State Undertakings in Competition Law
1. State undertakings—concept and function
The term ‘state undertakings’—although not a technical legal term in EU law—denotes the widespread phenomenon that states, acting as or through undertakings, participate as economic actors in the economy. The Treaty on the Functioning of the European Union (TFEU) speaks of ‘public undertakings’ in this respect (Art 106(1) TFEU/86(1) EC). The Transparency Directive 2006/111—itself based on Art 106(3) TFEU/86(3) EC—defines ‘public undertakings’ as ‘any undertaking over which the public authorities may exercise directly or indirectly a dominant influence by virtue of their ownership of it, their financial participation therein, or the rules which govern it’ (Art 2(1)(b)). The European Court of Justice (ECJ) routinely uses an identical definition in the context of Art 106(1) TFEU/86(1) EC. State undertakings have become a special problem in the context of competition law due to the public and economic policy goals that states tend to pursue when engaging directly in economic activities. In the past, states have frequently granted ‘their’ undertakings monopoly rights or other privileges in order to enable and protect the pursuit of such policy goals. Despite the inevitable tension resulting between a system of undistorted competition and state undertakings, their existence as such has never been challenged by EU law. Rather, Art 106(1) TFEU/ 86(1) EC presupposes it. According to Art 345 TFEU/ 295 EC, the European Treaties shall not prejudice the national systems of property ownership. The Member States are not obliged to privatize.
Instead, the Treaty on the Functioning of the European Union sets out a principle of neutrality: according to Art 106(1) TFEU/86(1) EC, with regard to public undertakings or undertakings to which they grant special or exclusive rights, Member States shall neither enact nor maintain in force any measure contrary to the rules contained in the treaties, particularly the general principle of non-discrimination (Art 18 TFEU/12 EC) and the competition and state aid rules (Arts 101–109 TFEU/81–89 EC). Thus, Member States must not take measures privileging public undertakings or undertakings to which they have granted special or exclusive rights; they must not use them as instruments for implementing measures contrary to the treaties; and they must not oblige or induce these undertakings to engage in conduct that would normally be considered an abuse within the meaning of Art 102 TFEU/82 EC. Moreover, in their relation to public undertakings, Member States remain fully subject to the state aid rules (Art 107(1) TFEU/87(1) EC).
These rules of EU law run counter to the established practice of many Member States who have traditionally exempted public undertakings from the application of the competition rules. Typically, public undertakings—especially those active in the large infrastructure sectors (telecommunications, postal services, railways etc)—were endowed with broad monopoly rights, which turned them into effective instruments of economic policy and state planning. The financial relations between public undertakings and the state were regarded as purely internal affairs of the state, were outside the sphere of judicial control and were characterized by a high degree of intransparency.
The application of EU law to public undertakings and to the interaction between such undertakings and the Member States has led to major changes in national law and practice. To the extent that public undertakings are exposed to competition and are witnessing their privileges being repealed, Member States can no longer use them as instruments of public and economic policy intervention. De facto, EU law has thus led to a redefinition of the function of state ownership and has supported national privatization policies. German public law scholars have claimed that the role of the state itself has been redefined, shifting from the direct provision of important economic services to a mere guarantee of the provision of those services through the market (Gewährleistungsstaat).
2. State undertakings in EU law
a) Article 37 TFEU/31 EC
Article 37 TFEU/31 EC requires the Member States to adjust their state monopolies of a commercial character so as to ensure that no discrimination regarding the conditions under which goods are procured and marketed exists between nationals of Member States. With a view to import monopolies, the ECJ has found that only their complete abolishment will effectively eliminate the structural risk of discrimination that their existence implies (ECJ Case C-59/75 – Manghera  ECR 91, para 13). A state monopoly of a commercial character that is free to determine the conditions on which it markets competing products alongside its own is in a strategic position that is incompatible with the commitment to a level playing field that Art 37 TFEU/31 EC entails. According to more recent jurisprudence, the same applies to export monopolies (ECJ Case C-159/94 – French energy monopolies  I-5815, paras 33–40). By contrast, the ECJ has found the existence of retail monopolies to be compatible with Art 37 TFEU/ 31 EC to the extent that they are justified by a public interest, their non-discriminatory organization and operation is ensured in law and in fact and no distortion of competition results (ECJ Case C-189/95 – Franzén  ECR I-5909, paras 39–40; ECJ Case C-438/02 – Hanner  ECR I-4551, paras 34 ff).
b) Article 106(1) TFEU/86(1) EC
Where public undertakings are to be qualified as ‘undertakings’ within the meaning of EU competition law, ie to the extent that they offer goods or services on the market and are thus engaged in an economic activity, they are bound by the EU competition rules—in particular by Arts 101, 102 TFEU/81, 82 EC—in the same way as private undertakings are (ECJ Case C-41/90 – Höfner  ECR I-1979, para 21).
