Regulated Prices & EU Energy Law after the Federutility case By Francesco Maria Salerno CREG Annual Conference In partnership with the Florence School of Regulation September 28, 2015 Brussels 2014 Cleary Gottlieb Steen & Hamilton LLP. All rights reserved. Throughout this presentation, Cleary Gottlieb and the firm refer to Cleary Gottlieb Steen & Hamilton LLP and its affiliated entities in certain jurisdictions, and the term offices includes offices of those affiliated entities.
Regulating retail prices in conditions of competition: Federutility-compatible?
The Italian gas market after Federutility - 1 Retails gas prices in Italy are amongst the highest in the EU Source: ACER/CEER Annual report 2013, p. 28 3
The Italian gas market after Federutility - 2 But the market situation has changed In 2009 ENI had about 70% Source: AEEG 2015 Annual Report, p. 156 4
The Federutility test and competition Public intervention in the determination of prices is permitted under three conditions: i. the intervention is justified in the general economic interest; ii. iii. the principle of proportionality is complied with; and the public service obligations are clearly defined, transparent, non-discriminatory, verifiable, and guarantee equal access for EU gas companies to consumers. The absence of competition remained in the background it is not part of the test The Court indirectlty confirmed that the level of competition is not part of the test in the recent Case C-36/14 against Polish gas regulated prices (September 10, 2015) Market with one company having 95% of the market Poland defended its right to apply regulated tariffs to curb monopoly power Court ignored the issue and reiterated Federutility test It found fault with the proportionality principle The measure was not limited in time There was no clear demarcation of the beneficiaries 5
Federutility / flexibility Cohabitation legale: Federutility allows regulated prices to live under the same roof with free market prices In Italy regulated prices will disappear in 2018 6
Regulating for the public service is different- an example from the telecoms space Since 2002 telecoms regulation requires a market analysis and a finding of significant market power (equivalent to dominant position) as necessary precondition for regulation In Case C-85/14 (September 17, 2015), the ECJ confirmed that regulating for reasons of public service is different and does not require a previous finding of dominance An NRA can impose a price cap on an undertaking, even if its market share is below the dominance threshold, when this furthers the access by customers to a service included in the notion of universal service (in casu, access to non-geographic so called 800 - numbers) Public service regulation in the shape of price regulation is possible even if the market is competitive 7
Federutility meets PreussenElektra Is regulating retail price State aid?
The basics on State aid Economic advantage Met if the regulated price is below the market price (as in Federutility) Distortion of competition and trade Easily met if economic advantage is present State resources? 9
State resources: from PreussenElektra 2001 to EEG 2014-1 In PreussenElektra the national Court asked the ECJ whether an obligation imposed on electricity operators (private and public) to purchase electricity from RES generators at minimum prices higher than the real economic value of that type of electricity entailed State aid ECJ considered that the measure in that case did not constitute State aid because the resources required to finance RES generators were paid directly by the electricity suppliers to the RES producers without transiting through any intermediary body appointed by the State to manage a State resource. Based on this rationale, in May 2002, the Commission decided that the then applicable German laws did not constitute state aid as State resources were not involved. The Commission noted that the measures were applicable without distinction to public and private operators and suppliers (Case NN 27/2000 - Law on promotion of electricity generation from renewable energies (OJ [2002] C 164) 10
State resources: from PreussenElektra 2001 to EEG 2014-2 The Commission has consistently maintained that if the state legislation designates that a component of the end users purchase price must be paid to an intermediary, over whom it exercises some control, and then in turn paid to a particular group of beneficiaries, the measure has to be classified as state aid The ECJ has upheld this reading in Case C 262/12 Vent de Colere In 2014 the Commission analyzed the new German law on RES support ( EEG ) and found that it involved State resources The Commission seems to consider that where a State sets rules under which private operators (including the TSOs) collect and administer a levy or surcharge, then this is sufficient to characterise the measure as involving State resources - even if no publicly controlled intermediary fund has been set up. The decision is subject to a number of appeals (e.g., case T-47/15) 11
Regulating retail prices may constitute State aid - revisited Economic advantage Met if the regulated price is below the market price (as in Federutility) Distortion of competition and trade Easily met if economic advantage is present State resources MET IF If State-owned company/ies with large market share (PreussenElektra) If entity under State control to administer a parafiscal levy collected to finance deficit (Vent de Colere) If regulatory framework to discipline the relationships of obligates entitled (EEG 2014) 12
What happens if regulated tariffs are State aid State State aid DG COMP 13
