State Resources, Control and Imputability

State Resources, Control and Imputability - State Aid Uncovered photos 1

Introduction

A public measure can be classified as State aid only when it is funded from state resources. Measures funded from the budgets of public authorities are always considered to be supported by state resources. However, measures not funded from state budgets may still be supported by state resources. This is because, rather counterintuitively, the concept of state resources covers also funds from private sources, which come under the constant control of the state.

On 24 January 2024, the General Court examined the conditions under which private funds could be classified as state resources in its judgment in case T-409/21, Germany v European Commission.1

Germany sought annulment of Commission decisions concerning case SA.56826 and case SA.53308. The two schemes supported heating and cooling systems and combined heat and power [CHP] plants. In both cases the Commission found the presence of State aid which, however, was assessed to be compatible with the internal market. Germany had notified the two schemes for purposes of legal certainty, even though it considered that they were free of State aid because, in its view, no state resources were used to finance the schemes.

The mechanism for financing the two schemes

In paragraphs 16 to 21 of the judgment, the General Court described how the two schemes were financed. The operators of electricity transmission systems were legally obliged to pay the beneficiaries connected to their systems [i.e. operators of CHP plants and operators of heating & cooling systems] certain amounts defined in the “2020 KWKG” – the relevant law.

In turn, system operators were entitled, but not required to do so by law, to pass on to their customers the costs associated with the schemes as a surcharge – the so-called “KWKG levy”. By way of derogation, system operators had to apply a reduced KWKG levy for energy-intensive consumers such as hydrogen producers. The amount of the KWKG levy was calculated each year by the system operators in accordance with a methodology laid down in the 2020 KWKG.

In order for each system operator to be compensated for the additional financial burden resulting from its obligations under the 2020 KWKG, that law put in place a mechanism by which that burden was shared equitably between the distribution and transmission system operators in proportion to the amount of electricity supplied to consumers connected to their network.

Then, the General Court began its analysis by referring, first, to the definition of the concept of state resources because the existence of state intervention or through state resources was the only condition at issue in the present case. In order for advantages to be classified as “aid” within the meaning of Article 107(1) TFEU, they must, first, be granted directly or indirectly through state resources and, second, be imputable to the state [paragraph 31 of the judgment].

Germany did not dispute that the measures at issue were imputable to it. After all, those measures were introduced by legislation and, therefore, they were imputable to the state. What Germany did dispute was the Commission’s conclusion that those measures were funded by state resources.

The General Court observed that the prohibition laid down in Article 107(1) TFEU covers both aid granted directly by the state or through state resources and aid granted by public or private bodies set up or designated by the state for the purpose of administering it [para 34].

The Court stressed that EU law could not accept that the mere creation of autonomous institutions responsible for the distribution of aid made it possible to circumvent the rules on State aid [para 35].

Funds financed by a tax or other compulsory levies under national legislation and managed and distributed in accordance with that legislation and, on the other hand, sums which remain constantly under public control may be classified as state resources within the meaning of Article 107(1) TFEU, and therefore be at the disposal of the competent national authorities. Those two criteria constitute alternative criteria for the concept of state resources within the meaning of Article 107(1) TFEU [para 36].

In other words, here the General Court did not examine funds from the budgets of public authorities. It examined, instead, other sources of funds which even if they did not enter the state budget were still at the disposal of the state to be used for purposes decided by the state. The statement in paragraph 36 of the judgment is important. Private resources which are controlled by the state also count as state resources even if their source is private. The question which, of course, arises is what are “control” and “disposal” in this context. They

must mean that the state can identify a resource which then it puts at its disposal by deciding how it can be used, even if a non-state entity is entrusted to manage that resource.

Germany argued that neither did the KWKG levy, nor the amounts paid by the system operators to the operators of CHP plants, storage facilities and district heating and cooling networks constitute a tax involving the commitment of state resources. It further argued that the resources received by the system operators were not under constant public control and at the disposal of the state.

In its analysis of the application of the concept of state resources to the present case, the Commission distinguished, on the one hand, between the measures supporting CHP plants and, on the other hand, the measure relating to the reduction of the KWKG levy in favour of hydrogen producers. For this reason, the General Court also examined the possible use of state resources separately for CHP plants and for the hydrogen producers.

The CHP support measures I: Was the revenue from a tax or a compulsory levy?

The General Court, first, considered whether the measure in question was financed by a tax or compulsory levy and identified the relevant principles in the case law.

Revenue from a surcharge imposed by the state on purchasers of electricity are akin to a tax levied on electricity and result in state resources within the meaning of Article 107(1) TFEU [para 56].

