State aid SA (2014/NN) Greece Alleged illegal aid for discharging Public Service Obligations in the Non- Interconnected Islands

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1 EUROPEAN COMMISSION Brussels, C(2014) 6436 final In the published version of this decision, some information has been omitted, pursuant to articles 24 and 25 of Council Regulation (EC) No 659/1999 of 22 March 1999 laying down detailed rules for the application of Article 93 of the EC Treaty, concerning non-disclosure of information covered by professional secrecy. The omissions are shown thus [ ]. PUBLIC VERSION This document is made available for information purposes only. Subject: State aid SA (2014/NN) Greece Alleged illegal aid for discharging Public Service Obligations in the Non- Interconnected Islands Sir, I. PROCEDURE (1) Verbund APT Energa Hellas S.A. ("Energa") 1 filed a State aid complaint 2 with the Directorate General for Competition on 6 December 2010 concerning the financial compensation paid to the Public Power Corporation S.A. (PPC) for the discharging of Public Service Obligations (PSO) to electricity consumers in the Greek Non- Interconnected Islands (NII). It alleged that PPC benefited from illegal State aid in 2008 and Represented by the law firm Pappas & Associates. Registered under SA (2010/CP) Κύριο Ευάγγελο Βενιζέλο Υπουργό Εξωτερικών Βασιλίσσης Σοφίας 5 Grèce Αθήνα Commission européenne, B-1049 Bruxelles Belgique Europese Commissie, B-1049 Brussel België Telephone: (0)

2 (2) Prior to the State aid complaint, Energa submitted on 17 July 2010 (replaced by a new version on 30 August 2010) a complaint 3 alleging an infringement of the European competition rules in the Greek electricity sector by Greece and by PPC, i.e. Articles 102 and 106 of the Treaty on the Functioning of the European Union ("TFEU"). More specifically the complaint concerned the PSO introduced by the Greek State and imposed on PPC of providing electricity to consumers on the NII. (3) On 8 August 2011 the Commission informed the complainant of its intention to close the investigation of case COMP B The Commission concluded that the concerns raised were primarily related to the implementation of Directive 2003/54/EC 4 by Greece. (4) Following a letter from the complainant, the Commission decided to transfer case COMP B to the Directorate-General for Energy. The complainant was informed of the transfer on 11 October To process that complaint, a CHAP procedure was opened which, following the Commission Decision granting the Hellenic Republic a derogation from certain provisions of Directive 2009/72/EC of the European Parliament and of the Council C(2014) 5902 of 14 August 2014 (the "Derogation Decision") 5 is currently under assessment. (5) Following the new complaint submitted to the Directorate-General for Competition as regards unlawful State aid and the Commission's decision to transfer case COMP B to the Directorate-General for Energy, the Commission informed the complainant on 16 March 2012 that, to avoid duplication of work, it planned to close the investigation of State aid case SA (6) By a letter from 2 April 2012 the complainant alleged that the State aid case was distinct from the infringements pertaining to Directive 2003/54/EC and should be assessed under State aid rules. (7) On 16 May 2012 the Commission forwarded the complaint to the Greek authorities for their comments. The Greek authorities submitted their comments on 6 and 7 August 2012 and on 28 September The Commission requested further information on 30 January 2014, which was provided by the Greek authorities on 17 and 18 March 2014 and on 26 March (8) The complainant submitted additional letters on 24 February 2013, 11 April 2013 and 16 April The Commission met the complainant on 11 April On 21 June 2013, the complainant introduced a Court case alleging a "failure to act" in the State aid case against the Commission before the General Court, which was discontinued on 17 January Registered under COMP B Directive 2003/54/EC of the European Parliament and of the Council of 26 June 2003 concerning common rules for the internal market in electricity and repealing Directive 96/92/EC, OJ L 176/37. OJ L 248, , p.12. 2

3 II. DESCRIPTION OF THE MEASURE 2.1 The public service obligation (9) The NII include fifty (50) Aegean islands, which only account for approximately 9% of total Greek electricity demand. The NII comprise the micro isolated systems (which also include Rhodes) plus Crete which is a small isolated system. (10) According to the Greek authorities, the supply of electricity to consumers in NIIs by any electricity supplier constitutes a PSO in the general economic interest. On the grounds of social cohesion, any electricity supplier active in the NII must supply electricity at a price equal, per category of consumer, to that in the Greek interconnected system. Providers of the NII PSO receive, in return for discharging the PSO, a financial compensation calculated on the basis of a methodology established by the Greek Regulatory Authority ( RAE ). The compensation offsets the higher running costs for power plants on the NII which are due to the small size of the power plants, the technology they use and the fuel they consume during the electricity production process. (11) Reportedly, the characteristics of the interconnected Greek system do not apply to the NII where the generation costs are much higher. Suppliers on the NII tend to be producers or to trade with producers under bilateral contracts. The Greek authorities showed that supplying in the NII has never been an attractive business activity because: the costs of generation on the islands are high, as diesel (which has a very high operating cost) is the only practical option for fuel and the demand is not constant. It fluctuates considerably over the course of the year, rising during the tourist season and falling during the winter. Allegedly, this exacerbates the business risk in terms of repaying the cost of capital to construct a power plant. (12) In practice, the PSO has so far only been discharged by PPC, which is the only electricity supplier on the NIIs, in accordance with the Derogation Decision C(2014) 5902 of 14 August 2014 and due to the fact that the necessary network operation code for the NII has not yet been fully implemented. 2.2 Legislative framework The legislative framework before 2011 (13) The public service obligation was explicitly introduced for the first time into the Greek legal order by Law 3426/2005, Article 28, which granted the Minister of Development the power to designate public services. The supply of electricity to consumers on the NII with tariffs which were the same as those for the interconnected system had always applied by way of the approval of the retail tariffs for consumers, in line with the constitutional principle of equality and in line with Article 106(1) of the Greek Constitution; however there was no specific legislation on this matter. (14) In 2007, the public services were expressly set up in line with Law 3426/2005 by way of decision No. ΠΔ5/ΗΛ/Β/Φ1Β/ of the Minister for Development. They 6 Government Gazette 1040/B/2007 3

