The article is based on a legal opinion, that was given to LEAG.
Doubts regarding the existence of an advantage – continued
Compensation amounts based on a MEO settlement agreement
An essential component of the compensation covering the full scope of any damages caused to the operators affected by the early closure is also the avoidance of legal and factual uncertainties as well as any connected litigation risks. RWE and LEAG have given up their favorable legal positions, in particular under mining property law (section 9(1) BBergG), within the framework of the overall agreement with the German Government. Their mining property is in fact devalued as a result of the early closure. All these devaluations, damages and costs together might even exceed the agreed compensation amounts.
The compensation serves, in particular, to avoid legal and factual uncertainties, which must be priced into the compensation as an essential component. Especially against the background of the German nuclear phase-out[1], the consequences of the lignite phase-out would also have been fraught with legal uncertainties. These have however been avoided through the waiver of legal remedies, that is part of the public-law contract (sections 23 and 24), and the agreement on the settlement of all potential claims (section 22). The compensation accordingly contains to a large extent elements of a settlement agreement, also taking account of RWE´s and LEAG´s forbearance to sue Germany for damages. This is relevant in light of the decision of the German Federal Constitutional Court[2] that partly classified the nuclear closure law as unconstitutional in the absence of adequate compensation. The operators’ forbearance to sue Germany for damages implies, on the other side, a paramount financial value for the German State under MEOT terms.
The Commission’s abstract assumptions on rather negligible litigation risks under German State liability law (p. 22, para 106 of the decision) therefore lack a profound analysis in light of the jurisprudence on the German nuclear phase-out. It is true that the lignite phase-out measures might not amount to expropriations in the meaning of Article 14(3) of the German Constitution (Grundgesetz). However, in order to balance proportionality of property rights and public interest limitations under Article 14(1) and (2) Grundgesetz, a financial compensation is also required, if the limitations restrict the exercise of property rights to a critical extent.[3] In the present case, the lignite phase-out causes a particularly severe restriction of the companies’ property rights, both with regard to the power plants and with regard to mining property. The final closure of the power plants almost completely devaluates these property positions, as no reasonable or legally permissible ways of using them exist anymore. Although this is done for reasons of public welfare, such a restriction can only be justified, under proportionality considerations of German constitutional law, if the intensity of the restriction is mitigated by a compensation. Such mitigating compensation (“Entschädigung”) to balance the proportionality of property rights and social limitations under Article 14(1) and (2) Grundgesetz is not subject to typical calculation methods for damages (“Schadensersatz”), e.g. of foregone profit or natural restitution.
In contrast to damages (“Schadensersatz”), mitigating compensation (“Entschädigung”) rather implies components essentially based on equity principles and, therefore, is more difficult to calculate. This means that a level of compensation beyond compensation for investment costs that have not been amortised can be justified and considered as appropriate. Compared to typical damages, which is aimed at foregone profit or natural restitution, mitigating compensation is therefore detached from net present value calculations (NPV) of foregone profits. The Commission does address the national compensation regime (pp. 21, paras 100-106 of the decision). However, this is done without considering the equity element of “Entschädigung” to balance proportionality of the restriction of property rights. The mere consideration of damages calculations based on NPV and additional costs is insufficient.
In particular, for measures that contain elements of risk management through a settlement agreement, the Commission should take into account that the public sector may also take its decisions on the basis of longer-term strategic considerations, which a MEO would also apply to avoid litigation risks from a long-term investor perspective. In view of an uncertain legal and/or factual situation, as well as from the terms of the settlement found between the German Government and the affected companies, the MEOT requires an economic evaluation of the risk costs, in particular opportunity costs, in the absence of the settlement. The negative experience of the German nuclear phase-out weighs heavily in this assessment. Ten years after the entry into force of the nuclear closure law, Germany had to agree in March 2021 to grant a compensation of EUR 2.4 billion under State liability law to the operators following the decision of the German Federal Constitutional Court[4] that partly classified the nuclear phase-out law as unconstitutional since no adequate compensation was granted to the operators.[5] However, the Commission’s opening decision in the German lignite phase-out case appears to underexpose these negative liability experiences.
