Intersentia 89

ENFORCEMENT OF STATE AID RULES IN THE ENERGY COMMUNITY

Going Beyond Formal Compliance?

Marco Botta*

1. INTRODUCTION: STATE AID RULES IN THE ENERGY COMMUNITY

In accordance with the Stabilisation and Association Agreements (SAAs)1 concluded by South-East European (SEE) countries with the EU, SEE countries have the legal obligation to adopt a State aid law. Th e establishment of a system of State aid control is also one of the main EU accession criteria emphasised by the EU Commission in its Progress Reports published every year for each EU candidate country.2 Each SAA includes a general prohibition on any State aid which could distort the competition in the market by favouring certain undertakings.3 In addition, the SAAs include an obligation for the SEE countries to establish an ‘operationally independent authority’ ‘entrusted with

* Marco.botta@univie.ac.at. Th e author would like to thank Rozeta Karova for her useful comments.

1 Th e SAA represents the fi rst step of the integration of the SEE countries into the EU. Th e EU has concluded SAA with all the SEE countries, with the exception of Kosovo. Finally, the EU has recognised to Montenegro, Serbia and to the Republic of Macedonia the candidate status. Finally, Croatia joined the EU on 01.07.2013. For further information concerning the enlargement process see: <http://ec.europa.eu/enlargement/countries/index_en.htm> accessed 01.10.2013.

2 Every year DG Enlargement publishes a Progress Report for each SEE country, indicating the improvements made in relation to the adoption and enforcement of the EU acquis, as well as the lack of implementation of certain aspects of the acquis. Th e Progress Reports thus represent a benchmark whereby the EU Commission assesses every year the readiness of SEE to join the EU. Th e text of the Progress Reports for each SEE country is available at: <http://ec.europa.eu/enlargement/press_corner/key-documents/reports_oct_2011_en.htm> accessed 01.10.2013.

3 Th e following provisions of the SAAs require the adoption of a State aid law:– SAA between the European Communities and their Member States and the Former

Yugoslav Republic of Macedonia, signed on 26.03.2001. Art. 69 (1)(c).– SAA between the European Communities and their Member States and the Republic of

Croatia, signed on 29.10.2001 and entered into force on 01.02.2005. Art. 70 (1)(c).

PR

OEF

1

Marco Botta

90 Intersentia

the powers necessary for the full application’ of the State aid prohibition.4 A general prohibition vis-à-vis State aids is also included in the Partnership and Cooperation Agreements (PCAs) concluded by the EU with Moldova and Ukraine,5 in the framework of the European Neighbourhood Policy. In addition, a ‘stronger’ obligation to include a system of State aid control is going to be included in the Association Agreements currently negotiated by the EU with Moldova and Ukraine in the context of the EU neighbourhood policy.6 Th e incentive to adopt a State aid law for these two groups of countries is thus related to the EU external conditionality: while for the SEE countries such conditionality is linked to the EU accession prospect, for Moldova and Ukraine the conditionality is related to the possibility to conclude an Association Agreement with EU, which would allow them to get access to the EU internal market.7

Besides the SAAs and the PCAs, a further obligation to introduce a system of State aid control in the energy sector derives from the Energy Community Treaty (EnCT). Similarly to the Treaty of Rome, the EnCT includes a general prohibition on ‘any aid which distorts or threatens to distort competition

– SAA between the European Communities and their Member States and the Republic of Montenegro, signed on 15.10.2007, entered into force on 01.05.2010. Art. 73(1)(iii)

– SAA between the European Communities and their Member States and the Republic of Albania, signed on 12.06.2006 and entered into force on 01.04.2009. Art. 71(1)(iii).

– SAA between the European Communities and their Member States and the Republic of Serbia, signed on 29.04.2008 and entered into force on 01.02.2010. Art. 73(1)(c).

BiH signed a SAA on 16.06.2008, but it is still not in force due to the lack of ratifi cation by the EU. In the meantime, an Interim Agreement has entered into force at the moment of the signature of the SAA. Th e Interim Agreement replicates in Art. 36 the same provision on State aids included in Art 71 SAA.

– Interim Agreement on Trade and Trade-Related Matters between the European Community and Bosnia and Herzegovina signed on 16.06.2008 and entered into force on 01.07.2008. Art. 36(1)(c).

4 Only the SAA concluded with the Republic of Macedonia does not explicitly mentioned in Article  69 that the general prohibition against State aids will have to be enforced by an independent State aid authority.

5 Th e Partnership and Cooperation Agreements concluded by the EU with Ukraine and Moldova included the following provision: ‘Th e Parties shall refrain from granting State aids favouring certain undertakings or the production of goods other than primary products as defi ned in the GATT, or the provision of services, which distort or threaten to distort competition insofar as they aff ect trade between the Community and the Republic of Moldova.’ Partnership and Cooperation Agreement between the European Communities and their Member States and the Republic of Moldova. Signed on 28.11.1994 in Brussels. OJ L 181/3–48. Art.  48(2)(2). Partnership and Cooperation Agreement between the European Communities and their Member States, and Ukraine. Signed in Luxembourg on 14.6.1994. OJ L 49/3–39. Art. 49(2)(2).

6 <www.eeas.europa.eu/ukraine/> accessed 01.10.2013. <www.eeas.europa.eu/moldova/index_en.htm> accessed 01.10.2013.

7 M. Botta, ‘State Aid Control in South-East Europe, the Endless Transition’ (2013) 11(1) EStAL (European State Aid Law Quarterly) 85–96.

PR

OEF

1

Enforcement of State Aid Rules in the Energy Community

Intersentia 91

among the undertakings active in the energy sector’.8 Th e Energy Community (EnC) founding fathers were well aware that the EnCT should include a system of State aid control, in order to avoid a subsidies race among the Contracting Parties while establishing a regional energy market that should later be included in the EU internal market. In particular, Annex III of the EnC Treaty replicates the text of Art.  107 of the Treaty of the Functioning of the European Union (TFEU).9

In spite of the infl uence of the EU State aid rules in the EnCT, one major diff erence exists between the two regimes: the EnCT introduced a ‘de-centralised’ system of enforcement of State aid rules, whereby each EnC Contracting Party (hereinaft er Contracting Party)10 should adopt a national State aid law and establish a State Aid Monitoring Authority. Th e latter institution has to review the new aid schemes notifi ed by national or local granting authorities, in order to decide whether to approve, block or approve subject to conditions the new subsidy schemes. Every State Aid Monitoring Authority would assess the notifi ed aid scheme in accordance with the corresponding national provision of Art. 107 TFEU, and in the light of the CJEU case law.11 On the other hand, the EnC Secretariat supervises the compliance with the EnCT by the Contracting Parties,12 but it does not exercise an ex ante control similar to that one performed by the EU Commission vis-à-vis the aid schemes notifi ed by the EU Member States.

In recent years, most of the Contracting Parties have adopted a State aid law in accordance with their international legal obligations.13 Th e last countries

8 Treaty Establishing the Energy Community, signed in Athens on 25.10.2005. Art. 18(c). Th e text of the Treaty is available at: <www.energy-community.org/portal/page/portal/ENC_HOME/ENERGY_COMMUNITY/Legal/Treaty> accessed 01.10.2013.

9 State aid rules are included in Arts. 107 and 108 of the Treaty of the Functioning of the European Union. Th e text of the two articles has not been substantially modifi ed since the Treaty of Rome in 1957. Consolidated Version of the Treaty on the Functioning of the European Union. Th e Treaty was signed in Lisbon on 13.12.2007, and it entered into force on 1.12.2009. OJ C 115/47, 09.05.2008.

10 Th e countries which have joined the EnCT are divided in three categories: the ‘Participants’ (i.e. EU Member States), the ‘Contracting Parties’ (i.e. Albania, Bosnia and Herzegovina, Kosovo, Republic of Macedonia, Moldova, Montenegro, Serbia and Ukraine), and ‘Observers’ (i.e. Armenia, Georgia, Norway and Turkey). Th e Contracting Parties are required to implement the EU acquis in the fi eld of energy. <www.energy-community.org/portal/page/portal/ENC_HOME/ENERGY_COMMUNITY/Who_are_we> accessed 01.10.2013.