4 included the supply of electricity to consumers on the NII at tariffs identical, for each category of consumer, to those for the interconnected system. (15) Article 25 of Law 2773/1999 (after being amended by Article 16 of Law 3426/2005) provided that from 1 July 2007 onwards all consumers shall be designated as Eligible Customers but introduced an exception relating to consumers on NII, provided derogation from Directive 2003/54/EC could be obtained. The relevant Greek legislation enacted to comply with EU law requirements gave all holders of supply licenses the option from 1 July 2007 onwards to become involved in the supply to NII and to provide the respective public service. However, as the NII management code was only enacted in 2014, and in the absence of a framework of secondary legislation setting out the rules of how that market was to operate, it was difficult for other suppliers to obtain a licence to supply in the NII. (16) Decision No. Δ5/ΗΛ/Β/Φ1Β/2467/ of the Minister for Development, issued following the opinion of the Regulatory Authority for Energy (RAE), specified the methodology for computing the compensation owed to license holders discharging public service obligations. The NII public service compensation was first regulated for a period of 5 years (relating to the years 2007 to 2011) by way of this methodology. The level of compensation was approved in accordance with the provisions of Law 3426/2005, each year, following an opinion from RAE, by means of a decision of the Minister for Development using the compensation methodology. (17) The following decisions were then issued in implementation of those provisions: a) Decision No. Δ5/ΗΛ/Β/Φ1.15/1415/οικ.13796/ approving the annual compensation to cover the cost of the PSO for 2008; b) Decision No. Δ5/ΗΛ/Β/Φ1.15/1416/οικ.13797/ of the Minister of Development setting the allocation rates for the annual compensation to cover the cost of the PSO and charges per category of customer for 2009; c) Decision No. Δ5/ΗΛ/Β/Φ.1.16/11/οικ. 2829/ of the Minister of Development setting the allocation rates for the annual compensation to cover the cost of the PSO and charges per category of customer for 2010; and d) Ministerial Decision No. Δ5/ΗΛ/Β/Φ.1.16/27/οικ.2528/ computing the annual compensation to cover the cost of the PSO for The legislative framework after 2011 (18) In line with Article 56(2) of Law 4001/2011, the methodology for computing the cost and the compensation owed for providing the PSO was to be set by a decision of RAE using specific criteria Government Gazette 2353/B/2007 Annulled by the Council of State in its Decision 469/2012 from 14 February 2012 Idem 8 Idem 8 4

5 (19) Currently, the operation of the PSO relies on the transitional provisions of Article 196(14) of Law 4001/2011. The initial decision of the Minister for Development from 2007 which specified the PSOs, including the NII public service, remains in force. (20) Article 55(3) of Law 4001/2011 states that, The Minister for Environment, Energy & Climate Change shall issue a decision stating that public services shall be provided: (a) either by all undertakings carrying on the relevant activity or (b) by undertakings selected following a call for expressions of interest, to be organised as per a decision issued by the Minister for Environment, Energy & Climate Change having obtained an opinion from RAE, with the applicable selection criterion being the ability to provide these services at the lowest cost for society as a whole. Ministerial Decision No. Δ5-ΗΛ/Β7Φ.1/οικ states that the public services are to be provided by all undertakings carrying on the relevant form of activity, namely by all electricity suppliers. (21) Given that the regulated period for computing the compensation for the NII public service obligation ended in 2011, in line with the provisions of Article 20(10) of Law 4203/ , RAE issued decision No. 14/ on the methodology for computing the compensation to cover the cost of providing public services on the NII, i.e. the yearly compensation for the PSO. The principles for the calculation of the compensation were maintained. The compensation corresponds to the extra cost incurred by the supplier to provide electricity to NII compared to the corresponding cost for providing electricity to consumers in the interconnected system. (22) The NII Management Code ("NII Code") was issued on 28 January 2014 by Decision No. 34/ of RAE and became effective with its publication in the Government Gazette on 11 February The enactment of the Code allows for all interested companies to become involved in the supply of electricity under terms and conditions similar to those which apply for the interconnected system market, but which differ due to the special features of the NII. (23) Following the enactment of the NII Code, PPC continues to be the sole supplier to the NII, of its own choice, given that no other supplier has yet entered the market. The company ELPEDISON expressed its interest in becoming involved in the supply on the NII. 2.3 Functioning of the PSO (24) In return for providing the PSO, suppliers receive a compensation, computed on the basis of the special methodologies mentioned under recitals (16) and (21) above. The compensation has been raised through a levy on all suppliers in the interconnected system (including the complainant for as long as it was active). Holders of electricity supply licenses were entitled to recover the cost of those charges from customers, in accordance with the relevant legislation and with a decision issued pursuant to Article 29(4) of Law 2773/1999, as in force. Following the judgment No. 469/2012 of the Government Gazette 2783/B/2011 Government Gazette 235/A/2013 Government Gazette 270/B/2014 Government Gazette 304/B/2014 5