The rules applicable to public undertakings are backed up by legal duties addressed to the Member States themselves. According to Art 106(1) TFEU/86(1) EC, the Member States must not take measures affecting the structure of competition in a way that is fundamentally incompatible with a system of undistorted competition. It is one of the recurring questions of EU law whether the granting of special or exclusive rights itself, which by their nature limit or exclude competition, can be aligned with this requirement. In a long-standing line of case law, the ECJ has analysed the compatibility of special or exclusive rights with the fundamental freedoms and with competition law. As regards Art 106(1) with Art 102 TFEU/86(1) with Art 82 EC, the ECJ has found that the mere creation of a dominant position through the grant of special or exclusive rights is not unlawful as such. There will only be a breach of Treaty obligations if the undertaking in question, merely by exercising the special or exclusive rights conferred upon it, is led to abuse its dominant position or where such rights are liable to create a situation in which that undertaking is led to commit such abuses (ECJ Case C‑475/99 – Ambulanz Glöckner  ECR I‑8089, paras 39 ff). The fundamental freedoms on their part, while originally focused on a prohibition of nationality-based discrimination, have come to be interpreted as prohibiting any form of restriction of free movement, broadly understood. The Member States must not take any measures which prohibit, impede or render less attractive the exercise of the freedoms guaranteed under EU law (with a view towards the freedom to provide services and freedom of establishment: eg ECJ Case C-451/03 – Servizi Ausiliari Dottori Commercialisti Srl.  ECR I-2941, para 31). The ECJ has repeatedly found that a measure—even if it applies non-discriminatorily to any person or undertaking carrying on an activity in the territory of the host Member State—that reserves certain activities for specific firms and thereby completely prevents access to the market for the services in question by economic operators established in other Member States constitutes a restriction of the free movement rules that can only be justified on the basis of overriding requirements relating to the public interest (ibid, paras 33–34, 37 ff).
c) The prohibition of state aid—Art 107(1) TFEU/87(1) EC
In establishing a level playing field between public and private undertakings, an important factor is the application of the state aid rules to the financial relationship between the state and public undertakings. Member States are free to both establish public undertakings and acquire shares of a company and, in either instance, provide them with capital. But such investment will be outside the scope of the state aid rules if and only if the state acts like a private market economy investor, ie when the provision of financial resources is justified based on the expected profitability of the investment (eg ECJ Case C-482/99 – Stardust Marine  ECR I-4397, para 70; ECJ Case C-239/09 – Seydaland  ECR I-0000 (nyr) paras 34-35). As a practical matter, the application of the market economy investor test can be difficult.
Complex questions of state aid law can also arise when a public undertaking endowed with special or exclusive rights for part of its economic activities uses profits gained in this market segment to cross-subsidize its activities in the liberalized segments of the market. The General Court (GC) and the ECJ have strived to develop a consistent legal framework for these issues, many of which have manifested themselves in the postal sector (ECJ Joined Cases C-83/01 P, C-93/01 P and C-94/01 P – Chronopost  ECR I -6993).
Finally, the financial compensation a Member State may grant to an undertaking entrusted with ‘services of general economic interest’ (see below) will, under specific circumstances, be qualified as state aid. According to the ECJ’s landmark ruling in Altmark Trans (ECJ Case C-280/00 – Altmark Trans  ECR I-7747, paras 88 ff), financial compensation will not be qualified as an economic advantage, and will consequently not constitute state aid within the meaning of Art 107(1) TFEU/87(1) EC, where the following four conditions are met: (1) the recipient undertaking must actually have public service obligations to discharge, and the obligations must be clearly defined; (2) the parameters on the basis of which the compensation is calculated must be established in advance in an objective and transparent manner; (3) the compensation must not exceed what is necessary to cover all or part of the costs incurred in the discharge of public service obligations, taking into account the relevant receipts and a reasonable profit for discharging those obligations; (4) the compensation must be determined either through a public procurement procedure, which would allow for the selection of the tenderer capable of providing those services at the least cost to the community or on the basis of an analysis of the costs which a typical, well-run undertaking would have incurred in discharging the public service obligation. If any of these conditions is not met, Art 107 TFEU/87 EC will apply and the compensation granted must be justified under Art 106(2) TFEU/86(2) EC.
d) Exceptions: Art 106(2) TFEU/86(2) EC; Art 14 TFEU/16 EC
Where the rules of EU law are infringed by undertakings entrusted with the provision of services of ‘general economic interest’ or by Member States with a view to such undertakings, such infringements will be justified under Art 106(2) TFEU/86(2) EC insofar as the application of the general rules of EU law would obstruct the performance, in law or in fact, of the particular task assigned to them. However, the development of trade must not be affected to such an extent as would be contrary to the interests of the Union (Art 106(2) s 2 TFEU/86(2) s 2 EC). Article 106(2) TFEU/86(2) EC thus strikes a balance between the broad scope of application of the free movement and competition rules on the one hand and the Member States’ particular political interest and influence in the functioning of the traditional ‘public’ sectors on the other. Both public and private undertakings can rely on the exception, provided they have been officially entrusted with a ‘service of general economic interest’.
