How to Use Economic Tools to Ensure the Proportionality of Aid (Commission Decision SA.34938 on a gas storage facility in Poland)

industry

Introduction

Normally, economic analysis is used by the Commission to find out whether a measure confers an abnormal advantage to an undertaking. This would be the case, for example, when a public authority makes an investment that generates a return that falls below what the market would demand. The recipient undertaking derives an abnormal advantage [i.e. an advantage that would not be possible under normal market conditions] because it pays out a lower dividend than otherwise. This economic reasoning is used when the Commission examines whether the measure in question falls within the scope of Article 107(1).

It is often asked by state aid officials whether economic analysis can also be used in the assessment of the compatibility of a measure under Article 107(3). The answer is affirmative but the objective of the analysis is different. Whereas under Article 107(1) the aim is to establish the existence of an advantage, the aim under Article 107(3) is twofold: i) to consider whether the advantage is necessary and ii) if it is necessary to prevent it from being disproportionately large.

While the logic and the technical calculations under Article 107(1) & (3) are rather similar, there can be, however, a subtle but significant difference. The benchmark under Article 107(1) is always the market. By contrast, the benchmark under Article 107(3) is the costs of the beneficiary itself. The aim of the analysis is to determine how much aid must be pumped into the undertaking to make a project profitable enough so that it can invest in it. A recent Commission decision on a gas storage facility in Poland highlights very well this kind of analysis.

The aid measure[1]

The measure concerns a project, co-financed by EU Structural Funds, of an expansion of a gas storage facility in Husów, in South-Eastern Poland. Natural gas undertakings keep gas stocks in storage to guarantee delivery to their customers at times of changing supply and demand conditions. The aid aims at improving the energy security of Poland in case of disruption.

In Poland, the business activity consisting of gas storage is regulated by the public authorities and requires a concession contract. Storage system operators (SSO) are appointed and regulated by the Energy Regulatory Office (ERO). The incumbent gas company, Polskie Górnictwo Naftowe i Gazownictwo (PGNiG) has such a concession. The majority of its shares are owned by the state and it has a quasi-monopolistic position on the markets for production, import, distribution, wholesale and retail sales of gas. Distribution of gas is operated by six separate gas distribution companies fully owned by but legally unbundled from PGNiG.

Under Polish law, PGNiG is obliged to store a percentage of gas imports in storage installations and to maintain mandatory reserves. Since, however, the storage and reserve requirement can be met in different ways, there is no obligation under Polish law mandating the construction of gas storage sites such as those at Husów.

The planned amount of eligible expenditure of the project amounts to PLN 67,700,000. The planned total amount of aid is PLN 38,589,000 which is approximately EUR 9.45 million. The aid intensity is therefore 57%.

In order to establish the precise aid amount, the Polish authorities have carried out a cost-benefit analysis. A financial rate of return (FRR) has been calculated as the discount rate which is needed to reduce the expected investment loss of the project. The table below shows the FRR and the net present value (NPV) of the project with and without aid. The FRR does not exceed the rate of 8% which is presumed to be adequate market rate of remuneration of capital.

Parameters   Without the aid   With the aid
Financial rate of return (FRR)   1.53%   7.74%
Net Present Value (NPV) – PLN 33,210,988 – PLN 835,627

 

Commission assessment

Although the project is financed by EU structural funds without any apparent contribution by the Polish government, the Commission has found, as it is its standard practice now, that there is transfer of state resources because the EU money comes under the control of the state. The facts that the beneficiary is state-owned and that it is under legal obligation to store and maintain gas reserves are not sufficient to exclude the measure from the scope of Article 107(1).

Since there are no guidelines on energy infrastructure, the Commission then, at the request of Poland, proceeded to examine the compatibility of the aid directly on the basis of Article 107(3)(c). It is interesting to note that this is a project that could be eligible for regional investment aid. Poland chose not to invoke the regional aid guidelines. One can only speculate that the reason for doing so was that the aid intensity exceeded what was allowed under the regional aid map of Poland.


Do you know we also publish a journal on State aid?

EStAL banner
The European State Aid Law Quarterly is available online and in print, and our subscribers benefit from a reduced price for our events.


 

Direct assessment on the basis of Article 107(3)(c) means application of the balancing test with market analysis to demonstrate the existence of market failure and quantitative analysis to prove that aid is necessary, proportional and does not cause undue distortion of competition.

Given that the project fits very well in the EU’s energy policy, the Polish authorities had little difficulty showing that it was in the general interest. With respect to whether the aid was an appropriate instrument for increasing energy security, the Polish authorities argued that they could not impose an extra regulatory obligation on PGNiG because it did not have enough capital for the investment. How this was proven is not explained in the decision. Certainly the project was unprofitable. But it is unclear whether the company as a whole would suffer if it used part of its profits from other operations to cover the funding gap of the project.

Interestingly, the Commission noted that “beyond profitability considerations, state aid to a particular activity or investment lacks incentive effect where the beneficiary is legally obliged to perform them.” [paragraph 46] Had the Polish authorities imposed a legal obligation on PGNiG, they would have shown that the aid was not an appropriate instrument, and in addition they would have deprived the aid from any incentive effect.

With respect to proportionality, a state aid measure is proportional if it is kept to the minimum. In this case the maximum aid intensity of the project does not exceed 57%. The net present value of the project is expected to remain negative, even including the planned aid. The project will yield a return of a bit less than 8% in nominal terms which, the Commission accepted as not being excessive in “absolute terms and in comparison with typical returns in the sector”.

