The Almunia Package: Legal Constraints, Policy Procedures, and Political Choices

Abstract

The entry into force of the Lisbon Treaty has, contrary to the view held by certain scholars, not changed the exclusive competence of the Commission for authorizing State aid for SGEI compensation. Article 14 TFEU, second sentence, does not provide a legal basis for legislating on the notion, the compatibility, or the notification exemption for State aid in the form of SGEI compensation. Under the legal constraints set by Altmark and its exclusive competence, the Commission has decided, first of all, to engage in a broad consultation and dialogue with the other Institutions and all stakeholders, including the legal community, prior to revising the Monti-Kroes package. With regard to the content of the Almunia package, it has opted for clarification (restatement of the case law and its decision practice); simplification (total notification exemption of social services) and proportionality (stricter rules for certain sectors and compensation above 15 million EUR). Whereas under the Monti-Kroes package, all SGEI were essentially treated the same way (verification for absence of overcompensation), the Almunia package tightens the rules for large SGEI. It excludes undertakings in difficulty from the benefit of SGEI compensations if they do not at the same time undergo in-depth restructuring (including usually compensatory measures in the form of disposals of assets and market share); requires award of the SGEI by tender (except for in house situations) and efficiency incentives in the compensation mechanism (so as to become Altmark compliant over time); and reserves the right for the Commission to ask for additional commitments in situations where there is particular risk of trade being affected to an extent contrary to the interest of the Union.

The views expressed in this chapter are strictly personal to the author, and can in no way engage the Institution he is working for.

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By adopting the Almunia Package, which provides this book with its raison d’être, the Commission has decided to reform the rules applicable to State aid in the form of compensation for services of general economic interest (SGEI) in a rather fundamental way. This chapter will set out the legal constraints the Commission was faced with (Sect. 6.1), the policy procedures it adopted (Sect. 6.2), and the political choices it made (Sect. 6.3).

1 Legal Constraints

There are two main legal constraints for the Commission in the field of compensation for SGEI: the interpretation of Article 107(1) TFEU given by the Court in Altmark, and the legal basis provided in the TFEU for its action. Whereas interpretation has remained unchanged since the Monti-Kroes package was adopted in 2005, the legislative basis may have been affected by the entry into force of the Lisbon Treaty.

1.1 The Altmark Ruling

In Altmark, the Court defined the conditions under which compensation for SGEI does not constitute State aid. By doing so, it limited the competence of the Commission, as certain payments financed from State resources now escape its scrutiny. At the same time, the ruling has set the bar relatively high, as only payments that meet four core conditions, in particular not to exceed the costs of an efficient undertaking, escape the Commission’s control. All other payments require in principle ex ante Commission approval.

1.2 The Legal Basis

Prior to the entry into force of the Lisbon Treaty, the only legal basis for assessing compliance of SGEI with the rules of the Treaty, in particular the competition provisions, was Article 86 EC [now 106 TFEU]. It was directly applicable and could be invoked in national courts; furthermore, it was one of the rare instances where the Treaty conferred authority upon the Commission to adopt secondary legislation in the form of Directives and Decisions without any involvement of the other Institutions, most notably Parliament and Council.

The Lisbon Treaty maintained Article 86 EC unchanged as Article 106 TFEU. At the same time, it added to the former Article 16 EC (now Article 14 TFEU) a second sentence, which provides a legal basis for the adoption of regulations on SGEI by Parliament and Council through the ordinary legislative procedure. Article 16 EC itself was of relatively recent origin, as it had only been introduced by the Treaty of Amsterdam. Its current wording is as follows:

Without prejudice to Article 4 of the Treaty on European Union or to Articles 93, 106 and 107 of this Treaty, and given the place occupied by services of general economic interest in the shared values of the Union as well as their role in promoting social and territorial cohesion, the Union and the Member States, each within their respective powers and within the scope of application of the Treaties, shall take care that such services operate on the basis of principles and conditions, particularly economic and financial conditions, which enable them to fulfill their missions. The European Parliament and the Council, acting by means of regulations in accordance with the ordinary legislative procedure, shall establish these principles and set these conditions without prejudice to the competence of Member States, in compliance with the Treaties, to provide, to commission and to fund such services.

This raises the question as to whether rules on State aid are part of the “principles and conditions, particularly economic and financial conditions, which enable services of general economic interest to fulfill their missions”. If this was the case, then the Commission could have chosen either to adopt the Almunia package itself on the basis of Article 106 (3) TFEU, or it could instead have opted to submit a proposal for a Regulation to Parliament and Council.

In order to answer this question, it appears necessary to first look into the history of how the second sentence of Article 14 TFEU came into being (Sect. 6.1.2.1), and then to proceed with a classical legal interpretation (Sect. 6.1.2.2). On this basis, the question will be answered (Sect. 6.1.2.3).

1.2.1 The History of Article 14 TFEU

The introduction of Article 16 EC has to be seen in the context of the market opening, in particular in the network industries (telecommunications, postal services, energy, and transport), which started in the late 1980s and reached full speed in the 1990s in the context of the drive to complete the internal market. The transport sector played a special role as the Treaty included a special legal basis in Articles 71 and 80 EC [now Articles 91 and 100 TFEU]. Outside transport, the Commission first relied on Article 86 EC (telecommunications).¹ Subsequently, the Court indicated that it would not necessarily be willing to accept Article 86 EC as legal basis² for energy which meant that the Commission had to rely on the general internal market competence of Article 95 EC.