Initially, considerable uncertainties existed as to the interpretation of Art 106(2) TFEU/86(2) EC. The ECJ has specified its meaning in a long series of judgments from the mid-1980s onwards. Since its Ahmed Saeed judgment (ECJ Case C-66/86 – Ahmed Saeed Flugreisen  ECR 803, para 53) and contrary to its early jurisprudence, the ECJ now considers Art 106(2) TFEU/86(2) EC to be directly applicable. In order to help clarify the meaning of Art 106(2) TFEU/86(2) EC, the EU Commission has published a series of communications (for the most recent one see Communication on services of general interest, including social services of general interest: a new European commitment, 20 November 2007, COM (2007) 725 final. See also: Guide to the application of the European Union rules on state aid, public procurement and the internal market to services of general economic interest, and in particular to social services of general interest, 7 December 2010, SEC(2010) 1545 final). ‘Services of general economic interest’ are market services the Member States subject to specific public service obligations by virtue of a general interest criterion (EU Commission, Communication ‘Services of General Interest in Europe’ of 26 September 1996,  OJ C281/3). In particular, these services must be provided even if the provision is unprofitable for the entrusted undertaking in a particular case (Case T-289/03 – BUPA  ECR II-741, para 190).
The Member States enjoy a broad discretion in determining for which types of goods and services such a public service obligation is justified, and they are subject only to a marginal review for manifest errors in this regard. The outer boundaries of the Member States’ discretion have not yet been clarified. An important precondition for the application of Art 106(2) TFEU/86(2) EC is the existence of an act of a public authority that clearly defines the public service obligation in question and specifies the undertaking entrusted with the task. The public act of entrustment is to ensure that the content and scope of the public service follow the general interest and not the commercial interests of the undertakings active in the field, and it is to guarantee legal certainty and transparency. Moreover, it constitutes the reference point for the proportionality test provided for in Art 106(2) TFEU/86(2) EC. The exact reach of the proportionality assessment remains controversial to this day. With a view to the justification of special or exclusive rights, it is particularly unclear when and to what extent the Commission and the European courts will analyse the availability of alternative, less restrictive means to ensure the fulfilment of a public service task. Clearly, a Member State is not required to replace a scheme of exclusive rights that allow for a cross-subsidization of unprofitable services with a scheme of direct state subsidies. According to the ECJ’s judgments in the energy monopolies cases, the Commission may, however, demonstrate that the maintenance of exclusive rights is unjustified by showing how an adequate regulatory framework can ensure the provision of services of general economic interest. The burden to substantiate this claim is upon the Commission in such a case (ECJ Case C-157/94 – Dutch energy monopolies  ECR I-5699, paras 58 ff).
Article 106(2) s 2 TFEU/86(2) s 2 EC, which limits the scope of the exception in Art 106(2) s 1 TFEU/86(2) s 1 EC, has not gained practical relevance so far.
The Treaty of Amsterdam introduced Art 14 TFEU/16 EC. The provision highlights the place occupied by services of general economic interests in the shared values of the Union and their role in promoting social and territorial cohesion. The Union and the Member States, each within their respective powers and within the scope of application of the treaties, are to take care that such services operate on the basis of principles and conditions that enable them to fulfil their mission. The treaty revision was initiated by some Member States, in particular France, with a view to re-establish the Member States’ sovereignty in the organization of the public sectors. However, Art 14 TFEU/16 EC has not had this effect so far: there is no evidence in the ECJ’s jurisprudence that the new provision has led to a widening of the exception in Art 106(2) TFEU/ 86(2) EC. Nor should a weakening of EU control be expected from Art 14, s 2 TFEU/16 s 2 EC, which has been introduced with the Treaty of Lisbon and provides for a new legal basis for the Parliament and the Council to pass regulations regarding ‘the principles and conditions’, particularly economic and financial conditions, which allow the fulfilment of the special mission of services of general economic interest. This new legal basis now competes with the pre-existing legal basis in Art 114 TFEU/95 EC and with Art 106(3) TFEU/86(3)EC (see below). The right of initiative remains with the Commission, however.