6 Greek Supreme Administrative Court, described below in recital (32), Greece enacted Article 36 of Law 4067/2012 which made electricity consumers directly responsible for paying the PSO compensation, establishing the PSO unitary charges per category of customer for the years 2009, 2010 and It allocated the relevant cost corresponding to the discharge of the PSO for the years 2007 to (25) The compensation is allocated uniformly across the entire territory of the state per category of customer, in line with the methodology for setting the different allocation rates. The costs of discharging the PSO are recuperated from electricity customers by way of allocation keys. These correspond to the sales and costs for each category of customers. Charges for the cost of the PSO are set for each of the following customer categories: low-voltage domestic, low-voltage agricultural, low-voltage commercial and government, low-voltage industrial, low-voltage street-lighting; medium-voltage agricultural, medium-voltage commercial and government, medium-voltage industrial, high-voltage including PPC lignite mines, hydroelectric pumping plants (for power used for pumping) and auxiliary power plant units connected to the system (for power consumed when the plant is not delivering power to the system). (26) The Greek authorities have stated that, under the legislative regime which applied since Law 3426/2005 until the entry into force of Law 4001/2011, the System Operator, DESMIE S.A., played a central role in the public service cost recovery mechanism since it held and managed a special account for the compensation of public services. It was debited with the compensation provided to suppliers of public services and credited with revenues from charges imposed on electricity supply license-holders (Article 28 of Law 3426/2005). After Law 4001/2011 came into force, the body responsible for keeping that account is the operator of the national electricity transmission system, ADMIE S.A., which has taken up the role of managing the System and other non day-ahead trading operations from DESMIE. Article 55(8) of Law 4001/2011 specifically states that the special account for public services is to be kept by ADMIE as specified in the System Management Code. 2.4 Separation of accounts (27) The electricity sector was formerly a public monopoly. In that context, PPC, as a public undertaking, belonged entirely to the Greek State, and had an exclusive privilege for generating, transmitting, distributing and trading in electricity. It operated in the public interest, under private economy rules, but was administratively and financially independent from the State. Under the provisions of Article 26 of Law 2773/1999, PPC was obliged to meet all consumer demand and for that reason, under the provisions of Article 14 of the Customer Supply Code 15, particularly strict regulatory restrictions applied in relation to PPC s supply operations, due to its special position as a former monopolistic undertaking. Save for a partial exception applicable to high voltage customers, all other supply tariffs offered by PPC were subject to strict regulatory control. (28) Article 30(2) of Law 2773/1999 specifically obliges integrated electricity undertakings to keep separate accounts for the electricity generation, transmission and distribution sectors, as they would do if the said activities were carried out by different undertakings, in order to avoid discrimination, cross-subsidies and distortions in 15 Ministerial Decision No. 4525/2001 of the Minister of Development (Government Gazette 270/B/2001) 6

7 competition. Where necessary, the respective undertakings keep accounts on a consolidated basis for other sectors outside of the electricity sector. (29) At the end of each fiscal year, every integrated undertaking operating in the energy sector prepares separate accounts for its activities in the previous year. The separate accounts must be kept so that they clearly show the revenues from the ownership of the transmission system, the distribution grid and the NII network. (30) Under the provisions of Article 23(a) of Law 2773/1999, PPC S.A. was obliged to keep separate accounts for its operations on the NIIs which relate to the difference in the cost of generation in the interconnected system and the cost of generation on the islands. Its activities as supplier and as power producer have to be presented separately in the accounts from its activities on the mainland, and have to show the financial compensation owed to it for performing the PSO, in order to promote transparency and to avoid end consumers being burdened with additional costs. Separate accounts for the PSOs ensure their verifiability. (31) The obligation to keep separate accounts is also specifically stated in Article 5(2) of Annex 7 of the Electricity Generation and Supply Licence Regulation 16. These provisions specifically state that the license-holders are obliged to submit separate accounts each year to RAE relating to their activities performed under licenses which relate to any supply to eligible or non-eligible customers. (32) An explicit obligation concerning public services was introduced in Article 28(3) of Law 3426/2005 which states that holders of electricity supply licenses are obliged, in the context of supplying electricity, to keep separate accounts showing the financial compensation given to them for discharging their public service obligations. This obligation is also expressly stated in Article 55 of Law 4001/2011. RAE is responsible for checking the compliance with these obligations. Moreover, the keeping of separate accounts is a requirement for compensation to be paid. (33) In line with the legislation described above, PPC keeps separate records for each activity (mines, production, trade, distribution, transmission) as well as separate records for the interconnected system and the NII. The accounting separation rules have been approved by RAE. Consequently, the financial compensation for providing NII public services is presented in the separate accounting records of PPC Supply. The costs of producing electricity on the NII are presented in the separate accounts of PPC NII Production. The separate accounts are available on the company s website. 2.5 The beneficiary (34) PPC is Greece's largest power generation company and the country's main power supply company, supplying electricity to approximately 7.5 million customers. PPC is also the sole company with a fully owned power transportation system in Greece. In accordance with the statements of the complainant, PPC apparently in 2008 held 98% of the Greek electricity market which increased to some 99.47% in The compensation 16 Decision Δ5/Β/Φ1/οικ (Government Gazette 1423/B/ ) 7

