# Commission Decision of 4 February 2014 on State aid No SA.21817 (C 3/07) (ex NN 66/06) implemented by Spain Spanish Electricity            Tariffs: consumers (notified under document C(2013) 7741) (Only the Spanish text is authentic) (Text with EEA relevance) (2014/456/EU)         

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# Commission Decision

# of 4 February 2014

# on State aid No SA.21817 (C 3/07) (ex NN 66/06) implemented by Spain

# Spanish Electricity Tariffs: consumers

# *(notified under document C(2013) 7741)*

# (Only the Spanish text is authentic)

# (Text with EEA relevance)

# (2014/456/EU)

THE EUROPEAN COMMISSION,

Having regard to the Treaty on the Functioning of the European Union, and in particular the first subparagraph of Article                           108(2) thereof,                        

Having regard to the Agreement on the European Economic Area, and in particular Article 62(1)(a) thereof,

Having called on interested parties to submit their comments pursuant to the provisions cited above(1) and having regard to their comments,                        

Whereas:

1.**PROCEDURE**(1)By letter dated 27 April 2006, the undertakings Céntrica plc and Céntrica Energía S.L.U. (hereinafter collectively referred                                 to as ‘Céntrica’) filed a complaint with the Commission regarding the system of regulated electricity tariffs implemented                                 in Spain in 2005.(2)By letter dated 27 July 2006, the Commission asked the Spanish authorities to provide information on the above measure. The                                 Commission received this information by letter dated 22 August 2006.(3)On 12 October 2006, the case was registered as non-notified aid (Case NN 66/06).(4)By letter dated 9 November 2006, the Commission asked the Spanish authorities for additional clarifications on the measure.                                 The Spanish authorities replied by letter dated 12 December 2006.(5)By letter dated 24 January 2007, the Commission informed the Spanish authorities that it had decided to initiate the procedure                                 laid down in Article 108(2) of the Treaty on the Functioning of the European Union in respect of the measure.(6)The Commission Decision was published in the *Official Journal of the European Union* (2). The Commission invited interested parties to submit their comments on the measure.(7)The Spanish authorities submitted their observations by letter dated 26 February 2007.(8)The Commission received comments from the following interested parties: the Regional Government of Galicia (Xunta de Galicia)                                 (letter dated 23 March 2007), Céntrica (letters dated 26 March 2007 and 3 July 2007), ACIE — Association of Independent Energy                                 Suppliers (letter dated 26 March 2007), Government of Asturias (letter dated 27 March 2007), AEGE — Association of Energy-Intensive                                 Users (letter dated 2 April 2007, with a supplement of 21 November 2011), Asturiana de Zinc — AZSA (letter dated 3 April 2007),                                 Ferroatlántica — a metal producer (letter dated 3 April 2007), Alcoa (letter dated 3 April 2007), UNESA — Spanish Electricity                                 Industry Association (letter dated 25 April 2007), ENEL Viesgo (letter dated 26 April 2007), Iberdrola (letter dated 26 April                                 2007), Union Fenosa Distribución (letter dated 27 April 2007), Hidrocantábrico Distribución Electrica (letter dated 27 April                                 2007), Endesa Distribución Electrica (letter dated 27 April 2007).(9)By letters dated 15 May 2007 and 6 July 2007, the Commission forwarded the interested parties' comments to the Spanish authorities,                                 who were given the opportunity to react; their comments were received by letter dated 2 August 2007.(10)Further information was submitted by Céntrica by letters dated 1 June 2007, 28 August 2007, 4 February 2008 and 1 March 2008,                                 by AEGE by letter dated 21 November 2011 and by Ferroatlántica by letter dated 5 December 2011.(11)By letters dated 30 July 2009, 19 March 2010, 6 October 2011, 12 April 2012, 31 August 2012, 4 February 2013 and 17 July 2013,                                 the Commission asked the Spanish authorities to provide further clarifications on the measure. The authorities replied by                                 letters dated 5 October 2009, 26 April 2010, 7 December 2011, 12 June 2012, 18 October 2012, 11 February 2013 and 4 October                                 2013.(12)On 19 April 2013 the file was split into two parts: the present case, namely Case SA.21817 (C 3/07, ex NN 66/06), which concerns                                 aid to electricity end-users, and Case SA.36559 (C3a/07, ex NN 66/06), which concerns aid to electricity distributors. The                                 present Decision deals only with possible aid to electricity end-users included in the scope of the procedure, that is, excluding                                 households and small businesses.