Certain Member States (mainly Belgium and France) feared that this would lead to a one-sided approach to SGEI, favoring privatization. Therefore, Member States agreed to protect their say in SGEI by introducing Article 16 EC, which underlines the fact that SGEI are part of the “European model” and that Member States enjoy a wide margin of discretion in defining SGEI. Although Article 16 EC was of a symbolic, political, and programmatic nature and did not modify Article 86 EC,³ it could be observed both in the actions of the Commission and in the case law of the Court that the balance between the principles of competition and the freedoms of the internal market on the one hand and the traditional prerogatives of the Member States for defining and financing SGEI on the other hand was readjusted.⁴ The sitting Dutch judge at the Court spoke of a “first step in the constitutionalization of the services of general economic interest”.⁵

Since the introduction of Article 16 EC, the Court appears not to have repeated its view on the strict interpretation of Article 86 EC which was first spelled out in Belgische Radio en Televisie ⁶:

As Article 90 (2) is a provision which permits, in certain circumstances, derogation from the rules of the Treaty, there must be a strict definition of those undertakings which can take advantage of it.

The Court of First Instance (now the General Court) did restate this interpretation after the introduction of Article 16 EC.⁷ More recently, the General Court has, on the contrary, adopted a more lenient approach.⁸

Judge Edward ⁹ and, more recently and building on it, Schweitzer ¹⁰ have analyzed in-depth the case law, and found that the Court oscillates between a “limited sovereignty” and a “limited competition” approach, favoring the former in the application of the rules on competition and the latter in the application of the rules on free movement. Wernicke observed that the Court has over the last years (indeed, starting with Altmark) avoided to take a clear stance on the use of Article 86(2) EC (and now 106(2) TFEU) as justification for a restriction of the four freedoms or competition rules.¹¹ The latest judgment in that line is Stadtreinigung Hamburg: Germany expressly pleaded that the absence of a public procurement procedure for a waste disposal contract was justified on the basis of Article 86(2) EC. The Grand Chamber avoided taking a clear stance, combining elements of the in house doctrine with references to carrying out tasks in the public interest in order to conclude that the public procurement Directives did not apply to public–public partnerships.¹²

Despite discussions on the topic in the intergovernmental conference, the Nice Treaty did not modify Article 16 EC.¹³

In the Convention, the working group “Social Europe” discussed the need for amending Article 16, and could not agree on a common line. The relevant passage of their final report to the Praesidium reads as follows¹⁴:

For various members, Article 16 TEC has an essentially declaratory value and cannot provide the basis for genuine European legislation on services of general interest, which would require a positive rather than an exceptional legal basis. These members therefore pleaded for the Constitutional Treaty to contain a legal basis allowing the Union to adopt framework legislation at European level, covering relevant aspects of the provision of such services e.g. universal access. Others considered the existing competences to be sufficient.

In particular following heavy lobbying from France,¹⁵ the draft Constitutional Treaty included in its Article III-6 a legal basis for the adoption of regulations, which was similar, but not identical to the text that can be found now in Article 14 TFEU second sentence:

European laws shall define these principles and conditions.

The proclaimed aim of France was to have a legal basis that would enable it to “export” its model of service public to the level of the Union. Germany, and in particular the Länder as well as the cities, municipalities, and counties had opposed this move, as they feared that they would lose part of their traditionally strong autonomy and self-governance.¹⁶ In particular the German literature deplored in strong words the fact that this new competence had been created, and that it only foresaw the possibility of adopting Regulations, i.e. the most “intrusive” form of EU law making, whereas the principle of subsidiarity would have warranted the use of directives (including the sitting German judge at the ECJ, who spoke of a “subsidiaritätsrechtlichen Missgriff”, which could be translated as ‘a misconception of the principle of subsidiarity’).¹⁷

1.2.2 The Legal Interpretation of Article 14 TFEU

The co-existence of two different legal bases for SGEI in Article 14 TFEU (in ordinary legislative procedure, i.e. adoption by Parliament and Council on the basis of a proposal by the Commission) and Article 106 (3) TFEU begs the question as to what their relationship is. For the present chapter, it is of particular importance to know whether all or at least part of the four texts which form the Almunia package could have been adopted on the basis of Article 14 TFEU.

Starting with a literal interpretation, the legal basis in Article 14 TFEU enables the Union legislator to establish the principles and set the conditions, particularly economic and financial conditions, which enable SGEI to fulfill their missions.

This wording remains relatively vague. In particular, it has to be taken into account that the Union legislator may not interfere with the competence of the Member States to provide, to commission, and to fund SGEI, which seems to exclude the possibility to oblige Member States to provide a certain type of service at certain conditions. It would then seem that any legislation will remain rather optional and programmatic. It could also be envisaged that the legislation foresees minimum requirements for SGEI in case the Member State decides to commission it. Another example, given by the Working Group on Social Europe of the Convention, is regulation of the principles governing universal access.

Nothing in the wording indicates that secondary legislation adopted on the basis of Article 14 TFEU could relate to the assessment of compensation payments for SGEI under State aid rules. On the contrary: Article 14 starts by stating that it is ‘without prejudice’ to Articles 93, 106 and 107 TFEU, which contain the rules on the assessment of compensation payments for SGEI under State aid rules. This would seem to entail two consequences¹⁸:

• Secondary legislation under Article 14 TFEU cannot interfere with the definition of State aid (and hence not with the interpretation of Article 107(1) TFEU which the Court has given in Altmark).

• Secondary legislation under Article 14 TFEU cannot cover the areas covered by the Commission’s competence under Article 106(3) TFEU.

