Levying of Charges to Maintain Equal Treatment Is Not Necessarily Selective

The standard of proof of whether a measure is selective depends on whether that measure is a scheme or a grant of individual aid. Measures providing for exemption are by definition selective. Measures that impose additional charges for the purpose of maintaining equality between operators are not necessarily selective even if the responsible authorities retain a degree of discretion in their application. The margin of discretion of the responsible authorities for the purpose of ensuring equality is wider from the (narrow) margin relating to the granting of advantages. This is because the application of a measure on objective criteria can still result in the conferment of a selective advantage. No State aid is subsequently granted by an agreement between the state and an undertaking, which is initially free of State aid, if economic conditions change and undertakings without such an agreement are later at a disadvantageous position. However, an agreement that initially is free of State aid may turn out to involve State aid if the responsible authorities intend, at the time of signing the agreement, to change the level of relevant fees later on.
 
 
Introduction
 
This article reviews two recent judgments of the Court of Justice. The first judgment, concerning the Hungarian oil exploration company MOL, focuses on the issues of selectivity and the granting of gratuitous advantages. MOL had successfully challenged a Commission decision that found incompatible State aid. The Commission appealed and lost. Because of the importance of the clarifications made by the Court of Justice, the case is examined in more detail than the other case which concerns a nuclear power station in Germany. In both judgments the decisive element was the notion of selectivity.
 
Background to Commission v MOL
 
On 4 June 2015, the Court of Justice delivered its judgment in case C-15/14 P, European Commission v MOL.[1] The Commission had appealed against the judgment of the General Court in case T-499/10, MOL v European Commission. In that judgment, the General Court annulled Commission decision 2011/88 which found that Hungary had granted incompatible State aid to MOL.MOL is a company that extracts and markets hydrocarbons such as oil and gas. It has a licence to explore for oil in Hungary. In 2005, that licence was renewed. In 2008, Hungary raised the licence fee. The Commission claimed that the 2005 renewal coupled with the later increase in fees implicitly granted State aid to MOL.The General Court relied on the principle expounded by the Court of Justice in C-399/10 P, Bouygues v Commission. In that case, the Court of Justice had ruled that apparently separate actions can be considered to be a single measure if, due to their chronology, purpose and circumstances, they are so closely linked that they are inseparable. The General Court applied that principle to determine whether Hungary had acted in such a way as to protect MOL by concluding with it an agreement for a fee that was fixed for the entire duration of that agreement, while having the intention of subsequently increasing the fee so that other market operators would be placed at a disadvantage.The General Court concluded that Hungary had no such intention in 2005 and the fact that the subsequent increase in exploration and exploitation fees indirectly benefitted MOL was merely incidental of the discretion that Member States enjoy to adjust their regulations in response to changing economic circumstances. The Hungarian measure, according to the General Court, did not confer an advantage to MOL, nor was it selective.

The judgment of the Court of Justice in Commission v MOL

The issue in dispute was whether the Hungarian measures provided a selective advantage to MOL. The Court of Justice began its analysis by clarifying how selectivity had to be demonstrated.

“60 It must be noted that the selectivity requirement differs depending on whether the measure in question is envisaged as a general scheme of aid or as individual aid. In the latter case, the identification of the economic advantage is, in principle, sufficient to support the presumption that it is selective. By contrast, when examining a general scheme of aid, it is necessary to identify whether the measure in question, notwithstanding the finding that it confers an advantage of general application, does so to the exclusive benefit of certain undertakings or certain sectors of activity.”

“61 It follows that the appropriate comparator for establishing the selectivity of the measure at issue in the present case was to ascertain whether the procedure for concluding and setting the terms and conditions of the agreement extending mining rights, […], draws a distinction between operators that are, in the light of the objective of the measure, in a comparable factual and legal situation, a distinction not justified by the nature and general scheme of the system at issue.”

“64 There is a fundamental difference between, on the one hand, the assessment of the selectivity of general schemes for exemption or relief, which, by definition, confer an advantage, and, on the other, the assessment of the selectivity of optional provisions of national law prescribing the imposition of additional charges. In cases in which the national authorities impose such charges in order to maintain equal treatment between operators, the simple fact that those authorities enjoy discretion defined by law, […], cannot be sufficient to establish that the corresponding scheme is selective.”