e) Article 106(3) TFEU/86(3)EC
Article 106(3) TFEU/86(3)EC empowers the Commission to address appropriate directives or decisions to the Member States (not undertakings) where this is necessary for the enforcement of Art 106 TFEU/86 EC. The ECJ has consistently confirmed the Commission’s power to issue directives, despite repeated attacks by the Member States (eg ECJ Joined Cases C-271/90, 281/90 and 289/90 – Telecommunications Services  ECR I-5833, paras 12 ff). In particular, Art 106(3) TFEU/86(3) EC has been the legal basis for the Transparency Directive 2006/111. It aims to ensure the transparency of the financial relations between the Member States and public undertakings, as well as the financial transparency within those public undertakings that are active in partly liberalized markets, and thus ensure an effective application of the state aid rules. Moreover, Directive 2002/77 on competition in the markets for electronic communications networks and services was based on Art 106(3) TFEU/86(3) EC.
3. Infrastructure sectors of EU-wide importance
The increased application of EU competition law to the provision of goods and services in traditionally public sectors has contributed to the liberalization movement. Simultaneously, it has also led to the introduction of new regulation. In the large infrastructure sectors of Union-wide importance (in particular telecommunications, postal services, energy and transport), the EU has provided a harmonized regulatory framework. Its aim is to reconcile the protection of legitimate public interests, including the interest in ensuring the provision of services of general economic interest, with the European interest in establishing an internal market with undistorted competition. The Universal Service Directive 2002/22, applicable to electronic communications, is representative: it defines those services the provision of which must be guaranteed in all Member States throughout their territory and to all end users at a certain level of quality and at an affordable price. At the same time, it sets out those mechanisms that may, in conformity with the principle of undistorted competition, be used to cover any net costs that may arise from the provision of such universal service. In the postal sector, with Dir 2008/6, the EU is now pursuing a similar model with a view to the complete abolishment of exclusive rights from 31 December 2010 onwards.
In contrast, no harmonized concept of universal service at the EU level is envisioned in the energy sectors, despite the abolishment of exclusive rights (see Dir 2003/54 concerning common rules for the internal market in electricity – repealed and replaced by Dir 2009/72; and Dir 2003/55 concerning common rules for the internal market in natural gas—repealed and replaced by Dir 2009/73). In the area of public passenger transport, EU law does not require the abolition of exclusive rights, but calls for a competition for the market where special or exclusive rights persist (see Reg 1370/2007 on public passenger transport services by rail and by road). EU law does not mandate the privatization of public undertakings. Many Member States have nonetheless privatized, or partly privatized, many of their undertakings. Sometimes, the privatization has been accompanied by the introduction of so-called ‘golden shares’ meant to ensure the state’s continuous influence on certain decisions of fundamental strategic importance. As impediments to freedom of establishment and the free movement of capital, the creation of golden shares has been subject to the ECJ’s control. In a long line of case law, the ECJ has formulated strict conditions for the introduction of golden shares (see ECJ Joined Cases C-463/04 and C-464/04 – Federconsumatori  ECR I-10419 with further references).
Ernst-Joachim Mestmäcker, ‘Daseinsvorsorge und Universaldienst im europäischen Kontext’ in Festschrift Hans F. Zacher (1997), 635; Damien Géradin (ed), The Liberalization of State Monopolies in the European Union and Beyond (2000); Heike Schweitzer, Daseinsvorsorge, ‘service public’, Universaldienst (2002); Thomas von Danwitz, ‘Dienste von allgemeinem wirtschaftlichem Interesse in der europäischen Wettbewerbsordnung’ in Bitburger Gespräche, Jahrbuch 2002/I (2003) 73; Josh Holmes, ‘The Control of State Action under EC Competition Law’ in Valentine Korah (ed), Competition Law of the European Community (2nd edn, 2005); José Luis Buendia Sierra, ‘Article 86—Exclusive Rights and Other Anti-Competitive State Measures’ in Jonathan Faull and Ali Nikpay (eds), The EC Law of Competition (2nd edn, 2007) 593; Ernst-Joachim Mestmäcker, ‘Heike Schweitzer, Art. 31, 86 EGV’ in Ulrich Immenga and Ernst-Joachim Mestmäcker (eds), Wettbewerbsrecht Bd. 1/EG Teil 1 (4th edn, 2007); Erika Szyszczak, The Regulation of the State in Competitive Markets in the EU (2007); Markus Krajewski, Ulla Neergaard and Johan van de Gronden, The Changing Legal Framework for Services of General Interest in Europe (2009).