European Union Competition Law - Essay Example

of the of the of the EC Competition Law Part I Aid Rules The Member s of the European Union are under an obligation, as per the provisions of Article 87(1); to ensure that they should not provide aid in any form, which distorts or adversely affects competition in the common market. Moreover, these Member States should not favour specific undertakings or promote the production of goods that will adversely affect the spirit of competition and trade between other Member States. State aid can be in any form, such as a onetime tax concession to service providers and economic operators1 or granting a concession to the entire economic sector2. If some essential feature of State Aid breaches an explicit treaty provision, then it will be deemed to be incompatible with the Common Market. This precludes the Commission from allowing tax concessions, if they infringe treaty tenets like disallowing charges having equivalent effect, which is specified in Article 23 EC; internal taxation that is biased, as provided for in Article 90 EC3; “or secondary legislation harmonizing VAT, Capital duties, Excise duties or Energy taxation4.” Discounts or other form of aid granted by Member States and public authorities, in order to compensate the excess expenditure incurred by undertakings, is not considered to be state aid, under the present interpretation and application of Article 87 EC. This can be applied to undertakings irrespective of their efficiency, by making a comparison with their competitors. However, this approach poses a threat to the legitimate incentives and benefits to undertakings. It also diminishes the market discipline imposed on undertakings and the requirement to contain their costs, rather than the costs of their competitors. Such state aid may encourage undertakings to expand their business into other markets. This is because they would not be exposed to any risk due to the competition rules. This provides an undue advantage for undertakings whose performance is below par5. Part II Articles 86 and 87 Article 86 EC empowers the Commission to adopt directives. The Treaty Articles specify the obligations of Member States, in the context of public undertakings or other undertakings that have special or exclusive rights. Article 86 has given limited power to the Commission. This power differs from that of the European Parliament or the European Council by which they adopt directives. In fact, the Commission cannot impose new requirements and obligations on Member States. The role of the Commission is restricted to determining the obligations imposed on Member States by the Treaty. In other words, the powers and responsibilities of the Commission are subject to the rules of the Treaty. In order to ensure that the competitive rules of the EC law are properly applied to these undertakings and to public undertakings, Article 86 EC empowers the European Commission to review the operation of the undertakings, and the application of the EC competition law provisions. The Commission, under the third paragraph of Article 86 EC, can issue directives or decisions to Member States. Article 155 EC requires the Commission to ensure the application of all the provisions of the EC Treaty. Therefore, Article 86(3) provides some specific tools, which can be used while carrying out its responsibilities and functions. That is to say that there are no new powers conferred by this Article on the Commission6. In the area of public broadcasting, the Commission decided that if the state granted annual financing, then such grants would be deemed to be aid. The Commission instructed the national authorities to take all possible measures to ensure that overcompensation was not provided to public broadcasters. The Commission requires the Member States to implement safeguarding measures such as separate accounts, implement new legislations that prevent overcompensation to undertakings, promote commercial viability of public service providers and to establish an independent and competent authority to ensure the implementation of these rules7. Even if the objective of a measure is to render undertakings in one Member State similar to those in another Member State; such measures will be deemed to be aid. The case law of the ECJ had established this concept. In Commission v. France, France had provided preferential interest rates for French experts. The ECJ had declared that such preferential discounts were tantamount to state aid and came under the ambit of Article 87(1) EC. In this case France had attempted to resolve the interests’ dispute by making them comparable with the interest rates found in other Member States. In the case of Italy v. Commission, Italy had argued that the textile industry in Italy was facing disadvantages, in comparison to the situation prevalent in the other Member States. It also argued that the rapid changes in socio – economic conditions in Italy had brought about this downtrend. Italy further contended that the decrease in the number of employees working in textile industries was also attributable to these changes. Member States cannot argue that an aid had been granted in response to an unlawful aid by other states. Such grant of aid is invalid and the Member States are under an obligation to refrain from granting state aid that breaches the provisions of Article 87(1) EC. A Member State that violates this obligation cannot put forth the defence that some other Member States are also in breach of this fundamental duty8. The decision in the Altmark case revealed that State interventions in some areas, relating to public services, were not welcome. General exemptions from income tax and other taxes do not come under the definition of public services9. The European Court of Justice clarified that Article 86(2) was not to be invoked in the event of affording protection to state financing that was excessive and over compensatory for the services rendered by a service provider. The service provider was already under an obligation to discharge