Funds must therefore be regarded as state resources if they come from compulsory contributions imposed by legislation and if they are managed and distributed in accordance with that legislation. In that regard, it is irrelevant that the financing mechanism does not, in the strict sense, fall within the category of levies of a fiscal nature in national law [para 57].

So, the concept of state resources is an autonomous EU term and it applies regardless of how national law classifies funds or revenue.

On the other hand, the Court said, the fact that the financial burden of the levy is borne by a defined category of persons is not sufficient to establish that the funds resulting from that levy are state resources. However, that levy must be compulsory under national law. The General Court recalled that, in other cases, it was not sufficient for system operators to pass on to their final customers the additional costs caused by their obligation to purchase green electricity at the tariffs set by law, since that practice was not a legal obligation [para 58].

Then the General Court applied the above principles to the case at hand.

It noted that the system put in place by the 2020 KWKG was characterised by the existence of two levels in the electricity supply chain. The first level corresponded to the relationship between the operators of CHP plants and the system operators. The second level was the relationship between system operators and their downstream customers. System operators were private entities [para 59].

In the context of the first level, the system operators had a legal obligation to pay financial support to the operators of eligible CHP plants. Under the second level, system operators could, without being obliged to do so by law, pass on the financial burden resulting from their obligation to buy electricity from CHP plants to their customers by means of the KWKG levy [para 60].

In order for funds to be regarded as state resources, they must originate from taxes or other compulsory levies imposed by state legislation and must be managed and distributed in accordance with that legislation [para 64].

So, we see here a double criterion: the compulsory nature of a levy or surcharge and the accompanying instructions given by the state to the entity that manages the revenue from the levy or surcharge on what to do with that revenue.

Therefore, the existence of a surcharge or compulsory levy concerned the source of the funds used to grant an advantage, in the sense that it made it possible to establish that state funds were used to finance that advantage [para 65].

Therefore, the Court held, the Commission could not take the view that the compulsory payments by the system operators to the operators of CHP plants, taking place at the first level of the supply chain, constituted a tax or other compulsory levy capable of being characterised as state resources [para 67]

In past cases, compulsory levies collected and managed by electricity distribution and transmission system operators at the second level of the supply chain served to compensate for the additional costs they incurred as a result of their legal obligations at the first level of that chain. The passing-on of the additional cost by means of a compulsory levy equivalent to a tax on electricity was distinct from the legal obligations of electricity distribution and transmission system operators to support green electricity producers. The funds used to implement those obligations originated from compulsory levies on electricity imposed on electricity consumers, which demonstrated the state financing of the measures [para 69].

In conclusion, the Court held that, given that the KWKG levy could not be classified as a tax or compulsory levy, the Commission had not established that the first criterion referred to in paragraph 36 had been satisfied [para 78].

In response to the Commission’s counter-arguments, the General Court admitted that the 2020 KWKG was based on a state initiative and that it pursued a public policy of support for the production of CHP electricity. It was also true that the system operators were obliged to pay the sums provided for by law to the operators of CHP plants. Indeed, the CHP support measures were introduced by legislation, with the result that they had to be regarded as imputable to the state. But, the imputability of the measures to the state, although necessary for the purposes of classifying those measures as State aid, was not in itself sufficient. It also had to be shown that the advantages in question were granted directly or indirectly through state resources [paras 81-85].

The General Court also rejected the Commission’s argument that the mere fiscal nature of a contribution was sufficient for it to be considered to constitute a state resource. The General Court again admitted that the criterion relating to the existence of a tax or other compulsory levies could make it possible to find that state resources had been committed, without having to demonstrate that the criterion relating to constant state control of the funds was also satisfied [para 87].

But the Court went on to reiterate that the criteria referred to in paragraph 36 were alternative. This meant that in order for the criterion relating to the existence of a tax or compulsory levy to hold, it was necessary to demonstrate that funds came from contributions which were compulsory in law, imposed by state legislation on a defined category of persons, and that those funds were managed and distributed in accordance with that legislation [para 88].

Again, we see the double condition of compulsory payment and management of the revenue raised from taxation.

Then the General Court referred to other cases where it was held that national legislation which required an electricity distribution operator to purchase green electricity at a price higher than the market price and which provided that the resulting additional costs were to be financed by a compulsory levy borne by final consumers constituted an intervention through state resources within the meaning of Article 107(1) TFEU. It should be noted that the advantage compulsorily granted to the beneficiaries at the first level of the supply chain was financed by a mandatory levy at the second level of the supply chain. However, the Commission had not established that that was the case here [para 89].

The CHP support measures II: Were the resources used under constant state control?