11 EnCT, supra n. 9, Art. 94.12 EnCT, supra n. 9, Article 67(b).13 – Albania: Law no. 9374, adopted by the Albania Parliamentary Assembly on 21.04.2005.

Th e Law 9374/2005 was amended by the Law 10183, adopted on 29.10.2009. An English translation of the text of the legislation is available at: <www.mete.gov.al/doc/20060509102817_law_on_state_aid.pdf> accessed 01.10.2013.

– Republic of Macedonia: Law on State Aid Control, Offi cial Gazette 145/2010. An English translation of the text of the legislation is available at: <www.kzk.gov.mk/images/Vestiimages/904/DOWNLOAD.pdf> accessed 01.10.2013.

PR

OEF

1

Marco Botta

92 Intersentia

that adopted such legislation were Moldova,14 Kosovo15 and Bosnia and Herzegovina.16 At the moment, Ukraine is the only Contracting Party without a State aid law, even though draft legislation is pending in the Parliament.17 Th e Contracting Parties have established Monitoring Authorities in accordance with two institutional set-ups:18 either by establishing an inter-governmental State Aid Commission assisted by an administrative State Aid Offi ce (e.g. Serbia,19 Montenegro,20 Albania,21 Kosovo),22 or by empowering the National

– Montenegro: Law of Control of State Aid Support and Aid, adopted by the Montenegro Parliament on 09.11.2009. An English translation of the text of the legislation is available at: <www.mf.gov.me/en/organization/state-aid-unit/98760/Law-on-State-Aid-Control.html> accessed 01.10.2013.

– Serbia: Law on State Aid Control, Offi cial Gazette 51/09. An English translation of the text of the legislation is available at: <www.mfi n.gov.rs/download/pdf/zakoni/sektor_za_ekonomiju_i_javna_preduzeca/Law%20on%20State%20Aid%20Control,%20July%208,%202009.pdf> accessed 01.10.2013.

– State Aid Act of the Republic of Croatia, entered into force on 02.04.2003. Offi cial Gazette 47/03.

14 Law on State Aid of the Republic of Moldova, Law no. 139. Adopted on 15.06.2012. Th e law entered into force in August 2013. Th e text of the legislation is available at: <http://lawsmd.blogspot.co.at/2012/10/law-on-state-aid.html> accessed 01.10.2013.

15 Law 2011/04-L-024, Law on State Aid adopted by the Assembly of the Republic of Kosovo on 29.07.2011. Th e Law entered into force on 01.01.2012. An English translation of the text of the legislation is available at: <www.kuvendikosoves.org/common/docs/ligjet/Law%20on%20state%20aid.pdf > accessed 01.10.2013.

16 Bosnia and Herzegovina adopted the State aid law in February 2012. EnC Secretariat, Annual Report on the Implementation of the Acquis under the Treaty Establishing the Energy Community, p. 135. Published in Vienna on 16.10.2012. Th e text of the report is available at: <www.energy-community.org/pls/portal/docs/1770178.PDF> accessed 01.10.2013.

17 EnC Secretariat, Annual Report on the Implementation of the Acquis under the Treaty Establishing the Energy Community, p. 83. Published in Vienna on 1.9.2013. Th e text of the report is available at: <www.energy-community.org/pls/portal/docs/2304177.PDF> accessed 11.10.2013.

18 L. Biegunski, ‘Forms of State Aid Authorities in Associated Countries of Central and Eastern Europe’ (2012) 11(3) EStAL 567–572.

19 Th e State Aid Commission includes fi ve members, representatives of the Ministry of Finance (chairman), Competition Authority (Deputy Chairman), Ministry of the Economy and Regional Development, Ministry of Infrastructure, Ministry of Environment. Serbia State aid law, supra n. 13, Art. 6.

20 Th e State Aid Commission includes nine members, representatives of diff erent Ministries, as well as one representative of the municipalities and one representative of the association of the employers. Montenegro State aid law, supra n. 13, Art. 11.

21 Th e State Aid Commission includes fi ve members appointed by the Council of Ministers for a period of four years. Th e Commission is chaired by the Minister of Economic Aff airs. Albania State aid law, supra n. 13, Art. 16.

22 Th e State Aid Commission includes fi ve members: Minister of Finance (chairman), Minister for European Integration, Minister of Trade, representative of the civil society, and chairman of the municipalities association. Under Art. 7 of the State aid law, the State Aid Offi ce should be placed within the Competition Authority. However, due to the fact that the State aid law entered into force only on 01.01.2012, the State Aid Offi ce has not been established yet. Kosovo State aid law, supra n. 13, Art. 7–8.

PR

OEF

1

Enforcement of State Aid Rules in the Energy Community

Intersentia 93

Competition Authority (NCA) to review the notifi ed aid schemes (e.g. Croatia,23 Republic of Macedonia24 and Moldova).25

To sum up, in the last decade most of the Contracting Parties of the Energy Community have introduced systems of State aid control in accordance with the legal obligation stemming from the SAAs and the PCAs, as well as from the obligation deriving from the EnCT. Although the EnCT introduced a ‘sectoral’ system of State aid control (i.e. it only covers the subsidies granted to energy undertakings, or aids granted by State-owned energy undertakings to third companies), the latter are of a great relevance for the Contracting Parties. As we will see in the following sections, due to the broad interpretation of the concept of energy sector in the EnCT,26 as well as due to the high degree of subsidisation of the energy sector, the State aid prohibition included in Art.  18 EnCT has important consequences for these countries.

2. STRUCTURE AND OBJECTIVES

Th is chapter assesses the degree of enforcement of State aid rules in the EnC. Th e existing literature has mainly focused on the institutional set-up of the State Aid Monitoring Authorities, focusing on the ineff ectiveness of the inter-governmental State Aid Commission due to their lack of independence from the executive branch.27 On the other hand, an analysis of the degree of enforcement of State aid rules by the State Aid Monitoring Authorities in a specifi c industry, such as the energy sector, has never been undertaken. Th is chapter fi lls this gap

23 In Croatia, competence in the fi eld of State aid has been granted to the Agencija za Zaštitu Tržišnog Natjecanja (Croatian Agency for Competition, AZTN) since the fi rst State aid law adopted in 2003. On 1 July 2013, Croatia joined the EU as the 28th EU Member State. Since that day, Croatia participates to the EnC as EU Member State and not anymore as Contracting Parties. In addition, AZTN has transferred the competence to review State aid schemes to the EU Commission.<www.aztn.hr/o-nama/> accessed 01.10.2013.

24 Th e enforcement of the 2003 Macedonian State aid law was assigned to an inter-governmental State Aid Commission supported by the Ministry of Finance. Th is institutional setting, which currently characterises the majority of the SEE countries, proved not be successful in ensuring an autonomous enforcement of the legislation. Consequently, following the example of Croatia, in 2006 the functions of State aids control were transferred to the Комисијата за заштита на конкуренцијата (Macedonian Competition Commission, KZK). Law on Amending and Supplementing the Law on State Aid, adopted on 06.06.2006. Published on the Offi cial Gazette 70/06. An English translation of the text of the legislation is available at: <www.kzk.gov.mk/images/Vestiimages/460/DOWNLOAD.PDF> accessed 01.10.2013.

25 Th e new Moldova State aid law grants the task of State Aid Monitoring Authority to the NCA. Moldova State aid law, supra n. 13, Art. 8.

26 Th e EnCT covers every source of energy, including electricity, gas and oil.27 See, for instance: I. Dajkovic, ‘Comments on the New State Aid Law in Serbia in the Context

of Serbia’s Accession to the EU’ (2010) 2 EStAL 347–360; P. Schutterl, ‘State Aid Control in Western Balkans and Turkey’ (2005) 5(2) EStAL 255–263; M. Botta, supra n. 7; L. Biegunski, supra n. 18.

PR

OEF

1

Marco Botta

94 Intersentia

by analysing the administrative decisions adopted by the Monitoring Authorities of the Contracting Parties in relation to subsidies granted in the energy sector. In particular, the chapter will focus on the electricity sector, since both the EU Commission and the State Aid Monitoring Authorities of the Contracting Parties have generally enforced State aid rules vis-à-vis subsidies granted in this industry. Th e enforcement of State aid rules by the Monitoring Authorities of the Contracting Parties will be assessed in view of the existing CJEU’s case law and the Decisions adopted by the EU Commission in this fi eld. Secondly, the chapter will rely on a number of international studies in order to estimate the amount of energy subsidies which escape from the duty of notifi cation to the State Aid Monitoring Authorities. In particular, the annual reports published by the EnC Secretariat28 and a recent study published by the United Nations Development Program (UNDP)29 will be important sources of information.

In the following section, the chapter will provide an overview of the CJEU’s case law and of the main EU Commission State Aid Decisions adopted in the electricity sector during the last decade. Aft erwards, the chapter will assess the enforcement trends of State aid rules in the energy sector in the Contracting Parties. Finally, the chapter will elaborate conclusions and provide a number of policy recommendations for reforming and strengthening the quality of the State aid rules enforcement in the EnC.

3. ENFORCEMENT OF STATE AID RULES IN THE ELECTRICITY SECTOR IN THE EU

EU Member States have traditionally heavily subsidised the energy sector in order to achieve a number of public policy goals, such as ensuring security of supply, universal service and aff ordability of energy sources, as well as promoting the development of green energy production and increasing energy effi ciency.30 For a number of decades the State aid rules were irrelevant in the

28 Under Art.  67(b) EnCT, the EnC Secretariat is required to prepare every year a report to assess the degree of implementation of the EnC acquis by the Contracting Parties. Th e reports include a section on State aid rules. Th e reports are available at: <www.energy-community.org/portal/page/portal/ENC_HOME/AREAS_OF_WORK/Implementation/Report> accessed 01.10.2013. Secondly, in April 2011 the law fi rms Hunton & Williams and Eisenberg Herzog published a report concerning the enforcement of State aid rules in the electricity sector by the Contracting Parties. Th e study was commissioned by the EnC Secretariat. Th e text of the study is available at: <www.energy-community.org/pls/portal/docs/948179.PDF> accessed 01.10.2013.

29 UNDP, Fossil Fuel Subsidies in the Western Balkans. Report published in December 2011. Th e text of the report is available at:<www.undp.org.tr/publicationsDocuments/Fossil_Fuel_Subsidies_F.pdf> accessed 01.10.2013.

30 K. Bacon, European Community Law of State Aid, Oxford University Press, Oxford, 2009, p. 393.

PR

OEF

1

Enforcement of State Aid Rules in the Energy Community

Intersentia 95

energy sector, since the energy companies were vertically integrated State-owned monopolies, and thus there was no competition in the energy markets. On the other hand, since the beginning of the liberalisation process, State aid rules have been increasingly enforced by the EU Commission, especially in the electricity industry.31 In the attempt to strengthen the enforcement of State aid rules in the energy sector, the EU Commission thus faced a diffi cult task to ‘balance’ the subsidies’ distortive eff ects on competition, since they could discourage new entrants in the market by thus jeopardising the process of liberalisation, with the achievement of the abovementioned public policy goals.

During the last years, DG Competition has actively enforced Art. 107 TFEU vis-à-vis long term Power Purchase Agreements (PPAs). Th e latter are long term supply contracts, which bind the supplier to purchase a fi xed amount of electricity from the generators at a regulated price periodically adjusted over a long period of time (e.g. usually over one decade).32 PPAs were oft en concluded in the Central and Eastern European (CEE) countries in the 1990s during the restructuring process of their electricity industry.33 From the State’s point of view, PPAs aimed at attracting foreign investors by reducing their commercial risk, and thus ensuring security of electricity supply in the country on a long-term basis. Th ree main types of PPAs exist:34

(1) PPAs concluded between electricity generators and State-owned electricity wholesale supplier: this type of PPAs guarantees to recently privatised generators that its electricity capacity will be purchased by the wholesale supplier over a long period of time.

(2) PPAs concluded between a generator which has recently built a new power plant in the country and a State-owned wholesale supplier: this type of PPA is designed to encourage the construction of new power plants, by ensuring to the foreign investor that the electricity capacity will be entirely purchased by the wholesale supplier, by thus reducing the uncertainty for the generator.

(3) PPAs concluded between State-owned generators and recently privatised distributor/supplier: it guarantees to the recently privatised distributor/supplier a security of electricity supply during the years following the privatisation for all its customers.

31 L. Hancher and F. Salerno, ‘State aid in the energy sector’ in E. Szyszczak (ed.), Research Handbook on European State Aid Law, Edward Elgar Publishing, Cheltenham, 2011, p. 246.

32 J.M. Glachant and A. De Hautecloque, Long Term Energy Supply Contracts in European Competition Policy: Fuzzy not Crazy. RSCAS Working Paper 2009/06. Th e text of the paper is available at: <http://cadmus.eui.eu/bitstream/handle/1814/10623/EUI_RSCAS_2009_06.pdf?sequence=1> accessed 01.10.2013.

33 L. Hancher and F. Salerno, supra n. 31, p. 248.34 J.M. Glachant and A. De Hautecloque, supra n. 32.

PR

OEF

1

Marco Botta

96 Intersentia

Th e State aid element in these agreements relates to the losses caused by the PPAs to the State-owned company (i.e. wholesale supplier or generator). Under the fi rst and second types of PPAs, in fact, the State-owned wholesale supplier usually commits itself to purchase electricity from the generator at a price above an average market price. On the other hand, under the third type of agreement, the State-owned generator will supply the recently privatised supplier/distributor at a price regulated by the national energy regulator (i.e. price that is usually below an average market price over a longer period of time). Th erefore, each PPA creates a selective advantage for the new investor, while it creates a loss for the State-owned energy company (i.e. loss of State’s resources). In view of these considerations, the EU Commission considered the Polish35 and the Hungarian36 PPAs as unlawful State aids in breach of Art. 107(1) TFEU. Th e Polish and the Hungarian PPAs fell within the fi rst category of PPAs mentioned above. On the other hand, the EU Commission has not sanctioned under State aid rules PPAs under the second and third category of agreements.

Historically, the energy prices have been regulated at the retail level in most of the EU Member States. A ‘regulated price’ is set by a public authority (i.e. National Regulatory Authority, NRA), rather than by the free interaction of supply and demand on the market. Although price regulation is not per se prohibited by the EU acquis, it may discourage new entrants in the market if the regulated energy prices are ‘too low’ (i.e. they are not ‘cost-refl ective’), and if most of the customers benefi t from the regulated tariff s.37 While household customers should benefi t from low regulated electricity prices as long as the market is not fully liberalised, large industrial customers should not benefi t from price regulation since the early stage of the liberalisation process. Large industrial customers, in fact, have the capacity to assess the off ers provided by the diff erent suppliers, by thus encouraging new suppliers to enter into the market. As recognised by the CJEU in Federutility,38 regulated tariff s for the large industrial customers might be allowed only as a temporary measure for a limited period of time, in exceptional and clearly defi ned circumstances, satisfying the proportionality principle.

35 European Commission Decision of 25  September 2007 on State aid awarded by Poland as part of Power Purchase Agreements and the State aid which Poland is planning to award concerning compensation for the voluntary termination of Power Purchase Agreements.