Article 14 does not mention Article 108 TFEU, which provides for the notification obligation for State aid, and Article 109 TFEU, which contains the legal basis for secondary legislation on the State aid procedure. However, as the notification obligation results from the qualification of a measure as State aid, it is indirectly covered by the reference to Article 107. With regard to Article 109 TFEU, it clearly constitutes a lex specialis with regard to the very broad scope of Article 14 TFEU.¹⁹

This reading of Article 14 TFEU, excluding any State aid competence, is confirmed by the following three systematic considerations. First, the control of State aid constitutes an exclusive competence of the Union. The first sentence of Article 14 recalls that the Union and the Member States shall act in the field of SGEI within their respective competences. It therefore does not intend to modify these competences. Therefore, the new legal basis cannot cover a field for which the TFEU has assigned an exclusive competence to the Union.

Second, Articles 106 and 108 TFEU provide for an exclusive competence for the Commission to adopt directives and decisions on the basis of Article 106 (3) TFEU and to authorize State aid on the basis of Article 107, 108 TFEU. This choice can be explained as the desire to put an “independent arbiter” in charge of decisions in an area where Member States may be tempted to foreclose markets or engage in subsidy races. If Article 14 TFEU was to enable the Union legislators to set out rules for State aid in secondary legislation, it would jeopardize the delicate balance between the institutions provided for in Articles 106–108.

The Court has expressly confirmed that parallelism between the Commission’s competence under Articles 106(3) and 108(3) TFEU in Netherlands v Commission ²⁰:

[The powers under Article 90 EEC (now Article 106 TFEU)] are also essential for the Commission so as to allow it to discharge the duty imposed upon it by Articles 85 to 93 of the Treaty to ensure the application of the rules on competition. […] The powers which the Commission may exercise in respect of Member States by means of decisions under Article 90(3) of the Treaty are to be compared with the powers, conferred upon it by Article 93 of the Treaty, to find that a State aid which distorts or threatens to distort competition is not compatible with the common market.

Third, Article 14 TFEU provides only the possibility to adopt regulations, whereas Article 106 TFEU allows for Decisions and Directives. This also hints towards a complementary nature between the two legal bases, rather than a competing one.

Scholars have presented divergent views on this topic. Wernicke takes the view that a proposal establishing an exemption from the prior notification exemption could be based on a double legal basis of Articles 14 and 109 TFEU (which would be interesting for Parliament, as Article 109 TFEU only provides for a consultation of the Parliament). Going even further, he considers that a redefinition of the Altmark-criteria would be possible, using a circular logic by claiming that Altmark-compliant compensation payments do not fall in the scope of application of Article 107 TFEU.²¹ This interpretation is shared by Schweitzer, who concludes that the scope of application of Article 106(2) TFEU is no longer a legal, but a political question, as in her view, the Union legislator could exempt all or parts of the SGEI from Article 106(2) TFEU altogether and rewrite the Altmark ruling.²² A similar logic appears to be implicit in a recent contribution of Von Danwitz, where he states—without however entering into a detailed legal interpretation of Article 14 TFEU²³:

Once secondary legislation [based on Article 14 TFEU] has been enacted, […] it remains to be seen to what extent the relevant jurisprudence of the Court, in particular PreussenElektra, Stardust Marine, Chronopost and Altmark Trans, will continue to play a crucial role in this field.

For Rodrigues, there can also be no doubt that Article 14 TFEU includes the competence to rewrite the State aid rules and define in secondary law what is considered as an economic activity (and therefore falls within the scope of the rules on competition). He bases his position on the fact that the application of State aid rules constitutes part of the ‘economic and financial conditions’.²⁴ The same view, though without detailed legal reasoning, is also taken by Bauby. ²⁵

Krajewski claims that at the very least, the Commission needs to take into consideration the political signal that the authors of the Lisbon Treaty wanted to send, namely a ‘protection’ of SGEI against efforts of liberalization and a strengthening of ‘social Europe’. He considers that Article 14 TFEU may shift the center of gravity of the debate and contribute to re-focus the secondary legislation.²⁶

These arguments are, however, not convincing. As to Wernicke, Schweitzer, Von Danwitz, Bauby and Rodrigues, they all overlook the systematic arguments presented above. Furthermore, the use of a double legal basis for notification exemptions appears to go against the case law which says that the legal basis depends on the center of gravity of the secondary piece of legislation.²⁷ The position that a redefinition of Altmark, respectively, of the notion of economic activity was possible, because it does not fall in the scope of application of Article 107 (1) TFEU, is obviously wrong: If the conditions are formulated in a stricter way, the secondary legislation would extend the competences of the Union beyond the limits provided for by the treaties. If the conditions are rewritten in a more lenient way, the secondary legislation would reduce the competences of the Union. In both cases, such secondary legislation would violate Article 107 (1) TFEU, and therefore be illegal.

As to Krajewski, the introduction of a legal basis for SGEI is neutral as to the content which such secondary legislation may have. The rules on the substance of SGEI of the former Article 16 EC, however, have remained unchanged. Therefore, it is not clear why the introduction of the legal basis would be indicative of any shift whatsoever.

1.2.3 Conclusion: Article 14 TFEU Does Not Modify the Legal Basis for the Adoption on Rules on State Aid in the Form of Compensation Payments for SGEI

To sum up: contrary to the opinion of other scholars, Article 14 TFEU cannot be relied upon for the adoption of secondary legislation which regulates State aid in the form of compensation payments for SGEI. Any other interpretation would upset the institutional balance provided for by the treaty rules on competition and State aid, and be contrary to the systematic interpretation of Article 14 and 106(2) TFEU.