8 The compensation methodology for the period 2007 to 2011 (35) As mentioned in recital (16), the compensation methodology from the time of setting up the PSO until 2011, included, has been approved by order of the Minister of Development, issued following the opinion of RAE. (36) The annual compensation for the public service obligation was calculated by taking a regulatory period of five years ( ), for which the year 2006 was set as reference. The compensation for 2006 was computed taking into account the following elements: a) The weighted average System Marginal Price. b) The regulated capital base and depreciation, presented and computed in the financial statements in accordance with Article 28(4) of Law 3486/2005 from the license-holders for producing electricity on the NII and micro-networks. c) Reasonable operating costs for producing electricity on the NII and micronetworks. d) An acceptable rate of return on the capital invested in the electricity production activity, analogous with the interest rates approved for monopolistic activities (6.8%). (37) For each year in the regulated period, variable factors were also recognised namely: a) The change in the percentage of electricity generated in that year. b) An estimate of the change in international prices of liquid fuels used in the electricity production activity (published by international organizations and weighted in terms of the fuel mix using a weighting factor of 40%). c) The estimated change in the consumer price index for the year in question in relation to the reference year, weighted using a weighting factor of 60%. d) A productivity improvement factor was applied which adjusted the annual compensation by -2% p.a. In producing this figure, regard was had to the requested improvement in efficiency and effective management and use of power plants, the requested improvement in the effectiveness of the supply and transmission of liquid fuels, and the requested maximum breakdown rate for power plants. (38) The amount actually owed in public service compensation, as provided for under Article 28(2) of Law 3426/2005, was approved annually by decision adopted by the Minister for Development with the assent of RAE. (39) The Greek authorities have shown that the objective of this methodology was to give suitable incentives and adequate time (a 5-year regulated period) to improve the efficiency of electricity production operations on the islands, but above all to develop island interconnections that would lead overall to a reduction in cost for the undertaking and consequently for the end consumer. In addition, the application of a more detailed methodology was not feasible from a practical viewpoint at the time because of the lack of detailed data for each independent island system. 8

9 (40) Compensation methodology: Table I ΕΑΝt = C ref x Qt x (1+0,4 Pt + 0,6 RPI - X) Where: C ref = the difference berween the total average cost of production in the NII (Non Interconnected Islands) with the weighted average SMP in the year 2006 used as the reference Qt = the electricity produced in year t in the NII RPIt = the difference of the retail price index of the year t compared to the reference year Pt = the difference of the weighted FOB fuel prices used in the electricity production of the NII between years t and the reference year X = efficiency index (2% per annum) Source Ministerial Decision (D5/EL/B/F1B/2467, C ref ( /MWh) 79,47 Gov. Gazette B' 2353/2007 Qt (GWh) PPC forecasts RPIt 2,9% 7,2% 8,0% 12,2% 16,8% National Statistics Office Pt 4,5% 41,95% -1,88% 30,94% 74,18% Platt's European Marketscan X 2% 4% 6% 8% 10% EANt ('000 ) Special tax for fuel used in NII (mio ) Additional cost due to the increase of the special tax on fuel consumption in 2011 was recognised Total EANt ('000 ) * * : Για τους σκοπούς της παρούσας ανάλυσης, το ετήσιο αντάλλαγμα έχει αναγραφεί στο έτος στο οποίο αφορά, παρότι συλλέχθηκε από τους καταναλωτές και αποδόθηκε στη ΕΗ Α.Ε. το επόμενο έτος από το έτος που αυτό αφορά * For the purposes of this analysis, the annual compensation has been presented for the year to which it relates, even though it was collected from consumers and paid to PPC in the year after the year to which it relates. The compensation methodology for 2012 up to the present (41) As described above in recital (21), a new methodology was adopted in 2014 which applies retroactively from 1 January It relies on actual cost data recorded by PPC. (42) Except for the price it has to pay for purchasing electricity produced on the NII, a supplier operating in the NII system bears the same costs for supplying electricity as those which would apply if it opted to operate on the interconnected system. Consequently the NII public service compensation owed to it only covers the extra cost incurred by reference to the corresponding operation on the interconnected system. The supplier can thus offer a single tariff, for each category of customers, throughout the entire territory of Greece. In order to satisfy this condition, the compensation covers the cost difference between the interconnected system and the NII system, Each electricity retail tariff is composed of different charges relating to the cost of producing electricity, the cost of using the transmission and distribution networks, the management cost, and the renewable energy sources levy. As per the Greek authorities, the only element out of the above which is disproportionately different on the NII system from the interconnected system is the cost of producing electricity (the competitive element). (43) Suppliers who operate on the NII are obliged to pay the full cost of producing electricity which is used up by meters of consumers they represent, which includes 9

10 both the variable cost of generation and the fixed cost of producing electricity and capacity (capacity assurance mechanism). On the other hand, suppliers operating on the interconnected system are likewise burdened with the cost of purchasing the electricity they supply to their customers via market mechanisms. The costs include the system margin price, other surcharges and the capacity mechanism payment. The burden for energy generated from RES, high-efficiency co-generation plants and the special features of the costs from hybrid stations on the NII are also taken into account. Suppliers who operate on the NII do not use the national electricity transmission system like suppliers who deliver to customers on the interconnected system and, consequently, are not liable to pay the relevant usage charges for that system. The revenues generated by applying those charges (as part of the uniform tariffs) are used to reduce the overall cost of providing public services and thus the amount that needs to be recovered via public service charges applied to all consumers. (44) The other cost elements (primarily regulated costs) are approximately the same for both NII and the interconnected system, and can be recouped via distribution network usage charges, the RES levy which is uniform across the territory of the State, and a reasonable profit margin for commercial or accounting management. Consequently, where the same electricity retail tariffs are offered to consumers on the interconnected and non-interconnected network, the cost element of the tariff which differs (and which needs to be recouped via the compensation paid for providing the public services) is the cost relating to the electricity production process. (45) Under the provisions of Article 20(11) of Law 4203/2013, when computing the compensation, RAE shall carry out a check on annual outturn cost data on which the compensation is computed, so that consumers are not burdened with unreasonable costs. This provision was also incorporated into the new methodology for computing the compensation which applies from 1 January RAE will approve each year the compensation and the costs used to compute that figure, both in terms of the type of costs and reasonability. (46) The new methodology is based on the net avoided cost methodology. The compensation computed using this methodology does not exceed the difference between the net costs of a supplier under a PSO and one without such an obligation. Solely the difference in the cost of supply is covered. (47) The compensation does not take into account the costs the supplier would bear in all events for supplying electricity in a NII system even if it did not have to discharge the PSO as these are unavoidable costs. (48) The compensation is associated exclusively with charges that are imposed solely by virtue of the structure and operation of the market of the NII system. The charges are not dependant on the framework and conditions of operation for the undertaking. (49) Given that, under the new compensation methodology, a supplier on the NII is similar to a supplier on the interconnected system in relation to the tariffs offered and the cost of supplying electricity, there are no additional benefits for such supplier. The only difference, as mentioned above, comes from the production costs. The new compensation methodology takes into account that customers of a supplier in a NII market are exempted from the system usage fees. 10

11 (50) The compensation is computed monthly and for each independent island electricity system (NII system) so that the supplier operating in the specific NII system recovers the NII public service charges corresponding to that system. (51) A final annual settlement of accounts for the monthly compensation computed during the previous year is carried out after RAE checks and approves the costs taken into account in the computations, and whether those costs are reasonable. (52) The compensation methodology as such does not include an efficiency incentive for NII supply operations, since the compensation for providing the NII public services depends only on the cost of electricity production on the NII. However, according to the information provided by the Greek authorities efficiency incentives are implemented in relation to the production of electricity. Namely, they have been incorporated into the provisions of the NII Code. Benchmarks taking into account the costs incurred by power plants considered to be very efficient in electricity production have been adopted for payments to conventional power plants so that costs are lowered for the same electricity output. As the cost of electricity production on the NII, recognized by the Greek authorities, will not be the actual costs of the plants, but the benchmark cost, power plants will be incentivized to reach the efficiency required for incurring only the benchmark costs. In time this means that the power plants acting on the NII have an incentive to become more efficient so that they incur the same costs as set by the benchmarks. The actual outturn cost of providing the PSO is compared to the total revenues from the PSO and the compensation computed using the methodology for providing this service. Table II shows the following data for 2007 to The final data for 2013 is not yet available. 11

12 Table II million A. Breakdown of production costs for PPC - producer in the NII A.a. Direct costs Labour Fuel cost Depreciation Other operating costs A.b. Indirect costs Central costs A.c. Cost of capital RAV Return on RAV 6.80% 6.80% 6.80% 6.80% 6.80% 8% Total Production Costs (A.a+A.b.+A.c.) B. RES Energy cost for PPC - supplier in the NII B.a. RES Energy (GWh) B.b. RES cost ( /MWh) RES Cost in million (B.a. * B.b.) C. Breakdown of costs for PPC - supplier in the NII C.a. Direct costs Labour Depreciation Other operating costs C.b. Indirect costs Central costs Total supply (C.a+C.b.) TC. TOTAL COSTS (A + B + C) D. Tarriffs revenue for PPC Net Revenue from tarriffs (excluding regulated prices for PSO charges and Distribution charges to customers included in the tarriffs) E. PSO amount - based on methodology E.a. EANt based on the "old" methodology E.b. EANt,settle based on actual data E.c. Estimation based on the "new" methodology * [ ]* PSO amount in million (E.a.+E.b. for / E.c. for 2012) [ ] TR. TOTAL REVENUE (D+E) [ ] Annual Difference (T.R. - T.C.) [ ] Total under-recovery (based on methodology) [ ] * - The estimate in point E.c for 2012 (since the relevant RAE decision is pending) and the last 4 lines of the Table which include it, must be treated as confidential information. * - Business secret 12

13 (53) In light of these data, the amount PPC recovered (sales revenues plus PSO compensation computed using the old methodology) appears to be below the overall cost for PPC for the years 2007 to 2011, by around 205 million (undercompensation). Under the new methodology, the estimated under-compensation for the year 2012 will be [ ] million. (54) The Greek authorities have shown that PPC (as owner of the NII network, and operator thereof) records revenues for the years from exclusive ownership and management of the NII network in separate financial statements for this role. Only in 2012 it obtained rent from ownership of the NII network, since DEDDIE S.A. is now the network operator. Those revenues are shown in Table III and are based on the statements of account of PPC. The revenues derive from applying the uniform tariffs across all of the territory of Greece to cover the permissible revenues of the Greek electricity distribution network operator and, in computing these amounts, regard is had to the operating costs (OPEX) approved by RAE, the deprecation and a reasonable return on the capital invested in this activity. This is not related to the PSO set-up for the NII and these revenues are not taken into account for the calculation of the compensation thereof. Table III: 2.7 Reasonable return (55) The "reasonable return", which is included in both the old compensation methodology indirectly when computing the reference coefficient and expressly in the new methodology as the return on the value of the Regulated Asset Base (RAV) of the electricity production operations on the NII, is one of the cost factors that influences the price of electricity that a supplier purchasing electricity for its operation on the NII has to pay. According to the Greek authorities, the reasonable return which belongs to electricity production should not be mistaken for the "reasonable profit" that a normal undertaking would demand for being involved in the supply of electricity on the NII. Rather, it represents the return on the capital invested in the electricity production on the NII and has no connection with the possible profits obtained in the downstream market of electricity supply. (56) The return rate chosen corresponds to the interest rate which applies to monopolistic operations (6.8% in the old methodology for the years 2007 to 2011, and 8% in the new methodology for the years 2012 and 2013) because of the characteristics of producing electricity using conventional fuels on the NII resembling a monopolistic activity. The return rate was also chosen in view of the weighted borrowing rate for those activities. (57) The Greek authorities consider that the reasonable profit a normal undertaking would demand for being involved in electricity supply has already been incorporated into the uniform supply tariffs which apply throughout the territory of Greece and thus does 13

