The Compatibility of State Aid with the Internal Market: Lessons from “Hinkley Point C” – Part III

The objective of common interest that should be supported by State aid does not have to be an objective agreed by all Member States.

 

Environmental protection

Austria argued that the Commission had ignored the potential negative effects of the aid on the environment such as the storing of nuclear waste.

The reply of the Court was that “(516) in the context of the application of Article 107(3)(c) TFEU, the Commission must weigh up the advantages of the measures at issue and their negative impact on the internal market. Although protection of the environment must be integrated into the definition and implementation of EU policies, particularly those which have the aim of establishing the internal market, it does not constitute, per se, one of the components of that internal market, defined as an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured. Consequently, when identifying the negative effects of the measures at issue, the Commission was not obliged to take into account the extent to which the measures at issue are detrimental to the implementation of that principle […] That applies equally to the precautionary principle, the ‘polluter pays’ principle and the sustainability principle relied on by the Republic of Austria.” [At this point the Court cites the landmark judgment in case T‑57/11, Castelnou Energía v Commission, paragraphs 189 to 191.]

Moreover, “(517) in so far as, by their arguments, the Republic of Austria and the Grand Duchy of Luxembourg seek to establish that measures that are contrary to EU law may not be authorised by the Commission, it should be noted that, apart from the principle of protection of the environment, the precautionary principle, the ‘polluter pays’ principle and the principle of sustainability, those Member States do not invoke any EU environmental legislation that may not have been complied with. Moreover, if those Member States are claiming that those principles preclude State aid from being granted for the construction or operation of a nuclear power plant, that argument must also be rejected, since such an interpretation would be inconsistent with Article 106a(3) of the Euratom Treaty.”

 

Impact of the aid on public finances

Austria also claimed that the large amount of aid would impact negatively on the UK’s budget and that it should have been taken into account by the Commission.

The Court rejected that too. “(523) As regards the Credit Guarantee, […] it entails the resources of the United Kingdom. Therefore, in that context, consumers may be affected in their capacity as taxpayers. However, in that regard, it should be borne in mind that it is necessary to distinguish the measures at issue from their funding. Taxes which serve to finance aid do not fall within the scope of the provisions of the Treaty concerning State aid unless they constitute the method of financing an aid measure, so that they form an integral part of that measure. For a tax, or part of a tax, to be regarded as forming an integral part of an aid measure, it must be hypothecated to the aid measure under the relevant national rules, in the sense that the revenue from the tax is necessarily allocated for the financing of the aid. In the event of such hypothecation, the revenue from the tax has a direct impact on the amount of the aid and, consequently, on the assessment of the compatibility of the aid with the internal market […] It must be noted, […], that the contested decision does not contain anything that might establish that the Credit Guarantee is similarly hypothecated to its financing”.

Austria also claimed that the Commission had not taken into account the fact that Hinkley Point C absorbed public funds that could have been used for projects to develop and expand renewable energy sources. The Court disagreed. “(526) In accordance with the second subparagraph of Article 194(2) TFEU, Member States are entitled to choose between different energy sources. Accordingly, in itself, the choice made by the United Kingdom to grant aid for the promotion of nuclear energy cannot be called in question, notwithstanding the fact that the public resources used for that project are, as a result, unavailable for other projects.”


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Operating aid

Austria and Luxembourg submitted that the aid measures constituted operating aid which, by its very nature, was not compatible with the internal market. Normally operating aid cannot be granted on the basis of Article 107(3)(c). Operating aid is only exceptionally allowed for underdeveloped regions under Article 107(3)(a) and for just a handful of policies under Article 107(3)(c) which, however, are indirectly linked to investment (e.g. environmental taxes, ship owning, risk finance).

The Court first recalled that “(579) operating aid intended to maintain the status quo or to release an undertaking from costs which it would normally have had to bear in its day-to-day management or normal activities cannot be considered compatible with the internal market”.

“(580) Such aid cannot meet the requirements of Article 107(3)(c) TFEU. Thus, operating aid which is limited to maintaining the status quo does not facilitate development within the meaning of that provision. Aid which does no more than lower the usual ongoing operating expenditure which an undertaking would have had to bear in any event in the course of its normal business cannot be considered to be pursuing a public interest objective for the purposes of that provision. Furthermore, aid by which advantages are conferred on undertakings without being intended to achieve a public interest objective pursued by the Member State conferring them and which may then be used by those undertakings to meet existing and ongoing operating costs cannot be declared compatible with the internal market under that provision. Such aid would give those undertakings an advantage over their competitors, without this being justified by the attainment of a public interest objective.”

Then the Court noted that although each of the measures seen in isolation (e.g. the contract for the difference in electricity prices) could be classified as operating aid, they were in fact intended to incentivise NNBG to invest the construction and operation of Hinkley Point C. Therefore, their aim was to support investment. What matters is not the form but the purpose of the aid.

