Introduction
In some Member States, the provision of potable water to households is a “closed” sector. This means that public funding of the operations of the water provider does not constitute State aid. However, according to the case law of the Court of Justice, for a sector to be considered closed to trade and competition it is not sufficient that legal monopoly rights or exclusive rights are conferred to an undertaking. Competition in the sector and for the sector must be precluded by law (and public funding may not cross-subsidise any economic activity outside the sector).
Recently, the Commission approved rescue aid that was granted by Italy to Sorical, the water provider in the region of Calabria [see SA.108998].[1] What makes this case interesting is that Sorical was the only water operator in the region and no other operator was allowed to provide competing services. Yet the rescue aid was considered to be State aid.
Under Italian law, surface water and groundwater are considered public resources. Hence, they belong to the state, which may entrust, through concessions, their management to companies. Italian law also requires that regions entrust water services to a single operator who may be an in-house entity or an external entity chosen through a public tendering procedure.
In June 2003, the Calabria region signed a concession agreement with Sorical for the supply of drinking water services. Later, this agreement was widened to cover the provision of “(4) integrated water management service, including the collection, supply and distribution of water for civil use, sewerage, purification and administrative management of utilities […] of the civil and industrial wastewater within the optimal territorial area of Calabria.”
The Calabria region acquired sole control over Sorical by owning 53.5% of its EUR 13.4 million share capital directly. In 2022, Calabria entrusted exclusively to Sorical, as an in-house-provider, the management of the water system in the region, including water treatment, sewage and waste-water treatment.
Since 2010, Sorical has experienced financial difficulties with increasing indebtedness and decreasing liquidity. When the measure was notified to the Commission, Sorical was practically insolvent. Therefore, the purpose of the measure was to rescue Sorical by lending it EUR 110 million at an interest rate of 1-year IBOR plus 4%.
The Commission assessed and approved the rescue loan on the basis of the Rescue & Restructuring Guidelines. However, what is more interesting is the Commission’s assessment of the presence of State aid and in particular the possible affectation of trade and distortion of competition. This is because, even though Sorical is the sole provider of water services in the region, the sector is not closed in the meaning explained above.
Presence of a selective advantage and affectation of trade
The Commission, first, explained that “(22) Sorical could not obtain – and is barred from obtaining – financial resources from financial institutions for the entire amount of the rescue aid loan […], and Italy does not claim that the loan to Sorical is granted at market conditions. Indeed, Sorical risks immediate market exit, as it cannot meet debt payments already overdue nor immediate dues essential for the continuation of its activity. Therefore, the rescue loan provides an advantage totalling the planned loan amount in the form of necessary liquidity that Sorical could not obtain at market conditions.”
“(23) The rescue loan will be granted to a single beneficiary through the exercise of discretion for an ad hoc amount determined by reference to the beneficiary’s specific liquidity needs. The rescue loan is not part of a broader general economic policy measure to provide support to undertakings in a comparable legal and economic situation. As the Court has stated, where individual aid is at issue, the identification of the economic advantage is, in principle, sufficient to support the presumption that a measure is selective.* This is so regardless of whether there are operators on the relevant markets that are in a comparable factual and legal situation. Therefore, the Commission concludes that the rescue aid is selective within the meaning of Article 107(1) TFEU.”
* Here the Commission cited the landmark judgment of the Court of Justice in case C-15/14 P, Commission v MOL, paragraph 60.
“(24) There was competition for the selection of a private shareholder, […], immediately before Sorical was entrusted with the provision of the drinking water services, even if there is no actual competitor at present in the regional market. Furthermore, if Sorical exited the market, which the rescue aid aims at avoiding, the services that Sorical now provides would eventually be entrusted either to an undertaking selected via an open public tender procedure or to another in-house provider. To ensure the respect of the principle of competition, the national rules on public procurement would require public authorities to motivate their choice of using an in-house provider instead of launching a call for tenders.”
“(25) Furthermore, the 2022 concession agreement provides that Sorical should ensure, in addition to the drinking water service that it had already been providing, the sewage and wastewater treatment services in the region, which so far have been supplied by the municipalities […] Therefore, the notified rescue aid – and thereafter the announced restructuring aid –, by averting the judicial liquidation of Sorical, allows the company, not only to stay in business in the market for drinking water services, but also to substitute the municipal undertakings that today provide the sewage and wastewater treatment services related to the drinking water that Sorical supplies. As a consequence, in the specific circumstances of the present case, the rescue loan also distorts (potential) competition on this service market that is downstream of drinking water service provision within Calabria.”
“(26) Therefore, the fact that Sorical’s activities may be held to be natural monopolies does not exclude that there may be competition for the market, and that the rescue loan threatens to distort competition.** This finding is in line with the decisions taken by the Commission on the rescue and restructuring of Abbanoa S.p.A., which provides water services in the Sardinia region.***
** At this point, footnote 12 states: “Because the rescue loan precludes likely competition for the market by averting the likely risk of ceasing of operations of Sorical, the presumption excluding potential distortions of competition in certain cases set out in point 188 of the Commission Notice on the notion of State aid […] does not apply.”
Point 188 states as follows:
“188. The fact that the authorities assign a public service to an in-house provider (even if they were free to entrust that service to third parties) does not as such exclude a possible distortion of competition. However, a possible distortion of competition is excluded if the following cumulative conditions are met:
(a) a service is subject to a legal monopoly (established in compliance with EU law);
(b) the legal monopoly not only excludes competition on the market, but also for the market, in that it excludes any possible competition to become the exclusive provider of the service in question;
(c) the service is not in competition with other services; and
(d) if the service provider is active in another (geographical or product) market that is open to competition, cross-subsidisation has to be excluded. This requires that separate accounts are used, costs and revenues are allocated in an appropriate way and public funding provided for the service subject to the legal monopoly cannot benefit other activities.”
*** See SA.33981 and SA.35205 on rescue aid and restructuring aid, respectively, for Abbanoa.
“(27) Although the services and goods provided by Sorical are not traded or tradeable outside the Calabria Region, other undertakings active in the water sector in Italy or other Member States – such as Veolia, the former indirect co-shareholder of Sorical – could eventually (even if not immediately) substitute Sorical if, in the absence of the rescue loan, it ceased operations. The rescue loan is capable of affecting trade between Member States because, by maintaining Sorical in operation, it reduces the opportunities for undertakings established in other Member States to offer their services in Calabria.”
“(28) The Commission therefore concludes that the rescue loan in favour of Sorical involves State aid within the meaning of Article 107(1) TFEU”.
Conclusions
Assigning legal monopolies rights or conferring exclusive rights to an undertaking does not necessarily exclude the possibility that trade and competition may be affected directly or indirectly.
To exclude affectation of trade, competition on the market and competition for the market must be precluded by law. If the beneficiary – i.e. the legal monopoly – carries out economic activities outside the closed sector, it must also have in place an accounting system that can preclude cross-subsidisation of those activities.
[1] The full text of the Commission decision can be accessed at:
