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Continuing performance contract with the state (or state-run enterprise) can constitute prohibited state aid

Continuing performance contract with the state (or state-run enterprise) can constitute prohibited state aid

The Court of the European Union (the Court) has ruled (in a judgement that has not yet been published) that a continuing performance contract that requires a Hungarian state-run enterprise to purchase a certain quantity of energy at a fixed rate constitutes state aid. The European state-aid regulations apply to the contract despite the fact that Hungary was not yet a member of the European Union when the contract was entered into (and not yet bound by European state-aid regulations at that time, therefore).

The case
In the mid-nineteen nineties, Hungary wanted to improve its energy infrastructure. However, the desired improvement could only be effected with substantial investments in power plants by foreign companies. In this context, Hungary, via a public undertaking (MVM), signed a continuing performance contract with Budapesti Erőmű Zrt (BEZ), a Hungarian subsidiary of Electricité de France (EdF). On the basis of this contract, MVM accepted the obligation to purchase a specific quantity of energy at a fixed price until 2024 from plants operated by BEZ. In this way, BEZ (EdF) was provided with a predictable flow of income on the basis of which it could earn back its own investments.

On 4 June 2008 the European Commission found that the continuing performance contract constituted prohibited state aid for BEZ, which meant that BEZ had to repay the advantage it had received. BEZ appealed the case to the Court.

State aid
State aid in the sense of Article 107 (1) of the Treaty on the Functioning of the European Union is involved if the state grants a selective advantage to one or more companies and competition and inter-state trade is affected as a result. If it is found that state aid has been granted unlawfully, the advantage thus obtained by the benefitting company must be repaid.

The Court’s decision
Before passing a substantive judgement on the continuing performance contract between BEZ and MVM, the Court investigated whether the state-aid regulations did in fact apply to the contract. After all, the continuing performance contract dates from 1996 and Hungary did not join the European Union until 1 May 2004 (and has only been subject to the state-aid regulations since that time, therefore). The Court concluded that the continuing performance contract had not been included in an appendix to the accession treaty with Hungary, which specifies reconcilable aid measures which may remain in effect after accession. This means that the contract had to be assessed as a new measure from 1 May 2004 on grounds of the (current) Treaty on the Functioning of the European Union.

It is also worth mentioning that in making the assessment in accordance with the law governing state aid, it is not relevant that the contract was not concluded between BEZ and the State, but rather between BEZ and a public undertaking (MVM). After all, the payment to BEZ is made from state resources.

Since it can be assumed that competition and inter-state trade will be affected by the continuing performance contract, the only question that remains is whether a selective advantage is given to BEZ by means of the continuing performance contract. In this context, the Court examined whether BEZ could have demanded the same conditions from a buyer who was purchasing energy on a purely commercial basis. In other words, would a commercial party have been willing to purchase a fixed quantity of energy at a fixed price?

In the Court’s opinion, a commercial party would not have been willing to agree to this. The European energy market is characterised by the fact that the quantity of energy that power plants can sell depends on demand, which fluctuates significantly. Because MVM purchases a specified quantity of energy at a fixed price, MVM (and not BEZ) runs the risk of fluctuations in demand. A risk that a commercial buyer would not be willing to bear. In short, the continuing performance contract enabled BEZ to enjoy a selective advantage that it would not have been given if MVM had acted like a market party. According to the Court, the Commission had rightly found that BEZ had to repay the advantage thus obtained.

Conclusion
Earlier (in 1999) the Court had already ruled that state aid may be involved if the government purchases more from a company than it actually needs. If a company concludes a continuing performance contract with the state for a long (or unpaid) period, on grounds of which fixed quantities are purchased at a fixed price, this can also constitute state aid.

As indicated by the Hungarian case outlined above, any advantage enjoyed in violation of the state-aid regulations must be repaid by the benefitting company, increased with interest! It also emerges from the Residex decision that a contract which results in state aid can be found void. Given these risks, companies are strongly advised to carefully check contracts with the government, even if these contracts appear normal, for any possible state-aid aspects.

Sjaak van der Heul

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