality product, it is likely that they will increase their sales and possibly gain a ‘first mover’ advantage.

3.2.6.3. Additional conditions for individually notifiable aid (101) The Member State must ensure that the negative effects as described in Section 3.2.6.1 are limited. In addition to the elements specified in Section 3.1.6.2, the Commission will take into account and assess whether the individual aid leads to: (a)

supporting inefficient production, thereby impeding productivity growth in the sector;

(b)

distorting dynamic incentives;

(c)

creating or enhancing market power or exclusionary practices;

(d)

artificially altering trade flows or the location of production.

(102) The Commission may consider the planned introduction of energy and environmental support schemes, other than the one notified, which directly or indirectly benefit the beneficiary with a view to assessing the cumulative impact of the aid. (103) The Commission will also assess whether the aid results in some territories benefiting from more favourable production conditions, notably because of comparatively lower production costs as a result of the aid or because of higher production standards achieved through the aid. This may result in companies staying in or re-locating to the aided territories, or to displacement of trade flows towards the aided area. In its analysis of notifiable individual aid, the Commission will accordingly take into account any evidence that the aid beneficiary has considered alternative locations. 3.2.7. Transparency (104) Member States must ensure the publication of the following information on a comprehensive State aid website, at national or regional level: the full text of the approved aid scheme or the individual aid granting deci1306

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sion and its implementing provisions, or a link to it, the identity of the granting authority/(ies), the identity of the individual beneficiaries, the form and amount of aid granted to each beneficiary, the date of granting, the type of undertaking (SME/large company), the region in which the beneficiary is located (at NUTS level II) and the principal economic sector in which the beneficiary has its activities (at NACE group level). (105) For schemes in the form of tax advantage and aid in the form of reductions in the funding of support for energy from renewable sources, the information on individual aid amounts can be provided in the following ranges (in EUR million): [0,5-1]; [1-2]; [2-5]; [5-10]; [10-30]; [30 and more]. (106) Such information must be published after the decision to grant the aid has been taken, must be kept for at least 10 years and must be available to the general public without restrictions58. Member States will not be required to provide such information before 1 July 2016. The requirement to publish information can be waived with respect to individual aid awards below EUR 500 000. 3.3.    Aid to energy from renewable sources 3.3.1. General conditions for investment and operating aid to energy from renew‑ able sources (107) The Union set ambitious climate change and energy sustainability targets in particular as part of its EU 2020 strategy. Several Union legislative acts already support the achievement of those targets, such as the Union ETS, Directive 2009/28/EC59  (‘the Renewable Energy Directive’or ‘RED’) and the Directive 2009/30/EC60 (‘the Fuel Quality Directive’). However, their implementation may not always result in the most efficient market outcome and under certain conditions State aid can be an appropriate instrument to contribute to the achievement of the Union objectives and related national targets. (108) These Guidelines apply to the period up to 2020. However, they should prepare the ground for achieving the objectives set in the 2030 Framework. Notably, it is expected that in the period between 2020 and 2030 established renewable energy sources will become grid-competitive, implying that subsidies and exemptions from balancing responsibilities 1307

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should be phased out in a degressive way. These Guidelines are consistent with that objective and will ensure the transition to a cost-effective delivery through market-based mechanisms. (109) Market instruments, such as auctioning or competitive bidding process open to all generators producing electricity from renewable energy sources competing on equal footing at EEA level, should normally ensure that subsidies are reduced to a minimum in view of their complete phasing out. (110) However, given the different stage of technological development of renewable energy technologies, these Guidelines allow technology specific tenders to be carried out by Member States, on the basis of the longerterm potential of a given new and innovative technology, the need to achieve diversification; network constraints and grid stability and system (integration) costs. (111) Specific exceptions are included for installations of a certain size, for which it cannot be presumed that a bidding process is appropriate, or for installations at demonstration phase. The inclusion of such installations is optional. (112) In view of the overcapacity in the food-based biofuel market, the Commission will consider investment aid in new and existing capacity for food-based biofuel not to be justified. However, investment aid to convert food-based biofuel plants into advanced biofuel plants is allowed to cover the costs of such conversion. Other than in this particular case, investment aid to biofuels can only be granted in favour of advanced biofuels. (113) Whilst investment aid to support food-based biofuel will cease from the date of application of these Guidelines, operating aid to food-based biofuels can only be granted until 2020. Therefore, such aid can only be granted to plants that started operation before 31 December 2013 until the plant is fully depreciated but in any event no later than 2020. (114) In addition, the Commission will consider that the aid does not increase the level of environmental protection and can therefore not be found compatible with the internal market if the aid is granted for biofuels which are subject to a supply or blending obligation61, unless a Member 1308

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State can demonstrate that the aid is limited to sustainable biofuels that are too expensive to come on the market with a supply or blending obligation only. (115) In particular while the EU ETS and CO2 taxes internalise the costs of greenhouse gas (‘GHG’) emissions, they may not, yet, fully internalise those costs. State aid can therefore contribute to the achievement of the related, but distinct, Union objectives for renewable energy. Unless it has evidence on the contrary, the Commission therefore presumes that a residual market failure remains, which can be addressed through aid for renewable energy. (116) In order to allow Member States to achieve their targets in line with the EU 2020 objectives, the Commission presumes the appropriateness of aid and the limited distortive effects of the aid provided all other conditions are met. (117) With regard to aid for the production of hydropower, its impact can be twofold: on the one hand, such aid has a positive impact in terms of low GHG emissions, on the other hand, it might also have a negative impact on water systems and biodiversity. Therefore, when granting aid for the production of hydropower, Member States must respect Directive 2000/60/EC62 and in particular Article 4(7) thereof, which lays down criteria in relation to allowing new modifications of bodies of water. (118) A core principle of Union legislation on waste is the waste hierarchy which prioritises the ways in which waste should be treated63. State aid for energy from renewable sources using waste, including waste heat, as input fuel can make a positive contribution to environmental protection, provided that it does not circumvent that principle. (119) Aid to energy from renewable sources can be granted as investment or operating aid. For investment aid schemes and individually notified investment aid, the conditions set out in Section 3.2 apply. (120) For operating aid schemes, the general provision of Section 3.2 will be applied as modified by the specific provisions as set in this Section. For individually notified operating aid, the conditions set out in Section 3.2 apply, where relevant taking into account the modifications made by this Section for operating aid schemes. 1309

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(121) The Commission will authorise aid schemes for a maximum period of 10 years. If maintained, such measure should be re-notified after such period. Concerning food-based biofuel, existing and newly notified schemes should be limited to 2020. (122) The Union set an overall Union target for the share of renewable energy sources in final energy consumption and translated this target into mandatory national targets. The Renewable Energy Directive includes cooperation mechanisms64 to facilitate cross border support for achieving national targets. Operating aid schemes should in principle be open to other EEA countries and Contracting Parties of the Energy Community to limit the overall distortive effects. It minimises costs for Member States whose sole aim is to achieve the national renewables target laid down in Union legislation. Member States however may want to have a cooperation mechanism in place before allowing cross border support as otherwise, production from installations in other countries will not count towards their national target under the RED65. The Commission will consider positively schemes that are open to other EEA or Energy Community countries. (123) Aid to electricity from renewable energy sources should in principle contribute to integrating renewable electricity in the market. However, for certain small types of installations, this may not be feasible or appropriate. 3.3.2. Operating aid granted to energy from renewable sources 3.3.2.1. Aid for electricity from renewable energy sources (124) In order to incentivise the market integration of electricity from renewable sources, it is important that beneficiaries sell their electricity directly in the market and are subject to market obligations. The following cumulative conditions apply from 1 January 2016 to all new aid schemes and measures: (a)

aid is granted as a premium in addition to the market price (premium) whereby the generators sell its electricity directly in the market;

(b)

beneficiaries66  are subject to standard balancing responsibilities, unless no liquid intra-day markets exist; and 1310

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(c)

measures are put in place to ensure that generators have no incentive to generate electricity under negative prices.

(125) The conditions established in paragraph (124) do not apply to installations with an installed electricity capacity of less than 500 kW or demonstration projects, except for electricity from wind energy where an installed electricity capacity of 3 MW or 3 generation units applies. (126) In a transitional phase covering the years 2015 and 2016, aid for at least 5 % of the planned new electricity capacity from renewable energy sources should be granted in a competitive bidding process on the basis of clear, transparent and non-discriminatory criteria.

From 1 January 2017, the following requirements apply:



Aid is granted in a competitive bidding process on the basis of clear, transparent and non-discriminatory criteria67, unless: (a)

Member States demonstrate that only one or a very limited number of projects or sites could be eligible; or

(b)

Member States demonstrate that a competitive bidding process would lead to higher support levels (for example to avoid strategic bidding); or

(c)

Member States demonstrate that a competitive bidding process would result in low project realisation rates (avoid underbidding).



If such competitive bidding processes are open to all generators producing electricity from renewable energy sources on a non-discriminatory basis, the Commission will presume that the aid is proportionate and does not distort competition to an extent contrary to the internal market.



The bidding process can be limited to specific technologies where a process open to all generators would lead to a suboptimal result which cannot be addressed in the process design in view of, in particular: (a)

the longer-term potential of a given new and innovative technology; or

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(b)

the need to achieve diversification; or

(c)

network constraints and grid stability; or

(d)

system (integration) costs; or

(e)

the need to avoid distortions on the raw material markets from biomass support68.

(127) Aid may be granted without a competitive bidding process as described in paragraph (126) to installations with an installed electricity capacity of less than 1 MW, or demonstration projects, except for electricity from wind energy, for installations with an installed electricity capacity of up to 6 MW or 6 generation units. (128) In the absence of a competitive bidding process, the conditions of paragraphs (124) and (125) and the conditions for operating aid to energy from renewable energy sources other than electricity as set out in paragraph (131) are applicable. (129) The aid is only granted until the plant has been fully depreciated according to normal accounting rules and any investment aid previously received must be deducted from the operating aid. (130) These conditions are without prejudice to the possibility for Member States to take account of spatial planning considerations, for example by requiring building permissions prior to the participation in the bidding process or requiring investment decisions within a certain period. 3.3.2.2. Aid for energy from renewable sources other than electricity (131) For energy from renewable sources other than electricity, operating aid will be considered compatible with the internal market if the following cumulative conditions are met: (a)

the aid per unit of energy does not exceed the difference between the total levelised costs of producing energy (‘LCOE’) from the particular technology in question and the market price of the form of energy concerned;

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(b)

the LCOE may include a normal return on capital. Investment aid is deducted from the total investment amount in calculating the LCOE;

(c)

the production costs are updated regularly, at least every year; and

(d)

aid is only granted until the plant has been fully depreciated according to normal accounting rules in order to avoid that operating aid based on LCOE exceeds the depreciation of the investment.

3.3.2.3. Aid for existing biomass plants after plant depreciation (132) Unlike most other renewable sources of energy, biomass requires relatively low investment costs but higher operating costs. Higher operating costs may prevent a biomass69 plant from operating even after depreciation of the installation as the operating costs can be higher than the revenues (the market price). On the other hand, an existing biomass plant may operate by using fossil fuel instead of biomass as an input source if the use of fossil fuel as an input is more economically advantageous than the use of biomass. To preserve the use of biomass in both cases, the Commission may find operating aid to be compatible with the internal market even after plant depreciation. (133) The Commission will consider operating aid for biomass after plant depreciation compatible with the internal market if a Member State demonstrates that the operating costs borne by the beneficiary after plant depreciation are still higher than the market price of the energy concerned and provided that the following cumulative conditions are met: (a)

the aid is only granted on the basis of the energy produced from renewable sources;

(b)

the measure is designed such that it compensates the difference in operating costs borne by the beneficiary and the market price; and

(c)

a monitoring mechanism is in place to verify whether the operating costs borne are still higher than the market price of energy. The monitoring mechanism needs to be based on updated production cost information and take place at least on an annual basis. 1313

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(134) The Commission will consider operating aid for biomass after plant depreciation compatible with the internal market if a Member State demonstrates that, independent from the market price of the energy concerned, the use of fossil fuels as an input is more economically advantageous than the use of biomass and provided that the following cumulative conditions are met: (a)

the aid is only granted on the basis of the energy produced from renewable sources;

(b)

the measure is designed such that it compensates the difference in operating costs borne by the beneficiary from biomass compared to the alternative fossil fuel input;

(c)

credible evidence is provided that without the aid a switch from the use of biomass to fossil fuels would take place within the same plant; and

(d)

a monitoring mechanism is in place to verify that the use of fossil fuels is more beneficial than the use of biomass. The monitoring mechanism needs to be based on updated cost information and take place at least on an annual basis.

3.3.2.4. Aid granted by way of certificates (135) Member States may grant support for renewable energy sources by using market mechanisms such as green certificates. These market mechanisms70 allow all renewable energy producers to benefit indirectly from guaranteed demand for their energy, at a price above the market price for conventional power. The price of these green certificates is not fixed in advance, but depends on market supply and demand. (136) The Commission will consider the aid referred to in paragraph (135) to be compatible with the internal market if Member States can provide sufficient evidence that such support (i) is essential to ensure the viability of the renewable energy sources concerned; (ii) does not, for the scheme in the aggregate, result in overcompensation over time and across technologies, or in overcompensation for individual less deployed technologies in so far as differentiated levels of certificates per unit of output are introduced; and (iii) does not dissuade renewable energy producers from becoming more competitive. 1314

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(137) The Commission considers in particular that no differentiation in support levels through green certificates may be applied unless a Member States demonstrates the need for a differentiation on the basis of the justifications set out in paragraph (126). The conditions set out in paragraphs (124) and (125) apply when technically possible. Any investment aid previously received must be deducted from the operating aid. 3.4.    Energy efficiency measures, including cogeneration and district heating and district cooling (138) The Union set the objective of saving 20 % of the Union’s primary energy consumption by 2020. In particular the Union adopted the Energy Efficiency Directive, which establishes a common framework to promote energy-efficiency within the Union pursuing the overall objective of achieving the Union’s 2020 headline target on energy-efficiency and pave the way for further energy-efficiency improvement beyond 2020. 3.4.1. Objective of common interest (139) In order to ensure that aid contributes to a higher level of environmental protection, aid for district heating and district cooling and cogeneration of heat and electricity (‘CHP’) will only be considered compatible with the internal market if granted for investment, including upgrades, to high-efficient CHP and energy-efficient district heating and district cooling. For measures co-financed by the European Structural and Investments Funds, Member States may rely on the reasoning in the relevant Operational Programmes. (140) State aid for cogeneration and district heating installations using waste, including waste heat, as input fuel can make a positive contribution to environmental protection, provided that it does not circumvent the waste hierarchy principle (referred to in paragraph (118)). (141) To demonstrate the contribution of the aid towards an increased level of environmental protection, the Member State may use, as much as possible in quantifiable terms, a variety of indicators, in particular the amount of energy saved due to better, lower energy performance and higher energy productivity or the efficiency gains by reduced energy consumption and reduced fuel input.

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3.4.2.  Need for State intervention (142) Energy-efficiency measures target negative externalities as referred to in paragraph (35) by creating individual incentives to attain environmental targets for energy-efficiency and for the reduction of greenhouse gas emissions. In addition to the general market failures identified in Section 3.2, one example of a market failure that may arise in the field of energy-efficiency measures concerns energy-efficiency measures in buildings. When renovation works in buildings are considered, the benefits of energy efficiency measures do not typically accrue with the building owner, who generally bears the renovation costs, but with the tenant. The Commission therefore considers that State aid may be needed to promote investments in energy-efficiency in order to meet the targets of the EED. 3.4.3. Incentive effect (143) The EED puts an obligation on Member States to achieve targets including in energy-efficient renovation of buildings and in final energy consumptions. However, the EED does not impose energy-efficient targets on undertakings and will on that point not prevent an aid in the field of energy-efficiency from having an incentive effect. (144) The incentive effect of the aid will be assessed on the basis of the conditions set out in Section 3.2.4 of these Guidelines. 3.4.4. Appropriateness of the aid (145) State aid may be considered an appropriate instrument to finance energyefficiency measures, independently of the form in which it is granted. (146) For energy efficiency measures, a repayable advance may be considered as an appropriate State aid instrument in particular if the revenues from the energy-efficiency measure are uncertain. (147) When assessing State aid granted for in particular the energy-efficient renovation of buildings, a financial instrument set up by the Member State to finance renovation works may be considered as an appropriate instrument for the granting of State aid.

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3.4.5. Proportionality Investment aid for energy-efficiency measures (148) The eligible costs are determined as the extra investment costs as established in paragraph (73). For energy-efficiency measures, the counterfactual scenario can be difficult to establish particularly in case of integrated projects. For such projects, the Commission is amenable to consider a proxy for determining the eligible costs as set out in paragraph (75). (149) The aid intensities set out in Annex 1 apply. Operating aid for energy-efficiency measures (except operating aid for high energy efficient CHP) (150) The Commission will consider operating aid for energy-efficiency to be proportionate only if the following cumulative conditions are met: (a)

the aid is limited to compensating for net extra production costs resulting from the investment, taking account of benefits resulting from energy saving71. In determining the amount of operating aid, any investment aid granted to the undertaking in question in respect of the new plant must be deducted from production costs;



and

(b)

the operating aid is limited to a five year duration.

Operating aid for high energy efficient CHP (151) Operating aid for high energy efficient cogeneration plants may be granted on the basis of the conditions applying to operating aid for electricity from renewable energy sources as established in Section 3.3.2.1 and only: (a)

to undertakings generating electric power and heat to the public where the costs of producing such electric power or heat exceed its market price;

(b)

for the industrial use of the combined production of electric power and heat where it can be shown that the production cost of one 1317

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unit of energy using that technique exceeds the market price of one unit of conventional energy. 3.5.    Aid for resource efficiency and in particular aid to waste management 3.5.1. Resource Efficiency (152) The Europe 2020 flagship initiative for ‘Resource Efficient Europe’ aims for sustainable growth by identifying and creating new business opportunities, inter alia, through new and innovative means of production, business models and product design. It sets out how such growth can be decoupled from the use of resources and its overall environmental impact. (153) Market failures as identified in paragraph (35) are particularly relevant for resource efficiency. In addition, market failures in that area are not often addressed by other policies and measures, such as taxation or regulation. State aid may in such cases be necessary. (154) For individual measures, Member States need to demonstrate quantifiable benefits in this policy area, particularly the amount of resources saved or the resource efficiency gains. (155) The Commission recalls in view of the close ties with new innovative production means that measures promoting resource efficiency may benefit, once the relevant criteria are fulfilled, from an additional eco-innovation bonus as referred to in paragraph78. 3.5.2. Aid to waste management (156) More specifically, and in line with the waste hierarchy principle (referred to in paragraph (118)), the Union’s Seventh Environment Action Programme identifies the prevention, re-use and recycling of waste as one of its top priorities. Member States are required to establish waste management plans72 and should respect this hierarchy and design state aid measures that are be coherent with implementation of these plans. Another key concept which inspires Union legislation in the environmental field is the ‘polluter pays principle’, described in paragraph (44). (157) State aid for the management of waste, in particular for activities aimed at the prevention, re-use and recycling of waste, can make a positive con1318

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tribution to environmental protection, provided that it does not circumvent the principles referred to in previous paragraph. This includes the re-use or recycling of water or minerals that would otherwise be unused as waste. In particular, in light of the PPP, undertakings generating waste should not be relieved of the costs of its treatment. Moreover, the normal functioning of the secondary materials market should not be negatively impacted. (158) The Commission will consider aid for waste management to serve an objective of common interest in accordance with the principles of waste management set out above if the following cumulative conditions are met: (a)

the investment is aimed at reducing waste generated by other undertakings and does not extend to waste generated by the beneficiary of the aid;

(b)

the aid does not indirectly relieve the polluters from a burden that should be borne by them under Union or national law, such a burden should be considered a normal company cost for the polluters;

(c)

the investment goes beyond the state of the art73, i.e. prevention, re-use, recycling or recovery or uses conventional technologies in an innovative manner notably to move towards the creation of a circular economy using waste as a resource;

(d)

the materials treated would otherwise be disposed of, or be treated in a less environmentally friendly manner; and

(e)

the investment does not merely increase demand for the materials to be recycled without increasing collection of those materials.

(159) Aid which, contrary to what is specified in paragraph (158)(a), is intended for the management of the beneficiary’s own waste will be assessed on the basis of the general criteria in Section 3.2 applicable to aid for undertakings going beyond Union standards or increasing environmental protection in the absence of Union standards pursuant to paragraph (25) (c).

