The Court of Justice of the European Union (“CJEU”) has issued a judgment (the “EDP-judgment”) on the obligation to state reasons for a finding of selectivity of the European Commission (the “Commission”) in a Commission decision to initiate the formal investigation procedure (the “initiation decision”).
The judgment relates to a Spanish environmental aid measure. The General Court found at first instance that the measure was of a selective nature and that sufficient reasons had been stated in the Commission’s initiation decision. However, the CJEU found that the Commission had not stated sufficient reasons for its finding of selectivity. The Commission’s decision must clearly and unequivocally express why it considers that the measure in question may constitute State aid. In this blog, we address the judgment and its practical implications for the Commission’s obligation to state reasons in State aid proceedings, and the rights of defence in these proceedings.
Burden of proof in State aid law
A measure constitutes State aid if a non-market economic advantage is selectively granted to an undertaking that performs an economic activity using State resources. The measure must distort (or potentially distort) competition and affect (or threaten to affect) trade within the EU. The selectivity of a measure is therefore an important aspect of the State aid criterion. To satisfy this criterion, a measure must grant an advantage to certain undertakings or the production of certain goods. The idea behind the selectivity criterion is that it can be used to distinguish between measures that distort the internal market and those that do not.
Article 296 of the Treaty on the Functioning of the European Union (“TFEU”) obligates the Commission to state sufficient reasons for its decisions. For decisions declaring aid measures compatible with the internal market under Article 107(3) TFEU, the Commission has a wide margin of discretion. This discretion stems from, among other things, the inherently complex economic and social assessment underlying the decision.
When assessing potential State aid measures, the Commission must state reasons why it considers there are or are not serious doubts as to the aid measure’s compatibility with the internal market. The requirements for the statement of reasons depend on the circumstances of each case. It is not necessary for the statement of reasons to cover all the relevant facts and points of law; only those elements that are considered essential must be mentioned. Where a decision follows an established line of earlier decisions, the statement of reasons may be concise. It is important, however, that the reasons underlying the decision are clearly stated in the decision. If a statement of reasons is deemed insufficient, the CJEU will annul the decision.
According to the CJEU, the obligation to state reasons serves two specific purposes. First, the statement of reasons enables the competent court to exercise its power to review the legality of a decision. Second, an individual affected by a decision must be given sufficient information to determine whether the decision is well-founded. That will enable them to decide whether or not to challenge the decision.
Selectivity
A measure may be found to be selective if it differentiates between undertakings that, given the objective of the measure, are in a comparable factual and legal situation, and that differentiation is not justified by the nature and design of the system in question. It is not apparent from the Treaty or from the Commission’s Notice how that assessment is made in practice. However, the CJEU is clear that, when assessing the comparability of undertakings, the Commission must state sufficient reasons for its findings to allow full judicial review. The argument that the selectivity condition is automatically met if a measure applies exclusively to a particular economic sector or to certain undertakings is therefore not acceptable. A mere deviation from the reference system is insufficient for a finding of selectivity. The Commission must demonstrate that a measure creates a difference between undertakings that are in a comparable factual and legal situation.
Reason for the judgment
The judgment relates to a dispute about a Spanish environmental aid measure for Spanish coal-fired power plants. All Spanish power plants received aid in various forms from 1998 to 2011. That aid did not apply to plants that produced electricity from renewable energy sources, as they were eligible for a separate scheme. In 2011, the scheme was extended to include coal-fired power plants that had also made other environmentally friendly investments to reduce their emissions before the scheme entered into force.
The Commission investigated the Spanish measure. As a result of that investigation, the Commission adopted an initiation decision in which it reached the preliminary conclusion that the measure at issue constituted state aid, which might be incompatible with the internal market. In its final decision, the Commission ruled that the measure was selective. It stated in that regard that the scheme was open only to power plants that used coal as their main fuel.
Observations CJEU
The CJEU stated that an initiation decision must contain a summary of the relevant facts and points of law regarding the assessment of a measure. It must include a preliminary assessment by the Commission as to the aid character of the State measure in question and the reasons for doubting its compatibility with the internal market. That decision also entails independent legal effects, particularly as regards the suspension of the measure under examination. National courts must refrain from taking decisions which conflict with such a decision of the Commission, even if it is provisional. The initiation decision is therefore not a measure subject to a lighter or superficial obligation to state reasons.
It is essential that an initiation decision allows the Member State concerned and the other interested parties to submit comments on the Commission’s analysis. Although the analysis is preliminary in nature, the Commission must state clearly and unambiguously why it believes that the measure in question may constitute State aid.
Findings CJEU
The CJEU found that the Commission had insufficiently demonstrated the selectivity of the measure. The Commission had the obligation to explain why the measure at issue favoured certain undertakings over other undertakings in a comparable factual and legal situation. It is not premature to require a justification of the comparability of the situations at the stage of the initiation decision. The Commission had failed to explain why the coal-fired power stations listed in the national scheme were in a comparable factual and legal situation to other power stations that did not qualify for the measure.
The mere existence of a competitive relationship between the beneficiaries of the measure and other electricity producers does not suffice to assume selectivity, since it does not necessarily explain why the situations of the plants benefiting from the measure are similar to those of the plants that were not benefiting from the measure.
The content of the decision as a whole cannot substitute for the absence of a specific analysis of the comparability of the plants that are and those that are not eligible for the measure. The Commission therefore failed to comply with its obligation to state reasons under Article 296 TFEU, since it had not set out the reasons why the measure favours certain undertakings or the production of certain goods over others in a comparable factual and legal situation. The CJEU therefore upheld the appeal, set aside the judgment of the General Court, and annulled the Commission’s decision.
Impact judgment
The EDP-judgment demonstrates that the Commission must state sufficient reasons for its decisions, also if they are initiation decisions. It does not suffice for the Commission to merely summarily assess the selectivity of a measure in the first stage of the investigation. The general principle of the obligation of stating reasons in Article 296 TFEU therefore also applies to the initiation decision. Although there are differences in the function and content between the initiation decision and the final decision, the initiation decision must contain a clear explanation of the Commission’s reasons for assuming that a measure constitutes aid.
The initiation decision must state the relevant issues of fact and law, including a preliminary State aid assessment of the measure and the reasons for doubting its compatibility with the internal market. The initiation decision must therefore also already include an analysis of selectivity, considering the comparability of the situation of the beneficiaries of the measure and that of comparable undertakings. That must demonstrate the discriminatory effect of the measure. This is a complex task that requires time and capacity. However, an error in a finding of selectivity necessarily affects the validity of the entire investigation.
The EDP-judgment has the effect of strengthening the rights of defence in EU State aid law. Parties involved in State aid proceedings within the EU will now receive more complete information, which will enable them to better defend themselves in such proceedings.
This blog is set out in more detail in an article by Bas van Os for the Tijdschrift voor Staatssteun (Journal for State Aid).
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