How to Determine Selectivity

A measure is selective when it excludes undertakings that are equally capable of contributing to the achievement of its objectives.

Introduction

Since no two undertakings are exactly the same, how can it be determined whether they are in a comparable situation? Differences in their features such as size or the type of technology they use do not necessarily mean that they are not in a comparable situation. This is because their comparability for State aid purposes is determined by the objective of the public measure that offers them subsidies to induce them to do something. In the case that is reviewed in this article, the Commission argues that a public measure is selective when it excludes undertakings that, despite being different from the aid recipients, are as capable of achieving the objectives of that measure and, therefore, are in a comparable situation to the aid recipients.

In 2009, the Commission received a complaint from Astra, the satellite broadcaster, that Spain subsidised the switch from analogue television to digital television in remote and less urbanised areas of the country. In 2010, the Commission opened the formal investigation procedure. In 2013, the Commission adopted Decision 2014/489 that found that State aid had been granted to the operators of terrestrial television platforms for the deployment, maintenance and operation of digital terrestrial television [DTT]. In addition, the aid was incompatible, among other things, for violating the principle of technological neutrality.

The 2013 Decision was appealed by Spain, certain Spanish regions and several of the operators [see, for example, T-461/13, Spain v Commission]. In 2015, the General Court dismissed the appeals. New appeals were then lodged at the Court of Justice. Some of them were dismissed but in December 2017, the Court of Justice, in case C-70/16 P, Autonomous Community of Galicia and Retegal v Commission, set aside the respective judgment of the General Court and annulled the 2013 Decision, due to the Commission’s failure to explain why the measure in question was selective.

Indeed, the Commission dealt with the selectivity of the measure in a single paragraph. It only stated that “(113) the advantage provided by the measure, including the ongoing aid, to the network operators is selective, as it only applies to the broadcasting sector. Within that sector it only concerns the undertakings active in the terrestrial platform market. The legislative framework sets technical specifications of eligibility that only terrestrial technology is able to fulfil. Moreover, only undertakings in the terrestrial platform market received the ongoing aid for maintenance and operation of the network. Therefore network operators who operate other platforms, such as satellite, cable and IPTV, are excluded from the measure.”

The Court of Justice accepted the arguments of Galicia and Retegal that the Commission had not shown that the aid recipients and the companies that were excluded from the measure were in a comparable situation. More precisely, the Court of Justice held that there was “(61) no indication of the reasons why undertakings active in the broadcasting sector should be regarded as being in a factual and legal situation comparable to that of undertakings active in other sectors or why undertakings using terrestrial technology should be regarded as being in a factual and legal situation comparable to that of undertakings using other technologies.”

Consequently, the Commission had to re-open the case and re-adopt its decision. The new decision, 2021/2034, contains a more extensive explanation why the Spanish measure was selective.[1]

Were the beneficiaries undertakings?

Because some of the beneficiaries were departments or entities belonging to public authorities, the Commission, first, had to determine whether they could be classified as undertakings.

It explained that broadcasting had been found by the Court of Justice to constitute an economic activity and then added more broadly that “(150) A market exists if other operators would be willing or able to provide the service in question, which is the case. […] The fact that the public undertakings and town councils do not receive remuneration for the provided services does not preclude the activities in question from being considered to be an economic activity.” It also cited in footnote 74 the judgment of the General Court in the landmark Leipzig-Halle case according to which “‘the fact that an activity is not engaged in by private operators or that it is unprofitable are irrelevant criteria in regard to the classification of that activity as an economic activity”.

It also disagreed with the arguments of Spain “(151) that operation of the terrestrial network by the Autonomous Communities, public undertakings and town councils falls within the exercise of official powers as a public authority and is therefore outside the scope of Article 107 TFEU. It has been recognised that the activities linked to the exercise of State prerogatives by the State itself or by authorities functioning within the limits of their public authority do not constitute economic activities for the purposes of competition rules. Such activities are those that form part of the essential functions of the State or are connected with those functions by their nature, their aim and the rules to which they are subject.”

“(152) In this light, the Commission is of the opinion that in the present case the operation of the terrestrial broadcasting network does not fall within the State’s obligations or prerogatives nor is it a typical activity that could only be performed by the State.”

Selective advantage

The Commission began its analysis of selectivity by recalling its definition in the case law. “(168) According to the case law of the Court a measure 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 objectives pursued by that regime, in a comparable factual and legal situation.’”