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3.6.    Aid to Carbon Capture and Storage (CCS) (160) As recognised by Directive 2009/31/EC74 (‘the CCS Directive’) and the Commission Communication on the future of CCS in Europe75, CCS is a technology that can contribute to mitigating climate change. In the transition to a fully low-carbon economy, CCS technology can reconcile the demand for fossil fuels, with the need to reduce greenhouse gas emissions. In some industrial sectors, CCS may currently represent the only technology option able to reduce process-related emissions at the scale needed in the long term. Given that the cost of capture, transport and storage is an important barrier to the uptake of CCS, State aid can contribute to fostering the development of this technology. (161) In order to promote the long term decarbonisation objectives, the Commission considers that the aid for CCS contributes to the common objective of environmental protection. (162) The Union has taken several initiatives to address negative externalities. In particular the Union ETS ensures the internalisation of the costs of GHG emissions, which however may not, yet, ensure the achievement of the Union’s long term decarbonisation objectives. The Commission therefore presumes that aid for CCS addresses a residual market failure, unless it has evidence that such remaining market failure no longer exists. (163) Without prejudice in particular to Union’s regulations in that field, the Commission presumes the appropriateness of aid provided all other conditions are met. Both operating and investment aid is permitted. (164) The aid may be provided to support fossil fuel and, or biomass power plants (including co-fired power plants with fossil fuels and biomass) or other industrial installations equipped with CO2 capture, transport and storage facilities, or individual elements of the CCS chain. However, aid to support CCS projects does not include aid for the CO2 emitting installation (industrial installations or power plants) as such, but aid for the costs resulting from the CCS project. (165) The aid is limited to the additional costs for capture, transport and storage of the CO2 emitted. It is generally accepted that the counterfactual scenario would consist in a situation where the project is not carried out as CCS is similar to additional infrastructure which is not needed to op1320

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erate an installation. In view of this counterfactual scenario, the eligible costs are defined as the funding gap. All revenues, including for instance cost savings from a reduced need for ETS allowances, NER300 funding and EEPR funding are taken into account76. (166) The Commission assesses the distortive effects of the aid on the basis of the criteria laid down in Section 3.2.6, taking into account whether any knowledge sharing arrangements are in place, whether the infrastructure is open to third parties and whether the support to individual elements of the CCS chain has a positive impact on other fossil fuel installations owned by the beneficiary. 3.7.    Aid in the form of reductions in or exemptions from environmental taxes and in the form of reductions in funding support for electricity from renewable sources 3.7.1. Aid in the form of reductions in or exemptions from environmental taxes (167) Environmental taxes are imposed in order to increase the costs of environmentally harmful behaviour, thereby discouraging such behaviour and increasing the level of environmental protection. In principle, environmental taxes should reflect the overall costs to society, and correspondingly, the amount of tax paid per unit of emission should be the same for all emitting firms. While reductions in or exemptions from environmental taxes may adversely impact that objective77, such an approach may nonetheless be needed where the beneficiaries would otherwise be placed at such a competitive disadvantage that it would not be feasible to introduce the environmental tax in the first place. (168) Indeed, granting a more favourable tax treatment to some undertakings may facilitate a higher general level of environmental taxes. Accordingly, reductions in or exemptions from environmental taxes78, including tax refunds, can at least indirectly contribute to a higher level of environmental protection. However, the overall objective of the environmental tax to discourage environmentally harmful behaviour should not be undermined. The tax reductions should be necessary and based on objective, transparent and non-discriminatory criteria, and the undertakings concerned should make a contribution towards increasing environmental protection. That could be achieved by granting compensation in the form of tax refunds, whereby undertakings are not exempted from the tax as 1321

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such but receive a fixed annual compensation for the anticipated increase in the tax amount payable. (169) The Commission will authorise aid schemes for maximum periods of 10 years, after which a Member State can re-notify the measure if the Member State re-evaluates the appropriateness of the aid measures concerned. (170) The Commission will consider that tax reductions do not undermine the general objective pursued and contribute at least indirectly to an increased level of environmental protection, if a Member State demonstrates that (i) the reductions are well targeted to undertakings being mostly affected by a higher tax and (ii) that a higher tax rate is generally applicable than would be the case without the exemption. (171) For this purpose, the Commission will assess the information provided by Member States. Such information should include, on the one hand, the respective sector(s) or categories of beneficiaries covered by the exemptions or reductions and, on the other hand, the situation of the main beneficiaries in each sector concerned and how the taxation may contribute to environmental protection. The exempted sectors should be properly described and a list of the largest beneficiaries for each sector should be provided (considering notably turnover, market shares and size of the tax base). (172) When environmental taxes are harmonised, the Commission can apply a simplified approach to assess the necessity and proportionality of the aid. In the context of Directive 2003/96/EC79 (‘ETD’), the Commission can apply a simplified approach for tax reductions respecting the Union minimum tax level. For all other environmental taxes, an in depth assessment of the necessity and proportionality of the aid is needed. Situation 1: Harmonised environmental taxes (173) The Commission will consider aid in the form of tax reductions necessary and proportional provided (i) the beneficiaries pay at least the Union minimum tax level set by the relevant applicable Directive; (ii) the choice of beneficiaries is based on objective and transparent criteria; and (iii) the aid is granted in principle in the same way for all competitors in the same sector, if they are in a similar factual situation. 1322

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(174) Member States can grant the aid in the form of a reduction of the tax rate or as a fixed annual compensation amount (tax refund), or as a combination of the two. The advantage of the tax refund approach is that undertakings remain exposed to the price signal, which the environmental tax gives. Where used, the amount of the tax refund should be calculated on the basis of historical data, i.e. the level of production, and the consumption or pollution observed for the undertaking in a given base year. The level of the tax refund must not go beyond the Union minimum tax amount that would result for the base year. (175) If the beneficiaries pay less than the Union minimum tax level set by the relevant applicable Directive, the aid will be assessed on the basis of the conditions for non-harmonised environmental taxes as set out in paragraphs (176) to (178). Situation 2: Non-harmonised environmental taxes and specific situations of of har‑ monised taxes (176) For all other non-harmonised environmental taxes and in the case of harmonised taxes below the Union minimum levels of the ETD (see paragraph (172)) and in order to demonstrate the necessity and proportionality of the aid, a Member State should clearly define the scope of the tax reductions. For that purpose, a Member State should provide information specified in paragraph (171). Member States may decide to grant aid beneficiaries aid in the form of a tax refund, (referred to in paragraph (174)). This approach continues to expose aid beneficiaries to the price signal, which the environmental tax intends to give, while limiting the anticipated increase in the tax amount payable. (177) The Commission will consider the aid to be necessary if the following cumulative conditions are met: (a)

the choice of beneficiaries is based on objective and transparent criteria, and the aid is granted in principle in the same way for all competitors in the same sector if they are in a similar factual situation;

(b)

the environmental tax without the reduction leads to a substantial increase in production costs calculated as a proportion of the gross value added for each sector or category of individual beneficiaries; and 1323

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(c)

the substantial increase in production costs could not be passed on to customers without leading to significant sales reductions.

(178) The Commission will consider the aid to be proportionate if one of the following conditions is met: (a)

aid beneficiaries pay at least 20 % of the national environmental tax; or

(b)

the tax reduction is conditional on the conclusion of agreements between the Member State and the beneficiaries or associations of beneficiaries whereby the beneficiaries or associations of beneficiaries commit themselves to achieve environmental protection objectives which have the same effect as if beneficiaries pay at least 20 % of the national tax or, in the circumstances foreseen in paragraph (173), if the Union minimum tax level were applied. Such agreements or commitments may relate, among other things, to a reduction in energy consumption, a reduction in emissions, or any other environmental measure. Such agreements must satisfy the following cumulative conditions: (i)

the substance of the agreements is negotiated by the Member State, specifies the targets and fixes a time schedule for reaching the targets;

(ii)

the Member State ensures independent80 and timely monitoring of the commitments concluded in the agreements; and

(iii) the agreements are revised periodically in the light of technological and other developments and stipulate effective penalty arrangements applicable if the commitments are not met. (179) In case of a carbon tax levied on energy products used for electricity production, the electricity supplier is liable to pay the tax. Such carbon tax can be designed in a way that supports and is directly linked to the Union ETS allowance price by taxing carbon. However, the electricity price increases if those costs are passed on to the electricity consumer. In that case, the effect of the carbon tax is similar to the effect of ETS allowance 1324

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costs being passed on and included in the electricity price, indirect emissions costs. (180) Therefore, if the tax referred to in paragraph (179) is designed in a way that it is directly linked to the EU ETS allowance price and aims to increase the allowance price, compensation for those higher indirect costs may be considered. The Commission will consider the measure compatible with the internal market only if the following cumulative conditions are met: (a)

aid is only granted to sectors and subsectors listed in Annex II of the ETS State Aid Guidelines81, to compensate for additional indirect cost resulting from the tax;

(b)

the aid intensity and maximum aid intensities are calculated as defined in paragraphs 27 to 30 of the ETS State Aid Guidelines. The ETS allowance forward price can be replaced by the level of the national tax; and

(c)

aid is granted as a lump sum that can be paid to the beneficiary in the year in which the costs are incurred or in the following year. If the aid is paid in the year in which the costs are incurred, an ex post monitoring mechanism needs to be put in place to ensure that any over-payment of aid is repaid before 1 July of the following year.

3.7.2. Aid in the form of reductions in the funding of support for energy from re‑ newable sources82 (181) The funding of support to energy from renewable sources through charges does as such not target a negative externality and accordingly has no direct environmental effect. Those charges are, therefore, fundamentally different from the indirect taxes on electricity set out in paragraph (167) even if they may also result in higher electricity prices. The increase in electricity costs may be explicit through a specific charge which is levied from electricity consumers on top of the electricity price or indirect through additional costs faced by electricity suppliers due to obligations to buy renewable energy which are subsequently passed on to their customers, the electricity consumers. A typical example would be the mandatory purchase by electricity suppliers of a certain percentage of renewable energy through green certificates for which the supplier is not compensated. 1325

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(182) In principle and to the extent that the costs of financing renewable energy support are recovered from energy consumers, they should be recovered in a way that does not discriminate between consumers of energy. However, some targeted reductions in these costs may be needed to secure a sufficient financing base for support to energy from renewable sources and hence help reaching the renewable energy targets set at EU level83. On the one hand, in order to avoid that undertakings particularly affected by the financing costs of renewable energy support are put at a significant competitive disadvantage, Member States may wish to grant partial compensation for these additional costs. Without such compensation the financing of renewable support may be unsustainable and public acceptance of setting up ambitious renewable energy support measures may be limited. On the other hand, if such compensation is too high or awarded to too many electricity consumers, the overall funding of support to energy from renewable sources might be threatened as well and the public acceptance for renewable energy support may be equally hampered and distortions of competition and trade may be particularly high. (183) For the assessment of State aid to compensate for the financing of support to energy from renewable sources, the Commission will only apply the conditions set out in this Section and in Section 3.2.7. (184) In order to ensure that the aid serves to facilitate the funding of support to energy from renewable sources, Member States will need to demonstrate that the additional costs reflected in higher electricity prices faced by the beneficiaries only result from the support to energy from renewable sources. The additional costs cannot exceed the funding of support to energy from renewable sources84. (185) The aid should be limited to sectors that are exposed to a risk to their competitive position due to the costs resulting from the funding of support to energy from renewable sources as a function of their electro-intensity and their exposure to international trade. Accordingly, the aid can only be granted if the undertaking belongs to the sectors listed in Annex 385. This list is intended to be used only for eligibility for this particular form of compensation. (186) In addition, to account for the fact that certain sectors might be heterogeneous in terms of electro-intensity, a Member State can include an undertaking in its national scheme granting reductions from costs resulting 1326

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from renewable support if the undertaking has an electro-intensity of at least 20 %86 and belongs to a sector with a trade intensity of at least 4 % at Union level, even if it does not belong to a sector listed in Annex 387. For the calculation of the electro-intensity of the undertaking, use is to be made of standard electricity consumption efficiency benchmarks for the industry where available. (187) Within the eligible sector, Member States need to ensure that the choice of beneficiaries is made on the basis of objective, non-discriminatory and transparent criteria and that the aid is granted in principle in the same way for all competitors in the same sector if they are in a similar factual situation. (188) The Commission will consider the aid to be proportionate if the aid beneficiaries pay at least 15 % of the additional costs without reduction. (189) However, given the significant increase of renewable surcharges in recent years, an own contribution of 15 % of the full renewable surcharge might go beyond what undertakings particularly affected by the burden can bear. Therefore, when needed, Member States have the possibility to further limit the amount of the costs resulting from financing aid to renewable energy to be paid at undertaking level to 4 % of the gross value added88 of the undertaking concerned. For undertakings having an electro-intensity of at least 20 %, Member States can limit the overall amount to be paid to 0,5 % of the gross value added of the undertaking concerned. (190) When Member States decide to adopt the limitations of respectively 4 % and 0,5 % of gross value added, these limitations must apply to all eligible undertakings. (191) Member States may take measures to ensure that gross value added data used for the purpose of this Section cover all the relevant labour costs. (192) Member States can grant the aid in the form of a reduction from charges, or as a fixed annual compensation amount (tax refund), or as a combination of the two89. Where the aid is granted in the form of a reduction from charges, an ex post monitoring mechanism needs to be put in place to ensure that any over-payment of aid will be repaid before 1 July of the following year. Where the aid is granted in the form of a fixed annual compensation amount, it must be calculated on the basis of historical data, i.e. 1327

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the observed levels of electricity consumption and the gross value added in a given base year. The amount of compensation shall not exceed the aid amount the undertaking would have received in the base year, applying the parameters set out in this Section. 3.7.3. Transitional rules for aid granted to reduce the burden related to funding support for energy from renewable sources (193) Member States are to apply eligibility and proportionality criteria set out in Section 3.7.2 at the latest by 1 January 2019. Aid granted in respect of a period before that date will be considered compatible if it satisfies the same criteria. (194) In addition, the Commission considers that all aid granted to reduce the burden related to funding support for electricity from renewable sources in respect of the years preceding 2019 can be declared compatible with the internal market to the extent that it complies with an adjustment plan. (195) To avoid abrupt disruption for individual undertaking, such adjustment plan shall entail progressive adjustment to the aid levels resulting from the application of the eligibility and proportionality criteria set out in section 3.7.2. (196) To the extent that aid was granted in respect of a period before the date of application of these Guidelines, the plan shall also provide for a progressive application of the criteria for that period. (197) To the extent that aid in the form of reduction or exemption from the burden related to funding support for electricity from renewable sources was granted before the date of application of these Guidelines to undertakings that are not eligible under Section 3.7.2, such aid can be declared compatible provided that the adjustment plan foresees a minimum own contribution of 20 % of the additional costs of the surcharge without reduction, to be established progressively and at the latest by 1 January 2019. (198) The adjustment plan shall take all relevant economic factors linked to the renewable policy into account.

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(199) The adjustment plan shall be approved by the Commission. (200) The adjustment plan shall be notified to the Commission at the latest 12 months after the date of application of these Guidelines. 3.8. Aid to energy infrastructure (201) A modern energy infrastructure is crucial for an integrated energy market, which is key to ensuring energy security in the Union, and to enable the Union to meet its broader climate and energy goals. The Commission has estimated total investment needs in energy infrastructures of European significance until 2020 at about EUR 200 billion90. That assessment was based on an evaluation of the infrastructure needed to allow the Union to meet the overarching policy objectives of completing the internal energy market, ensuring security of supply and enabling the integration of renewable sources of energy. Where market operators cannot deliver the infrastructure needed, State aid may be necessary in order to overcome market failures and to ensure that the Union’s considerable infrastructure needs are met. This is particularly true for infrastructure projects having a cross-border impact or contributing to regional cohesion. Aid to energy infrastructure should in principle be investment aid, including its modernisation and upgrade. 3.8.1. Objective of common interest (202) Energy infrastructure is a precondition for a functioning energy market. Aid to energy infrastructure therefore strengthens the internal energy market. It enhances system stability, generation adequacy, integration of different energy sources and energy supply in under-developed networks. The Commission therefore considers that aid to energy infrastructure is beneficial to the internal market and thus contributes to an objective of common interest. 3.8.2. Need for State intervention (203) Energy infrastructure investments are often characterised by market failures. A market failure that may arise in the field of energy infrastructure is related to problems of coordination. Diverging interests among investors, uncertainty about the collaborative outcome and network effects may prevent the development of a project or its effective design. At the same 1329

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time, energy infrastructure may generate substantial positive externalities, whereby the costs and benefits of the infrastructure may occur asymmetrically among the different market participants and Member States. (204) To address the market failures referred to in paragraph (203), energy infrastructure is typically subjected to tariff and access regulation and to unbundling requirements according to internal energy market legislation91. (205) In terms of financing, the granting of State aid is a way of overcoming the market failure other than by means of compulsory user tariffs. Therefore, to demonstrate of the need of State aid in the field of energy infrastructure, the principles described in paragraphs (206) and (207) apply. (206) The Commission considers that for Projects of Common Interest as defined in Regulation (EC) No 347/201392, for smart grids, and for infrastructure investments in assisted areas, the market failures in terms of positive externalities and coordination problems are such that financing by means of tariffs may not be sufficient and State aid may be granted. (207) For energy infrastructure projects falling under paragraph (206) and partially or wholly exempted from internal energy market legislation, and for projects not falling under paragraph (206), the Commission will carry out a case-by-case assessment of the need for State aid. In its assessment, the Commission will consider the following factors: (i) to what extent a market failure leads to a sub-optimal provision of the necessary infrastructure; (ii) to what extent the infrastructure is open to third party access and subject to tariff regulation; and (iii) to what extent the project contributes to the Union’s security of energy supply. (208) For oil infrastructure projects, the Commission presumes that there is no need for State aid. However, Member States may grant State aid in exceptional circumstances where duly justified. 3.8.3. Appropriateness (209) The Commission considers that tariffs93  are the appropriate primary means to fund energy infrastructure. However, in the case of Projects of Common Interest, smart grids and infrastructure investments in assisted areas, State aid may be considered an appropriate instrument to partially 1330

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or wholly finance that infrastructure. In such cases, market failures often prevent the full implementation of, the ‘user pays’ principle, on which tariff regulation is based, for example, because the tariff increase to finance new infrastructure investment would be so substantial as to deter investments or potential customers from using the infrastructure. 3.8.4. Incentive effect (210) The incentive effect of the aid will be assessed on the basis of the conditions set out in Section 3.2.4. 3.8.5. Proportionality (211) The aid amount must be limited to the minimum needed to achieve the infrastructure objectives sought. For aid to infrastructure, the counterfactual scenario is presumed to be the situation in which the project would not take place. The eligible cost is therefore the funding gap. (212) Aid measures in support of infrastructure should not exceed an aid intensity of 100 % of the eligible costs. (213) The Commission will require Member States to clearly and separately identify any other aid measure, which might impact on the aid measures for infrastructure. 3.8.6. Avoidance of undue negative effects on competition and trade (214) In view of the existing requirements under the internal energy market legislation, which are aimed at strengthening competition, the Commission will consider that aid for energy infrastructure subject to internal market regulation does not have undue distortive effects. (215) In the case of infrastructure partially or wholly exempted from, or not subject to, internal energy market legislation and in the case of underground gas storage facilities, the Commission will carry out a case-bycase assessment of the potential distortions of competition taking into account, in particular, the degree of third party access to the aided infrastructure, access to alternative infrastructure and the market share of the beneficiary.

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3.9.  Aid for generation adequacy (216) With the increasing share of renewable energy sources, electricity generation is in many Member States shifting from a system of relatively stable and continuous supply towards a system with more numerous and smallscale supply of variable sources. The shift raises new challenges for ensuring generation adequacy. (217) Moreover, market and regulatory failures may cause insufficient investment in generation capacity, for example, in a situation where wholesale prices are capped and electricity markets fail to generate sufficient investment incentives. (218) As a result, some Member States consider the introduction of measures to ensure generation adequacy, typically by granting support to generators for the mere availability of generation capacity94. 3.9.1. Objective of common interest (219) Measures for generation adequacy can be designed in a variety of ways, in the form of investment and operating aid (in principle only rewarding the commitment to be available to deliver electricity), and can pursue different objectives. They may for example aim at addressing short-term concerns brought about by the lack of flexible generation capacity to meet sudden swings in variable wind and solar production, or they may define a target for generation adequacy, which Member States may wish to ensure regardless of short-term considerations. (220) Aid for generation adequacy may contradict the objective of phasing out environmentally harmful subsidies including for fossil fuels. Member States should therefore primarily consider alternative ways of achieving generation adequacy which do not have a negative impact on the objective of phasing out environmentally or economically harmful subsidies, such as facilitating demand side management and increasing interconnection capacity. (221) The precise objective, at which the measure is aimed, should be clearly defined, including when and where the generation adequacy problem is expected to arise. The identification of a generation adequacy problem should be consistent with the generation adequacy analysis carried out 1332

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regularly by the European Network of Transmission Operators for electricity in accordance with the internal energy market legislation95. 3.9.2. Need for State intervention (222) The nature and causes of the generation adequacy problem, and therefore of the need for State aid to ensure generation adequacy, should be properly analysed and quantified, for example, in terms of lack of peak-load or seasonal capacity or peak demand in case of failure of the short-term wholesale market to match demand and supply. The unit of measure for quantification should be described and its method of calculation should be provided. (223) The Member States should clearly demonstrate the reasons why the market cannot be expected to deliver adequate capacity in the absence of intervention, by taking account of on-going market and technology developments96. (224) In its assessment, the Commission will take account, among others and when applicable, of the following elements to be provided by the Member State: (a)

assessment of the impact of variable generation, including that originating from neighbouring systems;

(b)

assessment of the impact of demand-side participation, including a description of measures to encourage demand side management97;

(c)

assessment of the actual or potential existence of interconnectors, including a description of projects under construction and planned;

(d)

assessment of any other element which might cause or exacerbate the generation adequacy problem, such as regulatory or market failures, including for example caps on wholesale prices.

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3.9.3. Appropriateness (225) The aid should remunerate solely the service of pure availability provided by the generator, that is to say, the commitment of being available to deliver electricity and the corresponding compensation for it, for example, in terms of remuneration per MW of capacity being made available. The aid should not include any remuneration for the sale of electricity, that is to say, remuneration per MWh sold. (226) The measure should be open and provide adequate incentives to both existing and future generators and to operators using substitutable technologies, such as demand-side response or storage solutions. The aid should therefore be delivered through a mechanism which allows for potentially different lead times, corresponding to the time needed to realise new investments by new generators using different technologies. The measure should also take into account to what extent interconnection capacity could remedy any possible problem of generation adequacy. 3.9.4. Incentive effect (227) The incentive effect of the aid will be assessed on the basis of the conditions set out in Section 3.2.4 of these Guidelines. 3.9.5. Proportionality (228) The calculation of the overall amount of aid should result in beneficiaries earning a rate of return, which can be considered reasonable. (229) A competitive bidding process on the basis of clear, transparent and nondiscriminatory criteria, effectively targeting the defined objective, will be considered as leading to reasonable rates of return under normal circumstances. (230) The measure should have built-in mechanisms to ensure that windfall profits cannot arise. (231) The measure should be constructed so as to ensure that the price paid for availability automatically tends to zero when the level of capacity supplied is expected to be adequate to meet the level of capacity demanded.

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3.9.6. Avoidance of undue negative effects on competition and trade (232) The measure should be designed in a way so as to make it possible for any capacity which can effectively contribute to addressing the generation adequacy problem to participate in the measure, in particular, taking into account the following factors: (a)

the participation of generators using different technologies and of operators offering measures with equivalent technical performance, for example, demand side management, interconnectors and storage. Without prejudice to the paragraph (228), restriction on participation can only be justified on the basis of insufficient technical performance required to address the generation adequacy problem. Moreover, the generation adequacy measure should be open to potential aggregation of both demand and supply;

(b)

the participation of operators from other Member States where such participation is physically possible in particular in the regional context, that is to say, where the capacity can be physically provided to the Member State implementing the measure and the obligations set out in the measure can be enforced98;

(c)

participation of a sufficient number of generators to establish a competitive price for the capacity;

(d)

avoidance of negative effects on the internal market, for example due to export restrictions, wholesale price caps, bidding restrictions or other measures undermining the operation of market coupling, including intra-day and balancing markets.

