The Date and Scope of Public Service Compensation

Aid is deemed to be granted on the date the beneficiary undertaking acquires the legal right to it, regardless of whether it is actually paid on that date. It is not enough for a public authority to define the service that it wants an operator to provide and the price that it should charge. It must also define where and when that service should be provided.



A recurring theme in the field of State aid is when aid is considered to be granted. This issue is of decisive significance when the Commission orders recovery of aid that is found to be incompatible with internal market. Another issue that seems to be causing problems to Member States is the correct definition of the scope of public service obligations.

In its judgment of 29 November 2018, the General Court dealt with both of those problems in case T-720/16, Aziende Riunite Filovie ed Autolinee (ARFEA) v European Commission. ARFEA, an Italian bus company, applied for the annulment of Commission decision 2016/2084 concerning “supplementary” public service compensation. The supplementary compensation was requested ex post after ARFEA incurred additional costs.

Italian authorities had been ordered by an Italian court in Piemonte to pay compensation to Italian bus companies which incurred extra costs in the course of providing transport services. The Commission, however, considered that the compensation was State aid which, moreover, was incompatible with the internal market. Consequently, the Commission instructed Italian authorities to recover it.

In the past few years, the Commission has dealt with similar issues in other cases involving Italian bus companies. Most recently, the General Court rejected an appeal against a negative Commission decision in case T-185/15, Buonotourist v Commission. This judgment was reviewed here on 7 August 2018: HERE.

A different Commission decision concerning Simet, another Italian bus company was reviewed here on 13 May 2014: HERE.

ARFEA, like the other bus companies, provided regional public transport services on the basis of concessions. Following a successful petition to a local court, ARFEA demanded from the Piedmont Region additional compensation for the economic disadvantages it allegedly suffered in 1997 and 1998. ARFEA had already received a public subsidy from the Piedmont Region for the services it provided. Before granting the additional compensation, the Italian authorities notified the measure to the Commission. After a formal investigation, the Commission prohibited the aid for being incompatible with the internal market.

A central issue in all these cases was the applicability of Regulation 1191/69 and Regulation 1370/2007.


Role of national courts

The General Court, first, referred to the role of national courts in the field of State aid. This is because ARFEA complained that the Commission decision violated the principle of “res judicata” that allegedly applied to the judgment of the local Italian court.

The General Court recalled that national courts may interpret and apply the concept of aid and determine whether a state measure was implemented in violation of Article 108(3) TFEU. But, national courts do not have jurisdiction to rule on the compatibility of State aid with the internal market. (Paragraph 68 of the judgment)

National courts must take all necessary measures to ensure the fulfilment of the obligations deriving from Union law and refrain from taking those which may jeopardize the achievement of the aims of the Treaty. This follows from Article 4(3) TEU which requires Members States and EU institutions to cooperate. (Paragraph 69) Therefore, the application of the principle of res judicata to a national court decision can not constitute an obstacle to the exercise by the Commission of its exclusive competence to assess the compatibility of State aid. (Paragraph 70) (Repeated in paragraph 165) On the basis of this reasoning, the General Court rejected ARFEA’s complaint.

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Existence of State aid

ARFEA alleged that the Commission wrongly classified the compensation as State aid for not conforming to the Altmark conditions.

The General Court referred to case law according to which the 1st Altmark condition essentially determines whether, first, the recipient undertaking has actually been entrusted with the performance of public service obligations and, second, whether those obligations are clearly defined in national law. The 1st Altmark condition relates to the existence of one or more acts of a public authority defining in a sufficiently precise manner the nature, the duration and the scope of the public service obligations. (Paragraph 87)

In the field of passenger transport, both Regulation 1191/69 and Regulation 1370/2007 contain a definition of the public service obligation. This definition stipulates that the tasks that are subject to the PSO are those that a transport undertaking, considering its own commercial interests, would not assume. (Paragraph 90) Then the Court examined whether such a kind of obligation had been imposed on ARFEA.

