Decision of the EFTA Surveillance Authority

No 142/00/COL

of 26 July 2000

on the closure of a case initiated on the basis of a complaint concerning alleged State aid to certain enterprises through the contract conditions for electricity ("Kraftkontrakter på myndighetsbestemte vilkår")

(Aid No 020.500.032)

(Norway)

THE EFTA SURVEILLANCE AUTHORITY,

Having regard to the Agreement on the European Economic Area(1), in particular to Articles 61 to 63 and of Protocol 26 thereto,

Having regard to the Agreement between the EFTA States on the establishment of a Surveillance Authority and a Court of Justice(2), in particular to Article 24 and Article 1 of Protocol 3 thereto,

Having regard to the Authority's Guidelines(3) on the application and interpretation of Articles 61 and 62 of the EEA Agreement,

Whereas:

I. FACTS

1. Introduction

By letter of 25 May 1999 from the Norwegian environmental organisation Bellona ("Miljøstiftelsen Bellona"), received and registered on 27 May 1999 (Doc. No 99-3837 A), the Authority received a complaint. The complainant assumed that prices on electric power in future contracts between Statkraft and 16 Norwegian enterprises would be below market prices and that this would be contrary to Article 61 of the EEA Agreement, Statkraft is a 100 % State owned company that is producing electricity generated from hydropower. Statkraft would be obliged to enter into the mentioned contracts on the basis of conditions established by the Norwegian Parliament ("Stortinget"). The complainant referred to the proposal from the Government to Stortinget ("St. prp. No 52 (1998-99) Om Statkrafts industrikontrakter og leieavtaler") which was presented on 26 March 1999.

2. Statkrafts' industrial contracts and leases ("St. prp. No 52 (1998-99) Om Statkrafts industrikontrakter og leieavtaler")

The Government proposed in St. prp. No 52 (1998-99) that Statkraft offer 16 specific enterprises new electric power contracts, commencing 1 January 2001 and running for 20 years (hereinafter "52-contracts"). The enterprises are within power-intensive industries and paper and pulp industries. Price conditions in these contracts were supposed to reflect expected market prices.

The proposed price was fixed at 15,5 øre/kWh (1999 prices) for contracts commencing 1 January 2001. Contracts that commence thereafter would have higher prices, reflecting the fact that market expectations imply that electricity prices will rise in real terms. The prices were to be adjusted according to the consumer price index ("Konsumprisindeksen"). Furthermore, prices in the 52-contracts were to be adjusted in 2011 if the electricity market were to develop differently from expected in St. prp. No 52. If the average spot price in the period 2006 to 2010 were to deviate by more than 1 øre/kWh (1999 prices) from 17,8 øre/kWh (1999 prices), the contract price would be adjusted accordingly.

Enterprises entering the new contracts would have to accept three sets of conditions, related to capacity constraints in the power grid, dry year buffer and energy efficiency. The standard terms in the 52-contracts imply that the enterprises have to offer power reserves up to 100 hours per 12 months. Statnett (the State-owned grid operator) may instruct the enterprises to reduce their electricity consumption on a 15 minutes notice. The 52-contracts furthermore require the industry to pay the spot price if the average spot price exceeds 30 øre/kWh for 168 hours in a row. This is a way to share the risk of high spot prices and scarcity of supply in the future between Statkraft and the industry. Price conditions as fixed in St. prp. No 52 (1998-99), and as already mentioned, are based on market conditions for long term power contracts adjusted for the value of the service obligations.

The enterprises would be offered contracts that cover a maximum of 50 % (nine enterprises) or 70 % (seven enterprises) of their current power requirements. From 2011 on the power volume would be reduced gradually (6 % per year).

According to St. prp. No 52, enterprises accepting the 52-contracts would have to terminate their existing contracts with Statkraft. This concerns 11 out of the 16 enterprises. For enterprises having contracts with a lower price than the starting price of the 52-contracts, the starting price of the new contracts would be reduced. Reductions would be calculated for each enterprises by 1. discounting to present value the difference between estimated market price and current contract price for the remainder of the contract period, and 2. converting this present value to price reductions for the duration of the new contracts.

Three additional enterprises were to be offered new leasing contracts connected to three power plants(4). The new leasing contracts would commence 1 January 2001 and run for 30 years. The price was to be fixed at 15,75 øre/kWh (1999 prices) for the period between 2001 and 2020. The price between 2021 and 2030 would (in real terms) be equal to the average spot price for electricity in the period from 2016 to 2020. Termination clauses similar to the other (sales) contracts would be introduced as well.

Stortinget adopted St. prp. No 52 (1998-99) on 16 June 1999 with three amendments(5). First, the reduction of the contract volumes from 2011 was reduced from 6 % per year to 5 % per year. Secondly, the indexation was also to be based on the wholesale price index. (The Ministry of Oil and Energy decided later that annual price adjustments should be based on an average of the consumer price index and the wholesale price index). Thirdly, two additional enterprises ("Becromal" and "Hunsfoss") were to be offered 52-contracts in addition to the 16 enterprises proposed by the Government.

3. The complaint

The complainant concludes that the contracts contained in St. prp. No 52 would not be in accordance with the State aid rules of the EEA Agreement (Article 61(1)). It would be possible, according to Bellona, to obtain 20-year contracts in the open market at a price of 21 øre/kWh (fixed nominal price), while the starting price in St. prp. No 52 is 15,5 øre/kWh (1999 prices indexed). For enterprises having existing 52-contracts with Statkraft the starting price could, due to the termination clauses, be as low as 11 øre/kWh (1999 prices indexed). If one compares a starting price of 15,5 øre/kWh (1999-prices indexed) with a price of 21 øre/kWh (fixed nominal price) over a period of 20 years, the indexation would have to be 3,1 % p.a. for the contracts to be economically equal. The complainant refers to the fact that the Government has assumed a growth in consumer prices of 2,5 % up to 2010. The 16 enterprises would therefore, according to Bellona, probably receive State aid by entering into the 52-contracts. The 52-contracts would fall within the scope of Article 61(1) EEA and none of the exemptions of Article 61(2) or (3) would be applicable, according to the complainant.