2 The Policy Procedures

The adoption of the Almunia package has to be seen against the political debates on SGEI (Sect. 6.2.1), which have been on-going ever since the Altmark ruling and gained new momentum with the entry into force of the Treaty of Lisbon, and in particular its changes to what is now Article 14 TFEU (Sect. 6.2.2). The first political choice, made by President nominated Barroso ahead of the confirmation vote in Parliament in his policy guidelines, was to abstain from making a legislative proposal on the basis of Article 14 TFEU during his mandate. Instead, he committed to the proposal of a “quality framework” (Sect. 6.2.3). Vice President Almunia made the preparation and adoption of the Almunia package his first policy priority in State aid; and opted for a very broad and inclusive consultation process (Sect. 6.2.4).

2.1 The Political Debate on SGEI

The political debate on SGEI has different facets. First of all, there is a clear divide between the right and the left in Parliament (Sect. 6.2.1.1). Secondly, a few Member States (incidentally the six founding members) dominate the debate (Sect. 6.2.1.2). Thirdly, local and regional actors are of particular importance, as they fund the bulk of the services (Sect. 6.2.1.3). Absent from the general policy debate are the potential beneficiaries of stricter State aid control (Sect. 6.2.1.4).

2.1.1 The Divide in Parliament

In Parliament, there is a clear right-left divide when it comes to SGEI. The right has been broadly supportive of the initiatives taken by the Commission and the case law of the Court to open markets to competition, and to apply Article 86 EC in a way that favors the efficient provision of public services. The left, on the contrary, has criticized this as “neo-liberal” and “putting the European social model at risk”. Therefore, in 2006, the Socialist group in Parliament has put forward a draft directive on SGEI.²⁸

In Parliament, the most active voice on SGEI stems from the Intergroup ‘Public Services’.²⁹ Intergroups can be formed of Members of Parliament from any political group and any committee, with a view to holding informal exchanges of views on particular subjects and promoting contact between Members and civil society. Intergroups are not Parliament bodies and therefore may not express Parliament’s opinion. Intergroups are subject to internal rules adopted by the Conference of Presidents.³⁰

This Intergroup is dominated by MEP from the left (i.e. besides the socialists, the Green group and the Left/Nordic Greens group). It also recruits the vast majority of its members from MEP which are from Member States with an SGEI “tradition”, that is in particular the six founding Member States. It has been very active in the current legislature 2009–2014, in particular in the fields of public procurement and State aid.

2.1.2 The Positions of Member States

The Member States which are the most vocal in the debate on SGEI are Germany, France, Austria, Finland, the Netherlands, and Belgium. All of them aim at reducing the interference of the EU with their national SGEI to the minimum necessary. They use, however, very different strategies. This has come to the fore in a particularly prominent manner at the occasion of the debate on the new legal basis in Article 14 TFEU. Whereas France has lobbied hard for this new legal basis, Germany (and in particular the Länder, cities, municipalities, and counties) fought hard against it. The motivation was identical: to limit interference. But whereas France considered that this would be best achieved by exporting its model at the EU level (for which it needed a legal basis), Germany played the subsidiarity card and opposed any new competences, hoping that the existing competences would not be sufficient to do any harm.

The strong interest in certain Member States in SGEI has also been reflected in the two rounds of public consultations which preceded the adoption of the Almunia Package. Most Member States replied; amongst the other stakeholders, there is a clear dominance of stakeholders from Austria, Belgium, Finland, France, Germany, Italy, the Netherlands, and Poland.³¹

2.1.3 The Particular Role Played by Local and Regional Authorities

SGEI are mainly procured and financed by local and regional authorities. They often also own the company providing the SGEI. They (respectively the associations which represent them) therefore play an important role in the debate on the State aid control of SGEI funding.

Given the limited administrative and legal capacities of (in particular) small municipalities and counties, local and regional authorities have pressed hard for broad exemptions from State aid control. This is often linked to the desire to preserve their rights of self-governance and/or autonomy.

2.1.4 The Absent Player: Private Competitors

Looking through the responses received by the Commission in its two rounds of consultation, it is striking that those who have the most to gain from strict State aid control are nearly absent from the debate: new entrants and private competitors.

At the same time, it becomes clear from individual State aid cases that these new entrants and private competitors exist. Indeed, most of the State aid cases where the Commission has opened formal investigation procedures are the result of complaints from competitors. But it would seem that they lack a coherent voice in the Brussels debate, which would go beyond the individual complaint.

2.2 Article 14 TFEU

The entry into force of the Lisbon Treaty, and with it of Article 14 TFEU sparked the debate on to what use that new legal basis could be put. The Left in the EP revived the idea of a Framework Directive (although it would now have to be a Framework Regulation), but was incapable of organizing a majority in Parliament for its position. At the same time, there was also a considerable amount of debate in academia.³²

2.3 The Commitment for a ‘Quality Framework’

When preparing for his confirmation by Parliament, President nominated Barroso faced the request of the Left in Parliament to commit to proposing a Framework Regulation on SGEI on the basis of Article 14 TFEU. He responded to that request by announcing a “quality framework for public and social services”.³³

This idea of a quality framework (avoiding any binding legislation) had for the first time been developed by the Commission in its 2007 Communication on SGI, which accompanied the Communication on “A single market for 21st century Europe”.³⁴

The quality framework was viewed by EPP and ALDE as the appropriate answer to the possibilities offered by Article 14. The Left did not have the necessary votes to force Barroso to go further. The Almunia package, together with the revision of the public procurement Directives, has been the main component of the quality framework, which was adopted as a Communication³⁵ the same day as the Almunia package and the proposals for the revision of the public procurement Directives.