36 Commission Decision of 4 June 2008 on the State aid C 41/05 awarded by Hungary through Power Purchase Agreements.

37 European Regulators’ Group for Electricity and Gas (ERGEG), End-user energy price regulation. An ERGEG Position Paper. Document no. E07-CPR-10–03, published on 18.07.2007. Th e text of the report is available at: <www.energy-regulators.eu/portal/page/portal/EER_HOME/EER_PUBLICATIONS/CEER_PAPERS/Customers/2007/E07-CPR-10–03_E-UPriceReg_0.pdf> accessed 01.10.2013.

38 C-265/08, Federutility and others v. Autorità per l’Energia Elettrica e il Gas [2010] ECR I-03377.

PR

OEF

1

Enforcement of State Aid Rules in the Energy Community

Intersentia 97

Th e EU State aid rules are relevant in relation to the regulated tariff s since the NRAs usually fi x them at a level which is not cost refl ective. Th e losses caused to the electricity operators by the regulated tariff s are usually covered either via direct State s transfers (i.e. State s resources), or via a levy charged on all the electricity customers, including the customers which do not benefi t from the regulated tariff . Regulated tariff s which benefi t households do not fall under the scope of State aids prohibition: fi rst of all, households are not undertakings; secondly these subsidies could be justifi ed as social aids under Art.  107(2)(a) TFEU. On the other hand, regulated tariff s may be prohibited under EU State aid rules when they create a selective advantage benefi ting a single or a group of undertakings. Th e 2009 EU Commission’s Decision sanctioning the benefi cial electricity rate granted by ENEL (i.e. Italian State-owned energy supplier) to Alcoa (i.e. aluminium producer – energy intensive company) is a good example of a State aid in the form of regulated electricity tariff benefi ting an individual undertaking.39 In addition, in 2007 the EU Commission opened the investigations vis-à-vis the French40 and the Spanish41 regulated electricity tariff s benefi ting medium and large industrial customers. Both cases remain pending at the moment:42 while the regulated tariff clearly created a selective advantage for the French and Spanish undertakings, the two regimes were partially fi nanced by a levy charged on every electricity customer. Consequently, the EU Commission has never proved that the regulated tariff s were fi nanced via State resources. Th erefore, although in its 2007 Energy Sector Inquiry the EU Commission announced its intention to enforce more rigorously Art. 107 TFEU vis-à-vis preferential energy tariff s,43 so far it has only sanctioned preferential energy tariff s benefi ting individual or groups of undertakings which are clearly fi nanced exclusively via direct State resources.

As mentioned above, during the last decade the EU Member States have granted subsidies to stimulate the production of electricity from renewable

39 C-194/09 P, Alcoa Trasformazioni Srl v. European Commission [2011] ECR I-06311.40 In 2006, France introduced a system which allowed large industrial customers which had

opted for the liberalised electricity market ‘to return’ to the regulated tariff s for a period of two years. Th e lower regulated tariff was fi nanced by a levy charged on all electricity customers. <http://ec.europa.eu/competition/sectors/energy/electricity/electricity_en.html> accessed 01.10.2013.

41 In 2007, the EU Commission opened investigations vis-à-vis Spanish regulated electricity tariff s to the benefi t of large and medium enterprises in relation to the year 2005. Th e losses generated by the regulated tariff s were covered a levy charged on every electricity customer. <http://ec.europa.eu/competition/sectors/energy/electricity/electricity_en.html> accessed 01.10.2013.

42 <http://ec.europa.eu/competition/sectors/energy/electricity/electricity_en.html> accessed 01.10.2013.

43 European Commission, Inquiry pursuant to Article 17 of Regulation (EC) No 1/2003 into the European gas and electricity sectors (Final Report). Published on 10.01.2007, SEC (2006) 1724. Th e text of the report is available at: <http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52006DC0851:EN:NOT> accessed 01.10.2013.

PR

OEF

1

Marco Botta

98 Intersentia

energy sources.44 In Preussen Elektra, the CJEU ruled that the legal obligation for the supplier to purchase a certain amount of electricity from generators based on renewable energy sources did not represent a State aid, since there was no transfer of State resources involved.45 In that case, in fact, the supplier was a private company, and thus the purchase obligation did not aff ect the State resources.46 Following Preussen Elektra, the EU Commission has cleared a number of similar cases involving ‘green energy’ purchase obligations.47 On the other hand, if the purchase obligation fell on a State-owned supplier, the obligation would fall under the scope of application of Art.  107(1) TFEU. Th e electricity produced from renewable energy sources, in fact, is more expensive than the electricity produced from other sources (i.e. loss for State resources). Secondly, such obligation would create a selective advantage for the generators that rely on renewable energy sources. However, even green energy subsidies prohibited under Art.  107(1) TFEU have generally been exempted by the EU Commission under Art.  107(3)(c) TFEU: taking in consideration that the promotion of renewable energy is one of the priorities of the Europe 2020–20 strategy,48 the EU Commission has generally privileged the goal of environment protection over the competition distortive eff ect of green energy subsidies in its analysis.49 In particular, the General Block Exemption Regulation provides an exemption for green energy subsidies.50 In addition, individual aids that fall outside the scope of the General Block Exemption could be further justifi ed under the Environmental Aid Guidelines.51

Th e last aspect of the EU State aid law which is relevant in the electricity sector concerns the subsidies granted as a compensation for the provision of a Services of General Economic Interest (SGEI).52 Under the Altmark case

44 In relation to the enforcement of State aid rules in relation to the production of electricity from renewable energy sources, see: M. Konings, ‘State Aid for Renewable Energy Sources: a Practical State Aid Manual for Going Green’ (2002) 1(1) EStAL 19–32.

45 C-379/98, PreussenElektra AG v. Schhleswag AG [2001] ECR I-02099, paras. 54–67.46 Ibid., para. 19.47 K. Bacon, supra n. 30, p. 394.48 <http://ec.europa.eu/europe2020/europe-2020-in-a-nutshell/priorities/sustainable-growth/

index_en.htm> accessed 01.10.2013.49 See, for instance, the EU Commission’s Decision concerning the Slovenian system to stimulate

the production of electricity from renewable energy sources. Case C-7/2005  European Commission Decision of 24 April 2007 on the State aid scheme implemented by Slovenia in the framework of its legislation on qualifi ed energy producers.

50 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 (General block exemption Regulation). OJ L 214/3–47.

51 European Commission, Community Guidelines on State aid for Environmental Protection. OJ C 82/1–33.

52 For an overview of the SGEI and of the CJEU case law and EU Commission Decisions see: E. Szyszczak, ‘Altmark Assessed’ in E. Szyszczak (ed.), Research Handbook on European State Aid Law, Edward Elgar Publishing, Cheltenham, 2011, pp. 329–326.

PR

OEF

1

Enforcement of State Aid Rules in the Energy Community

Intersentia 99

law,53 a compensation for the provision of a SGEI falls outside of the scope of Art.  107(1) when four cumulative conditions are satisfi ed: the SGEI provider is ‘clearly entrusted by an act of the EU Member State’;54 the compensation for the SGEI provision is ‘established in advance in an objective and transparent manner’;55 the compensation ‘cannot exceed’ the cost of SGEI provision;56 the SGEI provider is selected either via a public tender or by comparing the costs of the SGEI provider with a ‘typically well run undertaking.’57 Th e four Altmark conditions have to be complied cumulatively: in the Hungarian and Polish PPAs cases the EU Commission recognised that the conclusion of PPAs could be justifi ed due to reasons of security of supply. However, the generators which benefi ted of the PPA had not been selected via an open and transparent manner, and thus the Altmark conditions were not complied with.58

4. STATE AID ENFORCEMENT IN THE CONTRACTING PARTIES OF THE ENERGY COMMUNITY

According to a recent study published by the United Nations Development Program (UNDP), countries of the Western Balkans heavily subsidise their energy sectors; the average level of subsidies is estimated around 9% of the GDP of these countries.59 In spite of the relevance of the energy subsidies in the region and though most of the Contracting Parties have already adopted a State aid law, so far the State Aid Monitoring Authorities of these countries have played a marginal role in reviewing the subsidies granted. In particular, only the State Aid Monitoring Authorities of Albania, Republic of Macedonia and Croatia have analysed a limited number of subsidy schemes granted in the energy sector.60 A study carried out in 2011 by the law fi rm Hunton & Williams on behalf of the EnC Secretariat has also pointed out that most of the aid schemes granted in the energy sector by the Contracting Parties have not been notifi ed to the State Aid Monitoring Authorities. Th e report established a ‘State aid inventory’ of the

53 C-280/00, Altmark Trans GmbH and Regierungspräsidium Magdeburg v Nahverkehrs-gesellschaft Altmark GmbH [2003] ECR I-07747.

