Comments on the 2011 draft SGEI Package Damien Geradin Covington & Burling, Tilburg University and College of Europe Bruges, 30 September 2011

2 Overall comments Positive impressions from the Package –These instruments are generally well drafted and coherent; and –The objectives of the Commission to make rules simpler and clearer, and to encourage “efficient” provision of SGEIs are largely met. Yet, some aspects of the Package: –Should be clarified; and –Raise issues of principle that need to be discussed.

SGEI Package: Interrelation of the 4 legal instruments 2011 SGEI Communication Do the clarified Altmark criteria apply? 2011 de minimis Regulation Does it apply? No state aid exists No notification required 2011 SGEI Decision Does the apply? (Only relevant to certain types of SGEIs) State aid exists, but it is compatible No notification required 2011 SGEI Framework Does it apply? State aid exists, but it is compatible Notification required No Yes

4 Scope of my comments Focus on the “draft Framework” and in particular, on: –The mandatory nature of public procurement for SGEIs; –The net avoided cost methodology; –The theory supporting “offsetting” of SGEI (net) costs with profits from other activities of the SGEI operator; and –The new section of the Framework, allowing for the imposition of additional requirements on the SGEI operator, when the entrustment can lead to serious distortions of competition.

5 Compliance with EU public procurement rules § 19 of the draft Framework provides that: –“Aid will only be considered compatible with the internal market on the basis of Article 106(2) TFEU where the responsible authority, when assigning the provision of the service to the undertaking in question, has complied or commits to comply with the applicable EU rules in the area of public procurement.” This suggests that when a MS entrusts an SGEI to an operator against the payment of a compensation without proceeding to tendering when required under EU law, this compensation will not be justified under the Framework even if its amount does not exceed “what is necessary to cover the net cost for discharging the public service obligations, including a reasonable profit.” (§ 21) Is this understanding correct? If so, –Isn’t the Framework more stringent than the fourth Altmark condition? –The State aid clearance process becomes a tool to enforce EU public enforcement rules. More broadly, is tendering a panacea?

6 Net avoided cost methodology § 25 provides that: –“Under the net avoided cost methodology, the net cost … is calculated as the difference between the net cost for the provider of operating with the public service obligation and the net cost or profit for the same provider of operating without this obligation. … The net cost calculation should assess the benefits, including intangible benefits, to the SGEI provider.” Correct methodology, but clarifications will be necessary for concepts, such as “benefits” or “intangible” benefits Treatment of “legacy costs”?

7 Provisions applicable to firms carrying out activities other than SGEI or providing several SGEI Issue is whether profits accrued by the provider of a given SGEI from activities outside the scope of that SGEI should be allocated in whole or part to the financing of the SGEI in question (“offsetting theory”) Example, § 42 of the Framework states: “If the undertaking in question holds special or exclusive rights linked to activities, other than the SGEI for which aid is granted… or benefits from other advantages granted by the State, these must be taken into consideration… and added to its revenue.” But see also §§ 42, 43 and 51(c)

8 Offsetting or not? (1) Scenario 1 “profits in excess of the reasonable profit” made on a service for which the SGEI provider enjoyed special or exclusive rights are added to the revenue of the SGEI for the calculation of the net compensation ACCEPTABLE Scenario 2 “profits” made by the SGEI provider on a service for which it does not enjoy special or exclusive rights or “other advantages granted by the State” are added to the revenue of the SGEI for the calculation of the net compensation UNACCEPTABLE

9 Offsetting or not? (2) Scenario 2 is unacceptable. Once services are open to competition, SGEI providers should not see their profits on such services expropriated to fund SGEIs. There is no legal or economic support to offsetting In addition, such an approach is objectionable for a series of other reasons: –It would discriminate between operators which are entrusted with SGEI and those which are not; –It would disincentivize SGEI providers to be efficient in non- reserved services; and –It would go against the logic of liberalisation as it would effectively cap profits in competitive markets.

10 Additional requirements are necessary in case of serious competition distortions §§ provide that while –“[t]he requirements set out in … this framework are usually sufficient to ensure that the aid does not distort competition…. –There can, however, be circumstances in which the compensation can generate more serious competition distortions in the internal market, such as to deserve a particular scrutiny and additional conditions for the compatibility of the aid.”

11 Additional requirements The rest of § 49 details the circumstances in which this may happen: –SGEI entrustment is part of a network of similar entrustments in the same geographic or product market. –SGEI entrustment bundles several tasks that could have been entrusted separately at no extra cost. –SGEI entrustment is linked with special or exclusive rights which provide the undertaking with immaterial advantages, difficult to quantify. –SGEI entrustment finances the creation or use of infrastructure that is not easily replicable. –SGEI entrustment hinders the effective enforcement of EU legislation for the protection of the internal market The above language is entirely open-ended and thus can create legal uncertainty

12 Conditions or commitments The above circumstances, which seem to borrow theories of harm from other antitrust fields, can lead to “conditions or commitments”, e.g.: –taking into account the amount of excessive profits made on activities outside the scope of the SGEI using the same network;” … –granting access to third parties to the infrastructure or network financed by the compensation at fair and non- discriminatory conditions. There is no legal or economic support for such commitments

13 Conclusions Draft SGEI Package is helpful and the Commission should be commanded for putting it together BUT The draft Framework contains open-ended language which requires clarification (tendering, net avoided cost) The “offsetting” theory should be clearly circumscribed The circumstances under which the Commission can request additional conditions or commitments are vaguely defined, and thus create uncertainty Some of the enounced conditions or commitments appear overbroad and unjustified