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Article 106(1) TFEU ready for duty again; the CJEU’s judgment in the DEI case

Jose Manuel Panero Rivas
MA in Economics for Competition Law, King’s College London, LL.M in European Law, College of Europe, Bruges

On 17 July 2014 the Court of Justice (CJEU) delivered its much awaited judgment in the DEI case.[1] This was a very important case for the future of Article 106(1) TFEU, and the CJEU’s judgment certainly met expectations.

Article 106 TFEU is certainly a complex provision. As the learned readers of this blog know, on the one hand, Article 106(1) TFEU prohibits Member States from adopting, with regards to public undertakings or undertakings bearing special or exclusive rights, any measure that would lead to an infringement of another Treaty provision, including Articles 101 and 102 TFEU and free movement provisions. On the other hand, Article 106(2) TFEU allows for an exception from the different Treaty rules for Services of General Economic Interest (SGEI) to the extent that this is necessary for the achievement of the public service missions they are entrusted with. Finally, Article 106(3) TFEU is a peculiar legal basis, allowing the Commission to adopt directives and decisions in order to implement the rules set out in the precedent paragraphs.

DEI is important for the first limb of Article 106 when applied in combination with Article 102 TFEU. Admittedly, the prohibition established by the combined application of those articles is not straightforward to interpret. However, through the years, the CJEU has developed case law on the issue which, through a careful distillation, has been summarised as follows by Prof. Buendía:[2] Article 106(1), in combined application with Article 102 TFEU would prohibit State measures related to public or privileged undertakings when the following conditions are met:

a)     The undertaking holds a dominant position in a market that is relevant from an economic point of view and which embraces a substantial part of the internal market;

b)     The measure:

i. Leads the undertaking to behave in such a way as to abuse its dominant position; or
ii. Has the potential to lead the undertaking to behave in such a way as to abuse its dominant position; or
iii. Produces similar effects to those of an abusive behaviour; and

c)      The effects of the abuse of the effects of the State measure are capable of affecting intra-Union trade.

Concerning points b) i. and b) ii. the traditional case law suggests that for the prohibition to apply, there is no need to identify the actual abuse(s) committed by the undertaking at stake.[3] All that is required is to prove that the State measure is such that it could lead the undertaking to abuse. Examples of this are the ‘inability to meet demand doctrine’, which refer to cases where the undertaking is unable to cope with demand and the regulation at stake impedes competitors to enter the market[4] and the ‘conflict of interest doctrine’ where an infringement can be identified when the regulation puts the privileged undertaking in a situation of conflict of interest between commercial and regulatory activities – or even between several commercial activities developed by the same undertaking.[5] In those situations, the Court understands that the State measures give rise to a risk of an abuse of dominant position.

In addition, as mentioned above in point b) iii., Articles 106 and 102 prohibit State measures having similar effects to those of an abusive behaviour, even in the absence of any actual or potential behaviour. An example of this is the “doctrine of the extension of a dominant position”, according to which the grant to an undertaking, which is already dominant in one market, of exclusive rights in another adjacent but different market is contrary to Articles 106(1) and 102 TFEU, unless the grant can be objectively justified.[6] A good way of looking at this is that the State measure renders an abuse to capture the adjacent market unnecessary, as the State measure ‘does the job’ for the company. On top of that, there is a somehow independent line of case law promoting that exclusive rights, as such, would be prohibited by the combined application of Articles 106 and 102 TFEU. This is ultimate consequence of the idea above mentioned, as what preconizes is that an exclusionary abuse is rendered unnecessary by the granting of the exclusive right. However, this line of case law, which can be traced back to Corbeu,[7] has been somehow inconsistent.[8]

This status quo somehow exploded with the judgment of the General Court (GC) in the DEI case.[9] In probably the first time the GC has had the opportunity to deal with such provision, it made a stellar appearance.

The background of the case is well known: DEI, a former State monopoly, and currently a public undertaking, held a dominant position in the Greek wholesale electricity market,[10] with a market share of 85% was, and still is the owner of all Greek power stations operating on lignite. Additionally, the undertaking had been allocated rights to explore and exploit a very large part of the lignite resources available in Greece, having a market share in the supplying of lignite of 97%.

In an Article 106(3) decision, the Commission found that the grant and maintenance of those quasi-monopolistic lignite exploration and exploitation rights, was contrary to Article 106(1) read in conjunction with 102 TFEU, since it created a situation of inequality of opportunity between economic operators as regards access to primary fuels for the purposes of generating electricity, allowing DEI to maintain or reinforce its dominant position on the Greek wholesale market by excluding or hindering new entrants.

However, the General Court annulled the findings of the Commission as, it stated, it does not suffice for the Commission to establish that a State measure leads to the creation of “inequality of opportunity” in favour of a public undertaking for it to find an infringement; rather, the Commission must also identify the actual or – at least – potential abuse (behaviour) which the State measure in question led or could lead the dominant company to commit. In the own words of the General Court:“the prohibitions laid down by Article [106(1) TFEU] are addressed to Member States, whereas Article [102 TFEU] is addressed to undertakings, prohibiting them from abusing a dominant position. In the case of the combined application of those two provisions, infringement of Article [106(1) TFEU] by a Member State cannot be established unless the State measure is contrary to [102 TFEU]. The question therefore arises as to the extent to which an abuse, even if only potential, of the dominant position by an undertaking must be identified, that abuse having a link with the State measure.” [11]

Then, in paragraphs 94 to 118 the GC made an impressive effort in reassessing all the case law of the CJEU in order to demonstrate that the principle according to which measures which produce similar effects to those of an abusive behaviour are also prohibited under Article 106(1) applied in combination with Article 102 TFEU, does not follow from such case law. As a conclusion, and as the Commission had not identified any actual or potential abuse the company would have been led to commit, the General Court annulled the contested decision. It came with little surprise that the Commission challenged the decision before the CJEU.

In an orthodox Opinion, Advocate General Wathelet advised the CJEU to annul the judgment of the GC because it would have erred in the interpretation of the case law. Not only did the CJEU followed the opinion of its AG, but it even went further. First, it rejected the need of an actual of hypothetical behaviour of the concerned undertaking; therefore it reiterated that State measures producing similar effect to those of an abuse are covered by the prohibition. It specifically held that “the Court has moreover had occasion to state in that regard that, although the mere fact that a Member State has created a dominant position by the grant of exclusive rights is not as such incompatible with [Article 102 TFEU], the [TFEU] none the less requires the Member States not to adopt or maintain in force any measure which might deprive that provision of its effectiveness.”[12]

Thereafter, the CJEU rejected the interpretation of the case law given by the GC and held that “all that is necessary is for the Commission to identify a potential or actual anti‑competitive consequence liable to result from the State measure at issue. Such an infringement may thus be established where the State measures at issue affect the structure of the market by creating unequal conditions of competition between companies, by allowing the public undertaking or the undertaking which was granted special or exclusive rights to maintain (for example by hindering new entrants to the market), strengthen or extend its dominant position over another market, thereby restricting competition, without it being necessary to prove the existence of actual abuse.[13]

Finally, the Court came out with some reassuring and important statements for Article 106(1) TFEU. First (although this is not the order in which the ideas appear in the judgment), it stated the validity of the “extension of the dominant position doctrine” in the clearest possible terms (and the reasoning  behind it is very clear); “It is settled case-law that practices by an undertaking in a dominant position which tend to extend that position to a neighbouring but separate market by distorting competition amount to abuse of a dominant position within the meaning of [Article 102 TFEU] (…). Similarly, the Court has previously stated that the extension of a dominant position, without any objective justification, is prohibited ‘as such’ by [Article 106(1) TFEU] in conjunction with [Article 102 TFEU], where that extension results from a State measure. As competition may not be eliminated in that manner, it may not be distorted either.”[14]

Secondly – and this is a statement with intriguing and complex implications – it stated that, for the application of the doctrine of the ‘extension of the dominant position’ it is not required that the extension is carried out through the granting of special or exclusive rights. Specifically it held that “DEI (…) was wrong to assert that, in order to apply the theory that the public undertaking extended its dominant position from one market to another, which was neighbouring and separate, the Court’s case-law requires the Commission to show that the State measure at issue grants or enhances special or exclusive rights. It is sufficient that the measure at issue creates a situation in which a public undertaking or an undertaking on which the State has conferred special or exclusive rights is led to abuse its dominant position.[15]

In conclusion, Article 106(1) applied in combination with Article 102 TFEU is ready to ‘report for duty’ and is – at least – as strong as ever. However, the use the Commission will do of it is a mystery as, in recent times, the Commission has shown reluctance to rely on said provisions. This would likely also be good news for Article 106(1) TFEU if the Court also revisits its position in max.mobil[16] as this would add some incentive for the Commission to make more use of the provision. Indeed – and although somehow paradoxically – this would even be beneficial for the independence of the Commission if its inaction in the field could be challenged. Article 106(3) TFEU decisions are often politically tough and a reversal of max.mobil would better shield the Commission from pressure from Member States.

 

[1] Case C-553/12P DEI (2014), n.y.r.

[2] See J.L. Buendía Sierra, Exclusive Rights and State Monopolies under EC Law, OUP, 1999. For a less detailed but more updated summary see J.L. Buendía Sierra, “Article 106 – Exclusive or Special Rights and other anticompetitive State Measures” in Faull & Nikpay, The EU Law of Competition (3rd ed.) OUP, 2014 (pp. 809-879).

[2] Ibidem.

[3] See case C-18/88 RTT (1991) ECR I-5941 and case C-49/07 MOTOE, (2008) ECR I-4863.

[4] See inter alia case C-41/90 Höfner (1991) ECR I-1979.

[5] See inter alia cases C-260/89, ERT (1991) I-2925 and C-49/07 MOTOE, (2008) ECR I-4863.

[6] See inter alia cases C-18/88 RTT (1991) ECR I-5941, C-271, 281 and 289/90 Telecommunication Services Directive (1992) ECR I-5868.

[7] C-320/91 Corbeau (1993) ECR I-2533.

[8] See J.L. Buendía Sierra, “Article 106 – Exclusive or Special Rights and other anticompetitive State Measures” in Faull & Nikpay, The EU Law of Competition (3rd ed.) OUP, 2014 (pp. 809-879) and cases C-323/93 La Crespelle (1997) ECR I-5077, C-203/96 Dusseldorp [1998] ECR I-4075, C-147 and 148/97 Deustche Post (2000) ECR I-825 and C-209/98 Sydhavnens (2000) ECR I-3743.

[9] Case T-169/08 DEI (2012),n.y.r.

[10] Generation and supply of electricity in power stations and importation of electricity by means of interconnection systems.

[11] See para 86 of the Judgment of the GC (emphasis added).

[12] Paragraph 45 of the CJEU judgment (emphasis added).

[13] Paragraph 46 of the CJEU judgment (emphasis added).

[14] Paragraphs 66 to 67 of the CJEU judgment (emphasis added).

[15] Paragraphs 57 and 58 of the CJEU judgment (emphasis added).

[16] Case C-141/02P max.mobil (2005) ECR I-1283. According to this case law, the Commission’s refusal to act pursuant to Article 106(3) TFEU following the filing of a complaint by an individual against a Member State does not constitute a challengeable act.