14 not affect the examination of the compensation required for providing the PSO in light of the cost differences between the two systems. 2.8 The complaint (58) According to the complainant, PPC, as administrator of the NII, had failed to issue the network operation code, i.e. the NII Code, which determines the precise conditions for electricity generation and supply. Hence, it was not possible for competitors to receive authorisation for the supply of electricity on the NII. Despite this, the PSO compensation was financed through a levy imposed on electricity consumption by including it in the electricity price charged to customers by all suppliers, including Energa. (59) The fact that competitors were de facto prevented from supplying electricity on the NII would infringe the market-opening requirements of Directive 2003/54/EC, thereby leading to the compensation 17 representing illegal and incompatible State aid in breach of Article 107 TFEU. According to the complainant, the provisions of Article 106(2) TFEU do not apply as PPC does not exercise the PSO in a lawful manner, thus the measure would be subject to the competition rules. (60) The measure reportedly breaches Article 21(1)(c) of the Directive which provides that Member States shall ensure that all consumers had to be eligible 18 as of 1 July Greece had failed to render the operating code necessary to allow new entrants into the NII hence PPC maintained a de-facto monopoly. Greece had not obtained any derogation from the Commission under Article 26 of Directive 2003/54/EC which resulted in PPC keeping a de-facto monopoly. (61) The PSO would allegedly also breach Article 3(2) 19 of the Directive which requires that PSOs ensure equality of access for EU electricity undertakings to national customers and are non-discriminatory. Supposedly, the definition of the PSO does not fulfil the requirements of Article 3 (2) and (4) of the Directive as it does not contain the in depth reasoning as to why such services are considered as public services required by the Directive. (62) According to the complainant, the exact amount of the aid is unknown as the formula for calculating the compensation includes many types of costs. Since the costs of PPC with the PSO are compensated, PPC has an incentive to claim higher costs than actually incurred. Therefore, part of the compensation exceeds what is necessary to cover the costs of discharging the PSO. The methodology for the calculation of the compensation does not allow for the compensation to be verified as required by the Directive As the complaint was submitted in 2010 only the compensation for 2008 and 2009 had been calculated. Article 2 (12) of Directive 2003/54/EC establishes that eligible customers' means customers who are free to purchase electricity from the supplier of their choice within the meaning of Article 21. Article 3(2) of Directive 2003/54/EC provides that Member States may impose on electricity undertakings public service obligations. PSOs must relate to security, including security of supply, regularity, quality and price and environmental protection, including energy efficiency and climate protection. Such obligations must be clearly defined, transparent, non-discriminatory, verifiable and shall guarantee equality of access for EU electricity companies to national consumers. 14

15 (63) The complainant reportedly applied for a supply licence for the NII on 16 December 2009, but was denied on 1 February 2010 due to the fact that the NII Code had not been issued and that certain legislative provisions required amendment. Decision of the Greek Supreme Administrative Court (64) At a national level, the complainant submitted claims for the cancellation of the ministerial decisions issued for the implementation of the PSO in 2008 and The Greek Supreme Administrative Court found, in its Decision 469/2012 of 14 February 2012, that the contested PSO infringed Article 3 (4) of Directive 2003/54/EC. The Greek Supreme Court concluded that Greece's failure to open the market in the NII implied that the contested PSO is provided in a discriminatory manner as the PSO could only be provided by PPC. The Supreme Court annulled the ministerial decisions which had approved the financial compensation to PPC for the years 2008 and 2009 (around EUR 916 million). According to the complainant, the cancellation of these decisions did not lead to any measures on the part of the Greek State such as the restoration of the initial situation which would have entailed the recuperation of the amounts paid as compensation. The complainant reportedly used this decision as precedent for challenging also the decisions concerning the compensation granted for the PSO in (65) The complainant also claimed before the Greek Supreme Administrative Court that the PSO breached the provisions of Article 3(2) of Directive 2003/54/EC due to its lack of justification. Allegedly, the decision establishing the PSO does not reflect the reasons why supplying electricity in the NII should be set up as a service of general economic interest. The Court found that the NIIs have autonomous generation systems and the generation cost, thereof, exceed the generation cost in the mainland system. Greece was therefore entitled to set up favourable pricing treatment for consumer categories, such as large families, and pricing by consumer category in accordance with Article 3 of the Directive and with Greek national law and the contested regulatory decision providing for the arrangements for the set-up of the PSO is in line with Article 3 of the Directive. The Court thus dismissed this claim as unfounded. 2.9 The position of the Greek authorities (66) The Greek authorities argued mainly that (i) that no breach of Directive 2003/54/EC had occurred; (ii) that the supply of customers on the NII is defined in Greek legislation as an SGEI (regulated tariffs in order to secure social cohesion) for which compensation is granted in an objective way; and (iii) that the PSO compensation does not entail State aid. No State resources (67) The Greek authorities do not contest that the PSO can be attributed to the Greek State given that the legal basis for designating the PSOs is provided by Law, Law 2773/1999 and the recent Law 4001/2011, and in particular Article 55 et seq. thereof, and the details of how this is to be achieved are laid down in Ministerial Decisions and decisions of the RAE. However, they allege that state intervention cannot be considered to have been made through state resources as the compensation is paid by the customers of all electricity suppliers on the basis of itemised charges that appear on their bills. Recovery of the cost by PSO providers depends exclusively on the 15

