AG Saugmandsgaard Øe in C-329/15: Towards a novel approach to the state resources criterion?

By Gian Marco Galletti

Introduction

In his Opinion issued in case C-329/15 ENEA SA w Poznaniu v Prezes Urzędu Regulacji Energetyki on 22 March 2017, AG Saugmandsgaard ØE held that the quota-based system designed by Poland in order to support the production of energy from cogeneration (‘Combined Heat and Power electricity’ or ‘CHP electricity’) should be sheltered from the application of State aid rules as it does not fulfil all the conditions enshrined in Article 107(1) TFEU (‘Article 107(1)’). In particular, the missing piece of the ‘aid jigsaw’ is, according to AG Saugmandsgaard ØE, that the national measure in question does not entail the use of ‘State resources’.

The interpretation of the State resources criterion is a classic battleground between the effectiveness of EU rules and the protection of national regulatory autonomy. On the one hand, a broad reading of the State resources criterion is justified by the fact that Member States may feel tempted to assume a ‘private form’ to evade the application of State aid rules; on the other hand, a narrow reading averts the risk of enabling the Commission to conduct ‘an inquiry on the basis of the Treaty alone into the entire social and economic life of Member States’, as famously summarized by AG Jacobs in Viscido. The EU case law has, after some fluctuations, opted for a broad approach leaving only limited room for a finding of no State resources and therefore no aid (PreussenElektra). This was particularly evident when the Court was called to examine energy production-supporting measures taken by the Member States: the Netherlands (Essent Netwerk), Austria (Austria v Commission), France (Association Vent de Colère) and Germany (Germany v Commission) all unsuccessfully attempted to persuade the European judges that their feed-in tariff schemes did not engage public resources.

From a policy perspective, if this Opinion were to be upheld by the Court this would be the first (post-PreussenElektra) happy ending for the Member States in their struggle to design State aid-compliant legal mechanisms for funding the switch towards environmentally friendlier energy mixes and production processes.

From a strictly legal perspective, the reasoning of the AG in the present case deserves special attention in that it appears to point to a narrower, and arguably more accurate, interpretation of both layers of the State resources criterion.

Facts

The preliminary reference in the case at hand originates from a dispute in Poland between ENEA S.A. (‘ENEA’), a State-owned company which is active in the production, marketing and sale of electricity, and the president of Urzędu Regulacji Energetyki (Office for the regulation of energy, ‘URE’) concerning a financial penalty imposed on ENEA for breach of its obligation to supply CHP electricity (Article 9a(8) of the Law on Energy).

In short, the legal mechanism designed by the relevant national provisions has two tiers: first, the electricity providers, such as ENEA, are bound to sell to final users a minimum quota of CHP electricity, equal to 15% of the overall quantity sold in a given year; second, the maximum price that those providers are entitled to charge to final users (and, as part of this calculation, also the price of the CHP electricity regarded asIn  reasonable) is determined by the president of the URE. This results in a direct transfer of private funds between private parties (electricity providers and producers of CHP electricity), which does not involve the intervention of a publicly-owned or publicly-controlled intermediary body (e.g. the Dutch TSOs, the French Caisse des Dépôts et Consignations) as it occurred in the abovementioned cases concerning feed-in tariffs.

In the present case, ENEA failed to comply with the obligation incumbent on it under the Law on Energy and was sanctioned by the president of the URE. Against this factual background, the national judge has referred three preliminary questions to the Court of Justice. This post focuses on the first one, namely whether Article 107(1) must be construed as meaning that the obligation to purchase CHP electricity laid down by the Law on Energy amounts to a State aid.

Findings of the Advocate General

AG Saugmandsgaard ØE begins by carrying out an in-depth analysis of the features of the national rule at issue. He first observes that the obligation to obtain at least 15% of the electricity sold annually to final users from CHP electricity can be complied with by the electricity providers not only by purchasing electricity from third parties but also by producing it themselves. This is why that obligation should be characterised as a ‘supply obligation’ rather than an actual ‘obligation to purchase’, which involves the infliction of a penalty by the president of the URE in case of breach. Apart from that – the AG notes – the purchase of CHP electricity is not subject in Poland to any other national rule. In particular, the purchase is to be freely agreed between the electricity provider and the third party producer, and is not subject to any threshold or ceiling established by the public authorities. However, the maximum price that every electricity provider is entitled to charge to final users has to be approved by the president of the URE. Therefore, the action of the Polish State on the market of CHP electricity is limited to (i) imposing on electricity providers a supply obligation, and (ii) determining a maximum price for the sale of electricity to final users (which can result in a limitation of the ability of electricity providers to pass onto final users the extra costs stemming from the supply obligation).

