1. Introduction
In 2021, the discussion around energy was even more relevant due to the global energy crisis, caused by the covid-19 pandemic and Russia’s invasion of Ukraine. In these circumstances, social discounts are incredibly important to fulfill the European Union’s goal of universal access to energy. The judgment discusses the issue of non-discrimination of public service obligations, under Article 3(2) of Directive 2009/72. This directive aims to regulate internal market competition in the EU market of energy, ensuring consumer protection and that all member states act according to fair competition. The decision serves as a reference to governments and stakeholders in the EU, by safeguarding that public policies are in accordance with competition rules in the EU, providing consistency, predictability and equity.
2. Factual Background
The case concerns a dispute between the energy company “Viesgo Infraestructuras Energéticas SL”, the Spanish Government and twenty-two other energy companies in Spain, regarding the legality of an administrative “public service obligation”.
The dispute began on 21 November of 2018 when the “Real Decreto 968/2014” established a methodology for allocating the costs of a reduced rate tariff, applied to vulnerable consumers[1], to a group of companies that were simultaneously responsible for production, distribution and commercialization of energy[2] (vertically integrated companies or parent companies[3]). These companies had the obligation of funding a social welfare, as a “public service obligation”, under Article 3(2) of Directive 2009/72/EC.[4] The vulnerable consumers would receive a reduction in the cost of electricity, lowered in their energy bill by the “supplier of last resort”[5]. In accordance with Decree IET/350/2014, four companies would cover 96.64% of the costs of the social discount, while smaller companies had to cover less than 1%.
3. Legal Background
The case originated in an administrative law proceeding, on 18 December of 2014, by “Viesgo Infraestructuras Energéticas SL” that petitioned to an annulment of “Real Decreto 968/2014”, in the Supreme Court of Spain. The claimant stated that the methodology issued by the Spanish Government to support the discount[6], was incompatible with Directive 2009/72/EC”, since it was discriminatory[7].
On 24 October 2016, The Supreme Court of Spain ruled that the system created by Royal Decree 968/2014 wasn’t applicable since it was incompatible with Article 3(2) of Directive 2009/72, considering previous judgements of the CJEU: Federutility and Others (2010) and ANODE (2016). These judgments allowed public service obligations in EU gas companies only if they were transparent, clearly defined, verifiable and non-discriminatory.[8] The court decided that the judgement on the gas companies could be directly transposed to the electricity sector, since the directives regulating the EU markets of gas and electricity were comparable[9] [10].
However, the General State Administration appealed to the “Tribunal Constitucional”, the Constitutional Court of Spain, for alleged violation of the right to effective judicial protection (Article 24.1 EC) and the right to a fair trial (Article 24.2 EC). Consequently, the Court found that the previous case law of the CJEU concerned different EU directives (2003/55/EC and 2009/73/EC), and the issues raised were different from the financing of a social electricity discount under the Spanish system.[11] Consequently, the Constitutional Court concluded that the Supreme Court should have requested a preliminary ruling.[12]
Therefore, the Tribunal Supremo decided to refer two questions of interpretation to the CJEU:
“(1) In accordance with the case-law established by the Court of Justice, inter alia, in the judgments of 20 April 2010, Federutility and Others (C-265/08; EU:C:2010:205), and of 7 September 2016, ANODE (Case C-121/15, EU:C:2016:637) is national legislation – such as that established in Article 45(4) of [Law 24/2013] and subsequently implemented by Articles 2 and 3 of [Royal Decree 968/2014] – under which the financing of the [“social discount”] [regulated discount for electricity for certain vulnerable consumers; “the regulated discount”] falls on certain actors in the electricity system, namely the parent companies of company groups or, where applicable, companies that simultaneously carry on electricity production, distribution and retail activities, compatible with the requirements laid down in Article 3(2) of Directive [2009/72], where some of those actors carry very little weight in the sector as a whole, and where, by contrast, other entities or company groups that may be in a better position to bear that cost, either due to their turnover, relative size in a business sector or because they carry on two of those activities simultaneously on an integrated basis, are exempt from that burden?