16 amounts in the account held by ADMIE. In the view of the Greek authorities, the Court ruled in PreussenElektra 20 that the payment of compensation, where individuals alone bear the financial cost does not involve any direct or indirect transfer of State resources. The Commission reportedly followed this interpretation in Ν 550/ Belgique - Certificats verts dans le secteur de l électricité 21. The mere fact that state provisions impose mechanisms for public service providers to recover their costs is not sufficient to allow those mechanisms to be characterised as State aid 22 within the meaning of the Treaty because it does not entail a direct or indirect transfer of state resources. (68) In the view of the Greek authorities, the fact that the compensation is not paid directly by end consumers to the public service provider, but that the relevant amount is collected by suppliers and paid to ADMIE, who then pays the relevant amount to each beneficiary, is not sufficient to allow one to conclude that the intervention of ADMIE entails a transfer of state resources as it acts only as a treasurer, i.e. merely as a vehicle for the levying and allocation of resources. The role is similar to that of HBA in Pearle 23. Likewise, ADMIE is not obliged to pay PSO beneficiaries any amount which goes beyond the amounts in its accounts, even if the public service providers are in fact entitled to that amount as part of the costs they are recovering. The fact that the contested amounts are not transferred directly between private undertakings would not be sufficient for the said amounts to be considered as constantly remain[ing] under public control, and therefore available to the competent national authorities, [for it to be] sufficient for them to be categorised as State resources 24. Reportedly, the Greek State could not make use of the sums collected in ADMIE's account contrary to the situation in Iride 25. The lack of state resources is supposedly confirmed by the judgement in Doux Élevage 26 where the Court found that the legislation at issue did not confer upon the competent authority the power to direct or influence the administration of the funds (para. 38) and that "in the event of non-payment, the intertrade organisation must follow the normal civil or commercial judicial process, not having any State prerogatives (para. 32). This would also be the case for ADMIE. (69) ADMIE is soon to become a fully independent private undertaking in which the Greek State will hold only a minority shareholding of 34%. (70) In the view of the Greek authorities, the findings of the Court in Vent de Colère 27 are not relevant for the situation at hand as the situations are not comparable. In this case the Court of Justice ruled that the contested mechanism was an intervention through state resources, considering that it was guaranteed by the French state and that the C-379/98 PreussenElektra, 2001 I-02099, para JOCE C/330/2001 C-222/07 Unión de Televisiones Comerciales Asociadas (UTECA), 2009 I C-345/02 - Pearle and Others, 2004 I-07139, para C-482/99 France v. Commission, 2002 I-04397, para. 37 and C-83/98 P, France v. Ladbroke Racing and Commission, 2000 I-03271, para. 50 T-25/07 - Iride and Iride Energia v Commission, 2009 II C-677/11 - Doux Élevages and Coopérative agricole UKL-AREE, not yet published C-262/12 - Vent De Colère and Others, not yet reported 16

17 public organisation to which the funds were paid did have actual powers to manage the funds since it could make investments. No economic advantage (71) According to the Greek Authorities, it follows from the case law of the Court of Justice that State aid represents an intervention which is capable of directly or indirectly favouring undertakings or which confers an economic benefit which the undertakings benefitting from it would not have under normal market conditions. (72) According to settled case law, to the extent that state intervention entails compensation for the performance of services provided by beneficiary undertakings for discharging public service obligations, so that those undertakings do not enjoy any economic advantage, that intervention does not normally result in those undertakings being more favourably placed in terms of competition than competitors and consequently this situation does not fall within the scope of Article 107(1) TFEU 28. The Greek authorities suggest that the measure at hand fulfils all four conditions provided by the Altmark case law. Specifically, as regards the last condition, the Greek authorities point out that: (a) provision of the services to end consumers is guaranteed and (b) suitable signals can be given to PPC to encourage it to make every concerted effort to limit its costs. This two-sided objective of uninterrupted continuation of the PSO at optimum financial terms, which may overall lead to a reduction in the cost of the PSOs for both PPC and consumers, ensures a level of compensation below the actual cost of those services. According to the Greek Authorities, in Deutsche Post 29 the General Court ruled that the finding that the level of aid was below the additional cost arising from providing the SGEI precludes the national measure from being characterised as State aid. No selectivity (73) As per well-established case law of the Court of Justice, when assessing the selectivity of the measure, it appears essential to verify whether, in the context of the given legal regime, a state measure favours certain undertakings or certain production sectors' compared to others which are, in terms of the objective of the relevant measure, in a situation comparable from a factual and legal perspective. (74) The Greek authorities allege that the provision of public services on the NII in return for a fee is not a privilege which is granted exclusively to a single supplier only. Thus, the operating framework for PSOs on the NII cannot be considered to be a "selective measure" within the meaning of Article 107(1) TFEU. No distortion of competition or affectation of trade between Member States (75) Article 107(1) TFEU considers aid which affects trade between Member State and which distorts or threatens to distort competition as incompatible with the common market. The case law of the Court of Justice makes it clear that when State aid of a financial type bolsters the position of an undertaking compared to other undertakings Judgement in Case C-280/00 Altmark Trans GmbH and Regierungspräsidium Magdeburg v Nahverkehrsgesellschaft Altmark GmbH (2003) ECR I-7747, para. 87 T-266/02 - Deutsche Post v Commission, 2008 II-01233, para.74 17

18 competing against it in terms of intra-community trade, the latter may be deemed to be affected by the aid. It is self-evident that an essential condition for applying Article 107 TFEU is that there is a market open to competition. (76) However, according to the Greek authorities, the relevant services are provided in a narrowly defined geographical area where the defining feature is that it is cut off from the national market. There is no interconnection to the system and consequently no option to interact with and benefit from interconnection with the markets of other Member States. (77) The specific public services relate exclusively to local consumers, and the electricity supplied is the electricity produced locally (mainly from conventional thermal power plants of PPC). Consequently, the relevant activities would not affect trade between Member States Commission Derogation Decision C(2014) 5902 (78) On 14 August 2014, the Commission adopted Decision C(2014) 5902 granting the Hellenic Republic derogation from certain provisions of Directive 2009/72/EC 30 of the European Parliament and of the Council (the "Derogation Decision"). (79) Greece applied for a derogation from implementing certain provisions of Directive 2003/54/EC on 5 December Although preliminary steps were taken to investigate the initial application, the derogation pursuant to Article 26(1) of Directive 2003/54/EC was neither granted nor refused by the Commission. On 17 January 2012 Greece renewed its application, this time for a derogation from Chapters III and VIII of Directive 2009/72/EC for the NII. (80) The Commission concluded that substantial problems exist for the operation of conventional power plants within the NII isolated systems. (81) The Commission found that there were no grounds for a permanent derogation from Article 33 of Directive 2009/72/EC which concerns market opening and reciprocity. At the same time, it acknowledged that market opening requires setting up practical arrangements to enable the NII isolated systems to be operated fully in line with the NII Code. Practical problems related to market opening may entail either the unavailability of the registers required to attribute meters and metering data to suppliers or the fact that the optimal infrastructure configuration is not yet in place. On this basis, the Commission considered that a derogation from Article 33 of Directive 2009/72/EC which is limited in time would be appropriate. The derogation granted by the Decision is valid until 17 February 2016 or until the full installation of the infrastructure as provided for in the NII Network Code, whatever comes later. In any event, the derogation ceases to apply on 17 February (82) Moreover, the derogation for a given isolated system ceases automatically as soon as an interconnection between that system and the Greek interconnected system has become fully operational. 30 Directive 2009/72/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in electricity and repealing Directive 2003/54/EC, OJ L 211 of 18/8/2009, p