What happens if regulated tariffs are State aid -2 French regulated tariffs (C17/2007) Essential elements of the French regulated tariffs case: The Commission considered regulated tariffs for the sale of electricity for large and medium-sized consumers as compatible aid ex Article 107(3)(c). According to the Commission, the French measure is transitory The tariffs dated back to 2007, and the phase-out is scheduled to last until December 31, 2015 14
What happens if regulated tariffs are State aid -3 French regulated tariffs (C17/2007). The Commission extracted significant commitments from France. The compatibility finding is linked to the liberalisation of the electricity market in France, with a view to inject competition in the French wholesale electricity market. The Commission stated that a liberalization measure consisting in the regulated access to EDF s nuclear capacity justified the tariffs (so-called law NOME - Nouvelle Organisation du Marché de l'électricité, of December 7, 2010). The Commission s theory is that: EDF is dominant; the tariffs protected consumers from market power; the access to EDF s nuclear capacity will spur competition and reduce prices, hence consumers will not need protection against EDF any more State aid is a dialogue between the Commission and Ministry in the Member State Less role for Independent regulator 15
Final Remarks
Regulated Prices: Here to stay - exceptionally Exceptionally, regulated prices may coexist with free market prices For a significant time (in Italy from 2010 until 2018) If they entail State aid, the level of scrutiny will be higher But there is still significant room for Member States 17
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Back up
Timeline of Federutility case March 2007 AEEG Decision 79/07 June 2003 Directive 2003/55 May 2007 - Appeal vs. AEEG Decision June 2007 Decree-Law 73/2007 July 2007 Full liberalisation 15.4.2008 TAR request for a preliminary ruling 20.4.2010 ECJ preliminary ruling 25.11.2010 TAR Lombardia ruling 28.9.2012 Council of State ruling 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20
The TAR Lombardia s ruling 21 In its judgment of 25 November 2010, the TAR Lombardia upheld the applicants arguments and concluded that the Italian regulatory framework did not satisfy the principles and conditions set out by the ECJ in its preliminary ruling. The TAR Lombardia found that the measure was discriminatory and not limited in time. The most relevant part of the ruling concerned however the proportionality requirement: While the proportionality test usually comprises of two limbs (suitability and necessity), the ECJ had only made reference to the necessity test ( the method of intervention used must not go beyond what is necessary to achieve the objective which is being pursued in the general economic interest ). The TAR instead focused its assessment on the suitability test, arriving at the conclusion that the contested retail price control measure could only benefit final customers in the event of scarce competition in the retail sector, but could not address the issue of (almost) monopoly at the wholesale level (ENI covered around 70% of the market). The TAR Lombardia thus concluded that the measure could not be considered neither adequate nor necessary as it did not contribute in any way to the liberalisation objective. The AEEG appealed the TAR s ruling before the Italian Council of State.
The TAR Lombardia s ruling In its judgment of 25 November 2010, the TAR Lombardia upheld the applicants arguments and concluded that the Italian regulatory framework did not satisfy the principles and conditions set out by the ECJ in its preliminary ruling. The TAR Lombardia found that the measure was discriminatory and not limited in time. The most relevant part of the ruling concerned however the proportionality requirement: 22
The Council of State s ruling The Council of State upheld AEEG s appeal, quashed the TAR Lombardia s judgment and concluded that the Italian regulatory system set up with the AEEG measure respected the principles enshrined in the ECJ s preliminary ruling. The Council of State criticized the lower court s assessment as to the temporal nature of the measure and its discriminatory character. It is on the proportionality principle however that the Council of State s views most significantly clashed with those of the lower court: First, the Council of State noted that the ECJ did not in principle contest the suitability of the measure, namely that a measure affecting retail prices could address the rigidities of a monopolistic (or almost monopolistic) wholesale market. It considered reasonable and adequate the enactment of a regulatory system based on the introduction of more favorable reference prices for final customers, as this could induce retailers to react competitively vis-à-vis wholesalers and exercise their downstream competitive pressure to re-negotiate supply terms and conditions. Second, as to the necessity requirement, the Council of State excluded the court should identify and examine all the possible measures suitable to pursue a stated objective in order to decide whether the measure effectively adopted is not excessive. In particular, the contested measure did not impose a fixed price but only a reference price which retailers were free to match or to accompany with their own more advantageous offers. 23
The Council of State s ruling The Council of State upheld AEEG s appeal, quashed the TAR Lombardia s judgment and concluded that the Italian regulatory system set up with the AEEG measure respected the principles enshrined in the ECJ s preliminary ruling. The Council of State criticized the lower court s assessment as to the temporal nature of the measure and its discriminatory character. It is on the proportionality principle however that the Council of State s views most significantly clashed with those of the lower court 24