(233) The measure should: (a)

not reduce incentives to invest in interconnection capacity;

(b)

not undermine market coupling, including balancing markets;

(c)

not undermine investment decisions on generation which preceded the measure or decisions by operators regarding the balancing or ancillary services market;

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(d)

not unduly strengthen market dominance;

(e)

give preference to low-carbon generators in case of equivalent technical and economic parameters.

3.10. Aid in the form of tradable permit schemes (234) Tradable permit schemes can be set up to reduce emissions from pollutants, for instance to reduce NOxemissions99. They can involve State aid, in particular when Member States grant permits and allowances below their market value. If the global amount of permits granted by the Member State is lower than the global expected needs of undertakings, the overall effect on the level of environmental protection will be positive. At the level of each individual undertaking, if the allowances granted do not cover the totality of expected needs of the undertaking, the undertaking must either reduce its pollution, therefore contributing to the improvement of the level of environmental protection, or buy supplementary allowances on the market, therefore paying a compensation for its pollution. (235) Tradable permit schemes are considered to be compatible with the internal market if the following cumulative conditions are met: (a)

the tradable permit schemes must be set up in such a way as to achieve environmental objectives beyond those intended to be achieved on the basis of Union standards that are mandatory for the undertakings concerned;

(b)

the allocation must be carried out in a transparent way, based on objective criteria and on data sources of the highest quality available, and the total amount of tradable permits or allowances granted to each undertaking for a price below their market value must not be higher than its expected needs as estimated for a situation without the trading scheme;

(c)

the allocation methodology must not favour certain undertakings or certain sectors, unless this is justified by the environmental logic of the scheme itself or where such rules are necessary for consistency with other environmental policies;

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(d)

new entrants are not in principle to receive permits or allowances on more favourable conditions than existing undertakings operating on the same markets. Granting higher allocations to existing installations compared to new entrants should not result in creating undue barriers to entry.

(236) The Commission will assess the necessity and the proportionality of State aid involved in a tradable permit scheme according to the following criteria: (a)

the choice of beneficiaries must be based on objective and transparent criteria and the aid must be granted in principle in the same way for all competitors in the same sector if they are in a similar factual situation;

(b)

full auctioning must lead to a substantial increase in production costs for each sector or category of individual beneficiaries;

(c)

the substantial increase in production costs cannot be passed on to customers without leading to significant sales reductions. The analysis may be conducted on the basis of estimates of the product price elasticity of the sector concerned, among other factors. To evaluate whether the cost increase from the tradable permit scheme cannot be passed on to customers, estimates of lost sales as well as their impact on the profitability of the company may be used;

(d)

individual undertakings in the sector should not have the possibility to reduce emission levels in order to make the price of the certificates bearable. Irreducible consumption may be demonstrated by providing the emission levels derived from best performing technique in the European Economic Area (‘EEA’) and using them as a benchmark. Any undertaking reaching the best performing technique can benefit at most from an allowance corresponding to the increase in production cost from the tradable permit scheme using the best performing technique, and which cannot be passed on to customers. Any undertaking having a worse environmental performance benefits from a lower allowance, proportionate to its environmental performance.

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3.11. Aid for the relocation of undertakings (237) The aim of investment aid for the relocation of undertakings is to create individual incentives to reduce negative externalities by relocating undertakings that create major pollution to areas where such pollution will have a less damaging effect, which will reduce external costs. The aid may therefore be justified if the relocation is made for environmental reasons, but it should be avoided that aid is granted for relocation for any other purpose. (238) Investment aid for the relocation of undertakings to new sites for environmental protection reasons is considered compatible with the internal market if the conditions laid down in Sections 3.2.4 and 3.2.7 and the following cumulative conditions are met: (a)

the change of location must be dictated by environmental protection or prevention grounds and must have been ordered by administrative or judicial decision of a competent public authority or agreed between the undertaking and the competent public authority;

(b)

the undertaking must comply with the strictest environmental standards applicable in the new region where it is located.

(239) The beneficiary can be: (a)

an undertaking established in an urban area or in a special area of conservation designated under Directive 92/43/EEC100 which lawfully carries out (that is to say, it complies with all legal requirements including all environmental standards applicable to it) an activity that creates major pollution and which, on account of its location, must move from its place of establishment to a more suitable area; or

(b)

an establishment or installation falling within the scope of Directive 2012/18/EU101 (‘the Seveso III Directive’).

(240) In order to determine the amount of eligible costs in the case of relocation aid, the Commission will take into account, in particular:

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(a)

the following benefits: (i)

the yield from the sale or renting of the plant or land abandoned;

(ii)

the compensation paid in the event of expropriation;

(iii) any other gains connected with the transfer of the plant, notably gains resulting from an improvement, on the occasion of the transfer, in the technology used and accounting gains associated with better use of the plant; (iv) investments relating to any capacity increase; (b)

the following costs: (i)

the costs connected with the purchase of land or the construction or purchase of new plant of the same capacity as the plant abandoned;

(ii)

any penalties imposed on the undertaking for having terminated the contract for the renting of land or buildings, where the change of location is carried out in order to comply with an administrative or judicial decision.

(241) The aid intensities are laid down in Annex 1.

4.    EVALUATION (242) To further ensure that distortion of competition is limited, the Commission may require that certain aid schemes are subject to a time limitation (of normally 4 years or less) and to the evaluation referred to in paragraph (28). Evaluations will be carried out for schemes where the potential distortion of competition is particularly high, that is to say, that may risk to significantly restrict or distort competition if their implementation is not reviewed in due time. (243) Given its objectives, and in order not to put disproportionate burden on Member States and on smaller aid projects, evaluation only applies for aid schemes with large aid budgets, containing novel characteristics or 1339

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when significant market, technology or regulatory changes are foreseen. The evaluation must be carried out by an expert independent from the aid granting authority on the basis of a common methodology provided by the Commission. It must be made public. The Member State must notify, together with the aid scheme, a draft evaluation plan, which will be an integral part of the Commission’s assessment of the scheme. (244) In the case of aid schemes excluded from the scope of the General Block Exemption Regulation exclusively by reason of their large budget, the Commission will assess compatibility of the aid scheme, with the exception of the evaluation plan, on the basis of the criteria defined in that Regulation instead of these Guidelines. (245) The evaluation must be submitted to the Commission in due time to allow for the assessment of the possible prolongation of the aid scheme and in any case upon its expiry. The precise scope and modalities of each evaluation will be defined in the decision approving the aid scheme. Any subsequent aid measure with a similar objective (including any alteration of schemes referred in paragraph (244) must take into account the results of the evaluation.

5.    APPLICATION (246) These Guidelines will be applied from 1 July 2014 and replace the Guidelines on State aid for environmental protection published on 1 April 2008102. They will be applicable until 31 December 2020. (247) The Commission will apply these Guidelines to all notified aid measures in respect of which it is called upon to take a decision after their applicability, even where the projects were notified prior to that date. However, individual aid granted under approved aid schemes and notified to the Commission pursuant to an obligation to notify such aid individually will be assessed under the Guidelines that apply to the approved aid scheme on which the individual aid is based. (248) Unlawful environmental aid or energy aid will be assessed in accordance with the rules in force on the date on which the aid was granted in accordance with the Commission notice on the determination of the applicable rules for the assessment of unlawful State aid103 with the following exception: 1340

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Unlawful aid in the form of reductions in funding support for energy from renewable sources will be assessed in accordance with the provisions of Sections 3.7.2 and 3.7.3.



As from 1 January 2011, the adjustment plan foreseen in paragraph (194) shall also foresee a progressive application of the criteria of section 3.7.2 and of the own contribution foreseen in paragraph (197). Prior to that date, the Commission considers that all aid granted in the form of reductions in funding support for electricity from renewable sources can be declared compatible with the internal market104.

(249) Individual aid granted under an unlawful aid scheme will be assessed under the Guidelines that apply to the unlawful aid scheme at the time the individual aid was granted. If the beneficiary of such individual aid has received confirmation from a Member State that it will benefit from operating aid in support of energy from renewable sources and cogeneration under an unlawful scheme for a predetermined period, such aid can be granted for the entire period under the conditions laid down in the scheme at the time of the confirmation to the extent that the aid is compatible with the rules applying at the time of the confirmation. (250) The Commission herewith proposes to Member States, on the basis of Article 108(1) of the Treaty, the following appropriate measures concerning their respective existing environmental or energy aid schemes:

Member States should amend, where necessary, such schemes in order to bring them into line with these Guidelines no later than 1 January 2016, with the following exceptions:



Where necessary, existing aid schemes within the meaning of Article 1(b) of Council Regulation (EC) No 659/1999105 concerning operating aid in support of energy from renewable sources and cogeneration only need to be adapted to these Guidelines when Member States prolong their existing schemes, have to re-notify them after expiry of the 10 years-period or after expiry of the validity of the Commission decision or change106 them.



Whenever a beneficiary has received confirmation from a Member State that it will benefit from State aid under such a scheme for a predetermined period, such aid can be granted under the entire period under the conditions laid down in the scheme at the time of the confirmation. 1341

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(251) Member States are invited to give their explicit unconditional agreement to the proposed appropriate measures within two months from the date of publication of these Guidelines in the Official Journal of the European Union. In the absence of any reply, the Commission will assume that the Member State in question does not agree with the proposed measures.

6.    REPORTING AND MONITORING (252) In accordance with Council Regulation (EC) No 659/1999 and Commission Regulation (EC) No 794/2004107 and their subsequent amendments, Member States must submit annual reports to the Commission. (253) Member States must ensure that detailed records regarding all measures involving the granting of aid are maintained. Such records must contain all information necessary to establish that the conditions regarding, where applicable, eligible costs and maximum allowable aid intensity have been observed. These records must be maintained for 10 years from the date on which the aid was granted and be provided to the Commission upon request.

7.    REVISION (254) The Commission may decide to review or amend these Guidelines at any time if this should be necessary for reasons associated with competition policy or in order to take account of other Union policies and international commitments.

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Notes 1

COM(2010) 2020 final of 3.3.2010.

2

Decision No 406/2009/EC of 23 April 2009 (OJ L 140,5.6.2009, p. 136) and Directive 2009/28/EC of 23 April 2009 (OJ L 140, 5.6.2009, p. 16).

3

Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions — A policy framework for climate and energy in the period from 2020 to 2030 (COM(2014) 15 final) of 22.1.2014.

4

COM(2011) 21 of 26.1.2011.

5

COM(2011) 571 final of 20.9.2011.

6

The European Council Conclusions from 23 May 2013 confirmed the need to phase out environmentally or economically harmful subsidies, including for fossil fuels, to facilitate investments in new and intelligent energy infrastructure.

7

Other legislation such as Directive 2009/28/EC of the European Parliament and the Council of 23 April 2009 on the promotion of the use of energy from renewable sources and amending and subsequently repealing Directives 2001/77/EC and 203/30/EC, JO L 140 5.6.2009, p. 16, (‘the Renewable Energy Directive’) includes for instance requirements concerning sustainability of biofuels and non-discrimination in Article 17(1) - 17(8) thereof.

8

COM(2010) 639 of 10.11.2010.

9

COM(2012) 209 of 8.5.2012.

10

In particular, these Guidelines are without prejudice to the Community Guidelines on State aid for railway undertakings (OJ C 184, 22.7.2008, p. 13). The Railway Guidelines allow for different forms of aid, including aid for reducing external costs of rail transport. Such aid is covered by Section 6.3 of the Railway Guidelines and aims at accounting for the fact that rail transport makes it possible to avoid external costs compared with competing transport modes. Provided all the conditions of Section 6.3 of the Railway Guidelines are fulfilled and provided the aid is granted without discrimination, Member States can grant aid for reducing external costs.

11

Council Regulation (EC) No 1198/2006 of 27 July 2006 on the European Fisheries Fund (OJ L 223, 15.8.2006, p. 1).

12

See Commission proposal for a Regulation on the European maritime and Fisheries Fund, COM(2011) 804 final.

13

OJ C 319, 27.12.2006, p. 1. This is also valid to the framework replacing the 2006 Guidelines, the validity of which ends on 31 December 2013.

14

Environmental aid is generally less distortive and more effective if it is granted to the consumer/user of environmentally friendly products instead of the producer/manufacturer of the environmentally friendly product. In addition, the use of environmental labels and claims on products can be another means to allow consumers/users to make informed purchasing decisions, and to increase demand for environmental friendly products. When well designed, recognised, understood, trusted and perceived relevant by consumers, robust environmental labels and truthful environmental claims can be a powerful tool to guide and shape (consumer) behaviour towards more environmentally friendly choices. Using a reputable labelling/certification scheme with clear criteria and subject to external (third-party) verification will be one of the most effective

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ways for businesses to demonstrate to consumers and stakeholders that they are meeting high environmental standards. In this light, the Commission does not include specific rules concerning aid for the design and manufacture of environmentally friendly products in the scope of these Guidelines. 15

Adopted by the Commission on 26 July 2001 and communicated to Member States by letter ref. SG(2001) D/290869, 6 August 2001.

16

The Guidelines provide for a bonus for eco-innovation projects, which are highly environmentally friendly and highly innovative investments.

17

OJ C 323, 30.12.2006, p. 1.

18

This aid can be dealt with under SGEI rules; see cases SA.31243 (2012/N) and NN8/2009.

19

Communication from the Commission — Community Guidelines on State aid for rescuing and restructuring firms in difficulty (OJ C 244, 1.10.2004, p. 2).

20

See in this respect the joint Cases T-244/93 and T-486/93, TWD Textilwerke Deggendorf GmbH v Commission [1995] ECR II-2265 and the Notice from the Commission — Towards an effective implementation of Commission decisions ordering Member States to recover unlawful and incompatible State aid (OJ C 272, 15.11.2007, p. 4).

21

Consequently, standards or targets set at Union level which are binding for Member States but not for individual undertakings are not deemed to be Union standards.

22

Directive 2010/75/EU of 24 November 2010 on industrial emissions (integrated pollution prevention and control) (OJ L 334, 17.12.2010, p. 17).

23

Directive 2009/28/EC of the European Parliament and of the Council on the promotion of the use of energy from renewable sources (OJ L 140, 5.6.2009, p. 16).

24

The sustainability criteria also apply to bioliquids in accordance with Directive 2009/28/EC.

25

Directive 2012/27/EU of the European Parliament and the Council of 25 October 2012 on energy-efficiency, amending Directives 2009/125/EC and 2010/30/EU and repealing Directives 2004/8/EC and 2006/32/EC (OJ L 315, 14.11.2012, p. 1).

26

OJ L 315, 14.11.2012, p. 1.

27

Council Directive 2003/96/EC of 27 October 2003 restructuring the Community framework for the taxation of energy products and electricity (OJ L 283, 31.10.2003, p. 51).

28

OJ L 124, 20.5.2003, p. 36.

29

Council Recommendation of 3 March 1975 regarding cost allocation and action by public authorities on environmental matters (OJ L 194, 25.7.1975, p. 1).

30

Directive 2009/72/EC of 13 July 2009 concerning common rules for internal market in electricity (OJ L 211, 14.8.2009, p. 55).

31

Directive 2009/72/EC of 13 July 2009 concerning common rules for internal market in electricity (OJ L 211, 14.8.2009, p. 55).

32

OJ C 209, 23.7.2013, p. 1.

33

For the calculation of the capacity limit, the total unit capacity which is eligible for aid has to be taken into account for each project.

34

COM(2012)0209 final of 8.5.2012.

35

See Case C-156/98 Germany v Commission [2000] ECR I-6857, paragraph 78 and Case C-333/07 Régie

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Networks v Rhone Alpes Bourgogne [2008] ECR I-10807, paragraphs 94-116. See also, in the field of energy, Joined Cases C-128/03 and C-129/03 AEM and AEM Torino [2005] ECR I-2861, paragraphs 38 to 51. 36

Case C-206/06 Essent, [2008] ECR I-5497, paragraphs 40 to 59. For the application of Articles 30 and 110 of the Treaty to tradable certificates schemes, see Commission Decision C(2009)7085 of 17.9.2009, State aid N 437/2009 — Aid scheme for the promotion of cogeneration in Romania (OJ C 31, 9.2.2010, p. 8) recitals 63 to 65.

37

COM(2011)112 final ‘A roadmap for moving to a competitive low carbon economy’; COM(2011) 571 final ‘Roadmap to a Resource Efficient Europe’.

38

COM(2010)639 final ‘Energy 2020 Communication’

39

The term ‘market failure’ refers to situations in which, markets, if left to their own devices, are unlikely to produce efficient outcomes.

40

Typical examples of positive externalities are actions to further improve nature protection or biodiversity, to provide ecosystem services or externalities as a result of general training.

41

In particular, the Commission will consider that aid for contaminated sites can be granted only when the polluter — i.e. the person liable under the law applicable in each Member State without prejudice to the Environmental Liability Directive (Directive 2004/35/EC) and other relevant Union rules in this matter — is not identified or cannot be held legally liable for financing the remediation in accordance with the ‘polluter pays’ principle.

42

However, where future costs and revenues developments are surrounded by a high degree of uncertainty and there is a strong asymmetry of information, the public authority may also wish to adopt compensation models that are not entirely ex ante, but rather a mix of ex ante and ex post (for example, through a balanced sharing of unanticipated gains).

43

Directive 2012/27/EU of the European Parliament and of the Council of 25 October 2012 on energy efficiency, amending Directives 2009/125/EC and 2010/30/EU and repealing Directives 2004/8/EC and 2006/32/EC (OJ L 315, 14.11.2012, p. 1).

44

Production advantages that negatively affect the incentive effect are increased capacity, productivity, efficiency or quality. Other advantages may be linked to product image or the labelling of production methods which may negatively affect the incentive effect in particular in markets where there is competitive pressure to maintain a high level of environmental protection.

45

The net present value (‘NPV’) of a project is the difference between the positive and negative cash flows over the lifetime of the investment, discounted to their current value (typically using the cost of capital), that is to say the normal rates of return applied by the undertaking concerned in other investment projects of a similar kind. When this benchmark is not available, the cost of capital of the company as a whole or rates of return commonly observed in the industry concerned may be used for this purpose.

46

The internal rate of return (‘IRR’) is not based on accounting earnings in a given year, but takes into account the stream of future cash flows that the investor expects to receive over the entire lifetime of the investment. It is defined as the discount rate for which the NPV of a stream of cash flows equals zero.

47

For instance, certain kinds of benefits such as the ‘green image’ enhanced by an environmental investment are not easy to measure.

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48

For measures related to remediation of contaminated sites, the eligible costs are equal to the cost of the remediation work less the increase in the value of the land (see Annex 2).

49

A technically comparable investment means an investment with the same production capacity and all other technical characteristics (except those directly related to the extra investment for the targeted objective).

50

Such a reference investment must, from a business point of view, be a credible alternative to the investment under assessment.

51

The novelty could, for example, be demonstrated by the Member States on the basis of a precise description of the innovation and of market conditions for its introduction or diffusion, comparing it with state-of-theart processes or organisational techniques generally used by other undertakings in the same industry.

52

If quantitative parameters can be used to compare eco-innovative activities with standard, non-innovative activities, ‘significantly higher’ means that the marginal improvement expected from eco-innovative activities, in terms of reduced environmental risk or pollution, or improved efficiency in energy or resources, should be at least twice as high as the marginal improvement expected from the general evolution of comparable no innovative activities.



Where the proposed approach is not appropriate for a given case, or if no quantitative comparison is possible, the application file for State aid should contain a detailed description of the method used to assess this criterion, ensuring a standard comparable to that of the proposed method.

53

This risk could be demonstrated by the Member State for instance in terms of: costs in relation to the undertaking’s turnover, time required for the development, expected gains from the Eco innovation in comparison with the costs, and probability of failure.

54

Under such circumstances, it can be assumed that the respective bids reflect all possible benefits that might flow from the additional investment.

55

For instance support granted on the basis of Commission Decision 2010/670/EU (OJ L 290, 6.11.2010, p. 39) (NER300 funding) and Regulation (EC) No 2010/1233/EU amending Regulation (EC) No 2009/663/EC (OJ L 346, 30.12.2010, p. 5) (EEPR funding), Horizon 2020 or COSME.

56

Where ad hoc aid is granted, the cap is determined by comparison to typical industry data equivalent to a cap for individually notifiable aid granted on the basis of a scheme.

57

The calculation of extra investment costs may not fully capture all benefits, since the operating benefits are not deducted over the life time of the investment. In addition, certain types of benefits, for example linked to increased productivity and increased production with unaltered capacity, may be difficult to take into account.

58

This information shall be published within 6 months from the date of granting (or, for aid in the form of tax advantage, within 1 year from the date of the tax declaration). In case of unlawful aid, Member States will be required to ensure the publication of this information ex post, at least within 6 months from the date of the Commission decision. The information shall be available in a format which allows data to be searched, extracted, and easily published on the internet, for instance in CSV or XML format.

59

Directive 2009/28/EC of the European Parliament and the Council of 23 April 2009 on the promotion of the use of energy from renewable sources and amending and subsequently repealing Directives 2001/77/EC and 203/30/EC (OJ L 140, 5.6.2009, p. 16).

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60

Directive 2009/30/EC of the European Parliament and the Council of 23 April 2009 amending Directive 98/70/EC as regards the specification of petrol, diesel and gas-oil and introducing a mechanism to monitor and reduce greenhouse gas emissions and amending Council Directive 1999/32/EC as regards the specification of fuel used by inland waterway vessels and repealing Directive 93/12/EC (OJ L 140, 5.6.2009, p. 88).

61

An obligation to supply biofuels on the market needs to be in force, including a penalty regime.

62

Directive 2000/60/EC of the European Parliament and of the Council of 23 October 2000 establishing a framework for Community action in the field of water policy (OJ L 327, 22.12.2000, p. 1).

63

The waste hierarchy consists of (a) prevention, (b) preparing for re-use, (c) recycling, (d) other recovery, for instance energy recovery, and (e) disposal. See Article 4(1) of Directive 2008/98/EC of the European Parliament and of the Council 19 November 2008 on waste and repealing certain Directives (Waste Framework Directive) (OJ L 312, 22.11.2008, p. 3).