54 Ibid., para. 89.55 Ibid., para. 90.56 Ibid., para. 92.57 Ibid., para. 93.58 EU Commission’s Decisions adopted on 25.09.2007 and 04.06.2008, supra nn. 35–36.59 2011 UNDP study, supra n. 29, p. 18.60 See section 5 of the 2012 EnC Secretariat’s annual report. Energy Community Secretariat,

Annual Report on the Implementation of the Acquis under the Treaty Establishing the Energy Community. Published on 01.09.2012. Th e text of the report is available at: <www.energy-community.org/pls/portal/docs/1770178.PDF> accessed 01.10.2013.

PR

OEF

1

Marco Botta

100 Intersentia

energy schemes present in the Contracting Parties.61 Th e report underlined the existence of a great discrepancy between the large number of energy aid schemes present in these countries and the limited number of decisions adopted by the State Aid Monitoring Authorities in this fi eld. Finally, even when notifi ed, the State Aid Monitoring Authorities have generally approved without conditions the notifi ed aid schemes; as recognised by the EnC Secretariat, ‘no Contracting Party has ever taken a decision to prohibit the granting of aid to an energy undertaking or ordered its recovery in the energy sector.’62

Th e types of State aid granted in the energy sector by the Contracting Parties are quite similar to the energy subsidies granted by the EU Member States. In particular, during the last decade PPAs were concluded by KESH, the Albanian State-owned electricity wholesale supplier, with a number of hydropower plants.63 Under the energy law 9470/2006, KESH was legally required to enter into power purchasing agreements with the recently privatised hydropower plants according to a fi xed price determined by the Albanian National Regulatory Authority. Th e measure aimed at incentivising the purchase of hydropower plants by foreign investors during their privatisation process. Th ese PPAs were similar to the Hungarian and Polish cases analysed in the previous section; nevertheless, these long-term agreements have never been notifi ed to the Albanian State Aid Commission.64 Secondly, the Government of Kosovo is currently launching an international call for tenders to build a new hydropower plant in Zhouri.65 Th e contract for the construction of the new power plant is likely to include a PPA, in order to ensure that that the entire new generation capacity produced will be sold.66 Finally, the Contracting Parties have also included PPAs in the privatisation agreements of the distribution electricity company. A good example to this regard concerns the recent contract of privatisation of KEDS (i.e. Kosovo distribution and supply electricity company).67 Aft er having been separated from KEK, which remained State-owned generation company, KEDS has been sold to foreign investors. Under the terms of the privatisation agreement, KEDS will continue to benefi t from the PPAs previously concluded with KEK: KEDS will be able to purchase electricity from KEK at a guaranteed price over a long period of time.68

61 Study by Hunton & Williams 2011, supra n. 28, part II.62 EnC Secretariat annual report 2012, supra n. 60, p. 130.63 Study by Hunton & Williams 2011, supra n. 28, p. 75.64 Study by Hunton & Williams 2011, supra n. 28, p. 75.65 <http://mzhe.rks-gov.net/?page=2,76> accessed 01.10.2013.66 <http://mzhe.rks-gov.net/?page=2,76> accessed 01.10.2013.67 <http://mzhe.rks-gov.net/?page=2,270> accessed 01.10.2013.68 Republic of Kosovo, Implementation Agreement. Kosovo Electricity Distribution and Supply

Privatization. Published in October 2012. Art. 4.3. Th e text of the agreement is available at: <http://mzhe.rks-gov.net/repository/docs/Implementation_Agreement_-_Marreveshja_per_Implementim.pdf> accessed 01.10.2013.

PR

OEF

1

Enforcement of State Aid Rules in the Energy Community

Intersentia 101

Th ese examples show that the PPAs are not only concluded in the context of the privatisation of State-owned generators, like in Poland and Hungary, but also in the context of the privatisation of the supply and distribution companies, as well as in the tenders to build new power plants. Th e examples of the recent PPAs concluded in Kosovo and Albania show that the Contracting Parties are willing to rely on these long-term agreements in order to attract foreign investors. Nevertheless, in none of these examples the State Aid Monitoring Authority seems to have been notifi ed of these agreements, in order to assess their compatibility with State aid rules.

Most of the Contracting Parties provide either regulated tariff s or subsidies for vulnerable customers. For instance, in accordance with its Social Action Plan, in 2010 the Government of the Republic of Macedonia adopted a regime of electricity subsidies for vulnerable households. Th e latter could receive a partial reimbursement of the paid energy bills from the State budget.69 On the other hand, other Contracting Parties (e.g. Bosnia and Herzegovina,70 Montenegro71 and Serbia)72 opted for a system of regulated tariff s for all households. As mentioned in the previous section, regulated tariff s may jeopardise the liberalisation of the electricity industry if they are not cost-refl ective and if they concern most of the customers. From the point of view of State aid rules, regulated tariff s for households would not qualify as aids under Art.  107(1) TFEU, since they would not aff ect undertakings. In addition, even if considered State aids, they could be per se justifi ed as social aids under Art. 107(2)(a) TFEU. On the other hand, regulated electricity tariff s for industrial customers might be considered State aids when they are funded by State resources, rather than via a levy charged on the electricity bill of every customer. A study conducted in 2012 by the EnC Secretariat pointed out that in most of the Contracting Parties industrial customers still benefi t from regulated tariff s and fail to comply with the conditions pointed out by the CJEU in the Federutility judgment.73 An example of subsidised energy tariff to an individual customer concerns the sale of electricity by the Croatian State-owned supplier HEP to the aluminium producer TML-TVP, based in Mostar (Bosnia and Herzegovina). In July 2011, the two companies concluded an electricity supply contract, whereby HEP would sell electricity to TML-TVP at a price of € 42.75/MWh.74 Such price was below market price, since the regular price for electricity supply in Croatia for large

69 Study by Hunton & Williams 2011, supra n. 28, p. 88.70 Study by Hunton & Williams 2011, supra n. 28, p. 79.71 Study by Hunton & Williams 2011, supra n. 28, p. 93.72 Study by Hunton & Williams 2011, supra n. 28, p. 100.73 EnC Secretariat, Regulated Energy Prices in the Energy Community – State of Play and

Recommendations for Reform. Published on 25.6.2012. Th e text of the report is available: <www.energy-community.org/pls/portal/docs/1660178.PDF> accessed 01.10.2013.

74 2011 UNDP study, supra n. 29, p. 43.

