July 28, 2014
The sweeping powers of the European Commission (the "Commission") under Article 106 of the Treaty on the Functioning of the European Union ("TFEU") in relation to ex-State monopolies or firms which enjoy "special or exclusive rights" have been vindicated by the European Court of Justice ("ECJ"), after years of inactivity in the implementation of that provision by the Commission. According to the ECJ, the mere creation of unequal conditions of competition by a State measure is sufficient in and of itself to establish a presumption that the firm in question is in breach of Article 106(1) TFEU. One need go no further to establish the existence of actual anti-competitive effects.
In its Commission v DEI Appeal Judgment of July 17, 2014, the ECJ overturned the Judgment of the General Court, which had annulled the Commission’s original 2008 Decision against DEI taken under Article 106(1) TFEU. The Commission Decision had concluded that DEI, a former monopolist in the Greek energy market, had acted contrary to the terms of Article 106(1) TFEU by continuing to maintain a dominant position on the wholesale electricity market by its taking advantage of a State measure conferring upon it privileged access to lignite resources. On appeal, the Decision was annulled by the General Court, with the Commission having been found to have neither identified any abusive behavior effected by DEI nor established any abuse to which DEI was led or to which it could have been led by the grant of privileged access at issue.
In so holding, the General Court appeared to be developing new ground in the application of Article 106(1), which has been the subject of very few cases over the years. In doing so, the General Court seemed to be equating the standard of proof on the Commission for the establishment of an infringement under Article 106(1) TFEU with the standard usually expected in an action under Article 102 TFEU for a firm’s abuse of a dominant position.
In overturning the General Court’s Judgment, the ECJ held that the legal standard established by the General Court was incorrect, as the Commission was not required to identify or establish that an actual abuse had occurred or could have occurred as a result of the State measure at issue.
The delivery of the ECJ Judgment could not have been more timely, given that Greece is in the advanced stages of its privatization of DEI, while at the same time seeking to open up the electricity market to competition by long overdue legislative reforms designed to implement EU obligations.
DEI is a public undertaking belonging to the Greek State which was established in 1950. It enjoyed the exclusive right to generate, transmit and supply electricity in Greece. In 2001, DEI was converted into a limited liability company with the State’s shareholding remaining above 51%.
The Greek State has allocated to DEI exploration and exploitation rights for lignite (primary fuel for the generation of electricity) for reserves of approximately 2,200 million tonnes (out of an estimated total of 4,590 million tonnes available throughout Greece). Despite competitor interest in access to lignite reserves, no exploitation rights have been granted by the Greek State to third parties in relation to the remaining unexploited lignite reserves in Greece totaling well over 2,000 million tonnes.
The Commission Decision
Following a Complaint lodged in 2003, the Commission’s 2008 Decision found that the grant and maintenance of lignite exploration and exploitation rights by the Greek State to DEI infringed Article 106(1) TFEU, read in conjunction with Article 102 TFEU. The Commission found that this privileged access to lignite created a situation of inequality of opportunity between economic operators, thereby allowing DEI to maintain or reinforce its dominant position on the Greek wholesale electricity market.
Indeed, despite the liberalization of the wholesale electricity market, DEI continued to hold a quasi-monopolistic position on both that market (85%) and on the downstream lignite supply market (97%). By granting privileged access to the most accessible and economic fuel in Greece for the purposes of electricity generation, the Greek State had distorted competition on the wholesale electricity market.
The General Court Appeal
DEI brought an action for annulment of the Decision before the General Court, relying on four pleas. Of particular importance was the allegation that the Commission should have indicated or established the existence of an actual or potential abuse of DEI’s dominant position on the markets concerned in order to establish a breach of Article 106(1) TFEU, when read together with Article 102 TFEU.
The General Court addressed this ground of challenge by taking into account the fact that large reserves of lignite had remained unexploited in Greece. According to the General Court, this failure to exploit could not be imputed to DEI since it was the Greek State that was responsible for the granting of the relevant lignite extraction licenses.
The General Court also noted that the Commission had not established that privileged access to lignite was capable of creating a situation in which, by virtue of the mere exercise of its exploitation rights, DEI was able to commit abuses of a dominant position on the wholesale electricity market or was led to commit such abuses on that market. In particular, the General Court held that "the mere fact that the undertaking in question finds itself in an advantageous situation in comparison with its competitors, by reason of a State measure" does not in itself constitute an abuse of a dominant position. On the contrary, according to the General Court, the Commission was required to identify and establish the actual abuse of a dominant position by DEI to which the State measure at issue had led, or could lead.