64

Cooperation mechanisms ensure that renewable energy produced in one Member State can count to the target of another Member State.

65

The Commission notes that two cases that are currently pending in front of the Court of Justice may have an influence on this issue: Joined Cases C-204/12, C-205/12, C-206/12, C-207/12, C-208/12 Essent Belgium v Vlaamse Reguleringsinstantie voor de Elektriciteits- en Gasmarkt and Case С-573/12 Ålands Vindkraft v Energimyndigheten.

66

Beneficiaries can outsource balancing responsibilities to other companies on their behalf, such as aggregators.

67

Installations that started works before 1 January 2017 and had received a confirmation of the aid by the Member State before such date can be granted aid on the basis of the scheme in force at the time of confirmation.

68

No other operating aid may be granted to new installations generating electricity from biomass if excluded from the bidding process.

69

This includes the production of biogas which has the same characteristics.

70

Such mechanisms can for instance oblige electricity suppliers to source a given proportion of their supplies from renewable sources.

71

The concept of production costs must be understood as being net of any aid but inclusive of a normal level of profit.

72

Directive 2008/98/EC Article 28.

73

State of the art means a process in which the prevention, re-use, recycling or recovery of waste product to manufacture an end product is economically profitable and normal practice. Where appropriate, the concept of ‘state of the art’ must be interpreted from a Union technological and common market perspective.

74

Directive 2009/31/EC of the European Parliament and of the Council of 23 April 2009 on the geological storage of carbon dioxide and amending Council Directive 85/337/EEC, European Parliament and Council Directives 2000/60/EC, 2001/80/EC, 2004/35/EC, 2006/12/EC, 2008/1/EC and Regulation (EC) No 1013/2006 (OJ L 140, 5.6.2009, p. 114).

75

COM(2013) 180 final 27.3.2013.

76

Commission Decision 2010/670/EU (OJ L 290, 6.11.2010 p. 39) (NER300 funding) and Regulation (EC) No 2010/1233/EU amending Regulation (EC) No 2009/663/EC (OJ L 346 30.12.2010 p. 5) (EEPR funding).

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77

In many cases, the firms benefiting from the tax reductions are the ones with the most harmful behaviour targeted by the tax.

78

One way to do so would be to grant compensation in the form of tax credits, whereby undertakings are not exempted from the tax but receive a lump sum compensation for it.

79

Directive 2003/96/EC restructuring the Community framework for the taxation of energy products and electricity (OJ L 283, 31.10.2003 p. 51) sets such minimum tax levels.

80

It is irrelevant for these purposes whether the monitoring is done by a public or a private body.

81

OJ C 158, 5.6.2012, p. 4.

82

Internal market legislation (Directive 2009/72/EC of 13 July 2009 concerning common rules for internal market in electricity and repealing Directive 2003/54/EC (OJ L 211, 14.8.2009, p. 55), Regulation (EC) No 714/2009 of 13 July 2009 on conditions for access to the network for cross-border exchanges in electricity and repealing Regulation (EC) No 1228/2003 (OJ L 211, 14.8.2009, p. 15) and the subsequent network codes and guidelines), does not give right to cross-subsidisation of consumers within the tariff regimes.

83

Directive 2009/28/EC of the European Parliament and the Council on the promotion of the use of energy from renewable sources sets binding renewable targets for all Member States. Before that, Directive 2001/77/EC of the European Parliament and of the Council of 27 September 2001 on the promotion of electricity produced from renewable energy sources in the internal electricity market already set renewable electricity targets that Member States had to strive to reach.

84

The most direct way to demonstrate the causal link is by reference to a charge or levy on top of the electricity price, which is dedicated to the funding of energy from renewable sources. An indirect way to demonstrate the additional costs would be to calculate the impact of higher net costs for the electricity suppliers from green certificates and calculate the impact on the electricity price assuming the higher net costs are passed on by the supplier.

85

The Commission considers that such risks exist for sectors that are facing a trade intensity of 10 % at EU level when the sector electro-intensity reaches 10 % at EU level. In addition, a similar risk exists in sectors that face a lower trade exposure but at least 4 % and have a much higher electro-intensity of at least 20 % or that are economically similar (e.g. on account of substitutability). Equally, sectors having a slightly lower electrointensity but at least 7 % and facing very high trade exposure of at least 80 % would face the same risk. The list of eligible sectors was drafted on that basis. Finally, the following sectors have been included because they are economically similar to listed sectors and produce substitutable products (casting of steel, light metals and non-ferrous metals on account of substitutability with casting of iron; recovery of sorted materials on account of substitutability with primary products included in the list).

86

Details of how electro-intensity for an undertaking should be calculated are set out at Annex 4.

87

This test can be applied as well to undertakings from the service sector.

88

Details of how gross value added for an undertaking should be calculated are set out at Annex 4.

89

The use of fixed annual compensations (tax refunds) has the advantage that exempted firms face the same increase in the marginal cost of electricity (i.e. the same increase in the cost of electricity for every extra MWh consumed), thereby limiting potential distortions of competition within the sector.

90

Commission Staff Working Document, Energy infrastructure investment needs and financing requirements, 6.6.2011, SEC(2011)755, p. 2.

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91

Internal market regulation in the field of energy in particular includes Directive 2009/72/EC 13 July 2009 concerning common rules for the internal market in electricity (OJ L 211, 14.8.2009, p. 55); Directive 2009/73/EC of 13 July 2009 concerning common rules for the internal market in natural gas (OJ L 211, 14.8.2009, p. 94); Regulation (EC) No 713/2009 of 13 July 2009 establishing an Agency for the Cooperation of Energy Regulators; Regulation (EC) No 714/2009 of 13 July 2009 on conditions for access to the network for cross-border exchanges in electricity (OJ L 211, 14.8.2009, p. 15); and Regulation (EC) No 715/2009 of 13 July 2009 on conditions for access to the natural gas transmission networks (OJ L 211, 14.8.2009, p. 36).

92

Regulation (EU) No 347/2013 on Guidelines for trans-European energy infrastructure.

93

The regulatory framework enshrined in Commission Directives 2009/72/EC and 2009/73/EC sets out the rationale and the principles underpinning the regulation of access and usage tariffs, which are used by transmission and distribution system operators to fund the investment and the maintenance of such infrastructure.

94

The Commission specifically addressed the issue of generation adequacy in its Communication Delivering the internal market in electricity and making the most of public intervention of 5 November 2013 (C(2013)7243final) and in the associated staff working document Generation Adequacy in the internal electricity market — guidance on public interventions SWD(2013) 438 final of 5 November 2013.

95

Regulation (EC) No 714/2009 of 13 July 2009 on conditions for access to the network for cross-border exchanges in electricity, in particular Article 8 on tasks of the ENTSO for electricity (OJ L 211 14.8.2009, p. 15) In particular, the methodology developed by ENTSO-E, the European Association of Transmission System Operators, for its assessments of EU-level generation adequacy can provide a valid reference.

96

Such developments can include, for example, the development of market coupling, intraday markets, balancing markets and ancillary services markets and storage of electricity.

97

The Commission will also take account of plans related to the roll out of smart meters in accordance with Annex I of Directive 2009/72/EC as well as to the requirements under the Energy Efficiency Directive.

98

Schemes should be adjusted in the event that common arrangements are adopted to facilitate cross-border participation in such schemes.

99

Case C-279/08 P, Commission vs the Netherlands [2011] ECR I-7671.

100 Directive 92/43/EEC of 21 May 1992 on the conservation of natural habitats and of wild fauna and flora (OJ L 206 22.7.1992, p. 7); Directive as last amended by Directive 2013/17/EU (OJ L 158, 10.6.2013, p. 193). 101 Directive 2012/18/EU of 4 July 2012 on the control of major-accident hazards involving dangerous substances, amending and subsequently repealing Council Directive 96/82/EC (OJ L 197, 24.7.2010, p. 1). 102 OJ C 82, 1.4.2008, p. 1. 103 OJ C 119, 22.5.2002, p.22. 104 The Commission considers that such aid does not adversely affect trading conditions to an extent contrary to the common interest for the following reasons. By 5 December 2010, the Member States had to bring into force the laws, regulations and administrative provisions necessary to comply with the RED, which introduces legally binding targets for consumption of renewable energy. On the other hand, the total costs for the support of the production of electricity from renewable sources remained rather limited until the year

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2010, so that the level of charges remained relatively low. Therefore, the amount of aid granted to undertakings in the form of reductions in funding support for electricity from renewable sources remained limited at the level of the individual beneficiary. Furthermore, any aid granted from December 2008 until December 2010 that does not exceed 500 000 EUR per undertaking is likely to be compatible on the basis of the Communication from the Commission — Temporary Community framework for State aid measures to support access to finance in the current financial and economic crisis (OJ C 83, 7.4.2009, p. 1) as amended. 105 Council Regulation (EC) No 659/1999 of 22 March 1999 laying down detailed rules for the application of Article 93 of the EC Treaty (OJ L 83, 27.3.1999, p. 1). 106 A change is any notifiable change within the meaning of Article 1(c) of Regulation (EC) No 659/1999. 107 Commission Regulation (EC) No 794/2004 of 21 April 2004 implementing Regulation (EC) No 659/1999 (OJ L 140, 30.4.2004, p. 1).

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ANNEX 1 Aid intensities for investment aid as a part of the eligible costs (1)

The following aid intensities are applied for environmental aid measures:

  Aid for undertakings going beyond Union standards or increasing the level of environmental protection in the absence of Union standards (aid for the acquisition of new transport vehicles) Aid for environmental studies Aid for early adaptation to future Union standards

Small enterprise

Medium-sized enterprise

Large enterprise

60 % 70 % if ecoinnovation, 100 % if bidding process

50 % 60 % if ecoinnovation, 100 % if bidding process

40 % 50 % if ecoinnovation 100 % if bidding process

70 %

60 %

50 %

 

 

 

more than 3 years

20 %

15 %

10 %

between 1 and 3 years before the entry into force of the standards

15 %

10 %

5%

Aid for waste management

55 %

45 %

35 %

Aid for renewable energies Aid for cogeneration installations

65 %, 100 % if bidding process

55 %, 100 % if bidding process

45 %, 100 % if bidding process

Aid for energy-efficiency

50 %, 100 % if bidding process

40 %, [100] % if bidding process

30 %, 100 % if bidding process

Aid for district heating and cooling using conventional energy

65 %, 100 % if bidding process

55 %, 100 % if bidding process

45 % 100 % if bidding process

Aid the remediation of contaminated sites

100 %

100 %

100 %

Aid for relocation of undertakings

70 %

60 %

50 %

Aid in the form of tradable permits

100 %

100 %

100 %

Aid for energy infrastructure District heating infrastructure

100 %

100 %

100 %

Aid for CCS

100 %

100 %

100 %

The aid intensities mentioned in this table may be increased by a bonus of 5 % points in regions covered by Article 107(3)(c) or by a bonus of 15 % points in regions covered by Article 107(3)(a) of the Treaty up to a maximum of 100 % aid intensity.

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ANNEX 2 Typical State interventions (1)

The Commission considers typical scenarios of State aid interventions to increase the level of environmental protection or strengthen the internal energy market.

(2)

In particular, for the calculation of the eligible costs on the basis of a counterfactual scenario the following guidance is provided:

Aid category

Counterfactual scenario/Eligible costs1

CHP

The counterfactual is a conventional electricity or heating production system with the same capacity in terms of the effective production of energy.

Environmental Studies2

The eligible costs are the costs of the studies.

Remediation of contaminated sites

The costs incurred3 for the remediation work, less the increase in the value of the land4.

District heating and cooling production plants

The investment costs for the construction, expansion, refurbishment of one or more generation units which are an integral part of the efficient district heating and cooling system.

Waste management5

The extra investment compared to the cost of conventional production not involving waste management with the same capacity investment.

Aid for going beyond Union standards

The extra investment costs consist of the additional investment costs necessary to go beyond the level of environmental protection required by the Union standards6.

Absence of Union or national standards

The extra investment costs consist of the investment costs necessary to achieve a higher level of environmental protection than that which the undertaking or undertakings in question would achieve in the absence of any environmental aid.

RES electricity production

The extra investment cost compared to the cost of a conventional power plant with the same capacity in terms of the effective production of energy.

RES heating

The extra investment cost compared to the cost of a conventional heating system with the same capacity in terms of the effective production of energy.

Biogas production which is upgraded to a level of natural gas

If the aid is limited to the upgrading of biogas, the counterfactual constitutes the alternative use of these biogas (including burning).

Biofuels and biogas used for transport

In principle the extra investment cost compared to that of a normal refinery should be chosen, but the Commission can accept alternative counterfactuals if duly justified.

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Making use of industrial by-products

If the by-product would go wasted unless reused: the eligible cost is the extra investment necessary to use the by product, for instance a heat exchanger in the case of waste heat. If the by-product would need to be disposed: the counterfactual investment is the disposal of the waste.

Aid involved in tradable permit schemes

Proportionality needs to be demonstrated by the absence of overallocation.

1 The Commission may accept alternative counterfactual scenarios if duly justified by the Member State. 2 This includes aid for energy-efficiency audits. 3 The environmental damage to be repaired has to cover damage to the quality of the soil or of surface water or groundwater. All expenditure incurred by an undertaking for the remediation of its site, whether or not such expenditure can be shown as a fixed asset on its balance sheet, may rank as eligible investment in the case of the remediation of contaminated sites. 4 Evaluations of the increase in value of the land resulting from the remediation have to be carried out by an independent expert. 5 This concerns waste management of other undertakings and includes re-utilisation, recycling and recovery activities. 6 The cost of investments needed to reach the level of protection required by the Union standards is not eligible and need to be deducted.

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ANNEX 3 List (1) of eligible sectors (2) under Section 3.7.2

NACE code

Description

510

Mining of hard coal

729

Mining of other non-ferrous metal ores

811

Quarrying of ornamental and building stone, limestone, gypsum, chalk and slate

891

Mining of chemical and fertiliser minerals

893

Extraction of salt

899

Other mining and quarrying n.e.c.

1032

Manufacture of fruit and vegetable juice

1039

Other processing and preserving of fruit and vegetables

1041

Manufacture of oils and fats

1062

Manufacture of starches and starch products

1104

Manufacture of other non-distilled fermented beverages

1106

Manufacture of malt

1310

Preparation and spinning of textile fibres

1320

Weaving of textiles

1394

Manufacture of cordage, rope, twine and netting

1395

Manufacture of non-wovens and articles made from non-wovens, except apparel

1411

Manufacture of leather clothes

1610

Sawmilling and planing of wood

1621

Manufacture of veneer sheets and wood-based panels

1711

Manufacture of pulp

1712

Manufacture of paper and paperboard

1722

Manufacture of household and sanitary goods and of toilet requisites

1920

Manufacture of refined petroleum products

2012

Manufacture of dyes and pigments

2013

Manufacture of other inorganic basic chemicals

2014

Manufacture of other organic basic chemicals

2015

Manufacture of fertilisers and nitrogen compounds

2016

Manufacture of plastics in primary forms

2017

Manufacture of synthetic rubber in primary forms

2060

Manufacture of man-made fibres

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2110

Manufacture of basic pharmaceutical products

2221

Manufacture of plastic plates, sheets, tubes and profiles

2222

Manufacture of plastic packing goods

2311

Manufacture of flat glass

2312

Shaping and processing of flat glass

2313

Manufacture of hollow glass

2314

Manufacture of glass fibres

2319

Manufacture and processing of other glass, including technical glassware

2320

Manufacture of refractory products

2331

Manufacture of ceramic tiles and flags

2342

Manufacture of ceramic sanitary fixtures

2343

Manufacture of ceramic insulators and insulating fittings

2349

Manufacture of other ceramic products

2399

Manufacture of other non-metallic mineral products n.e.c.

2410

Manufacture of basic iron and steel and of ferro-alloys

2420

Manufacture of tubes, pipes, hollow profiles and related fittings, of steel

2431

Cold drawing of bars

2432

Cold rolling of narrow strip

2434

Cold drawing of wire

2441

Precious metals production

2442

Aluminium production

2443

Lead, zinc and tin production

2444

Copper production

2445

Other non-ferrous metal production

2446

Processing of nuclear fuel

2720

Manufacture of batteries and accumulators

3299

Other manufacturing n.e.c.

2011

Manufacture of industrial gases

2332

Manufacture of bricks, tiles and construction products, in baked clay

2351

Manufacture of cement

2352

Manufacture of lime and plaster

2451/2452/ 2453/2454

Casting of iron, steel, light metals and other non-ferrous metals

2611

Manufacture of electronic components

2680

Manufacture of magnetic and optical media

3832

Recovery of sorted materials

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1 The Commission may carry out a review of the list in Annex 3 on the basis of the criteria contained in footnote 89, provided that the Commission is presented with evidence that the data on which the Annex is based has changed significantly. 2 This list, and the criteria it is based on does not represent, and is not relevant, for the Commission’s future position on the risk of carbon leakage as regards ETS for the work in the context of elaborating carbon leakage rules in the 2030 climate and energy policy framework.

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ANNEX 4 Calculation of gross value added and electro-intensity at the level of the undertaking under section 3.7.2 (1)

For the purposes of Section 3.7.2, gross value added (GVA) for the undertaking means the gross value added at factor costs, which is GVA at market prices less any indirect taxes plus any subsidies. Value added at factor cost can be calculated from turnover, plus capitalised production, plus other operating income, plus or minus changes in stocks, minus purchases of goods and services (1), minus other taxes on products that are linked to turnover but not deductible, minus duties and taxes linked to production. Alternatively, it can be calculated from gross operating surplus by adding personnel costs. Income and expenditure classified as financial or extraordinary in company accounts is excluded from value added. Value added at factor costs is calculated at gross level, as value adjustments (such as depreciation) are not subtracted (2).

(2)

For the purposes of applying Section 3.7.2, the arithmetic mean over the most recent 3 years (3) for which GVA data is available shall be used.

(3)

For the purposes of Section 3.7.2, the electro-intensity of an undertaking shall be defined as:

(4)

(a)

The undertaking’s electricity costs (as calculated according to paragraph (4) below); divided by

(b)

The undertaking’s GVA (as calculated according to paragraphs (1) and (2) above).

An undertaking’s electricity costs shall be defined as: (a)

The undertaking’s electricity consumption; multiplied by

(b)

The assumed electricity price.

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(5)

For the calculation of the electricity consumption of the undertaking, use is to be made of electricity consumption efficiency benchmarks for the industry where available. If not available, the arithmetic mean over the most recent 3 years (4) for which data is available shall be used.

(6)

For the purposes of subparagraph (4)(b), above, the assumed electricity price shall mean the average retail electricity price applying in the Member State to undertakings with a similar level of electricity consumption in the most recent year for which data is available.

(7)

For the purposes of subparagraph (4)(b), above, the assumed electricity price can include the full cost of funding support for electricity from renewable sources that would be passed on to the undertaking in the absence of reductions.

Notes 1

For avoidance of doubt, ‘goods and services’ shall not include personnel costs.

2

Code 12 15 0 within the legal framework established by Council Regulation (EC, Euratom) No 58/97 of 20 December 1996 concerning structural business statistics.

3

In the case of undertakings in existence for less than one year, projected data can be used in the first year of operation. However, Member States should carry out an ex-post assessment at the end of the first year of operation (‘Year 1’) to verify the eligibility status of the undertaking and the cost limits (as a percentage of GVA) applying to it under paragraph 189 in Section 3.7.2. Following this ex-post assessment, Member States should compensate companies or recover compensation given, as appropriate. For Year 2, data from Year 1 should be used. For Year 3, the arithmetic mean of data for Years 1 and 2 should be used. From Year 4 onwards, the arithmetic mean of data for the previous 3 years should be used.

4

See previous footnote.

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ANNEX 5 Mining and manufacturing sectors not included on the list of Annex 3 having an extra-EU trade intensity of at least 4 %

NACE code

Description

610

Extraction of crude petroleum

620

Extraction of natural gas

710

Mining of iron ores

812

Operation of gravel and sand pits; mining of clays and kaolin

1011

Processing and preserving of meat

1012

Processing and preserving of poultry meat

1013

Production of meat and poultry meat products

1020

Processing and preserving of fish, crustaceans and molluscs

1031

Processing and preserving of potatoes

1042

Manufacture of margarine and similar edible fats

1051

Operation of dairies and cheese making

1061

Manufacture of grain mill products

1072

Manufacture of rusks and biscuits; manufacture of preserved pastry goods and cakes

1073

Manufacture of macaroni, noodles, couscous and similar farinaceous products

1081

Manufacture of sugar

1082

Manufacture of cocoa, chocolate and sugar confectionery

1083

Processing of tea and coffee

1084

Manufacture of condiments and seasonings

1085

Manufacture of prepared meals and dishes

1086

Manufacture of homogenised food preparations and dietetic food

1089

Manufacture of other food products n.e.c.

1091

Manufacture of prepared feeds for farm animals

1092

Manufacture of prepared pet foods

1101

Distilling, rectifying and blending of spirits

1102

Manufacture of wine from grape

1103

Manufacture of cider and other fruit wines

1105

Manufacture of beer

1107

Manufacture of soft drinks; production of mineral waters and other bottled waters

1200

Manufacture of tobacco products

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Appendix 6 Guidelines on State aid

1391

Manufacture of knitted and crocheted fabrics

1392

Manufacture of made-up textile articles, except apparel

1393

Manufacture of carpets and rugs

1396

Manufacture of other technical and industrial textiles

1399

Manufacture of other textiles n.e.c.