In addition, the Commission considered that the part of the investment corresponding to the co-financing from the EU Structural Funds “will not form part of the capital of the [beneficiary] on the basis of which the calculation of gas tariffs takes place. In combination with the tariff regulation preventing that excessive revenues are derived from the operation of the subsidised infrastructure, this ensures that the planned aid shall not provide excessive profits beyond a reasonable return.” [paragraph 50]

Finally, with respect to the possible distortions to competition, the Commission accepted the Polish position that increase in the storage capacity would facilitate the entry of more gas suppliers. On the basis of the above considerations, the Commission approved the aid.

——————————————-

[1] Commission Decision SA.34938 on a gas storage facility in Poland. It can be accessed at:

http://ec.europa.eu/competition/state_aid/cases/244992/244992_1434038_194_2.pdf

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 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.

Zusammenhängende Posts

03. Apr 2020
Guest State Aid Blog von P. Kamil Rosiak
Corona Virus

Covid-19 Support Package for Entrepreneurs: An Update from Poland

We are happy to share with you an update on the Covid-19 support package that Poland is creating to support entrepeneurs fighting the impact of the corona pandemic. Our guest auhor P. Kamil Rosiak is Attorney-at-Law & Partner Associate at KPMG D.Dobkowski LP in Warsaw.* On 28 March 2020 the lower house of Polish parliament (Sejm) passed a bill (so […]
10. Aug 2017
Guest State Aid Blog von Lexxion Publisher
EStAL Mihalis Kekelekis

15th Jubilee Feature – State Aid Experts Paying Court to EStAL: Mihalis Kekelekis

Since 2002 Lexxion Publisher’s European State Aid Law Quarterly – EStAL serves as a forum for dialogue and deliberation on all issues related to State aid. On the occasion of our 15th anniversary special feature we have gathered our State aid family to reflect upon their joint journey together with our precious EStAL and of course our favourite topic State […]
14. Sep 2016
Guest State Aid Blog von Michał Bernat
windmills

Polish Green Certificates Held by the Commission to Be Compatible State Aid: a Curious Story Comes to an End

We are happy to welcome Dr Michał Bernat on the State Aid Blog today. He is a legal and tax adviser and State aid expert at the Dentons offices in Warsaw. Today he shares his insights on a decision in a case involving Polish green certificates issued to producers of energy from renewable energy sources. Read on to learn more. […]
03. Dez 2015
Guest State Aid Blog von Emanuela Matei
forest

The Interpretation of Conflicting Norms regarding the Validity of State Aid Infolding Contracts Must Be Consistent with the Safeguard of Individual Rights Created by EU State Aid Law (C 505/14, Klausner)

The following blog post is another contributory piece by Emanuela Matei, Associate Researcher at the Centre of European Legal Studies, Bucharest. Matei holds a Juris Master in European Business Law (Lund University, June 2012), a Magister legum (Lund University, June 2010) and a BSc in Economics & Business Administration (Lund University, June 2009). We are very glad to welcome her […]
24. Sep 2015
Guest State Aid Blog von Gian Marco Galletti
steel construction

How Reasonable The Private Investor May Be Assumed To Be? Corsica Ferries France

The following article summary is a contributory piece by Gian Marco Galletti. The full piece was published in the Common Market Law Review. Galletti is working as a researcher at the Dickson Poon School of Law since 2013. He is currently working on a PhD in European law under the supervision of Prof. Andrea Biondi. He holds an LLB with […]
16. Mrz 2015
State Aid Uncovered von Phedon Nicolaides

Relief from Pension Contributions and Reduction of Taxes

Compensation for structural disadvantages encumbering undertakings is still State aid. Compensation for structural disadvantages encumbering SGEI providers is not State aid only if it satisfies the Altmark criteria. Reductions of excise duties approved by the Council may still be subject to scrutiny by the Commission under State aid rules. Exception of fossil fuel from energy taxes when it is not […]
16. Jan 2015
Guest State Aid Blog von Emma Linklater
Lady Justice

In Brief: Case C-518/13 Eventech and Case T-1/12 France v Commission

A quick look at the two new rulings this week. This post gives a preliminary overview of the two new judgments this week (more in depth posts with analysis will be online soon!): On Wednesday 14th January the CJEU passed its ruling in the hotly awaited Eventech case (Case C-518/13), while a day later the General Court gave its word on […]
09. Jan 2015
Guest State Aid Blog von Emma Linklater
hotel pool

In Brief: Case T-58/13, Club Hotel Loutraki AE and Others v Commission (judgment of 08.01.2015)

On Thursday the 8th January the GC dismissed all four pleas in the action for annulment of the Commission Decision finding that the exclusive rights granted to operate 35 000 Video Lottery Terminals and 13 games of chance were not State aid.   The case is can be accessed here (English and French versions currently available) and the press release here.Background to the […]
09. Dez 2014
State Aid Uncovered von Phedon Nicolaides

A Surprising Interpretation of the Concept of Selectivity

Tax measures are selective when they constitute an exception or deviation from the normal or common system of taxation. In addition, the exception must be open only to a pre-defined category of undertakings. IntroductionOften, the decisive element in whether a tax measure constitutes State aid is the existence of selectivity. On 7 November 2014, the General Court ruled on two […]
11. Nov 2014
State Aid Uncovered von Phedon Nicolaides
calculator

Reduction of Property Taxes and Electricity Tariffs

Relief from property tax is State aid even when the user of the property is involved in defence contracts. Providing cheaper electricity to a few manufacturers cannot be considered to be an appropriate measure for regional development. Introduction This article summarises several judgments which were delivered in October 2014. They concern a tax exemption in Spain and reduction of electricity […]