19 (83) In order for the derogation to be proportional and not to go beyond what is strictly necessary, the Commission provided clear incentives and requirements for transparency as regards decisions whether to interconnect the NII isolated systems. The Derogation Decision provides, in recital (92), for a series of obligations in this respect to be fulfilled by the Greek authorities. (84) As the application for a derogation by Greece of 17 January 2012 renewed the initial application that was submitted in 2003, it was considered that the non-action on the side of the Commission should not be to the detriment of Greece and as no legal or factual changes have occurred with regard to the small and micro isolated systems that may qualify for derogation under Directive 2003/54/EC and Directive 2009/72/EC, the Derogation Decision applies retroactively from the date of notification of the initial application, i.e. from 5 December III. ASSESSMENT 3.1. Qualification of the measures as State aid (85) According to Article 107(1) TFEU, save as otherwise provided in the Treaties, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market. (86) In determining whether a measure constitutes State aid within the meaning of Article 107(1) TFEU, the Commission has to apply the following criteria: the measure must be imputable to the State and involve State resources, it must confer an advantage on certain undertakings or certain sectors which distorts or threatens to distort competition and is liable to affect trade between Member States Existence of State resources (87) In order to be qualified as State aid, a financial measure must be imputable to the State and granted directly or indirectly by means of State resources. The distinction made in that provision between aid granted by a Member State and aid granted through State resources does not signify that all advantages granted by a Member State whether financed through State resources or not constitute aid, but is intended merely to bring within that definition both advantages which are granted directly by the State and those granted by a public or private body designated or established by the State 31. The Court has also held that Article 107(1) TFEU covers all the financial means by which the public authorities may actually support undertakings, irrespective of whether or not those means are permanent assets of the public sector. Therefore, even if the sums corresponding to the measure in question are not permanently held by the Treasury, the fact that they constantly remain under public control, and are therefore available to the competent national authorities, is sufficient for them to be categorised as State resources 32. The Commission considers that the PSO compensation Case 76/78 Steinike & Weinlig v Germany [1977] ECR 595, paragraph 21; Case C-379/98 PreussenElektra [2001] ECR I-2099, paragraph 58. Case C-262/12, Vent de Colère, not yet published, para

20 constitutes a resource that is continuously under the control of the State for the following reasons: (88) The Greek State introduced the PSO by law and also instituted the mechanism for the payment and the collection of the compensation owed to the undertakings discharging the PSO. Such compensation was initially raised through a levy on all suppliers in the interconnected system, including PPC, which was recuperated through a charge that was evenly allocated throughout the country by customer category based on a methodology that establishes the allocation variation coefficients. Currently, the compensation is collected directly from the customers by way of their electricity invoices. (89) The exact amount is fixed every year by way of ministerial decisions. The allocation coefficients for the compensation and the supplies that are exempt from its payment have been determined by way of ministerial decisions by the Ministry of Finance and Development. Each year the numerical values of the coefficients in this methodology are also determined by ministerial decision following an opinion of RAE and published in the Government Gazette. The same legislation also set an initial cap of EUR 600,000 for the customer charge by consumption location. RAE ensures that this limit is adjusted annually based on the annual change in the consumer price index. (90) The State has designated a company, the system operator in Greece, to set up a special account for services of general interest to be credited with the revenues from the charges imposed on electricity supply authorization holders (to be recuperated from customers, as mentioned above, and more recently paid directly by the customers through their electricity bills) and debited with the compensation paid to the providers of services of general interest. Before 2011 the obligation pertained to Hellenic Transmission System Operator (DESMIE) 33. In accordance with article 117 (1) of Law 4001/2011, part of DESMIE s duties was transferred to ADMIE, the current Greek transmission operator, and DESMIE was re-named LAGIE. (91) ADMIE, currently the operator of the national electricity transmission system, is now in charge of the mechanism for collecting the compensation charges and paying out the compensation to the companies discharging the PSO. Both DESMIE and ADMIE are public companies. Before the amendment of the legislation from 2011, DESMIE was owned by the Greek State which held 51% of its share capital and by PPC which held 49% of its share capital. ADMIE is wholly owned by PPC 34. (92) The Greek authorities state, as mentioned in recital (26), that the role of ADMIE is central in the public service cost recovery mechanism. Moreover, in accordance with Article 36(2) of Law 4067/2012 the responsibility to manage the compensation for the services of general economic interest lies with ADMIE as it keeps the special account where the collected compensation amounts are credited and pays out, from the same account, the due PSO compensation Established by way of the Presidential Decree Nr. 328/2000 (FEK A 268/ ) in conjunction with articles 14 et seq. of Law 2773/1999 (FEK A 286/ ). See information on ADMIE's website, available online at: accessed on 25 June