How to grant unfettered discretion to the Commission to disregard third parties’ submissions in State aid cases – AG Tanchev Opinion of 3 June 2021 in Tempus
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We knew that third parties’ rights in State aid assessment procedures are virtually non-existent – as has been deplored for many years (see e.g. here or here) – but Advocate General Tanchev’s Opinion of 3 June 2021 in Case C-57/19 P Commission v. Tempus Energy Ltd and Tempus Energy Technology Ltd (the Opinion) would effectively grant unfettered discretion to the Commission to cherry-pick the information it analyses when deciding on the compatibility of aid measures with the internal market. Besides being illogical in several aspects, the Opinion also highlights the intrinsic flaws of State aid procedural rules when it comes to taking into account information from sources other than the notifying Member States themselves.
Background to the case
Without going into the complex details, the Tempus case originates from an action for annulment brought by Tempus Energy Ltd and Tempus Energy Technology Ltd (together ‘Tempus’) against the Commission’s State aid decision of 23 July 2014 (SA.35980). In the decision, the Commission had raised no objection to a capacity mechanism introduced by the UK government, remunerating energy operators for ensuring capacity adequacy in Great Britain. Tempus was notably arguing that the scheme discriminated against demand-side response (DSR) operators by disfavouring them in the auctions and in the capacity contracts for which they were eligible, compared to energy generators. DSR offers flexibility services by which businesses and consumers can turn up, turn down, or shift electricity demand in real-time. On 15 November 2018 (T-793/14), the General Court (‘GC’) upheld Tempus’ action and found that the Commission should have opened a formal investigation on the scheme based on Article 108(2) TFEU (see here for an analysis amongst many others). The GC considered that the observations from third parties, the length of the pre-notification procedure (18 months), and the complexity and novelty of the measure indicated that the Commission should have had doubts about the compatibility of the measure with the internal market. Therefore, it should have initiated a formal investigation procedure in order to come to a decision with full knowledge of the facts. The GC in particular accused the Commission to have “simply requested and reproduced the information submitted by the relevant Member State without carrying out its own analysis” (para 114). The Opinion commented hereunder relates to the Commission’s appeal against that judgment.
Meanwhile, in application of the judgment, the Commission opened a formal investigation and found again, on 24 October 2019, that the capacity mechanism was compatible with the internal market – noting that the UK had committed to improve the status of DSR operators as per the GC’s findings. That last decision was not challenged.
The Tempus case largely resonated with State aid and energy law practitioners, notably because the British capacity mechanism was the first one authorised by the Commission under the State aid guidelines for environmental protection and energy 2014-2020; and thus led to the first successful annulment action relating to a capacity mechanism before the GC. The GC’s ruling undoubtedly impacted the Commission’s subsequent assessments of other capacity mechanisms. The ECJ’s ruling in the appeal, which is expected on 2 September 2021, should indirectly reactivate the cases pending before the GC against the Polish and Italian capacity mechanisms (the case against the Irish one was withdrawn).
The Advocate General’s Opinion
Let us recall first that Article 107(1) TFEU prohibits State aid by principle. An aid can be granted only after the Commission authorises it or, in case an exemption from such prior notification applies, if it satisfies the relevant conditions in the General Block Exemption Regulation No 651/2014. The Commission’s role as an authorising authority is thus to ensure that an aid is compatible with the internal market under Article 107(2) or (3) TFEU. Even though the Commission benefits from a wide margin of discretion, it is not absolute and its decision must be based on evidence and duly motivated under Article 296 TFEU. Hence, the question is on which evidence and sources must, or may, the Commission rely.
The AG Opinion addresses a number of issues: whether Tempus could rely on information that was or could have been available to the Commission at the date of adoption of the decision at issue; whether the number and sources of third parties’ observations, the length of the pre-notification phase, and the complexity and novelty of the measure can be taken into account as indications of the existence of serious difficulties; finally, on substance, whether the Commission should have had doubts about the treatment of DSR operators in the scheme during the course of the preliminary examination phase. AG Tanchev concludes to recommend the annulment of the GC’s judgment. This comment focuses on the Commission’s potential duty to look for, and/or take into account information provided by third-party sources (i.e. sources other than those provided by the Member State) when conducting a preliminary investigation on a State aid measure.
