The Court of Justice confirms the European Commission’s mandatory obligation in determining the existence of aid prior to assessing compatibility with the Internal Market
On 14 June 2024, in ‘European Commission vs Kingdom of the Netherlands’ the European Court of Justice (‘‘ECJ’’) had, for the first time ever, to decide a dispute as to whether the European Commission (“Commission”) must assess and verify the existence of state aid, prior to deciding on the measure’s compatibility with the Internal Market. In its ruling, the ECJ confirmed that the Commission cannot make any determination on the compatibility of the aid in question, prior to establishing whether the aid actually exists.
Background
The case at hands dates back to 2019. In an effort to reduce carbon dioxide emissions into the environment and in line with its obligations under the Paris Agreement, the Dutch State proposed a law whereby coal-fired power plants had to be closed down. It further proposed that plants which were to be negatively affected by this ban, were to be given adequate compensation (“Compensation Law”) for damages arising out of it. The Compensation Law was notified to the Commission under the Information Society Directive (Directive (EU) 2015/1535[1]), however no formal notification for state aid clearance was filed with the Commission, as mandated under Article 108(3) of the Treaty on the Functioning of the European Union (“TFEU”).
Under EU state aid rules, Member States cannot grant state aid to undertakings, without having notified the same to the Commission and being given the green light that the aid being granted is compatible with the internal market. The determination as to whether state aid is compatible with the internal market or otherwise, is a competence which lies solely in the hands of the Commission. The Commission ensures compliance with EU state aid rules both by assessing the compatibility of state aid as well as investigating whether any unlawful and incompatible aid has been granted to undertakings.
As a result of the Compensation Law, Vattenfall, being one of Europe’s largest producers of electricity, received 52.5 million euro in compensation from the Dutch state, for the closure of Vattenfall’s Hemweg 8 power plant (“Hemweg”). Whilst other coal-fired power plants were allowed a transitional period to recover their investments or adapt to a different energy source, Hemweg was forced to close immediately due to its inefficiencies and in view of the fact that it did not produce any electricity or heat from renewable sources. The compensatory amount of 52.5 million euro was independently verified by auditors and tax specialists to ensure that it reflected an accurate sum in line with Hemweg’s foregone profits resulting from the mandatory closure.
Following an ex officio investigation, the Commission adopted a decision (“Contested Decision”) whereby it held that although it cannot definitively determine whether the 52.5 million euro granted to Vattenfall under the Compensation Law amounted to state aid, such determination was not necessary, since even if state aid was involved, the measure at issue was compatible with the Internal Market pursuant to Article 107(3)(c) TFEU.
The General Court’s Decision
Although the Contested Decision was ultimately a favourable one for the Dutch State since the Compensation Law was deemed to be compatible with the Internal Market, it still lodged an action for annulment before the General Court. In its application, it argued that the Commission could not make a determination as to the compatibility of the measure at hand without first classifying it as state aid and consequently, the Commission had infringed the principle of legal certainty in its failure to clearly assess whether there was the presence of state aid.
The General Court shared the views of the Dutch State and on the 16th of November 2022, it annulled the Contested Decision on the basis that the Commission had failed to determine whether the measure in question constituted state aid, prior to deeming the Compensation Law as compatible with the Internal Market. The General Court held that the Commission had exceeded its powers in acting in such a manner.
The Commission’s appeal before the Court of Justice
The Commission appealed the General Court’s decision, summarily arguing that it is not necessary for the Commission to determine on a definitive basis as to whether a measure constitutes aid, prior to assessing its compatibility. In the Commission’s view, by stating that the term ‘aid’ in article 107(3) TFEU should be interpreted to mean that it only applies to measures which have been deemed to be state aid with absolute certainty, the General Court had adopted an unduly restrictive interpretation of Article 107(3) of the TFEU and Article 4(3) of the Procedural Regulation[2].
The Court of Justice’s findings
In its findings and borrowing from the General Court’s considerations, the Court of Justice recalled how it is settled case law that where the Commission is unsure whether a public measure constitutes state aid or otherwise, it is bound to initiate a formal investigation under Article 108(2) of the TFEU. Thus, there is an obligation on the Commission to make a determination as to whether a measure constitutes state aid prior to taking a decision on compatibility and the Commission does not have any discretion in this regard.
The Court of Justice further held that under Article 4 of the Procedural Regulation, which exhaustively lists the decisions that the Commission may adopt following a preliminary examination, the Commission cannot declare a measure as compatible with the internal market, without the Commission having first decided whether to classify that measure as state aid. The Court of Justice found no error in the General Court’s reading of Article 107(1) of the TFEU and Article 4(3) of the Procedural Regulation.
In considering the scheme and spirit of Article 107 TFEU, the Court of Justice held that it is clear that the Commission does not have the power to assess compatibility of measures with the Internal Market, without first classifying the measure as state aid. The classification of a public measure is a precondition to the assessment of compatibility with the Internal Market. Even though Article 107 TFEU does not stipulate the Commission’s powers or procedural rules that it must follow in its assessment, a logical reading of Article 107 TFEU is consistent with the view that a determination as to the existence of state aid or otherwise, is mandatory.
Concluding Remarks
The confirmation that the Commission must first determine the existence of state aid, prior to assessing its compatibility, is welcome. Such a determination helps public authorities as well as their legal advisors in taking a view as to whether future proposed measures (which are similar to the ones that the Commission would have assessed) constitute state aid and whether a notification to the Commission is required. Legal certainty is of particular importance in the realm of state aid especially due to the unforgiving repercussions arising from any missteps in this regard, including the risk that the Commission orders the repayment of the incompatible aid, together with interest.
[1] Directive (EU) 2015/1535 of the European Parliament and of the Council of 9 September 2015 laying down a procedure for the provision of information in the field of technical regulations and of rules on Information Society Services.
[2] Council Regulation (EU) 2015/1589 of 13 July 2015 laying down detailed rules for the application of Article 108 of the Treaty on the Functioning of the European Union.