its public services. Hence state financing should not exceed the original costs of discharging obligations by service providers. As such public service providers do not expect a reasonable profit from their services10. The decision of the ECJ in the Altmark case supported the concept established in the decisions in ADBHU and Ferring. The ruling in the Altmark case laid down four requirements to be fulfilled in order to circumvent the burden of the presence of state aid in compensation measures for undertakings. First, there should be a clear definition with regard to the public service obligations and the manner in which such obligations are to be discharged by undertakings. Second, the state government must have established the indicators for the calculation of the compensation to be paid. Such establishment of indicators must be done much earlier to the provision of state aid and the calculation should be done in a transparent way. Third, the principle of proportionality must be adopted by the state government. Under this principle the government must not provide compensatory measures in excess of the amount that would be sufficient to cover the costs incurred by an undertaking while discharging a public service obligation. The state must consider the monetary amounts received by the undertaking and whether a reasonable profit is being achieved by the latter. Fourth, the beneficiary undertaking must discharge its public service obligations by adopting a public procurement procedure. In other words, the compensation must be limited to the extent of the costs which under normal conditions a typical undertaking would incur, while discharging its public service obligations11. The Commission had to interpret the ruling in the Altmark case and implement it into the analysis mechanisms in order to counterbalance the costs relating to the PSOs. Subsequent to the Altmark ruling, a majority of the decisions taken by the Commission on state aid measures pertained to the financing of public service broadcasting. The Commission ascertained whether the measures provided by Member States had been directed to the benefit of public broadcasters and whether such measures had met the conditions of the prohibition of State Aid stipulated by Article 87(1) EC. The Commission considered the fact, as to whether the decision in Altmark had affected its analysis in this regard. The Commission found on scrutiny that in most of the cases the second and fourth conditions laid down by the Altmark test had not been met. In other words, the parameters that determine the financial support measures had not been calculated well in advance; either in an objective manner or in a transparent manner. Moreover, the beneficiary public broadcasters had not been chosen through any public tender. The state aid provided was not on the basis of the probable costs of an archetypal, efficiently managed entity12. The Commission, after classifying these measures as State Aid, declared them to be consistent with the common market. In the course of this analysis that was based on Article 87(1) EC, the Commission accepted the contention that in the absence of a public procurement procedure, public broadcasters were incurring costs that depicted their lack of efficiency as operators. Accordingly, the Commission held that these costs were in keeping with the proportionality requirements of Article 86(2) EC derogation13. In the course of applying the proportionality test provided by 86(2) EC, the Commission applies a more stringent legal standard, which evaluates as to whether a Services of General Economic Interest or SGEI measure is in consonance with the ruling in Altmark; and a less stringent legal standard, wherein the actual costs incurred by the beneficiary are taken for granted, so as to obtain a positive result14. As such, these Altmark criteria do not conform to fact. It is the considered opinion of the Commission that hardly any scheme has abided by these measures. Moreover, the Member States would be unable to comply with the public service obligations if they had to comply with the Altmark measures. Article 86(2) EC is not rendered inapplicable by the ruling in Altmark. In fact, it had been held that upheld the applicability of the State Aid primary law, despite the absence of the four requirements. Hence, the Article 86(2) EC derogation is significant in evaluating SGEI schemes15. The decision in Ferring clearly establishes that state sponsored compensatory measures which exceed the legitimate costs as prescribed by law with regard to undertakings, cannot become state aid. In order to become state aid, such measures must be within the limits imposed by the law. This reasoning provides economic dilemma. States provide aid to counterbalance the operational costs for beneficiary undertakings. However, such measures would distort competition between beneficiary undertakings as well as between beneficiaries and non – beneficiaries. This situation contrasts with the Court’s view that compensatory measures can promote the opportunities for competition. At this juncture, it can be said that such compensatory measures would provide more benefits to beneficiary over other undertakings such as competitors. This would distort the competition. The costs will be compensated completely even though the beneficiaries could resolve themselves. On the other hand, non – beneficiary undertakings which provide the same services of beneficiary undertakings may not be in a position to receive those measures or cannot receive similar treatment in the lines of beneficiaries. Moreover, compensatory measures do not fall under the application of Article 87(1) EC, although the amount of state aid is lesser than the excessive costs as imposed by law. There is no such presumption that proves contrary to this argument. Therefore, compensatory measures similar to those in Ferring should be treated as state aid16. The application of Article 86(2) was reviewed in the Ferring ruling. In order to consider compensatory measures as state aid, there