However, the Court chose to respond to the argument of Austria and Luxembourg as follows. “(583) There is nothing to preclude an aid measure which pursues a public interest objective, which is appropriate to and necessary for the attainment of that goal, which does not adversely affect trading conditions to an extent contrary to the common interest and which therefore satisfies the requirements of Article 107(3)(c) TFEU from being declared compatible with the internal market under that provision, irrespective of whether it must be characterised as investment aid or operating aid. It should, moreover, be recalled that even operating aid may be declared compatible with the internal market if those conditions are satisfied”.

At this point the Court cites case T‑162/13, Magic Mountain Kletterhallen v Commission, paragraphs 116 and 117, which in turn cites case T-308/11, Eurallumina v Commission, paragraph 86 that concerns operating aid in an underdeveloped region falling under Article 107(3)(a). In the Magic Mountain case the Commission considered that aid for sports associations could be assimilated into aid to support a service of general economic interest. Aid for SGEI can cover operating costs which the SGEI provider would not incur without public support. Just like in the case of SGEI, the crux of the issue in the present case is whether the aid incentivises the recipient to do something out of the ordinary or to undertake investment that it would not do without the aid. And the answer, as far as NNBG was concerned, was in the affirmative.

Indeed, in the very next paragraph the Court said so. “(584) The Commission found that those measures pursued a public interest objective, namely, the creation of new nuclear energy generating capacity, which could not be achieved within a reasonable time without State intervention […] Accordingly, those measures cannot be regarded as aid that is limited to maintaining the status quo. On the contrary, according to the Commission’s findings, without them, no investment in new nuclear energy generating capacity would be made within a reasonable time.”

“(585) Second, it must be recalled that, […], the measures at issue are appropriate to and necessary for the attainment of that goal and do not adversely affect trading conditions to an extent contrary to the common interest. In those circumstances, the measures at issue cannot be regarded as aid that does no more than lower the usual ongoing operating expenditure which an undertaking would have had to bear in any event in the course of its normal business. On the contrary, the objective of those measures was to create an incentive to construct new nuclear energy generating capacity by reducing the risks associated with investment, with a view to ensuring that the investment would be profitable.”

Later on in the judgment, in the context of its more detailed assessment of the operating character of the three measures, the Court identified what is important from the point of view of the aid beneficiary. “(617) From a financial modelling point of view, the net present value of the strike price payments could be thought of as the equivalent of a lump sum payment which allowed NNBG to cover construction costs.” This is correct. In principle, it does not matter whether the aid is provided in the form of an up-front grant or in the form of regular (pre-determined) payments later on. All expected costs and benefits are discounted to the point in time at which the investment decision is made. Of course, events that are expected to occur farther into the future become less certain. But even this uncertainty can be quantified and taken into account for the purpose of calculating the present value of future costs and benefits.

 

Selection procedure

Austria claimed that the UK should have launched a tendering procedure for identifying the most efficient builder/operator of Hinkley Point C and determining the minimum necessary amount of aid.

In paragraphs 636-676, the Court rejected that claim on the grounds that the construction and operation of Hinkley Point C was not a public works, or public service supply or a concession project. Moreover, the UK government imposed no public service obligation on NNBG. It merely offered aid to make possible the construction of the nuclear power station.

Then the Court considered Austria’s argument that the selection procedure used by the UK was defective, because there was no call for tenders in relation to the construction and operation of Hinkley Point C and, as a result, there was breach of the principles of equal treatment, non-discrimination and transparency inherent in the FEU Treaty.

The Court recalled that “(686) the principles of equal treatment, non-discrimination and transparency are applicable to public contracts, to concessions, to exclusive authorisations and to exclusive licences granted by a public authority and for which the EU legislature has not laid down special rules. Where such contracts or such rights are awarded, the principles of equal treatment, transparency and non-discrimination require that the Member States ensure a degree of advertising sufficient to enable the competition selection procedure to be open and the impartiality of the award procedures to be reviewed”.

“(687) However, in that context, it should be noted that the principles of equal treatment, non-discrimination and transparency do not necessarily require a tendering procedure in order for a particular project to be launched […] They do not therefore limit the right of a Member State to choose between a public contract and the grant of a subsidy to encourage undertakings to achieve a particular public interest objective.” “(688) The Court must therefore reject the argument of the Republic of Austria alleging breach of the principles of equal treatment, non-discrimination and transparency, without there being any need to determine whether the measures at issue may be treated in the same way as an exclusive authorisation or licence”.

This is very interesting because it says that a Member State can opt to grant aid to a particular undertaking to carry out a project rather than select competitively the undertaking that is to carry out that project. It seems to say that the granting of State aid is the opposite of competitive selection. However, the phrasing of paragraph 687 leaves unclear whether the principles of equal treatment, non-discrimination and transparency do not apply to subsidy procedures or whether they merely allow a choice of procedure by Member States. Alternatively, if they do apply to subsidy procedures, the Court did not explain how.

The rest of the judgment dealt with procedural issues concerning the right of interested parties to submit observations to the Commission.

On the basis of all of the above considerations, the General Court dismissed the action for annulment of Commission decision 2015/658.

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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.

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