In this respect, the Opinion concludes that “in the context of a preliminary investigation, the Commission may generally confine itself to relying on the information provided by the Member State concerned, unless a third party adduces evidence that, in the Commission’s view, calls into question that information. However, in the latter case, the Commission is simply obliged to take that evidence into account, not to go beyond the examination of the facts and points of law brought to its attention by the third party” (para 96).
In contrast, the GC had ruled that “the Commission [did not carry] out a specific investigation during its preliminary examination concerning the information sent by the United Kingdom with regard to the role of DSR within the capacity market. […] the Commission was not in a situation where it could simply rely on the information provided by the relevant Member State without carrying out its own investigation in order to examine and, if necessary, seek relevant information from, where appropriate, interested parties for the purposes of its assessment.” (paras 111 to 115).
To reach his conclusion, AG Tanchev considered the following:
- both in the course of a formal investigation and of a preliminary examination of an aid measure, “the Commission is required […] to conduct a diligent and impartial examination of the contested measures, so that it has at its disposal, when adopting the final decision, the most complete and reliable information possible for that purpose.” (para 80);
- it suffices that the Commission examines diligently and impartially the facts and points of law brought to its attention by the Member State concerned, without being required to investigate on its own motion the circumstances of the case (para 81);
- since third parties have no procedural right to submit observations on an aid measure during the preliminary examination phase, the Commission, in turn, does not have any obligation to take spontaneous observations into account (paras 84, 89, 91);
- exceptionally, the Commission must take into account third parties’ observations when the “third party adduces evidence that calls into question the completeness and reliability of the information provided by the Member State concerned” (para 93);
- despite this, the Commission is never obliged to investigate the case on its own motion, or go beyond the examination of the facts and points of law brought to its attention by the third party (paras 81, 85, 89, 96).
Let us analyse these elements and the absurd consequences they can lead to.
The role of third parties in State aid procedures
This post will not address the hot topic of third parties’ standing before the CJEU in State aid cases; it was not debated in the Tempus case, but is discussed here in detail, for those who are interested.
In support of its annulment action, Tempus was relying on spontaneous submissions made by three market operators and trade associations (including the UK Demand Response Association) alleging that DSR was discriminated against based on several parameters of the scheme. Arguably, third parties like Tempus have an interest in State aid procedures (in the general meaning of the word ‘interest’) and can bring valuable arguments and evidence on the (in)compatibility of an aid measure, such as market data and analysis or distortion of competition, or evidence of the breach of Union law by the aid beneficiaries (see e.g. C-594/18P Austria v Commission).
Nevertheless, under the current state of the law, third parties (understood in law as anyone else other than the notifying authority, including aid beneficiaries) have an extremely limited role to play in State aid procedures; their degree of formal involvement varies depending on the stage at which they try to intervene, i.e. if they file a formal complaint (Article 24 Council Regulation (EU) 2015/1589); or if they are invited to participate by the Member State (recital 11 Regulation 2015/1589), or by the Commission when it initiates a formal investigation procedure (Articles 6 and 7 Regulation 2015/1589). In the latter case, the Commission is obliged to take third-party observations, and the Member State’s comments on them, into account before taking a final decision.
The procedural rules, however, do not leave any formal space for third parties to submit observations on an aid measure at the early assessment stages (i.e. the pre-notification stage and the preliminary examination stage). AG Tanchev hence deduces that the Commission has no duty to take spontaneous observations into account, unless they “adduce evidence that calls into question the completeness and reliability of the information provided by the Member State concerned” (para 93).
The Commission’s duty to conduct a diligent and impartial examination of aid measures
There is no doubt that the Commission must primarily rely on information provided by the Member State at the pre-notification stage and during the preliminary investigation. However, not obliging the Commission to take into account spontaneous third-party observations is a serious gap in the procedure, which can ultimately lead the Commission to take decisions that breach Article 107(3) TFEU.