Whereas the Commission’s State aid notice is silent on public settlement agreements in general, it provides for specific MEOT standards on tax settlements. Tax settlement agreements can be a suitable instrument ‘’to avoid long-standing legal disputes before national jurisdictions’’[6] and related legal or factual uncertainties. In the view of the Commission, such settlement agreements may be considered a selective advantage within the meaning of Art. 107(1) TFEU, if the measure meets the following criteria:
‘’In this context, a transaction between the tax administration and a taxpayer may in particular entail a selective advantage where:
(a) in making disproportionate concessions to a taxpayer, the administration applies a more ‘favourable’ discretionary tax treatment compared to other taxpayers in a similar factual and legal situation;
(b) the settlement is contrary to the applicable tax provisions and has resulted in a lower amount of tax, outside a reasonable range. This might be the case, for example, where established facts should have led to a different assessment of the tax on the basis of the applicable provisions (but the amount of tax due has been unlawfully reduced).’’[7]
Even if the specifications of the State aid notice only refer to tax settlements, the conclusions can be transposed to the principle that the avoidance of litigation risks through settlements of legal and/or factual uncertainties can be taken into account to an adequate extent in a State measure without this constituting a selective advantage within the meaning of Article 107(1) TFEU.
According to the specifications on tax settlements in the State aid notice and the decision-making practice of the Commission, it is furthermore important that the settlement agreement is part of a ”normal practice”[8] of the State authorities and thus provided for by national law. The German Administrative Procedures Act (Verwaltungsverfahrensgesetz) provides in section 55 explicitly for such a settlement agreement as a public-law contract to eliminate legal or factual uncertainties:
“55. Compromise agreements
The authority may conclude an agreement under public law within the meaning of section 54, second sentence, which eliminates an uncertainty existing even after due consideration of the facts of the case or of the legal situation by mutual yielding (compromise) if the authority considers the conclusion of such a compromise agreement advisable in order to eliminate the uncertainty.”[9]
Consequently, German law explicitly allows the conclusion of a settlement agreement, as long as an existing legal and/or factual uncertainty is eliminated by a mutual concession of all parties. Therefore, the present settlement agreement regarding the lignite phase-out is part of the “normal administrative practice” of the German authorities.
According to the ECJ, the burden of proof to establish the actual advantage has to be borne by the Commission, and the Member States may even submit ex-post evaluations as counter-evidence on the lack of an advantage.[10] Therefore, the Commission would be well advised to conduct the MEOT evaluation of any risk settlement in a diligent manner by proceeding in the following manner:
- In a first step, the settlement pre-conditions, i.e. an uncertain legal and/or factual situation, are to be established, assessed and quantified in stochastic (if available: statistical) probabilities from an ex-ante perspective. In the absence of substantial, quantifiable uncertainty, a MEO would refrain from a costly and superfluous settlement of controllable minor risks. Instead, in case of minor factual risks, a MEO would rely on means of judicial evidence.
- In a second step, the judicial defeat risks are to be assessed ex-ante, preferably by virtue of a reliable independent legal opinion balancing judicial defeat risks and winning/defence chances.
- In a third step, on the basis of the aforementioned steps, it has to be assessed under terms of best business practices, whether a hypothetical private party to a dispute would have entered into a corresponding settlement on terms of mutual forbearance, respectively to sue and defend, preferably by virtue of a reliable opinion by a certified public accountant with resilient experiences regarding accounting provisions/reserves for legal risks.[11]
These basic requirements of an appropriate MEOT evaluation of risk settlements should be taken into account more thoroughly by the Commission for the assessment of the public-law contract and the compensation granted to RWE and LEAG for devaluations, damages and extra charges resulting from the early closure of the lignite-fired power plants.
Certainly, if an action for annulment under Article 263(4) TFEU were filed, the General Court of the European Union (GC) would scrutinize the Commission´s assessment of any proportionate/disproportionate elements of the settlement terms within an all-embracing approach on a long-term-scale (see IV. below).
Essential elements of the compensation within an all-embracing settlement
It appears that the Commission’s opening decision might have neglected an all-embracing comparative analysis of the financial status quo ante of RWE and LEAG and their financial situation after the State intervention to achieve the lignite phase-out. Even a deterioration of the financial situation may occur, if all devaluations, damages and extra charges from the early closure of the lignite-fired power plants are fully balanced against the compensation. In particular LEAG´s case raises questions about under-compensation since its compensation funds (managed exclusively by SPVs, as described above) serve as a primary security deposit to cover the follow-up costs associated with the lignite phase-out.
The first element of the Commission’s focus on compensation is the foregone profit, which is considered and assessed in great detail (pp. 8, paras 30-54 of the decision). This focus is reflected in particular in the detailed data presented in the relevant calculations. These foregone profits are obviously one of the decisive reasons for the Commission’s qualification of the measure as an advantage within the meaning of Article 107(1) TFEU (p. 22, para 107 of the decision). The measure does indeed contain aspects of lost profit, which could, however, also be compensated under German law if the prospects of profit have become sufficiently plausible.
However, the loss of profit is, inter alia, only a first component within an all-embracing and rather complex compensation scheme. The Commission´s second focus lies on the compensation of the operators’ subsequent damages and costs. Especially the additional mine rehabilitation costs are considered by the Commission, although not in sufficient detail (pp. 12, paras 55-63 of the decision), and this aspect should certainly be extended going forward. Nevertheless, not even these aspects are the only essential positions of relevant devaluations, damages and costs.
In sum, an all-embracing compensation scheme, meeting the MEOT standards, rests on the following principal pillars to settle the early closure of lignite-fired power plants, in an appropriate and fully balanced overall assessment:
- compensation of foregone profits;
- compensation of additional mine rehabilitation costs, costs for socially acceptable personnel adjustments under German labour law, additional financing costs resulting from the anticipated use of provisions for the mining costs and additional investment costs, which would not have occurred without the closure law, to technically allow the gradual early phase-out of the lignite-fired power plants (decommissioning costs);
- in LEAG´s case, between the economic disposability of the compensation funds for investment and management purposes and the restrictions imposed on the funds managed exclusively by SPVs, while serving as a primary security deposit to cover the follow-up costs associated with the lignite phase-out;
- settlement of an uncertain legal and factual situation, as section 22 of the public-law contract contains an agreement on the settlement of all potential claims, especially against the background that the mining property-law issues of the decommissioning obligations have not been conclusively clarified, the agreement contributes to legal certainty;
- elimination of judicial defeat risks of the State, as sections 23 and 24 of the public-law contract contain a waiver of legal remedies, in light of the decision of the German Federal Constitutional Court on the nuclear phase-out a judicial defeat risk of the State should definitely not be neglected.
Impact on competition
According to the Commission’s State aid notice, the measure
is considered to distort or threaten to distort competition when it is liable to improve the competitive position of the recipient compared to other undertakings with which it competes. For all practical purposes, a distortion of competition within the meaning of Article 107(1) of the Treaty is generally found to exist when the State grants a financial advantage to an undertaking in a liberalised sector where there is, or could be, competition.‘‘[12]
At least as far as LEAG is concerned, even a risk of distortion of competition appears rather doubtful when it comes to the very restricted terms and conditions under which LEAG can use the compensation. The entire compensation granted solely to the SPVs is withdrawn from LEAG’s direct disposability. Instead, the compensation is channelled and filtered as a primary security deposit through the SPVs that manage the financial resources within strict public law constraints to secure the rehabilitation obligations under mining law and other after-care obligations.
As said, the assets are only available for investment purposes or other management measures in accordance with the investment guidelines agreed with the Federal States and to increase assets. Under this investment option it must be ensured that the assets of the SPVs always remain sufficient to fulfil the primary obligations. Furthermore, the income from the investments based on the assets of the SPVs flows into their special funds and thus serves again the security purpose.
Thus, there is no, or very little, margin for LEAG to engage in practices to distort or threaten to distort competition. Even if LEAG invests funds through the SPVs in the relevant market transformation process, this does not lead to a distortion of competition, as its market shares and commercial position will become significantly weaker due to the ongoing transformation process of the energy sector in the coming years.
Last but not least, the compensation does not distort competition, instead it preserves LEAG as a (small) competitor in the remaining relevant markets for the generation and wholesale of electricity, in particular from renewable sources. Only through the filter of SPVs, parts of the compensation could be used by LEAG as a (small) player to counter the growing market power which will be accumulated and exercised progressively by big international players, not only by traditional incumbent electricity providers like Eon, RWE or Vattenfall, but also by the new leaders of the renewable and hydrogen energy economy, such as Shell or BP. None of these forward-looking aspects appear to be appropriately addressed in the Commission’s opening decision in the German lignite phase-out case.
Even if LEAG’s (limited) possibilities to use the special assets for investments through the SPVs under the public law constraints were considered as an advantage, the compensation for LEAG would not cause or risk to cause any distortions of competition. This becomes apparent from the manifold public law constraints, in particular under section 16(1) of the public-law contract in conjunction with the respective investment guidelines, and, above all, when LEAG’s competitive position is analysed in greater detail and compared to RWE’s position. Whereas RWE receives the compensation directly (sections 10(1) and 15 of the contract), in LEAG’s case the entire compensation is channelled and filtered as a primary security deposit through the SPVs that manage the financial resources within severe public law constraints, leaving no margin for LEAG to engage in any practices to distort or threaten to distort competition.
Certainly, LEAG might decide to engage in a transformation process and enter the markets for trading of renewable energies. Thus, the lignite phase-out will cause an exit of LEAG from the conventional electricity generation and wholesale market. However, LEAG might enter and expand its position in the renewable energy markets as a new player. In this transformation process, however, LEAG will lose significant market power in comparison to the competitive situation before and until the lignite phase-out. In 2019, LEAG was the second largest electricity producer in Germany with a market share of 16 percent.[13] The lignite-fired power plants accounted for the majority of LEAG’s production capacity. It is obvious that the company will no longer be able to produce electricity in such large quantities after the lignite-fired power plants are shut down. LEAG will almost completely lose its business basis in course of the lignite phase-out. Without compensation that enables a transformation process, LEAG might not even be in a position to engage in other, more future-oriented markets.
Accordingly, even an alleged advantage resulting from the potential use of the compensation would not lead to a distortion or risk of distortion of competition in the sense that LEAG may obtain an advantageous market position as a result of the State measure. Rather, the measure enables LEAG to undergo a transformation process through which it can survive the lignite phase-out and remain a small competitor on the renewables market. Overall, the measure is thus aimed at providing an adequate legal and financial compensation for a public intervention massively reducing LEAG’s business activities and competitive position. After the transformation process LEAG will have a much weaker position in the relevant markets on electricity generation and wholesale of renewable energies than before on conventional markets. In this regard it is important to understand that the compensation scheme at hand is the necessary flip side of the early closure of the lignite-fired power plants. Consequently, the existential effects of the early closure on LEAG’s market position are mitigated by the compensation scheme in order to balance the reduction in its market shares. This in return does not easily suggest that the compensation will lead to a distortion of competition by LEAG, as it was assumed by the Commission in the opening decision.
Conclusions
At least in LEAG´s case, the compensation payments to be granted by the German Government for the lignite phase-out does not meet the relevant legal criteria for constituting State aid within the meaning of Article 107(1) TFEU.
First, LEAG does not gain an advantageous economic position. The entire compensation is granted by payments to the SPVs and is thus withdrawn from LEAG’s direct disposability. Instead, the compensation is channelled and filtered as a primary security deposit through the SPVs that manage the financial resources as trustees within severe public law constraints in order to secure the rehabilitation obligations under mining law and any other after-care obligations. Therefore, an all-embracing MEOT assessment should include the following aspects to settle the early closure of lignite-fired power plants, in order to strike an appropriate balance:
- compensation of foregone profits, additional mine rehabilitation costs, costs for socially acceptable personnel adjustments under German labour law, additional financing costs resulting from the anticipated use of provisions for the mining costs and additional investment costs, which would not have occurred without the closure law, to technically allow the gradual phase-out of the lignite-fired power plants (decommissioning costs);
- limited economic disposability of the compensation funds for investments and management uses and restrictions imposed on the funds managed exclusively by SPVs with the funds serving as a primary security deposit to cover the follow-up costs associated with the lignite phase-out;
- settlement of an uncertain legal and factual situation especially against the background that the mining property-law issues of the decommissioning obligations have not been conclusively clarified;
- elimination of judicial defeat risks of the State by virtue of a waiver of legal remedies in light of the decision of the German Federal Constitutional Court on the nuclear phase-out.
Second, even if LEAG’s (limited) possibilities to use the special assets for investments through the SPVs were considered as an advantage, the compensation would not cause or risk to cause distortions of competition. Instead, the compensation preserves LEAG as a (small) competitor in the remaining relevant electricity generation and wholesale markets from renewable sources. Only indirectly, through the filter of SPVs, parts of the compensation can be used by LEAG as a small player to counter growing market powers which will be accumulated and exercised progressively by big international players.
These aspects do not appear to be appropriately addressed in an all-embracing manner in the Commission’s opening decision. Having regard to the Commission´s burden of proof under Article 107(1) TFEU to establish the actual advantage and the risks to cause distortions of competition, DG Competition would be well advised to widen and deepen its analysis and evaluation.
[1] For further information see https://www.reuters.com/article/us-germany-nuclear-compensation-idUSKBN2AW2FI.
[2] German Federal Constitutional Court, Decision of 6 December 2016 – 1 BvR 2821/11, 1 BvR 321/12, 1 BvR 1456/12 – Nuclear phase-out.
[3] Ibid.
[4] German Federal Constitutional Court, Decision of 6 December 2016 – 1 BvR 2821/11, 1 BvR 321/12, 1 BvR 1456/12 – Nuclear phase-out.
[5] For further information see https://www.reuters.com/article/us-germany-nuclear-compensation-idUSKBN2AW2FI.
[6] European Commission, Notice of 19 July 2016 – 2016/C 262/01, para 175.
[7] European Commission, Notice of 19 July 2016 – 2016/C 262/01, para 176.
[8] European Commission, Decision of 26 May 2010 – State aid C 76/03 (ex NN69/03), Umicore SA – 2011/276/EU, paras 153-160.
[9] Official English translation of para 55 of the German Administrative Procedures Act, Federal Ministry of the Interior, Building and Community –https://www.bmi.bund.de/SharedDocs/downloads/EN/gesetztestexte/VwVfg_en.pdf?__blob=publicationFile&v=1.
[10] Dekker, Annotation on Case C-148/19P BTB, EStAL 2020, p. 346.
[11] See Koenig/Hellstern, RIW 5/2011, p. 287.
[12] European Commission, Notice of 19 July 2016 – 2016/C 262/01, para 176.
[13] See the Monitoring Report 2020 of the Bundesnetzagentur (p. 42), https://www.bundesnetzagentur.de/EN/Areas/Energy/Companies/DataCollection_Monitoring/DataCollectionMonitoring_node.html.
Author
Christian Koenig, Prof. Dr. iur., LL.M. (LSE), University of Bonn
Photo by Dominik Vanyi on Unsplash
