State Guarantees for Publicly-Owned Electricity Utilities: Iceland Constrained to Change Rules by EFTA Surveillance Authority to Be Compatible with State Aid Regime

EFTA Surveillance Authority (ESA) announced on 24 April 2013 that it had decided to close a case concerning the qualification as state aids and legality of state guarantees granted to two publicly-owned electricity utilities in Iceland, namely Landsvirkjun and Orkuveita Reykjavíkur.

The previous Icelandic rules provided unlimited state guarantees to the two publicly owned electricity utilities, which was considered by ESA as state aids incompatible with EEA law.

To put an end to the investigation, Iceland had to change its rules for the attribution of state guarantees to these undertakings. The main changes adopted relate to:

- the end of unlimited state guarantees for the two publicly-owned electricity utilities;

- the payment by the two companies of a "state guarantee premium" equivalent to the benefits derived from the state guarantee, to be adjusted each year;

- the prohibition from getting a guarantee covering more than 80% of either an outstanding loan or financial obligation;

- the prohibition to include any performance guarantee in any new power purchase agreement.

Although the decision from ESA in the case has not yet been made public, it is worth reminding the legal basis for such assessments which are based on both Treaty provisions and guidelines.

In addition to the general prohibition of state aids defined in Art. 61 EEA Agreement (equivalent Art. 107 TFEU), ESA has adopted guidelines on different specific aid instruments which can qualify as state aids, the compatibility of which must be assessed in a transparent manner (which is the purpose of the guidelines). ESA follows closely the practice of the European Commission on this matter.* One of these instruments is the granting of state guarantees. As indicated in the guidelines, state guarantees can take various forms and are usually "associated with a loan or other financial obligation to be contracted by a borrower with a lender; they may be granted as individual guarantees or within guarantee schemes."  The nature of state guarantees varies very much, and includes among other categories: general guarantees (i.e. not linked to a specific transaction) like a loan or equity investment; guarantees related to a specific instrument (i.e. not related to the nature of the undertaking); guarantees originating from a contractual source; unlimited guarantees (such as in the case at stake in Iceland) granted for unlimited period of time and for an unlimited amount. The Guidelines define then methodologies for calculating the aid element in the guarantee and simplified rules for SMEs. Note that the compatibility as such of state guarantee qualified as state aid is not addressed by the guidelines on state guarantees, but by the guidelines applicable to each sector as well as in the General Exemptions Regulation.

The granting of state guarantees is a relatively common practice (see recent temporarily - due to national financial situation - approval by the Commission of a EUR18 billion state guarantee to cover Credit Immobilier de France's liquidity, February 2013). The Court of Justice of the EU has also previously discussed the (un)enforceability for the borrower of state guarantees recognised incompatible with state aid rules. In a previous state aid case in the energy sector, the Commission obtained that France removed an unlimited guarantee which it had granted to EDF (December 2003). ESA's decision will contribute to clarify applicable rules in the energy sector.

*See i.a. Commission Notice on the application of Articles 87 and 99 of the EC Treaty to State aid in the form of guarantees (OJ C 155, 20.06.2008, p.10, as corrected).

Source: see press release from ESA here.