OPINION OF ADVOCATE GENERAL

RUIZ-JARABO COLOMER

delivered on 20 October 2009 1( )

Case C‑265/08

Federutility

Assogas

Libarna Gas SpA

Collino Commercio SpA

Sadori gas SpA

Egea Commerciale

E.On Vendita srl

Sorgenia SpA

v

Autorità per l’energia elettrica e il gas

(Reference for a preliminary ruling from the Tribunale Administrativo Regionale della Lombardia (Italy))

(Setting of prices for supplies of natural gas to household customers – Public service obligations – General economic interest)

I – Introduction

1. In the early days of the welfare state, certain areas of the economy were set apart from the free market philosophy with the aim of reducing the distance between the ‘dominated lebensraum (living space)’ and the ‘effective lebensraum’. ( ) Inspired by ideals which went beyond the strictly economic – enshrined in the time-honoured continental legal concept of service public – state intervention in some sectors was intensified, monopolies were created and regulation was increased.

2. Since the Single European Act, when competition was installed as the new deity on ‘the altar of political ideas’, public service has become an obstacle to be overcome in the name of a liberalisation on which all hopes were pinned. ( )

3. The creation of an open market is the first step of this policy, but once barriers have been removed there remain certain requirements which the market alone is not able to meet. Hence the origins of public intervention, in the form of ‘services of general interest’ and ‘public service obligations’, imposed by the authorities on undertakings in liberalised sectors in order to safeguard public interests which, because they are inalienable, cannot be left to market forces to take care of.

4. It is the great challenge of economic law today to define the limits of this state activity. So far, the question has only arisen in connection with the existence of exclusive rights or the financing of these services and rarely in relation to public service obligations. It is precisely this aspect with which the present reference for a preliminary ruling is concerned.

5. Since the 19th century gas has had a special importance in the development of modern societies. Literature reflects the suspicion initially aroused by gas ( ) and the impact that it later had, ( ) until it became part of everyday life, as shown by Pérez Galdós. ( ) Directive 2003/55/EC ( ) provides that the gas market shall be entirely opened up from 1 July 2007 and the Tribunale Administrativo Regionale della Lombardia (Regional Administrative Court, Lombardy) is asking whether, after this date, the Italian authorities can intervene on an exceptional basis in the setting of gas prices in a situation where there is a de facto absence of competition.

6. If public service can be defined, as noted by the French Conseil d’État, ( ) as ‘the extension of the market by other means, where the market has failed, and not the other way around’, then, in a situation of diminished competition, the state would have to intervene in order to mitigate the effects of this difficult situation. Yet state involvement in the market must be limited so as not to postpone true liberalisation indefinitely, and should focus on the protection of the rights of the consumer.

II – Legal framework

A – Community law: Directive 2003/55

7. Directive 2003/55 seeks to complete the internal market in natural gas.

8. As noted in Recital 2 in the preamble to that directive, experience in respect of Directive 98/30/EC, ( ) which is repealed by the 2003 directive, has shown the benefits that would result from the creation of such a market, while highlighting the significant shortcomings that remain and the possibilities for improvement in the functioning of the market, notably through ‘concrete provisions … to ensure a level playing field and to reduce the risks of market dominance and predatory behaviour, …, and ensuring that the rights of small and vulnerable customers are protected’.

9. Recital 18 in the preamble to Directive 2003/55 concerns one of the key aspects of the liberalisation process: the ability of gas customers to choose their supplier freely. The directive adopts a phased approach to achieving this objective, coupled with a deadline, in order to enable undertakings to adjust and to ensure the protection of the interests of customers and their real and effective right to choose a supplier.

10. Recital 26 concerns measures taken by Member States to achieve high levels of ‘public service in the Community’, specifying that they should be regularly notified to the Commission and that they differ ‘according to households and small and medium sized enterprises’. Recital 27 refers to public service, stating that it is a ‘fundamental requirement’ of the directive, which should specify ‘common minimum standards, … which take into account … consumer protection, security of supply, environmental protection and equivalent levels of competition in all Member States’. It also emphasises that such requirements must be interpreted taking into account national circumstances and subject to the observance of Community law.

11. Pursuant to Article 2(25), the directive defines ‘household customers’ as meaning those customers purchasing natural gas for their own household consumption and, pursuant to Article 2(28), it defines ‘eligible customers’ as meaning those customers who are free to purchase gas from the supplier of their choice, within the meaning of Article 23 of the directive. Article 23(1)(c) requires Member States to ensure that, from 1 July 2007, all customers are eligible customers.

12. Article 3 of the directive relates to public service obligations and customer protection. Article 3(1) requires Member States to ensure that ‘natural gas undertakings are operated in accordance with the principles of this Directive with a view to achieving a competitive, secure and environmentally sustainable market in natural gas’ and states that they must not ‘discriminate between these undertakings as regards either rights or obligations’.