1412

Manufacture of workwear

1413

Manufacture of other outerwear

1414

Manufacture of underwear

1419

Manufacture of other wearing apparel and accessories

1420

Manufacture of articles of fur

1431

Manufacture of knitted and crocheted hosiery

1439

Manufacture of other knitted and crocheted apparel

1511

Tanning and dressing of leather; dressing and dyeing of fur

1512

Manufacture of luggage, handbags and the like, saddlery and harness

1520

Manufacture of footwear

1622

Manufacture of assembled parquet floors

1623

Manufacture of other builders’ carpentry and joinery

1624

Manufacture of wooden containers

1629

Manufacture of other products of wood; manufacture of articles of cork, straw and plaiting materials

1721

Manufacture of corrugated paper and paperboard and of containers of paper and paperboard

1723

Manufacture of paper stationery

1724

Manufacture of wallpaper

1729

Manufacture of other articles of paper and paperboard

1813

Pre-press and pre-media services

1910

Manufacture of coke oven products

2020

Manufacture of pesticides and other agrochemical products

2030

Manufacture of paints, varnishes and similar coatings, printing ink and mastics

2041

Manufacture of soap and detergents, cleaning and polishing preparations

2042

Manufacture of perfumes and toilet preparations

2051

Manufacture of explosives

2052

Manufacture of glues

2053

Manufacture of essential oils

2059

Manufacture of other chemical products n.e.c:

2120

Manufacture of pharmaceutical preparations

2211

Manufacture of rubber tyres and tubes; retreading and rebuilding of rubber tyres

1360

Appendix 6 Guidelines on State aid

2219

Manufacture of other rubber products

2223

Manufacture of builders’ ware of plastic

2229

Manufacture of other plastic products

2341

Manufacture of ceramic household and ornamental articles

2344

Manufacture of other technical ceramic products

2362

Manufacture of plaster products for construction purposes

2365

Manufacture of fibre cement

2369

Manufacture of other articles of concrete, plaster and cement

2370

Cutting, shaping and finishing of stone

2391

Production of abrasive products

2433

Cold forming or folding

2511

Manufacture of metal structures and parts of structures

2512

Manufacture of doors and windows of metal

2521

Manufacture of central heating radiators and boilers

2529

Manufacture of other tanks, reservoirs and containers of metal

2530

Manufacture of steam generators, except central heating hot water boilers

2540

Manufacture of weapons and ammunition

2571

Manufacture of cutlery

2572

Manufacture of locks and hinges

2573

Manufacture of tools

2591

Manufacture of steel drums and similar containers

2592

Manufacture of light metal packaging

2593

Manufacture of wire products, chain and springs

2594

Manufacture of fasteners and screw machine products

2599

Manufacture of other fabricated metal products n.e.c.

2612

Manufacture of loaded electronic boards

2620

Manufacture of computers and peripheral equipment

2630

Manufacture of communication equipment

2640

Manufacture of consumer electronics

2651

Manufacture of instruments and appliances for measuring, testing and navigation

2652

Manufacture of watches and clocks

2660

Manufacture of irradiation, electromedical and electrotherapeutic equipment

2670

Manufacture of optical instruments and photographic equipment

2680

Manufacture of magnetic and optical media

2711

Manufacture of electric motors, generators and transformers

2712

Manufacture of electricity distribution and control apparatus

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2731

Manufacture of fibre optic cables

2732

Manufacture of other electronic and electric wires and cables

2733

Manufacture of wiring devices

2740

Manufacture of electric lighting equipment

2751

Manufacture of electric domestic appliances

2752

Manufacture of non-electric domestic appliances

2790

Manufacture of other electrical equipment

2811

Manufacture of engines and turbines, except aircraft, vehicle and cycle engines

2812

Manufacture of fluid power equipment

2813

Manufacture of other pumps and compressors

2814

Manufacture of other taps and valves

2815

Manufacture of bearings, gears, gearing and driving elements

2821

Manufacture of ovens, furnaces and furnace burners

2822

Manufacture of lifting and handling equipment

2823

Manufacture of office machinery and equipment (except computers and peripheral equipment)

2824

Manufacture of power-driven hand tools

2825

Manufacture of non-domestic cooling and ventilation equipment

2829

Manufacture of other general-purpose machinery n.e.c.

2830

Manufacture of agricultural and forestry machinery

2841

Manufacture of metal forming machinery

2849

Manufacture of other machine tools

2891

Manufacture of machinery for metallurgy

2892

Manufacture of machinery for mining, quarrying and construction

2893

Manufacture of machinery for food, beverage and tobacco processing

2894

Manufacture of machinery for textile, apparel and leather production

2895

Manufacture of machinery for paper and paperboard production

2896

Manufacture of plastic and rubber machinery

2899

Manufacture of other special-purpose machinery n.e.c.

2910

Manufacture of motor vehicles

2920

Manufacture of bodies (coachwork) for motor vehicles; manufacture of trailers and semi-trailers

2931

Manufacture of electrical and electronic equipment for motor vehicles

2932

Manufacture of other parts and accessories for motor vehicles

3011

Building of ships and floating structures

3012

Building of pleasure and sporting boats

3020

Manufacture of railway locomotives and rolling stock

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Appendix 6 Guidelines on State aid

3030

Manufacture of air and spacecraft and related machinery

3040

Manufacture of military fighting vehicles

3091

Manufacture of motorcycles

3092

Manufacture of bicycles and invalid carriages

3099

Manufacture of other transport equipment n.e.c.

3101

Manufacture of office and shop furniture

3102

Manufacture of kitchen furniture

3103

Manufacture of mattresses

3109

Manufacture of other furniture

3211

Striking of coins

3212

Manufacture of jewellery and related articles

3213

Manufacture of imitation jewellery and related articles

3220

Manufacture of musical instruments

3230

Manufacture of sports goods

3240

Manufacture of games and toys

3250

Manufacture of medical and dental instruments and supplies

3291

Manufacture of brooms and brushes

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Appendix 7

COUNCIL REGULATION (EU) 2015/1589 of 13 July 2015 laying down detailed rules for the application of Article 108 of the Treaty on the Functioning of the European Union (codification) (Text with EEA relevance) THE COUNCIL OF THE EUROPEAN UNION, Having regard to the Treaty on the Functioning of the European Union, and in particular Article 109 thereof, Having regard to the proposal from the European Commission, Having regard to the opinion of the European Parliament,1

Whereas: (1)

Council Regulation (EC) No 659/19992 has been substantially amended several times.3 In the interests of clarity and rationality, that Regulation should be codified.

(2)

Without prejudice to special procedural rules laid down in regulations for certain sectors, this Regulation should apply to aid in all sectors. For the purpose of applying Articles 93 and 107 of the Treaty on the Functioning of the European Union (TFEU), the Commission has specific competence under Article 108 thereof to decide on the compatibility of State aid with the internal market when reviewing existing aid, when taking decisions on new or altered aid and when taking action regarding non-compliance with its decisions or with the requirement as to notification. 1365

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(3)

In the context of a modernised system of State aid rules, to contribute both to the implementation of the Europe 2020 strategy for growth and to budgetary consolidation, Article 107of the TFEU should be applied effectively and uniformly throughout the Union. Regulation (EC) No 659/1999 consolidated and reinforced the Commission’s previous practice of increasing legal certainty and supporting the development of State aid policy in a transparent environment.

(4)

In order to ensure legal certainty, it is appropriate that the circumstances under which aid is to be considered as existing aid be defined. The completion and enhancement of the internal market is a gradual process, reflected in the permanent development of State aid policy. Following those developments, certain measures, which at the moment they were put into effect did not constitute State aid, may since have become aid.

(5)

In accordance with Article 108(3) TFEU, any plans to grant new aid are to be notified to the Commission and should not be put into effect before the Commission has authorised it.

(6)

In accordance with Article 4(3) of the Treaty on European Union (TEU), Member States are under an obligation to cooperate with the Commission and to provide it with all information required to allow the Commission to carry out its duties under this Regulation.

(7)

The period within which the Commission is to conclude the preliminary examination of notified aid should be set at 2 months from the receipt of a complete notification or from the receipt of a duly reasoned statement of the Member State concerned that it considers the notification to be complete because the additional information requested by the Commission is not available or has already been provided. For reasons of legal certainty, that examination should be brought to an end by a decision.

(8)

In all cases where, as a result of the preliminary examination, the Commission cannot find that the aid is compatible with the internal market, the formal investigation procedure should be opened in order to enable the Commission to gather all the information it needs to assess the compatibility of the aid and to allow the interested parties to submit their comments. The rights of the interested parties can best be safeguarded within the framework of the formal investigation procedure provided for in Article 108(2) TFEU. 1366

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(9)

In order to assess the compatibility with the internal market of any notified or unlawful State aid for which the Commission has exclusive competence under Article 108 TFEU, it is appropriate to ensure that the Commission has the power, for the purposes of enforcing the State aid rules, to request all necessary market information from any Member State, undertaking or association of undertakings whenever it has doubts as to the compatibility of the measure concerned with the Union rules, and has therefore initiated the formal investigation procedure. In particular, the Commission should use this power in cases in which a complex substantive assessment appears necessary. In deciding whether to use this power, the Commission should take due account of the duration of the preliminary examination.

(10) For the purpose of assessing the compatibility of an aid measure after the initiation of the formal investigation procedure, in particular as regards technically complex cases subject to substantive assessment, the Commission should be able, by simple request or by decision, to require any Member State, undertaking or association of undertakings to provide all market information necessary for completing its assessment, if the information provided by the Member State concerned during the course of the preliminary examination is not sufficient, taking due account of the principle of proportionality, in particular for small and medium-sized enterprises. (11) In the light of the special relationship between aid beneficiaries and the Member State concerned, the Commission should be able to request information from an aid beneficiary only in agreement with the Member State concerned. The provision of information by the beneficiary of the aid measure in question does not constitute a legal basis for bilateral negotiations between the Commission and the beneficiary in question. (12) The Commission should select the addressees of information requests on the basis of objective criteria appropriate to each case, while ensuring that, when the request is addressed to a sample of undertakings or associations thereof, the sample of respondents is representative within each category. The information sought should consist, in particular, of factual company and market data and facts-based analysis of the functioning of the market. (13) The Commission, as the initiator of the procedure, should be responsible for verifying both the information transmission by the Member States, 1367

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undertakings or associations of undertakings, and the purported confidentiality of the information to be disclosed. (14) The Commission should be able to enforce compliance with the requests for information it addresses to any undertaking or association of undertakings, as appropriate, by means of proportionate fines and periodic penalty payments. In setting the amounts of fines and periodic penalty payments, the Commission should take due account of the principles of proportionality and appropriateness, in particular as regards small and medium-sized enterprises. The rights of the parties requested to provide information should be safeguarded by giving them the opportunity to make known their views before any decision imposing fines or periodic penalty payments is taken. The Court of Justice of the European Union should have unlimited jurisdiction with regard to such fines and periodic penalties pursuant to Article 261 TFEU. (15) Taking due account of the principles of proportionality and appropriateness, the Commission should be able to reduce the periodic penalty payments or waive them entirely, when addressees of requests provide the information requested, albeit after the expiry of the deadline. (16) Fines and periodic penalty payments are not applicable to Member States, since they are under a duty to cooperate sincerely with the Commission in accordance with Article 4(3) TEU, and to provide the Commission with all information required to allow it to carry out its duties under this Regulation. (17) After having considered the comments submitted by the interested parties, the Commission should conclude its examination by means of a final decision as soon as the doubts have been removed. It is appropriate, should this examination not be concluded after a period of 18 months from the opening of the procedure, that the Member State concerned has the opportunity to request a decision, which the Commission should take within 2 months. (18) In order to safeguard the rights of defence of the Member State concerned, it should be provided with copies of the requests for information sent to other Member States, undertakings or associations of undertakings, and be able to submit its observations on the comments received. It should also be informed of the names of the undertakings and the associations of 1368

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undertakings requested, to the extent that these entities have not demonstrated a legitimate interest in the protection of their identity. (19) The Commission should take due account of the legitimate interests of undertakings in the protection of their business secrets. It should not be able to use confidential information provided by respondents, which cannot be aggregated or otherwise be anonymised, in any decision unless it has previously obtained their agreement to disclose that information to the Member State concerned. (20) In cases where information marked as confidential does not seem to be covered by obligations of professional secrecy, it is appropriate to have a mechanism in place according to which the Commission can decide the extent to which such information can be disclosed. Any such decision to reject a claim that information is confidential should indicate a period at the end of which the information will be disclosed, so that the respondent can make use of any judicial protection available to it, including any interim measure. (21) In order to ensure that the State aid rules are applied correctly and effectively, the Commission should have the opportunity of revoking a decision which was based on incorrect information. (22) In order to ensure compliance with Article 108 TFEU, and in particular with the notification obligation and the standstill clause in Article 108(3), the Commission should examine all cases of unlawful aid. In the interests of transparency and legal certainty, the procedures to be followed in such cases should be laid down. When a Member State has not respected the notification obligation or the standstill clause, the Commission should not be bound by time limits. (23) The Commission should be able, on its own initiative, to examine information on unlawful aid, from whatever source, in order to ensure compliance with Article 108 TFEU, and in particular with the notification obligation and standstill clause laid down in Article 108(3) TFEU, and to assess the compatibility of an aid with the internal market. (24) In cases of unlawful aid, the Commission should have the right to obtain all necessary information enabling it to take a decision and to restore immediately, where appropriate, undistorted competition. It is therefore 1369

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appropriate to enable the Commission to adopt interim measures addressed to the Member State concerned. The interim measures may take the form of information injunctions, suspension injunctions and recovery injunctions. The Commission should be enabled, in the event of noncompliance with an information injunction, to decide on the basis of the information available and, in the event of non-compliance with suspension and recovery injunctions, to refer the matter to the Court of Justice directly, in accordance with the second subparagraph of Article 108(2) TFEU. (25) In cases of unlawful aid which is not compatible with the internal market, effective competition should be restored. For this purpose it is necessary that the aid, including interest, be recovered without delay. It is appropriate that recovery be effected in accordance with the procedures of national law. The application of those procedures should not, by preventing the immediate and effective execution of the Commission decision, impede the restoration of effective competition. To achieve this result, Member States should take all necessary measures ensuring the effectiveness of the Commission decision. (26) For reasons of legal certainty it is appropriate to provide for a period of limitation of 10 years with regard to unlawful aid, after the expiry of which no recovery can be ordered. (27) For reasons of legal certainty, it is appropriate to provide for limitation periods for the imposition and enforcement of fines and periodic penalty payments. (28) Misuse of aid may have effects on the functioning of the internal market which are similar to those of unlawful aid and should thus be treated according to similar procedures. Unlike unlawful aid, aid which has possibly been misused is aid which has been previously approved by the Commission. Therefore the Commission should not be allowed to use a recovery injunction with regard to misuse of aid. (29) In accordance with Article 108(1) TFEU, the Commission is under an obligation, in cooperation with Member States, to keep under constant review all systems of existing aid. In the interests of transparency and legal certainty, it is appropriate to specify the scope of cooperation under that Article. 1370

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(30) In order to ensure compatibility of existing aid schemes with the internal market and in accordance with Article 108(1) TFEU, the Commission should propose appropriate measures where an existing aid scheme is not, or is no longer, compatible with the internal market and should initiate the procedure provided for in Article 108(2) TFEU if the Member State concerned declines to implement the proposed measures. (31) It is appropriate to set out all the possibilities which third parties have to defend their interests in State aid procedures. (32) Complaints are an essential source of information for detecting infringements of the Union rules on State aid. To ensure the quality of the complaints submitted to the Commission, and at the same time transparency and legal certainty, it is appropriate to lay down the conditions that a complaint should fulfill in order to put the Commission in possession of information regarding alleged unlawful aid and set in motion the preliminary examination. Submissions not meeting those conditions should be treated as general market information, and should not necessarily lead to ex officio investigations. (33) Complainants should be required to demonstrate that they are interested parties within the meaning of Article  108(2) TFEU and of Article 1(h) of this Regulation. They should also be required to provide a certain amount of information in a form that the Commission should be empowered to set out in an implementing provision. In order not to discourage prospective complainants, that implementing provision should take into account that the demands on interested parties for lodging a complaint should not be burdensome. (34) In order to ensure that the Commission addresses similar issues in a consistent manner across the internal market, it is appropriate to provide for a specific legal basis to launch investigations into sectors of the economy or into certain aid instruments across several Member States. For reasons of proportionality and in the light of the high administrative burden entailed by such investigations, sector inquiries should be carried out only when the information available substantiates a reasonable suspicion that State aid measures in a particular sector could materially restrict or distort competition within the internal market in several Member States, or that existing aid measures in a particular sector in several Member States are not, or are no longer, compatible with the internal market. Such inquiries 1371

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would enable the Commission to deal in an efficient and transparent way with horizontal State aid issues and to obtain an ex ante overview of the sector concerned. (35) In order to allow the Commission to monitor effectively compliance with Commission decisions and to facilitate cooperation between the Commission and Member States for the purpose of the constant review of all existing aid schemes in the Member States in accordance with Article 108(1) TFEU, it is necessary that a general reporting obligation with regard to all existing aid schemes be laid down. (36) Where the Commission has serious doubts as to whether its decisions are being complied with, it should have at its disposal additional instruments allowing it to obtain the information necessary to verify that its decisions are being effectively complied with. For this purpose on-site monitoring visits are an appropriate and useful instrument, in particular for cases where aid might have been misused. Therefore the Commission should be empowered to undertake on-site monitoring visits and should obtain the cooperation of the competent authorities of the Member States where an undertaking opposes such a visit. (37) Consistency in the application of the State aid rules requires that arrangements be established for cooperation between the courts of the Member States and the Commission. Such cooperation is relevant for all courts of the Member States that apply Article 107(1) and Article 108 TFEU. In particular, national courts should be able to ask the Commission for information or for its opinion on points concerning the application of State aid rules. The Commission should also be able to submit written or oral observations to courts which are called upon to apply Article 107(1) or Article 108 TFEU. When assisting national courts in this respect, the Commission should act in accordance with its duty to defend the public interest. (38) Those observations and opinions of the Commission should be without prejudice to Article 267 TFEU and not legally bind the national courts. They should be submitted within the framework of national procedural rules and practices including those safeguarding the rights of the parties, in full respect of the independence of the national courts. Observations submitted by the Commission on its own initiative should be limited to cases that are important for the coherent application of Article 107(1) 1372

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or Article 108 TFEU, in particular to cases which are significant for the enforcement or the further development of Union State aid case law. (39) In the interests of transparency and legal certainty, it is appropriate to give public information on Commission decisions while, at the same time, maintaining the principle that decisions in State aid cases are addressed to the Member State concerned. It is therefore appropriate to publish all decisions which might affect the interests of interested parties either in full or in a summary form or to make copies of such decisions available to interested parties, where they have not been published or where they have not been published in full. (40) The Commission, when publishing its decisions, should respect the rules on professional secrecy, including the protection of all confidential information and personal data, in accordance with Article 339 TFEU. (41) The Commission, in close liaison with the Advisory Committee on State aid, should be able to adopt implementing provisions laying down detailed rules concerning the procedures under this Regulation, HAS ADOPTED THIS REGULATION: CHAPTER I GENERAL Article 1 Definitions For the purposes of this Regulation, the following definitions shall apply: (a)

‘aid’ means any measure fulfilling all the criteria laid down in Article 107(1) TFEU;

(b)

‘existing aid’ means: (i)

without prejudice to Articles 144 and 172 of the Act of Accession of Austria, Finland and Sweden, to point 3 and the Appendix of Annex IV to the Act of Accession of the Czech Republic, Estonia, 1373

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Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Slovenia and Slovakia, to points 2 and 3(b) and the Appendix of Annex V to the Act of Accession of Bulgaria and Romania, and to points 2 and 3(b) and the Appendix of Annex IV to the Act of Accession of Croatia, all aid which existed prior to the entry into force of the TFEU in the respective Member States, that is to say, aid schemes and individual aid which were put into effect before, and are still applicable after, the entry into force of the TFEU in the respective Member States; (ii)

authorised aid, that is to say, aid schemes and individual aid which have been authorised by the Commission or by the Council;

(iii) aid which is deemed to have been authorised pursuant to Article 4(6) of Regulation (EC) No 659/1999 or to Article 4(6) of this Regulation, or prior to Regulation (EC) No 659/1999 but in accordance with this procedure; (iv) aid which is deemed to be existing aid pursuant to Article 17 of this Regulation; (v)

aid which is deemed to be an existing aid because it can be established that at the time it was put into effect it did not constitute an aid, and subsequently became an aid due to the evolution of the internal market and without having been altered by the Member State. Where certain measures become aid following the liberalisation of an activity by Union law, such measures shall not be considered as existing aid after the date fixed for liberalisation;

(c)

‘new aid’ means all aid, that is to say, aid schemes and individual aid, which is not existing aid, including alterations to existing aid;

(d)

‘aid scheme’ means any act on the basis of which, without further implementing measures being required, individual aid awards may be made to undertakings defined within the act in a general and abstract manner and any act on the basis of which aid which is not linked to a specific project may be awarded to one or several undertakings for an indefinite period of time and/or for an indefinite amount;

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(e)

‘individual aid’ means aid that is not awarded on the basis of an aid scheme and notifiable awards of aid on the basis of an aid scheme;

(f )

‘unlawful aid’ means new aid put into effect in contravention of Article 108(3) TFEU;

(g)

‘misuse of aid’ means aid used by the beneficiary in contravention of a decision taken pursuant to Article 4(3) or Article 7(3) or (4) of Regulation (EC) No 659/1999 or Article 4(3) or Article 9(3) or (4) of this Regulation;

(h)

‘interested party’ means any Member State and any person, undertaking or association of undertakings whose interests might be affected by the granting of aid, in particular the beneficiary of the aid, competing undertakings and trade associations.

CHAPTER II PROCEDURE REGARDING NOTIFIED AID Article 2 Notification of new aid 1.    Save as otherwise provided in regulations made pursuant to Article 109 TFEU or to other relevant provisions thereof, any plans to grant new aid shall be notified to the Commission in sufficient time by the Member State concerned. The Commission shall inform the Member State concerned without delay of the receipt of a notification. 2.

In a notification, the Member State concerned shall provide all necessary information in order to enable the Commission to take a decision pursuant to Articles 4 and 9 (‘complete notification’).

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Article 3 Standstill clause Aid notifiable pursuant to Article 2(1) shall not be put into effect before the Commission has taken, or is deemed to have taken, a decision authorising such aid. Article 4 Preliminary examination of the notification and decisions of the Commission 1.    The Commission shall examine the notification as soon as it is received. Without prejudice to Article 10, the Commission shall take a decision pursuant to paragraphs 2, 3 or 4 of this Article. 2.

Where the Commission, after a preliminary examination, finds that the notified measure does not constitute aid, it shall record that finding by way of a decision.

3.

Where the Commission, after a preliminary examination, finds that no doubts are raised as to the compatibility with the internal market of a notified measure, in so far as it falls within the scope of Article 107(1) TFEU, it shall decide that the measure is compatible with the internal market (‘decision not to raise objections’). The decision shall specify which exception under the TFEU has been applied.