With regard to ENEA itself, AG Saugmandsgaard ØE remarks that it cannot be inferred from the available information that its decision to refuse several offers of CHP electricity, the price of which was 46% to 75.6% above the average price of electricity on the Polish market, was dictated by considerations alien to its own commercial interest. In this respect, he emphasises that, although ENEA is wholly owned by the Polish State, its autonomy was not undermined by the public authorities, which did not issue any instruction in relation to the performance of the supply obligation.

Moving to the legal assessment, the AG first deals with the question of whether the legislative provision has the effect of granting a selective advantage to the producers of CHP electricity. In this respect, he argues that the practical effect of the supply obligation at stake is to bring about an increase in demand for CHP electricity which would not have occurred under the normal conditions of the Polish electricity market. For this reason, the supply obligation enabled those producers to demand a price higher than the economic value of that type of electricity. In conclusion, they were granted an economic advantage within the meaning of Article 107(1). No doubt can be raised, according to AG Saugmandsgaard ØE, that the advantage in question should be regarded as selective since it only benefits the production of CHP electricity.

He also concludes, after recalling the basic principles stemming from the relevant case law, that the supply obligation is likely to distort competition and affect trade between Member States.

On the issue of State resources, the reasoning of the AG provides greater depth. In the first place, it deals with the question of whether the national measure concerned is ascribable to the Polish State (‘imputability’). In that regard, he recalls that the finding of imputability to the State logically follows from the fact that the supply obligation was introduced by legislative provision. The argument advanced by the Polish government that this conclusion would be flawed given that the advantage to the producers of CHP electricity would instead result from the negotiation between the latter and the electricity providers, should, according to the AG, be refuted. In his words, ‘the advantage conferred by the supply obligation is to be found specifically in the alteration in electricity market conditions and, more particularly, in the increase in demand for electricity produced by cogeneration. That alteration is undeniably caused by the supply obligation in Article 9(8) of the Law on Energy and is, therefore, attributable to the State’ (para 75).

In the second place, he considers whether the advantage is granted through resources of State origin. Here the answer is, rather crucially, negative. As a point of departure, the resources employed do not flow from the public purse; on the contrary, the advantage is granted by means of a transfer of resources between private persons (from producers of other types of electricity and electricity providers to producers of CHP electricity) –as in PreussenElektra.

The fact that, in contrast to PreussenElektra, the State owned a majority shareholding in the capital of various electricity providers is not – the AG makes clear – sufficient to justify a finding of State resources in the present case. Although it is true that in Stardust Marine the Court inferred the State origin of the resources from the control exercised by the State over a private undertaking through its majority shareholding, this principle is not applicable to the case at issue since the advantage does not originate from a decision of an undertaking, but from a legislation of a general scope – which is equally applicable to electricity providers in which the State is not the majority shareholders. In any event, even if it were assumed that Stardust Marine is applicable to the case in point, the majority shareholding of the State in an undertaking would not be sufficient, in the AG’s view, to conclude that the condition relating to the imputability to the State is met. As follows from Stardust Marine, the imputability must be conversely demonstrated ‘by establishing the actual exercise by the State of the supervisory power which its status as majority shareholder confers upon it’ (para 99). This would not be the case here, as the referring court emphasised that ENEA’s conduct had not been dictated by instructions from the public authorities.

Finally, AG Saugmandsgaard ØE rejects the argument that the circumstances of the case under consideration are comparable to those which gave rise to the Court’s pronouncements in Essent Netwerk and Association Vent de Colère, and warrant thereby the same positive conclusion as to the use of State resources. The conclusive factor in this respect is that, in contrast to those cases, the electricity providers active in the Polish market ‘are not mandated to manage a State resource, but are bound by an obligation to purchase by means of their own financial resources’ (para 109). It is precisely the function of the fixing of the maximum price provided by Polish legislation to limiting the ability of electricity providers to pass on the extra costs resulting from the supply obligation to end users, so that they are not eventually compensated for the costs incurred in discharging that obligation.