(2) Is national legislation according to which the obligation to finance the regulated discount is not established on an exceptional basis or limited in time, but indefinitely and with no refund or compensatory measure whatsoever, compatible with the requirement of proportionality established in Article 3(2) of Directive [2009/72]?”[13]
4. Legal reasoning of the judgment
The CJEU began by clarifying if the obligation under discussion corresponded to a public service obligation (PSO), under Article 3(2) of Directive 2009/72. It defined PSO’s as “public intervention measures (…), for the purpose of pursuing a general economic interest, to act on that market on the basis of criteria imposed by the public authorities”.[14] Consequently, it concluded that the obligation of the Spanish energy companies was a PSO[15], since they were forced to limit their commercial freedom to protect the interest of vulnerable consumers.[16]
In response to the first question, the Court evoked article 106 TFEU that allows member states to impose public service obligations in the electricity market. Inclusively, it highlighted its past settled judgment (ANODE, C-121/15) on the regulation of the internal gas market, regarding the compatibility of regulated tariffs with EU energy market liberalization rules, to reiterate that there are three conditions of acceptability under Directive 2009/72: the respect for the principle of proportionality, the objective of “general economic interest”, “clearly defined, transparent, non-discriminatory and verifiable regulations” and the “guarantee of equality of access for EU electricity undertakings to national consumers”.[17]
The Court highlighted that in the context of non-discrimination, public service obligations should be imposed in “general” and not “specifically”, under Article 3(2) of Directive 2009/72. If conducted, the differentiation must be “objectively justified”.[18]
The ratio of the differentiation made by the Spanish government is explained by the intention of minimizing the economic consequences of the obligation. Companies that conduct simultaneously production, distribution and retail carry out the main commercial activities of the electricity sector, thus, allowing for the burden of the public service to be distributed.[19]
However, the referring court stated that companies not under the obligation of financing the public service measure could be in a better position to contribute, because of their higher turnover and share in the market. Nevertheless, because they only carried one or two of the services provided in the energy market, they were excluded. Moreover, some of the companies under the obligation were not as crucial in the electricity sector.[20]
As a result, the CJUE concluded that the measure was not “objectively justified”, since the intention of distribution of its cost was undermined by the exclusion of companies that had at least one main activity in the electricity sector.[21]
Concerning the second question, the Court reiterated that the principle of proportionality is essential in cases where the state intercedes in the electricity market. Inclusively, the CJEU revisited past judgments (2010) Federutility and Others, C-265/08 to highlight cases of state intervention, such as the issuing of “reference prices”. The Court decided that this obligation may limit the freedom of companies in order to achieve general economic interests. Nevertheless, it could only be pursued but in a limited period, which would entail “periodic re-examination” of the necessity of such limit, that must be conducted by the national courts.[22]
However, the “periodic examination” only concerns the “necessity of intervention” of the electricity prices and the “means” of such intervention (regulated prices), not the “financing method/system” (how the discount is funded), because it does not affect the electricity prices independently. Inclusively, the general economic interest, the objective that must respect proportionality under Directive 2009/72, is pursued through the price regulation and not the financing system.[23] Consequently, the principle of proportionality cannot be interpreted.
Regarding the first question as an obligation for “periodic re-examination” of the “method of financing”.
Lastly, the Court considered that member states are not required to grant financial compensation for public service obligations, since Article 3(2) of Directive 2009/72 does not mention “compensatory measures”.