PR

OEF

1

Marco Botta

102 Intersentia

industrial customers varied between € 48/MWh and € 52/MWh.75 In exchange, TML-TVP ensured a regular supply of 60,000 tons of aluminium per year for the Croatian market.76 TML-TVP was an important aluminium supplier for Croatia, and thus the agreement aimed at achieving important industrial policy goals for Croatia (i.e. ensuring aluminium security of supply). In December 2011, the Croatian Parliament adopted an amendment to the electricity law to allow the sale of electricity below-market price to TML-TVP.77 Although TML-TVP would have clearly benefi ted of a State aid, since HEP was a State-owned company and the agreed electricity tariff was below market value (i.e. loss of State resources), the AZTN (Croatian Agency for Competition, acting as State Aid Monitoring Authority) was not notifi ed of this aid scheme.78 Only under the pressure of international institutions (i.e. EnC Secretariat and the EU Commission), the Croatian Parliament later amended those provisions of the electricity law.79

As mentioned above, the Contracting Parties have adopted a number of subsidies schemes to incentivise the production of renewable energy. In particular, a number of Contracting Parties have introduced the legal obligation for the electricity wholesale supplier to conclude long-term PPAs with electricity generators relying on renewable energy sources (e.g. Kosovo,80 Republic of Macedonia,81 Montenegro,82 Serbia,83 Bosnia and Herzegovina).84 In addition, some Contracting Parties have also provided tax reliefs (e.g. Albania,85 Serbia)86 and direct grants (e.g. Montenegro)87 to support green energy projects. As mentioned in the previous section, the PPAs should be assessed under Preussen Elektra case law: they would not qualify as State aid under Art. 107(1) TFEU if the purchase obligation was imposed on a private supplier/distributor. On the other hand, they could be considered State aids if the supplier was State-owned, and thus the PPAs involved a transfer of State resources. However, even if the PPAs and other aid schemes to incentivise the production of renewable energy were qualifi ed as State aids under Art. 107(1) TFEU, they could still be exempted

75 2011 UNDP study, supra n. 29, p. 43.76 2011 UNDP study, supra n. 29, p. 43.77 Law amending the Electricity Market Act, adopted on 26  January 2011 by the Croatian

Parliament, Offi cial Journal of Republic of Croatia, No. 14/11.78 Th e AZTN’s decisions in the fi eld of State aid are publicly available at: <www.aztn.hr/

rezultati-odluke/?casenumber=&dateearlier=&datelater=&area=dp&text=&submit_odluke> accessed 01.10.2013.

79 EnC Secretariat annual report 2012, supra n. 60, p. 137.80 Study by Hunton & Williams 2011, supra n. 28, p. 104.81 Study by Hunton & Williams 2011, supra n. 28, p. 89.82 Study by Hunton & Williams 2011, supra n. 28, p. 93.83 Study by Hunton & Williams 2011, supra n. 28, p. 101.84 Study by Hunton & Williams 2011, supra n. 28, p. 101.85 For instance, Law 8987/2002 provided for a customs duties exemption for imported goods

necessary to build new generators relying on renewable energy sources.86 Study by Hunton & Williams 2011, supra n. 28, p. 101.87 In May 2011, Montenegro established an Energy Effi ciency Fund to support energy effi ciency

projects. <www.energetska-efi kasnost.me/> accessed 01.10.2013.

PR

OEF

1

Enforcement of State Aid Rules in the Energy Community

Intersentia 103

under Art.  107(3)(c) TFEU. As mentioned above, the EU Commission has generally exempted most of the notifi ed aid schemes aiming at supporting green energy projects; therefore, most of the aid schemes adopted by the Contracting Parties in this fi eld are unlikely to breach EU State aid rules. Nevertheless, this presumption of legality does not prevent the granting authorities from notifying the scheme to the State Aid Monitoring Authority. So far, only the Croatian NCA has reviewed ex ante the State aid schemes aiming at improving production of renewable energy88 and to support projects to stimulate energy effi ciency.89

Th e main issue of concern in the Contracting Parties in relation to the enforcement of State aid rules vis-à-vis long-term PPAs, regulated retail electricity tariff s and green energy subsidies is the lack of notifi cation of the new aid schemes to the State Aid Monitoring Authority. On the other hand, in relation to their analysis of SGEI in the energy fi eld, the State Aid Monitoring Authorities have oft en ‘misapplied’ the Altmark criteria. Good examples of this misapplication are two decisions adopted in December 2011 by the Комисијата за заштита на конкуренцијата (Macedonian Competition Commission, KZK), acting as State Aid Monitoring Authority in the country.90 KZK approved two aid schemes provided by the State-owned companies MEPSO (i.e. Macedonian Transmission System Operator, TSO) and ELEM (i.e. Macedonian Power Production Company) to Toplifi kacija (i.e. private company providing district heating in the city of Skopje). MEPSO and ELEM would grant to Toplifi kacija a loan at an interest rate lower than the ordinary interest rate applied by commercial banks. Th e loan would satisfy the conditions to be considered a State aid under Art. 107(1) TFEU: the loan implied a disbursement of State resources by State-owned companies, it created a selective advantage for Toplifi kacija, and it breached the market investor principle (i.e. the interest rate was lower than the commercial interest rate available on the market). Th e Macedonian NCA, however, approved the two aid schemes by arguing that ‘companies performing activities of public interest may receive State aid to cover

88 For instance, in April 2012 the Croatian NCA submitted an opinion to the Parliament concerning a new draft legislation aiming at stimulating the production of renewable energy in the country. Th e Croatian NCA analysed whether the new tariff system introduced by the legislation to incentive renewable energy production would have distorted competition in the market. Decision of the Croatian NCA no. 430–01/2010–002/009, adopted on 25.04.2012. Th e text of the opinion is available at:<www.aztn.hr/uploads/documents/odluke/DP/430–012010–02009.pdf> accessed 01.10.2013.

89 Before joining the EU on 01.07.2013, the Croatian NCA has adopted a number of decisions concerning the compatibility of the subsidies granted by the national fund for energy effi ciency to individual fi rms willing to undertake large projects to increase energy effi ciency. Th e list of decisions adopted by the Croatian NCA in the fi eld of State aid before 01.07.2013 is available at: <www.aztn.hr/rezultati-odluke/?casenumber=&dateearlier=&datelater=&area=dp&text=&submit_odluke> accessed 01.10.2013.

90 Decisions no. 10–84 and 10–86 adopted by the Macedonian NCA on 21.12.2011. Th e text of the two decisions of the Macedonian NCA is available at:<www.kzk.gov.mk/mak/zapis1.asp?id=1001&kategorija=11> accessed 01.10.2013.

PR

OEF

1

Marco Botta

104 Intersentia

any arising costs, including a reasonable profi t from performing activities of public interest’.91 KZK thus argued that the aid was granted in view of the ‘public interest’ function performed by Toplifi kacija (i.e. provision of district heating in Skopje), and the aid did not ‘over-compensate’ Toplifi kacija for the public service performed. Prohibition of over-compensation is one of the four Altmark conditions; nevertheless, the Macedonian NCA omitted to assess whether the other three conditions were duly complied with as well. In particular, in its decision the KZK did not assess whether Toplifi kacija had been entrusted by an act of the State to perform the SGEI; whether the amount of compensation had been defi ned in advance when Toplifi kacija had been selected as SGEI provider, and whether Toplifi kacija had been selected via public tender. Th e Toplifi kacija decision well represents the tendency by the State Aid Monitoring Authorities of the Contracting Parties to approve any aid scheme in the energy fi eld which aims at satisfying general ‘public interest’ objectives, without analysing in details whether the four Altmark are cumulatively satisfi ed.

A closely connected issue to the ‘misapplication’ of Altmark conditions is the tendency by State Aid Monitoring Authorities of the Contracting Parties to approve any aid scheme granted to the State-owned companies operating in the energy industry. In June 2011, the KZK approved a State guarantee in favour of MEPSO at more favourable conditions than ordinary market conditions.92 MEPSO needed a fi nancial guarantee in order to receive a loan from international fi nancial institutions (e.g. World Bank and European Bank for Reconstruction and Development); the loan would fi nance the construction of new interconnectors with Serbia and Bulgaria. In its decision, the KZK recognised that the guarantee created an advantage for MEPSO. However, since MEPSO was the only entity in the Republic of Macedonia dealing with the electricity transmission, the Macedonian NCA concluded that the subsidy did not distort the competition in the market (i.e. the subsidy did not qualify as State aid under Art.  107(1) TFEU).93 A similar case was decided at the beginning 2013 by Montenegrin State Aid Commission, which authorised a loan granted by the central government to CGES (i.e. Montenegro TSO), in order to build a new under-sear electricity transmission line connecting Montenegro with Italy.94 Similarly to the KZK decision in MEPSO, the Montenegrin State Aid Commission authorised the aid without a deep analysis of the eff ects on

91 Decisions no. 10–84 and 10–86, supra n. 90.92 Decision no. 10–64 adopted by the Macedonian NCA on 28.06.2011. Th e text of the decision is

available at: <www.kzk.gov.mk/mak/zapis1.asp?id=977&kategorija=11> accessed 01.10.2013.93 Decision no. 10–64, supra n. 92.94 EnC Secretariat, Annual Report on the Implementation of the Acquis under the Treaty

Establishing the Energy Community, p.  84. Published in Vienna on 9.10.2013. Th e text of the report is available at: <www.energy-community.org/portal/page/portal/ENC_HOME/AREAS_OF_WORK/Implementation/Report> accessed 01.10.2013.