Comments on the State resources criterion

It is submitted that the Opinion of AG Saugmandsgaard ØE reflects a common unease when it comes to the application of the traditional broad judicial interpretation of the State resources criterion, and may be regarded as pointing to a novel approach. In particular, the AG seems to suggest a shift from a reading founded on the proof of a mere control exerted by the State over the resources engaged by the national measure concerned (transfer of State resources) and over the public undertaking (imputability) to an understanding requiring an actual commitment of public resources (transfer of State resources) and a causal link between alleged advantage and State budget (imputability).

With regard to the imputability of national measures to the State, which is ordinarily largely presumed in case of legislative acts and predominantly based on the control exerted over the public undertaking in case of decisions taken by the latter, the AG appears to carry out a test based on remoteness. As a second prong of the test of causation in English tort law, remoteness would require the presence of a ‘sufficiently direct link’ between the national measure concerned and the economic advantage granted to the beneficiary. In the State aid field, examples of remoteness (admittedly not explicitly identified as such) may already be found in the judgments delivered by the Court in cases France Télécom II, NOx Emission Trading Scheme and Eventech.

In his Opinion, AG Saugmandsgaard ØE seems to employ the remoteness test as he dismisses the Polish government’s objection that the advantage to the producers of CHP electricity resulted from the specific conditions agreed during the negotiation between the latter and the electricity providers:

The advantage at issue in the dispute in the main proceedings was not spontaneously granted by the electricity providers to producers of electricity produced by cogeneration, but is the result of legislative and regulatory acts emanating from the Polish State’ (para 76).

The above passage may be well seen as meaning that the reason why the advantage conferred to the producers of CHP electricity is imputable to the State is that the causal link between the supply obligation set out in Article 9a(8) of the Law on Energy and the increase in demand of CHP electricity is ‘sufficiently direct’. In other words, the fact that the fulfillment of the supply obligation is left to the free negotiations between private subjects is not such as to weaken the causal link to the point that it loses the required strength and directness.

Another time in the Opinion that the question of causation comes up is where the AG considers whether the majority shareholding of the State in the capital of several electricity providers is sufficient to conclude that the resources of the latter are State resources. In this respect, the AG rightly recalls that, if this were true, the imputability to the State would not inevitably follow as Stardust Marine teaches us that, in case of decisions taken by public undertakings, the imputability to the State must be demonstrated by establishing ‘the actual exercise by the State of the supervisory powers which its status as majority shareholder confers upon it’ or ‘the actual involvement of the public authorities’ (para 99) in the adoption of the decision. Considering that in Stardust Marine the EU judges do not go so far as to require the proof of an ‘actual involvement’ of the public powers and that the more recent case law deems it sufficient that the Commission prove mere ‘control’ generally exercised by the State over the public undertaking, this strikes one as a further attempt to push the concept of imputability towards the realm of causation.

Regarding the origin of the resources, the AG’s findings confirm that the classic broad interpretation, which entails that mere ‘public control’ over the funds involved is sufficient to classify those funds as State resources (Air France), does not constitute a workable tool in borderline cases, such as those concerning the legal frameworks set up by Member States for funding the transition to environmentally friendlier energy sources or production processes. In this respect, the AG emphasises the difference between the financing mechanism provided for in the Polish legal regime, which does not entail the use of State resources, and the one at stake in Association Vent de Colère, which does. The fixing of a maximum price in the case at hand, by limiting the ability of electricity providers to pass on the extra costs to final users, means that the supply obligation must be complied with by means of the electricity providers’ own financial resources; by contrast, the national legislation at issue in Association Vent de Colère, by enabling the electricity distributors to cash in a tax imposed on the consumers, guaranteed that the additional costs resulting from an obligation to purchase wind-generated electricity would be offset. Therefore, there cannot ultimately be a transfer of State resources within the meaning of Article 107(1) without an actual granting or withdrawal of resources belonging to the public budget.

In conclusion, there seems to emerge from the Opinion of the AG Saugmandsgaard ØE a narrower interpretation of the State resources criterion, based on the commitment of public resources and causation/remoteness. Rather interestingly, some national case law goes in the same direction, as recently attested by the pronouncement of the UK Administrative Court (Queen’s Bench Division of the High Court of Justice) in the case British Academy of Songwriters, Composers and Authors (BASCA) v Secretary of State for Business, Innovation and Skills which summarises effectively that the State resources criterion is met whenever it can be found ‘a clear and direct nexus of a relative formal character between the advantage and the [transfer of funds or] foregoing of revenue’.

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