2.4 The Consultation Process of the Commission

Article 106(3) TFEU, the legal basis for the Almunia package,³⁶ does not require any prior consultations of other institutions or stakeholders. The Commission opted nevertheless for a broad consultation process in several steps (Sect. 6.2.4.1). This can be partly explained by general principles of Commission practice since the adoption of the governance White Paper³⁷ but also reflects a genuine choice with regard to the policy process (Sect. 6.2.4.2).

2.4.1 The Consultation Process Preceding the Adoption of the Almunia Package

The consultation process started in 2010, when the Commission invited Member States and stakeholders to comment on their experience with the application of the Monti-Kroes package. The Commission received a large number of replies. It summarized them in a staff working document, which was adopted on 23 March 2011.³⁸ On the same day, the Commission adopted a Communication in which it set out the broad lines it envisaged for the Almunia Package.³⁹ They are summarized under the headings clarification, simplification, and proportionality. These three policy goals constitute the leitmotiv of the Almunia Package. The Communication also sets out the architecture envisaged for the package: an interpretative Communication that clarified the notion of State aid, and in particular the precise meaning of the four Altmark conditions (a novelty; hereafter: the SGEI Communication); a Decision based on Article 106(3) TFEU exempting certain compensation payments from prior notification (as in Monti-Kroes; hereafter: the SGEI Decision); a Framework setting out the criteria for the compatibility of compensation payments which are not exempted from notification (as in Monti-Kroes; hereafter: the SGEI Framework); and a de minimis Regulation, stating that payments made to SGEI providers that do not exceed a threshold of 500,000 EUR over 3 years (which is higher than the general de minimis threshold of 200,000 EUR over 3 years) do not constitute State aid (a novelty, hereafter: the SGEI de minimis Regulation).

With the adoption of the Communication, the Commission launched a second round of consultations. It invited the other institutions, Member States, and stakeholders to react to the broad lines set out in its Communication. Parliament,⁴⁰ Committee of the Regions ⁴¹ and Economic and Social Committee⁴² responded with reports, which were adopted before the summer break. These reports were broadly supportive of the policy line proposed by the Commission, but requested more generous notification exemptions. One contentious point in all three bodies was the question of whether the Commission should make a proposal on the basis of Article 14 TFEU. In the Committee of the Regions and the Economic and Social Committee, a majority supported this idea, and invited the Commission to use this legal basis, rather than a Communication from the Commission, to clarify the notion of State aid and the precise meaning of the Altmark ruling.⁴³

In September 2011, the Commission published the draft texts for the four instruments, and again invited comments from the other institutions, Member States, and stakeholders. The response was similar to the one that was given to the Communication: broad support, the wish for broader exceptions and notification exemptions, and calls from the left to use Article 14 TFEU. The only institution to formally adopt an opinion was the Committee of the Regions.⁴⁴

In parallel to the outreach to the other institutions, Member States, and stakeholders, the Commission also engaged in a dialogue with the legal community. The initial consultation and the Communication were debated in the annual gatherings of the State aid community, in particular at the yearly conference of the European State Aid Law Institute (EStALI).⁴⁵ Vice President Almunia presented the draft texts at an academic conference at the College of Europe in Bruges.⁴⁶

The results of these various consultations are reflected in the impact assessment accompanying the Almunia Package⁴⁷ as well as in the content of the final texts.

2.4.2 Broad and Repeated Consultation as a Conscious Policy Choice

With the exception of the Enabling Regulation, which constitutes the legal basis for the SGEI de minimis Regulation and requires two formal rounds of consultation of the Member States, the adoption of the texts comprising the Almunia Package does not, from a legal point of view, require any prior consultation of anyone.

The Commission could have simply adopted them: The SGEI Communication on the notion of State aid does not have any legal effects, as the Commission enjoys no discretion with regard to the objective notion of State aid. It therefore is not necessary to ground it on any legal basis. The SGEI Decision is based on Article 106(3) TFEU, which grants regulatory powers to the Commission. The SGEI Framework is based on the discretion which the Commission enjoys under Article 106(2) TFEU for the assessment of the compatibility of compensation payments for SGEI. According to the case law, the Commission may auto-limit this discretion by adopting frameworks and guidelines. These texts then become binding for the Commission.⁴⁸

What explains then, in the absence of any legal requirement, the policy choice of the Commission to consult broadly and repeatedly?

First of all, there is a political commitment of the Commission to ex ante consultation. This commitment results from the ‘European Governance’ White Paper.⁴⁹ Whereas prior to the adoption of this White Paper, certain Directorates General within the Commission (in particular DG Environment) had already developed a consultation culture, others acted without consulting.⁵⁰ The Commission has further strengthened the importance of consultations by rendering impact assessments, which rely in part on the results of consultations, mandatory in the internal process.⁵¹ Finally and in parallel, there is a long tradition in State aid to consult Member states on draft guidelines.

But even compared to the by now firmly established ‘consultation culture’ of the Commission, the consultation process preceding the Almunia Package was strikingly broad and repeated. Partially, this policy style reflects certainly the personality of Vice President Almunia. In the concrete case of the Almunia Package, this choice appears particularly appropriate, for at least three reasons:

• First of all, certain actors (in particular in Parliament and the Committees) had disputed the very competence of the Commission. Although not majoritarian, they constituted a vocal and strong minority. A broad and repeated consultation, which took the form of a veritable dialogue, was the farthest the Commission could go legally and politically to accommodate their concern on process.