PR

OEF

1

Enforcement of State Aid Rules in the Energy Community

Intersentia 105

competition caused by the aid.95 Th ese decisions are clearly in contrast with the practice of the EU Commission. A relevant Decision concerned the aid granted by Poland to the Polish TSO in order to build new interconnectors and a new power line between Poland and Lithuania.96 A second Decision concerned the aid granted to Kraft nät Åland Ab for the construction of an electricity cable between mainland Finland and Aland.97 Both Decisions followed the same line of reasoning and reached the same conclusions. Contrary to the Macedonian NCA and Montenegro State Aid Commission, the EU Commission decided that the public funding would create an advantage for the Polish and Finnish TSOs which ‘will make it more unlikely that any alternative operators bid for a transmission license when the current license expires’.98 Consequently, the EU Commission considered the subsidy received by Polish and Finnish TSOs as State aid under Art. 107(1) TFEU, and aft erwards it exempted it in the light of Art.  107(3)(c) TFEU exception.99 Although the authorities achieved the same fi nal conclusion (i.e. public funding to build an important cross-border interconnector could be authorised), they followed a diff erent legal reasoning: while the KZK and Montenegro State Aid Commission pointed out the current lack of competition in the transmission market, the EU Commission looked at the ‘potential’ distortive eff ect on competition of the subsidy in a long term perspective. MEPSO and CGES decisions are not isolated cases of this type of reasoning: in September 2012, the Albanian State Aid Commission authorised a State guarantee to allow KESH (i.e. a State-owned wholesale supplier) to import electricity from abroad.100 In its decision, the Albanian State Aid Commission concluded that the State guarantee would not distort competition since KESH was the only licensed entity in the country which had the obligation to purchase electricity either from generators present in the country, or to import it from abroad.101 Th e Albanian State Aid Commission concluded that the State guarantee was not a State aid since KESH was a State-owned company and it acted as monopolist in the wholesale electricity supply market, rather than exempting the aid under the national provision equivalent to Art. 107(3)(c).

Th e last issue that characterises the Contracting Parties concerns the widespread ‘operating’ aids granted to State-owned energy companies which face troubles to remain profi tably in the market. A number of Contracting Parties have covered the losses cumulated by their energy companies via loans and

95 EnC Implementation Report 2013, supra n. 94, p. 84.96 European Commission, Decision 2010/546/EC, adopted on 06.01.2011.97 European Commission, Decision COM (2012) 5526 fi nal, adopted on 31.07.2012.98 Decision COM (2012) 5526, supra n. 978, para. 40.99 Decision COM (2012) 5526, supra n. 97, paras. 44–67.100 Decision of the Albanian State Aid Commission no. 42, adopted on 11.09.2012. Th e texts of

the decisions of the Albanian State Aid Commission are available at: <www.mete.gov.al/> accessed 01.10.2013.

101 Decision 42/2012, supra n. 100.

PR

OEF

1

Marco Botta

106 Intersentia

fi nancial guarantees (e.g. Serbia),102 measures of debts cancellation (e.g. Albania)103 and tax exemptions (e.g. Albania).104 A good example of this tendency is Kosovo, where the formerly State-owned electricity company KEK cumulated a debt of €  157 million vis-à-vis the Kosovo Government over the period 2005–2009.105 Due to the low electricity bills collection rate in the country (i.e. which varied 51% and 64% over this period of time), the Government of Kosovo had to directly intervene via loans and fi nancial guarantees to ensure that KEK had suffi cient liquidity to purchase electricity.106 Th e cumulated debt was periodically reduced by Kosovo Government via measures of debt cancellation. Such measures could be considered as operational State aid schemes, necessary to allow KEK to stay in the market. In view of their potential anti-competitive eff ect, it is well known that operating State aids should be allowed only for a limited period of time, in context of a restructuring program of the benefi ciary undertaking. However, in some Contracting Parties operating State aids to State-owned energy companies have been granted over a long period of time, and such aid schemes have generally not been notifi ed to the State Aid Monitoring Authorities.

5. CONCLUSIONS AND POLICY RECOMMENDATIONS

Th e data analysed in the previous section show a general lack of de facto compliance with the EnC State aid rules in the Contracting Parties. Most of these countries have adopted a State aid law and established a Monitoring Authority. However, due to the lack of notifi cations of new aids schemes by the aid providers, the State Aid Monitoring Authorities have played a marginal role in enforcing the State aid rules in the energy sector. Th e latter remains a highly subsidised sector in the Contracting Parties. In particular, the fact that State-owned energy companies have received substantial ‘operational’ State aids during the last decade is a matter of concern.

Besides the lack of enforcement, the previous section has shown that the State Aid Monitoring Authorities have cleared energy subsidies without taking

102 Over the last years, Serbia has provided extensive loans and guarantees to Elektroprivreda Srbije, the main State-owned generator active in the country. A table summarising the loans and fi nancial guarantees granted by Serbian government in favour of Elektroprivreda Srbije is available at: Study by Hunton & Williams 2011, supra n. 28, pp. 97–99.

103 During the last decades, the Albanian governments adopted a number of decisions to cancel the debts cumulated by KESH based on unpaid taxes and contributions. Study by Hunton & Williams 2011, supra n. 28, p. 76.

104 For instance, in July 2007 the Albanian State Aid Commission approved an aid scheme deferring the VAT payment for imported equipment by KESH to be used in electrical power plants. Decision of the Albanian State Aid Commission n. 17, adopted on 16.07.2007.

105 2011 UNDP study, supra n. 29, p. 41.106 2011 UNDP study, supra n. 29, p 41.

PR

OEF

1

Enforcement of State Aid Rules in the Energy Community

Intersentia 107

in consideration the CJEU’s case law and the EU Commission’s Decisions in this fi eld. In particular, the Macedonian State Aid Authority has ‘misapplied’ the Altmark criteria, considering out of the scope of Art. 107(1) TFEU any subsidy granted in the ‘public interest’, rather than analysing whether the four Altmark conditions were cumulatively satisfi ed. Furthermore, the Albanian, Montenegrin and Macedonian State Aid Monitoring Authorities have considered subsidies granted to State-owned energy companies operating in monopolistic sectors (i.e. aids to TSO or single wholesale supplier) as per se falling outside of the scope of Art. 107(1) TFEU.

It is important to stress that a number of Contracting Parties have only recently adopted a State aid law (i.e. Moldova, Kosovo and Bosnia and Herzegovina), and thus their Monitoring Authorities are still not fully functional. It is thus understandable that these countries may need a number of years before fully enforcing the State Aid law in the energy sector. On the other hand, in countries like Albania and the Republic of Macedonia the State Aid Monitoring Authority has already been operational for a number of years. Th e cases of ‘misapplication’ of the Altmark criteria by these authorities and the low number of notifi cations of new aid schemes show that even in these countries the enforcement of State aid law in the energy sector is not eff ective. Th is conclusion is independent from the institutional set-up of the State Aid Monitoring Authority (i.e. inter-governmental State Aid Commission in Albania versus independent NCA in the Republic of Macedonia). Croatia has been more active than other Contracting Parties in enforcing State aid rules in the energy sector. However, this might be explained by willingness of the Croatian Government to reduce the amount of the granted State aids in view of Croatia’s accession to the EU, rather than by the eff ectiveness of the State aid control carried out by the Croatian NCA.107 As shown by the case of the benefi cial electricity tariff applied by HEP in favour of TML-TVP, similarly to the Monitoring Authorities of other Contracting Parties the Croatian NCA did not receive the notifi cation of this politically sensitive aid schemes and failed to enforce the State aid rules in this case.

