Security of Supply May Justify a Deviation from Public Procurement Rules

Security of supply justifies a deviation from the normal procurement procedures as long as the same security cannot be achieved through a competitive selection of suppliers.

Introduction

Point 19 of the 2012 SGEI Framework requires that the assignment of a public mission to an undertaking must comply with the applicable public procurement rules. It does not impose an obligation for competitive selection, only that the relevant rules should be followed. This implies that, under certain conditions, Member States may invoke exceptions that are allowed by the public procurement directives. In other words, Member States may be able to award a contract without a prior competitive procedure or with a procedure that is subject to restrictions.

Indeed, on 8 September 2021, the General Court confirmed that that was possible in its judgment in case T‑193/19, Achema & Achema Gas Trade v European Commission.[1] Achema and Achema Gas Trade appealed against Commission decision SA.44678 on State aid to LNG terminal in Lithuania.

Achema and Achema Gas Trade, are companies in the Achemos Group. Achema produces fertilisers and chemicals. Achema Gas Trade is a subsidiary of Achema and supplies natural gas.

Background

In November 2013, the European Commission, in case SA.36740, declared as compatible with the internal market aid granted by Lithuania to state-owned Klaipėdos Nafta for the construction and operation of a liquefied natural gas [LNG] terminal in order to ensure security of gas supply in Lithuania which was heavily dependent on the Russian Gazprom.

The aid measure consisted of three components:

  1. a special levy imposed on all users of gas [“the LNG supplement”], for a period of 55 years;
  2. a requirement for certain electricity companies to purchase a minimal mandatory quota of gas imported through the LNG terminal [“the obligated purchasers”];
  3. a state guarantee covering the financing of the construction of the LNG terminal.

In the 2013 decision, the Commission found, first, that investment aid measures, namely the state guarantee and part of the LNG supplement, were compatible with the internal market on the basis of Article 107(3)(c) TFEU. Second, operating aid measures, namely the purchase obligation and another part of the LNG supplement, were compatible with the internal market, on the basis of Article 106(2) TFEU.

Achemos Group and Achema lodged an appeal against that Commission decision, but the General Court, in case T‑417/16, Achemos Group and Achema v Commission, dismissed the appeal. The two companies lodged a new appeal before the Court of Justice which also dismissed it, in case C-847/19 P, Achemos Group and Achema v Commission.

In 2014, the Lithuanian Ministry of Energy appointed Litgas UAB as the designated supplier of gas. The appointment followed a public tender.

Then, in 2016 Lithuania decided, without prior notification to the Commission, to make certain amendments to the aid measures that were approved in 2013. Litgas was entrusted with a service of general economic interest [SGEI]. It was obliged to provide a mandatory quantity of LNG to the LNG terminal. The net cost of the SGEI would be financed by a new component of the LNG supplement in favour of Litgas. The objective of the 2016 amendments was to place the economic burden for the supply of the LNG mandatory quantity not on the obligated purchasers, as was previously the case, but on all gas consumers.

After receiving a complaint from Achema and Achemos Group, the Commission examined the 2016 amendments and concluded, in October 2018 without opening the formal investigation procedure, that they constituted new aid which was compatible with the internal market [decision SA.44678].

Then, Achema and Achema Gas Trade [hereinafter, Achema and Achema or the applicants] lodged a new appeal claiming that their procedural rights were violated because they were deprived from the possibility to submit their observations to the Commission. They contended that the Commission should have had serious doubts as to the compatibility of the aid with the internal market and should have opened the formal investigation procedure.

Length of the administrative procedure

The applicants alleged that the long duration of the Commission’s preliminary examination [two years and 3 months] showed that the Commission encountered serious difficulties.

The General Court, first, recalled that “(63) the particularly long duration of the administrative procedure […] constitutes an objective indication of the complexity of the particular case and of the existence of serious difficulties encountered by the Commission in its examination. Moreover, […], the Commission itself acknowledges that the 2016 amendments were characterised by ‘a certain degree of complexity’.”