Then it developed a main line and a subsidiary line of reasoning. The main line of reasoning presented a rather novel approach to identification of selectivity. It does not appear to have been tested before the Court of Justice so far, but it is an argument that has been advanced by officials of the Commission in several academic conferences.

The main line of reasoning ran as follows. “(169) Taking into account that the aid is in the form of subsidies, the system of reference in this case are the normal market conditions under which companies should operate. The objective of the system of reference is not to give subsidies, since under normal market conditions, operators bear their own costs. The measure under investigation aimed at accelerating the digital switchover […] The measure constitutes a derogation from the system of reference (i.e. normal market conditions), since it alleviates the normal costs for certain companies.”

“(170) The beneficiaries of the scheme are therefore favoured compared to all other undertakings in all other sectors and in the same sector, which have to bear their own costs. The measure is therefore prima facie selective.”

One can sympathise with this argument. But it seems to me that the Commission is committing the same error it made in its analysis of turnover taxes in Hungary and Poland. Both the General Court and the Court of Justice concluded in those cases that the Commission defined an arbitrary reference system that did not exist in the national legislation of Hungary or Poland. What are the “normal market conditions” that the Commission refers to? Where are they defined in the relevant Spanish rules? Are they the conditions that prevail before state intervention? If yes, this the benchmark for determining the existence of advantage. Is the Commission saying that the same benchmark can be used to determine the existence of selectivity?

Because this is a novel approach, the Commission must have thought it prudent to develop a subsidiary line of reasoning that is based on a more traditional approach.

The Commission began its subsidiary line of reasoning by addressing certaon of the arguments of the aid recipients. “(171) Some of the parties have alleged that there was no selectivity because digital terrestrial operators would be in charge of a public service remit. […] it should be recalled that a measure remains selective, even when its objective is to favour financially organisations regarded as socially deserving or when they create positive effects on the economy, which go beyond their individual interest. The positive effects of a digitalisation of the broadcasting signal therefore cannot undermine the conclusion of a prima facie selectivity of the measure.”

“(172) In any event, even if the system of reference was limited to the broadcasting sector (which is not the case), and even if the aim of the system of reference was considered as being the transmission of digital broadcasting (which is not the case either), it should be noted that, in the broadcasting sector typically several platforms compete with each other and all these platforms (such as terrestrial, cable, satellite or DSL networks) are able to provide services for the transmission of digital broadcasting signal.”

“(173) The selectivity of the measure would be assessed by taking into consideration all undertakings providing or able to provide the extension of digital broadcasting coverage in Area II. If network operators using other technologies than terrestrial – especially satellite – are able to provide the services for an extension of coverage in Area II, they should be considered as being in a comparable factual and legal situation, in the light of the objectives of the legal regime concerned.”

This is an important statement. The Commission argues that the Spanish measure was selective because it treated undertakings differently when in fact they should have been treated because they had the same ability to provide digital broadcasting which was the purpose of the measure.

“(174) Spain argued that the terrestrial and the satellite technology could not be considered as being in a comparable legal and factual situation. Spain explains that the legal framework for DTT technology and other technologies are very different. At the time of the adoption of the measures at stake, different laws regulated the different technologies. In Spain’s view […], the legal framework for the DTT technology and other technologies are still different. Moreover, according to Spain, DTT technology is more cost-effective than satellite […] Spain argues that no discrimination took place against undertakings using satellite technology, since these other technologies are not in a similar legal and factual situation as DTT.”

“(175) The above arguments cannot be accepted. The Commission considers that the fact that different technologies are subject to different specific regulations has no relevance when assessing the selectivity criterion in this case. In the context of the regulatory differences, Cellnex referred to the Eventech judgment whereby the Court held that the practice of permitting Black Cabs to use bus lanes while prohibiting minicabs from using those lanes does not seem to confer a selective economic advantage on Black Cabs. In the Commission’s view the Eventech case has limited relevance in this case, since the facts of that case are very different. In Eventech, the services offered by the two groups of operators (i.e. Black Cabs and mini cabs) were quite different. In the case at hand, DTT and satellite could provide essentially the same service (i.e. transmitting digital television signal in Area II). The regulatory differences of these two technologies do not result in the provision of different services.”

“(176) Different technologies could have been used for the extension of coverage in Area II. The differences in technology specific regulations do not affect the ability of these different technologies (i.e. DTT and satellite) to offer the services for the transmission of television signals in Area II. The Commission considers that technologies other than DTT – notably satellite – would be able to provide the services of transmitting television signal in Area II”.