2.**DETAILED DESCRIPTION OF THE MEASURE**THE SPANISH ELECTRICITY SYSTEM IN 2005(13)In the legislative framework established by Law 54/1997 of 27 November 1997 (Ley del Sector Eléctrico, hereinafter ‘LSE’),                                 applicable in 2005, the supply of electricity to end-users at regulated tariffs was categorised as a regulated activity. This                                 task was assigned by the Law to distributors.(14)In 2005 all end-users of electricity in the Spanish market could choose whether to negotiate supply contracts with independent                                 suppliers or be supplied at regulated tariffs set by the State. In the regulated market, every end-user who so requested had                                 the right to be supplied by its local distributor at the integral regulated tariff (all-inclusive price) having regard to                                 its consumption profile and consumption volume. In the free market, customers paid a network access charge, which was also                                 regulated, in addition to which they had to meet the costs of energy supply. Since the completion of the reform of the electricity                                 sector in 2009, distributors no longer supply electricity at integral regulated tariffs.(15)Integral regulated tariffs and regulated network access charges were decided *ex ante* for the whole year, normally before N – 1 year-end, but could be adjusted in the course of the year(3). However, annual tariff increases were subject to a maximum cap(4). In principle, tariffs and charges were set, on the basis of forecasts, to ensure that the regulated revenues resulting from                                 their application would suffice to cover the electricity system's total regulated costs. These regulated costs of the system                                 included, in 2005, the costs of energy supply at integral tariffs, the costs of purchasing energy from special schemes (renewable                                 sources, cogeneration, etc.), transport and distribution costs, demand management measures, additional electricity generation                                 costs in the Spanish islands, support for coal, previous years' deficits, etc. There were no rules earmarking a particular                                 category of revenues, or a proportion thereof, for a particular category of costs or proportion thereof. As a result, revenues                                 from network access charges, for example, were not earmarked in whole or in part to finance, for example, subsidies for electricity                                 from renewable sources or electricity produced in the Spanish islands.(16)In 2005 there were no fewer than 25 regulated tariffs for end-users, depending on the consumption level, the consumption profile,                                 the intended consumer and the network connection voltage. At the same time, nine other regulated network access charges were                                 applied to end-users in the free market, also based on connection voltage and other characteristics.(17)On 30 December 2004, the Spanish authorities set the electricity tariffs applicable in 2005(5), corresponding to the following user categories:INTEGRAL TARIFFS**Low voltage**1.0.Power up to 770 kW2.0.General, power not above 15 kW3.0.General4.0.General, long useB.0Public lightingR.0Agricultural irrigation**High voltage***General tariffs**Short use*1.1.General, not above 36 kV1.2.General, between 36 and 72,5 kV1.3.General, between 72,5 and 145 kV1.4.General, above 145 kV*Medium use*2.1.Not above 36 kV2.2.Between 36 and 72,5 kV2.3.Between 72,5 and 145 kV2.4.Above 145 kV*Long use*3.1.Not above 36 kV3.2.Between 36 and 72,5 kV3.3.Between 72,5 and 145 kV3.4.Above 145 kV*Traction tariffs (Tarifas de tracción)*T.1Not above 36 kVT.2Between 36 and 72,5 kVT.3Between 72,5 kV and 145 kV*Agricultural irrigation*R.1Not above 36 kVR.2Between 36 and 72,5 kVR.3Between 72,5 and 145 kVG.*Tariff for large consumers (G4)*
*Tariffs for sales to distributors*
D.1Not above 36 kVD.2Between 36 and 72,5 kVD.3Between 72,5 and 145 kVD.4Above 145 kVACCESS TARIFFS**Low voltage**2,0 AOrdinary low-voltage access tariff2,0 NASimple low-voltage access tariffs with day/night discrimination3,0 AGeneral low-voltage access tariff**High voltage**3.1.AAccess tariff for voltages not above 36 kV (power not above 450 kW)6.1Access tariff for voltages not above 36 kV (power above 450 kW)6.2Access tariff for voltages above 36 kV and not above 72,5 kV (power above 450 kW)6.3Access tariff for voltages above 72 kV and not above 145 kV (power above 450 kW)6.4Access tariff for voltages above 145 kV (power above 450 kW)6.5Access tariff for international exchanges(18)Integral regulated tariffs could be split into a component designed to cover transport, distribution and general system costs                                 (*network access charge*) and a component reflecting the cost of procuring electricity in the wholesale market (*energy component*). Additionally, a system of discounts on integral tariffs was applied to demand management services (e.g. accepted interruptions                                 in power supply upon notice or consumption concentrated in off-peak periods). From 2005 Spain introduced changes in the system                                 of regulated tariffs. The last of these was made in 2013, when Spain adopted a new legislative framework for the electricity                                 sector (Law 24/13) which included, among other measures, the reform of regulation of retail market prices. Spain announced                                 that this new law and its implementing provisions would be drawn up in 2014. Below are some of the basic integral tariffs                                 for the lowest tariff level of the categories referred to above (i.e. not above 145 kV) applicable from 1 January 2005:*Table 1***Basic amount integral regulated tariffs 2005**
*Source:* Annex I to Royal Decree 2392/2004, Commission's calculations.                                             
A/Power componentB/Energy componentIntegral tariff (A + B)EUR/kW monthEUR/kWhEUR/MWh**Low voltage**1.0Power < 770 W0,2771100,06228762,673.0General1,4302690,08372885,714.0General, long use2,2846340,07651379,69**High voltage**1.4Short use, general > 145 kV1,7593580,05841260,862.4Medium use, general > 145 kV3,6326290,05322458,273.4Long use, general > 145 kV9,5119210,04290856,12G.Large consumers G410,2080700,01126525,44(19)The Spanish National Energy Commission (*Comisión Nacional de Energía — C*NE), the Spanish regulator, has stated that, on average, integral tariffs in 2005 did not reflect all the costs of supply,                                 in particular the cost of procuring energy in the wholesale market. In particular, as shown in the graph below, only in the                                 five months between January and February 2005 and then again between April and June 2005 were the prices implicit in the average                                 integral regulated tariffs below average prices in the wholesale electricity market. Conversely, between October 2006 and                                 December 2007 the opposite occurred: during this 14-month period, average wholesale prices fell sharply below the energy prices                                 implicit in the average integral regulated tariffs, well above the difference observed in the seven months of 2005 when wholesale                                 prices were higher than those implicit in integral tariffs.*Graph 1***Weighted average wholesale price vs energy price implicit in integral tariff**
*Source:* CNE — Report on development of competition in gas and electricity markets. Period 2005/2007, p. 84.                           
THE 2005 TARIFF DEFICIT(20)The accounts of the electricity system, based on actual regulated revenues and costs, were settled once a year. In 2005, the                                 level at which the regulated tariffs and the network access charges were set did not generate sufficient revenues to enable                                 the system to recover all the regulated costs documented *ex post* for the entire year. The final settlement process for 2005, carried out by the CNE at year-end, established a deficit of                                 EUR 3 811 million. It was not the first time that the settlement process had given rise to a deficit, although the size of                                 the 2005 deficit was unprecedented. In 2000, 2001 and 2002 lower deficits were recorded.(21)In particular, the government underestimated the actual costs of electricity procurement. Whereas electricity consumption                                 by end-users in both the regulated and the free market developed in 2005 roughly as predicted in December 2004, a series of                                 unforeseen price increases during the year set wholesale prices at EUR 62,4/MWh in 2005 compared with EUR 35,61/MWh in 2004,                                 bringing the average wholesale price in 2005 to EUR 59,47/MWh. The causes of this increase include an unusually dry year,                                 which reduced hydroelectric power production by 55 %, a rise in oil prices, the impact of the market price of CO2 emission allowances received free of charge under the Emissions Trading System and an increase in the demand for energy higher                                 than GDP growth.(22)Another important factor which contributed to increasing the general costs of the system was the high level of aid for the                                 production of renewable energy. In particular, renewable producers could opt for direct participation in the wholesale electricity                                 market or ‘pool’. In 2005 this option was particularly attractive and as a result, more renewable producers than expected                                 participated in the pool, leading to higher costs for the system. In addition, direct aid to the energy costs of electricity                                 under the special scheme (renewables, cogeneration), which were entered in the accounts as a regulated cost, amounted to EUR                                 2 701 million in 2005. By way of illustration, the system's transport and distribution costs amounted to EUR 4 410 million                                 in 2005.**Mechanism adopted to pre-finance the deficit**(23)The development of the deficit did not go unnoticed. Already in March 2005, when it became clear that a tariff deficit was                                 developing, by Article 24 of Royal Decree-Law 5/2005(6) the Spanish authorities stipulated that the funds required to bridge the gap between the costs and revenues of the electricity                                 system would be provided by Spain's five biggest ‘entitled electricity utilities’, which were those entitled to receive compensation                                 for stranded costs(7), on the basis of the following percentages:-  Iberdrola, S.A.: 35,01 %; 
-  Unión Eléctrica Fenosa, S.A.: 12,84 %; 
-  Hidroeléctrica del Cantábrico; S.A: 6,08 %; 
-  Endesa, S.A.: 44,16 %; 
-  Elcogas, S.A.: 1,91 % 
(24)Decree-Law 5/2005 laid down that the future deficit be imputed to the above five companies as a negative balance in an existing                                 deposit account used by the CNE to pay stranded costs to these companies. This meant in practice that the utilities were required                                 to advance the funds. The negative balance in the stranded costs account would give rise to collection rights, consisting                                 in the right of the utilities to collect revenue from electricity consumers in the future. These rights could be securitised                                 and sold on the market by the utilities. The collection rights assigned to these utilities yielded a minimum interest rate                                 (3-month Euribor, calculated as the average Euribor rates for November of the previous year, without any spread).**Mechanism adopted to recover the deficit from end-users**(25)In June 2006, the Spanish authorities took a decision concerning the arrangements for recovering the 2005 deficit from electricity                                 consumers via the regulated tariffs. By Royal Decree 809/2006(8), the Spanish authorities laid down that the 2005 deficit (or, more precisely, the collection rights attributed to the utilities)                                 would be repaid by consumers over fourteen and a half years by means of a special surcharge applied to both integral and access                                 tariffs. The surcharge, calculated as the yearly amount required to recover linearly the net present value of the 2005 deficit                                 over 14,5 years, was set at 1,378 % of the integral tariff, and at 3,975 % of the access tariff for 2006. The applicable interest                                 rate was the 3-month Euribor.(26)This surcharge was regarded as a ‘specifically earmarked contribution’ (*cuota con destino específico*). The Spanish authorities established that the revenues from the contribution to finance the 2005 deficit would accrue in                                 the deposit account managed by the CNE. The CNE would then transfer the funds to the owners of the collection rights, i.e.                                 the generators that financed the deficit or the entities that had subsequently purchased the collection rights from them,                                 according to the share of the deficit financed by each of them.**Effects of the tariff deficit on the Spanish market**(27)In 2005, 37,49 % of electricity demand in Spain was procured on the free market. This quantity corresponds to a relatively                                 small number of consumers; only 8,5 % of consumers purchased energy on the free market, whereas 91,5 % remained on regulated                                 tariffs (down from 97 % in 2004). High-voltage customers (above all industrial customers) were the main category present on                                 the free market; 38,9 % of them had exercised their option and their purchases accounted for 29 % of total electricity consumption                                 in mainland Spain in 2005. The vast majority of households and small low-voltage consumers, which could opt for the free market                                 from 2003(9), were still on regulated tariffs; however, in 2005 a significant proportion of them also opted for the free market. On 31 December                                 2005, over 2 million consumers were in the free market (compared with 1,3 million in 2004).(28)However, the price advantage afforded on average by the regulated tariffs in 2005 should be considered in parallel with the                                 return of consumers to the regulated market, albeit with a certain time lag. As shown in Table 2 below, the number of consumers                                 supplied in the free market increased throughout 2005 but declined in 2006, bringing the percentage (8,15 %) to that reached                                 in the first half of 2005. Likewise, the decline in the amount of energy supplied to end-users in the free market that was                                 apparent in December 2004 continued in the first quarter of 2005. Although it halted significantly between June and September                                 2005, it continued in December 2005 and throughout 2006.*Table 2***Share of supply sites and energy in the free market (as a percentage of the total market) 2004-2006**
*Source:* CNE Report ‘Nota Informativa sobre los suministros de electricidad y gas natural en los mercados liberalizados, actualización                                                31 de diciembre de 2006’.                                             
Electricity200420052006MarJunSepDecMarJunSepDecMarJunSepDecAs a % of supply sites1,532,824,215,737,429,4210,3710,6610,209,288,868,15As a % of energy29,3033,6036,1933,5733,1535,3441,3937,4129,3827,1025,7424,87(29)Although the impact of the losses borne by suppliers began to be felt by mid-2005, when wholesale prices started to increase                                 considerably, supply contracts could not be terminated immediately. As a result, suppliers in the free market, particularly                                 those which did not have generation capacity but had to procure electricity in the wholesale market, were forced to make offers                                 under free-market conditions which matched the regulated tariff despite the possibility of incurring losses, or to charge                                 higher prices reflecting actual procurement costs, thereby losing market share.

