State aid, unbundling and EdF – a new piece in the puzzle?
Written by Leigh Hancher
The EU Treaty state aid rules (Articles 107 and 108) have a major role to play in the energy sector. Governments intervene to support public and private energy companies as markets evolve from heavily regulated to liberalised markets and from carbon to low carbon economies. In some cases, this may mean compensating companies left with ‘stranded assets’ – generating facilities which cannot compete on the market and cannot exit the market on commercial terms. In other cases, it can mean providing financial incentives for new market entrants – such as producers of renewable energy – who cannot compete with fossil fuel producers. Often governments provide both types of support at the same time and, indeed, Europe’s energy market is heavily subsidised.
The EU state aid rules do not forbid government support for the energy sector – their purpose is to distinguish good aid from bad and to allow Member States to finance ‘objectives of common European interest’, such as the clean energy transition.
Despite several decades of application, the concept of a state aid is still not well defined and continues to generate protracted legal battles in the European courts. This is well illustrated by a ruling in Case T-747/15 of the General Court of the EU on Tuesday 15 January 2018, confirming that the Commission had correctly applied the state aid rules to order France to require EdF to pay back Euro 1.37 billion.
A government may claim that as a major shareholder in an energy company, it is entitled to reorganise that company just as any private shareholder would often do. Private shareholders use their own resources to fund re-structuring but governments invariably use public resources generated from tax revenue to cover restructuring costs. The French government did exactly that when, in accordance with EU energy law requirements, it unbundled the state energy company, EdF, to create a separate transmission system operator (TSO). It waived a tax claim in order to boost the utility ’s balance sheet after unbundling. In 2003, the Commission held that this tax waiver was an illegal state aid. France claimed that it had simply acted as any other market investor would have done and that the method it had used (the tax waiver) was irrelevant.
Although most private investors do not enjoy the right to collect and then waive taxes, rather surprisingly, the EU courts upheld France’s challenge. The Commission had to redo its homework. In 2015, it adopted a new decision. It found that the French government had not made any assessment of the future profitability of the firm at the time of the tax waiver. The government had not required the same return on its investment as a private investor would have done. State aid was therefore granted to EdF. The General Court’s ruling can be appealed to the European Court of Justice (ECJ) and, if this occurs, at least two decades will have elapsed in this complex but by no means a unique case.
State aid may well be an important instrument in the Commission’s toolbox but it is not always easy to deploy, and legal challenges are very frequent. Our new book on State Aid in the EU Energy Sector explores the significance as well as the complexities of the EU state aid regime.
State Aid in the Energy Sector will be published by Hart Publishing in late February and launched in Brussels on 2 March 2018. You can pre-order the publication here.