5. Critical assessment
The interpretation of the Court reinforced the importance and balanced the principles of proportionality, non-discrimination and transparency in EU law, by clearly defining and imposing these rules and enabling common standards in the regulation of the market. Inclusively, it confirmed the right of member states to prioritize social policies, under certain conditions. Moreover, with the changes to come in EU regulations due to the Green Transition agenda, the case reinforces the importance of fair mechanisms for this type of market regulation.[24]
Regarding the first question, the Court seems to prioritize objective criteria and formal equality in the distribution of the financial burden over equity. It reiterates the lack of objective justification for the difference in treatment of the companies. However, it does not seem to deeply investigate such differentiations or fully define what it deems as objective. The Court does not touch on the advantage of the economies of scale of larger companies that carry all stages of production. It presents as an argument the recognition by the Spanish Government, in the main proceedings, that companies with only retail and production services also benefited from cost advantages.[25] However, it does not consider that companies that hold all stages of production (bigger scale of operation) still have a considerable advantage in the reduction of the cost of their enterprise, due to the larger ability to redistribute costs. Although the differentiation might not be entirely equal, the Court could be completely dismissing the influence and market dominance of larger companies (monopolistic hold). According to the “European Network of Corporate Observatories” (2020), “Spain is a paradigmatic example of how private companies can form a cartel to control a strategic sector such as electricity”.[26]
A 2023 international investigation on the Spanish electricity lobby[27] even references how finding legal problems with the policies of the Spanish Government is a common practice, to avoid regulations that do not benefit the large companies.[28]
Regarding the second question, on the necessity of “periodic re-examination”, the CJUE conclusion seems to put companies in an unproportionate disadvantage in comparison to others not burdened by the PSO, contrasting with the severe defense of fair treatment and proportionality in the first question. The response to the second question allows for a mechanism where companies may have to sustain an indefinite burden if the necessity of the obligation is not scrutinized, taking into consideration the volatility of markets, and the economic and social moment. As previously stated, the Court draws a line between the “financing mechanisms” used by Spanish government and the “price regulations”. However, it could be argued that this distinction is forced since both the regulated prices and the mechanism for their financing are interconnected and highly relevant to the energy markets. The financing mechanism is what allows for the reduction of the price, thus affecting the market. It may not affect prices “autonomously”[29], however, based on the possibility of strain on the economic capacity of the chosen companies, it could affect the long-term application of price regulation. Inclusively, without a financing mechanism there would be no pursuit of a general economic interest, since the only purpose of the creation of this mechanism is to aid vulnerable consumers. Consequently, the financing mechanism should be under the same level of examination as the price regulations.
6. Conclusion
The decision is important as it reinforces the importance and balances the principles of proportionality, non-discrimination and transparency in EU law. However, the lack of objective justification of the difference in treatment of the companies, that does not account for the influence and market dominance of larger stakeholders, as well as the forced distinction between the regulated prices and the mechanism for their financing, may undermine the objectives of proportionality and non-discrimination of the judgment.
[1] Under article 3(7) of the Electricity Directive it is defined that “Member State shall define the concept of vulnerable customers which may refer to energy poverty and, inter alia, to the prohibition of disconnection of electricity to such customers in critical times”. (Directive 2005/29/EC of the European Parliament and of the Council of 11 May 2005 concerning unfair business-to-consumer commercial practices in the internal market [2005] OJ L149/22;
Inclusively, under Article 59 of 2019 EU Electricity Directive, defines energy poor households as those that “are unable to afford those energy services due to a combination of low income, high expenditure on energy and poor energy efficiency of their homes” Directive (EU) 2019/944 of the European Parliament and of the Council of 5 June 2019 on common rules for the internal market for electricity and amending Directive 2012/27/EU [2019] OJ L158/125;
Article 45 (1) of Spanish Law Ley 24/2013 del Sector Eléctrico (Law 24/2013 on the electricity sector) of 26 December 2013 states that “Electricity consumers shall be regarded as vulnerable customers if they meet social, consumption and purchasing power characteristics to be determined. In any event, the measure is restricted to natural persons in their habitual residence”. Directive (EU) 2024 of the European Parliament and of the Council concerning common rules for the internal market in natural gas [2024] OJ).
According to the AN Evaluation Report from the European Commission, the Spanish definition of such consumers is considered under the following criteria: “a large family or a family where all members are unemployed; be low voltage consumers (less than 1 kV) with contracted demand lower than or equal to 3 kW; or a pensioner older than 60 years with a minimum level pension.” European Commission, Commission Staff Working Document: Evaluation Report Covering the Evaluation of the EU’s Regulatory Framework for Electricity Market Design and Consumer Protection in the Fields of Electricity and Gas;(Directive 2005/89), SWD(2016) 412 final, 30 November 2016.
[2] Ibid, para 13.
[3] “Form of business organization in which all stages of production of a good, from the acquisition of raw materials to the retailing of the final product, are controlled by one company.” Encyclopedia Britannica, ‘Vertical Integration’ (Britannica) https://www.britannica.com/money/vertical-integration, accessed: 10.12.2024.
[4] Advocate General Bobek, ‘Opinion of Advocate General Bobek delivered on 15 April 2021 in Case C- 683/19 Viesgo Infraestructuras Energéticas SA v Administración General del Estado and Others’ (CJEU).
