Case T-62/08 ThyssenKrupp Acciai Speciali Terni SpA v. European Commission: When the Extension of a Compensatory Measure Becomes A State Aid
... A case on the late aftermaths of the prolongation of what was a compensatory measure adopted under the nationalisation of the electricity sector in Italy.
An interesting judgement of the General Court of 1 July 2010 relates to the qualification as state aid of the extension of a compensatory measure adopted by the Italian government at the time of nationalisation in the 1960s.
Facts and legal issues
The compensatory measure consists in a preferential tariff for the supply of electricity, the aim of which was to compensate for expropriation of Terni. Terni was operating in the steel, cement and chemicals sectors. It owned and operated an hydroelectric powerplant mainly for its own needs. The Italian government decided then that "[g]iven its strategic importance for the country's energy supply,' Terni's hydroelectricity assets should be nationalised by the way of transferring its assets to ENEL 'despite the fact that Terni was a self-producer" (para.4). The compensatory measure for expropriation following nationalisation of the hydroelectric sector in 1962 consisted in the granting of a preferential tariff (the Terni tariff) for the supply of electricity, which was first applied from 1963 to 1992. The disputed measure in the case consists in its renewed temporal extension by Law No. 80/05 as from 1 January 2005 and not in the initial compensatory measure as defined in Decree No. 1165/63 (in terms of volume, price and length).
The compensatory measure had been extended once, from 1992 to 31 December 2001. In that case, the Italian government intended to adjust the compensatory measure with the renewal of hydroelectric concessions. This renewal included a provision on the progressive decrease of the level of the aid granted to Terni (by way of lower electricity traiff). The measure was notified to the EU, and the European Commission decided 'not to raise objections' to the application of Law No 9/91.
A progressive phase-out of the measure was also meant to follow the liberalisation of the electricity market. However, the applicant argues here that the liberalisation process initiated in Italy by Decree No.79/99 in the electricity sector did not deliver the expected result, which were of enabling the Terni companies to purchase electricity directly on the liberalised power market at competitive rates, "similar to the production costs they would have had if they had retained possession of the expropriated plants" (para. 37, arguments of the parties). According, and still according to the applicant, "in 2005 the liberalisation of the electricity market in Italy did not produce the anticipated favourable effects in terms of competition and the Terni companies were once again in the position of being discriminated against as compared to the non-expropriated self-producers, which led the legislature to adopt the disputed measure." "Ultimately, the disputed measure kept intact the underlying rationale of the compensation, which was to treat Terni like a virtual self-producer." (para.37)
Indeed, the 'true compensatory nature' of the measure adopted in 2005 is the core question examined in Case T-62/08. The Commission assessed it as fulfilling the criteria of state aid in the contested Decision 2008/408/EC of 20 November 2007 on the state aid C 36/A/06 (ex NN 38/06) (OJ 2008 L 144, p.37).
The applicant disagrees with the Commission's assessement. It argues that "the disputed measure cannot be categorised as State aid as the condition relating to the grant of an advantage to the recipients is not satisfied, that mesure being purely compensatory in nature." (para.58)
In its decision, the Commission agrees in saying that "the compensation granted by the State for an expropriation of assets does not normally qualify as State aid (recital 70 of the contested decision)." This is indeed established case law. But here, the terms of the problem are different as it regards an extension of compensation, with discutable legal basis and justification.
Judgement of the General Court
On the nature of the initial measure, the Court estimates that it is "completely unambiguous that the Terni tariff was granted by way of compensation for a very specific period, with no possibility of postponing the expiry date," which was fixed to 31 December 1992 and extended by Law No. 80/05 until 2010 (under tariffs and quantities agreed upon in 2004). But the extension in time of the measures did not have the compensatory nature as the initial measure did. (para.119)
The application justifies the extension as follows: "the duration of that tariff must, in keeping with the underlying rationale of the compensation chosen by the national legislature, be extended systematically in alignment with the non-expropriated self-producers' renewals, in order to neutralise 'continually' the adverse effects of nationalisation, in the light of changes in electricity prices."(para 129)
The Court rejects critically the arguments, by saying that: "Yet, the application has not referred to any rule, principle of Community law, provision of nationation law or decision of a national court on which to base its interpretation, which would lead to the grant of compensation for an indefinite period or providing more generally for the possibility of taking account of events subsequent to the fixing of the compensation in order to alter the estimate of the nationalised or expropriated asset and, therefore, the scope of the compensation" (para. 131).
