CJEU takes more refined approach to the 'separability of activities' in the definition of (public) undertakings for the application of EU competition law (C-185/14)

In its Judgment in EasyPay and Finance Engineering, C-185/14, EU:C:2015:716, the Court of Justice of the European Union (CJEU) assessed whether the grant by a Member State of an exclusive right to pay retirement pensions by money order to the national postal operator that formerly held the postal monopoly restricts the rights of alternative postal operators and is detrimental to free competition. The CJEU also assessed whether the granting of such exclusive right to pay retirement pensions by postal money order constitutes State aid or if it can be exempted on the basis that the activity constitutes a service of general economic interest (SGEI).

The case concerned Decree of the Bulgarian Council of Ministers adopted in the year 2000 whereby it ordered that retirement pensions had to be paid through the domestic banks and the post offices of the national postal operator ‘Balgarski poshti’ (BPoshti), which at the time was a single-member commercial company wholly owned by the State. Those postal money orders included the payment of retirement pensions at both the post offices and the address of the beneficiary by a postal worker, which was an activity covered by the universal postal service that only BPoshti was authorised to carry out.

A reform of the postal services act (PSA) to implement postal liberalisation determined that postal money orders are no longer included in the universal postal service and, consequently, under the postal legislation they should be services open to provision by alternative post operators in competition with BPoshti. However, the Council of Ministers maintained the reserve of this activity for BPoshti on the basis that 'the granting and payment of pensions form part of the exercise of State social security functions, which cannot be qualified as an economic activity. ‘Balgarski poshti’ was entrusted under a regulatory act with a public service activity which does not fall within the scope of competition law. The Council of Ministers adds that only that company has a branch network covering all of the territory of Bulgaria, including sparsely populated areas' (C-185/14, para 25). Privately-owned alternative postal operators challenged this reserve of activity under the both EU postal rules of Directive 97/67 (as amended) and Articles 106 and 107 TFEU.

The CJEU first addressed the point of coverage of postal money orders by the postal universal service and confirmed that 'money order services, which consist in making payments through the public postal network to natural or legal persons on behalf of and on the order of others, are not within the scope of Directive 97/67 (see judgment in Asempre and Asociación Nacional de Empresas de Externalización y Gestión de Envíos y Pequeña Paquetería, C-240/02, EU:C:2004:140, paragraph 34)' (C-185/14, para 32). Therefore, given the inapplicability of the sectoral postal regulation, the analysis of the reservation of this activity to BPoshti had to be assessed under the general rules in Articles 106 and 107 TFEU.

In this analysis, the CJEU returns to the definition of undertaking for the purposes of the application of competition law and stresses several aspects regarding the need for an inseparable connection with the national pensions system for an entity to escape the definition of undertaking on the basis that it operates within a system based on the principle of solidarity and oriented exclusively to perform a social function. In terms of the Judgment in EasyPay and Finance Engineering,
37 ... for the purposes of the application of EU competition law, an undertaking is any entity engaged in an economic activity, irrespective of its legal status and the way in which it is financed ...  any activity consisting in offering goods and services on a given market is an economic activity (see judgment in Compass-Datenbank, C-138/11, EU:C:2012:449, paragraph 35).
38 ... the organisations involved in the management of the public social security system fulfil an exclusively social function. That activity is based on the principle of national solidarity and is entirely non-profit-making. The benefits paid are statutory benefits bearing no relation to the amount of the contributions (see, to that effect, judgment in Poucet and Pistre, C-159/91 and C-160/91, EU:C:1993:63, paragraph 18).
39 It is for the referring court to ascertain whether or not the money order operations carried out by ‘Balgarski poshti’, enabling the payment of retirement pensions at issue in the main proceedings, is involved in the functioning of the public social security service and, accordingly, must or must not be regarded as an economic activity falling within the scope of Article 107(1) TFEU.
40 In that context, it must be recalled that, in order to avoid classification as an economic activity, that activity must, by its nature, its aim and the rules to which it is subject, be inseparably connected with the national pensions system (see, by analogy, judgment in Aéroports de Paris v Commission, C-82/01 P, EU:C:2002:617, paragraph 81). Thus, in the main proceedings, any inseparable connection thereto of the activity of money order operations must be taken into consideration.
41 In that regard, it is apparent ... that the old-age benefits granted in the State social security system form part of the task of the [National Social Security Institute] which, in carrying out that task, uses ‘Balgarski poshti’ solely to handle the payments of retirement pensions.
42 In addition ... payment of retirement pensions may also be made through banks. Thus, according to the information provided by the Institut ... approximately 53% of the total number of retirement pensions were paid by bank transfer. Accordingly, the money orders used by ‘Balgarski poshti’ are not actually the sole method of payment of the retirement pensions.
43 Those elements constitute an indication enabling the view to be taken that the activity of money order operations enabling the payment of retirement pensions may be separable from the national pensions system. It is for the national court to assess the relevance of those elements, in particular in the light of the other factual and legal elements before it (C-185/14, paras 37-43, emphasis added).
This is an interesting approach, because the CJEU seems to have deviated from the line of case law that was tending towards an excessively lenient analysis of the 'inseparable connection' between market services and the discharge of public services (see here and, for more details, here). However, the specific circumstances of the case may have prompted this  more nuanced or refined approach, particularly because the postal operator seems to be quite far removed from the core public function its (market) activity supports.