“(177) Apart from technical and qualitative criteria, the examples of the previous recitals also indicate that there is no inherent economic reason why other platforms should be excluded ex-ante for Area II.”

“(187) The contested measure favours the digital terrestrial platform operators (they are the only operators who can benefit from the measure), despite the fact that operators using other technologies (especially satellite) are able to provide the services in question and therefore they are in a legally and factually comparable situation as the terrestrial operators, in light of the objectives of the legal regime concerned. The contested measure therefore entails discrimination.”

“(189) The measure attributes a selective economic advantage to individual companies that exercise commercial activities. The public financing grants a selective advantage to the beneficiaries by reducing the costs they would normally bear under normal market conditions.”

“(190) On the basis of the above, the Commission considers that the measures under investigation are selective in the sense of Article 107(1) TFEU.”

Compliance with the Altmark conditions?

Spain and the aid recipients argued that the subsidies were not State aid because they conformed with the Altmark conditions. Given that the Altmark conditions are cumulative, the Commission chose to examine only the first and fourth conditions.

First Altmark condition: Clear definition and assignment of public service obligations

The Commission observed that “(198) Spanish law does not declare the operation of a terrestrial network to be a public service.”

“(203) In their actions for annulment of the 2013 Decision, various parties claimed that operation of the digital terrestrial network has been attributed as an SGEI by an official act in a given region and brought the relevant documents to the Commission’s attention. Having examined these documents during the Court proceedings, the General Court confirmed the Commission view that none of those documents constituted the required act of attribution. The said General Court judgments have been confirmed by the Court of Justice.”

“(204) It is therefore concluded that under Spanish law the operation of terrestrial networks does not have the status of a public service.”

“(205) As a result, it has not been established that the first Altmark condition has been satisfied.”

“(217) In any event […], there has been no act of attribution of the public authority entrusting the terrestrial platform operators with an SGEI mission, including a public service mandate and a clear definition of the tasks and related obligations.”

Therefore, designating a service as being in the public interest is not enough. One or more undertakings have to be entrusted with specific tasks.

Fourth Altmark condition: Least costs to the community

“(219) In the absence of a tender, the fourth Altmark condition requires that the level of necessary compensation must be determined on the basis of an analysis of the costs which a typical undertaking, well run and adequately provided with means of transport so as to be able to meet the necessary public service requirements, would have incurred in discharging those obligations. For this purpose, the relevant revenues and a reasonable profit for discharging the obligations should be taken into account.”

“(220) In the Autonomous Communities where a public tender has been organised for the extension of coverage and this call did not comply with the principle of technological neutrality and, in particular, was not justified by any prior comparison of costs, such a procedure cannot be considered as satisfying the fourth Altmark criterion. A call for tender that – without any valid reason – hinders the participation of certain interested operators cannot be considered open, transparent and non-discriminatory. Since the calls for tender were tailor-made for terrestrial operators, other platform operators – that could have carried out the extension of coverage –considered themselves automatically excluded from the procedure. Therefore the Commission concludes that in the areas where a public tender has been organised in breach of the principle of technological neutrality, the fourth Altmark condition cannot be seen as being fulfilled by the existence of a tender.”

“(221) In the case of the Basque Country where there was no tender, the Basque authorities argue that the criterion is fulfilled due to the fact that Itelazpi itself is a well-run and suitably equipped company to perform the requested activities. On the basis of a cost comparison, the Basque authorities conclude that satellite provision would have been more expensive than upgrading Itelazpi’s terrestrial network. However, to fulfil the fourth Altmark criterion, a comparison with satellite technology is not sufficient to establish that Itelazpi is efficient. There could also have been other terrestrial operators which could have performed this service at lower cost.”

“(222) In the light of the above it is concluded that in the case of the Basque Country too, the fourth Altmark condition has not been fulfilled. Given that these conditions are cumulative, it cannot be considered that the financing granted to Itelazpi by the Basque Country authorities does not constitute State aid because it fulfils the conditions for being deemed compensation for the provision of a service of general economic interest.”

“(223) As regards the other cases where there was no tender, the Spanish authorities have provided no analysis of the costs which a typical undertaking, well-run and adequately provided with means to meet the public service requirements, would have incurred.”

Conclusion

In the end the Commission found, as in its 2013 decision, that the Spanish measure constituted State aid. The aid was incompatible with the internal market because it was not technologically neutral as it favoured terrestrial platforms and it had to be recovered.