Besides the political sensitivity of State aid control, the limited human resources and lack of expertise of the State Aid Monitoring Authorities, the Contracting Parties do not enforce EU State aid rules due to the limited control on compliance exercised by the EU Commission. In its annual reports, the EU Commission generally points out whether each EU candidate country has adopted the State aid law and established the State aid Monitoring Authority. Nevertheless, the EU Commission has never undertaken any assessment

107 M. Botta and G. Schwellnus, Th e Eff ectiveness of Conditionality in Enforcing EU State Aid Rules in EU Candidate Countries, paper presented at the 13th bi-annual conference of the European Union Studies Association, Baltimore (USA), 9–11 May 2013. Th e text of the paper is available at: <http://euce.org/eusa/2013/papers/10d_botta.pdf> accessed 01.10.2013.

PR

OEF

1

Marco Botta

108 Intersentia

of the number of aid notifi cations received by the Monitoring Authorities in comparison to the total number of existing aid schemes in the country. In addition, the EU Commission has never assessed the ‘quality’ of the decisions adopted by the State aid Monitoring Authorities in any sector of the economy. Th e process of EU enlargement proceeds by monitoring if the ‘transposition’ of the EU acquis by the candidate country is satisfactory. However, regulatory policies like competition, State aid control and regulation of network industries require a delicate process of institution building and monitoring of proper implementation; process which goes far beyond the mere legislative transposition. Since these regulatory policies do not fall in the core area of expertise of DG Enlargement and of the EU Commission delegations in the EU candidate countries, the EU Commission does not have the capacity to follow ‘more closely’ the enforcement of these regulatory policies by the newly established institutions in the EU candidate countries. Th e EU Commission has been fi nancing projects of technical assistance and twinning projects to strengthen the capacity of the State Aid Monitoring Authorities of the Contracting Parties.108 However, aft er the conclusion of every project the main challenges faced by the Monitoring Authorities remain (i.e. lack of human resources and constraints related to the political sensitivity of the system of State aid control).

Th e EnC Secretariat supervises the implementation of the EnCT, and thus it can open infringement proceedings vis a vis a Contracting Party which does not properly comply with the terms of the Treaty.109 In recent years, the EnC Secretariat has opened a number of investigations related to diff erent types of infringement of the EnCT. In particular, in the area of State aid control, the Secretariat opened infringement proceedings against Kosovo110 and Bosnia and Herzegovina,111 due to the delay in the implementation of the State aid law. Th e main limit of the current EnC disputes settlement is that the Secretariat lacks decision-making power, and it cannot impose any direct sanction on the non-

108 For instance, offi cers of the Montenegro State Aid Commission have been attending training sessions and seminars during the last year funded by the German Gesellschaft für Internationale Zusammenarbeit (GIZ) and by the EU Commission. Similarly, the Macedonian NCA has also been benefi ting of a project of technical assistance in the fi eld of State aid organised by the EU Commission. <www.mf.gov.me/organizacija/odjeljenje-za-pripremu-drzavne-pomoci?alphabet=lat> accessed 01.10.2013. <www.kzk.gov.mk/images/Vestiimages/1056/DOWNLOAD.pdf> accessed 01.10.2013.

109 EnCT, supra n. 8, Art. 10.110 Case 7/11, Dispute settlement procedure initiated against Kosovo for the failure to

adopt State aid legislation. Case opened on 09.02.2011. For further information see:  <www.energy-community.org/portal/page/portal/ENC_HOME/AREAS_OF_WORK/Dispute_Settlement/2011/07_11> accessed 01.10.2013.

111 Case 1/10, Dispute settlement procedure initiated against Bosnia and Herzegovina for the failure to adopt State aid legislation. Opened on 22.9.2010. Further information see:  <www.energy-community.org/portal/page/portal/ENC_HOME/AREAS_OF_WORK/Dispute_Settlement/2010> accessed 01.10.2013.

PR

OEF

1

Enforcement of State Aid Rules in the Energy Community

Intersentia 109

compliant Contracting Party. It can bring an infringement case to the Ministerial Council of the Energy Community, which can ‘determine the existence of a serious and persistent breach by a Party of its obligations under the Treaty and may suspend certain of the rights … including the suspension of voting rights and exclusion from meetings or mechanisms provided for in this Treaty.’112 However, such sanction should be adopted by consensus. Since such decision has never been adopted so far, it is unclear whether the withdrawal of the voting rights would represent a suffi cient sanction ‘to encourage’ the Contracting Party to terminate the infringement and ‘to deter’ further EnCT violations.113

Despite this drawback in the dispute settlement mechanism, the Secretariat has made an eff ort in assessing the quality of State aid law enforcement in the energy sector by the Contracting Parties in the implementation reports published during the past years.114 Due to its focus on the energy sector, the EnC Secretariat has the necessary expertise to closely monitor the State aid law enforcement in the Contracting Parties. However, the Secretariat s supervision would be strengthened if the Contracting Parties were required under the EnCT to notify to the Secretariat any new aid scheme and decision of the Monitoring Authority in the fi eld of energy. At the moment, the Secretariat receives information only ex post from the Contracting Parties; information which are relied on by the Secretariat in the preparation of the annual implementation report. However, a duty of notifi cation would allow the Secretariat to be kept constantly updated on the developments in the Contracting Parties. Consequently, the Secretariat would have suffi cient and timely information in order to assist and support the Contracting Parties, helping them to properly apply the EnC State aid rules to the energy cases. Furthermore, by relying on the information received, the Secretariat could open infringement proceedings not only for lack of adoption of the State aid law, but also due to the lack of notifi cation of new aid schemes to the Monitoring Authority and due to the ‘misapplication’ by the latter institution of the CJEU’s case law and the EU Commission’s Decision in the area of State aid law.

An alternative and more far reaching proposal would imply to grant to the EnC Secretariat decision-making power in the fi eld of State aid law. Since the Treaty of Rome, the EU Member States have delegated the exclusive enforcement of State aid policy to the European Commission. Th e EC founding fathers were well aware that the EU Member States would have not be willing to self-enforce a system of State aid control, and thus they delegated this function to

112 EnCT, supra n. 8, Art. 92.113 In May 2013, the Secretariat submitted a reasoned request to the Ministerial Council

concerning case ECS-8/11 on gas legislation in Bosnia and Herzegovina. Th is case is the fi rst-ever case to be decided by the Ministerial Council, at its meeting on 24 October 2013.

114 <www.energy-community.org/portal/page/portal/ENC_HOME/DOCUMENTS?library.category=758> accessed 01.10.2013.

PR

OEF

1

Marco Botta

110 Intersentia

a supranational body like the European Commission.115 Th is logic is still valid today, both for the EU Member States, and as well as for the Contracting Parties. Instead of supervising the enforcement of State aid law in the Contracting Parties, the EnC Secretariat could be granted the decision-making power to review and approve/reject the aid schemes adopted by the Contracting Parties in the energy sector. Only by granting decision-making power to a supranational institution like the EnC Secretariat would the enforcement of the EnC State aid rules in the Contracting Parties fi nally go beyond formal compliance.

115 D. Spector, ‘State Aids: Economic Analysis and Practice in the European Union’ in V. Xavier (ed.), Competition Policy in the EU: Fift y Years on in the EU, Oxford Scholarship Online, Oxford, 2009, pp. 176–202.

PR

OEF

1