Selectivity

Selectivity - State Aid Uncovered photos 1

Introduction

On 14 December 2023, the Court of Justice, in its judgment in joined cases C-693/21 P and C-698/21 P, EDP España & Naturgy Energy Group v European Commission, faulted the Commission for failing to provide a sufficient explanation why a Spanish measure was selective in the meaning of Article 107(1) TFEU.1 According to the Court of Justice, the Commission should have explained at least succinctly the reasons for the selectivity of the measure in question even if it had decided only to open the formal investigation procedure rather than definitively conclude that the measure constituted State aid.

EDP España and Naturgy Energy Group appealed against the judgment of the General Court in case T-328/18, Naturgy Energy Group v European Commission, by which the General Court dismissed the action of Naturgy Energy Group for annulment of the Commission decision concerning aid scheme SA.47912 on environmental incentives provided by Spain to coal-fired power plants.

Background

In 2007, the Spanish Ministry for Industry, Tourism and Trade, in a broader policy of incentivising producers of electricity to invest in additional production capacity, it also implemented a measure that provided financial support to coal-fired installations. The purpose of that measure was to diversify the sources of energy in Spain.

In April 2015, the Commission launched an inquiry into the capacity mechanism market in 11 Member States, including Spain. In November 2017, the Commission adopted the decision at issue by which it initiated the formal investigation procedure. In that decision, the Commission stated that it had reached the preliminary conclusion that the measure at issue constituted State aid and that it had doubts as to its compatibility with the internal market.

In May 2018, Naturgy Energy Group & EDP España brought an action against that decision before the General Court. Their action was dismissed by the General Court. In their appeal to the Court of Justice, the two companies argued that the Commission had not sufficiently explain why the measure in question was selective.

Indeed, the Commission’s assessment of selectivity in decision SA.47912 was very brief and as follows:

“3.1.2. Existence of a selective advantage

(28) Since the scheme is exclusively open to power plants using coal as their main fuel and included in the PNRE-GIC, the measure appears to be selective.”

“(29) The power plants receive compensation for specific investment costs, which they would not receive under normal market conditions. The Commission’s preliminary view is therefore that the measure confers an advantage on its beneficiaries.”

The obligation of the Commission to explain sufficiently its reasoning also when it has doubts as to the compatibility of the aid with the internal market

The main issue examined by the Court of Justice was whether the Commission had adequately explained why it held the view that the Spanish incentives conferred a selective advantage, even though it was only a preliminary finding in its decision to open the formal investigation procedure.

The Court of Justice, first, recalled that “(61) the statement of reasons required by Article 296 TFEU must be appropriate to the measure at issue and must disclose in a clear and unequivocal fashion the reasoning followed by the institution which adopted that measure in such a way as to enable the persons concerned to ascertain the reasons for the measure and to enable the Courts of the European Union to exercise their power of review. The requirements to be satisfied by the statement of reasons depend on all the circumstances of each case, in particular, the content of the measure in question, the nature of the reasons given and the interest which the addressees of the measure, or other parties to whom it is of direct and individual concern, may have in obtaining explanations. It is not necessary for the reasoning to go into all the relevant facts and points of law, since the question whether the statement of reasons meets the requirements of Article 296 TFEU must be assessed with regard not only to its wording but also to its context and to all the legal rules governing the matter in question”.

“(62) As regards a Commission decision to initiate the formal investigation procedure, it should be recalled that Article 6(1) of Regulation 2015/1589 provides that such a decision is to summarise the relevant issues of fact and law, include a ‘preliminary assessment’ of the Commission as to the aid character of the State measure at issue and set out the doubts as to its compatibility with the internal market.”

“(63) Furthermore, …, the provisional nature of the classification of a State measure as State aid in such a decision is confirmed by Article 9(2) of Regulation 2015/1589, which provides that, at the end of the formal investigation procedure, the Commission may find that that measure does not constitute aid.”

“(64) However, as is apparent from Article 4(4) of that regulation, the fact remains that, in the context of a decision to initiate a formal investigation procedure, the Commission finds, even if only on a preliminary basis, both that the measure under examination is State aid and that there are doubts as to its compatibility with the internal market.”

“(65) That decision also entails independent legal effects, particularly as regards the suspension of the measure under examination … National courts must refrain from taking decisions which conflict with such a decision of the Commission, even if it is provisional. Consequently, those courts are required to adopt all the necessary measures with a view to drawing the appropriate conclusions from an infringement of the obligation to suspend the implementation of the measure in question”.

“(66) Lastly, it is also necessary to take into account the fact that, in accordance with Article 6(1) of Regulation 2015/1589, the formal investigation procedure allows the Member State concerned and other interested parties to submit comments on the Commission’s analysis.”

“(67) It follows that, even if the Commission’s analysis is provisional, that institution is nevertheless required to disclose in a clear and unequivocal fashion the reasons why it considered that the measure in question was liable to constitute State aid.”

