sou · GWB338d2 · 2009-01-01 00:00:00 — As explained above, given that the dominance of the public housing companies as well as the abusive behaviour of setting the rents too low can be attributed to Swedish legislation and the Swedish Tenancy Act, Art. 82 EC cannot apply on its own but only in con- junction with Art. 86(1) EC. The following section therefore discusses the conditions for application of Art. 86(1) EC. 80 The largest public housing company in the area of Greater has a market share of and an annual turnover of . In the case of , the public housing companz has a market share of about and an annual turnover of almost 500 mil- lion Euro. The public housing company in has a market share of and an annual turnover of . 7 of your memo of 9 Maz 2007). 6.Compatibility of the rent setting system with Art. 86 in conjunction with Art. 82 EC 86 EC provides that: 1.In the case of public undertakings and undertakings to which Member States grant special or exclusive rights, Member States shall neither enact nor maintain in force any measure contrary to the rules contained in this Treaty, in particular to those rules provided for in Art. 12 [former Article 6] and Articles 81 to 89. 2.Undertakings entrusted with the operation of services of general economic interest or having the character of a revenue- producing monopoly shall be subject to the rules contained in this Treaty, in particular to the rules on competition, in so far as the application of such rules does not obstruct the performance, in law or in fact, of the particular tasks assigned to them. The develop- ment of trade must not be affected to such an extent as would be contrary to the interest of the Community. 3.The Commission shall ensure the application of the provisions of this Article and shall, where necessary, address appropriate directives or decisions to Member States. 86(1) EC is a prohibition addressed to Member States them- selves. As such it is closely related to Art. 10 EC but in contrast to the latter, it has its own sphere of application. Art. 86(2) EC provides for a limited exception for Member States and under- takings entrusted with the operation of services of general economic interest from the application of the competition rules. Art. 86(3) EC provides the Commission with important powers to ensure compliance with the provisions of Art. 86 EC.81 In the following, the conditions under Art. 86(1) EC will be examined more closely. a.Public undertakings or undertakings with special or exclusive rights 76.It has already been established in the context of Art. 81 EC that public housing companies are undertakings pursuant to the competition rules as they are engaged in an economic acti- vity. The terms public undertakings and undertakings with special or exclusive rights are not defined in the Treaty but 81 Whish, Competition , 5th edition, (2003) , p. indications as to the content of these terms can be found in the Transparency Directive.82 2(1)(b) of the Transparency Directive states that a public undertaking encompasses any undertaking over which the public authorities may exercise, directly or indirectly, a dominant influence by virtue of their owner- ship of it, their financial participation therein, or the rules which govern it.83 Thus, decisive is whether the State has a controlling interest in the undertaking and not the legal form of the company in question. 78.The term undertakings with special or exclusive rights has been defined as follows: exclusive rights means rights that are granted by a to one undertaking through any legislative, regulatory or administrative instrument, reserving it the right to provide a service or undertake an activity within a given geographical area; special rights means rights that are granted by a to a limited number of undertakings through any legislative, regulatory or administrative instrument, reserving it the right to provide a service or undertake an activity within a given geo- graphical area: –limits to two or more the number of such undertakings, autho- rised to provide a service or undertake an activity, otherwise than according to objective, proportional and non-discriminatory criteria, or –designates, otherwise than according to such criteria, several competing undertakings, as being authorised to provide a service or undertake an activity, or –confers on any undertaking or undertakings, otherwise than according to such criteria, any legal or regulatory advantages which substantially affect the ability of any other undertaking to provide the same service or to operate the same activity in the same geographical area under substantially equivalent conditions.84 82Commission Directive 2000/52/EC amending Directive 80/723/EC on the transparency of financial relations between Member States and public undertakings, OJ 2000 L 193. 84Ibid, Article 2(1)(f) and (g). 79.In the case at issue, the public housing companies are owned by the municipalities, which also exert a controlling influence on the public housing companies.85 Furthermore, public housing companies fulfil a special role in the Swedish housing market in that their objective according to the Swedish Municipal Housing Provision Act is to create the conditions for all in- habitants of a municipality to live in good housing. Thus, they are given the specific task of providing housing not only to normal income groups but also to people with social or finan- cial difficulties in order to counteract segregation. This quali- fies them as public undertakings and undertakings to which Member States grant special or exclusive rights pursuant to Art. 86(1) EC. b.Obligation on Member States to refrain from adopting anticompetitive State measures 86(1) EC requires Member States to refrain from enacting or maintaining in force any measure contrary to the Treaty. Thus, the addressees of the provision are the Member States and not the undertakings implementing the anti-competitive State measure. The conduct of undertakings can only be assessed under the competition rules if their behaviour involves anti-com- petitive conduct beyond what is required by the State measures, i.e. if the State measure leaves room for autonomous conduct and if they engage in distortive conduct which cannot be justi- fied by reference to the State measure. The autonomous con- duct of the undertakings would then be assessed according to Art. 81 or 82 EC. 81.The application of Art. 86(1) EC therefore requires, as a first step, that the State measure infringes one of the categories of Art. 86(1) EC and that it cannot be justified according to Art. 86(2) EC. The conduct of the undertaking would only be considered as a second step if the State measure at issue leaves room for independent conduct of the undertaking in question or, as the ECJ in the Ladbroke case86 stated: 85Memorandum PM 4, p. 86Joined cases C-359/95P and C-379/95P Commission v . [1997] ECR I-6265. It is important to emphasise that the Ladbroke defence only applies to under- takings and never to the State. If anti-competitive conduct is required of undertakings by national legislation or the latter creates a legal framework which itself eliminated any possibility of competitive activity on their part, Articles [81] and [82] do not apply. In such a situation, the re- striction of competition is not attributable, as those provisions implicitly require, to the autonomous conduct of the undertakings. Articles [81] and [82] may apply, however, if it is found that the national legislation does not preclude undertakings from en- gaging in autonomous conduct which prevents, restricts or distorts competition. [] [A] prior evaluation of national legislation affec- ting such conduct should therefore be directed solely to ascertaining whether that legislation prevents undertakings from engaging in autonomous conduct which prevents, restricts or distorts com- petition.87 82.Thus, an undertaking cannot be held liable for anti-competi- tive behaviour, on the basis of the Ladbroke defence, if the State measure inevitable leads to distortive conduct on the part of the undertaking, i.e. if the anti-competitive conduct can be directly related to the State measure. The focus should therefore primarily lie on the government measure before considering the conduct of the undertakings. 83.Furthermore, before entering into the analysis of the case, two points regarding the application of Art. 86(1) in conjunc- tion with Art. 82 EC need to be made: (1) Art. 86(1) EC can only be infringed, as explained above, where there is a causal link between a Member States legislative or administrative inter- vention on the one hand and anti-competitive behaviour of undertakings on the other hand,88 and (2) the mere creation of a dominant position by the grant of exclusive rights does not as such infringe Art. 86(1) EC.89 84.The case law on Art. 86(1) EC is complex and it is not always easy to determine the circumstances under which a can be liable under Art. 86(1) EC for an infringement of Art. 82 EC. However, it is possible to distinguish four general categories concerning the application of these provisions:90 87Ibid, paras 33–35. 88Opinion of AG in Case C-67/96 etc. v SBT [1999] ECR I-5751, para. 89See e.g. Case C-260/89 ERT v Dimotiki [1991] ECR I-2925, paras 12 and 32, or Case C-41/90 Höfner & v [1991] ECR I-1979, para. 90The following categorisation is taken from , Sufrin, , 2nd edition, (2004) , p. (1)Manifest inability to meet demand: Art. 86(1) EC, mostly in combination with Art. 82(2)(b) EC, is infringed where a statutory monopoly is set up in such a way that it is incapable of meeting the demand in the reserved sector.91 (2)Conflict of interest: this refers to the case where the dominant undertakings is given a regulatory function which enables it to disadvantage competitors, for instance in a downstream market.92 State measures which bundle regulatory functions and commercial activities together inevitably create a conflict of interest. However, the cumulation of rights in the hands of a monopolist or dominant undertaking does not necessarily have to result in an infringement of Art. 82 in order to fall under that category. It is sufficient if the company is led to infringe the provision or induced to commit an abuse93 because it would inevitably discriminate in its own favour. Thus, the possibility of abuse is sufficient.94 However, the ECJ is less likely to find an infringement of Art. 86(1) EC if there is a judicial review of the decisions made by the conflicted undertaking.95 (3)Extension of monopoly into neighbouring markets: this refers to the situation where a State measure results in the extension of a monopoly to an ancillary activity on a neighbouring but separate market.96 This category can also include cases where a dominant company refuses to supply its services on a downstream or neighbouring market where it is also active.97 (4)Pricing abuses: this category was for instance used in the case GT-Link.98 Here, the ECJ stated that, where a public undertaking which owns and operates a commercial port waives the port duties on its own ferry services and some of its trading partners whilst charging the full duties to 91See e.g. Case C-41/90 Höfner & v [1991] ECR I-1979. 92See e.g. Case C-260/89 ERT v Dimotiki [1991] ECR I-2925. 93Ibid, para. 94As this sentence indicates, the probability that an abuse will be committed in the near future is sufficient for this condition to apply and as such inherent in the concept of led to abuse or induced to commit. The abuse does not actually have to take effect pursuant to Art. 86(1) EC, the conflict of interest, which may lead to an abuse, is sufficient. 95Case C-67/96 etc. v SBT [1999] ECR I-5751, paras 116–121. 96Case C-18/88 RTT v [1991] ECR I-5973. 97Commission decision regarding , OJ 1994 L 55/52. 98Case C-242/95 GT-Link A/S v De Danske [1997] ECR I-4349. other could be held liable for an infringement of Art. 82(2)(c) EC, that is to say the application of dissimilar conditions to equivalent transactions placing other trading parties at a competitive disadvantage.99 85.This list of categories is not exhaustive and only represents an attempt to classify the case law to make it more accessible. It is not based on any kind of categorisation done by the Com- munity Courts. Moreover, the distinction between these four categories is not always clear and easy to make as the alleged abusive conduct can fall under two or more of these categories. For instance, the second and the third category are very closely connected in that a cumulation of rights can lead to an exten- sion of the dominant position into a downstream market. Nevertheless, it helps to understand the case law of the Courts and to establish whether the present case falls under one of these categories, i.e. 55 of the Tenancy Act which lays down the utility value system qualifies as a State measure which infringes or might lead to an infringement of Art. 82 EC and for which the State bears responsibility under Art. 86(1) EC. 86.In the following, I will apply the above findings to the Swedish housing market. It will quickly emerge, however, that the question whether Art. 86(1) EC applies is closely linked to the way the housing market is organised. Based on the informa- tion I received from the Inquiry, I came to the conclusion that the Swedish housing market is differently organised than most other European housing markets, e.g. the Irish and the Dutch housing markets. Whereas most European housing markets are characterised by a distinction between social/public and commercial housing markets, i.e. two separate markets, the Swedish housing policy aims to create one housing market by establishing the same rent setting system for all kinds of house- holds, irrespective of the income level of the and ir- respective of whether the landlord is a public or private housing company. Therefore, in order to avoid confusion but also to present a comprehensive analysis of all legal issues which could arise, I will first discuss the situation which can be found on most housing markets and which is based on a separation of 99 Whish, Competition , 5th edition, (2003) , p. social and commercial housing. The second situation describes the Swedish housing market as I have understood it from expla- nations of the Inquiry and which constitutes of one market comprising both social and commercial housing. i.Situation 1: Two markets – existence of a conflict of interests 87.Assuming that the Swedish housing market follows the same policy as most other European housing markets in that the market is separated in a social and commercial housing sector, Sect. 55 of the Tenancy Act could result in a conflict of in- terest for the public housing undertakings according to the second category defined above and thereby infringe Art. 86(1) EC. The conflict could consist in the fact, on the one hand, that the utility value system gives public housing companies a regulatory role vis-à-vis the private companies when setting the rents. On the other hand, public housing companies are also normal market operators engaged in a regular commercial acti- vity on the housing market where they compete with private companies. This leads to a bundling of regulatory functions and commercial activities which inevitably creates a conflict of interest. It could therefore be argued that the Swedish regulation on the utility value system confers a competitive advantage on public housing companies which may induce them to engage in abusive conduct to force private competitors out of the market. The abusive conduct could consist in the imposition of unfair trading conditions pursuant to Art. 82(a) EC by lowering the rental level to such an extent that private com- petitors would find impossible to match. 88.In your memo of 5 2007, you ask whether the fact that private housing companies may exceed the rent for an equiva- lent apartment owned by a public housing company by has a mitigating effect on the normative role of the public housing companies and could exclude the conflict of interest pursuant to Art. 86(1) EC.100 This cannot be assumed as the 5%-rule does not remove the underlying incompatibility of the utility 100 Point 4.1 of the memo of 5 2007. value system and the bundling of regulatory and commercial activities in the hands of the public housing companies. 89.However, as indicated above, the ECJ is less likely to find an infringement of this provision if there is a judicial review of the decisions made by the conflicted undertaking.101 This goes back to the case102 where the Court had to adjudicate on the question whether the Dutch regime of com- pulsory affiliation to sectoral pension funds and the power of these funds to grant exemptions from affiliation could lead to a conflict of interest inducing the funds to abuse their power of exemption pursuant to Art. 86(1) in conjunction with Art. 82 EC. The Court did not accept this argument on the basis of several grounds, one of them being that national courts adjudicating, as in this case, on an objection to a requirement to pay contribution must subject to review the decision of the fund refusing an exemption from affiliation, which enables them at least to verify that the fund has not used its powers to grant an exemption in an arbitrary and that the principle of non-discrimination and the other conditions for the legality of that decision have been complied with.103 90.In principle, the rent levels set by both public and private housing companies are subject to review by the rent tribunals which can set the rent at an equitable amount according to the utility value system. This is illustrated by the ruling of the of Appeal. Based on the comments I re- ceived, it seems, however, that the circumstances surrounding the ruling were exceptional and that, in general, it is extremely difficult for the parties to obtain reliable evidence that the normative rents indeed deviate from the prescribed rent levels.104 101Whish, Competition , 5th edition, (2003) , p. 102Case C-67/96 etc. v SBT [1999] ECR I-5751. 103Case C-67/96 etc. v SBT [1999] ECR I-5751, para. See for a discussion of the case including a reference on the role of national courts to rule on decisions taken by the conflicted undertaking: case annotation by in 37 CML Rev 2, pp. 425 et seq. 104You explain in your memo of 5 2007: The normative rents are the rents of the municipal housing company. That company is not a party to the proceeding. The parties normally do not have any information about how the rents of the municipal housing com- panies are set, if they have any information about the apartments and rents of the municipal housing companies at all. Presently, the municipal housing companies probably set their rents on a self cost basis on a company level, not on an apartment level. Probably, not even the municipal companies themselves have correct information about the self cost of a single apartment. Thus, in a vast majority of cases the municipal housing companies do not have 91.The fact that judicial review of the rent levels does not seem to be possible due to the difficulty to obtain the necessary evi- dence argues against the application of the principle. The national court has to be able to determine whether the nor- mative rule is not applied in an arbitrary and whether it satisfies the principle of proportionality, i.e. the normative rule has to be suitable to achieve the specified objective, it has to be necessary and it cannot weigh excessively on the interests of the private individual (proportionality in the narrow sense). Thus, the national court has to be able to at least verify that these basic principles are complied with. If this is not possible, the judicial review requirement under is not fulfilled and Art. 86(1) in conjunction with Art. 82 EC applies. How- ever, the conduct at issue, which is based on Swedish legislation, could still be justified pursuant to Art. 86(2) EC.105 ii.Situation 2: No conflict of interests 92.The above considerations are based on the assumption of two separate markets, a market for social housing and a market for private/commercial housing. Indeed, as explained previously, this distinction can be found in most housing poli- cies as the Commission decisions on social housing in and the exemplify. Yet, the Swedish housing system seems to deviate from this system. As explained at the very be- ginning of this Report, the Swedish housing policy is characte- rised by the objective of achieving overall social cohesion, i.e. creating economically and ethnically mixed populations in all neighbourhoods. While this may also hold true for the Irish and Dutch housing schemes, the means by which aims to achieve this objective are very different. It established the same rent setting system for all kinds of households, irrespective of the income level of the and irrespective of whether the landlord is a public or private housing company. Similarly, it is not foreseen that only certain groups, e.g. groups whose income is below a certain level, may rent an apartment from a public information about the self cost of a single apartment and under all circumstances the parties of the proceedings at the rent tribunals do not have access to such information. 6., pt. 105 See paras 96 et seq. The following paragraphs will therefore discuss the situation where the special circumstances of the Swedish housing system are taken into consideration. 93.The system of setting the same rents irrespective of income and irrespective of whether a public or private housing com- pany rents out the apartment is achieved through the utility value system and the normative role of the public housing com- panies. Thus, also private housing companies provide housing to persons with low income as well as to persons with average or high income. This situation is fundamentally different from the situation where the government creates two separate markets, social and private, and seeks to control the rents in the private sector through the normative role of the municipal companies. The Swedish social cohesion policy is aimed at creating one market, a market for reasonably priced housing for all citizens. 94.On the basis of these explanations, a conflict of interest for the public housing companies pursuant to Art. 86(1) EC cannot be assumed. As there is no distinction between public/social and commercial housing markets, there is no bundle of regu- latory functions and commercial activities and hence no cumula- tion of rights in the hands of the public housing companies.106 It is therefore likely that the Commission will consider Art. 86(1) EC not to be applicable in the present case. 95.If we follow this reasoning, the analysis of the Swedish housing system pursuant to the competition rules ends here and we could proceed with the assessment of the compatibility of the housing system with the rules on State aid pursuant to Arts 87 EC et seq.107 However, as this Report attempts to address all legal issues that could arise in the present case, I will now con- tinue to discuss the case considered in Situation 1 above where the utility value system results in a conflict of interest for the public housing companies and therefore infringes Art. 86(1) EC but could be exempted pursuant to Art. 86(2) EC. 106This, however, does not imply that public and private housing companies cease competing with each other although competition may be mainly limited to competition over quality. is restricted by the normative role. The housing market remains an attractive investment opportunity also for private housing companies and even if the market on which these companies provide their services is regulated, the market forces are still present and private companies will invest there if they can expect a certain return on their investments. 107See paras 128 et seq. c.Exemption pursuant to Art. 86(2) EC