4.

Where the Commission, after a preliminary examination, finds that doubts are raised as to the compatibility with the internal market of a notified measure, it shall decide to initiate proceedings pursuant to Article 108(2) TFEU (‘decision to initiate the formal investigation procedure’).

5.    The decisions referred to in paragraphs 2, 3 and 4 of this Article shall be taken within 2 months. That period shall begin on the day following the receipt of a complete notification. The notification shall be considered as complete if, within 2 months from its receipt, or from the receipt of any additional information requested, the Commission does not request any further information. The period can be extended with the consent of 1376

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both the Commission and the Member State concerned. Where appropriate, the Commission may fix shorter time limits. 6.

Where the Commission has not taken a decision in accordance with paragraphs 2, 3 or 4 within the period laid down in paragraph 5, the aid shall be deemed to have been authorised by the Commission. The Member State concerned may thereupon implement the measures in question after giving the Commission prior notice thereof, unless the Commission takes a decision pursuant to this Article within a period of 15 working days following receipt of the notice. Article 5 Request for information made to the notifying Member State

1.    Where the Commission considers that information provided by the Member State concerned with regard to a measure notified pursuant to Article 2 is incomplete, it shall request all necessary additional information. Where a Member State responds to such a request, the Commission shall inform the Member State of the receipt of the response. 2.    Where the Member State concerned does not provide the information requested within the period prescribed by the Commission or provides incomplete information, the Commission shall send a reminder, allowing an appropriate additional period within which the information shall be provided. 3.    The notification shall be deemed to be withdrawn if the requested information is not provided within the prescribed period, unless, before the expiry of that period, either the period has been extended with the consent of both the Commission and the Member State concerned, or the Member State concerned, in a duly reasoned statement, informs the Commission that it considers the notification to be complete because the additional information requested is not available or has already been provided. In that case, the period referred to in Article 4(5) shall begin on the day following receipt of the statement. If the notification is deemed to be withdrawn, the Commission shall inform the Member State thereof.

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Article 6 Formal investigation procedure 1.    The decision to initiate the formal investigation procedure shall summarise the relevant issues of fact and law, shall include a preliminary assessment of the Commission as to the aid character of the proposed measure and shall set out the doubts as to its compatibility with the internal market. The decision shall call upon the Member State concerned and upon other interested parties to submit comments within a prescribed period which shall normally not exceed 1 month. In duly justified cases, the Commission may extend the prescribed period. 2.    The comments received shall be submitted to the Member State concerned. If an interested party so requests, on grounds of potential damage, its identity shall be withheld from the Member State concerned. The Member State concerned may reply to the comments submitted within a prescribed period which shall normally not exceed 1 month. In duly justified cases, the Commission may extend the prescribed period. Article 7 Request for information made to other sources 1.    After the initiation of the formal investigation procedure provided for in Article 6, in particular as regards technically complex cases subject to substantive assessment, the Commission may, if the information provided by a Member State concerned during the course of the preliminary examination is not sufficient, request any other Member State, an undertaking or an association of undertakings to provide all market information necessary to enable the Commission to complete its assessment of the measure at stake taking due account of the principle of proportionality, in particular for small and medium-sized enterprises. 2.    The Commission may request information only: (a)

if it is limited to formal investigation procedures that have been identified by the Commission as being ineffective to date; and

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(b)

in so far as aid beneficiaries are concerned, if the Member State concerned agrees to the request.

3.    The undertakings or associations of undertakings providing information following a Commission’s request for market information based on paragraphs 6 and 7 shall submit their answer simultaneously to the Commission and to the Member State concerned, to the extent that the documents provided do not include information that is confidential vis-à-vis that Member State.

The Commission shall steer and monitor the information transmission between the Member States, undertakings or associations of undertakings concerned, and verify the purported confidentiality of the information transmitted.

4.    The Commission shall request only information that is at the disposal of the Member State, undertaking or association of undertakings concerned by the request. 5.    Member States shall provide the information on the basis of a simple request and within a time limit prescribed by the Commission which should normally not exceed 1 month. Where a Member State does not provide the information requested within that period or provides incomplete information, the Commission shall send a reminder. 6.    The Commission may, by simple request, require an undertaking or an association of undertakings to provide information. Where the Commission sends a simple request for information to an undertaking or an association of undertakings, it shall state the legal basis and the purpose of the request, specify what information is required and prescribe a proportionate time limit within which the information is to be provided. It shall also refer to the fines provided for in Article 8(1) for supplying incorrect or misleading information. 7.    The Commission may, by decision, require an undertaking or an association of undertakings to provide information. Where the Commission, by decision, requires an undertaking or an association of undertakings to supply information, it shall state the legal basis, the purpose of the request, specify what information is required and prescribe a proportionate time limit within which the information is to be provided. It shall also 1379

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indicate the fines provided for in Article 8(1) and shall indicate or impose the periodic penalties payments provided for in Article 8(2), as appropriate. In addition, it shall indicate the right of the undertaking or association of undertakings to have the decision reviewed by the Court of Justice of the European Union. 8.    When issuing a request under paragraph 1 or 6 of this Article, or adopting a decision under paragraph 7, the Commission shall also simultaneously provide the Member State concerned with a copy thereof. The Commission shall indicate the criteria by which it selected the recipients of the request or decision. 9.    The owners of the undertakings or their representatives, or, in the case of legal persons, companies, firms or associations without legal personality, the persons authorised to represent them by law or by their constitution, shall supply on their behalf the information requested or required. Persons duly authorised to act may supply the information on behalf of their clients. The latter shall nevertheless be held fully responsible if the information supplied is incorrect, incomplete or misleading. Article 8 Fines and periodic penalty payments 1.  

The Commission may, if deemed necessary and proportionate, impose by decision on undertakings or associations of undertakings fines not exceeding 1 % of their total turnover in the preceding business year where they, intentionally or through gross negligence: (a)

supply incorrect or misleading information in response to a request made pursuant to Article 7(6);

(b)

supply incorrect, incomplete or misleading information in response to a decision adopted pursuant to Article 7(7), or do not supply the information within the prescribed time limit.

2.    The Commission may, by decision, impose on undertakings or associations of undertakings periodic penalty payments where an undertaking or association of undertakings fails to supply complete and correct infor1380

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mation as requested by the Commission by decision adopted pursuant to Article 7(7).

The periodic penalty payments shall not exceed 5 % of the average daily turnover of the undertaking or association concerned in the preceding business year for each working day of delay, calculated from the date established in the decision, until it supplies complete and correct information as requested or required by the Commission.

3.    In fixing the amount of the fine or periodic penalty payment, regard shall be had to the nature, gravity and duration of the infringement, taking due account of the principles of proportionality and appropriateness, in particular for small and medium-sized enterprises. 4.    Where the undertakings or associations of undertakings have satisfied the obligation which the periodic penalty payment was intended to enforce, the Commission may reduce the definitive amount of the periodic penalty payment compared to that under the original decision imposing periodic penalty payments. The Commission may also waive any periodic penalty payment. 5.    Before adopting any decision in accordance with paragraph 1 or 2 of this Article, the Commission shall set a final deadline of 2 weeks to receive the missing market information from the undertakings or associations of undertakings concerned and also give them the opportunity of making known their views. 6.    The Court of Justice of the European Union shall have unlimited jurisdiction within the meaning of Article 261 TFEU to review fines or periodic penalty payments imposed by the Commission. It may cancel, reduce or increase the fine or periodic penalty payment imposed. Article 9 Decisions of the Commission to close the formal investigation procedure 1.    Without prejudice to Article 10, the formal investigation procedure shall be closed by means of a decision as provided for in paragraphs 2 to 5 of this Article. 1381

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2.    Where the Commission finds that, where appropriate following modification by the Member State concerned, the notified measure does not constitute aid, it shall record that finding by way of a decision. 3.    Where the Commission finds that, where appropriate following modification by the Member State concerned, the doubts as to the compatibility of the notified measure with the internal market have been removed, it shall decide that the aid is compatible with the internal market (‘positive decision’). That decision shall specify which exception under the TFEU has been applied. 4.    The Commission may attach to a positive decision conditions subject to which aid may be considered compatible with the internal market and may lay down obligations to enable compliance with the decision to be monitored (‘conditional decision’). 5.    Where the Commission finds that the notified aid is not compatible with the internal market, it shall decide that the aid shall not be put into effect (‘negative decision’). 6.    Decisions taken pursuant to paragraphs 2 to 5 shall be taken as soon as the doubts referred to in Article 44 have been removed. The Commission shall as far as possible endeavour to adopt a decision within a period of 18 months from the opening of the procedure. This time limit may be extended by common agreement between the Commission and the Member State concerned. 7.    Once the time limit referred to in paragraph 6 of this Article has expired, and should the Member State concerned so request, the Commission shall, within 2 months, take a decision on the basis of the information available to it. If appropriate, where the information provided is not sufficient to establish compatibility, the Commission shall take a negative decision. 8.    Before adopting any decision in accordance with paragraphs 2 to 5, the Commission shall give the Member State concerned the opportunity of making known its views, within a time-limit that shall not normally exceed 1 month, on the information received by the Commission and provided to the Member State concerned pursuant to Article 7(3).

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9.    The Commission shall not use confidential information provided by respondents, which cannot be aggregated or otherwise be anonymised, in any decision taken in accordance with paragraphs 2 to 5 of this Article, unless it has obtained their agreement to disclose that information to the Member State concerned. The Commission may take a reasoned decision, which shall be notified to the undertaking or association of undertakings concerned, finding that information provided by a respondent and marked as confidential is not protected, and setting a date after which the information will be disclosed. That period shall not be less than 1 month. 10.    The Commission shall take due account of the legitimate interests of undertakings in the protection of their business secrets and other confidential information. An undertaking or an association of undertakings providing information pursuant to Article 7, and which is not a beneficiary of the State aid measure in question, may request, on grounds of potential damage, that its identity be withheld from the Member State concerned. Article 10 Withdrawal of notification 1.    The Member State concerned may withdraw the notification within the meaning of Article 2 in due time before the Commission has taken a decision pursuant to Article 4 or to Article 9. 2.    In cases where the Commission initiated the formal investigation procedure, the Commission shall close that procedure. Article 11 Revocation of a decision The Commission may revoke a decision taken pursuant to Article 4(2) or (3), or Article 9(2), (3) or (4), after having given the Member State concerned the opportunity to submit its comments, where the decision was based on incorrect information provided during the procedure which was a determining factor for the decision. Before revoking a decision and taking a new decision, the Commission shall open the formal investigation procedure pursuant to Article 4(4). 1383

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Articles 6, 9 and 12, Article 13(1) and Articles 15, 16 and 17 shall apply mutatis mutandis.

CHAPTER III PROCEDURE REGARDING UNLAWFUL AID Article 12 Examination, request for information and information injunction 1.    Without prejudice to Article 24, the Commission may on its own initiative examine information regarding alleged unlawful aid from whatever source.

The Commission shall examine without undue delay any complaint submitted by any interested party in accordance with Article 24(2) and shall ensure that the Member State concerned is kept fully and regularly informed of the progress and outcome of the examination.

2.    If necessary, the Commission shall request information from the Member State concerned. Article 2(2) and Article 5(1) and (2) shall apply mutatis mutandis.

After the initiation of the formal investigation procedure, the Commission may also request information from any other Member State, from an undertaking, or association of undertakings in accordance with Articles 7 and 8, which shall apply mutatis mutandis.

3.  

Where, despite a reminder pursuant to Article 5(2), the Member State concerned does not provide the information requested within the period prescribed by the Commission, or where it provides incomplete information, the Commission shall by decision require the information to be provided (‘information injunction’). The decision shall specify what information is required and prescribe an appropriate period within which it is to be supplied.

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Article 13 Injunction to suspend or provisionally recover aid 1.    The Commission may, after giving the Member State concerned the opportunity to submit its comments, adopt a decision requiring the Member State to suspend any unlawful aid until the Commission has taken a decision on the compatibility of the aid with the internal market (‘suspension injunction’). 2.    The Commission may, after giving the Member State concerned the opportunity to submit its comments, adopt a decision requiring the Member State provisionally to recover any unlawful aid until the Commission has taken a decision on the compatibility of the aid with the internal market (‘recovery injunction’), if all the following criteria are fulfilled: (a)

according to an established practice there are no doubts about the aid character of the measure concerned;

(b)

there is an urgency to act;

(c)

there is a serious risk of substantial and irreparable damage to a competitor.

Recovery shall be effected in accordance with the procedure set out in Article 16(2) and (3). After the aid has been effectively recovered, the Commission shall take a decision within the time limits applicable to notified aid.

The Commission may authorise the Member State to couple the refunding of the aid with the payment of rescue aid to the firm concerned.



The provisions of this paragraph shall be applicable only to unlawful aid implemented after the entry into force of Regulation (EC) No 659/1999.

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Article 14 Non-compliance with an injunction decision If the Member State fails to comply with a suspension injunction or a recovery injunction, the Commission shall be entitled, while carrying out the examination on the substance of the matter on the basis of the information available, to refer the matter to the Court of Justice of the European Union directly and apply for a declaration that the failure to comply constitutes an infringement of the TFEU. Article 15 Decisions of the Commission 1.    The examination of possible unlawful aid shall result in a decision pursuant to Article 4(2), (3) or (4). In the case of decisions to initiate the formal investigation procedure, proceedings shall be closed by means of a decision pursuant to Article 9. If a Member State fails to comply with an information injunction, that decision shall be taken on the basis of the information available. 2.  

 In cases of possible unlawful aid and without prejudice to Article 13(2), the Commission shall not be bound by the time-limit set out in Articles 4(5), 9(6) and 9(7).

3.    Article 11 shall apply mutatis mutandis. Article 16 Recovery of aid 1.    Where negative decisions are taken in cases of unlawful aid, the Commission shall decide that the Member State concerned shall take all necessary measures to recover the aid from the beneficiary (‘recovery decision’). The Commission shall not require recovery of the aid if this would be contrary to a general principle of Union law.

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2.    The aid to be recovered pursuant to a recovery decision shall include interest at an appropriate rate fixed by the Commission. Interest shall be payable from the date on which the unlawful aid was at the disposal of the beneficiary until the date of its recovery. 3.    Without prejudice to any order of the Court of Justice of the European Union pursuant to Article 278 TFEU, recovery shall be effected without delay and in accordance with the procedures under the national law of the Member State concerned, provided that they allow the immediate and effective execution of the Commission’s decision. To this effect and in the event of a procedure before national courts, the Member States concerned shall take all necessary steps which are available in their respective legal systems, including provisional measures, without prejudice to Union law.

CHAPTER IV LIMITATION PERIODS Article 17 Limitation period for the recovery of aid 1.    The powers of the Commission to recover aid shall be subject to a limitation period of 10 years. 2.    The limitation period shall begin on the day on which the unlawful aid is awarded to the beneficiary either as individual aid or as aid under an aid scheme. Any action taken by the Commission or by a Member State, acting at the request of the Commission, with regard to the unlawful aid shall interrupt the limitation period. Each interruption shall start time running afresh. The limitation period shall be suspended for as long as the decision of the Commission is the subject of proceedings pending before the Court of Justice of the European Union. 3.    Any aid with regard to which the limitation period has expired shall be deemed to be existing aid.

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Article 18 Limitation period for the imposition of fines and periodic penalty payments 1.    The powers conferred on the Commission by Article 8 shall be subject to a limitation period of 3 years. 2.    The period provided for in paragraph 1 shall start on the day on which the infringement referred to in Article 8 is committed. However, in the case of continuing or repeated infringements, the period shall begin on the day on which the infringement ceases. 3.    Any action taken by the Commission for the purpose of the investigation or proceedings in respect of an infringement referred to in Article 8 shall interrupt the limitation period for the imposition of fines or periodic penalty payments, with effect from the date on which the action is notified to the undertaking or association of undertakings concerned. 4.    After each interruption, the limitation period shall start running afresh. However, the limitation period shall expire at the latest on the day on which a period of 6 years has elapsed without the Commission having imposed a fine or a periodic penalty payment. That period shall be extended by the time during which the limitation period is suspended in accordance with paragraph 5 of this Article. 5.    The limitation period for the imposition of fines or periodic penalty payments shall be suspended for as long as the decision of the Commission is the subject of proceedings pending before the Court of Justice of the European Union. Article 19 Limitation periods for the enforcement of fines and periodic penalty payments 1.    The powers of the Commission to enforce decisions adopted pursuant to Article 8 shall be subject to a limitation period of 5 years.

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2.    The period provided for in paragraph 1 shall start on the day on which the decision taken pursuant to Article 8 becomes final. 3.    The limitation period provided for in paragraph 1 of this Article shall be interrupted: (a)

by notification of a decision modifying the original amount of the fine or periodic penalty payment or refusing an application for modification;

(b)

by any action of a Member State, acting at the request of the Commission, or of the Commission, intended to enforce payment of the fine or periodic penalty payment.

4.    After each interruption, the limitation period shall start running afresh. 5.    The limitation period provided for in paragraph 1 shall be suspended for so long as:



(a)

the respondent is allowed time to pay;

(b)

the enforcement of payment is suspended pursuant to a decision of the Court of Justice of the European Union.

CHAPTER V PROCEDURE REGARDING MISUSE OF AID Article 20 Misuse of aid

Without prejudice to Article 28, the Commission may, in cases of misuse of aid, initiate the formal investigation procedure pursuant to Article 4(4). Articles 6 to 9, 11 and 12, Article 13(1) and Articles 14 to 17 shall apply mutatis mutandis.

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CHAPTER VI PROCEDURE REGARDING EXISTING AID SCHEMES Article 21 Cooperation pursuant to Article 108(1) TFEU 1.    The Commission shall obtain from the Member State concerned all necessary information for the review, in cooperation with the Member State, of existing aid schemes pursuant to Article 108(1) TFEU. 2.    Where the Commission considers that an existing aid scheme is not, or is no longer, compatible with the internal market, it shall inform the Member State concerned of its preliminary view and give the Member State concerned the opportunity to submit its comments within a period of 1 month. In duly justified cases, the Commission may extend this period. Article 22 Proposal for appropriate measures Where the Commission, in the light of the information submitted by the Member State pursuant to Article 21, concludes that the existing aid scheme is not, or is no longer, compatible with the internal market, it shall issue a recommendation proposing appropriate measures to the Member State concerned. The recommendation may propose, in particular: (a)

substantive amendment of the aid scheme; or

(b)

introduction of procedural requirements; or

(c)

abolition of the aid scheme.

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Article 23 Legal consequences of a proposal for appropriate measures 1.    Where the Member State concerned accepts the proposed measures and informs the Commission thereof, the Commission shall record that finding and inform the Member State thereof. The Member State shall be bound by its acceptance to implement the appropriate measures. 2.    Where the Member State concerned does not accept the proposed measures and the Commission, having taken into account the arguments of the Member State concerned, still considers that those measures are necessary, it shall initiate proceedings pursuant to Article 4(4). Articles 6, 9 and 11 shall apply mutatis mutandis.

CHAPTER VII INTERESTED PARTIES Article 24 Rights of interested parties 1.    Any interested party may submit comments pursuant to Article 6 following a Commission decision to initiate the formal investigation procedure. Any interested party which has submitted such comments and any beneficiary of individual aid shall be sent a copy of the decision taken by the Commission pursuant to Article 9. 2.    Any interested party may submit a complaint to inform the Commission of any alleged unlawful aid or any alleged misuse of aid. To that effect, the interested party shall duly complete a form that has been set out in an implementing provision referred to in Article 33 and shall provide the mandatory information requested therein.

Where the Commission considers that the interested party does not comply with the compulsory complaint form, or that the facts and points of law put forward by the interested party do not provide sufficient grounds 1391

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to show, on the basis of a prima facie examination, the existence of unlawful aid or misuse of aid, it shall inform the interested party thereof and call upon it to submit comments within a prescribed period which shall not normally exceed 1 month. If the interested party fails to make known its views within the prescribed period, the complaint shall be deemed to have been withdrawn. The Commission shall inform the Member State concerned when a complaint has been deemed to have been withdrawn.

The Commission shall send a copy of the decision on a case concerning the subject matter of the complaint to the complainant.

3.    At its request, any interested party shall obtain a copy of any decision pursuant to Articles 4 and 9, Article 12(3) and Article 13.

CHAPTER VIII INVESTIGATIONS INTO SECTORS OF THE ECONOMY AND INTO AID INSTRUMENTS Article 25 Investigations into sectors of the economy and into aid instruments 1.    Where the information available substantiates a reasonable suspicion that State aid measures in a particular sector or based on a particular aid instrument may materially restrict or distort competition within the internal market in several Member States, or that existing aid measures in a particular sector in several Member States are not, or no longer, compatible with the internal market, the Commission may conduct an inquiry across various Member States into the sector of the economy or the use of the aid instrument concerned. In the course of that inquiry, the Commission may request the Member States and/or the undertakings or associations of undertakings concerned to supply the necessary information for the application of Articles 107 and 108 TFEU, taking due account of the principle of proportionality.

The Commission shall state the reasons for the inquiry and for the choice of addressees in all requests for information sent under this Article. 1392

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The Commission shall publish a report on the results of its inquiry into particular sectors of the economy or particular aid instruments across various Member States and shall invite the Member States and any undertakings or associations of undertakings concerned to submit comments.

2.    Information obtained from sector inquiries may be used in the framework of procedures under this Regulation. 3.    Articles 5, 7 and 8 of this Regulation shall apply mutatis mutandis.

CHAPTER IX MONITORING Article 26 Annual reports 1.    Member States shall submit to the Commission annual reports on all existing aid schemes with regard to which no specific reporting obligations have been imposed in a conditional decision pursuant to Article 9(4). 2.    Where, despite a reminder, the Member State concerned fails to submit an annual report, the Commission may proceed in accordance with Article 22 with regard to the aid scheme concerned. Article 27 On-site monitoring 1.    Where the Commission has serious doubts as to whether decisions not to raise objections, positive decisions or conditional decisions with regard to individual aid are being complied with, the Member State concerned, after having been given the opportunity to submit its comments, shall allow the Commission to undertake on-site monitoring visits.