On the point of analysis of the reservation of the activity as an SGEI, which would exclude the existence of State aid under Article 106(2) TFEU, the CJEU focuses the analysis on the level of compensation that BPoshti receives for the discharge of the public service that triggers the reservation of activity. In that regard, it is worth noting that
45 ... a State measure regarded as compensation for the services provided by the recipient undertakings in order to discharge public service obligations, so that those undertakings do not enjoy a real financial advantage and the measure thus does not have the effect of putting them in a more favourable competitive position than the undertakings competing with them is not caught by Article 107(1) TFEU (see judgments in Libert and Others, C-197/11 and C-203/11, EU:C:2013:288, paragraph 84, and Altmark Trans and Regierungspräsidium Magdeburg, C-280/00, EU:C:2003:415, paragraph 87).
46 However, for such compensation to escape classification as State aid in a particular case, a number of conditions must be satisfied (judgment in Altmark, C-280/00, EU:C:2003:415, paragraph 88).
52 Where the undertaking which is to discharge the service of general economic interests ... is not chosen pursuant to a public procurement procedure, it is also for the referring court to make sure, in accordance with the fourth condition laid down in paragraph 93 of the judgment in Altmark (C-280/00, EU:C:2003:415), that the level of compensation is determined on the basis of an analysis of the costs which a typical undertaking, well run and adequately equipped, would have incurred in discharging those obligations, taking into account the relevant receipts and a reasonable profit for discharging the obligations (C-185/14, paras 45-46 and 52, emphasis added).
In the case at hand, the remuneration payable to BPoshti was set out in the Decree of the Council of Minister, which foresaw that the National Social Security Institute 'shall pay through its territorial divisions to the territorial divisions of the “Balgarski poshti” 8.5 thousandths of the pensions payable in the month in question for the work performed in connection with the payment of pensions through the postal network' (C-185/14, para 15). In my view, it seems unlikely that such a general figure established 15 years ago (coincidentally) matches the costs of a notional efficient postal competitor.

Thus, in general terms, the conclusion to be extracted from the Judgment in EasyPay and Finance Engineering is that the reservation of the activity of payment of pensions or any other benefits through postal money order (or equivalent) to incumbent postal operators (or any other undertakings) is very likely to fall foul of Articles 106 and 107 TFEU, unless the undertaking is chosen through a procurement procedure (which should be relatively easy to implement) or its remuneration is determined in strict accordance with the standard of a notional efficient postal competitor [for discussion, see A Sanchez-Graells, 'The Commission’s Modernization Agenda for Procurement and SGEI', in E Szyszczak & J van de Gronden (eds) Financing Services of General Economic Interest: Reform and Modernization (The Hague, TMC Asser Press / Springer, 2012) 161-181]. Let's hope that the domestic Bulgarian court follows the very clear cues given by the CJEU in that respect.

Any State aid implications in Ofcom's 4G auction?

Ofcom has unveiled its plans for 4G auction of the airwaves--which will be the largest ever auction of spectrum for mobile services in the UK--laying the path for next-generation 4G networks to be rolled out in 2013 and fully implemented by 2017 (see Ofcom's press release: http://tinyurl.com/Ofcom4Gauction).

The auction process seems well designed from the standpoint of a competition lawyer completely foreign to technical issues, particularly because Ofcom has reserved a lot for a relatively small player or new entrant in the UK mobile telephony market, so that consumers benefit from future competition between four credible service providers rather than the current three (see relevant documents for the planned 4G auction: http://tinyurl.com/Ofcom4Gauctdocs).

However, such a complicated regulatory scheme--whereby Ofcom is shaping future competition in the UK communications industry--must not only tackle the complex issue of the number of licenses tendered and the foreseeable sizes (and relative strengths) of tenderers, but also the matter of ensuring universal access (or a public service obligation) to the next mobile telephony networks. Ofcom has decided to do so by earmarking one of the lots (actually, a "double-sized lot", since there are four "regular" lots numbered 1 to 4 and the earmarked lot is "5 & 6") for the imposition of a coverage obligation.

In terms of the draft license for lot "5 & 6", the coverage obligation implies that the licensee shall by no later than 31 December 2017 provide, and thereafter maintain, an electronic communications network that is capable of providing, with 90% confidence, a mobile telecommunications service with a sustained downlink speed of not less than 2 megabits per second when that network is lightly loaded, to users at indoor locations in an area within which at least: a) 98% of the population of the United Kingdom lives, and b) 95% of the population of each of England, Wales, Scotland and Northern Ireland lives.

Given the undertaking of such coverage obligation by the awardee of lot "5 & 6", that licence is planned to be tendered at a significantly reduced reservation price of basically 55.56% of the reservation price for a "regular" licence (which has half the bandwith)--with an implicit "discount" of £200 million.

The relevant issue from the State aid perspective and, particularly, concerning compliance with Articles 106(2) and 107 TFEU is whether that difference in license reservation prices (rectius, of the prices finally paid by licensees as a result of the 4G auction) does not amount to an excessive compensation of the public service obligation (ie coverage obligation) attached to lot "5 & 6".

On the one hand, a formalistic approach to this issue could be simply accept that, in the absence of anomalies in the tendering process, the design of the 4G auction in open and competitive terms suffices to exclude any element of aid because the "pro-competitiveness" of the mechanism would warrant that the award reflects (competitive) market conditions (in an "inverse" reading of the fourth condition in the ECJ's Judgment in Altmark--on which see my critical considerations at http://ssrn.com/abstract=2071655).

On the other hand, a refined and materially-oriented approach would allow for the scrutiny of the difference in actual prices paid for a "regular" 4G license (double its price, actually) and the license with coverage obligation (lot "5 & 6")--to see whether it implied any potential excessive remuneration to the universal access provider. In that regard, it may be useful to take into account that Ofcom has commissioned and published a study on the "Methodologies used for the analysis of costs relating to a coverage obligation" (available at http://tinyurl.com/Ofcom4Gmethod). Nonetheless, this methodological study does not offer an aggregate total cost of the coverage obligation, which is dependent on the pre-existing infrastructure of the future licensee.

However, the study "Spectrum value of 800MHz, 1800MHz and 2.6GHz" by DotEcon and Aetha (also commissioned by Ofcom and available at http://tinyurl.com/Ofcom4Gmoneys) has estimated the impact of the coverage obligation in the (broad) bracket of between £100 to £400 million (although some operators submitted higher cost estimates). Even if the cost could be reduced by Ofcom if pre-auction mobile coverage was extended by means of additional public investments, and based on the information supplied by potential bidders in the auction, the DotEcon and Aetha study considers that:

There seems to be significant room (and difficulty) in determining the actual cost of the coverage obligation imposed upon the future licensee of lot "5 & 6" in the UK 4G auction. However, there is exacty the same room for potential overcompensation of such universal access / public service obligation--which would infringe Articles 106(2) and 107 TFEU.

Hence, special care seems to be needed on the part of Ofcom at the end of the auction and prior to the award of the licenses, whereby it may want to include a condition in the award procedure (or licence terms) that allows it to require additional payments by the initial awardee of lot "5 & 6" in case the price differential with (double) the cheapest (or more expensive, if a lenient approach is preferred, or average) "regular" 4G licence indicates that there is excessive compensation for the coverage obligation.

Be it as it may, it seems clear that there are potential State aid implications in the UK's 4G auction as designed by Ofcom, which will be an interesting case study once the final prices for "regular" and coverage obligation licenses are set.

A reasonable estimate of the cost of a 98% population coverage obligation should range from £100m to £400m as the cost estimate provided by Vodafone (and supported by O2) of £540m may not reflect the cost of meeting the coverage obligation by an operator with a well maintained, efficient network: John Cresswell of Arqiva estimated that the [98%] coverage obligation will cost around £200m to £230m, with Guy Laurence of Vodafone stating that a further £140 million in operating expenditure would be required to achieve 99% coverage (emphasis added; please note that £200 million is precisely the implicit discount in the reduced reservation price for lot "5 & 6").