In the field of bus or rail transportation, Member States may impose either public service obligations through a contract or regulate prices through general rules.
Providers of transport services are entitled to compensation only if they are financially worse off as a result of compliance with public service obligations.
Introduction
It is now a well-established principle in the case law and decisional practice of the European Commission that sectoral or professional regulation is not necessarily equivalent to the imposition of public service obligations. Although it is true that regulatory acts, such as those that apply to legal or medical professions, identify certain services as being in the general interest and lay down certain behavioural requirements, they do not impose an obligation to provide services to particular persons or in particular regions. Indeed the simplest way to distinguish between sectoral or professional regulation and public service obligations is that the latter make it compulsory for one or more undertakings to provide a service to a pre-determined group of persons.
In its judgment of 8 September 2022, in case C‑614/20, Lux Express Estonia v Majandus- ja Kommunikatsiooniministeerium, the Court of Justice clarified that the compulsion can be laid down in a form of a contract or by “general rules” in case of price regulation.[1]
The judgment arose from a request for a preliminary by an Estonian court that asked for guidance on the interpretation of Regulation 1370/2007 on transport by rail and road. The case concerned a dispute on the definition of public service obligations and the scope of the compensation for the extra costs of fulfilling those obligations.
Lux Europe, a bus company, had initiated legal proceedings against Majandus- ja Kommunikatsiooniministeerium, the Ministry of the Economy and Communications of Estonia, because the latter refused to compensate it for the costs it incurred in carrying certain categories of passenger free of charge. Under the relevant Estonian law, licensed bus operators were required to transport children and disabled persons for free without being entitled to compensation. The claimed revenue loss by Lux Europe was about EUR 2 million.
Lux Express argued, inter alia, that that requirement constituted a public service obligation within the meaning of Article 2(e) of Regulation 1370/2007 and, therefore, it was entitled to compensation. By contrast, the Ministry was of the view that Regulation 1370/2007 was not applicable because Lux Express had not entered into a public service contract with any competent authority. Being a regulated or licensed operator was not the same as being under a public service obligation.
Please note that Regulation 1370/2007 has been amended by Regulation 2016/2338.
The scope of the public service obligation
In particular, the referring Estonian court asked whether Article 2(e) of Regulation 1370/2007 meant that the concept of “public service obligation” covered the obligation for free transportation of passengers without compensation.
The Court of Justice, first, recalled that “(34) according to the first subparagraph of Article 1(1) of Regulation No 1370/2007, the purpose of that regulation is to define how, […], competent authorities may act in the field of public passenger transport to guarantee the provision of services of general interest which are among other things more numerous, safer, of a higher quality or provided at lower cost than those that market forces alone would have allowed. In addition, it is apparent from Article 1(2) of that regulation that it applies to the national and international operation of public passenger transport services by rail and other track-based modes of transport and by road, except for services which are operated mainly for their historical interest or their tourist value.”
Then, the Court of Justice proceeded to examine the definitions laid down in Article 2 of that Regulation. “(35) Article 2(e) of Regulation No 1370/2007 defines the concept of ‘public service obligation’ as ‘a requirement defined or determined by a competent authority in order to ensure public passenger transport services in the general interest that an operator, if it were considering its own commercial interests, would not assume or would not assume to the same extent or under the same conditions without reward’.”
“(36) Under Article 2(b) of Regulation No 1370/2007, for the purposes of that regulation, ‘competent authority’ means ‘any public authority, or group of public authorities, of one or more Member States, which has the right to intervene in public passenger transport in a given geographical area, or any body vested with such a power’.”
“(37) Furthermore, it follows from Article 3 of that regulation that public service obligations may be the subject of either a public service contract or a general rule, within the meaning of Article 2(l) of that regulation, that is to say, a measure which applies without discrimination to all public passenger transport services of the same type in an area.”
Please note that in Regulation 1370/2007, the use of a “general rule” is a derogation from the normal approach of imposing public service obligations in the form of a contract. Moreover, this derogation is possible only for the purpose of price regulation such as the setting of maximum tariffs.
The Court of Justice went on to conclude that “(39) that obligation is defined or determined by a public authority of a Member State which has the power to intervene in public passenger transport, that is to say, by a ‘competent authority’ within the meaning of Article 2(b) and (e) of Regulation No 1370/2007, and, second, that obligation is established by means of a ‘general rule’ within the meaning of Article 2(l) of that regulation.”
“(40) Next, it follows from Article 34 of the ÜTS [the relevant Estonian law] that any transport operator providing regular transport services by road, inland waterway and rail must carry certain categories of passenger free of charge, inter alia, children of pre-school age and certain categories of persons with disabilities.”
“(42) Last, the referring court states that it is unlikely that an undertaking, if it were to consider its own commercial interests, would assume that obligation without consideration in return.”