“65 Consequently, it must be stated, first, that the General Court correctly held […] that the margin of assessment at issue in the present case allows the fixing of an additional charge imposed on economic operators in order to take account of the imperatives arising from the principle of equal treatment, and can be distinguished, by its very nature, from cases in which the exercise of such a margin is connected with the grant of an advantage in favour of a specific economic operator.”

It is not clear why the Court of Justice chose not to state, in much simpler terms, that by seeking to ensure equality between operators the Hungarian authorities were acting objectively.

“67 In addition, […] the General Court first analysed, […], the rates stipulated under that agreement and found that no evidence of unjustified preferential treatment of MOL was apparent from the decision at issue, and that therefore it could not be assumed that MOL was afforded favourable treatment in relation to any other undertaking that was potentially in a situation comparable to its own”.

The Court of Justice went on to observe that the General Court had also examined “76 […] whether or not the mining fee rate was set on the basis of objective criteria applicable to any potentially interested operator. Thus, the General Court noted first, […], that the Mining Act was drafted in general terms as regards the undertakings eligible for the extension of mining rights. Next, the General Court found, […], that the fact that MOL was the only undertaking to have concluded an extension agreement in the hydrocarbons sector did not necessarily constitute evidence of selectivity, since the criteria for concluding such an agreement are objective and applicable to any potentially interested operator, and the absence of other agreements may result from decisions by undertakings themselves not to apply for an extension of mining rights.”

Then the Court of Justice faulted the Commission for misreading the judgment of the General Court. According to the Court of Justice, the General Court did not hold “77 […] that the presence of objective criteria necessarily rules out any possibility of selectivity”. “78 In any event, it must be stated that, […], the Court of Justice addressed the issue of whether or not the beneficiaries of State aid schemes were selected on the basis of objective criteria. Thus, in particular in the judgment in GEMO [C‑126/01], the Court found that, despite the fact that the beneficiaries of the scheme adopted by national law were defined on the basis of objective and apparently general criteria, the benefits of that law accrued largely to farmers and slaughterhouses.”

Having dealt with the issue of selectivity, the Court of Justice turned its attention to the issue of advantage. It began by observing that “89 where a Member State concludes with an economic operator an agreement which does not involve any element of State aid for the purposes of Article 107 TFEU, the fact that, subsequently, conditions external to such an agreement change in such a way that the operator in question is in an advantageous position vis-à-vis other operators that have not concluded a similar agreement is not a sufficient basis on which to conclude that, together, the agreement and the subsequent modification of the conditions external to that agreement can be regarded as constituting State aid.”

“90 If that were not the case, any agreement that an economic operator might conclude with a State which does not involve any element of State aid for the purposes of Article 107 TFEU would always be open to challenge, when the situation on the market on which the operator party to the agreement is active evolves in such a way that an advantage is conferred on that operator, […[, or when the State exercises its regulatory power in an objectively justified manner following a market evolution while observing the rights and obligations resulting from such an agreement.”

“91 A combination of elements […] may be categorised as State aid where the terms of the agreement concluded were proposed selectively by the State to one or more operators rather than on the basis of objective criteria, laid down by a text of general application, applicable to any operator. […] The fact that only one operator concluded an agreement of that type is not sufficient to establish the selective nature of the agreement, since that may result from, inter alia, lack of interest on the part of any other operator.”

“93 A combination of elements […] may be categorised as State aid when the State acts in such a way as to protect one or more operators already present on the market, by concluding with them an agreement granting them fee rates guaranteed for the entire duration of that agreement, while having the intention at that time of subsequently exercising its regulatory power, by increasing the fee rate so that other market operators are placed at a disadvantage, be they operators already present on the market on the date on which that agreement was concluded or new operators.”

The Court of Justice agreed with the General Court that as “96 […] there is no chronological and/or functional link between [the 2005 and 2008 agreements], they cannot be interpreted as constituting a single aid measure.”

On the basis of the above considerations, the Court of Justice dismissed the appeal of the Commission.