The applicant tries in a final effort to call upon the application of Article 1 of the First Protocol of the European Court of Juman Rights concerning the Protection of Property, as applied in ECHR judgement of 11 April 2002, Lallement v France (on the expropriation of property land used for agricultural purposes). The argument is strongly rejected by the Court in the following terms:
"... not only is the analogy drawn by the application between Terni's situation and that which gave rise to that judgement, ..., questionable, but furthermore the judgement of the ECHR contains no explicit statement to the effect that compensation may 'sometimes call for amounts which are significantly higher than the value of the expropriated property alone." (para.138)
and to conclude that:
"That judgement [of the ECHR] is based on the reasonable relationship which must exist between the amount of compensation and the given value of the expropriated property, a ground which is incompatible with the applicant's interpretation of Article 6 of Decree No.1165/63, which is liable to lead to there being an unlimited or perpetual right to enjoy the Terni tariff, due to the lack of temporal specification." (para.140)
The Court finally agrees with the Commission on the nature of the contested measure as being a state aid since "there could be no doubt that the provision of electricty at lower prices compared to the ordinary electricity tariff constituted a clear economic advantage for the beneficiaries, who saw their production costs reduced and their competitive position strengthened..." (para.141).
Concluding remark
As a general conclusion one can say that national authorities should be extremely careful when envisaging the renewal of compensatory measures and the like granted at pre-liberalisation phases. Market conditions have changed, and adjustment may require a more careful legal argumentation than the one provided by the applicant in that case. This case also underlines the role of the EU state aid regime as a safety net for the application of competition rules on the internal energy market.
An interesting judgement of the General Court of 1 July 2010 relates to the qualification as state aid of the extension of a compensatory measure adopted by the Italian government at the time of nationalisation in the 1960s.Facts and legal issues
The compensatory measure consists in a preferential tariff for the supply of electricity, the aim of which was to compensate for expropriation of Terni. Terni was operating in the steel, cement and chemicals sectors. It owned and operated an hydroelectric powerplant mainly for its own needs. The Italian government decided then that "[g]iven its strategic importance for the country's energy supply,' Terni's hydroelectricity assets should be nationalised by the way of transferring its assets to ENEL 'despite the fact that Terni was a self-producer" (para.4). The compensatory measure for expropriation following nationalisation of the hydroelectric sector in 1962 consisted in the granting of a preferential tariff (the Terni tariff) for the supply of electricity, which was first applied from 1963 to 1992. The disputed measure in the case consists in its renewed temporal extension by Law No. 80/05 as from 1 January 2005 and not in the initial compensatory measure as defined in Decree No. 1165/63 (in terms of volume, price and length).
The compensatory measure had been extended once, from 1992 to 31 December 2001. In that case, the Italian government intended to adjust the compensatory measure with the renewal of hydroelectric concessions. This renewal included a provision on the progressive decrease of the level of the aid granted to Terni (by way of lower electricity traiff). The measure was notified to the EU, and the European Commission decided 'not to raise objections' to the application of Law No 9/91.