In light of these considerations, the General Court annulled the Commission’s Decision, "without it being necessary to examine the other complaints, parts and pleas submitted".
The Appeal to the ECJ
The Commission appealed to the ECJ on two grounds, namely: (i) alleging an error of law by the General Court in the interpretation and application of Article 106(1) TFEU, read in conjunction with Article 102 TFEU; and (ii) deficient, incorrect and insufficient reasoning on the part of the General Court.
The ECJ repeated its well established case-law, according to which a Member State may be found to have infringed Article 106(1) TFEU if its measures create a situation in which a public undertaking or an undertaking on which it has conferred special or exclusive rights, merely by exercising the preferential rights conferred upon it, is led to abuse its dominant position, or when those rights are liable to create a situation in which that undertaking is led to commit such abuses. In that respect, the ECJ reiterated that it is not necessary that any abuse should be found to have actually occurred.
In addition, the ECJ noted that the existence of an equality of opportunity between the economic operators is a fundamental element of the principle of undistorted competition. Thus, if a State measure creates such inequality, it will be regarded as giving rise to an infringement of Article 106(1) TFEU, read together with Article 102 TFEU.
Consistent with the Opinion expressed by the Advocate General, the ECJ concluded that the relevant Treaty rules may be infringed irrespective of whether any abuse is shown to have actually occurred. Rather, such an infringement may be established where the State measure at issue affects the structure of the market by creating unequal conditions of competition between competitors, thereby allowing the public undertaking or the undertaking which was granted special or exclusive rights to maintain, strengthen or extend its dominant position over another market.
From a legal perspective, the ECJ’s Judgment has left no doubt that, in pursuing an action under Article 106 TFEU, the Commission is entitled to presume that anti-competitive effects are likely to flow from the mere creation of unequal conditions of competition (in this particular case, the grant of privileged access to lignite deposits). As long as the potential anti-competitive effects can be identified from the existence of such privileged access, it is not necessary for the Commission to establish the existence of actual anti-competitive harm. The General Court had, by requiring the Commission to establish an abuse of dominant position in order to establish an infringement of Article 106 TFEU, sought to change the scope of the traditional breadth of powers enjoyed by the Commission under that provision. The whole structure of Article 106, read in conjunction with Article 102, does not suggest that any effects-based test is appropriate for its application, as had been suggested by the General Court.
Seen more broadly, the Judgment confirms that, while there is nothing in the Treaty which prevents Member States from having ownership stakes in firms in strategic economic sectors (especially utility sectors), firms enjoying the fruits of historical State-sanctioned monopoly will be subject to an even higher level of scrutiny than their private sector counterparts given that their privileged position will always mean that they can adversely affect the structure of relevant markets. Given the clarity with which the Court has expressed its views, the onset of a new Commission President and Competition Commissioner is unlikely to change that aspect of competition law enforcement in the foreseeable future, regardless of the "industrial policy" rhetoric which is swirling around Brussels decision-making at this moment in time.
From an economic perspective, the Judgment will hopefully provide some impetus for the shifting of the virtual tectonic plates between energy liberalization on the one hand, and the entrenched position of DEI on the other. There is an urgent need for a real opening of the Greek energy market to occur for the benefit of consumers and businesses alike. The other side of that economic coin, however, may be less appealing to a Greek State that is still so desperate to generate revenues, as the Judgment will have an inevitable impact on DEI’s perceived value in the marketplace in light of its imminent privatization. Greece and other Member States alike need to be aware that, in selling off the metaphorical family silver, the temptation to make the price more attractive by granting prospective buyers "special or exclusive rights" should be avoided.
 "Special or exclusive rights" may be found to exist where "protection is conferred by a legislative measure on a limited number of undertakings which may substantially affect the ability of other undertakings to exercise the economic activity in question in the same geographical area under substantially equivalent conditions" (Case C-475/99 Ambulanz Glöckner,  ECR I-8089, at para. 24).
 Significant steps were taken in the 1990s under Article 106(1) and (3) TFEU to liberalize utilities markets. See, among others, Case C-41/90 Höfner and Elser v Macrotron,  ECR I-1979; Case C-260/89 ERT v Dimotiki,  ECR I-2925; Case C-179/90 Merci convenzionali porto di Genova SpA v Siderurgica Gabrielli SpA,  ECR I-5889; Case C-18/88 RTT v GB-Inno-BM,  ECR I-5941; Case C-320/91 Corbeau,  ECR I-2533. See, also, Commission Directive 88/301/EEC of 16 May 1988 on competition in the markets in telecommunications terminal equipment and Commission Directive 90/388/EEC of 28 June 1990 on competition in the markets for telecommunications services, both enacted under Article 106(3) TFEU.
 Case C-553/12 P, Commission v. Dimosia Epicheirisi Ilektrismou AE.
 Case T-169/08,  ECR II-0000.
 Case C (2008) Final of 5 March 2008, concerning the grant or maintenance by the Hellenic Republic of rights in favour of DEI for the extraction of lignite.
 The operative part of Article 106(1) TFEU reads: "In the case of public undertakings and undertakings to which Member States grant special or exclusive rights, Member States shall neither enact nor maintain in force any measure contrary to the rules contained in the Treaties, in particular to those rules provided for in Article 18 and Articles 101 to 109."
 Case T-169/08,  ECR II-0000, at para. 93.
 This occurred despite the fact of entry into force of Directive 96/92/EC concerning common rules for the internal market in electricity (OJ L 027 , 30/01/1997, P. 20 – 29), pursuant to which the Greek electricity market had been liberalized formally by May 2005, creating a market for sellers and buyers of electricity in the interconnected network on which electricity generators and importers were to sell their production/imports.
 Which includes the generation and supply of electricity in power stations and the importation of electricity by means of interconnection systems.
 DEI’s pleas against the Commission concerned alleged: (i) errors of law and a manifest error of assessment in applying the combined provisions of Articles 106(1) TFEU and 102 TFEU; (ii) infringement of the duty to state reasons; (iii) infringement of the principles of legal certainty, legitimate expectations and private property and the misuse of powers; and (iv) infringement of the principle of proportionality.
 Case C-18/88 GB-Inno-BM SA,  ECR I-5941; Case C-163/96 Raso and Others,  ECR I-533; Case C-462/99 Connect Austria,  ECR I-5197; Case C-49/07 MOTOE,  ECR I-4863.
 Opinion of Advocate General Wathelet delivered on 5 December 2013.
 The Judgment of the General Court was set aside, while the ECJ also dismissed DEI’s allegations regarding the alleged need to establish the existence of exclusive or special rights conferred upon it, and the alleged lack of extension of DEI’s dominant position from the lignite supply market to the wholesale electricity market. For the remaining of DEI’s pleas and arguments, the case was referred back to the General Court.
Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, or the authors of this alert:
Please also feel free to contact any of the following members of the firm’s Antitrust and Competition practice group:
Peter Alexiadis (+32 2 554 7200, firstname.lastname@example.org)
Andrés Font Galarza (+32 2 554 7230, email@example.com)
Jens-Olrik Murach (+32 2 554 7240, firstname.lastname@example.org)
David Wood (+32 2 554 7210, email@example.com)
Lena Sandberg (+32 2 554 7260, firstname.lastname@example.org)
Ali Nikpay (+44 20 7071 4273, email@example.com)
Philip Rocher (+44 20 7071 4202, firstname.lastname@example.org)
Charles Falconer (+44 20 7071 4270, email@example.com)
Patrick Doris (+44 20 7071 4276, firstname.lastname@example.org)
Deirdre Taylor (+44 20 7071 4274, email@example.com)
Scott D. Hammond (+ 1 202-887 3684, firstname.lastname@example.org)
F. Joseph Warin (+1 202-887-3609, email@example.com)
D. Jarrett Arp (+1 202-955-8678, firstname.lastname@example.org)
David P. Burns (+1 202-887-3786, email@example.com)
John Christopher Wood (+1 202-955-8595, firstname.lastname@example.org)
Cynthia Richman (+1 202-955-8234, email@example.com)
Randy M. Mastro (+1 212-351-3825, firstname.lastname@example.org)
Peter Sullivan (+1 212-351-5370, email@example.com)
Lawrence J. Zweifach (+1 212-351-2625, firstname.lastname@example.org)
James A. Walden (+1 212-351-2300, email@example.com)
Gary R. Spratling (+1 415-393-8222, firstname.lastname@example.org)
Joel S. Sanders (+1 415-393-8268, email@example.com)
Trey Nicoud (+1 415-393-8308, firstname.lastname@example.org)
Rachel S. Brass (+1 415-393-8293, email@example.com)
© 2014 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.