The Consequences of not Knowing when State Aid is State Aid

Introduction

Public officials, legal advisors and academics are sometimes frustrated by the practice of the Commission of declaring a public measure as being compatible with the internal market without first taking a firm position on whether that measure constitutes State aid. The Commission would say something like “it is not certain whether the aided activity is economic in nature” or “affectation of trade cannot be excluded” and then conclude that it is not necessary to decide definitively because if the measure in question constitutes State aid it is anyway compatible with the internal market.

But, this approach creates problems for those who have to comply with State aid rules. Public officials need to know whether public policies fall within the scope of Article 107(1) TFEU, legal advisors need to guide their clients to avoid receiving unlawful aid while academics need to explain to students the boundaries of the prohibition of Article 107(1) TFEU.

On 16 November 2022, the General Court ruled, in case T-469/20, Netherlands v European Commission, that the Commission exceeded its powers and violated the principle of legal certainty by being vague as to whether a public measure did not constitute State aid.

The Netherlands had sought the annulment of Commission decision SA.54537 concerning the prohibition of the use of coal for electricity generation in the Netherlands and a related compensation of power stations that had to close as a result of that prohibition.

Background

In March 2019, the Netherlands notified the Commission of a draft law whose aim was to reduce carbon dioxide (CO2) emissions. The draft law also provided for the possibility of compensation for damage caused to power stations which, in comparison to other power stations, would be disproportionately affected by the ban on the use of coal for electricity generation. The prohibition of the use of coal for electricity production was to be applied gradually, depending on the profitability of each plant, the extent of their use of biomass and their electrical efficiency.

The law also provided for compensation because, according to the Netherlands, the prohibition of the use of coal affected the right to property and the principles of equal treatment and burden sharing. Therefore, the Dutch authorities considered it necessary to strike a fair balance between the general interest of protecting the environment from CO2 emissions and the individual interest of the power plants.

At that time there were five coal-fired power stations in the Netherlands, namely Amercentrale 9, Eemshaven, Engie Maasvlakte, MPP 3 and Hemweg 8. Four of the five power plants benefited from a transitional period of five to ten years, giving them the opportunity to recover the investments made, or adapt to another energy source or prepare for closure.

Hemweg, which did not burn biomass, produced no renewable energy and had the lowest efficiency among the five plants, did not benefit from a transitional period. As this plant did not have the possibility to adapt to another energy source, it had to be closed at the end of 2019. Hemweg’s operator was Vattenfall.

According to the relevant Dutch law, Hemweg was therefore eligible for compensation, given that in comparison to other plants it would be disproportionately affected by the ban on the use of coal for electricity generation.

The Netherlands eventually adopted the law in December 2019 before the Commission authorised the notified measure. In the same month, Vattenfall received compensation amounting to EUR 52.5 million.

In May 2020, the Commission adopted decision SA.54537 by which it declared the by then unlawful aid to be compatible with the internal market pursuant to Article 107(3)(c) TFEU.

With respect to the existence of State aid, the Commission concluded in paragraph 48 of its decision that it could not conclude with a sufficient degree of certainty that there was a right to compensation in the amount of EUR 52.5 million. Therefore, the Commission inferred that it could not be ruled out that the measure in question might have contained State aid.

However, the Commission considered in paragraph 49 of the decision that there was no need to draw a definitive conclusion as to whether the measure conferred an advantage to Vattenfall because if the compensation were State aid it would be compatible with the internal market.

The Netherlands disputed the conclusion of the Commission concerning the possible presence of State aid and asked the Court to annul the Commission decision.

We have here a repetition of the disagreement between the Netherlands and the Commission of about ten years ago in the famous case of NOx emissions which resulted in the landmark judgment in case C-279/08 P, European Commission v Netherlands. In that case, the Commission found that State aid in the form of emission permits was compatible with the internal market. Although the Commission decision was positive, the Netherlands decided to contest the classification of the permits as State aid. It succeeded in this respect before the General Court. However, on appeal by the Commission, the judgment of the General Court was set aside by the Court of Justice that found that the measure was selective as it covered only large polluters instead of all polluters [i.e. all undertakings that emitted NOx].

Why the Commission was uncertain as to whether the compensation constituted State aid

As is well established in the EU case law, the aim or objective of a public measure is irrelevant for the purpose of its classification as State aid. Therefore, compensatory measures can also constitute State aid. The decisive issue here is the presence of advantage. Normally, compensation that reduces a disadvantage also counts as an advantage for the simple reason that the disadvantage would be larger in the absence of state intervention. The only situation where compensation by a public authority does not confer an advantage is when the state is liable for damage that itself has caused.