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2.    The officials authorised by the Commission shall be empowered, in order to verify compliance with the decision concerned:



(a)

to enter any premises and land of the undertaking concerned;

(b)

to ask for oral explanations on the spot;

(c)

to examine books and other business records and take, or demand, copies.

The Commission may be assisted if necessary by independent experts.

3.    The Commission shall inform the Member State concerned, in good time and in writing, of the on-site monitoring visit and of the identities of the authorised officials and experts. If the Member State has duly justified objections to the Commission’s choice of experts, the experts shall be appointed in common agreement with the Member State. The officials of the Commission and the experts authorised to carry out the on-site monitoring shall produce an authorisation in writing specifying the subjectmatter and purpose of the visit. 4.    Officials authorised by the Member State in whose territory the monitoring visit is to be made may be present at the monitoring visit. 5.    The Commission shall provide the Member State with a copy of any report produced as a result of the monitoring visit. 6.    Where an undertaking opposes a monitoring visit ordered by a Commission decision pursuant to this Article, the Member State concerned shall afford the necessary assistance to the officials and experts authorised by the Commission to enable them to carry out the monitoring visit.

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Article 28 Non-compliance with decisions and judgments 1.    Where the Member State concerned does not comply with conditional or negative decisions, in particular in cases referred to in Article 16 of this Regulation, the Commission may refer the matter to the Court of Justice of the European Union directly in accordance with Article 108(2) TFEU. 2.  

 If the Commission considers that the Member State concerned has not complied with a judgment of the Court of Justice of the European Union, the Commission may pursue the matter in accordance with Article 260 TFEU.

CHAPTER X COOPERATION WITH NATIONAL COURTS Article 29 Cooperation with national courts 1.    For the application of Article 107(1) and Article 108 TFEU, the courts of the Member States may ask the Commission to transmit to them information in its possession or its opinion on questions concerning the application of State aid rules. 2.    Where the coherent application of Article 107(1) or Article 108 TFEU so requires, the Commission, acting on its own initiative, may submit written observations to the courts of the Member States that are responsible for applying the State aid rules. It may, with the permission of the court in question, also make oral observations.

The Commission shall inform the Member State concerned of its intention to submit observations before formally doing so.

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For the exclusive purpose of preparing its observations, the Commission may request the relevant court of the Member State to transmit documents at the disposal of the court, necessary for the Commission’s assessment of the matter.

CHAPTER XI COMMON PROVISIONS Article 30 Professional secrecy The Commission and the Member States, their officials and other servants, including independent experts appointed by the Commission, shall not disclose information which they have acquired through the application of this Regulation and which is covered by the obligation of professional secrecy. Article 31 Addressee of decisions 1.    The decisions taken pursuant to Article 7(7), Article 8(1) and (2), and Article 9(9) shall be addressed to the undertaking or association of undertakings concerned. The Commission shall notify the decision to the addressee without delay and shall give the addressee the opportunity to indicate to the Commission which information it considers to be covered by the obligation of professional secrecy. 2.    All other decisions of the Commission taken pursuant to Chapters II, III, V, VI and IX shall be addressed to the Member State concerned. The Commission shall notify them to the Member State concerned without delay and shall give that Member State the opportunity to indicate to the Commission which information it considers to be covered by the obligation of professional secrecy.

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Article 32 Publication of decisions 1.    The Commission shall publish in the Official Journal of the European Union a summary notice of the decisions which it takes pursuant to Article 4(2) and (3) and Article 22 in conjunction with Article 23(1). The summary notice shall state that a copy of the decision may be obtained in the authentic language version or versions. 2.    The Commission shall publish in the Official Journal of the European Union the decisions which it takes pursuant to Article 4(4) in their authentic language version. In the Official Journal published in languages other than the authentic language version, the authentic language version shall be accompanied by a meaningful summary in the language of that Official Journal. 3.    The Commission shall publish in the Official Journal of the European Union the decisions which it takes pursuant to Article 8(1) and (2) and Article 9. 4.    In cases where Article 4(6) or Article 10(2) applies, a short notice shall be published in the Official Journal of the European Union. 5.    The Council, acting unanimously, may decide to publish decisions pursuant to the third subparagraph of Article 108(2) TFEU in the Official Journal of the European Union. Article 33 Implementing provisions The Commission, acting in accordance with the procedure laid down in Article 34, shall have the power to adopt implementing provisions concerning: (a)

the form, content and other details of notifications;

(b)

the form, content and other details of annual reports;

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(c)

the form, content and other details of complaints submitted in accordance with Article 12(1) and Article 24(2);

(d)

details of time-limits and the calculation of time-limits; and

(e)

the interest rate referred to in Article 16(2). Article 34 Consultation of the Advisory Committee on State aid

1.    Before adopting any implementing provision pursuant to Article 33 the Commission shall consult the Advisory Committee on State aid set up by Council Regulation (EU) 2015/1588 (4) (‘the Committee’). 2.    Consultation of the Committee shall take place at a meeting called by the Commission. The drafts and documents to be examined shall be annexed to the notification. The meeting shall take place no earlier than 2 months after notification has been sent. This period may be reduced in the case of urgency. 3.    The representative of the Commission shall submit to the Committee a draft of the measures to be taken. The Committee shall deliver an opinion on the draft, within a time-limit which the chairman may lay down according to the urgency of the matter, if necessary by taking a vote. 4.    The opinion shall be recorded in the minutes. In addition, each Member State shall have the right to ask to have its position recorded in the minutes. The Committee may recommend the publication of the opinion in the Official Journal of the European Union. 5.    The Commission shall take the utmost account of the opinion delivered by the Committee. It shall inform the Committee on the manner in which its opinion has been taken into account.

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Article 35 Repeal Regulation (EC) No 659/1999 is repealed. References to the repealed Regulation shall be construed as references to this Regulation and shall be read in accordance with the correlation table in Annex II. Article 36 Entry into force This Regulation shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union. This Regulation shall be binding in its entirety and directly applicable in all Member States. Done at Brussels, 13 July 2015. For the Council The President F. ETGEN

Notes 1

Opinion of 29 April 2015 (not yet published in the Official Journal).

2

Council Regulation (EC) No 659/1999 of 22 March 1999 laying down detailed rules for the application of Article 108 of the Treaty on the Functioning of the European Union (OJ L 83, 27.3.1999, p. 1).

3

See Annex I.

4

Council Regulation (EU) 2015/1588 of 13 July 2015 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to certain categories of horizontal State aid (see page 1 of this Official Journal).

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ANNEX I Repealed Regulation with list of its successive amendments Council Regulation (EC) No 659/1999 (OJ L 83, 27.3.1999, p. 1). Point 5(6) of Annex II to the 2003 Act of Accession   Council Regulation (EC) No 1791/2006 (OJ L 363, 20.12.2006, p. 1). Council Regulation (EU) No 517/2013 (OJ L 158, 10.6.2013, p. 1). Council Regulation (EU) No 734/2013 (OJ L 204, 31.7.2013, p. 15).

ANNEX II Correlation table Regulation (EC) No 659/1999

This Regulation

Articles 1 to 6

Articles 1 to 6

Article 6a

Article 7

Article 6b

Article 8

Article 7

Article 9

Article 8

Article 10

Article 9

Article 11

Article 10

Article 12

Article 11(1)

Article 13(1)

Article 11(2), first subparagraph, introductory wording

Article 13(2), first subparagraph, introductory wording

Article 11(2), first subparagraph, first indent

Article 13(2), first subparagraph, point (a)

Article 11(2), first subparagraph, second indent

Article 13(2), first subparagraph, point (b)

Article 11(2), first subparagraph, third indent

Article 13(2), first subparagraph, point (c)

Article 11(2), second, third and fourth subparagraphs

Article 13(2), second, third and fourth subparagraphs

Article 12

Article 14

Article 13

Article 15

Article 14

Article 16

Article 15

Article 17

Article 15a

Article 18

Article 15b

Article 19

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Article 16

Article 20

Article 17

Article 21

Article 18

Article 22

Article 19

Article 23

Article 20

Article 24

Article 20a

Article 25

Article 21

Article 26

Article 22

Article 27

Article 23

Article 28

Article 23a

Article 29

Article 24

Article 30

Article 25

Article 31

Article 26(1) and (2)

Article 32(1) and (2)

Article 26(2)a

Article 32(3)

Article 26(3)

Article 32(3)

Article 26(4)

Article 32(4)

Article 26(5)

Article 32(5)

Article 27

Article 33

Article 28

—

Article 29

Article 34

—

Article 35

Article 30

Article 36

—

Annex I

—

Annex II

1401

Index

Abuse of dominant positions 3.39–3.42, 3.335–3.619 Discrimination 3.519–3.545 in Energy sector 3.430–3.433 Exclusionary pricing practices 3.546–3.584 Supply refusal 3.477–3.478 Tying 3.464–3.473 Unfair pricing 3.585–3.614 Access to Files/Documents 3.720–3.744 to Generation capacities 4.468–4.499 to Infrastructure 5.240–5.241 to Storage and transmission 4.501–4.505 Accumulation of rights 6.27 Advantages and State aid 5.144–5.190, 5.191–5.212 see also Commercial advantages Advisory committees, Consulted in anti-trust proceedings 3.752 Agreements. see under specific agreements ‘Altmark’ criteria 6.104–6.107 Ancillary restraints, and Merger Regulation 4.154–4.163 Annulment of merger decision 4.671 Anti-competitive effects, of Horizontal mergers 4.241–4.246 Anti-trust agreements 3.646–3.650 Anti-trust law/rules 3.169 Infringements of 3.703–3.752, 3.799–3.804 Judicial review of 3.862–3.877 Anti-trust proceedings Access to files/documents in 3.720–3.744 Attorney/client privilege in 3.665 Commitment decision/settlements in 3.775–3.798 Complaints 3.626–3.641 Fines 3.674, 3.687, 3.805–3.861 Inapplicability findings 3.766–3.769 Information requests 3.658–3.675 Inspections/investigations 3.651–3.699 Interim measures 3.770–3.774 Oral hearings 3.748–3.751 Own-initiative proceedings 3.640–3.641 Procedural safeguards in 3.753–3.758 Statements of objections 3.710–3.719, 3.745–3.747 1403

Index

Arbitration, of Energy Charter Treaty 5.537 Assessment of Concentrations 4.130–4.167 of Market dominance/Competition 4.132–4.142, 4.200–4.202, 4.207– 4.219 of Market power 3.74–3.375 of State aid 5.131–5.143 Assets, Disposal of 5.167–5.168 Attorney/client privilege, in Anti-trust proceedings 3.665 Austria Electricity customers 2.45 Geographic markets for electricity 2.204–2.207 State aid in, stranded costs exemption cases 5.390 Automatic exceptions, to EU prohibition on state aid 5.291–5.294 Balancing markets Coal and Nuclear aid 5.75–5.77 Commercial advantages of 4.191 Costs of 4.549–4.551 of Electricity market 2.86–2.93, 2.290–2.293 of Gas market 3.13–3.16 Belgium Geographic markets for electricity 2.208–2.210 Geographic markets for gas 2.382, 2.386, 2.387 Nuclear aid in 5.80–5.82 State aid in, stranded costs exemption cases in 5.391–5.393 Benchmarks, for State guarantees 5.228–5.239 Block exemption regulations for co-operation agreements Infrastructure agreements 3.171–3.172 Production agreements 3.140–3.151 Unilateral distribution agreements 3.113–3.118 Vertical agreements 3.222–3.229, 3.315–3.317 Business customers, of Gas 2.340–2.341 Business secrets, Protection of 4.623–4.631 Calculations, of Turnover thresholds for jurisdiction over merger control 4.75–4.84 Calorific values of gas 2.302–2.309, 2.362–2.363 Capacity Access to generation of 4.468–4.499 1404

Index

Agreements on reservation of 3.330–3.334, 3.409–3.413 Mechanisms 5.540–5.549 Withdrawals of 3.611–3.614, 4.212–4.213 see also Interconnection capacities Captive use, of infrastructure 3.186–3.192 Carbon capture and geological storage (CCS), State aid for 5.522–5.524 Cartels 3.58–3.64 Cavern gas storage 2.360 Clean Energy Package 5.439–5.441 Coal Power Plants, Aid for conversion of 5.30–5.31 Coal sector, State aid to 5.7–5.41 Collective market dominance 3.388–3.395 Abuse of 3.420–3.424 Combined production and sales agreements 3.152–3.163 Combined services, Commercial advantages of 4.322 Commercial advantages of Conglomerate mergers 4.322–4.357 as Indictors of market dominance 4.186–4.195 Commitments decisions/settlements, in Anti-trust proceedings 3.775– 3.798 Companies. see Undertakings/Companies Compatibility provisions 5.453–5.456 Competition Assessment of 4.132–4.142, 4.200–4.202, 4.207–4.219 Distortions of 5.191–5.212, 5.484–5.486 Restrictions 3.17–3.18, 3.25–3.38 Rules 3.346–3.363, 5.284–5.286 Rules, infringements of 3.620–3.877 Tests 3.393–3.395 TFEU on 3.1–3.42 Competition authorities, National 4.356 Competitors 3.44–3.46 Appeals against European Commission decisions by 4.652–4.657 Elimination of 4.323 Market position of 3.75 Size and importance of 3.400, 4.181–4.182 Complaints in Anti-trust proceedings 3.626–3.641 in Merger proceedings 4.616–4.622 Concentrations 4.6–4.8 1405

Index

Assessment of 4.130–4.167 and Control changes 4.41–4.42 in Gas market 3.9 Implementation of 4.636–4.637 Parties to 4.646–4.648 see also Merger Control Conglomerate mergers 4.322–4.357 Connected markets, Abuse of dominant position on 3.420–3.424 Connection capacities 2.58–2.59 Connection services 2.98 Consortia arrangements 3.100 Consumption, of Electricity 2.44–2.46, 2.53–2.57 Contaminated sites, State aid for remediation of 5.503–5.506 Contentious procedure phases, in State aid procedures 5.630–5.635 Contracts, Long-term 4.194, 4.530–4.540 Contractual tying 3.469–3.479 Control Changes in 4.9–4.43 of Essential facilities 3.371–3.381 over Infrastructure 4.500–4.529 Joint 4.24–4.36 Quality of 4.41–4.42 Sole 4.11–4.23 of Wholesale markets 4.202 see also Merger control Co-operation agreements Anti-trust agreements 3.646–3.650 Combined production agreements 3.152–3.163 Distribution agreements 3.109–3.118, 3.291–3.334 in Energy sector 3.65–3.89 Infrastructure agreements 3.164–3.192 Joint production agreements 3.127–3.151 Joint sales agreements 3.98–3.108 Limited commercialisation arrangements 3.120–3.126 Vertical agreements 3.193–3.334, 3.330–3.334, 3.409–3.413 Corrib case 3.156–3.159 Cost efficiencies 3.93–3.94, 3.243, 3.323 see also Efficiency defences Costs, of Balancing markets 4.549–4.551 Countervailing buying power 3.76 1406

Index

Croatia, Geographic markets for electricity 2.211 Cross-subsidisation 3.559–3.561 as State aid 5.246–5.251 Customers Appeals against European Commission decisions by 4.662–4.669 of Electricity 2.24, 2.34–2.60 Foreclosures of 3.434–3.447 of Gas 2.329–2.343 Loyalty of 2.158–2.163, 2.174, 4.199 Market partitioning by 3.288–3.290 Cyprus, Geographic markets for electricity 2.212 Czech Republic Coal aid in 5.35 Geographic markets for electricity 2.213 De facto tying 3.471 ‘Deggendorf principle’ 5.686–5.688 Delivery clauses 3.284 Demand, Manifest failure to satisfy 6.28–6.29 De minimus Regulation 5.216–5.219 Denmark Geographic markets for electricity 2.214–2.220 Geographic markets for gas 2.371–2.375 Destination clauses 3.282 Judicial review 3.276–3.279 Direct taxation of energy products and state aid 5.260–5.276 Discretionary exceptions, to EU prohibition on state aid 5.295–5.300 Discrimination as Abuse of a dominant market position 3.519–3.545 Nationality based 3.536–3.545 Distortion of competition, and State aid 5.191–5.212, 5.473–5.476 Distribution Acquisition of 4.220–4.285 Agreements 3.109–3.118, 3.291–3.334 of Electricity 2.83–2.93, 2.285–2.289 of Gas 2.349 District heating 5.488–5.495 Divestiture/divestments of Shareholdings 4.385–4.451 of Storage infrastructure 4.522–4.529 1407

Index

Domestic customers, of Gas 2.342–2.343 Dominant firms Conglomerate mergers of 4.329–4.331 Mergers with non-dominant firms 4.323–4.328 Dominant positions/market dominance 3.335–3.345, 3.364–3.413 Abuse of 3.39–3.42, 3.335–3.619 Assessment of 4.132–4.142, 4.200–4.202, 4.207–4.219 Collective dominance 3.388–3.395 of Conglomerate mergers 4.322–4.357 in Energy sector 3.430–3.433 Entry barriers 4.196–4.206 Evidence of 4.203–4.206 Horizontal dominance 3.369, 4.220–4.285 Indicators of 3.396–3.399, 4.177–4.180 Oligopolistic dominance 4.358–4.376 Vertical dominance 3.370–3.383, 4.286–4.321 Downstream markets 3.12 Discrimination on 3.520–3.524 DUC case 3.160–3.163 Early adoption, State aid for 5.503–5.506 Economic activities, development of 5.335 Economic advantages, and State aid 5.144–5.190 Economic interests. see Services of general economic interest Economic tying 3.469–3.479 Economies of scale, Commercial advantages of 4.322 ‘Eco-taxes’ 5.550–5.566 ECSC Treaty 5.7–5.41 Effective competition test 3.393–3.395 Efficiency defences 3.33–3.35 and Co-operation agreements 3.101, 3.241–3.252, 3.322–3.329 Invocation of 3.79–3.96, 3.190 and Merger Regulation 4.143 for State aid, to energy sector 5.488–5.500 Electricity market 2.14–2.60, 2.61–2.82, 2.83–2.93, 2.94–2.102 Balancing of 2.86–2.93, 2.290–2.293 Entry barriers 2.120–2.125 Exchanges and pools in 2.190–2.202 Interconnection capacities 2.131–2.150 Licenses 2.122–2.123 1408

Index

Regulatory frameworks 2.50–2.52, 2.186–2.189 Regulatory monopolies 2.120–2.121 Elimination, of competitors 4.323 Emission trading schemes, and State aid 5.208–5.212 Employees, Appeals against European Commission decisions by 4.658–4.661 End customers. see Customers Energy sector Co-operation agreements in 3.65–3.89 Exclusionary pricing practices in 3.562–3.563 Merger control in 4.168–4.175 Price retaliation in 3.535, 3.585–3.614 Services of general economic interest in 5.227, 5.407–5.438, 6.63–6.114 State aid granted to 5.242–5.245, 5.712–5.718 Taxation of products in 5.131–5.143, 5.260–5.276, 5.418, 5.550–5.566, 5.689–5.691 Tying scenarios in 3.472–3.473 Unfair pricing in 3.601–3.614 Energy Sector Inquiry 3.9–3.13, 4.180 Anti-trust cases in 3.642–3.645 on Market dominance 4.207–4.219 Energy sources, Renewable 5.458–5.459, 5.557–5.566 Entry barriers 3.77, 4.196–4.206 on Electricity markets 2.120–2.125 as Market dominance indicator 3.304–3.408 Environmental aid 4.439–4.441, 5.304–5.310, 5.442–5.581 Environmental studies, State aid for 5.501–5.502 Essential facilities Control of 3.371–3.381 in Energy Sector 3.384–3.387 and Refusal to supply 3.484–3.518 Estonia, Geographic markets for electricity 2.227 EU Community standards, state aid for early adaptation of 5.503–5.506 Free movement principles of 5.255–5.259, 6.19–6.26 EU law Competition rules 3.346–3.363, 5.284–5.286 and National law 3.355–3.358 on State aid 5.1–5.6, 5.252–5.289, 5.290–5.441, 5.583–5.584 Euratom Treaty 5.42–5.103 European Commission 1409

Index

Decisions in anti-trust proceedings 3.759–3.861 Guidelines 5.448–5.581 Market dominance assessed by 4.207–4.219 Merger control by 4.67–4.71, 4.332–4.355, 4.641–4.671 State aid reviewed by 5.15–5.24, 5.52–5.103, 5.389–5.406 Evaluatation Plans 5.719 Evidence, of Market dominance 4.203–4.206 Exceptions. see Exemptions Exchanges and pools, in Electricity markets 2.190–2.202 Exclusionary pricing practices 3.546–3.584 Exclusive dealing arrangements 3.434–3.463 Exclusive distribution agreements 3.291–3.334 Exclusive purchasing and supply agreements 3.200–3.252 Exclusive rights 6.1–6.114 Exemptions from EU prohibition on state aid 5.301–5.353 from Network charges 5.567–5.571 from Taxes 5.131–5.143, 5.418 see also Block exemption regulations for co-operation agreements; Stranded costs exemptions for state aid Existing state aid Determination of 5.590–5.596 v New state aid 5.603–5.614 Procedures 5.650–5.652 Expectations, legitimate 5.675–5.676 Ex Post Monitoring, of State aid 5.719–5.720 Failing companies, as Merging party 4.144–4.151 Failure to tender 5.79 Final customers. see Customers Financial crises, and State aid 5.319–5.320 Financing, of Public service obligations 6.93–6.103 Fines, in Anti-trust cases 3.674, 3.687, 3.805–3.861 Finland, Geographic markets for electricity 2.228–2.229 Firms. see Undertakings/Companies Flexibility tools, and Gas storage 2.351–2.357, 2.394–2.399 Foreclosures of Customers 3.434–3.447 of Inputs 3.448–3.456 of Networks 3.457–3.348 1410