3.**DECISION TO INITIATE PROCEEDINGS UNDER ARTICLE 108(2) OF THE TFEU**(30)The Commission decision to initiate the formal investigation compared the regulated tariffs paid by various categories of                                 end-user with the estimated prices they would have had to pay in the free market in the absence of these tariffs. The market                                 price estimates were calculated on the basis of the price of electricity in the wholesale market, the network access charges                                 and an average marketing margin estimated at EUR 10/MWh, as submitted by Céntrica.*Table 3***Price comparison by consumer category**
*Source:* Céntrica.                                             
Consumer categoryRegulated tariff(EUR/MWh)Estimated market price (only wholesale price, plus access tariff)(EUR/MWh)Estimated market price (+ EUR 10 marketing margin)1.Large industrial consumers connected to the high-voltage network (G4 tariff)23,961,1771,172.Large industrial consumers with interruptible supply27,073,87-76,4783,87-86,473.Consumers connected to the high-voltage network76,281,5791,574.Households101,2107,75117,755.Small industrial consumers or service companies connected to the low-voltage network103,9101,07111,07(31)This table showed a significant advantage for the first two categories (large industrial users). For the other categories                                 of end-user, the comparison is less conclusive but a small advantage can still be observed.(32)The decision found that this advantage had been granted selectively, since the artificially low regulated prices favoured                                 undertakings using electricity rather than, for example, gas, as an energy source. Moreover, the existence of *de facto* and *de jure* selectivity was observed, in that the advantage was disproportionately bigger for large industrial end-users, which in certain                                 cases benefited from all-inclusive prices that were less than half the energy component of estimated free-market prices.(33)The opening decision indicated that, by encouraging end-users to switch back to the regulated market, the system might also                                 have benefited distributors, who appeared to have enjoyed a guaranteed profit margin on their regulated activities.(34)The decision also considered that the system involved a transfer of state resources, since the price surcharge used to repay                                 the deficit constitutes a parafiscal levy, the proceeds of which transit through the Spanish Regulator CNE (a public body)                                 before being channelled to the final beneficiaries. The decision concluded that, in the light of Court of Justice case-law                                 on this matter, these funds should be regarded as state resources.(35)Considering that end-users operate in markets which are generally open to competition and trade within the EU, in the opening                                 decision the Commission came to the conclusion that all the criteria laid down in Article 107(1) were fulfilled and that the                                 measure constituted state aid in favour of end-users.(36)After noting that none of the derogations provided for in Article 107 TFEU seemed applicable, the opening decision assessed                                 whether the provision of electricity at regulated tariffs could be considered a service of general economic interest (SGEI)                                 and as such benefit from the derogation provided for in Article 106(2) TFEU. The decision stated that, in the electricity                                 sector, Member States' margin of discretion in establishing public service obligations is limited by the provisions of Directive                                 2003/54/EC of the European Parliament and the Council of 26 June 2003 concerning common rules for the internal market in electricity                                 and repealing Directive 96/92/EC(10) (‘The Electricity Directive’). This Directive lays down an obligation for Member States to establish a universal service                                 obligation (including notably the right to be supplied at reasonable prices) only for household consumers and small enterprises(11). The decision concluded that, in the light of the Electricity Directive, the provision of electricity at regulated tariffs                                 to medium-sized or large undertakings could not be considered an SGEI in the strict sense of the term.(37)The Commission thus expressed serious doubts as to whether the elements of aid in the regulated tariffs that were applied                                 to undertakings other than small enterprises could be considered compatible with the internal market.(38)The opening decision also found that it was possible that electricity distributors received state aid. This part of the case                                 is the subject of a separate decision (case C 3a/07).

4.**COMMENTS BY INTERESTED PARTIES**(39)The Commission's invitation to submit comments on the decision to open the in-depth investigation attracted numerous submissions                                 from large industrial consumers, distributors, independent suppliers and governments of Spain's Autonomous Communities. Only                                 observations relevant to the alleged state aid in favour of electricity end-users will be summarised here.COMMENTS FROM INDEPENDENT SUPPLIERS(40)Comments were received from Céntrica and ACIE, the Association of Independent Energy Suppliers. The arguments and conclusions                                 are largely equivalent.**Comments from Céntrica and ACIE**(41)The main focus of Céntrica's submission is the alleged advantage conferred on electricity distributors. However, the figures                                 and arguments put forward by the company also suggest the presence of state aid for electricity end-users.(42)According to Céntrica, the coexistence between the free and regulated markets, and in particular the possibility for end-users                                 to switch freely between the two, meant that the regulated tariffs acted as a price reference, or a *de facto* cap, on free-market prices. Suppliers could not charge prices higher than the regulated tariff, or they would fail to attract                                 new customers and lose existing ones.(43)Normally, in a free market, the price paid by electricity end-users consists of two components: the network access charge                                 and a ‘supply component’, which results from market mechanisms and goes to the retail supplier. In retail supply, profitability                                 depends on whether the ‘supply component’ paid by customers covers the supplier's costs (i.e. energy procurement costs in                                 the wholesale market or own generation costs in the case of a vertically integrated company) and a ‘marketing margin’, which                                 includes other supply costs (marketing costs, IT systems, billing, etc.) and remuneration on the capital invested. Therefore,                                 a free-market supplier could operate profitably in a given market segment only if there was a ‘positive marketing margin’,                                 in other words a difference between the general costs incurred by the supplier in serving customers and the regulated tariff.(44)Céntrica substantiated the existence of a competitive disadvantage for free-market suppliers through calculations showing                                 that there were no marketing margins in 2005 for any consumer category(12) (or that whatever margins existed at the beginning of the year were eroded during the year). This meant that the regulated                                 tariffs were set too low for independent suppliers to compete profitably. According to Céntrica, it was not possible to compete                                 for certain categories of end-user (notably energy-intensive users on the G4 tariff and other large industrial users) even                                 before the emergence of a tariff deficit, since the integral tariffs never left any margin to compete. The competitive disadvantage                                 alleged by Céntrica occurred above all in the user category comprising service undertakings and small industries connected                                 to the low-voltage network, and in the household segment.(45)The figures provided by Céntrica, notably the comparison between regulated tariffs and estimated market prices, are taken                                 over in the Commission's opening decision (see recital 30 and Table 3).(46)In Céntrica's view, the system breached the Electricity Directive, not only because of the discriminatory nature of the deficit                                 arrangements (which compensated for the losses of distributors but not of suppliers) but also because consumers were deprived                                 of the right to transparent prices and tariffs(13). Since part of the electricity price payable for 2005 was deferred to future years, the final prices charged were not transparent                                 for consumers.(47)Besides, Céntrica claimed that the deficit repayment mechanism was not balanced for two main reasons: firstly, the deficit                                 would be repaid mostly by low-voltage end-users, even though the users which contributed most to its creation were large high-voltage                                 end-users. Secondly, end-users in the free market were required to pay for a deficit to which they did not contribute.(48)Céntrica supported the Commission's preliminary view that the Spanish deficit arrangements involved a transfer of state resources.                                 Céntrica also held that state resources were involved in the Spanish Government's decision to allow generators to securitise                                 their collection rights.(49)ACIE, the Association of Independent Energy Suppliers, estimates that the energy procurement cost taken as the basis for the                                 regulated tariffs in 2005 was 68 % below the actual cost sustained by suppliers when purchasing energy in the wholesale market.                                 ACIE underlined the severe repercussions that the 2005 tariff deficit had on independent suppliers. According to ACIE, suppliers                                 in the free market were subject to similar procurement costs to those of distributors. Moreover, they were *de facto* obliged to adjust to the level of the integral tariff set by the government for each customer category, since otherwise they                                 would not have been able to attract new customers or retain existing ones. In particular, ACIE points out that, at the beginning                                 of 2005, its members concluded contracts based on the government's forecasts of wholesale prices, and that they later had                                 to honour such contracts even though they turned out not to be profitable. As a result, independent suppliers experienced                                 losses. Céntrica estimates that in 2005 it suffered losses of EUR 10 million. According to ACIE, several suppliers, including                                 Saltea Comercial, Electranorte, CYD Energia and RWE, were forced out of the market.COMMENTS FROM ENERGY-INTENSIVE USERS(50)Energy-intensive users took part in the procedure through their association AEGE (Asociación de Empresas con Gran Consumo                                 de Energia). Some of them (Asturiana de Zinc, Ferroatlántica and Alcoa) also took part individually. Alcoa is an aluminium                                 producer which operates three production facilities in Spain, located in San Ciprián, La Coruña and Avilés, which benefited                                 from the G4 integral tariff (the interruptible tariff reserved for energy-intensive users) in 2005. Ferroatlántica is an aluminium                                 and iron alloys producer which benefited from the 3.4 interruptible tariff. Asturiana de Zinc is a zinc producer which benefited                                 from the G4 tariff for its plant in San Juan de Nieva.(51)In their observations, the energy-intensive users challenge the Commission's conclusion that the industrial tariffs (G4 and                                 other interruptible tariffs) constitute state aid, arguing that the tariffs did not confer an economic advantage, did not                                 involve state resources and did not affect competition and trade between Member States.**No economic advantage**(52)In the opinion of energy-intensive users, the benchmark used in the opening decision to establish the presence of an advantage                                 is incorrect. The Commission compared the industrial tariffs with the average wholesale market price (the pool price), which                                 was considered representative of the cost these companies would have paid in the market under normal conditions. Since the                                 industrial tariffs were found to be lower than the pool price, the opening decision concluded that the tariffs conferred an                                 economic advantage on their beneficiaries.(53)Energy-intensive users claim that the pool is a spot market in which electricity is traded every hour for the following day.                                 According to the energy-intensive users, the pool suffers from certain shortcomings that affect its efficiency and competitiveness.                                 Consequently, the pool prices do not accurately reflect marginal generation costs and therefore do not reflect a situation                                 of perfect competition. Large end-users, which consume large volumes of electricity and have flat consumption profiles, do                                 not purchase from the pool, but typically enter into bilateral contracts with electricity suppliers. This is confirmed by                                 OMEL's 2005 report, which shows that only seven of eligible users, representing 5 % of traded electricity, procured electricity                                 directly on the pool.(54)In any event, even assuming that prices recorded on the pool could be considered a valid benchmark, it would not be correct                                 to use the average wholesale price in 2005, as the Commission did, since this average price reflects the electricity demand                                 of suppliers who served a varied portfolio of end-users, including households and small undertakings. According to AEGE, Ferroatlántica                                 and Asturiana de Zinc, an appropriate benchmark would be the minimum price recorded on the pool in 2005, i.e. EUR 18,6/MWh,                                 as this price would reflect the most competitive market conditions on the pool (where generators offer electricity at a price                                 equivalent to their marginal costs). Large industrial consumers are not in a comparable situation to other end-users, particularly                                 households. Therefore, the average pool price would not be the appropriate benchmark. According to Alcoa, the Commission should                                 instead compare the contested tariffs with prices contracted bilaterally by large end-users.(55)Alcoa provided one example of a bilateral market price and indicated that its three aluminium plants had always benefited                                 from the G4 tariff. However, Alcoa also owns an alumina plant (Alúmina Española) for which a bilateral contract was entered                                 into with a supplier at the end of 2004. The contract was for two years, extendible for an additional year. The three aluminium                                 plants have the same flat consumption profile as the alumina plants. However, the latter consume considerably lower volumes                                 of electricity (0,35 TWh as against 1,3 TWh at the Avilés and La Coruña plants, and 3,4 TWh for the San Ciprián plant). The                                 average price agreed on the basis of this contract was EUR 34,45/MWh (including the cost of the nuclear moratorium, network                                 access costs and other ancillary costs). This price was obtained on the basis of a competitive tender, and suppliers' bids                                 were within EUR 5 of each other.(56)According to Alcoa, the difference between this bilateral price (EUR 34,45/MWh) and the G4 tariff (EUR 23,9/MWh) can be explained                                 by objective factors. In particular, users on the G4 tariff are subject to regulatory restrictions which do not apply to bilateral                                 contracts, such as the obligation to use all the power contracted under the G4 tariff (subject to penalties), the requirement                                 to own voltage control equipment, and the requirement to pay within 20 days (whereas bilateral contracts have better terms                                 of payment).(57)Alcoa thus concludes that a hypothetical market price applicable to its three aluminium plants would be well below EUR 34,45/MWh                                 because of the higher consumption level of these plants. Furthermore, if an average marketing margin of EUR 10/MWh was considered,                                 the net cost of supply of the alumina plant would be EUR 24,25/MWh, which is very close to the G4 integral tariff.(58)Ferroatlántica pointed out that the opening decision misrepresented the 3,4 regulated tariff used in 2005 by wrongly including                                 discounts in the basic tariff and comparing it with an access charge ten times higher than the one applicable (and that of                                 very large consumers). Ferroatlántica also provided evidence that, while the monthly average market price in 2004 for forward                                 contracts for electricity supply in 2005 was EUR 31,68/MWh, this price was EUR 31,05/MWh in December 2004. It would follow                                 that a company would have obtained its basic electricity supply in 2005 at that price at the time when the regulated tariffs                                 were set. After adding ‘additional services’ (EUR 3,92/MWh) and the relevant access tariff (EUR 1,70/MWh), an industrial user                                 would have obtained a market price of EUR 36,67/MWh, which is below the amount of EUR 56,11/MWh of the 3,4 tariff applicable                                 to energy-intensive users.(59)In fact, other discounts on that tariff remunerated the capacity to provide demand management services and the acceptance                                 of these services for the benefit of the system. In this respect, Ferroatlántica adds that the discount on the tariff reflected                                 various services supplied, namely, hourly discrimination (with night and weekend consumption), interruptibility (acceptance                                 of supply upon request of the network operator), seasonality (with concentration of supply in low-demand months) and management                                 of reactive energy. It is only these discounts, which were variable and set by regulation from 1995, and not the regulated                                 tariff level, that explain and, in the view of Ferroatlántica, justify the lower average electricity price paid in 2005.(60)Energy-intensive users contest the statement in the opening decision that the advantage was not proportional to the volumes                                 consumed, and tended to increase for large consumers. On this point, energy-intensive users claim, for example, that the CNE                                 itself confirmed that the level of the G4 tariff should have been even lower. Energy-intensive users note that large consumers                                 under the G4 or 3,4 tariff consumed several thousand times more electricity than average high-voltage consumers, while paying                                 three times less than them.(61)Furthermore, it would be normal for large consumers to obtain a higher unit discount on the price. On this basis, energy-intensive                                 users claim that the conclusion that the industrial tariffs involved an advantage is debatable. They point out that in any                                 event it is for the Commission to provide conclusive proof of the existence of such an advantage.(62)Alcoa also indicated that the price paid by Alcoa in Spain was almost identical to the average weighted price paid by aluminium                                 plants in the EU, and was even higher than the average weighted price paid in the EEA.**No state resources**(63)Energy-intensive users submit that it was they who paid industrial tariffs directly to distributors, without the funds coming                                 under the control of the State, and therefore, in line with the *PreussenElektra* case law, such an arrangement did not involve state resources.(64)Energy-intensive users argue that there was a time lapse between the setting of the tariffs, which took place at the end of                                 2004, and the adoption of the mechanism to recover the deficit from consumers, which did not take place until June 2006. In                                 the opening decision, the Commission argued that state resources were involved because of the introduction of the surcharge                                 in users' bills, which was qualified as a parafiscal charge. Energy-intensive users submit that, if this hypothesis is accepted,                                 a measure which was not aid in 2005 would become aid (*ex-post*) in 2006. This would be contrary to fundamental principles of EU law such as legal certainty and legitimate expectation.                                 Energy-intensive users point out that the classification of a measure as aid depends only on the circumstances existing at                                 the time of its adoption, and cannot depend on future events, particularly when they are not reasonably predictable. They                                 quote Advocate General Jacobs in the *Van Calster* case(14): ‘the situation should be assessed on the date of the initial introduction of the charges, and cannot be altered retroactively’.(65)Energy-intensive users submit that the 2005 regulated tariffs did not constitute state aid in 2005. These companies point                                 out that, in these circumstances, the analysis of the financing mechanism is irrelevant, as the latter was introduced only                                 in 2006. The assessment of the mode of financing would be relevant only if the measure constituted state aid from the outset.                                 Since the tariffs did not include aid, energy-intensive users take the view that the Commission cannot rely on the surcharge                                 to come to the opposite conclusion.(66)Energy-intensive users further submit that, in the case of parafiscal taxes, the mode of financing of a measure is in any                                 event only relevant to the state aid assessment where the tax is ‘hypothecated to the aid’, i.e. when there is a direct and                                 immediate link between the measure and its financing(15). Energy-intensive users deny the existence of such a link, as the surcharge was designed to cover a deficit which arose during                                 the settlement of regulated activities, which concerned not only the provision of electricity at regulated tariffs, but also                                 other system costs. The surcharge was therefore not specifically allocated to cover losses arising from the supply at regulated                                 tariffs. Secondly, there was no direct or indirect link between the level of the tariffs and the surcharge applied, since                                 the tariff set in 2004 was unconditional (not subject to further adjustments in later years).(67)Energy-intensive users also submit that the surcharge did not constitute a parafiscal charge or levy, because it was not of                                 a fiscal nature under Spanish law. Fiscal measures are used to finance public expenditure, whereas in this case the aim of                                 the surcharge was to recover a deficit that had been incurred by private operators (distributors) which carried out regulated                                 activities within the electricity system. According to the Spanish Constitution, a new fiscal measure can only be introduced                                 by a law (not by a Royal Decree). Furthermore, the State never owns or has discretion to dispose of the proceeds of the surcharge;                                 these funds are transferred to a deposit account managed by the CNE, and cannot be appropriated by the State. The settlement                                 process is fully automatic, and the CNE has no margin of discretion, autonomy or control over the destination or the amount                                 of the funds to be settled for the various players.(68)According to energy-intensive users, this was recognized by the Commission in its Decision on the Spanish Stranded Costs(16), which stated that ‘the transfer of the amounts via the CNE is essentially for accounting purposes’ and does not conclude                                 that the measure involved state resources.(69)Energy-intensive users submit that this situation is identical to the ‘stranded costs’ scenario, since in both cases the government                                 introduced a surcharge aimed at compensating a permanent cost of the system. This line appeared to be confirmed also in a                                 case involving the United Kingdom(17).**No impact on competition and trade**(70)Asturiana de Zinc and Alcoa contend that, due to the specific characteristics of the aluminium and zinc markets, a measure                                 concerning the price of electricity used in the production of these metals can have no impact on EU trade, since metals are                                 commodities and their prices are set at world level on the London Metal Exchange. In these circumstances, variations in local                                 production costs do not translate into differences in world prices.(71)The two companies submit that there is a growing production deficit in the EU for aluminium and zinc, while demand is increasingly                                 being met by exports from non-EU states.(72)If the aluminium and zinc industries disappeared in Spain, no new EU entrant would step in, as EU (aluminium) plants are already                                 working at full capacity, and no new entrant or existing producer would have an incentive to increase capacity, given that                                 long-term prospects are uncertain as regards future availability of affordable power. The deficit would therefore be covered                                 by imports alone.(73)Moreover, Alcoa claims that the interests of other European producers are not threatened by the tariffs, since they offer                                 electricity at a price which is identical to the average price paid by other aluminium producers in EU-25.**Even if the industrial interruptible tariffs constituted aid, it would be ‘existing aid’**(74)Energy-intensive users claim that the contested tariffs already existed before the accession of Spain to the EU.(75)Even though the denomination ‘G4 tariff’ was formally introduced by the Ministerial Order of 6 March 1986, it existed *de facto* already before 1 January 1986, the date of Spain's accession to the EU, since it corresponds to the former ‘long-use industrial                                 tariff I’ established by Ministerial Order of 14 October 1983, i.e. before Spain's accession. All electricity end-users benefiting                                 from industrial tariff I were automatically switched to the G4 tariff, which was *de facto* the same tariff under a new name.(76)The other interruptible tariffs are also explicitly provided for in the 1983 Ministerial Order.(77)Furthermore, according to energy-intensive users, the measure would constitute existing aid on the basis of Article 15 of                                 Council Regulation (EC) No 659/1999 of 22 March 1999 laying down detailed rules for the application of Article 108 of the                                 Treaty on the Functioning of the European Union(18), owing to the expiry of the 10-year limitation period.**Recovery would be precluded by legitimate expectations**(78)Energy-intensive users submit that, even assuming that the tariffs could not be deemed to constitute existing aid, recovery                                 would be precluded by the principle of legitimate expectation. Throughout 2005, the tariffs were a direct payment between                                 private operators. Users could not have predicted that tariffs set in December 2004 would become aid by virtue of a government                                 measure adopted in June 2006. No economic operator, however prudent, could have expected this change in its legal situation.                                 Therefore, users had a legitimate expectation that their tariffs did not involve state aid.COMMENTS FROM THE REGIONAL GOVERNMENTS OF GALICIA AND ASTURIAS(79)As regards possible aid to energy-intensive users, the Regional Government of Galicia submits that the Commission was wrong                                 to use the pool price as a substitute for the market price, since energy-intensive users normally enter into long-term contracts                                 on considerably better terms.(80)Given that the liberalisation of the Spanish market has not yet been completed, and given in particular the absence of bilateral                                 contracts between producers and large consumers, the Regional Government of Galicia considers that it would make sense to                                 use as a benchmark the actual costs paid by producers to supply these customers. An alternative would be to obtain a benchmark                                 price based on the technical literature (Wilson, 1993(19) and Castro-Rodriguez(20), 1999), by considering either the cost of the most efficient technology meeting the specific needs of energy-intensive users                                 or the average cost of electricity during the different hours of the day. The gap between a benchmark price thus obtained                                 and the regulated tariff paid in 2005 would be much lower. The Regional Government of Galicia further argues that, in any                                 event, all Spanish users, including energy-intensive users, will, in time, repay the deficit caused by the lower tariffs applied                                 in 2005.(81)Furthermore, according to the Regional Government of Galicia, the tariff system as it stood in 2005 was not legally selective,                                 since the State did not intend to confer an advantage on end-users but merely made errors in its forecasts of market trends                                 and prices when it set the tariffs in 2004. The Regional Government of Galicia also contests the conclusion that the system                                 had an impact on trade within the EU.(82)The comments from the Asturias regional government are similar to those put forward by the Spanish Government, to which they                                 refer.OBSERVATIONS BY SPAIN(83)Spain maintains that the regulated tariffs system in 2005 did not involve aid, either for end-users or for distributors.**No causal link between state action and the deficit, and the deficit cannot be imputed to the State**(84)Spain contends that the deficit is not imputable to the State since it was caused by unpredictable external circumstances                                 and not by the State's deliberate intention to subsidise certain activities.(85)Spain submits that supply at regulated tariffs set by the State was not precluded by EU law in 2005. Therefore, state regulatory                                 intervention was legally valid, as it was the expression of national sovereignty. One of these sovereign prerogatives consists                                 in setting the tariffs so that expected costs match expected demand.(86)Spain submits that the 2005 deficit was caused by a discrepancy between the government's forecasts of wholesale electricity                                 prices and the actual prices recorded on the pool. The exceptionally high prices of 2005 were driven by unpredictable causes                                 amounting to force majeure.(87)Since the event generating the alleged aid was a higher-than-forecast increase in wholesale prices, the alleged advantage                                 could not be imputable to any legal act. Even assuming that this advantage had existed (which is not the case), it would have                                 been caused by circumstances unrelated to the State's intentions. The existence of force majeure, according to Spain, breaks                                 the causal link between the administrative decision setting the level of the tariffs and the competitive advantage giving                                 rise to state aid. Even assuming (which is not the case) that the objective condition of the causal link was met, the subjective                                 condition of intentionality (imputability) on the part of the State would be absent.**No state resources**(88)Spain submits that the tariffs did not involve public funds. Firstly, Spain claims in this respect that the surcharge is not                                 a ‘charge’ within the meaning of the case-law of the European Court of Justice on parafiscal levies, because it is not collected                                 by the State and does not correspond to a fiscal levy. According to Spain, the surcharge is an integral part of the tariff                                 and is like a tariff in nature. The tariff is thus a private price.(89)Secondly, the funds are not collected by the State and are not paid into a fund designated by the State. The tariffs are collected                                 by distributors, not by the State, and therefore they are private prices which ensure the equitable remuneration of the players                                 (as laid down in the LSE). They are neither taxes nor public prices. The State does not remunerate anything, since it is the                                 system that provided remuneration by virtue of market forces for non-regulated activities and by virtue of access tariffs                                 set by the State as regards regulated activities. Since in such a system there is no burden for the State, no state resources                                 would be involved, according to the *Sloman Neptune* case law(21). Furthermore, these funds never flow into the state coffers, are not mentioned in budgetary laws, are not subject to verification                                 by the Court of Auditors, and cannot be recovered from debtors by means of administrative recovery procedures. Debts vis-à-vis                                 the electricity system are not subject to the interest rate applicable to debts owed to the State.(90)Spain reiterates that these funds are handled by the Spanish Regulator, the CNE, which acts as a mere accounting intermediary.                                 Spain points out that in its 2001 decision on the Spanish stranded costs (SA NN 49/99) the Commission had already established                                 that ‘the transit of funds through the CNE is of an essentially accounting nature. The funds transferred to the account in                                 the name of the CNE never became the property of this body, and were immediately paid to the beneficiaries according to a                                 pre-determined amount which the CNE is unable to modify in any way’. On the basis of this consideration, the Commission came                                 to the conclusion that ‘it [was] not in a position to determine whether the proceeds of the levy established within the framework                                 of the Stranded Costs scheme constitute state resources’.**No advantage**(91)Spain does not share the Commission's view that regulated tariffs confer an economic advantage on end-users (or distributors).(92)As regards end-users, after reiterating that the deficit is the result of force majeure, Spain contends that the deficit did                                 not benefit large consumers, because it was passed on to the tariffs for the following years with interest. Therefore, the                                 alleged economic advantage arising from a lower electricity price is only apparent, since the difference with respect to free                                 market prices is repaid with interest by consumers.**Supply at regulated tariffs is a service of general economic interest**(93)Spain submits that in 2005 the existence of regulated tariffs was not contrary to EU law, as the deadline for opening up the                                 market to all consumers including households was 1 July 2007.(94)In particular, according to the Spanish authorities, electricity supply is a service of general interest, and the State must                                 intervene to avoid abuses of dominant positions arising from the existence of a single network (natural monopoly).(95)The parameters for setting the tariffs were set in an objective and transparent way. The complex regulatory framework for                                 setting the tariffs and the settlement procedure demonstrate, in Spain's view, that the tariff system was based on a thorough                                 analysis of the costs and revenues of the system, and an analysis of electricity demand.**Undertaking from Spain**(96)As noted in recitals 25 and 26, the deficit generated in 2005 is being repaid in annual instalments, which yield an interest                                 rate set at the Euribor rate, without any spread. Without prejudice to its comments, Spain has undertaken to retrospectively                                 raise the interest rate charged to business users with connections of more than 1 kV. The increase will be determined in proportion                                 to the contribution to the 2005 deficit of business users which are the subject of the current proceedings, and which were                                 supplied at integral regulated tariffs. It will result from the application of a spread of 65 basis points over the Euribor                                 reference, thus aligning it broadly with the rate applied to the deficit in the following years.(97)The relevant amount will be charged to business users as follows: as regards the annual instalments of the part of the 2005                                 deficit which has already been repaid, a one-off increase in access tariffs will be applied; as regards the amounts still                                 to be reimbursed, the higher interest rate will be applied directly to each annual amount, again in the form of higher access                                 tariffs.

5.**ASSESSMENT OF THE MEASURE**PRESENCE OF STATE AID PURSUANT TO ARTICLE 107(1) OF THE TFEU(98)A measure constitutes state aid within the meaning of Article 107(1) of the TFEU if the following conditions are met: the                                 measure (a) confers an economic advantage on the beneficiary; (b) is granted by the State or through state resources; (c)                                 is selective; (d) has an impact on intra-Community trade and is liable to distort competition within the EU. Since these conditions                                 must all be met, the Commission will confine its assessment to the existence of an economic advantage conferred on the beneficiaries.**Presence of an economic advantage**(99)Undertakings are favoured within the meaning of Article 107(1) of the TFEU if they obtain an economic advantage which they                                 could not otherwise obtain under market conditions. In the case at hand, the assessment must establish, having regard also                                 to the repayment of the 2005 deficit of the electricity system, whether there was any positive difference between the regulated                                 tariffs set in 2005 and the market prices that the potential beneficiaries would have had to pay for the electricity purchased                                 and the services supplied under their tariff regime. Any advantage with respect to market conditions must be established by                                 reference to actual market prices. Both matters, i.e. the existence of positive differences — or the absence thereof — between                                 electricity pool prices, market prices and regulated tariffs, and the repayment of the deficit, are examined in turn below.*Comparison with electricity pool average prices*(100)The average prices of the electricity pool provide an indication of general price levels in the wholesale market. This average                                 reference price was EUR 59,47 MWh in 2005, for the entire year. As indicated and illustrated in recital 19 (Graph 1), in seven                                 non-consecutive months in 2005 average wholesale prices were above the electricity prices implicit in the integral regulated                                 tariffs applied to all end-users. Therefore, the average tariff level set by Decree 2392/2004 appears to have given rise to                                 a positive difference in favour of all the end-users which opted for regulated tariffs, at least for the majority of months                                 in 2005.(101)However, in monthly periods of less than a year, this difference did not arise during the five months between January and                                 May 2005. There was therefore no advantage for the entire regulated tariff system. Furthermore, if the comparison is made                                 between periods of more than one year, e.g. until 30 December 2007, the possible accumulated advantage from June 2005 is more                                 than cancelled out by the decrease in average pool prices, which fell sharply to EUR 37/MWh in March 2007, while the prices                                 implicit in the integral regulated tariffs were around EUR 68/MWh during the same period. In fact, from October 2006 the electricity                                 prices implicit in integral tariffs were much higher than wholesale supply prices (see Graph 1). Consequently, the benefits                                 and economic advantages to consumers which were supplied at regulated tariffs, where pool prices are higher than the implicit                                 cost of electricity in the regulated tariffs, may be cancelled out when pool prices are lower than the implicit cost of electricity.(102)It follows that, both in monthly periods of less than one year in 2005 and two-year periods encompassing part of 2005, the                                 energy prices implicit in the regulated tariffs applicable in 2005 do not appear to have provided an advantage to the group                                 of consumers supplied at regulated tariffs, when compared with the electricity pool wholesale prices. However, the fact is                                 that revenue from access charges and regulated tariffs paid in respect of the whole electricity system were not sufficient                                 to cover the regulated costs of the system in 2005. It must therefore be considered whether the mechanism in place is sufficient                                 to guarantee repayment of the deficit.*Repayment of the 2005 deficit of the electricity system*(103)As described in recitals 15 and 20-22 above, the accounts of the electricity system in 2005 encompassed all the regulated                                 costs and regulated revenues of the system without assigning specific revenues to specific costs. For instance, transport                                 and distribution costs (EUR 4 410 million) or cogeneration and renewable energy support costs (EUR 2 701 million) were not                                 divided between, respectively, regulated revenues from integral tariffs in the regulated market and/or revenues from regulated                                 access charges in the free market, and were not financed differentiating between these two types of revenue. In fact, all                                 the system users receive a profit and can be expected to cover costs of support for efficient forms of cogeneration and renewable                                 energy, or transport and distribution services. In this system of non-cumulative costs for each tariff, it is impossible *ex post* to objectively assign the distribution of costs to free market users and users at regulated tariffs and, within the latter                                 category, to the 25 different tariff steps applicable in 2005. It follows that it is appropriate to examine the possible advantages,                                 or absence thereof, of the 2005 deficit for the electricity system as a whole.(104)In this respect, Spain has put in place a mechanism for recovering the whole of the 2005 deficit. This is consistent with                                 this universality of the accounts of the system applied during that period. The shortfall in regulated revenues of the electricity                                 system to cover the system costs was addressed through the injection of resources collected through the ‘specifically earmarked                                 contribution’ provided for by Royal Decree 809/2006. From mid-2006, recovery began through the application of a surcharge                                 on the value of 1,378 % on integral regulated tariffs and 3,975 % on access charges and, thereafter, the surcharges needed                                 to ensure that over 14,5 years ending in 2020, the EUR 3,8 billion plus interest is recovered (see recitals 25 and 26 above).(105)It follows that the revenue from the special contribution earmarked for financing the 2005 deficit allows system users to                                 pay electricity bills, with the increase needed to balance the 2005 system accounts *ex post*, with a significant time lag.(106)Under these circumstances, the only debatable aspect of the method chosen in 2006 to repay the 2005 electricity system deficit                                 and balance the accounts would be the low interest rate initially applied to the annual repayments, namely the Euribor reference                                 rate without any spread. As described in more detail in recitals 96 and 97, Spain has undertaken to increase the interest                                 rate applicable to the business users which are the subject of the present proceedings. Spain undertakes to apply a spread                                 of 65 basis points over the reference interest rate.(107)Application of this modification to the measure initially applied to repay the 2005 deficit, which excludes households and                                 small businesses that have paid the highest regulated tariffs under the correction mechanism, cancels out any hypothetical                                 advantage the companies may have obtained from the deferral of payments from 2006. In addition, the application of a surcharge                                 on the tariff means that the total amount recovered is, for each company, directly proportional to its electricity consumption.                                 The more electricity consumed, the higher the surcharge.*Comparison with electricity market prices*(108)Secondly, as noted by some interested parties, prices recorded in the electricity pool are not adequate benchmarks for comparing                                 the electricity prices paid by large consumers under regulated tariffs with market prices. Indeed, based on the evidence in                                 the 2005 report of the electricity market operator OMEL, only seven end-users accounting for 5 % of demand were sourcing electricity                                 directly from the pool, compared with hundreds of industrial and large business users. Industrial and other large consumers,                                 in particular energy-intensive consumers for whom energy accounts for a sizeable proportion of their production costs (typically                                 30-40 % for aluminium production) require and obtain predictable price and supply conditions. These conditions are established                                 in contracts with longer terms than day-ahead. The prices quoted hourly on a day-ahead market such as the electricity pool                                 are illustrative of average market prices for suppliers serving a varied portfolio of customers, including households. They                                 are, however, not adequate benchmarks for determining the prices which energy-intensive users should pay in the free market                                 under contracts with longer terms than day-ahead. Contrary to the opinion given in the opening decision, the investigation                                 has shown that regulated tariffs lower than average pool prices do not necessarily imply an advantage over market conditions                                 for industrial users, since the pool prices are not market prices for most of these users. This dispels the doubts raised                                 in this connection.(109)Moreover, in Spain, the option of switching to the free market was not irreversible in 2005. Consumers were constantly able                                 to choose between the most attractive offers in the regulated and free markets, which led to a degree of price convergence.                                 The reversibility of supply options tends necessarily to depress retail market prices in situations of wholesale price-hikes                                 like those in Spain from April 2005, whereas the opposite incentive to increase free market prices to bring them closer to                                 the highest regulated tariff levels appears when the situation is reversed.(110)As confirmed by the association of independent suppliers (recitals 42-49), in 2005 suppliers in the free market had to honour                                 their contracts or terminate them unilaterally, if this was possible, or else renegotiate their prices and adjust them upwards,                                 taking the risk that their customers might switch to the regulated market. The operating losses that the free market suppliers                                 claim to have incurred indicate that prices in the free market in 2005, especially for one-year contracts which were honoured,                                 remained close to the respective regulated tariff levels, and, accordingly, that regulated tariffs did not *de facto* confer an economic advantage compared with actual prices in the free market.(111)This implies, therefore, that two hypothetical competing industrial users, one operating under a free market-based one-year                                 electricity supply contract from January to December 2005 and the other obtaining supplies at regulated tariffs in the same                                 period faced, all other things being equal, similar electricity costs. In fact, the only effect that the level of the regulated                                 tariffs had on prices in the free market in 2005 was to confer on free-market users the indirect benefit of limiting price                                 increases, even assuming that these increases were contractually possible during the year or, in the longer term, in the whole                                 of 2005. The actual or potential competition between industrial users obtaining electricity in the free and regulated markets                                 could not distort regulated tariffs.(112)Thirdly, in its opening decision, the Commission referred in particular to the low regulated tariff levels of EUR 23,9/MWh                                 and EUR 27,0/MWh, applied in 2005 to large industrial consumers (G4 tariff) and to large industrial consumers with interruptible                                 supply (e.g. 3,4 tariff), respectively, as shown in Table 3 in recital 30 above. As pointed out by certain third parties,                                 the levels of regulated tariffs objected to in the opening decision are not tariffs but average prices after discounts. Without                                 discounts, the basic tariff levels actually laid down in Decree 2392/2004 shown in Table 1 were, respectively, EUR 56,12/MWh                                 (3,4 tariff) and EUR 25,44/MWh (G4 tariff).(113)In this respect, the formal investigation provided evidence that the regulated tariffs applicable to industrial users mentioned                                 in the opening decision were at the level of the market prices applicable for the whole period between January and December                                 2005, as is shown below:(114)Firstly, evidence has been provided that there were bilateral market prices of EUR 34,45/MWh which were applied to energy-intensive                                 users in the free market in 2005 (recitals 55-57). With a marketing margin lower than the average EUR 10 margin added in the                                 decision opening the formal investigation, this market price shows a supply cost close to EUR 25,44/MWh of the lowest (G4)                                 regulated tariff (EUR 23,9/MWh of average *ex-post* price). When account is taken of objective differences concerning supply under the regulated tariff, such as supply volumes                                 9,7 times higher, investment in control equipment and payment time limits, the fact that the regulated tariff was lower does                                 not appear to have conferred any undue economic advantage on the beneficiaries.(115)Secondly, the evidence available shows that in December 2004 one-year contracts on baseload supply, based on forward market                                 prices of EUR 31,05/MWh, could be concluded for supply between January and December 2005. A final market price (with additional                                 services and access tariff) of EUR 36,67/MWh, which is lower than the relevant basic tariff level (tariff 3,4), was available                                 for interruptible industrial users with strong load modulation (see recitals 16, 18 and 58 above).(116)Additional discounts available under regulated tariffs for demand management (e.g. load modulation, interruptibility) allowed                                 for lower average prices in the regulated market for the users providing these services(22). These discounts, which were not specifically addressed in the opening decision, remunerated valuable demand-side services                                 to the network, which required adjustments, investments or restrictions imposed in commercial or industrial processes. Load                                 modulation requires energy-intensive industrial or commercial processes to be carried out in off-peak rather than peak periods                                 in order to reduce consumption and voltage in the electricity network. In the same way, interruptibility services supplied                                 to the network are economically useful since they consist, for the industrial user in question, in allowing the system operator                                 to interrupt supply at short notice (from a few seconds to two hours) and for a long period (from one to 12 hours), as was                                 the case with the relevant regulated tariffs in Spain.(117)The benefits of these services in terms of guaranteeing continuity of electricity supply are recognised in EU legislation.                                 Directive 2005/89/EC of the European Parliament and of the Council of 18 January 2006 concerning measures to safeguard security                                 of electricity supply and infrastructure investment(23) requires Member States to take account of demand management technologies and to take measures to remove the barriers preventing                                 the use of interruptible contracts in order to maintain the balance between supply and demand. These services supplement and                                 may even replace other means of regulation used by the network operator to guarantee that demand for electricity from the                                 network is in line with supply, thereby avoiding interruptions and blackouts, which are socially and economically costly and                                 may trigger sanctions or liabilities.(118)Specifically in the case of Spain, the absence of a significant interconnection capacity with other Member States and the                                 significant penetration of intermittent electricity supply from renewable energy sources in 2005 make these services particularly                                 valuable. The extent of their economic value and of the costs that may be avoided in the electricity system can be illustrated                                 in terms of the costs borne by the Spanish network operator Red Eléctrica de España in purchasing balancing services. In 2005                                 Red Eléctrica de España paid, on average, EUR 65/MWh for secondary regulation services to increase energy (adding additional                                 energy on line for between 15 seconds and 15 minutes to balance the network); for tertiary regulation of energy increase (adding                                 additional energy on line between 15 minutes and 2 hours to restore the secondary regulation energy reserve), the average                                 price in 2005 was EUR 78/MWh, going up to EUR 600/MWh(24). By flattening demand and removing it from peak times (load modulation) or providing the capacity to reduce it in critical                                 situations (interruptible services), discounts on the relevant regulated tariffs (e.g. around EUR 32/MWh on the 3,4 tariff)                                 appear to be economically justifiable.(119)In the absence of such discounts for demand-management measures, regulated tariffs for users connected to the high-voltage                                 network (1,4 and 2,4 tariffs) stood at a much higher level, between EUR 58 and 61/MWh for the basic tariff and EUR 76,2/MWh                                 for the average actual price. When compared with forward market prices of EUR 31,05/MWh available for the period between January                                 and December 2005, it cannot be considered that the market prices are higher than the regulated tariffs applicable to the                                 vast majority of high-consumption industrial and commercial users.(120)It follows that, although the prices registered in the electricity pool are not an appropriate benchmark for comparison with                                 the electricity prices paid by large industrial and commercial users, the actual market prices applicable to supplies of electricity                                 to end-users which were supplied at regulated tariffs in 2005 were in line with the respective levels of regulated tariffs.

6.**CONCLUSIONS ON THE MEASURE**(121)In the light of the above considerations, the Commission considers that it has been demonstrated that, firstly, the companies                                 that received electricity at integral regulated tariffs did not obtain benefits from the level of these tariffs and, secondly,                                 bearing in mind Spain's undertaking to amend the measure, that interest will be charged at an appropriate rate for the delay                                 by certain companies in paying part of their electricity bills in 2005.(122)Therefore, the measure at hand does not imply an economic advantage in favour of business users. Since the criteria of Article                                 107(1) TFEU are cumulative, there is no need to examine whether the other criteria are fulfilled.(123)The Commission thus concludes that, having regard to the arrangements put in place by Spain to recover end-users' debt towards                                 the electricity system, the system of regulated tariffs implemented in 2005 did not give rise to state aid within the meaning                                 of Article 107(1) TFEU. This conclusion relates to the situation and time period covered by the complaint, without prejudice                                 to any assessment that the Commission may make of measures taken by Spain after 2005,

HAS ADOPTED THIS DECISION:

# Article 1U.K.

The system of regulated tariffs implemented by the Kingdom of Spain in 2005 does not constitute state aid within the meaning                     of Article 107(1) of the Treaty on the Functioning of the European Union.                  

# Article 2U.K.

This Decision is addressed to the Kingdom of Spain.

Done at Brussels, 4 February 2014.

*For the Commission*                            

Joaquín Almunia                            

*Vice-President*                            

1

OJ C 43, 27.2.2007, p. 9.                           

2

See footnote 1.

3

Article 12(2) of the LSE provided that electricity tariffs were, in principle, to be set once a year but could be adjusted                              during the year.                           

4

Under Article 8 of Royal Decree 1432/2002, the average tariff could not increase by more than 1,40 % (year on year), whereas                              individual tariffs could increase only by a percentage equivalent to the increase in the average tariff: + 0,60 % (2 % in                              total).                           

5

Royal Decree 2392/2004 of 30 December 2004 establishing the electricity tariff for 2005. Official State Gazette No 315, p. 42766.

6

Royal Decree-Law 5/2005 of 11 March 2005 on urgent reforms to promote productivity and improve public procurement. Official                              State Gazette 62, 14.3.2005, p. 8832.                           

7

Stranded costs are losses sustained by incumbent electricity providers as a result of non-recoverable investments carried                              out before liberalisation. The Commission authorised the granting of compensatory aid to cover such losses, on the basis of                              the criteria outlined in the Stranded Costs Methodology (Commission Communication relating to the methodology for analysing                              State aid linked to stranded costs), by letter SG (2001) D/290869 of 6 August 2001. By Decision SG (2001) D/290553 of 25 July                              2001 in Case NN 49/99, the Commission authorised Spain to grant compensation for stranded costs until 2008 to the companies                              which were asked to pre-finance the 2005 deficit.                           

8

First additional provision of Royal-Decree 809/2006 of 30 June 2006 revising the electricity tariff from 1 July 2006. Official                              State Gazette 156, 1.7.2006.                           

9

Spain liberalised the retail electricity market earlier than required by the 1996 and 2003 Electricity Directives, which provided                              for a liberalisation timetable between 1999 and 2004 for business end-users (starting with the largest) and made the liberalisation                              of the household segment mandatory only from 1 July 2007.                           

10

OJ L 176, 15.7.2003, p. 37.                           

11

Article 3(3) of the Electricity Directive states: ‘Member States shall ensure that all household customers, and, where Member                              States deem it appropriate, small enterprises, (namely enterprises with fewer than 50 occupied persons and an annual turnover                              or balance sheet not exceeding EUR 10 million), enjoy universal service, that is the right to be supplied with electricity                              of a specified quality within their territory at reasonable, easily and clearly comparable and transparent prices. To ensure                              the provision of universal service, Member States may appoint a supplier of last resort.’                           

12

Céntrica itself divided consumers into five groups. This division does not correspond to the regulated tariff structure published                              in the annual tariffs decree, as indicated in recital 17.                           

13

See Annex A(b) and (c) to the Electricity Directive.

14

Advocate General's Opinion in Joined Cases C-261/01 and C-262/01 *Van Calster*, paragraph 41.                           

15

Judgment of the Court of Justice in Joined Cases C-261/01 *Van Calster*, ibid., paragraphs 49 and 50.                           

16

Commission Decision of 25 July 2001, State Aid No 49/99 — Spain. Transitional regime for the electricity market.

17

Commission letter to the United Kingdom of 27 February 2002 (State aid No 661/99).

18

OJ L 83, 27.3.1999, p. 1.                           

19

Wilson, R. (1993), *Nonlinear Pricing*, Oxford University Press.                           

20

Castro Rodriguez, F. (1999), *Wright tariffs in the Spanish electricity industry, The case of residential consumption*, Utilities Policy, pp. 17-31.                           

21

Judgment of the ECJ of 17 March 1993 in Joined Cases C-72/91 and C-73/91, paragraph 21: ‘The system at issue does not seek,                              through its object and general structure, to create an advantage which would constitute an additional burden for the State’.                           

22

The main source from which the figures in the opening decision are derived is the CNE report: ‘El Consumo Eléctrico en el                              Mercado Peninsular en el Año 2005’, 25.7.2006, Section 2. For large industrial consumers (interruptible and THP), the report                              indicates that strong load modulation with supply in off-peak periods, which requires adjustments in production processes,                              allows for substantial discounts on the headline tariff.                           

23

OJ L 33, 4.2.2006, p. 22; see Articles 3(3)(c) and 5(2)(b).                           

24

*El Sistema Eléctrico Español 2005*, pp. 54 and 55, Red Eléctrica de España.