Taxation of nuclear power

On 4 June 2015, the Court of Justice also issued a preliminary ruling in case C-5/14, Kernkraftwerke Lippe-Ems v Hauptzollamt Osnabruck.[2] A German court requested a preliminary ruling in a dispute between Kernkraftwerke Lippe-Ems [KLE] and the tax authorities in Germany. KLE was an operator of a nuclear power station. It claimed that the production of electricity from nuclear material was taxed twice; first at the level of inputs [a tax on nuclear fuel] and then at the level of output [a tax on consumption of electricity]. KLE also claimed that this double taxation was State aid to those methods of generating electricity which did not produce CO2 but which were not subject to the same tax. Indeed green electricity is exempt from any charges on the consumption of electricity produced from fossil fuel. [In addition, KLE alleged that the taxes were contrary to the free movement provisions of the Treaty, but this part of the judgment is not examined in this article.]

Before turning to the substance of the case, the Court of Justice had to resolve a legal dilemma that had been raised by the referring German court. In its request for a preliminary ruling the German court noted that the case was also pending before the constitutional court of Germany and for this reason the referring court was not sure how to proceed given that the two parallel procedures could give rise to contradictory findings.

The Court of Justice clarified that a national court is under duty to apply any relevant provisions of EU law and in this connection, it must refuse to apply any conflicting provisions of national law [paragraphs 32 & 33]. Moreover, the effectiveness of EU law would be in jeopardy if national courts would be prevented by domestic procedures, even of constitutional nature, from referring cases to the Court of Justice for interpretation of EU law [paragraph 34].

Then the Court reviewed the various EU directives on excise taxation and taxation of electricity and concluded that nothing in their wording could lead to the conclusion that taxation at both the input and output level was prohibited.

The main issue concerning State aid was the alleged selectivity of the taxation of nuclear fuel. On this point the Court of Justice noted that the relevant German law that taxed nuclear fuel did not have as its objective the taxation of energy sources used for the production of electricity, which do not contribute to CO2 emissions [paragraphs 76-77]. [Indeed it would have been bizarre if German law taxed a CO2-free method of electricity production.] On the contrary, according to the Court, the aim of that German law was to raise revenue for the maintenance of the site where radioactive waste was stored, in compliance with the polluter-pays principle. No other means of producing electricity generated radioactive waste [paragraphs 78-79]. Hence, the non-taxation of other methods of electricity generation did not confer an advantage to them because they did not produce radioactive waste.

—————————————————–

[1] The full text of the judgment can be accessed at:

http://curia.europa.eu/juris/document/document.jsf?text=&docid=164723&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=208045.

[2] The full text of the judgment can be accessed at:

http://curia.europa.eu/juris/document/document.jsf?text=&docid=164722&pageIndex=0&doclang=en&mode=lst&dir=&occ=first&part=1&cid=211016.

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About

Phedon Nicolaides

Dr. Nicolaides was educated in the United States, the Netherlands and the United Kingdom. He has a PhD in Economics and a PhD in Law. He presently holds positions at the College of Europe and the University of Maastricht. He has published extensively on European integration, competition policy and State aid. He is also on the editorial boards of several journals. Dr. Nicolaides has organised seminars and workshops in many different Member States, and has acted as consultant to several public authorities.

Comments

  1. Sir, the claim “no other means of producing electricity generated radioactive waste [paragraphs 78-79]” is not supported by available scientific evidence, as convincingly argued for instance by UNSCEAR review of technologically modified exposures to natural radiation. This authoritative UN body has for instance endorsed the conclusion that “radionuclide concentrations in ashes and slags from coal-fired power stations are significantly higher than the corresponding concentrations in the earth’s crust”. In other words, coal used for electricity production provides an immediate counter-example to the said claim. It would be interesting to speculate whether the conclusion of the Court still holds in absence of that leg. JM

  2. by Phedon Nicolaides

    Thank you for your comment. Paragraph 79 of the judgment states ‘as only that method [i.e. nuclear power] generates radioactive waste arising from the use of such fuel.’ You may be right that there are radioactive by-products in coal-fired power stations. I, of course, cannot assess the correctness of the scientific information on which the judgment is based.

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