• Secondly, the rules on SGEI concern a vast number of regional and local bodies and (often small) undertakings. In order to design adequate rules centrally in Brussels, it is indispensable to have a profound understanding of their concerns. Consultation, together with the interactive question and answer online tool, is the best way of gathering this knowledge.

• Finally, the political choices made by the Commission are bold and courageous, as will be shown in the following section. Broad and repeated consultation is one means of increasing the likelihood that these choices will be accepted by all stakeholders, without the need for too much enforcement action based on complaints.

3 The Political Choices

The Monti-Kroes package consisted of two documents, namely a Decision exempting payments below 30 million EUR to undertakings with a turnover of less than 100 million EUR from the need of prior Commission approval, and a Framework auto-limiting the Commissions’ discretion in assessing the compatibility of payments above that threshold to a simple check for the absence of overcompensation. In both instances, the Commission required the respect of the first to third Altmark conditions.⁵² The Almunia package opted instead for a more diversified approach. First of all, it clearly spells out the Commissions’ reading of the legal constraints deriving from the Altmark ruling in a new Communication on the notion of State aid in the context of SGEI (this corresponds to the goal of clarification, (Sect. 6.3.1). Secondly, it provides for simplification and less Commission control (and therefore administrative burden) for small compensation amounts and certain categories of SGEI (Sect. 6.3.2). This is counterbalanced by significantly stricter rules for larger (above 15 million EUR annually) payments for SGEI, applying the concept of proportionality (Sect. 6.3.3).

It would go beyond the scope of this chapter to provide a detailed legal analysis of all four texts (see for this Chap. 7 in this book).⁵³ Therefore, it will be limited to a presentation of the main political choices made by the Commission in comparison to the Monti-Kroes package and in the light of the expectations from stakeholders set out above.

The first choice—which came as no surprise in the light of the policy guidelines which President nominated Barroso had presented to Parliament, but was nevertheless qualified as “quite courageous in this time of centrifugal tendencies at the EU level”⁵⁴—was not to heed to the chants of the sirens and to refrain from using Article 14 TFEU as legal basis. The fact that such a choice would have run into major legal obstacles certainly confirmed the College of Commissioners in this decision.

Following this implicit choice, it is time to turn to the explicit choices set out in the four texts of the Almunia Package.

3.1 Clarification: The SGEI Communication

The declared aim of the Communication is ‘to clarify the key concepts underlying the application of the State aid rules to public service compensation’.⁵⁵ The interpretative Communication provides for a restatement of the case law of the Court. As the Commission is bound by the objective notion of State aid as it results from the case law,⁵⁶ there is, strictly speaking, no room for political choices. The most interesting aspects of such an interpretative Communication are fields where the case law is perceived as incomplete or open to interpretation.

In the political debate preceding the adoption of the Almunia Package, the following aspects received particular attention: the notion of economic activity; the assessment of in-house services; the potential of purely local services to affect trade; and the interpretation of the first, third, and fourth Altmark criteria.

There is extensive case law on the notion of economic activity, both in competition law and under the four freedoms.⁵⁷ Therefore, the Commission had no choice but to disappoint all those stakeholders that had called for an exemption from State aid rules by means of a reinterpretation of that notion: any such move of the Commission would simply have been illegal.⁵⁸

The case law is equally well developed on the criteria ‘impact on trade’. Indeed, in Altmark the Court also had the occasion to reconfirm that “there is no threshold or percentage below which trade between Member States can be regarded as not having been affected”.⁵⁹ The Commission nevertheless also repeated its somewhat more generous decision practice, in which it has found that payments for purely local activities such as local swimming pools, hospitals, museums, and cultural events do not have the potential to affect trade, provided that all users/visitors live in the vicinity.⁶⁰ This line of decisions has never been tested in Court. There appears to be a certain tension between these decisions on the one hand and the facts and the reasoning in Altmark on the other hand. As to the facts, there is no indication that the bus service under assessment in Altmark would have been used by anybody but the local population. As to the reasoning, the Court in Altmark derived the potential impact on trade from the observation that opportunities for undertakings established in other Member States to offer their services were reduced by the subsidy. It did, in other words, not look at cross-border implications on the demand side (the users/visitors), but on the supply side (market open to service providers from other Member States).

If the Commission showed signs of pragmatic flexibility on the question of purely local services, it reaffirmed on the other hand its tough stance on the question of whether compensation payments to an in house provider were subject to State aid control. In this regard, Member State governments⁶¹ and national judges⁶² had expressed the view that such payments to in house providers somehow escaped State aid control. Different legal arguments were presented in this regard: the absence of an economic activity; the absence of an impact on trade; and, most recently and most surprisingly, the absence of the applicability of the fourth Altmark criterion.⁶³

The Commission states in clear terms that “the fact that a particular service is provided in-house has no relevance for the economic nature of the activity”.⁶⁴ As there is no case law on the question, the Commission bases its position on the conclusions of AG Geelhoed in Asemfo,⁶⁵ secondary legislation,⁶⁶ and its Decision in Verkehrsverbund Rhein Ruhr. ⁶⁷

The Commission also provides extensive reasoning as to why compensation payments to an in-house provider may distort competition. As this reasoning is not based on any case law or decision practice, it is worth quoting it in full:

Where the market has been reserved for a single undertaking (including an in-house provider), the compensation granted to that undertaking is equally subject to State aid control. In fact, where economic activity has been opened up to competition, the decision to provide the SGEI by methods other than through a public procurement procedure that ensures the least cost to the community may lead to distortions in the form of preventing entry by competitors or making easier the expansion of the beneficiary in other markets.