Although “(71) the length of the preliminary examination can constitute an indication of the existence of serious difficulties, it does not of itself suffice to show the existence of such difficulties […] It is only if it is reinforced by other factors that the expiry of a time period may lead to the conclusion that the Commission encountered serious difficulties necessitating initiation of the procedure under Article 108(2) TFEU”.

 Then the General Court pointed out that the evidence from the exchanges between Lithuania and the Commission did indeed indicate the existence of doubts. “(89) The exchanges in question did not relate exclusively to factual or technical information, the purpose of which was to enable the Member State to prepare a complete notification, but also contained evidence showing the existence of doubts on the part of the Commission as to certain essential elements of the 2016 amendments, thus demonstrating the serious difficulties of assessment encountered by the Commission.”

“(90) Therefore, contrary to the assertions of the Commission and the interveners, the number and content of the exchanges between it, the Lithuanian authorities and the applicants concerning the 2016 amendments must be regarded as indicative of serious difficulties, particularly since the purpose of the 2016 amendments was to amend the aid measures which were the subject of the 2013 decision, meaning that the Commission was already aware of the factual and legal context in which those amendments took place.”

“(91) Taken together with the particularly long duration of the administrative procedure concerning the aid measure resulting from the 2016 amendments, these circumstances constitute evidence of the existence of serious difficulties during the examination of that measure.”

The General Court proceeded to examine whether the conclusion drawn above on the basis of the length of the administrative procedure and the circumstances surrounding the adoption of the contested decision was supported by the evidence relating to the content of the contested decision.

The necessity and scope of the SGEI

The applicants argued that the analysis of the Commission with respect to the necessity and scope of the SGEI was deficient and insufficient.

First, the General Court referred to the provisions of the 2012 SGEI Framework. “(100) Point 12 of the SGEI Framework states that the aid granted by a Member State under Article 106(2) TFEU must relate to a ‘genuine’ SGEI, within the meaning of that provision, to which a correct definition must be given. Thus, point 13 of the SGEI Framework states, in particular, that Member States cannot attach specific public service obligations to services that are already provided or can be provided satisfactorily and under conditions, such as price, objective quality characteristics, continuity and access to the service, consistent with the public interest, as defined by the State, by undertakings operating under normal market conditions.”

As is well known, however, Member States enjoy wide discretion in defining what they regard as SGEIs. Their definition can be questioned by the Commission only in the event of “manifest error”. Since the General Court acknowledged that the provision of gas under conditions that ensure security of supply was a genuine SGEI, it went on to examine the necessity, proportionality and compatibility of the SGEI in order to determine whether Lithuania had committed a manifest error.

“(103) As regards the necessity of the SGEI at issue, it should be noted that, […], the Commission found, in essence, that, under the 2016 and 2019 amendments, the Lithuanian authorities had entrusted Litgas with a genuine SGEI, consisting in an obligation to provide a minimum mandatory quantity of LNG to the LNG terminal, […], which was necessary to ensure the stable operation of that terminal and security of gas supply in Lithuania. According to the Commission, the mere construction of the LNG terminal did not guarantee security of supply in Lithuania. In order to achieve that objective, it was also necessary to keep the LNG terminal constantly operational. In order to do so, it was necessary to store a certain quantity of LNG in the LNG terminal tanks and to release LNG continually into the natural gas system. According to the Commission, the SGEI at issue guaranteed a regular supply of gas to the LNG terminal in accordance with a fixed timetable during the year, including during periods when gas demand was low, which ensured stable operation of the LNG terminal.”

“(104) In that regard, it should be noted, first, that, in view of the broad discretion enjoyed by the Member States in defining what they regard as SGEIs, […], and of the specific situation in Lithuania, characterised by almost total dependence on a single source of gas supply […], the applicants have not demonstrated that the Commission should have had doubts as to whether the SGEI at issue was genuine and necessary.”

“(107) It is apparent […] that the Commission examined alternative options to the SGEI at issue, such as annual capacity bookings and spot bookings. It concluded that they were not appropriate for attaining the objective pursued, that is to say, ensuring the stable operation of the LNG terminal”.

Then the General Court considered whether the Commission should have had doubts as to the proportionality of the SGEI.