should be a restricted interpretation of Article 86(2); and under this restricted interpretation, the net excess costs must be taken as the criterion of the legal provisions, only then can the beneficiaries be exempted from the state aid regulations. Such aid must cover only the net excessive costs, which are obtained by deducting extra revenue from extra costs17. The competition rules of the EU are not applied to the providers of SGEI. However, competition rules are the same for other undertakings in all fields of the economic sector. The ECJ had further extended the scope of this application, and public service providers may incur additional expenditure in their operations. However, there is no need to compensate these extra costs, unless their public service obligation imposes an adverse effect on the market supply. If the compensation promotes the supply of undertakings then it can be justified. A more efficient policy matter is that of auctioning, which ensures the grant of minimum aid. Moreover, auctioning compensation is not considered to be state aid. Users of the SGEI, can be undertakings, and they are eligible to receive indirect aid from the state18. The case of FFSA is the landmark case with regard to state aid and the assessment of funding of Public Service Obligations. The Public Service Obligations or the PSOs are established by the Treaty with regard to the role of state aid rules. This case dealt with the state measure of preferential tax benefits to the French public service operation La Poste. The French government had granted tax benefits to La Poste in order to counterbalance and compensate for the excess costs incurred by La Poste while providing postal services in France. La Poste was under a public service obligation19. The operational costs of La Poste exceeded the compensation. The Court of First Instance or the CFI had considered the state’s measure as being a state aid and it fell well within the interpretation of Article 87(1). The CFI held that La Poste had been placed in a more advantageous position by this tax benefit than other taxpaying undertakings. The CFI based its decision on the earlier case law in this regard, and opined that such state aid provided by public authorities would reduce the costs of the undertaking20. The Court of First Instance opined that La Poste had been provided with an advantage by the state. This type of advantage cannot be availed under normal conditions. While referring to the exceptions provided by Article 86(2), the CFI had considered that the state aid in this case would be compatible with the spirit of the common market. This clearly demonstrates that invoking the exception provided by Article 86(2) would mitigate the effects of competition rules in the common market. However, such a measure would be tantamount to state aid as interpreted by Article 87(1)21. Article 87(1) EC prohibits State aid to undertakings for compensating excess costs incurred by them while performing public service obligation. This can be avoided by the application of Article 86(2) which provides exceptions to that notion. However, this exception stipulates that it should be used where the state aid attempts to counterbalance the excess and additional costs incurred by discharging public service obligations. It also specifies that state aid encourages undertakings to efficiently fulfill the PSOs and to maintain economic viability22. In the case of SIC, the CFI ruled that the decision in the case of FFSA can be applied to cases of state aid. The facts of SIC case had been the grant of funding by the Portuguese to the public television channels in the form of compensation for their discharge of public service obligations. The CFI had considered the state funding as state aid that places the television channels in an advantageous position. The television channels would not get such state aid during normal market conditions23. In fact, state aid was provided to the television channels to offset the extra costs incurred by them, while discharging their public service obligations. The CFI’s ruling could not be influenced by this general perception. This is because the provisions of Article 87(1) EC had not provided a clear distinction between state measures on the basis of their objectives and functions. Article 87(1) deals with state aid with respect to their aftereffects. Under this article, the notion of state aid is objective. The important aspect to be examined here is whether such state aid confers any advantageous position upon undertakings in the common market. The Court of First Instance held that economic advantage measures provided to undertakings, in order to counterbalance or offset their excessive costs while discharging public service obligations, would not affect the classification of such measures as state aid under Article 87(1) EC24. Article 87(1) EC encompasses grants that bestow specific benefits on infrastructure operators; if the State Aid conditions are satisfied. The discretionary powers of the Commission are to be employed only if the State Aid is indispensable for furthering Community goals and interests, as specified in Article 87(3) EC. For example, in infrastructure projects, State Aid is deemed to be in keeping with Article 87(3) EC provisions, to the level that is required for developing financial performance of economic regions, as long as there is no distortion of competition that affects the common interest. Approval of such provision of funds is vested with the Commission25. Part III Article 28 State aid can be held to be in accordance with the principles of the common market, under the provision of Article 87 (3). Article 30 EC permits Member States to deal with issues pertaining to non – economic reasons, in order to deviate from the free movement of goods principle, which is provided by Article 28 EC. Moreover, Article 28 EC is directly applicable as opposed to Article 87(3) EC, because Article 87 is not absolute in nature, because it emanates from Article 87(3) EC and Article 88 EC. These two articles