13. However, the foregoing is ‘without prejudice to paragraph 2’ of Article 3, which provides that ‘having full regard to the relevant provisions of the Treaty, in particular Article 86 thereof, Member States may impose on undertakings operating in the gas sector, in the general economic interest, public service obligations which may relate to … price of supplies …’. Such obligations must be clearly explained, transparent, non discriminatory, verifiable and must guarantee equality of access for EU gas companies to national consumers.

14. Article 3(3) introduces a requirement to protect consumers, and to pay particular attention to the most needy: Member States must protect final customers and ensure adequate levels of consumer protection, particularly of vulnerable customers, including helping them to avoid disconnection, in particular with respect to transparency regarding general contractual terms and conditions, information and dispute settlement mechanisms. Member States should ensure that eligible customers are able to switch to a new supplier. As regards at least household customers, these measures should include those set out in Annex A. ( )

15. Pursuant to Article 3(6), Member States shall, ‘upon implementation of this Directive, inform the Commission of all measures adopted to fulfil public service obligations, including consumer and environmental protection, and their possible effect on national and international competition’, irrespective of whether such measures represent a derogation from the provisions of the directive.

B – The relevant Italian law

16. Just a few days before 1 July 2007, which was the deadline for completing the liberalisation of the gas market under Article 23 of Directive 2003/55, Italian Decree-Law No 73 of 18 June 2007 was adopted, giving the Autorità per l’energia elettrica e il gas (Regulatory Authority for Electricity and Gas) the power to set ‘reference prices’ for the sale of gas to certain customers, even after the market had been fully opened up.

17. The Decree-Law was converted into Law No 125 of 3 August 2007, Article 1(3) of which provides that:

‘To comply with the Community law provisions on universal service, the Autorità per l’energia elettrica e il gas shall impose standard terms for the supply of the service and establish, on a transitional basis and based on the actual costs of the service, reference prices … for supplies of gas to domestic customers, which distributors or suppliers shall, within the scope of their public service obligations, incorporate into their commercial offers (providing also the possibility of a choice between different tariff and time-band packages). … without affecting the powers of supervision and intervention of the Autorità per l’energia elettrica e il gas to protect the rights of consumers, particularly in cases of verified and unjustified price increases and variations in the terms of service to customers who have not yet exercised the right of choice.’ ( )

18. The Italian court making the reference takes the view that this provision provides ‘a legislative basis for the exercise beyond 1 July 2007 of the regulatory power of the Authority in relation to the price of gas’.

III – The main proceedings and the question referred for a preliminary ruling

19. On 29 March 2007 the Autorità per l’energia elettrica e il gas adopted Decision No 79/07 revising the economic terms for the supply of gas for the period between 1 January 2005 and 31 March 2007 and establishing criteria for future revisions of such terms. Paragraph 1.3.1 of the decision provides that the calculation formulae approved for the revision of the variable wholesale cost would apply until 30 June 2008; paragraph 1.3.2 allows the Autorità to determine whether the conditions are met for this power to be extended until 30 June 2009.

20. Federutility, Assogas, Libarna Gas SpA., Collino Commercio SpA, Sadori Gas SpA., Egea Commerciale, E.On Vendita srl and Sorgenia SpA (which are undertakings and associations of undertakings operating in the Italian natural gas market) have brought five actions challenging Decision No 79/07 and other subsequent decisions of the Autorità (Decision Nos 80/07, 158/07, 242/07 and 346/07). ( )

21. The main argument put forward by them concerns a supposed breach of Directive 2003/55, pursuant to which the gas sector was to have been entirely liberalised from 1 July 2007. The applicants maintain that in order to ensure that, as from that date, all customers can freely choose their supplier, gas prices must be determined exclusively by supply and demand, without interference from the authorities. They therefore claim that, after the second quarter of 2007, the ‘reference prices’ (which were introduced under Decision No 79/07) contravene Community law.

22. The fourth Chamber of the Tribunale Administrativo Regionale della Lombardia, before which these actions have come, has taken the view that the resolution of the case depends on the interpretation of Directive 2003/55 and has referred the following questions to the Court of Justice for a preliminary ruling pursuant to Article 234 EC:

‘On a proper interpretation, in accordance with the principles enshrined in the EU Treaty, of Article 23 of Directive 2003/55/EC of the European Parliament and of the Council of 26 June 2003, which regulates the opening up of the gas market, is it contrary to that provision and to the principles of Community law for a national provision (and measures adopted in pursuance thereof) to maintain in effect after 1 July 2007 the power of the national regulatory authority to set reference prices for the supply of natural gas to domestic customers (an open-ended category not defined in the legislation and which does not of itself entail particular circumstances of socio-economic disadvantage such as might justify the setting of such reference prices), which distributors or suppliers, within the scope of their public service obligations, are bound to include in their commercial offers?’

