Dramatic Developments in European State Aid Law

Triniti

In its recent 01.10.2015 decision, Dunamenti Erömü v Commission (C 357/14 P), the European Court found that the investment made by a private investor in 1995 contained prohibited state aid as from Hungary’s accession to the European Union on 01.05.2004. By this decision, the Court also changed the earlier single economic unit doctrine, distinguishing between the parent company’s and the subsidiary’s liability.

Sale of Energy at a Fixed Price

In 1995, the Republic of Hungary decided to privatise Dunamenti Erömü, a state-owned electricity producer. In order to carry this through smoothly, Dunamenti Erömü and its parent company MVM entered into 15 and 20-year contracts, under which MVM was to buy a significant share of Dunamenti Erömü’s production at a regulated price. Once the contracts had been signed, 75% of the shares of Dunamenti Erömü were privatised to the Belgian company Electrabel SA. 25% remained in the possession of MVM.

Prohibited State Aid

The contracts caught the attention of the European Commission. In its decision of 2009, the Commission found that long-term contracts for the sale of energy in fixed quantities and at a fixed price, which covers fixed costs, variable costs and the cost of capital, are in essence a guarantee of the investment and as such prohibited state aid. Moreover, the Commission found that the beneficiary was Dunamenti Erömü and not Electrabel SA.

Reasonable Market Investor

Dunamenti Erömü appealed against the Commission’s decision, claiming inter alia that when entering into the contracts, Hungary acted as a reasonable market investor, as this allowed to get the highest price for the sale of the 75% of the shares. Dunamenti Erömü further claimed that by paying the highest sale price for the shares, Electrabel SA compensated for any potential state aid already in advance.

The Abandoned Single Economic Unit Doctrine

According to the decision of the European Court, Electrabel SA did not receive any prohibited state aid, as it paid the best possible market price for the shares. This, however, did not change the Court’s view that it was still the subsidiary Dunamenti Erömü that received prohibited state aid.

With this position, the Court abandoned the former single economic unit doctrine, according to which a parent company, which directly or indirectly intervenes in the management of its subsidiary, is in fact involved in the subsidiary’s economic operation. In its earlier decisions, the Court has found that in the context of state aid, business operators which have been established separately but which are operating jointly must be viewed as a single economic unit. It is clear that if the Court had made the decision in the Dunamenti Erömü case also based on the single economic unit doctrine, it would not have been prohibited state aid precisely because any potential state aid was included in the privatisation price which Electrabel SA had already paid in 1995.

Summary

The decision of the European Court contains a fundamental conflict between the Community’s free competition and the private investor’s legitimate expectations and interests of legal certainty. This conflict could be avoided by more consistent application of European state aid law. Unfortunately, abandoning the single economic unit doctrine does not serve this purpose to any significant degree, and the more the investors operating on the market are required to exercise utmost caution when it comes to matters of prohibited state aid.

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