[5] Companies that ensure the continuity of supply for energy consumers, at fair prices (“tariffs of last
resort”). Ibid, para 10.
[6] “Provided for in Article 45(4) of Law 24/2013 and implemented by Articles 2 and 3 of Royal Decree 968/2014.” Viesgo Infraestructuras Energéticas SL v Administración General del Estado and Others (Case C-683/19) EU:C: 2021:847 [11] (CJEU, 14 October 2021), para 8.
[7] Viesgo Infraestructuras Energéticas SL v Administración General del Estado and Others (Case C-683/19) EU:C: 2021:847 [8] (CJEU, 14 October 2021).
[8] Federutility Assogas, Libarna Gas SpA, Collino Commercio SpA, Sadori Gas Srl v Autorità per l’energia elettrica e il gas (Case C-265/08) [2010] ECR I-03377 [47] (CJEU).
[9] Viesgo Infraestructuras Energéticas SL v Administración General del Estado and Others (Case C-683/19).
EU:C: 2021:847 [9] (CJEU, 14 October 2021).
[10] Under article 267(3) of the Treaty on the Function of the European Union (TFUE), if the issue has already been clarified by previous rulings of the CJEU, the case can be ruled as an “acte éclaire”, instances where national courts are not obliged to submit a question to the CJEU (a preliminary ruling). Rafał Mańko, Preliminary Reference Procedure (EPRS | “European Parliamentary Research Service”, July 2017) PE 608.628 EN.
[11] Judgment 37/2019, Spanish Constitutional Court, 26 March 2019, BOE No 99, 25 April 2019, ECLI:ES:TC:2019:37.
[12] Viesgo Infraestructuras Energéticas SL v Administración General del Estado and Others (Case C-683/19)
EU:C: 2021:847 [11] (CJEU, 14 October 2021).
[13] Ibid (para 19).
[14] Ibid (para 31).
[15] Ibid (para 32).
[16] Ibid (para 33).
[17] Ibid (para 44).
[18] Ibid (para 45).
[19] Ibid (para 47).
[20] Judgment 37/2019, Spanish Constitutional Court, 26 March 2019, BOE No 99, 25 April 2019, ECLI:ES:TC:2019:37.
[21] Ibid (para 50).
[22] Ibid (paras 54-55).
[23] Ibid (para 57).
[24] “Developing market-based support schemes for renewable energy and energy efficiency investments.”. European Commission, Green Transition (European Commission) https://reform- support.ec.europa.eu/what-we-do/green-transition_en, accessed 19.12.2024.
[25] Ibid (Para 51).
[26] “Do Spanish private corporations have greater power than those of Germany or France? The answer is yes. It is important to understand that the current situation is the result of a historical process in which private companies have always played a central part since the dawn of electrification.”
“The almost hundred-year-long control of this oligopoly has allowed it to influence and co-dictate the laws governing the sector, disregarding regional laws designed to prevent energy poverty. It is thus inevitable that any attempt to transform the sector will collide with the interests of the electricity oligopoly.” “’Switching Off Spain’s Electricity Oligopoly: Three Proposals to Dismantle the Monopoly” (CorpWatchers, 25/06/2020) https://corpwatchers.eu/en/investigations/cities-versus- multinationals/switching-off-spain-s-electricity-oligopoly-three-proposals-to-dismantle-the accessed [10.12.2024].
[27] “Radiography of the energy lobby” Míriam Martos, “An Investigation Uncovers the Pressures from Energy Companies to Maximize Profits” (30 October 2023) https://nonprofit.xarxanet.org/news/investigation-uncovers-pressures-energy-companies-maximize-profits
[28] “All of this allowed them (bigger energy companies in Spain) to finish 2022 with combined revenues exceeding 120 billion euros, making it one of the richest sectors. Despite these enormous economic figures, it is not enough for the energy companies, and they implement maximum pressure in legal, media, and political forms to influence decisions related to energy.” Ibid.
[29] Viesgo Infraestructuras Energéticas SL v Administración General del Estado and Others (Case C- 683/19) EU:C: 2021:847 [11] (CJEU, 14 October 2021) (para 57).