“(114) Since the applicants have not stated, let alone provided any evidence capable of suggesting, that the minimum quantity of LNG required in order to allow the LNG terminal to remain operational of 0.37 bcm per year, used in the contested decision, was disproportionate or excessive, they have also failed to demonstrate that the Commission should have had doubts in that regard.”

Infringement of EU public procurement rules

The applicants also argued that the Commission erred by finding that the appointment of Litgas as the designated supplier was compliant with point 19 of the SGEI framework because, according to them, the EU public procurement rules were not observed.

Point 19 of the SGEI Framework stipulates that aid is considered compatible with the internal market only when the entrustment of an SGEI complies with the applicable EU rules on public procurement. Aid that does not comply with such rules is considered to affect the development of trade to an extent that would be contrary to the interests of the EU in the meaning of Article 106(2) TFEU.

“(133) In the present case […] Litgas was selected as a designated supplier responsible for the SGEI at issue following a tendering procedure in which only undertakings in which the Lithuanian State held shares conferring at least two thirds of the voting rights and whose activities did not include the transmission or distribution of gas could participate. The Commission considered, […], that the award to Litgas of the SGEI at issue complied with point 19 of the SGEI Framework on the ground, in essence, that the contract at issue was excluded from the scope of [the EU public procurement] Directive 2004/18/EC […] pursuant to Article 14 thereof, since that contract concerned the protection of the essential interests of the Republic of Lithuania.”

“(134) Under Article 14 of Directive 2004/18, that directive is not to apply to public contracts when they are declared to be secret, when their performance must be accompanied by special security measures in accordance with the laws, regulations or administrative provisions in force in the Member State concerned, or when the protection of the essential interests of that Member State so requires.”

“(135) The Court has previously held that it was for the Member States to define their essential security interests. Nevertheless, measures adopted by the Member States in connection with the legitimate requirements of national interest are not excluded in their entirety from the application of EU law solely because they are taken, inter alia, in the interests of public security”.

In this part of the judgment, the Court cites extensively C‑187/16, Commission v Austria.

“(136) The derogation provided for by Article 14 of Directive 2004/18, must, in accordance with the settled case-law relating to derogations from fundamental freedoms, be interpreted strictly. Furthermore, even though Article 14 of Directive 2004/18 affords the Member States discretion in deciding the measures considered to be necessary for the protection of their essential security interests, that article cannot, however, be construed as conferring on Member States the power to derogate from the provisions of the TFEU simply by invoking those interests. A Member State which wishes to avail itself of that derogation must show that such derogation is necessary in order to protect its essential security interests. Accordingly, a Member State which wishes to avail itself of that derogation must establish that the protection of such interests could not have been attained within a competitive tendering procedure as provided for by Directive 2004/18”.

Then the Court examined whether Lithuania relied on a genuine essential interest and whether that essential interest could have been protected in the context of a competitive tendering procedure.

“(138) As regards, in the first place, the existence of a genuine essential interest of the Lithuanian State, the Commission stated, […], that the task of keeping the LNG terminal operational on a permanent basis had to be regarded as essential in order to safeguard security of gas supply in Lithuania, since any disruption could jeopardise the functioning of the terminal itself, and therefore, ultimately, the supply of gas in Lithuania.”

Moreover, “(139) the construction of that terminal does not in itself guarantee the essential interests of the Lithuanian State, unless that terminal is operational on a stable and permanent basis, in order to ensure diversification of that Member State’s supply sources.”

“(140-141) As regards, in the second place, the question whether that essential interest could have been protected in the context of a competitive tendering procedure such as that provided for by Directive 2004/18, […] the Commission analysed the possibility of adopting alternative measures allowing competitive tendering in accordance with the procedures laid down in Directive 2004/18, by rejecting them on the ground that the award of the SGEI at issue to an undertaking not controlled by the Lithuanian State would risk negatively affecting the provision of the SGEI on account of the risk that the selected undertaking might maintain or develop ties in the future with the former single gas supplier.”

In response to the argument of the applicants that it would have been possible to safeguard the essential interests of Lithuania through other means, the response of the Court was that “(143) the applicants submit that those interests could be safeguarded just as well by subjecting tenderers to a condition of being ‘independent from Gazprom’, subject to penalties in the event of infringement of those clauses. However, as Ignitis maintains, such a condition would not have been capable of ensuring that the successful tenderer would be protected from the influence of the former single gas supplier, since such an influence can take place in various forms that are sometimes concealed and difficult to identify, which are capable, moreover, of changing over time, so that the risk of circumvention remains a genuine threat. Providing for penalties or the termination of the contract forming the subject matter of the SGEI at issue in the event of non-compliance with that condition does not constitute an adequate remedy, in so far as such sanctions or termination of the contract could result in disruption of supply, which would jeopardise the essential interests of the Lithuanian State.”

The need for compensation for the SGEI

Gas companies incur certain costs which are called “boil-off” costs. These costs equal the value of the gas which evaporates in storage. Since Litgas was under obligation to maintain on a constant basis a minimum amount of gas in storage, it incurred extra costs as a result of its SGEI mission. According to the applicants, the Commission considered the totality of the boil-off costs as compensable in the 2016 amendment, while for the 2019 amendments, only part of the boil-off costs were classified as compensable.

The General Court, first, observed that “(177) according to point 11 of the SGEI Framework, State aid may be declared compatible with Article 106(2) TFEU if it is ‘necessary for the operation’ of the SGEIs concerned. It was therefore for the Commission to ascertain whether the compensation for the entirety of the boil-off costs under the 2016 amendments was ‘necessary’ for the operation of the SGEI at issue, given that only part of those costs was considered necessary as from 2019.”

But because “(182) the examination carried out by the Commission in that regard was incomplete and insufficient […] the Commission did not in any way examine whether the purchase obligation determined, in any way whatsoever, the extent of the boil-off costs incurred by Litgas in the context of the SGEI at issue.” “(184) Therefore, the examination carried out in the contested decision as regards the compensation for the entirety of the boil-off costs, in accordance with the 2016 amendments, was incomplete, insufficient and inconsistent, which constitutes objective evidence of the doubts which the Commission should have had in that regard.”

The Court also found other inconsistencies in the Commission decision [see paras 191-195 of the judgment] but at the same time also rejected several other claims of the applicants.

Overall assessment of the General Court

In view of the fact that the Commission examination took a long time and that its decision contained inconsistencies, the General Court concluded its analysis with an overall assessment “(219) in order to determine whether, viewed as a whole, that evidence shows that the Commission was not in a position, on the date of adoption of the contested decision, to overcome all the serious difficulties encountered as regards the compatibility of the measures at issue with the internal market.”

“(220) As regards the 2016 amendments, it is apparent from the foregoing considerations that the particularly long duration of the administrative procedure […], the circumstances surrounding the adoption of the contested decision […], and the incomplete, insufficient and inconsistent examination as regards the compensation for the entirety of boil-off costs and balancing costs of Litgas […] indicate doubts which the Commission ought to have had in that regard. That latter factor carries significant weight in the overall assessment, in so far as those costs represent a significant part of Litgas’s total costs and, therefore, significantly affect the amount of compensation for the SGEI at issue during the period from 2016 to 2019. That body of objective and consistent evidence of serious difficulties, viewed as a whole, serves to show that the compatibility of the State aid resulting from the 2016 amendments with the internal market gave rise to doubts within the meaning of Article 4 of Regulation 2015/1589 which should have led the Commission to initiate the procedure referred to in Article 108(2) TFEU.”

But, as noted above, the Court rejected several other claims of the applicants. Consequently, it held that the plea “(222) put forward by the applicants must be upheld in so far as it concerns the State aid resulting from the 2016 amendments and must be rejected as to the remainder.”