A progressive phase-out of the measure was also meant to follow the liberalisation of the electricity market. However, the applicant argues here that the liberalisation process initiated in Italy by Decree No.79/99 in the electricity sector did not deliver the expected result, which were of enabling the Terni companies to purchase electricity directly on the liberalised power market at competitive rates, "similar to the production costs they would have had if they had retained possession of the expropriated plants" (para. 37, arguments of the parties). According, and still according to the applicant, "in 2005 the liberalisation of the electricity market in Italy did not produce the anticipated favourable effects in terms of competition and the Terni companies were once again in the position of being discriminated against as compared to the non-expropriated self-producers, which led the legislature to adopt the disputed measure." "Ultimately, the disputed measure kept intact the underlying rationale of the compensation, which was to treat Terni like a virtual self-producer." (para.37)
Indeed, the 'true compensatory nature' of the measure adopted in 2005 is the core question examined in Case T-62/08. The Commission assessed it as fulfilling the criteria of state aid in the contested Decision 2008/408/EC of 20 November 2007 on the state aid C 36/A/06 (ex NN 38/06) (OJ 2008 L 144, p.37).
The applicant disagrees with the Commission's assessement. It argues that "the disputed measure cannot be categorised as State aid as the condition relating to the grant of an advantage to the recipients is not satisfied, that mesure being purely compensatory in nature." (para.58)
In its decision, the Commission agrees in saying that "the compensation granted by the State for an expropriation of assets does not normally qualify as State aid (recital 70 of the contested decision)." This is indeed established case law. But here, the terms of the problem are different as it regards an extension of compensation, with discutable legal basis and justification.
Judgement of the General Court
On the nature of the initial measure, the Court estimates that it is "completely unambiguous that the Terni tariff was granted by way of compensation for a very specific period, with no possibility of postponing the expiry date," which was fixed to 31 December 1992 and extended by Law No. 80/05 until 2010 (under tariffs and quantities agreed upon in 2004). But the extension in time of the measures did not have the compensatory nature as the initial measure did. (para.119)
The application justifies the extension as follows: "the duration of that tariff must, in keeping with the underlying rationale of the compensation chosen by the national legislature, be extended systematically in alignment with the non-expropriated self-producers' renewals, in order to neutralise 'continually' the adverse effects of nationalisation, in the light of changes in electricity prices."(para 129)
The Court rejects critically the arguments, by saying that: "Yet, the application has not referred to any rule, principle of Community law, provision of nationation law or decision of a national court on which to base its interpretation, which would lead to the grant of compensation for an indefinite period or providing more generally for the possibility of taking account of events subsequent to the fixing of the compensation in order to alter the estimate of the nationalised or expropriated asset and, therefore, the scope of the compensation" (para. 131).
The applicant tries in a final effort to call upon the application of Article 1 of the First Protocol of the European Court of Juman Rights concerning the Protection of Property, as applied in ECHR judgement of 11 April 2002, Lallement v France (on the expropriation of property land used for agricultural purposes). The argument is strongly rejected by the Court in the following terms:
"... not only is the analogy drawn by the application between Terni's situation and that which gave rise to that judgement, ..., questionable, but furthermore the judgement of the ECHR contains no explicit statement to the effect that compensation may 'sometimes call for amounts which are significantly higher than the value of the expropriated property alone." (para.138)
and to conclude that:
"That judgement [of the ECHR] is based on the reasonable relationship which must exist between the amount of compensation and the given value of the expropriated property, a ground which is incompatible with the applicant's interpretation of Article 6 of Decree No.1165/63, which is liable to lead to there being an unlimited or perpetual right to enjoy the Terni tariff, due to the lack of temporal specification." (para.140)
The Court finally agrees with the Commission on the nature of the contested measure as being a state aid since "there could be no doubt that the provision of electricty at lower prices compared to the ordinary electricity tariff constituted a clear economic advantage for the beneficiaries, who saw their production costs reduced and their competitive position strengthened..." (para.141).
Concluding remark
As a general conclusion one can say that national authorities should be extremely careful when envisaging the renewal of compensatory measures and the like granted at pre-liberalisation phases. Market conditions have changed, and adjustment may require a more careful legal argumentation than the one provided by the applicant in that case. This case also underlines the role of the EU state aid regime as a safety net for the application of competition rules on the internal energy market.
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