empower the Commission to have wide discretion, and they allow the Council to derogate from Article 87(1) EC26. National courts must apply Article 28 EC. The Commission applies Article 87 EC as conferred by Article 88 EC. This differentiation restricts individual parties from invoking the principle of incompatibility with the principles of the common market, regarding state aid. However, individuals can bring action under Article 230 EC against the Commission if the latter decides upon the compatibility or incompatibility of state aid with the common market. Member States are required to intimate the Commission about their state aid measures. Thereafter the Commission reviews such measures for their compatibility with the common market. Member States are also under a duty to abstain from implementing state aid measures, till such time as the Commission arrives at a decision with regard to the compatibility or incompatibility of such measures. Article 88(3) EC lays down such requirements on Member States. However, Article 28 EC does not contain any such restrictions27. In the Irish Sugar case, the Irish Sugar was deemed to have abused its dominant position, with respect to the discernment of price, in order to cause loss to its competitors’. It had also provided concessions to a customer, with a view to prevent him from getting out side products. Other retailers had been given attractive rebates, so as to dissuade them from getting the product from other suppliers. The judgement in this case disclosed that the Court would penalize any company that attempted to exploit its dominant position in the Common Market28. Part IV Article 90 Fiscal Sovereignty and the Tax Exemption regime It is the Commission’s considered opinion that there is no community interest that justifies the wider application of state aid. The Italian government’s motive was to limit the tax concessions to the profits made by the undertakings, in the course of their business with the Eastern European nations. Thus, the Italian measure seems to deviate from community interest. Therefore, the Commission had to take the necessary steps to end the preferential taxation regime29. Therefore, the stringent enforcement of the Treaty rules over state aids creates significant barriers to the independent industrial policies of the Member States. State aids are the fundamental characteristics of the member states’ autonomous industrial policy. At present, public sector undertakings are also being made subject to the scope of the treaty rules on state aids. Previously public undertakings enjoyed state aids as privileged instruments, but the situation has since changed; and public undertakings can no longer enjoy their privileged status. This situation encourages a greater amount of privatisation30. In the FENIN case the Court of First Instance held that a purchaser could not be categorized as an undertaking, if the purchase of goods or services was for some activity other than economic activity. While determining the nature of the activity of the purchaser, the nature of such activity is not to be set aside from the act of purchase. The ECJ upheld this decision of the Court of First Instance31. The principal decisions regarding compatibility of exclusive rights and Article 86 (1) was summarized in the Albany International case32. In the Horner case the state had merely granted an exclusive right. The monopolist, due to the peculiarity of the economic context was unable to abstain from abusing a dominant market position, specifically; the monopolist was unable to meet the demand. The exemption applied for was refused33. The various notices and guidelines that have been issued from time to time have ensured that the rules pertaining to state aid are very clear and the least influenced by national politics. Control of state aid is analytically different from the other areas of EC competition policy. Works Cited Case 173/73 Italy v. Commission (1974) ECR 709 Case C-41/90 Horner and Elser v Macrotron ([1991) ECR I-1979 Case 294/90 British Aerospace v. Commission (1992) ECR I-493 Case T-106/95, FFSA v Commission, (1997) ECR II-229. Upheld on Case C-67/96 Albany International (1999) ECR I-5751 appeal in Case C-174/97 P, FFSA v Commission, (1998) ECR I-1303 Case T-46/97, SIC v Commission, [2000] ECR II-2125. Case T – 228/97. Irish Sugar plc v. Commission of the European Communities. October 7, 1999. Case C-280/00, Altmark Trans GmbH, Regierungspräsidium Magdeburg v. Nahverkehrsgesellschaft Altmark GmbH. Case C-205/03P FENIN v Commission, (2006) ECR 1-6295 Commission of the European Communities, 20.04.2005. Report: State Aid Scoreboard. 28 March 2008. Doern, Alik. Public Procurement Law Review. 2004. The interaction between EC rules on public procurement and state aid. Page 1. Louis, Frédéric and Anne Vallery. State aid and the financing of public services: A comment on the Altmark Judgment of the Court of Justice. September 2003. 27 March 2008 . Nicolaides, Phedon European Competition Law Review. 2003. Compensation for public service obligations: the floodgates of state aid?. Pages 10 – 11. NYC School of Law. Article 90(3): the special tools of the Commission to ensure the application of competition rules to the public sector. 27 March 2008 . PROFESSOR P. NICOLAIDES. European Competition Law Review 2002 Case Comment Distortive effects of compensatory aid measures: a note on the economics of the Ferring judgment. European Institute of Public Administration Maastricht. Page 7. Quigley, Conor, Anthony Collins. EC State Aid Law and Policy. Hart Publishing. Page 44 Rydelski, Michael Sanchez. The EC State Aid Regime: Distortive Effects of State Aid on Competition. 2006. Pp. 60 – 100. Cameron May. ISBN: 1905017340 Sauter, Wolf. Competition Law and Industrial Policy in the Eu.1997. P. 147. Oxford University Press. ISBN: 0198264933. Usher, John Anthony. 2000. The Law of Money and Financial Services in the EC. Pp 40-43. Oxford University Press. Capital movements/ Law and legislation/ European Union countries . ISBN 0198298773 Read More