In this case, the Commission was uncertain “whether the Dutch expropriation rules give rise to an obligation to pay a compensation to Vattenfall and that the level of the compensation is equivalent to what would have been granted according to Dutch law”. [paragraph 32 of the Commission decision]

The Dutch law in question certainly affected the property rights of Vattenfall. But it did not necessarily follow that the state acting as legislator was liable. After all, laws and regulations increase or decrease our liabilities and our right to use our property as we wish [e.g. new cars or houses must comply with new environmental standards that make them more expensive].

Moreover, in the Dutch legal system it is normally courts with the assistance of experts who determine the amount of compensation. In this case it was the government that decided to grant EUR 52.5 million without resorting to courts.

What kind of measure can be declared compatible with the internal market?

The Netherlands submitted that only State aid may be declared compatible with the internal market. But the Commission had not established that the measure at issue constituted aid. In response, the Commission claimed that neither Article 107(3) TFEU, nor Article 4(3) of Regulation 2015/1589 imposed on it an obligation to declare definitively that a measure constituted aid before it could consider that measure to be compatible with the internal market.

The General Court, first, noted that the Commission adopted the contested decision on the basis of Article 4(3) of Regulation 2015/1589. [paragraph 49 of the judgment]

Then it clarified that the use of the term “aid” in Article 107(3) TFEU implied that the compatibility of a national measure with the internal market could be examined only after that measure was classified as aid. [para 53]

Moreover, the General Court recalled that where the Commission cannot be satisfied, at the end of the preliminary examination stage, that a public measure either does not constitute aid or, if classified as aid, is compatible with the Treaty, then the Commission has to initiate the formal investigation procedure. [para 54]

It follows that only a measure falling within the scope of Article 107(1) TFEU, i.e. a measure classified as State aid, may be considered by the Commission to be compatible with the internal market. [para 55]

The General Court went on in paragraphs 56-57 to explain that that conclusion was supported by the wording of Article 4 of Regulation 2015/1589 [the procedural regulation].

More importantly, according to the General Court, Article 4 of Regulation 2015/1589 provides an exhaustive list of decisions which the Commission may adopt following the preliminary examination of an unlawful measure. This list does not include the possibility of a measure being compatible with the internal market without the Commission having previously ruled on its classification as State aid. In particular, Article 4(3) of Regulation 2015/1589 provides that the Commission may declare a measure compatible with the internal market only if, first,  falls within the scope of Article 107(1) TFEU. [para 59]

Given that the Commission had doubts as to whether the measure could be classified as aid, the General Court concluded that the Commission adopted a decision contrary to both Article 107(3) TFEU and Article 4(3) of Regulation 2015/1589. [paras 60-61]

Legal certainty

The Netherlands argued that the practice of the Commission not to take a firm position as to when a public measure constitutes State aid harms legal certainty. The Commission counter-argued that a positive decision always creates legal certainty. But as we will see below, the General Court rejected the Commission’s view not because of legal uncertainty about the compatibility of the aid, but because of legal uncertainty about the existence of aid.

The General Court held that the principle of legal certainty, which forms part of the EU legal order, is intended to ensure the predictability of situations covered by EU law and requires that any act which produces legal effects be clear and precise, so that the persons concerned may know unambiguously their rights and obligations and take steps accordingly. [para 63]

Then the General Court made a very interesting observation. Given that the measure in question was put into effect before the Commission adopted its decision, competitors could have initiated proceedings before a national court. Had that court found the measure to constitute State aid, then the Netherlands would have to demand from Vattenfall payment of interest for the period of illegality. [para 65]

But one may retort that a competitor could have demanded that the Netherlands requested payment of interest for the period of illegality even if the Commission had found the measure to constitute State aid. As may be recalled, this is what happened in the case of illegal aid that was granted to the public broadcaster in Denmark, which was later found to be compatible with the internal market. A competitor asked a national court to oblige Denmark to demand for payment of interest for the period of illegality.

The General Court also noted that the failure to classify the measure at issue left the Netherlands in an uncertain situation as regards the grant of new aid under the rules on cumulation of aid. [para 66]

The General Court concluded that the contested decision did not enable the Netherlands to know precisely its rights and obligations and to act accordingly. Therefore, the Commission infringed the principle of legal certainty. [paras 70-71]

On the basis of the above reasoning, the General Court annulled the contested decision.

The full text of the judgment in languages other than English can be accessed at:

https://curia.europa.eu/juris/fiche.jsf?id=T%3B469%3B20%3BRD%3B1%3BP%3B1%3BT2020%2F0469%2FJ&nat=or&mat=or&pcs=Oor&jur=C%2CT%2CF&num=t-469%252F20&for=&jge=&dates=&language=en&pro=&cit=none%252CC%252CCJ%252CR%252C2008E%252C%252C%252C%252C%252C%252C%252C%252C%252C%252Ctrue%252Cfalse%252Cfalse&oqp=&td=%3BALL&avg=&lgrec=en&lg=&cid=1117471

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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 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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