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

https://curia.europa.eu/juris/document/document.jsf?text=&docid=245708&pageIndex=0&doclang=en&mode=lst&dir=&occ=first&part=1&cid=3060089


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

05. Okt 2021
State Aid Uncovered von Phedon Nicolaides

What the Commission Must Find Out in the Preliminary Examination of State Aid: The Lessons from Tempus Energy on what is Sufficient Information

The Commission must open the formal investigation procedure when it has serious doubts based on the information available to it. Introduction Once I asked an administrator of an institute where I used to work why I was not informed about certain benefits that were available to staff. “Because you did not ask”, he answered. How could I ask about something […]
07. Sep 2021
State Aid Uncovered von Phedon Nicolaides

Assignment of Public Service Obligations

The compensation for public service obligations may include reasonable profit and incentives for cost reduction. Introduction Member States have discretion to define services they consider to be in the general economic interest [SGEI]. However, they need to justify that definition. The Court of Justice has ruled on numerous occasions that an SGEI has “special characteristics” that set it apart from […]
25. Mai 2021
State Aid Uncovered von Phedon Nicolaides

Compensation for Universal Service Provision

As long as the compensation does not exceed the net extra costs of the universal service activities, it may be used to offset other costs. Introduction The rules on State aid for services of general economic interest [SGEI] are very generous because they allow both investment and operating aid. Yet, it is not easy to comply with those rules because […]
18. Mai 2021
State Aid Uncovered von Phedon Nicolaides

State Aid and Essential National Interest

State aid that is necessary for protecting essential national interests can be compatible with the internal market. Introduction State aid should support outcomes that the market by itself cannot achieve. This implies that State aid that is restricted to only one or a few undertakings is unlikely to be capable of delivering the desired outcome. Yet, sometimes there may be […]
22. Sep 2020
State Aid Uncovered von Phedon Nicolaides

A Real Estate Deal that Does not Affect Intra-EU Trade

Operators selected through competitive, transparent, non-discriminatory and unconditional procedures receive no State aid. When only a single bid is submitted, the market conformity of the outcome must be verified with comparative analysis. Activities are purely local when they are not likely to attract customers or operators from abroad. Update on Temporary Framework: Number of approved and published covid-19 measures, as […]
15. Sep 2020
State Aid Uncovered von Phedon Nicolaides

Non-economic Activities and Services of General Economic Interest

Non-economic tasks and economic activities which are inseparable from those non-economic tasks are together, as a bundle, non-economic in nature. Public compensation for the extra costs of services of general economic interest [SGEI] may not cross-subsidise activities that fall outside the scope of the SGEI. Update on Temporary Framework: Number of approved and published covid-19 measures, as of 11 September […]
23. Jun 2020
State Aid Uncovered von Phedon Nicolaides
coins on banknotes

The Commission’s White Paper on Foreign Subsidies: A Real Problem that Needs Sharper Tools

The European Commission proposes new instruments to counter unfair foreign subsidies and acquisition of European companies. Temporary Framework: Number of approved Covid-19 measures, as of 20 June 2020: 164* Legal basis: Article 107(2)(b): 14; Article 107(3)(b): 137; Article 107(3)(c): 15 Fifteen measures support R&D, testing or production of Covid-19 related products. Three measures support recapitalisation. The Member States with the […]
16. Jun 2020
State Aid Uncovered von Phedon Nicolaides

Direct v Indirect Advantages: The Case of Sardinian Airports

Public funding that flows through intermediaries to third parties also counts as a state resource if the intermediaries carry out instructions by the funding authority. Temporary Framework: Number of approved covid-19 measures, as of 12 June 2020: 154* Legal basis: Article 107(2)(b): 14; Article 107(3)(b): 130; Article 107(3)(c): 14 Three recapitalisation measures have been approved [Finland, Lithuania & Poland]. The […]
09. Apr 2020
Guest State Aid Blog von Lexxion Publisher
Typewriter, Covid-19 Articles

Open Access Content Related to Covid-19: At a Glance

During these tough times, Lexxion Publisher wants to help to spread current news and updates on new regulations or support measures for combating the impact of the corona pandemic. Various contributions will be available as open access during the upcoming weeks. This post lists all contributions and will be updated on a rolling basis. Contributions related to State Aid & […]
04. Feb 2020
State Aid Uncovered von Phedon Nicolaides

How to Compensate for the Extra Cost of Public Service Obligations: Step-by-Step Guidance on a Complex Calculation

The “net avoided cost methodology” takes into account only incremental costs. Introduction The two most difficult issues in the design of State aid measures to support services of general economic interest [SGEI] are the proper definition of the public service obligation [PSO] and the identification of the “counterfactual” on the basis of which the public service compensation [PSC] is calculated. […]