This approach can be found in embryonic state in the decision in Verkehrsverbund Rhein Ruhr. However, it is for the first time developed in full in the SGEI Communication.

The SGEI Communication does not expressly address the reasoning developed by the Bundesverwaltungsgericht; however, the Commission has also rejected in no uncertain terms this reasoning in its decision on the same case.⁶⁸

With regard to the Altmark criteria, the first issue on which stakeholders had sought clarification was the requirement of an ‘entrustment’ act, which results from the first Altmark criterion (clearly defined public service obligations to discharge). The SGEI Communication responds to the call for clarity with a list of five sets of information which constitute the minimum requirement for a valid entrustment; at the same time, there is flexibility as to the instrument chosen for the entrustment (legislative or regulatory act; contract; acceptance of application), and no requirement that the State has actually made use of powers as public authority.⁶⁹

The second issue flagged by stakeholders was the interpretation to be given to the notion of ‘reasonable profit’, which is part of the third Altmark criterion. There is until today no case law that would elucidate the precise meaning of the word “reasonable”. The Commission has presented in the SGEI Communication its take on the question. It takes as reference point the return on capital, and defines as benchmarks for defining a reasonable return on capital the level of risk and the return on capital achieved on similar contracts awarded under competitive conditions, preferably in the same Member State. Where the second benchmark does not exist, it accepts the use of data from other Member States and/or other sectors.⁷⁰

The third issue concerns the question of which kind of competitive award constitutes a ‘public procurement procedure which would allow for the selection of the tenderer capable of providing [… the SGEI] at the least cost to the community’. In the consultation, certain stakeholders had taken a maximalist position, pursuant to which any competitive procedure, including one respecting only the minimum requirements of transparency and non-discrimination established by the Court in Telaustria ⁷¹ would meet this test. In response to the request for clarification, the Commission presents its view on all four tender procedures foreseen by Directive 2004/17/EC coordinating the procurement procedures of entities operating in the water, energy, transport, and postal services sectors⁷² and Directive 2004/18/EC on the coordination of procedures for the award of public works contracts, public supply contracts, and public service contracts.⁷³ The Commission explains that an “open” and, under certain circumstances, a ‘restricted’ procedure can meet the fourth Altmark criterion,⁷⁴ but qualifies this statement subsequently. Factors which may indicate that services are not procured ‘at the least cost to the community’ include: use of non-price-related award criteria; any ‘particularities of the service in question’; and the presence of only one bidder.⁷⁵ It results a fortiori from these considerations that a competitive procedure complying only with the minimum requirements set by Telaustria is not capable of meeting the first alternative of the fourth Altmark criterion.

The fourth issue concerns the notion of a ‘typical, well-run undertaking’, which serves as benchmark for establishing compliance with the fourth Altmark criterion in the absence of a competitive award procedure. The Commission clarifies here in particular that it is not necessary to look at the average costs of undertakings operating in the sector; rather, it is necessary to establish the average cost structure of efficient and comparable undertakings in the sector under consideration.⁷⁶

Overall, the interpretative guidance given by the Commission on the most contentious issues can be described as a mix of pragmatism and firmness. Pragmatic, so as to make the criteria operational; firm, so that no loopholes are opened for circumventing State aid control. At the same time, the Commission sticks to the case law where a broad body of case law exists, but does not hesitate to give its own view on issues that are not yet clearly decided.

This political choice is likely to disappoint all those who had hoped that the Commission would exclude certain activities from State aid control by means of a creative (one may also say revolutionary) interpretation of the notion of State aid (and thereby attack frontally the case law of the Court). But the SGEI Communication fully respects the absence of discretion of the Commission when it comes to the notion of State aid, and adheres to the case law. At the same time, it provides the clarification and guidance sought by stakeholders.

3.2 Simplification and Less ex ante Control for Small Amounts and Certain Categories of Aid

The aim of simplification (and less ex ante control) is pursued by two different instruments, namely the SGEI de minimis Regulation for aid to undertakings entrusted with an SGEI and the SGEI Decision.

The SGEI de minimis Regulation only requires two things: that the aid does not exceed the de minimis amount of 500,000 EUR in 3 years, and that the aid beneficiary is entrusted with an SGEI (the first Altmark criterion). It is, on the contrary, not necessary to verify the respect of the second to fourth Altmark criteria. The theoretical justification for an increase of the de minimis amount is that contrary to normal de minimis aid, which is a grant without any strings attached, the beneficiary of the SGEI de minimis aid is entrusted with an SGEI, the provision of which will consume most, if not the entirety of the aid. Therefore, the risk of distortions of competition is lower.

As the bulk of SGEI is procured by small local authorities, the de minimis Regulation should lead to a considerable simplification for those public authorities that do not necessarily have the administrative know-how to comply with the Altmark ruling. At the same time, this is unlikely to result in distortions of competition.

The new SGEI Decision has two different objectives: on the one hand, simplification, on the other, proportionality (on this aspect, see Sect. 6.3.3).