“(43) In those circumstances, subject to the referring court’s definitive assessment of all the relevant factors, it must be held that, in so far as it imposes on any undertaking providing in the national territory a regular transport service by road and by rail to carry certain categories of passenger free of charge, inter alia, children of pre-school age and certain categories of persons with disabilities, Article 34 of the ÜTS lays down a ‘public service obligation’ within the meaning of Article 2(b) of Regulation No 1370/2007.”
Given that Regulation 1370/2007 refers to public contracts, the Estonian government counter-argued that Regulation 1370/2007 did not apply to transport operators who provided services outside of the framework of public service contracts.
The reply of the Court of Justice was that, first, “(45) the second subparagraph of Article 1(1) of Regulation No 1370/2007 does not distinguish public service obligations according to the manner in which they are established.”
Indeed, Article 1(1) refers to either “imposing or contracting for public service obligations”.
“(46) Second, as has been noted in paragraph 37 of the present judgment, it follows from Article 3 of Regulation No 1370/2007 that that regulation applies both to public service obligations laid down in a public service contract and to those imposed by means of general rules. Article 3(2) refers expressly to national measures, laid down in general rules, which establish maximum tariffs for certain categories of passenger. Those measures include the obligations to carry passengers free of charge, such as that laid down in Article 34 of the ÜTS.”
That is, regulation establishing maximum tariffs can also mean zero tariffs or free transportation.
The Court of Justice concluded that “(47) Article 2(e) of Regulation No 1370/2007 must be interpreted as meaning that the concept of ‘public service obligation’, […], covers an obligation for undertakings providing in the territory of the Member State concerned a public transport service by road and by rail – laid down in national legislation – to carry free of charge and without receiving compensation from the State certain categories of passenger, in particular, children of pre-school age and certain categories of persons with disabilities.”
Refusal of compensation
The referring court asked whether the competent authorities could refuse to pay compensation for the costs incurred in discharging a public service obligation.
The Court of Justice, first, observed that the “(49) question is based on the premiss that Regulation No 1370/2007 requires the competent authorities to provide compensation for the financial burdens resulting from public service obligations.”
“(51) In that regard, Article 3(1) of that regulation provides that, where a competent authority decides to grant the operator of its choice an exclusive right and/or compensation, of whatever nature, in return for the discharge of public service obligations, it must do so within the framework of a public service contract.”
“(52) That provision thus lays down the principle that public service obligations and the compensation relating thereto must be established in the context of a public service contract.”
“(53) By way of derogation from that provision, the first sentence of Article 3(2) of that regulation authorises the introduction, by means of general rules, of public service obligations which aim at establishing maximum tariffs for all passengers or for certain categories of passenger.”
“(54) Under the second sentence of Article 3(2) of Regulation No 1370/2007, the competent authority is to compensate public service operators for the net financial effect, positive or negative, on costs incurred and revenues generated in complying with the tariff obligations established through general rules in a way that prevents overcompensation. That compensation is to be granted in accordance with the principles set out in Article 4, Article 6 of that regulation and the annex thereto.”
“(55) It follows from the use of the imperative wording ‘the competent authority shall compensate’ that that provision imposes on the competent authorities not a mere option but an obligation.”
“(56) That interpretation is supported by the context of that article. The second subparagraph of Article 1(1) of Regulation No 1370/2007 refers to ‘the conditions under which competent authorities, when imposing […] public service obligations, compensate public service operators for costs incurred’. Article 2a(2) of that regulation deals with specifications of public service obligations and the ‘related compensation of the net financial effect of public service obligations’.”
“(61) The interpretation according to which Article 3(2) of Regulation No 1370/2007 does not merely set out an option, but imposes an obligation for the competent authorities to compensate for the costs incurred in discharging the public service obligations referred to in that provision is also supported by the objectives of the relevant EU legislation.”
Those objectives were to “guarantee safe, efficient and high-quality passenger transport services” and to “eliminate the disparities between transport undertakings from different Member States which may give rise to substantial distortions of competition”.
“(69) As is apparent from the first subparagraph of Article 1(1) and recital 4 of Regulation No 1370/2007, [the] objective [of eliminating disparities between transport undertakings from different Member States] is additional to that of guaranteeing through regulated competition the provision of services of general interest which are among other things more numerous, safer, of a higher quality or provided at lower cost than those that market forces alone would have allowed.”
“(70) The EU legislator acknowledged, in recital 34 of that regulation, that compensation for public services may prove necessary in the inland passenger transport sector so that undertakings responsible for public services operate on the basis of principles and under conditions which allow them to carry out their tasks.”
“(71) It follows from the foregoing considerations that Regulation No 1370/2007 requires the competent authorities to grant compensation for the financial burdens resulting from public service obligations.”
“(72) Next, as regards Article 4(1)(b)(i) of Regulation No 1370/2007, that provision provides that public service contracts and general rules are to establish in advance, in an objective and transparent manner, the parameters on the basis of which compensation, ‘if any’, is to be calculated.”