Or is the provision in question (Article 23) to be read in conjunction with Article 3 of Directive 2003/55/EC (which provides that Member States may impose on undertakings operating in the gas sector, in the general economic interest, public service obligations which … relate … to the price of supplies) as meaning that it is not contrary to those provisions of Community law for a national provision which, having regard to the particular circumstances of the market, still characterised by an absence of conditions of “effective competition”, at least in the wholesale sector, to allow a public authority to set a reference price for natural gas which has to be quoted by every supplier in its commercial offers to its domestic customers within the scope of the universal service concept, despite the fact that all customers [are] treated as “free”?’

IV – The procedure before the Court of Justice

23. The request for a preliminary ruling was lodged at the Registry of the Court of Justice on 20 June 2008.

24. Federutility, Libarna Gas SpA, Sorgenia SpA and Assogas have submitted written observations, as have the Commission and the Polish, Estonian and Italian Governments.

25. In a document appended to the notice to attend the hearing, the parties to the main proceedings and the Italian Republic were asked whether the requirement to state ‘reference prices’ for supplies of natural gas to domestic customers in commercial offers means that undertakings are obliged to offer and apply these prices to their customers and that, consequently, they are prohibited from entering into contracts on the basis of different tariffs, or whether those prices are purely indicative. They were also asked about the scope of this requirement and requested to give information on whether the customers involved are private individuals only, to the exclusion of legal persons. Federutility, Libarna Gas SpA, Sorgenia SpA, Assogas and the Italian Government have each replied to the Court of Justice in documents dated July 2009.

26. At the hearing held on 8 September 2009, the representatives of Federutility, Assogas, Libarna Gas SpA, Sorgenia SpA, the Commission, the Italian Government and the Estonian Government presented oral submissions.

V – Preliminary remarks: price intervention in a context of formal competition

A – The absence of genuine competition in the gas market

27. The process of liberalising the energy sector which started with Directives 96/92/EC ( ) and 98/30/EC was considerably hastened by the adoption of Directives 2003/54/EC ( ) and 2003/55/EC, which opened up the electricity and gas markets for all non-domestic customers from 1 July 2004 and for all consumers, without distinction, from 1 July 2007. ( )

28. It was for the Member States to make this ambitious agenda a reality. Progress has, however, been very uneven. So stated the Commission in its Communication to the Council and the European Parliament of 10 January 2007, ( ) which recognises that, although ‘the basic concepts of the internal energy market have become embedded in terms of the legal framework, institutional arrangements and the physical infrastructure …, meaningful competition does not exist in many Member States. Often customers do not have any real possibility of opting for an alternative supplier’ and, in general, a high degree of confidence in the internal market does not yet exist. ( )

29. Mindful that the liberalisation process is incomplete, the Commission has adopted a ‘third energy package’ with a view to addressing the shortcomings of the current provisions. This includes a proposal for amending Directive 2003/55 which suggests, for example, the effective separation of supply and production activities from network operation. ( )

30. The Commission sees intervention in gas (and electricity) pricing as simultaneously one of the causes and one of the effects of the current lack of competition in the energy sector. On the one hand, the Commission puts ‘regulated prices preventing entry from new market players’ among the main deficiencies observed in the transposition of the recent directives. ( ) On the other, it goes on to say that such shortcomings mean that ‘incumbent electricity and gas companies largely maintain their dominant positions’, which has ‘led many Member States to retain tight control on the electricity and gas prices charged to end-users. Unfortunately this is often a serious constraint on competition.’ ( )

31. Coexistence of open energy markets and regulated prices is quite common among EU Member States; according to the Commission report of 15 April 2008, ( ) it exists ‘in one third of the gas markets … and more than half of the electricity markets. For most Member States with price regulation, regulation is not limited to small customers – all customer segments can be supplied at regulated prices’.

32. This situation matches that of the Italian gas sector. As the Italian Government has expressed in its statement of written observations, the national gas market is characterised by the pre-eminent role of Eni, an undertaking which simultaneously has a monopoly on gas imports, owns most of the transport network, has a totally dominant position with regard to production and is the main wholesaler. This absence of competition in the wholesale market has allowed the continued existence of local retail monopolies, which are frequently vertically integrated with the operators of the distribution network. In this situation, it is very difficult for other suppliers to enter the market: firstly because they would be obliged to purchase gas from Eni, which would impose its own terms, thus reducing to a minimum any profit margins; and secondly because of the difficulty of competing locally with vertically integrated operators.

B – Regulation of the price of supplies in conditions of absence of competition

33. It was these circumstances, together with rising oil prices on the international markets, which led the Italian authorities to take the action now in dispute. To prevent the increased cost of the raw material having a negative impact on consumers, it took the decision to extend the power of the Autorità per l’energia elettrica e il gas to set ‘reference prices’ for the supply of natural gas to domestic customers even after 1 July 2007, the date on which the Italian gas market was liberalised under the legislation transposing Directive 2003/55.

34. Under Article 1(3) of the Italian Law of 3 August 2007, the power at issue has the following characteristics:

(1) It sets ‘reference prices’ for the supply of natural gas which distributors or suppliers are required to incorporate ‘into their commercial offers (providing also the possibility of a choice between different tariff and time-band packages)’.

In response to enquiries made of the parties to the main proceedings and the Italian Government regarding the scope of this obligation, the former reply denying that such ‘reference prices’ are merely indicative. They argue that, in practice, gas undertakings cannot offer their customers different and more attractive prices than those indicated by the Autorità, whose ‘reference prices’ are already below the European average. Taking into account the fact that, in addition, suppliers have to offer and apply such protected prices to a large number of consumers, the conclusion must be, according to the applicants in the main proceedings, that the option of other pricing is purely theoretical. ( )

(2) The ‘reference prices’ are calculated on the basis of ‘the actual costs of the service’. According to the information on the file, the economic terms set by the Autorità derive from the aggregate of four elements: the cost of distribution, the cost of transport and storage, a variable amount relating to retail sale and a further variable amount relating to the cost of acquiring the raw material, including the cost associated with the wholesale purchase of gas. The dispute in this case revolves around the calculation of the last component, since, unlike in the wholesale market, where gas prices follow the trajectory of oil prices, retail gas prices are protected by a ‘safeguard clause’, used by the Autorità to prevent the full cost of the raw material being recouped when it is very high. Thus, gas suppliers are obliged to charge their customers a price which does not fully reflect the amount paid for the raw material. To prevent the economic burden of the transaction falling exclusively on these undertakings, the Autorità has required wholesalers to renegotiate their gas sales contracts. ( )

(3) As far as the scope of such ‘reference prices’ is concerned, Article 1(3) of the Decree-Law requires only that these should be offered to ‘domestic customers’. The order for reference calls this category of consumers ‘open-ended’; the Commission suggests, to the contrary, that ‘reference prices apply to families and to homes in centrally heated buildings which use less than 200 000 cubic metres per year’.

More specifically, the replies given by the parties to the main proceedings and the Italian Government at the end of July 2009 and the oral statements made at the hearing indicate that the requirement to maintain ‘reference prices’ affects two classes of consumers:

(a) final customers who were already eligible customers prior to 1 January 2003 (because their annual gas consumption was in excess of 200 000 cubic metres or for other reasons) and who had not yet entered into a new gas supply contract;

(b) final customers whose annual gas consumption was less than 200 000 cubic metres.

The applicants in the main proceedings alleged at the hearing and in the documents of July 2009 that both categories of final customers are made up of both private individuals and undertakings, including legal persons. ( ) They cite Article 4 of Decision No 64/09 of the Autorità, which extended the application of protected prices to property owners’ associations, even where the owner of the point of distribution is a management company. Nevertheless, Article 5 of Decision No 64/09 emphasises that final customers who have not entered into new contracts and who are not private individuals continue to fall within the protection until 30 September 2009 or until 30 September 2010 if their annual consumption does not exceed 200 000 cubic metres.

The Italian Government argues, to the contrary, that the system of ‘reference prices’ applies only to private individuals.

(4) The Decree-Law, as converted into law by the Italian parliament, states that the power of the Autorità to set prices is of a transitional nature, thus amending the original wording of the Decree-Law, which did not mention this aspect.

At the hearing, the applicants argued that the power to set prices is insufficiently transitional in nature, since a cut-off point for exercising it was never laid down. In this regard they refer to the recent Law No 99 of 23 July 2009, which, in their view, grants the Autorità a general regulatory power without any limitation in time whatsoever.

(5) Finally, the Italian legislature adds that ‘reference prices’ are established ‘within the scope of their public service obligations’ and in order to ‘comply with the Community law provisions on universal service’.

35. The Tribunale Administrativo Regionale della Lombardia is asking the Court of Justice whether, in a market which is liberalised, as in the case of gas, but where there is a lack of effective competition, state intervention of this nature is contrary to Article 23 of Directive 2003/55 or whether it falls within Article 3. Both provisions should therefore be analysed.

VI – Analysis of the question referred

A – Article 23 and price liberalisation

36. The creation of an internal market in natural gas, which is the prime objective of Directive 2003/55, requires complete liberalisation.

37. The Community legislature soon realised that the opening up of the market would have to be undertaken gradually. The starting point was markets which were highly regulated, wholly national and often subject to monopolies. ( ) The challenge was to turn them into a single, entirely free European market in which all consumers would be able to buy gas from the supplier of their choice. Directive 98/30 was a tentative first step, followed by Article 23 of Directive 2003/55, which set out a step-by-step timetable towards ensuring that all customers, including domestic customers, were eligible. ( )

38. The time-limit for attaining this goal was 1 July 2007. To achieve it required the removal of barriers which might hinder competition in the gas market, including price intervention to the extent that it constitutes a disincentive to investment. Article 3(1) of the directive obliges Member States to ‘ensure … that … natural gas undertakings are operated in accordance with the principles of this Directive with a view to achieving a competitive, secure and environmentally sustainable market in natural gas’.

39. In view of the terms of the directive, and of its obvious liberalising motive, it would seem difficult to argue, as the Polish Government does in its statement of written observations, that the setting of prices purely by supply and demand is not a prerequisite for ensuring the right to a free choice of supplier. In fact, neither Article 23 nor any other provision in the directive expressly requires the Member States to allow prices for supplies to be established by the free operation of the market, and, in theory, it remains open to debate whether such a measure would always be beneficial for the consumer.

40. It is significant, however, that the Community legislature contemplates the regulatory authorities approving gas transmission and distribution tariffs (Article 25(2) of the directive), and, when it comes to establishing the price of supplies, sees this merely as an exceptional power within the framework of public service obligations (Article 3(2)).

B – Article 3 and public service obligations

41. The fact that the market has been liberalised does not necessarily mean that any intervention in gas pricing is ruled out. Article 3 of the directive provides various routes for legitimising the actions of Member States in this regard.

42. Firstly, Article 3(2) allows them to ‘impose on undertakings operating in the gas sector, in the general economic interest, public service obligations’ relating to the price of supplies. Secondly, Article 3(3) charges the Member States with adopting appropriate measures to protect final customers, particularly vulnerable customers, and to ensure a high level of consumer protection.

43. Both paragraphs of Article 3 reflect the multiple objectives of Directive 2003/55: to establish an internal market in gas as a way of protecting the interests of undertakings and consumers at the same time. Liberalisation, if it is not to be at any cost to individuals, makes a certain amount of regulation necessary when the market does not function adequately. Public service obligations constitute a method of structuring that exceptional state intervention, even after the deadline of 1 July 2007.

44. By the time the second energy package was adopted the formula was already well tried and tested. Once the state-owned monopolies ( ) in the sector had been eliminated and it was subject to the laws of the market, certain requirements of general interest still remained. With this aim, the Community legislature considered the possibility of imposing public service and universal service obligations, even in the first sectors to be liberalised, such as the postal, transport and telecommunications sectors. The Court of Justice has specifically addressed these derogations, particularly their funding, and has held that the subsidies paid by way of ‘compensation’ for public service obligations do not constitute State aid ( ) if they meet certain conditions. ( )

45. Article 3(2) of Directive 2003/55 incorporates the concept into the list of measures for the organisation of the gas sector and permits Member States to impose certain burdens on gas undertakings provided that these are essential to protect a ‘general economic interest’ whose precise scope remains undefined. ( )

46. The directive’s lack of precision shows that the Community legislature has allowed the Member States wide discretion. This is confirmed by Recital 27, which refers to establishing ‘common minimum standards’ concerning the respect of the public service requirements, forming a nucleus which balances up ‘the objectives of consumer protection, security of supply, environmental protection and equivalent levels of competition in all Member States’, and is interpreted in the light of the particular characteristics of each country, ‘taking into account national circumstances and subject to the observance of Community law’.

47. However, the Member States do not have absolute freedom in this area, since Article 3(6) of the directive envisages a monitoring procedure for ‘all measures adopted to fulfil public service obligations, including consumer and environmental protection, and their possible effect on national and international competition’, which must be notified to the Commission upon implementation of the directive. Thereafter, the Member States are required to notify any changes every two years. ( )

48. Furthermore, the directive itself sets out some fairly strict parameters for imposing public service obligations, which must:

– be in the ‘general economic interest’;

– be developed ‘having full regard to the relevant provisions of the Treaty, in particular Article 86 thereof’;

– be clearly defined, transparent and verifiable;

– not give rise to discrimination; and

– guarantee equality of access for EU gas companies to national consumers.

49. Whether or not the power of the Autorità per l’energia elettrica e il gas to set prices is legally viable, which is the question at stake in this case, depends on whether or not these parameters have been respected and this must be established by the national court, following the interpretation of the directive given by the Court of Justice. ( )

50. It is necessary, then, to examine both the requirement for a ‘general economic interest’ (C), having regard to the Treaty and, in particular, Article 86 (D), and the absence of discrimination (E).

C – The need for reasonable prices as grounds for ‘general economic interest’

51. Whether or not there exists a ‘general economic interest’ justifying public service obligations is the first matter at issue in this case.

52. As the Commission correctly argues in its statement of written observations, ( ) the double reference in Article 3(2) of the directive to Article 86 EC and to ‘the general economic interest’ means that the obligations contemplated therein correspond to those of undertakings entrusted with ‘services of general economic interest’ within the meaning of that article of the Treaty. ( )

53. The Court of Justice has held a large and varied group of services to be of general economic interest, including water, ( ) gas ( ) and electricity, ( ) distribution, countrywide collection and delivery of mail, ( ) the operation of unprofitable airlines, ( ) ambulance transport ( ) and the pharmaceuticals wholesale business, ( ) to name but few. It is difficult to extrapolate a clear and precise rule from these decisions. ( ) The directive, the Treaty and the case-law are all inspired by the same idea of finding a balance between the free market and regulation, between competition and the implications of the general interest, and, in my view, they also concur that it is for the Member States to determine which services of general economic interest they wish to preserve, without prejudice to the powers of the Community institutions (particularly the Court of Justice) to oversee such decisions and to prevent excesses. ( )

54. In the search for a common thread, one might look to Rolland’s famous laws, to which the judgments in Corbeau ( ) and Almelo and Others ( ) indirectly refer in setting out the conditions for the provision of services of general economic interest: the service should be uninterrupted (continuity); for the benefit of all consumers throughout the relevant territory (universality); at uniform tariff rates and of similar quality, irrespective of specific situations or of the degree of economic profitability of each separate transaction (equality).

55. Continuity, universality and equality; and today we would usually add transparency and affordability of the service to these time-honoured rules. Thus, Directive 2003/55 seeks continuity, universality and non-discrimination in the supply of gas, ( ) but it also seeks to protect the right of customers ‘to be supplied with natural gas of a specified quality at reasonable prices’ (Recital 26). Hence the possibility of intervention in the price of supplies contemplated in Article 3(2) of the directive.

56. Against this background, it follows that the objective of preventing undesirable and disproportionate price rises which would be detrimental to consumers constitutes grounds for ‘general economic interest’ which, provided the directive’s other conditions are met, would justify public intervention in respect of prices for the supply of natural gas.

D – The proportionality test and regard for Community interests

57. The second parameter focuses on the need to have full regard to the Treaty and, in particular, Article 86.

58. Of great importance here is Article 86(2) EC, which seeks, in the words of the case-law, ‘to reconcile the Member States’ interest in using certain undertakings, in particular in the public sector, as an instrument of economic or fiscal policy with the Community’s interest in ensuring compliance with the rules on competition and the preservation of the unity of the Common Market’. ( )

59. According to the Treaty provision, ‘undertakings entrusted with the operation of services of general economic interest’ are subject to the Treaty and to its rules on competition, provided that their application does not obstruct the performance, in law or in fact, of the tasks assigned to them; and, in any event, the development of trade must not be affected contrary to the interests of the Community.

60. In the situation now to be resolved, the following aspects need to be examined: firstly, whether intervention in the price of gas supplies constitutes a necessary measure to ensure ‘reasonable prices’ (the so-called proportionality test); and, secondly, whether this route is contrary to ‘the interests of the Community’.

1. The proportionality test

61. The part of the article which provides that the exception to the rules of the market must not obstruct the performance, in law or in fact, of the tasks in the general economic interest, brings the so-called proportionality test into play, and this is really the key to Article 86(2) EC, because it introduces the possibility of modulating its use.

a) Case-law

62. Growing expectation over this article was triggered by the Sacchi judgment, which held that it was for the Member States to prove that free competition would seriously hinder the task assigned to the body in question. ( ) Later on, the Höfner judgment clarified that the Treaty cannot be said to hinder the performance of the task assigned to a public employment agency ‘in so far as [it] is not in a position to satisfy demand in that area of the market’ and allows other companies to encroach on its exclusive rights.( )

63. However, it was not until Corbeau that the principle of proportionality appeared in the Court’s reasoning. In Corbeau, and later in Almelo and Others, the Court held that it was permissible to make exceptions to the rules of the market where these were necessary to ensure the ‘economic stability’ of the service, taking into account the balance of profitable and unprofitable operations.

64. Subsequently, three decisions concerning exclusive rights in the Netherlands, Italy and France to import and export energy ( ) added further details. On the one hand, they referred to proportionality in the context of Article 86, allowing paragraph 2 to be relied upon ‘to justify the grant by a Member State, to an undertaking entrusted with the operation of services of general economic interest, of exclusive rights …, [provided that the] performance of the … tasks assigned to it [is guaranteed by] the grant of such rights and provided that the development of trade is not affected … contrary to the interests of the Community’. ( ) On the other hand, the decisions went on to say that for the Treaty rules to be inapplicable, it is sufficient that they prevent ‘the performance, in law or in fact, of the special obligations incumbent upon that undertaking. It is not [essential] that the survival of the undertaking … be threatened’ ( ) and, although the burden of proof falls on the Member State in question, that Member State cannot be required to demonstrate ‘that no other conceivable measure, which by definition would be hypothetical, [would guarantee] those tasks … under the same conditions’. ( )

65. It follows from the case-law that a derogation from competition rules on the basis of Article 86 is permissible only when absolutely necessary for the performance of the task of general interest in question and it is for the Member States to evaluate such circumstances in accordance with national policy and having full regard to the Treaty.

b) Application to the case at issue

66. By means of a Decree-Law, the Italian Government chose to grant the national regulatory authority the power to intervene in the price of gas supplies, citing the absence of effective competition in the national gas market and rising oil prices in the international markets.

67. In my view, it is possible that circumstances such as those described could constitute a hindrance to attaining the ‘general economic interest’ aim of ensuring gas supplies at reasonable prices, thereby justifying state involvement in the free operation of the rules of the market.

68. In its Communication of 10 January 2007, referred to above, the Commission recognises that ‘[e]xperience to date has demonstrated that wholesale energy prices exhibit considerable volatility. This raises the question of whether and how end-user customers, including vulnerable customers, should be exposed to such fluctuations’. With this concern in mind, it adds that, ‘[a]lthough price controls prevent suitable … signals being given to customers about future costs, targeted … regulations may be [unavoidable] to protect consumers in certain specific circumstances, for instance in the transition period towards effective competition’. Furthermore, ‘[such controls] must be balanced so as not to prevent market opening, create discriminations among EU energy suppliers, reinforce distortions of competition or restrict [sale]’. ( )

69. Thus, intervention must be proportional to the objective sought, which means, according to the case-law, that it must not go beyond what is absolutely necessary to achieve the relevant purpose ‘of general economic interest’: here, curbing prices. In applying this proportionality test, the following criteria, derived from the case-law already mentioned, can act as a guide:

i) Transitional nature and adaptability

70. The temporary nature of the measure is, in my view, the first and main consequence of the proportionality principle, since the exception to the rules of the internal market loses its justification if the situation changes: for example, if competitors join the wholesale market or if prices stabilise. Any power to set prices for an unspecified period would therefore contravene the rule, ( ) but would not require a date for the expiry of the power of intervention to be set. Moreover, the fact that it is adaptable to changing situations and is regularly revised ( ) are aspects which should be regarded positively.

ii) Content

71. Secondly, the content of the measure under consideration should be taken into account. So, if the aim is to prevent excessive rises in the amount paid by the final consumer of natural gas as a result of increases in oil prices, the public intervention must be limited to that component of the sale price which relates to the raw material. ( )

iii) Beneficiaries

72. Thirdly, in order to be proportional, the beneficiaries of the state measure must be limited. Mandatory pricing for commercial users (which are not families or ‘domestic customers’) would go beyond the objective of consumer protection which, ultimately, is the basis for state involvement in the market. In the present case, this would mean investigating whether the category of ‘domestic customers’ referred to in the Decree-Law fits this description. The applicants in the main proceedings and the Italian Government expressed their differing views on this point at the hearing. It is for the national court to determine whether, under Italian law, and in particular Autorità Decision No 64/09, the pricing protection applies to undertakings; if the answer is in the affirmative, the implication would be that the intervention is disproportionate and, as such, contrary to Community law.

73. Federutility, Assogas and Libarna Gas SpA also criticise the fact that the ‘reference prices’ extend beyond the category of ‘vulnerable customers’ referred to in Article 3(3) of the directive. There is particular concern shown for this group in the provision (it later mentions those living in outlying areas), but this is part of a general commitment to consumer protection. Consequently, it does not follow either from Article 3(3) or from Article 3(2) that public service obligations must always be based on social considerations.

iv) Comparison with other instruments

74. Fourthly, of all the possible solutions, the least harmful to competition should be chosen. The case-law has given the Member States wide discretion in this regard, establishing that they cannot be required to provide the probatio diabolica or impossible proof that ‘no other conceivable measure,…[would guarantee that] those tasks [were] performed under the same conditions’. ( ) Consequently, the judgment in Albany ( ) rejected the idea that the authorities should opt for the solution which least restricts competition.

75. Federutility takes the view that the Italian state protects the quality and price of supplies (as well as their security and continuity) through the appointment of a supplier of last resort. It is for the Italian court to ascertain whether the price intervention and the universal service (referred to in Article 3(3) of the directive) have the same objective or whether they seek different and complementary aims.

76. The Commission ‘benchmarking’ carried out under Article 3(6) of the directive could be used for this type of monitoring, to compare measures implemented in the different Member States. However, this type of comparison requires great caution, as the directive itself demands ‘that the public service requirements … be interpreted on a national basis, taking into account national circumstances and subject to the observance of Community law’ (Recital 27).

2. Contrary to ‘the interests of the Community’

77. Without prejudice to the proportionality test described above, Article 86(2) seeks to ensure that the measure adopted does not affect trade to such an extent ‘as would be contrary to the interests of the Community’.

78. In the three judgments of 23 October 1997 referred to above, ( ) the Court of Justice stated that it was incumbent on the Commission to define this interest. However, as Advocate General Léger warns in his Opinion in Wouters and Others, ( ) these statements can be explained by the rules governing the burden of proof in infringement proceedings. I am in agreement with my former colleague that in order to find that there is a detrimental effect on intra-community trade within the meaning of Article 86(2), unlike the classic concept of measures having an effect equivalent to a quantitative restriction, proof would be required that the measure in issue has substantially disrupted the operation of the internal market.

79. In the present case, the Italian court must establish whether the price intervention of the Autorità has caused such a disruption. In its order for reference, the court hints that the ‘continuation of a measure calculated to contain the cost of the raw material’ has a negative impact on the right under the directive to choose a supplier. The court must also establish whether actual harm has been caused and whether, as has been claimed, ( ) this hinders the opening up of the market.

E – The non-discriminatory nature of public service obligations

80. According to Article 3(2) of the directive, the public service obligations imposed on gas companies must not give rise to discrimination.

81. This requirement seeks to ensure that public service obligations bind all of the undertakings operating in the sector equally, so as to prevent the lack of competition becoming worse.

82. For example, it would be an infringement of the directive if ‘reference prices’ were introduced only for the dominant operator, giving rise to additional competitive advantages. Such a situation, coupled with the fact that the measure had an open-ended period of validity, led the French Conseil Constitutionnel to hold that a provision which subjected ‘incumbent operators’ to mandatory tariffs for the supply of electricity and natural gas were unconstitutional. ( )

83. However, applying them in an indiscriminate, general way does not ensure equal treatment either. Assogas adds that the decisions of the Autorità give rise to a difference in treatment between gas suppliers who also act as wholesalers and those who do not, since although they are both obliged to respect the low ‘reference prices’, there is nothing to prevent the former from compensating themselves for the extra cost of the raw material out of sales to the latter. The case file indicates that the Autorità has attempted to minimise losses to retailers by pushing for a renegotiation of wholesale contracts. ( ) Assogas suggests that this approach is inadequate, as the Autorità cannot involve itself in relationships governed by private law. The referring court must therefore investigate whether discrimination has taken place which resulted in actual losses for individual natural gas retailers.

F – The role of Article 3(3) of the directive in the present case

84. Whilst under Article 3(2) of the directive the introduction of public service obligations is simply seen as a Member State power ‘in the general ... interest’, under Article 3(3) the Member States have a general commitment to ‘take appropriate measures to protect final customers and to ensure high levels of consumer protection’.

85. The possibility that this case could be considered under Article 3(3) has been raised and rejected, on more or less sound grounds, in some of the statements of written observations in these preliminary ruling proceedings.

86. Some of the applicants in the main proceedings argue that the disputed decisions are not justified under Article 3(3) because they apply to all types of user and not only to ‘vulnerable’ users. This argument is without foundation, as the provision is not limited to such persons, even if it expressly mentions them and accords them special protection.

87. I share the Commission’s view that the measures to be taken by national governments under Article 3(3) of the directive ‘do not relate directly to setting pricing requirements, since there is a more specific rule in Article 3(2)’.

88. Article 3(3) refers only indirectly to measures affecting the price of gas supplies, by way of reference to Annex A, which includes the requirement to inform consumers of their rights ‘to be supplied, under the national legislation applicable, with natural gas of a specified quality at reasonable prices’ (paragraph g).

89. Intervention in the price of supplies is, therefore, simply something which is permissible and it falls within Article 3(2) rather than Article 3(3).

90. Article 3(3) reinforces the powers of the Member States by allowing them, and even requiring them, to intervene in a liberalised market, such as the gas market, when they become aware of a real threat to consumers which is not capable of being deflected by the tools provided in Article 3(2).

VII – Conclusion

91. In the light of the foregoing considerations, I propose that the Court of Justice should answer the questions referred for a preliminary ruling by the Tribunale Administrativo Regionale della Lombardia (Italy), by declaring that:

On a proper interpretation of Articles 3 and 23 of Directive 2003/55/EC, a national provision which, having regard to the particular circumstances of the market, still characterised by an absence of conditions of ‘effective competition’, allows a public authority to set a reference price for natural gas which it is compulsory to quote in commercial offers to domestic customers, does not infringe those articles, provided that the parameters laid down in Article 3(2) of Directive 2003/55 are respected and, in particular:

– it is directed towards a general economic interest such as the need to keep prices at a reasonable level;

– it meets the so-called proportionality test with regard to its period of validity, content and beneficiaries;

– it does not substantially disrupt the operation of the internal market; and

– it does not give rise to discrimination between operators in the sector.