With regard to simplification, it extends the exemption of the notification obligation to all compensation payments to hospitals and social services. Social services are defined as ‘services […] meeting social needs as regards health and long-term care, childcare, access to and reintegration into the labor market, social housing, and the care and social inclusion of vulnerable groups’ (Article 2(1) letter c).⁷⁷

It also provides simplification in three further aspects: First of all, the limitation to undertakings with a turnover of less than 100 million EUR disappears. The new rule foresees that the threshold is 15 million EUR compensation per SGEI; the undertaking is entrusted with (Article 2(1) letter a). This is both stricter and more generous than the old rule: where an undertaking is entrusted with only one SGEI, the compensation amount that is exempted has been halved. Where, on the contrary, the undertaking is entrusted with more than one SGEI, this is more generous than the previous SGEI decision. Secondly, the SGEI decision contains a “safe haven” with regard to the rate of reasonable profit. It is set at the relevant swap rate plus 100 basis points (Article 5(7)). Thirdly, it clarifies that the maximal length of the entrustment is 10 years, except where significant investment has to be carried out by the undertaking entrusted, which is amortized according to generally accepted accounting principles over a period of more than 10 years (Article 2(2)).

3.3 Proportionality: The SGEI Decision and the SGEI Framework

The SGEI Decision and the SGEI Framework differentiate more between different categories of services and the amount of compensation, by applying stricter rules to certain sectors and aid above a certain amount.

The SGEI Decision has a lower threshold of 15 million EUR (but this threshold is per SGEI, and no longer subject to a second threshold linked to the turnover of the undertaking providing that service, see above in Sect. 6.3.2). Furthermore, it contains special (and no longer alternative) thresholds for air and maritime transport (Article 2 (1) letter d and e; see on this in more detail in Chap. 11 on Transport). Finally, it requires compliance with the requirements flowing from the Treaty or from sectoral Union legislation (Article 3), whereas the old SGEI Decision applied without prejudice to these requirements. This means, for instance, that where an SGEI is awarded in violation of the Telaustria case law or of the public procurement Directives, or violates a condition for SGEI foreseen in the regulatory framework for energy, postal services or telecommunications, it is not exempted from notification, even if all the other conditions are met. As a result, certain compensation payments that were exempt from notification now fall within the SGEI Framework.

The SGEI Framework contains a number of conditions for compatibility which go beyond what was required under the old SGEI Framework. To start with, it does not apply to undertakings in difficulty.⁷⁸ Secondly, the SGEI Framework requires compliance with the Union rules on public procurement, including the Telaustria case law.⁷⁹ It does, however, apply only without prejudice to sectoral regulation, so that non-compliance for example with the regulatory framework on energy, postal services, or telecommunication is not per se a reason for declaring the compensation incompatible with the internal market.⁸⁰ Thirdly, the method for calculating compensation payments has to include so-called efficiency incentives, which set the entrusted undertaking on course towards compliance with the fourth Altmark criterion.⁸¹ Finally, the SGEI Framework stipulates that the Commission may impose additional requirements which may be necessary to ensure that the development of trade is not affected to an extent contrary to the interests of the Union.⁸²

In the immediate aftermath of the Altmark judgment, there was considerable discussion on whether the Commission could still declare aid compatible if one of the Altmark criteria, in particular the fourth one, was not met.⁸³ The question has been answered in the affirmative by the Commission, when adopting the Monti-Kroes package; and it appears to have been accepted by the legal community.

Following the adoption of the Almunia package, the Commission will be faced with another question: How much discretion does it actually enjoy when assessing under Article 106(2) TFEU the compatibility of an SGEI compensation with the internal market? The General Court stated recently in an obiter dictum its view that the Commission’s powers under Article 106(2) TFEU are limited to verifying whether the SGEI compensation does not go beyond the additional net costs of the SGEI.⁸⁴ This position appears, however, not very convincing. It would deprive the second sentence of Article 106(2) TFEU of any effet utile. The first sentence of Article 106(2) TFEU is in itself sufficient to limit the allowable amount of compensation to the net additional costs of the service. The recovery of any overcompensation is not capable of obstructing the performance of the SGEI, as it is per definitionem not necessary for the performance of the SGEI. The second sentence of Article 106(2) TFEU adds to the condition of necessity a proportionality test, by stating:

The development of trade must not be affected to such an extent as would be contrary to the interests of the Union.

This language is reminiscent of the language of Article 107(3) letter c TFEU (not adversely affect trading conditions to an extent contrary to the common interest). The assessment of whether the development of trade is affected to such an extent necessarily involves a complex economic assessment by the Commission; it therefore would appear that the Commission does enjoy at least a certain degree of discretion when authorizing SGEI compensation on the basis of Article 106(2) TFEU.

4 Conclusion

This chapter has first clarified that the entry into force of the Lisbon Treaty has, contrary to the view held by certain scholars, not changed the exclusive competence of the Commission for authorizing State aid for SGEI compensation. Article 14 TFEU second sentence, does not provide a legal basis for legislating on the notion, the compatibility or the notification exemption for State aid in the form of SGEI compensation.

Under the legal constraints set by Altmark and its exclusive competence, the Commission has decided, first of all, to engage in a broad consultation and dialogue with the other Institutions and all stakeholders, including the legal community, prior to revising the Monti-Kroes package.

With regard to the content of the Almunia package, it has opted for clarification (restatement of the case law and its decision practice); simplification (total notification exemption of social services), and proportionality (stricter rules for certain sectors and compensation above 15 million EUR). Whereas under the Monti-Kroes package, all SGEI were essentially treated the same way (verification for absence of overcompensation), the Almunia package tightens the rules for large SGEI. It excludes undertakings in difficulty from the benefit of SGEI compensations if they do not at the same time undergo in-depth restructuring (including usually compensatory measures in the form of disposals of assets and market share); requires award of the SGEI by tender (except for in house situations) and efficiency incentives in the compensation mechanism (so as to become Altmark compliant over time); and reserves the right for the Commission to ask for additional commitments in situations where there is particular risk of trade being affected to an extent contrary to the interest of the Union.