[1] The Commission Decision is published in OJ L 417, 23/11/2021. It can be accessed at:

https://eur-lex.europa.eu/eli/dec/2021/2034

Tags

Über

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.

Zusammenhängende Posts

18. Jan 2022
State Aid Uncovered von Phedon Nicolaides

A Non-Selective Financial Tax with a Narrow Scope

The scope of a tax must be objectively defined in order for those excluded from the tax not to benefit from a selective advantage. Introduction Taxes are burdens, so they fall outside the scope of Article 107(1) TFEU which prohibits selective benefits funded with state resources. Normally, Article 107(1) applies to benefits from tax exemptions or tax derogations which result […]
16. Nov 2021
State Aid Uncovered von Phedon Nicolaides

Selectivity and Tax Measures

The reference system for determining the selectivity of a tax measure must have its own logic and be autonomous and its identification depends on the content, structure and specific effects of the applicable rules. A measure that does not exclude any particular undertaking can be selective if it treats differently undertakings which are in similar situations. Introduction On 6 October […]
09. Nov 2021
State Aid Uncovered von Phedon Nicolaides

Compensatory Payments and State Resources

Funds used in compensation mechanisms mandated by the state become state resources Introduction The Court of Justice has stressed repeatedly that any resource over which the state can exercise control becomes a state resource, regardless of whether it is managed by a public authority or a private entity. Member States, however, keep inventing novel and complicated arrangements in which mandated […]
24. Aug 2021
State Aid Uncovered von Phedon Nicolaides

It is Difficult to Challenge a Commission Decision Opening the Formal Investigation Procedure

The assessment of the Commission in an “opening decision” is only provisional. The Commission is not required to prioritise its investigations or to extend them to anyone who may be in a similar situation. The right of non-discrimination is not violated when the Commission chooses to investigate some instead of all possible cases of State aid. An individual measure that […]
29. Jun 2021
State Aid Uncovered von Phedon Nicolaides

Amazon and the Difficulty of Finding a Comparable Tax Payer

To apply the Arm’s Length Principle to transactions between two related companies, the Commission must identify the less complex company of the two and compare it to a similar independent company. Methodological errors in the application of the Arm’s Length Principle by national authorities does not necessarily prove the existence of advantage. Introduction On 12 May 2021 the Commission suffered […]
11. Mai 2021
State Aid Uncovered von Phedon Nicolaides

State Aid Measures May not be Funded through Discriminatory Taxes

A tax that is levied on both imported and domestic products but its revenue finances only domestic products infringes fundamental provisions of the EU Treaty. Introduction Member States finance the generation of electricity from renewable energy sources [RES] with revenue they raise through levies or charges on consumers of electricity. On 14 April 2021, the General Court in judgment in […]
04. Mai 2021
State Aid Uncovered von Phedon Nicolaides

Turnover Taxes Can Be Progressive without Being Selective

Progressive rates can be part of a reference tax system. The reference tax system is, in principle, made up of the tax base, the tax rates and the taxable events. Introduction Progressive turnover taxes were thought to be selective because they are levied on gross revenue before costs are deducted and larger volumes of revenue are taxed at higher rates. […]
19. Jan 2021
State Aid Uncovered von Phedon Nicolaides

Funding of Public Hospitals

Public healthcare provided in accordance with the principle of social solidarity is not economic in nature. Introduction There are two sectors where economic and non-economic activities mix and cause potential State aid problems: healthcare and education. Healthcare and education provided by public institutions do not differ much from healthcare and education provided by private institutions. The critical difference is not […]
10. Nov 2020
State Aid Uncovered von Phedon Nicolaides

What is the Value of Informal Commission Communications?

An official’s statement can be imputed to his authority if it can be reasonably assumed that the official speaks on behalf of the authority. Introduction It is often asked by national officials how much credence they should give to assurances by Commission officials in the absence of a formal Commission decision and what is the legal value of such assurances. […]
21. Jul 2020
State Aid Uncovered von Phedon Nicolaides
MacBook on Table

Taxation of Multinational Companies: The Apple Case – A Political Setback for the Commission, but a Victory on Principle

Defects, incompleteness and inconsistencies in tax rulings are not sufficient to prove the existence of an advantage in the meaning of Article 107(1) TFEU. Update on Temporary Framework: Number of approved and published covid-19 measures, as of 17 July 2020: 213* Legal basis: Article 107(2)(b): 21; Article 107(3)(b): 179; Article 107(3)(c): 18 Five Member States have implemented 13 or more […]