“(73) In that regard, there is nothing to indicate that, by that provision, the EU legislature intended to authorise the competent authorities to depart from the principle of compensation for the financial effect of compliance with tariff obligations established through general rules, laid down in Article 3(2) of that regulation.”
It seems that the Court of Justice believed that Regulation 1370/2007 did not allow Member States to escape from their duty to compensate transport providers by setting a tariff ceiling instead of imposing public service obligations through contracts.
“(74) As regards the expression ‘if any’, used in Article 4(1)(b)(i) of that regulation, it is apparent from the context of that provision that that expression refers to the possibility for the competent authorities, provided for in the second subparagraph of Article 1(1) and in Article 3(1) of that regulation, to choose, in the context of a public service contract, to grant operators, in addition to or instead of exclusive rights, compensation in return for the discharge of public service obligations.”
On the basis of the above reasoning, the Court of Justice concluded that “(75) Article 3(2) and Article 4(1)(b)(i) of Regulation No 1370/2007 must be interpreted as meaning that the competent authorities are required to compensate undertakings providing in the territory of the Member State concerned a public transport service by road and by rail for the net financial effect, positive or negative, on costs incurred and revenues generated in complying with the obligation for those undertakings, established through a general rule, to carry certain categories of traveller free of charge, in particular, children of pre-school age and certain categories of persons with disabilities.”
The extent of the public service compensation
Then, the referring Estonian court asked about the conditions that the granting of public service compensation must meet, especially with respect to State aid rules.
The Court of Justice pointed out that “(85), as set out in the first subparagraph of Article 1(1) of Regulation No 1370/2007, the purpose of that regulation is to define how, in accordance with the rules of EU law, competent authorities may act in the field of public passenger transport.”
“(86) It follows that, […], Regulation No 1370/2007 establishes a system which the Member States must comply with when they consider imposing public service obligations on undertakings in the land transport sector”.
“(87) As is apparent from Article 9(1) and recital 35 of Regulation No 1370/2007, public service compensation for the operation of public passenger transport services or for complying with tariff obligations established through general rules paid in accordance with that regulation is compatible with the internal market. That compensation is exempt from the prior notification obligation laid down in Article 108(3) TFEU.”
“(88) As regards compensation for the net financial effect, positive or negative, on costs incurred and revenues generated in complying with the tariff obligations established through general rules which aim at establishing maximum tariffs for certain categories of passenger, Article 3(2) of Regulation No 1370/2007 provides that such compensation is to be granted in accordance with the principles set out in Article 4 and Article 6 of that regulation and the annex thereto, in a way that prevents overcompensation.”
“(89) It follows from point 2 of the annex to that regulation that compensation may not exceed an amount corresponding to the net financial effect equivalent to the total of the effects, positive or negative, of compliance with the public service obligation on the costs and revenue of the public service operator. The effect is assessed by comparing the situation where the public service obligation is met with the situation which would have existed if the obligation had not been met.”
That is, the financial impact on transport providers has to be determined by reference to their overall situation in the counterfactual scenario of operating without any public service obligation, not whether they forego some revenue from tickets. In this connection, the Court of Justice made the following important statement.
“(90) The loss of revenue on the sale of tickets does not necessarily represent the effect of compliance with the obligation to carry certain passengers free of charge on the costs and revenue of the public service operator. The carriage of those passengers deprives the transport undertaking concerned of the possibility of carrying passengers who have to purchase a ticket only in cases where there is no longer any space for those passengers. The additional costs to the operator arising from the presence on board a coach of passengers who must be carried free of charge may also prove to be negligible.”
Although the last sentence of paragraph 90 may not be factually correct, its first sentence is certainly logically correct.
“(91) It is for the referring court, which alone has jurisdiction to assess the facts, to verify the amount corresponding to the net financial effect of compliance with the obligation laid down in Article 34 of the ÜTS on the costs and revenue of the applicant in the main proceedings and to satisfy itself that the compensation does not exceed that amount.”
It is, however, unlikely that a company on which no public service obligation was imposed would have entered voluntarily the market for passenger transportation if the carrying of students and handicapped persons for free would have led to losses or reduced profitability.
On the basis of the above reasoning, the Court of Justice concluded that “(92) Article 3(2) of Regulation No 1370/2007 and point 2 of the annex thereto must be interpreted as meaning that compensation for the net financial effect, positive or negative, on costs incurred and revenues generated in complying with the tariff obligations established through general rules, which aim at establishing maximum tariffs for certain categories of passenger, must be granted in accordance with the principles set out in Article 4 and Article 6 of that regulation and in the annex thereto, in a way that prevents overcompensation. The compensation may not exceed an amount corresponding to the net financial effect equivalent to the total of the effects, positive or negative, of compliance with the public service obligation on the costs and revenue of the public service operator, which are assessed by comparing the situation where the public service obligation is met with the situation which would have existed if the obligation had not been met.”
[1] The full text of the judgment can be accessed at:
