Introduction
Normally the cost of compliance with mandatory regulations may not be offset, partially or fully, by State aid because it lacks incentive effect. The beneficiaries would have to incur those costs anyway.
However, even in the case of mandatory compliance, State aid may still have an incentive effect if the undertakings concerned would cease altogether the activity in question.
A case in point is a recent Commission decision that approved a State aid measure implemented by Slovakia to compensate Towercom, a broadcasting company, for the cost of releasing the 700 MHz frequency band [see decision on SA.55953].
This frequency band was used until recently for digital terrestrial television [DTT]. However, there has been a coordinated change across the EU, following EU Council decision 2017/899, to allocate that band to broadband services.
Perhaps it should also be explained right at the outset why a company needs to be compensated for releasing a frequency band. The explanation is made up of three parts. First, by giving up that frequency band, Towercom would have to switch to another band. But the switch required substantial investment in the appropriate equipment using a different technology.
Second, the revenue from using the new band to continue broadcasting was not sufficient to cover the additional investment cost.
Third, one may wonder why State aid was necessary to incentivise a switch in frequency when the switch was mandatory. The reason was that without the aid Towercom would simply stop broadcasting in the new frequency. But that would have a social impact. It would deprive many viewers from access to terrestrial television.
In Slovakia, fewer than 10% of television viewers relied on terrestrial broadcasting [free-to-air television]. Therefore, Slovakia decided to grant State aid to prevent Towercom from opting not to broadcast in the new frequency.
Amount and form of aid and eligible costs
The budget for the measure was EUR 11.7 million and was to be provided in the form of a direct grant. The aid would cover all extra costs of the new equipment at all stages of broadcasting.
Presence of State aid
The measure was funded by state resources and would certainly affect trade and distort competition. What is more interesting was the Commission’s assessment of the presence of a selective advantage.
“(45) An advantage within the meaning of Article 107(1) TFEU is an economic benefit, which a beneficiary would not have received under normal market conditions, in the absence of State intervention. The advantage may take the form of a positive financial support but also any measure that mitigates the charges, which are normally included in the budget of an undertaking. Among the charges that are normally included in the budget of an undertaking are costs arising from regulatory measures inherent in the exercise of a regulated economic activity.”
“(46) In the present case, aid is granted to Towercom, namely an undertaking that offers television transmission services, which constitute an economic activity, and mitigates charges which should normally be included in the budget of that undertaking. In particular, the Measure intends to compensate costs that arose from regulatory measures, namely the decision of the Slovak authorities to change the assigned frequency channels and the DTT network parameters, taken during the period of validity of the relevant on-going DTT authorizations. Obligations arising from these regulatory measures placed on Towercom are inherent to its economic activity. They pertain to holding of authorisations to use frequencies, the initial validity of which went beyond the deadline set by the EPaC decision.”
“(47) In line with previous cases, the Commission considers that the Measure relieves Towercom from costs that are inherent in its business. In the absence of the Measure, the operator would have been obliged to bear all the costs linked to the release of the 700 MHz band stemming from regulatory measures. Therefore, the Commission concludes that the Measure confers an economic advantage to Towercom.”
With respect to the selectivity of the measure, the Commission held that “(49) the only beneficiary of the Measure is Towercom, namely an undertaking active in the sector of television transmission services, which operates via the DTT network. Given that the present case concerns an individual aid measure, the identification of the economic advantage […] is sufficient to support the presumption that the measure is selective. In any case, it does not appear that other operators transmitting television services via other means such as satellite, cable or IPTV benefit from the Measure. Therefore, the Commission concludes that the Measure is selective.”
Compatibility with the internal market
The article reviews below the most important aspects of the Commission’s assessment, in view of the fact that the aid had a compensatory element.
Incentive effect
“(62) To be compatible with the internal market, the Measure must have an incentive effect. To that end, it must be demonstrated that, in the absence of the Measure, the investment intended to implement the project at issue would not take place or would take place later or in a restricted manner. If that same investment would take place even without the Measure, the conclusion should be that the aid serves merely to improve the financial situation of the recipient undertaking, without, however, meeting the requirement in Article 107(3)(c) TFEU that it is necessary for the development of certain activities.”
“(63) The following indicates that the Measure gave an incentive to complete the release of the 700 MHz band in line with the deadline set by the EPaC Decision.”
“(64) Available information indicates that, without the aid, Towercom would have had no incentive to undertake the changes resulting from the release of the 700 MHz band, thereby jeopardising continuity and availability of DTT services for end-users following the release of the 700 MHz band imposed by the EPaC Decision. In particular:
(a) Towercom held TOAs for mux1 until 31 May 2021 and for multiplexes 2- 4 until 9 September 2029 (see recital (10)). Towercom was required to carry out its DTT transmission activity in accordance with the technical parameters in the TOAs (see footnote 3), which included the use of the 700 MHz band. The regulatory change intervened during the period of validity of the relevant authorisations, which were granted when the regulatory changes were not in sight;
(b) Towercom would have not invested in the replacement of frequency-related equipment, in the switch to a more advanced transmission and encoding standard for mux1 or in information campaigns, considering the declining trend of the Slovak DTT market, the low DVB-T2 penetration in Slovakia. Moreover, Towercom could not expect to recoup the costs of switching to DVB-T2 given the lack of interest from the broadcasters (recital (12));
(c) Towercom commissioned the first relevant equipment for the migration only following the publication of the draft legislative text establishing the conditions for the award of compensation subject of this Decision (thus, following the awareness that, in principle and subject to the conditional clause in the legal base concerning approval under State aid rules, Towercom would qualify for compensation) (recital (20)).”
“(65) Based on the above, the Commission concludes that it is the Measure that incentivised Towercom to undertake the necessary investment for the release of the 700 MHz band.”
Necessity of the aid
The necessity of the aid is often confused with the incentive effect. There is, however, a big difference between them. The former indicates the need for state intervention to achieve a public policy objective that is unobtainable by the market itself. The latter demonstrates that the aid changes the behaviour of the recipient.
“(73) State aid should be targeted towards situations where aid can bring about a material improvement that the market alone cannot deliver.”
“(74) The Commission has recognised in previous cases that access to, and use of, radio spectrum and frequencies are regulated by the national authorities. It is the authorities that decide, in accordance with the Union and national regulatory framework, under which conditions rights to use frequencies are assigned, including technical requirements such as the transmission standard that must be used. Hence, market players may not consider the positive effects of (positive externalities) freeing up frequencies and modifying network configurations, including transmission standards. That is because they should normally have planned to carry out their activity when receiving the rights to use spectrum for the duration for which those rights were granted, and in light of the conditions under which those rights of use were assigned.”
“(75) The Commission acknowledges that the decision to release the 700 MHz band by June 2020 is a regulatory measure, coordinated at Union level, therefore not in the hands of the market. Therefore, considering the lack of commercial interest by Towercom in switching DTT transmission standard in the timeframe set by the release of the 700 MHz band in Slovakia (recital (64)), and the explained absence of positive effects at all for Towercom of migrating to different frequencies (see recital (13)), Towercom would not have decided on its own to retune frequencies and transmitters. In Slovakia, DTT services are marginal (see recital (9)), their market share is declining (recital (12)(a)) and DVB-T2 penetration is low (recital (13)(b)). Moreover, Towercom could not expect to recoup the costs of switching to DVB-T2 given the lack of interest from the broadcasters (recital (12)(b)). In thiscontext, in the absence of the regulatory change, Towercom would have had no incentive to undertake the investments needed to release the 700 MHz band and migrate to the sub-700 Mhz band in the timeframe set by the EPaC Decision (as confirmed at the national level). Without the regulatory measure which imposed the release of the 700 MHz band, the parameters for broadcasting channels in all multiplexes would not have been modified, enabling Towercom to continue carrying out the DTT transmission activities as before. With specific reference to the switch of the transmission standard of mux1 from DVB-T to DVB-T2, the Slovak authorities explained that such switch was needed to avoid problems of massive interference (see recital (23)(b)), which would have caused disruption in the provision of DTT services, thereby jeopardising the objective of the Measure (see recital (3)). Finally, according to the Slovak authorities, following on the release of the 700 MHz band, Towercom did not generate additional revenues but incurred additional costs (see recital (13)).”
“(76) As concerns costs to be supported through the Measure, the Slovak authorities demonstrated, including based on an independent technical report (recital (32)), that all eligible costs are directly and necessarily related to the release of the 700 MHz band. In particular, the Slovak authorities demonstrated for each cost item the technical reasons for the necessary investment, notably based on the independent technical report (recitals (33)-(36)). The Slovak authorities commissioned the report from an independent expert and based on it the identification of the eligible costs. In addition, the information campaign constitutes a cost directly related to the release of the 700 MHz band as it aims to inform end users of the then upcoming changes resulting from the release of the 700 MHz band decided by the authorities (see recital (22)).”
Conclusions
The aid measure was appropriate, proportional and would not cause any undue negative effects on trade and competition. Therefore, the Commission concluded that the aid was compatible with the internal market.
Normally, the state may not compensate undertakings for costs they have to incur for complying with regulatory obligations. However, the lesson to be drawn from this case is that even when costs are incurred as a result of mandatory obligations, State aid may be necessary if in the absence of aid, the regulated activity would cease altogether.
The full text of the Commission decision can be accessed at:
https://ec.europa.eu/competition/state_aid/cases1/202425/SA_55953_170.pdf