Index

Vertical 3.10 Formal procedure phases, in State aid procedures 5.630–5.635 Four freedoms. see Free movement principles of EU France Geographic markets for electricity 2.230–2.232 Geographic markets for gas 2.383 Nuclear aid in 5.83–5.84 and Research and development aid 5.351–5.352 Tariffs in 5.156 Free movement principles of EU Deviations from 6.19–6.26 and State aid 5.255–5.259 Full-function joint ventures 4.44–4.66 Gas hubs 2.323–2.327, 2.388–2.391 Gas market 2.298–2.364 Balancing markets of 3.13–3.16 Concentrations in 3.9 Submarkets within 2.328 Upstream 3.516–3.518 Generation adequacy, State aid for 5.460–5.463 Generation of energy Access to capacities for 4.468–4.499 Cogeneration of heat and electricity 5.488–5.495 Portfolio 4.192 Geographic markets Electricity 2.103–2.297 Gas 2.365–2.401 Horizontal mergers on 4.221–4.285 Identification of 4.131 Germany Geographic markets for electricity 2.233–2.236 Geographic markets for gas 2.380 Nuclear aid in 5.85–5.87 Goodwill, as Indicator of market dominance 3.410 Greece Geographic markets for electricity in 2.237 Stranded costs exemption cases in 5.394 Guidelines on EU regional aid 5.336–5.345 1411

Index



on State aid 5.357–5.379, 5.432, 5.448–5.581 on Vertical restraint 3.233, 3.239

Hardcore restraints on horizontal agreements 3.60–3.64, 3.170 HCV gas storage 2.358–2.359 High calorific gas 2.302–2.309 Hinkley Point C 5.415–5.416, 6.113 Horizontal agreements 3.19–3.20, 3.43–3.185 Combined production and sales agreements 3.152–3.163 Distribution agreements 3.109–3.118 Infrastructure agreements 3.164–3.192 Joint production agreements 3.127–3.151 Mergers 4.220–4.285 Horizontal dominance 3.369, 4.220–4.285 Horizontal integration, Commercial advantages of 4.193 Hungary Existing state aid v new aid 5.603–5.609 Geographic markets for electricity in 2.238–2.244 Geographic markets for gas 2.385, 2.391 Nuclear aid in 5.88–5.95 Stranded costs exemption cases 5.395 Termination of PPAs 5.660–5.664 Identification, of Markets 4.131 IEM Directives, and Granting of special and exclusive rights 6.79–6.87 Imputability tests, in Assessment of state aid 5.131–5.143 Inapplicability findings, in Anti-trust proceedings 3.766–3.769 Incentives, of Environmental aid 5.477–5.479 Indicators of market dominance 3.396–3.399 Indirect market partitioning 3.280–3.387 Indirect taxation, and State aid 5.260–5.276 Individual exemptions, to State aid prohibition 5.311–5.353 Industrial customers, Gas 2.335–2.339 Informal guidance, on Anti-trust agreements 3.646–3.650 Information as Essential facility 3.379–3.381 Exchanges 3.53–3.56 Misleading/incorrect 4.639–4.640 Requests 3.658–3.675 Requirements 5.636–5.649 1412

Index

Infrastructure Agreements 3.164–3.192 Aid 5.240–5.241 Aid for conversion of 5.572–5.580 Control over 4.500–4.529 as Essential facility 3.378 trans-European energy, Regulations for 5.324–5.331 Infringements, of Anti-trust rules 3.703–3.752, 3.799–3.804 Innovation Framework, and State aid 5.346–5.353 Input foreclosure arrangements 3.448–3.456 Inspections, in Anti-trust proceedings 3.651–3.699 Interconnection capacities 4.198 Electricity market 2.131–2.150 Release and increase of 4.510–4.521 Interim measures, in Anti-trust cases 3.770–3.774 Internal Economic Market Directives (IEM Directives), and Granting of special and exclusive rights 6.79–6.87 International law, and State aid procedures 5.665–5.671 Investigations in Anti-trust proceedings 3.651–3.699 by Member states into concentrations 4.113–4.129 Sectoral 3.642–3.645 in State aid procedures 5.617–5.629 Investment aid, v Operating aid 5.78 Investments, as Efficiency defence for co-operation agreements 3.246–3.249, 3.326 IPCEI Communication 5.332–5.334 Ireland Geographic markets for electricity in 2.245 Stranded costs exemptions in 5.396 Italy Existing state aid v new aid 5.610–5.614 Geographic markets for electricity in 2.246–2.249 Special and exclusive rights 6.88–6.691 Stranded costs exemptions in 5.397 Tariffs in 5.158–5.162 Tax exemptions and loans to public utilities in 5.418 Joint control 4.24–4.36 Joint production agreements 3.127–3.151 1413

Index

Joint sales agreements 3.98–3.108 Joint ventures, Full-function 4.44–4.66 Judicial review of Anti-trust rules 3.862–3.877 of Combined production and sales agreements 3.156–3.163 of Discrimination and price retaliation 3.549–3.553 of Essential Facility 3.382–3.383 on Foreclosures 3.439–3.447, 3.459–3.463 of Granting special and exclusive rights 6.30–6.32, 6.54–6.55, 6.66–6.78, 6.104–6.113 of Merger control 4.641–4.671 in Merger Regulation 4.164–4.166 of State aid 5.389–5.406, 5.692–5.718 of Unfair pricing 3.603–3.614 of Vertical agreements 3.253–3.265 Languages, for Notification in merger procedures 4.597 Latvia, Geographic markets for electricity in 2.250 LCV gas storage 2.358–2.359 Legitimate expectations doctrine 5.675–5.676 Legitimate interests, Protection of 4.113–4.129 Licenses Electricity market 2.122–2.123 Refusal of 3.479–3.483 Lignite 5.39–5.41 Limited commercialisation arrangements 3.120–3.126 Lisbon Treaty. see TFEU Lithuania Geographic markets for electricity in 2.251 Special and exclusive rights in 6.108–6.112 Loans, Securing of 3.245, 3.325 Locus standi, in State aid procedures 5.695–5.696, 5.703–5.706 Long-term contracts Early termination of 4.530–4.540 Supply 4.194 Low calorific gas 2.302–2.309 Loyalty of Customers 2.158–2.163, 2.174, 4.199 Rebates 3.569–3.575 Luxembourg 1414

Index



Geographic market for electricity 2.252 Stranded costs exemptions in 5.398

Malta, Geographic markets for electricity 2.253 Market coupling, Electricity market 2.195–2.202 Market definition 2.1–2.13 see also Geographic markets; Product markets Market dominance. see Dominant positions/market dominance Market economies, State participation in 5.169–5.190 Market entry Facilitation of 3.244, 3.324 see also Entry barriers Market failure 5.72 Market identification 4.131 Market Integration 3.11 Market investor test (MEIT) and PPAs 5.180–5.186 and Public undertakings 5.176–5.179 Market liberalisation 3.119 Market maturity 4.200 Market partitioning 3.111–3.112 by Customer 3.266–3.268, 3.283–3.285 by Territory 3.269–3.287 Market power Assessment of 3.74–3.375 and Tying 3.467–3.468 and Vertical agreements 3.230–3.240 see also Dominant positions/market dominance Market shares Changes in 4.204 as Indicator of dominance 3.398–3.399, 4.177–4.180 Stability of 3.401 Market surveys, as Evidence of market dominance 4.205 Maturity of the market 4.200 MEIT. see Market investor test Member states New 5.601–5.602 Referrals of concentrations to and from 4.86–4.112 Merger control 3.169 Acquisition of a failing firm 4.152–4.153 1415

Index

Ancillary restraints 4.154–4.163 Assessment of concentrations 4.130–4.167 of Conglomerate mergers 4.322–4.357 Efficiencies 4.143 in Energy sector 4.168–4.175 by European Commission 4.67–4.71, 4.332–4.355, 4.641–4.671 of Horizontal mergers 4.220–4.285 Judicial review in 4.164–4.166 and Market dominance 3.351 of Oligopolistic dominance 4.358–4.376 Remedies 4.144–4.151, 4.380–4.566 of Vertical mergers 4.286–4.321 see also Concentrations in; Merger procedures Merger decision, Annulment of 4.671 Merger procedures 4.567–4.571 Complaints in 4.616–4.622 Notification 4.572–4.597, 4.632–4.635 Pre-notification contacts 4.567–4.571 Protection of business secrets in 4.623–4.631 Sanctions for violations of obligations of 4.632–4.640 Simplified procedure 4.598–4.605 Standard procedure 4.606–4.615 Suspension effect in 4.577–4.594 Third party involvement in 4.616–4.622 Merger Regulation Concentration concept in 4.6–4.8 Parallel national investigations in protection of legitimate interests 4.113–4.129 Referrals to/from Member States 4.86–4.112 and State aid 5.287 Turnover thresholds 4.72–4.84 Meter reading and operation, Electricity 2.99–2.102 Monopolies, Regulatory 2.120–2.121 National companies, Electricity 2.164–2.165 National competition authorities, Conglomerate mergers reviewed by 4.356 National courts, role of 5.707–5.711 Nationality, Discrimination based on 3.536–3.545 National law, and EU law 3.355–3.358 National markets. see Geographic markets 1416

Index

National regulatory frameworks, of Electricity markets 2.50–2.52, 2.186– 2.189 Necessity, Tests 6.50–6.53 Netherlands Geographic markets for electricity 2.254–2.257 Stranded costs exemptions in 5.399 Network charges, exemption from 5.567–5.571 Network foreclosure arrangements 3.457–3.348 Network management/services Electricity 2.294–2.297 Gas 2.361–2.364, 2.400–2.401 New aid 5.585–5.589 v Existing state aid 5.603–5.614 Notification 5.615–5.616 Procedures 5.615–5.652 New member states, State aid in 5.25–5.41, 5.601–5.602 Non-compete obligations/agreements 3.208–3.221 Non-dominant firms, Mergers between 4.323–4.328 Norway, Geographic markets for electricity 2.258 Notice on State Guarantees (European Commission, 2008) 5.223–5.227 Notifications of Anti-trust agreements 3.646–3.650 in Merger procedures 4.572–4.597, 4.632–4.635 of New state aid 5.589 Nuclear sector, State aid to 5.42–5.103 Obligations in Merger procedures 4.632–4.640 Non-compete 3.208–3.221 of Public services 5.407–5.438 Oligopolistic market dominance 4.358–4.376 Online trading 2.79 OPEC (Organisation of Petroleum Exporting Countries) 3.64 Operating aid, v Investment aid 5.78 Oral hearings, in Anti-trust proceedings 3.748–3.751 Organisation of Petroleum Exporting Countries (OPEC) 3.64 Own-initiative proceedings, Anti-trust cases 3.640–3.641 Para-fiscal charges, and state aid 5.260–5.276, 5.689–5.691 Physical trade, in Electricity 2.72–2.78 1417

Index

‘Plaumann test’ 5.697–5.702 Poland Coal aid in 5.34 Geographic markets for electricity 2.259–2.260 Stranded costs exemptions in 5.400 Pore gas storage 2.360 Portfolio, Energy generation 4.192 Portugal Geographic markets for electricity 2.261–2.262 Geographic markets for gas 2.386 Stranded costs exemptions in 5.401 Power plants Gas consumption by 2.335–2.339 Virtual auctions of 4.382, 4.468, 4.471 Power purchase agreements (PPAs) and Market investor test (MEIT) 5.180–5.186 and State aid 5.144–5.153, 5.410 Termination of 5.660–5.664 Powers to take statements, in Anti-trust proceedings 3.695–3.699 Predatory pricing 3.559–3.561 Preferential tariffs, and State aid 5.596–5.600 Pre-notification contacts, in Merger procedure 4.567–4.571 Prices Caps 2.124–2.125 of Electricity 2.155–2.157 Electricity 2.175–2.184 Exclusionary practices 3.546–3.584 Fixing of 3.59–3.60 Levels of 4.206 Remedies related to 4.541–4.551 Retaliation 3.528–3.535 Setting of 4.210–4.211 Unfair 3.585–3.614 Primary law 3.359–3.363 Private investor test and PPAs 5.180–5.186 and Public undertakings 5.176–5.179 Privileged undertakings 6.7–6.8 Procedural safeguards, in Anti-trust proceedings 3.753–3.758 Procedures/proceedings 1418

Index



for Infringements of competition rules 3.620–3.877. see also Anti-trust proceedings; Merger procedures for State aid 5.582–5.720 Product markets, Electricity 2.14–2.60, 2.61–2.82, 2.83–2.93, 2.94–2.102 Profit splitting mechanisms 3.281–3.286 Prohibitions of State aid, Exceptions/exemptions 5.290–5.345 Projects of common European interest, and State aid 5.321–5.223 Proportionality of Environmental aid 5.480–5.483 Tests 6.50–6.53 Protection of Business secrets 4.623–4.631 of Environment, and state aid 4.439–4.441, 5.304–5.310, 5.442–5.581 of Legitimate interests 4.113–4.129 Public authorities, Aid granted or imposed by 5.115–5.130 Public land, Disposal of 5.167–5.168 Public measures and Conduct control 3.349 to Entrust an undertaking with a specific task/mission 6.48–6.49 Public service obligations Financing of 6.93–6.103 and Rights of member states to grant special and exclusive rights 6.33– 6.114 and State aid 5.407–5.438 Public undertakings 3.349–3.350, 6.10–6.13 Purchasing agreements Exclusive 3.200–3.252. see also Power purchase agreements Quality of control 4.41–4.42 Quantitative rebates 3.578–3.584 Reciprocal distribution agreements 3.110 Recovery, of Unlawful state aid 5.653–5.691 Referrals of concentrations to/from Member States 4.86–4.112 Refusal to supply 3.474–3.518 Regional aid 5.312–5.317 EU guidelines on 5.336–5.345 Regulated tariffs 4.195, 5.154–5.162 Regulatory barriers 4.197 Regulatory frameworks, Electricity market 2.50–2.52, 2.186–2.189 1419

Index

Regulatory monopolies, Electricity market 2.120–2.121 Relevant geographic markets. see Geographic markets Relevant Product markets. see Product markets Relocation, of Undertakings 5.509–5.516 Remediation, of Contaminated sites 5.503–5.506 Remedies in Energy mergers 4.380–4.566 Failure to implement 4.638 Merging parties offering of 4.144–4.151 Renewable energy sources (RES) Reductions from funding for 5.557–5.566 State aid for 5.458–5.459 RES. see Renewable energy sources Rescue aid, Guidelines on 5.357–5.363 Research and development, and State aid 5.346–5.353 Restrictions of competition 3.17–3.18, 3.25–3.38 Restructuring aid, Guidelines on 5.357–5.360, 5.364–5.379 Retail supply of Electricity 2.34–2.60 of Gas 2.329–2.343 Romania Coal aid in 5.36–5.38 Geographic markets for electricity 2.263–2.264 Restructuring aid in 5.380 Safe harbour. see Block exemption regulations for co-operation agreements Sanctions, for Violations of merger procedure obligations 4.632–4.640 Sector specific law, Status of 3.359–3.363 Security of energy supply as Commercial advantage 4.322 as Justification for co-operation agreements 3.250–3.252, 3.327–3.329 and State aid 5.434–5.438 Selective advantages, and State aid 5.191–5.212 Services of general economic interest and Rights of member states to grant special and exclusive rights 6.33– 6.114 and State aid 5.227, 5.407–5.438 Settlements, in Anti-trust proceedings 3.775–3.798 Shareholders 1420

Index

Appeals against European Commission decisions by 4.649–4.651 Changing coalitions 4.43 Divestiture of 4.385–4.451 Slovakia Geographic markets for electricity 2.265–2.271 Nuclear aid in 5.96–5.99 Slovenia Geographic markets for electricity in 2.272 Stranded costs exemptions in 5.402–5.403 Small businesses, as Gas customers 2.340–2.341 SMEs, State aid to 5.304–5.306 Sole control 4.11–4.23, 4.24–4.27 Spain Coal aid in 5.32 Geographic markets for electricity in 2.273–2.274 Geographic markets for gas 2.386 RES decisions 5.672–5.675 Stranded costs exemptions in 5.404–5.405 Tariffs in 5.157 Special and exclusive rights Accumulation of 6.27 Rights of member states to granting of 6.1–6.114 Specific tasks/missions, Undertakings being entrusted with 6.46–6.49 Standing requirements, in State aid procedures 5.695–5.696, 5.703–5.706 State aid Assessment of 5.131–5.143 to Coal sector 5.7–5.41 and Distortion of competition 5.191–5.212 Emission trading schemes 5.208–5.212 to Energy sector 5.242–5.245 EU law/Treaty rules on 5.1–5.6, 5.252–5.289 EU law/Treaty rules on, exemptions 5.290–5.441 Existing aid 5.590–5.596, 5.650–5.652 Ex Post Monitoring of 5.719–5.720 Guidelines on 5.357–5.379, 5.432, 5.448–5.581 legitimate expectations of 5.537 New aid 5.585–5.589 no right to 5.537 to Nuclear sector 5.42–5.103 and Power purchase agreements (PPAs) 5.144–5.153, 5.410 1421

Index

Procedures for 5.582–5.720 and Public service obligations 5.407–5.438, 6.93–6.103 Public undertakings 3.349–3.350, 6.10–6.13 and Selective advantages 5.191–5.212 to SMEs 5.304–5.306 Stranded costs exemptions 4.201, 5.383–5.406 and Tax exemptions/reductions 5.131–5.143, 5.418 Trade effects of 5.213–5.215 Types of 5.221–5.251, 5.401, 5.442–5.583 Unlawful aid 5.653–5.691 State conduct, and Conduct control 3.349 State guarantees 5.228–5.239 Statements of objections, in Anti-trust proceedings 3.710–3.719, 3.745– 3.747 State participation, in Market economies 5.169–5.190 State resources 5.115–5.130 Transfer of 5.131–5.143 State undertakings. see Public undertakings Storage Access to 4.501–4.505 of Carbon 5.522–5.524 of Gas 2.350–2.360, 2.394–2.399 Infrastructure 4.522–4.529 Stranded costs exemptions for state aid 4.201, 5.383–5.406 in Austria 5.390 in Belgium 5.391–5.393 European Commission on 5.389–5.406 in Greece 5.394 in Hungary 5.395 in Ireland 5.396 in Italy 5.397 in Luxembourg 5.398 in Netherlands 5.399 in Poland 5.400 in Portugal 5.401 in Slovenia 5.402–5.403 in Spain 5.404–5.405 in United Kingdom 5.407–5.414 Submarkets within Electricity market 2.27, 2.43 1422

Index

within Gas market 2.328 Subsequent owners, Recovery of state aid from 5.677–5.685 Suppliers of last resort, Commercial advantages of 4.195 Supplies of Electricity 2.17–2.60 of Energy 4.194 Exclusive agreements on 3.200–3.252 of Gas 2.310–2.345, 2.367 Refusal to 3.474–3.518 Security of 3.250–3.252, 3.327–3.329, 4.322, 5.434–5.438 Suspension effects, in Merger procedures 4.577–4.594 Sweden Geographic markets for electricity in 2.275–2.276 and Research and development aid 5.350 Target rebates 3.576–3.577 Tariffs Preferential 5.596–5.600 Regulated 4.195, 5.154–5.162 Tasks/Missions, Undertakings being entrusted with specific 6.46–6.49 Taxation of energy products and state aid 5.260–5.276 ‘Eco taxes’ 5.550–5.566 Imputability test 5.131–5.143 in Italy 5.418 Parafiscal charges 5.260–5.276, 5.689–5.691 Tax reduction, as Environmental state aid 5.550–5.566 Temporary community framework, and State aid 5.319–5.320 Temporary market dominance 3.402–3.403 Tender, Failure to 5.79 Termination of Long-term contracts 4.530–4.540 of Power purchase agreements (PPAs) 5.660–5.664 Territorial market partitioning 3.269–3.287 TFEU on Competition 3.1–3.42 Efficiency defences 3.79–3.96, 3.322–3.329 on Market dominance 3.335–3.619 State aid in 5.104–5.289 Third parties Access to infrastructure agreements 3.173–3.185 1423

Index

Involvement in merger procedures 4.616–4.622 Tradable permit schemes, State aid for 5.517–5.521 Trade associations, State aid procedures initiated by 5.703–5.706 Trademarks, as Indicator of market dominance 3.410 Trade/Trading Effects of state aid on 5.213–5.215 in Electricity 2.61–2.82, 2.166–2.173, 2.277–2.284 in Gas 2.388–2.391 Trans-European energy, Infrastructure of, Regulations for 5.324–5.331 Transmission Access to 4.501–4.505 of Electricity 2.83–2.93, 2.126–2.130, 2.285–2.289 of Gas 2.346–2.348, 2.392–2.393 Transparency of Environmental aid 5.487 of Financial relations 5.103 Need for 4.214–4.219 Transportation. see Distribution; Transmission Transport vehicles, New 5.503 Turnover thresholds, for Determination of European Commission jurisdiction over mergers 4.72–4.84 Tying 3.464–3.473 and Refusal to supply 3.477–3.478 Undertakings/Companies 3.21–3.24 Conduct control of 3.349 Public 3.349–3.350, 6.10–6.13 Relocation of 5.509–5.516 RES decisions 5.672–5.675 Special and exclusive rights granted to 6.1–6.114 Specific tasks/missions entrusted to 6.46–6.49 Unfair pricing 3.535, 3.585–3.614 Unilateral distribution agreements 3.110 Block exemption regulation for 3.113–3.118 United Kingdom Geographic markets for electricity 2.221–2.226 Geographic markets for gas 2.381 Nuclear aid in 5.57–5.66, 5.100–5.102, 6.113 Stranded costs exemptions in 5.407–5.414 Up-front buyers, of Divestments 4.449–4.451 1424

Index

Upstream gas markets 3.516–3.518 Vertical agreements 3.193–3.334 Block exemption regulations for 3.222–3.229 Capacity reservation agreements 3.330–3.334, 3.409–3.413 Exclusive distribution agreements 3.291–3.334 Exclusive purchasing and supply arrangements 3.200–3.252 Facilitation of Market Entry 3.244 Judicial review of 3.253–3.265 Market partitioning by customer 3.283–3.285 Market partitioning by territory 3.269–3.287 Mergers 4.286–4.321 Vertical foreclosures 3.10 Vertical integration Commercial advantages of 4.187–4.190 as Indicator of market dominance 3.411–3.412 Vertical market dominance 3.370–3.383 Vertical Restraint Guidelines (European Commission) 3.233, 3.239 Virtual power plant auctions 4.382, 4.468, 4.471 Voltage levels/Connection capacities 2.58–2.59 Voting rights, Non-exercise of 4.452 VPP auctions 4.382, 4.468, 4.471 Waste, Management of 5.496–5.500 Waste management 5.496–5.500 Wholesale markets, Control of 4.202 Wholesale supply Electricity 2.19–2.33 Gas 2.311–2.328

1425