An undertaking is considered to be entrusted with the management of a service of general economic interest when it is obliged to do so by virtue of an act of public authority. However, it does not have to be a legislative or regulatory act. Public service obligations in the field of passenger transport may be imposed by licenses for regular coach services, obliging the carrier to charge only the tariff authorised by the licensing authority and to operate according to a schedule. (Paragraph 91)

The Court proceeded to examine the contents of the concessions that had been granted to ARFEA. It found that, contrary to the Commission’s assertions, those concessions contained precise enough public service obligations. First of all, each of those concessions required the applicant to provide a passenger transport service for a specified period and route, respecting the designated stops and schedules that had been approved by the regional authorities. All the concessions referred to tariffs which were fixed by decision of public authorities and obliged ARFEA to keep proof of the number of tickets sold and the price charged. The concessions also obliged ARFEA to carry certain categories of passengers free of charge. Next, the concessions imposed several other obligations concerning safety and controls. Finally, most of the concessions in question also contained a clause relating to public subsidies aiming to redress budget deficits. (Paragraphs 97-100)

The Court acknowledged that the Piedmont Region did charge ARFEA with the performance of particular public services and specified obligations and tariffs which could give entitlement to public subsidies. (Paragraph 101)

However, despite these findings, the Court considered that they were not sufficient to ensure conformity with the 1st Altmark condition. The concessions examined by the Court did not indicate the extent of the public service obligations for which ARFEA was actually responsible during the relevant period. (Paragraph 102)

The Court noted discrepancies with respect to the period of validity of the concessions and the public service obligations, the number of routes or lines serviced by ARFEA and the amount of compensation requested and received by ARFEA. Moreover, the Court doubted that the compensation was correctly calculated, given that the number of lines operated by ARFEA could not be verified. (Paragraphs 103-107) Therefore, the Court considered that ARFEA failed to prove that the compensation complied with the Altmark conditions and it rejected its plea that the Commission made a mistake in classifying the compensation as State aid.

The lesson that should be drawn from this case is that it is not enough for a public authority to define the service that it wants an operator to provide and the price that it should charge. It must also define where, when and how that service should be provided.


Retroactive application of State aid rules

ARFEA claimed that the Commission applied the wrong State aid rules. The General Court, began its analysis by recalling the relevant principles with regard to the temporal application of EU law. Accordingly, there are two types of situations. First, there are the situations that arise under old rules which continue to produce effects after the adoption of new rules. Second, there are situations which existed before the entry into force of new rules. Thus, a new rule applies in principle immediately to the future effects of a situation arising under old rules. On the other hand, the application of a new rule to situations that occurred in the past constitutes a retroactive application which is allowed only when certain conditions are fulfilled. Since EU law must ensure respect for the principles of legal certainty and the protection of legitimate expectations, it applies to situations that occurred prior to the entry into force of new rules only to the extent that it is clear from their terms, purpose or economy that such an effect must be attributed to them. However, the principle of the protection of legitimate expectations cannot be extended so far as to prevent a new rule from applying to the future effects of situations arising under the old rule. (Paragraphs 121-123)

On the basis of the above reasoning, the General Court concluded that the compensation granted to ARFEA had to be regarded as concerning a situation that occurred under the old rule, i.e. Regulation 1191/69, but produced future effects. These future effects had to be assessed under the new rule, i.e. Regulation 1370/2007. Therefore, the Commission correctly assessed the compatibility of the compensation under the provisions of Regulation 1370/2007. (Paragraphs 136-137) In this respect this judgment concurs with the judgment in Buonotourist. Since the Court found that Regulation 1370/2007 was not, in this case, applied in a retroactive manner, it considered it unnecessary to determine whether retroactive application was permissible under its terms, purpose or economy. (Paragraph 138)


The obligation to notify aid

ARFEA claimed that the Commission wrongly characterised the compensation as unlawful State aid.