Although Member States must provide all relevant information for the assessment of the aid measure as per their duty of sincere cooperation (Article 4(3) TEU), one must recognise the Member States’ conflict of interest. AG Tanchev himself acknowledges in para 83 that Member States can sometimes provide “incomplete, inaccurate or misleading” information. He argues that in such a case, the Commission must simply ask the Member State to provide additional information. This makes sense if the information provided is incomplete and it is true that Article 5 Regulation 2015/1589 does not explicitly require the Commission to do anything else.
But what if the information provided is inaccurate or misleading: should the Commission not look for information from other sources? These other sources are important for two reasons. First, even if we presume its good faith, the Member State may still omit relevant information in subsequent exchanges with the Commission. Second, by relying only on the information provided by the Member State, the Commission might not be able to realise in the first place that such information is inaccurate. Whilst conducting a diligent examination of the file certainly helps to find certain flaws, information from other sources undoubtedly will facilitate identifying inaccuracies. Without a duty to duly take third-party submissions into account, the Commission might not realise that information submitted by a Member State is incorrect and thus would not investigate the matter further. If the Commission can also ignore spontaneous third-party submissions because it considers them not substantiated enough, the risk arises that the Commission would not raise objections on a measure that may in effect be highly distortive of competition, disproportionate, or would benefit an undertaking that does not comply with Union law.
The reasoning in paras 87 to 92 of the Opinion also makes an illogical and artificial distinction between the treatment of information submitted in a complaint and information provided spontaneously during a preliminary examination. In a nutshell, AG Tanchev denies that the Commission should extend its investigations to points of facts and law brought forward by third parties during a preliminary examination because it is the Member State that shall primarily provide that information. If, however, a third party provides information as part of a complaint, the Commission has such a duty. Arguably, the underlying situations appear extremely similar. Requiring that the third party “adduces sound evidence” of its allegations when it makes spontaneous observations whilst recognising that third parties “typically have limited access to relevant information” (para 90), puts an incredible burden of proof on that party, also keeping in mind the strong presumption that State aid files are confidential. There is also no reason to accept that third parties do not have an easy access to information when they file a complaint, but then ignore that they face the same obstacle if they submit the information spontaneously. Additionally, the Commission’s interpretation of the notion of “interested parties” under Article 1(h) Regulation 2015/1589 is voluntarily restrictive so that the institution can decide itself which complaints are treated as such and which are treated as spontaneous market information instead. Moreover, in both instances, the Member States must provide all relevant information to the Commission. Combined with the Commission’s duty to conduct a diligent and impartial assessment, there is no reason for exempting the Commission from taking into account spontaneous third-party submissions and investigate further the points of fact and law they raise, when they lead to questioning the information originally provided by the Member State.
The AG’s Opinion ends up leaving all discretion to the Commission to decide when to take account of third-party observations and when it considers them substantiated enough to be worth analysing, whereas the notion of doubts, or serious difficulties, under Article 108(2) TFEU is very much objective.
The AG’s Opinion is inconsistent. This becomes clear when AG Tanchev assesses whether the Commission should have examined the potential role of DSR within the capacity market in more detail as Tempus was arguing. He writes that “given the difficulty of gathering reliable information, the Commission cannot be faulted for failing to carry out its own investigation of DSR potential” and that therefore, “the General Court erred in holding, in paragraph 158 of the judgment under appeal, that the Commission’s lack of examination of the potential role of DSR within the capacity market was an indication of the existence of serious difficulties” (paras 133-135). AG Tanchev seems to suggest that when information is difficult to collect and considering the fact that a preliminary examination is meant to form only the Commission’s prima facie opinion on an aid measure (para 82), the Commission can expedite the file, limit itself to a superficial and insufficient analysis, and raise no objection to a measure where compatibility with the Treaty has not been duly established.
That is, however, not what a diligent and impartial investigation consists of, nor what the Commission’s role of “guardian of the Treaties” requires. Regardless of its final conclusions on the merits of the case, the ECJ should clarify that the Commission’s duty to conduct a diligent and impartial investigation, even at the stage of a preliminary examination, involves a duty to take into account third parties’ observations that question the accuracy or completeness of the information provided by the Member State; to confront the Member State with these allegations; and, where necessary, to investigate the matter further, by initiating a formal investigation if doubts remain.