Next, the General Court considered whether, in the alternative, Germany could exercise “constant public control” over the resources that financed the measures in question.

The Court, first, noted that the Commission relied on the first criterion identified in paragraph 36 of the judgment, relating to the existence of a tax or compulsory levy, in order to conclude that the measures to support the CHP were financed through state resources. Therefore, the Commission did not clearly and expressly examine the second criterion relating to constant public control of resources [paras 91-93].

Then the Court clarified that although the failure to carry out a clear and express examination of that second criterion does not, in itself, constitute an error of law, …, given that the two criteria identified in paragraph 36 of the judgment are alternative, nevertheless the Commission also failed to establish that the measures to support the CHP producers were financed through state resources on the basis of the second criterion [para 94].

The Commission counter-argued that the state nature of the funds stemmed from the lack of discretion of the system operators in the context of the payment of the financial support provided for by the 2020 KWKG.

The General Court responded that Article 107(1) TFEU covered all the financial means which public authorities could actually use to support undertakings, irrespective of whether or not those means belonged permanently to the assets of the state. Even if sums corresponding to the aid measure concerned were not permanently in the possession of the state, the fact that they remained constantly under public control, and therefore at the disposal of the competent national authorities, was sufficient for them to be classified as state resources [para 96].

In the present case, it is true that system operators had to pay the beneficiaries [i.e. CHP plants] without being able to derogate from the eligibility criteria for those beneficiaries or from the amounts of financial support provided for by law [para 97].

However, the fact that the law laid down the detailed arrangements for the allocation of financial support was not such as to characterise it as a transfer of state resources, but only to assign the imputability to the state for the measures supporting CHP plants [para 99].

This is indeed correct. An undertaking can be forced by the state to compensate another undertaking without State aid being involved, even though such a measure can be imputed to the state, as long as no resources are earmarked or no resources are designated for that purpose. By contrast, the designation of private resources that are to be used for a specific purpose seems to be equivalent to the state exercising constant control over them. It is also reasonable to consider that constant control should be understood to mean that designated resources can only be expended for the purposed defined by law.

Application of the PreussenElektra case-law [C-379/98]

The General Court also examined how the principles enunciated by the Court of Justice in landmark PreussenElektra judgment could apply to the present case. This is because in its decision, the Commission had found that the measures in support of CHP plants did not consist of “mere price regulation, as was the case in PreussenElektra. In that case, Germany had by law imposed an obligation on system operators to purchase green electricity at a certain price or of a certain quantity.

The General Court clarified that the Courts of the European Union did not exclude the commitment of state resources on account of the way in which the advantage was conferred on the recipients, namely by fixing the price of products or by imposing an obligation to purchase products at a certain price or quantity [para 104].

In PreussenElektra, it was held that the obligation imposed on system operators to purchase green electricity at fixed minimum prices could not be regarded as intervention through state resources since there was no direct or indirect transfer of state resources to the green electricity producers. In such situations, private undertakings were not mandated by the state to manage a state resource, but were bound by an obligation to purchase using their own financial resources. The decisive factor was not the fact that private undertakings were obliged to purchase green electricity, but the fact that they used their own resources to comply with that obligation [paras 105-108].

The General Court concluded that in order to exclude the application of the case-law arising from PreussenElektra, the Commission had to establish, irrespective of whether or not the measures supporting CHP plants constituted a measure of mere price regulation, that the advantage in favour of the operators of CHP plants and other CHP-related installations was not granted by the system operators by means of their own financial resources, but that they were mandated by the state to manage state resources [para 112].

The reduced KWKG levy in favour of hydrogen producers

The Commission had found that the reduced KWKG levy in favour of hydrogen producers resulted in a waiver of state resources, which constituted a transfer of state resources because those producers did not pay the full levy.

The General Court observed that the 2020 KWKG did not require system operators to pass on the KWKG levy to their customers, with the result that that levy was not a burden that the latter had to pay. That levy could not be regarded as a tax or as a compulsory levy in law capable of characterising state resources [para 123].

Furthermore, the wording of the 2020 KWKG law did not indicate that hydrogen producers were obliged to pay the KWKG levy. That law only provided, inter alia, that, for electricity-intensive undertakings, such as hydrogen producers, the reduction of the KWKG levy applied in so far as it did not exceed a certain amount. However, it did not follow from that provision that the KWKG levy was compulsorily payable by hydrogen producers [para 124]. Consequently, in so far as the KWKG levy was not a state resource, the reduction of that levy for hydrogen producers did not constitute a waiver of state resources [para 125].

On the basis of the above reasoning, the General Court proceeded to annul the Commission decisions on SA.56826 and SA.53308.

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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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