The General Court noted that the Commission took the view that Article 108(3) TFEU was infringed because the compensation was non-notified aid and it could not benefit from an exemption to the notification obligation under Article 17(2) of Regulation 1191/69. In addition, the compensation did not fall within the scope of Article 1(b) of Regulation 2015/1589, which lists the cases that can be considered as existing aid. (Paragraphs 155-156)

Then the Court added that even if the compensation could have come under the exemption from the notification obligation provided by Regulation 1191/69, it did not conform with the requirements of that Regulation. The Regulation stipulates that where a transport company operates both services subject to public service obligations and other activities, the company must have separate accounts. The Commission had found in its decision that ARFEA did not keep an appropriate system of separation of accounts between the activities allegedly subject to public service obligations and its other commercial operations. (Paragraphs 161-163)


Recovery of incompatible aid

ARFEA claimed that the compensation could not be recovered due to the application of the limitation rules laid down in Article 15 of Regulation 659/1999 and Article 17 of Regulation 2015/1589. This is because the Commission ordered recovery more than 18 years after the compensated services had been provided. According to ARFEA, the compensation constituted in fact only a payment in 2013 of the balance of the sums partially paid to it in 1997 and therefore owed to it since 1997.

The General Court, first, pointed out that Article 17 of Regulation 2015/1589 and Article 15 of Regulation 659/1999 relied on by ARFEA were not applicable in this case. The rules of procedure are generally intended to apply to all measures at the moment they enter into force. Article 17 of Regulation 2015/1589, whose content is identical to that of Article 15 of Regulation 659/1999, applies to all administrative procedures on measures pending before the Commission when Regulation 2015/1589 entered into force on 14 October 2015. In addition, Article 17 does not contain any transitional provisions as regards its application over time. It limits the powers of the Commission to recover aid to a period of ten years. The limitation period begins to run on the day on which the unlawful aid is granted to the beneficiary. Any measure taken by the Commission or a Member State, acting at the request of the Commission, with regard to that unlawful aid interrupts the limitation period. According to the General Court, it was therefore necessary to determine the moment when the compensation, which was unlawful aid, was granted to ARFEA. (Paragraphs 171-175)

The General Court considered that, contrary to the Commission’s submission, the time at which the aid was granted did not necessarily have to coincide with the actual payment of the amount of the aid. Similarly, the fact that an actual payment of aid did not take place did not mean that the aid was not granted to its beneficiary. The Court mentioned as an example of this possibility the additional compensation for public service obligations granted to Simet. (Paragraph 176) (see Commission decision 2014/201:

As is well-established in the case law, aid is regarded as granted at the moment when the right to receive it is conferred on the beneficiary undertaking under the applicable national rules. Therefore, in determining that moment, all the conditions laid down by national law for obtaining the aid in question have to be taken into account.

The General Court recalled that the relevant criterion for determining when aid is granted is the date of the adoption of the legally binding act by which the competent national authority commits itself to give the aid. (Paragraph 181) (The Court also referred to certain judgments according to which aid was granted on the date it was made available to the beneficiary undertaking. But those cases concerned multi-annual schemes or tax schemes. This was not the case with the compensation granted to ARFEA.)

Then the General Court pointed out that, by applying to Italian national courts, ARFEA had sought recognition of its right to obtain the additional compensations covering the extra costs it had incurred from the provision of transport services in 1997 and 1998. The General Court also underlined the unusual nature of this case whereby the State aid was granted as a result of a decision of a national court. Accordingly, the right to receive the compensation was conferred on ARFEA on the date of the delivery of judgment of the national court, which was the 10th of October 2013. The General Court concluded that the Commission was within its powers to order recovery of the aid. (Paragraphs 183-186)

Given that all the pleas of ARFEA proved unsuccessful, the General Court dismissed in its entirety the application for annulment of Commission decision 2016/2084.



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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