On the basis of the above analysis, the Court of Justice concluded that “(70) the General Court erred in law, …, by holding that the Commission was not obliged to set out, even succinctly, the reasons why the measure at issue favoured certain undertakings or the production of certain goods over other undertakings in a comparable factual and legal situation, on the ground, inter alia, that to require in all circumstances, at the preliminary analysis stage set out in a decision to initiate the formal investigation procedure, a statement of reasons relating to the comparability of the situations might prove to be premature.”

The concept of selectivity

Next, the Court of Justice examined the concept of selectivity. It recalled that “(71) a measure which benefits only one economic sector or some of the undertakings in that sector is not necessarily selective and is selective only if, within the context of a particular legal regime, it has the effect of conferring an advantage on certain undertakings over others, in a different sector or the same sector, which are, in the light of the objective pursued by that regime, in a comparable factual and legal situation”.

This is an important statement. The wide or narrow scope of application of a public measure is not a decisive element. What matters is the comparability of the undertakings that fall within the scope of a measure and those that are excluded.

“(72) It follows from the foregoing that, if the Commission considers, in order to decide to initiate a formal investigation procedure, that a measure is selective, it must state, even in a succinct manner, the reasons why it considers that, within the context of a particular legal regime, that measure has the effect of conferring an advantage on certain undertakings over

others which are, in the light of the objective pursued by that regime, in a comparable factual and legal situation.”

“(73) However, it is in no way apparent …, that the Commission set out the reasons why the coal-fired power plants included in the [scheme in question], which benefited from the measure at issue, were in a factual and legal situation comparable to that of other power plants, which did not benefit from that measure, in the light of the objective pursued by that measure.”

“(74) The General Court merely found that the contested decision indicated that the coal-fired power plants included in the PNRE-GIC benefited exclusively from the measure at issue, in order to consider that the word ‘exclusively’, …, made it possible to distinguish the coal-fired power plants listed in the PNRE-GIC from power plants using other technology or any power plant which was not included in that plan.”

The comment of the Court of Justice in the above paragraph is also important. The mere fact that a measure applies “exclusively” to certain undertakings does not necessarily confer to them a selective advantage in relation to other undertakings. The former enjoy a selective advantage only if they are in a comparable situation to the latter.

“(75) Furthermore, …, the General Court referred, in a general manner, to the nature of the decision at issue, its wording, its content, the context in which it was adopted and all the relevant legal rules in order to hold that, despite the fact – which it itself acknowledged – that the statement of reasons relating to the selective nature of the measure at issue was of a ‘summary’ nature, the applicant at first instance had been able to understand the reasons underlying the Commission’s preliminary view that the measure at issue appeared to be selective.”

“(76) It should be stated that although, …, the General Court, as a basis for its analysis, also referred to paragraph 30 of the decision at issue, which mentions the existence of a competitive relationship between the beneficiaries of the measure and other electricity producers, such a factor cannot moreover suffice to explain to the requisite legal standard the comparability of the situations between the power plants benefiting from the measure at issue and those which do not benefit from it”.

“(77) It should be added that although, in order to assess the statement of reasons for a decision, it is indeed necessary to examine its content in its entirety …, such an examination cannot compensate for the absence of any indication of the comparability of the situations, as in the present case, as between the power stations which benefit from the measure at issue and those which do not.”

“(78) In the light of the foregoing, the appellants’ first grounds of appeal in Cases C-693/21 P and C-698/21 P must be upheld.”

Final judgment

If the Court of Justice quashes the decision of the General Court, it may itself give final judgment in the matter, where the state of the proceedings so permits. That is so in the present case.

“(82) In that regard, it should be noted that, …, in a decision to initiate a formal investigation procedure, the Commission is required, under Article 296 TFEU, to disclose in a clear and unequivocal fashion the reasons why it considered that the measure in question was liable to constitute State aid. …, if the Commission considers that a measure is selective, it must state, even in a succinct manner, the reasons why it considers that, within the context of a particular legal regime, that measure has the effect of conferring an advantage on certain undertakings over others which are, in the light of the objective pursued by that regime, in a comparable factual and legal situation.”

“(83) It is sufficient to note that, in the present case, …, the Commission did not comply with its obligation to state reasons under Article 296 TFEU, in that it failed to set out the reasons why, in its view, the measure at issue favours certain undertakings or the production of certain goods over other undertakings in a comparable factual and legal situation and is, therefore, selective in nature.”

Conclusions

Two important conclusions may be drawn from this case. First, even in a decision that sets out its preliminary findings, the Commission must provide sufficient explanations.

Second, a measure is selective not simply because it favours only certain undertakings. It is selective because it excludes undertakings which are in a similar situation. As the Court put it, the favoured and the excluded undertakings must be in a comparable situation. Their comparability is determined by the objective of the aid measure. Therefore, a finding of selectivity requires three steps: First, identification of the objective of the measure; second, identification of all undertakings that are in a comparable situation, in view of the objective of the measure; and, third, discrimination or exclusion of some of the comparable undertakings from the advantages conferred by the measure in question.

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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 is professor at the University of Maastricht and the University of Nicosia. 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.

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