4. Correspondence between the Norwegian authorities and the Authority

By letter of 6 July 1999 (Doc. No 9-5022 D), the Authority forwarded a copy of the complaint from Bellona to the Norwegian authorities. The Norwegian authorities were, inter alia, invited to submit full documentation on the system of allocating energy contracts by Statkraft to individual companies. The Authority in particular asked the Norwegian authorities to substantiate why, in their view, prices of electric power offered to certain enterprises would not favour those enterprises, within the meaning of Article 61(1) EEA.

By letter of 13 October 1999, received and registered by the Authority on 14 October 1999 (Doc. No 99-7668 A), the Mission of Norway to the European Union responded to the letter of 6 July 1999 from the Authority. The letter contained comprehensive documentation on the former and present Norwegian system of electricity production, including the main features of St. prp. No 52 (1998-99). The Norwegian authorities stated in the letter that the 52-contracts are "based on a price level obtainable on the basis of long-term contracts in today's power market, adjusted for the value of certain service obligations".

In a meeting between officials from the Norwegian authorities and the Authority which took place in Brussels on 15 February 2000, the Norwegian authorities explained in detail the contents of St. prp. No 52 (1998-99).

By letter of 28 February 2000 (Doc. No 00-1613 D), the Authority requested further information from the Norwegian authorities. The authority, inter alia, invited the Norwegian authorities once more to comment upon the complaint by Bellona, to submit additional information on the prices of the 52-contracts and to explain how the value of the service obligations had been calculated.

A second meeting took place on these issues between officials from the Norwegian authorities and the Authority in Oslo on 3 March 2000. On the same date the Authority had meetings with operators in the electricity market in Norway.

By letter of 8 May 2000, received and registered by the Authority on 10 May 2000 (Doc. No 00-3577 A), the Ministry of Petroleum and Energy submitted further information. The Ministrey argued that "the 52-contracts are based on prices attainable in the present power market of long-term contracts, adjusted for the value of the service obligations. In addition, the downward adjustment of the contract volume, which commences in 2011, is also reflected in the contract price. The price referred to by Bellona, is applied in contracts without service obligations, and with a constant volume per year throughout the contract period. It is therefore not correct to compare these two prices". The Ministry refered to the earlier correspondence and stated that "It has been demonstrated that the Ministry's price is at the same level or higher than Bellona's price of 21 øre/kWh, depending on the discount rate".

In the letter of 8 May 2000, the Ministry furthermore referred to the fact that Stortinget adjusted some of the elements in St. prp. No 52 (1998-99). This concerned the indexation of the contract price and the redution of the contract volumes from 2011. In order to incorporate these changes, the starting price of the 52-contracts had been increased from 15,50 øre/kWh to 15,88 øre/kWh (1999 prices). The Ministry referred to the fact that the prices of the 52-contracts could be adjusted as of 1 January 2011, if the power market prices developed differently from what has been expected. The Ministry also noted that the industry would have to pay spot market prices whenever these prices exceed 30 øre/kWh (1999 prices) seven days consecutively. The Ministry furthermore elaborated, inter alia, on the calculation of the service obligations (power-control, dry-year buffer and efficient use of energy), and the termination clause in the 52-contracts and the leasing contracts.

In a letter of 12 May 2000 (Doc. No 00-3564 D) to the Norwegian authorities, the Authority stated that "based on the information we have received so far, the Authority is of the view that contracts foreseen in St prp nr. 52 may contain aid. Termination clauses in the proposed cotracts imply that enterprises with existing contracts ('statkraftskontrakter') and leases ('leieavtaler') will be conferred benefits for an extended period of time. On the other hand, for enterprises not having existing contracts, i.e. not affected by the termination clause, the price conditions outlined in St. prp. No 52 seem to be comparable to market conditions. If Statkraft and the enterprises mentioned in St. prp. No 52 conclude contracts under the conditions currently laid down, i.e. containing termination clauses, the Authority would be obliged to open proceedings according to Article 1 of Protocol 3 to the Surveillance and Court Agreement."

5. Changes in Statkraft's industrial contracts and leases ("St. prp. No 78 (1999-2000) Endringer i vilkårene for Statkrafts industrikontrakter og leieavtaler")

By letter of 13 June 2000 from the Mission of Norway to the European Union, received and registered on 14 June 2000 (Doc. No 00-4346 A), the Norwegian authorities informed the Authority that on 2 June 2000 the Norwegian Government had submitted a proposal to Stortinget on changes in conditions related to Statkraft's industrial contracts and leases ("St. prp. No 78 (1999-2000) Endringer i vilkårene for Statkrafts industrikontrakter og leieavtaler"). The proposal suggested the elimination of the termination clauses in the 52-contracts. This meant that the existing contracts and leases will continue with no alterations until they expire.

By letter of 27 June 2000 from the Norwegian Ministry of Petroleum and Energy, received and registered on 29 June 2000 (Doc. No 00-4701 A), the Ministry informed the Authority that Stortinget had approved St. prp. No 78 (1999-2000) on 14 June 2000(6).

II. APPRECIATION

The complainant assumed that prices in the 52-contracts (see point I.2) would be below market prices and that this would be contrary to Article 61(1) of the EEA Agreement.

For a measure to constitute State aid within the meaning of Article 61(1) EEA it must:

1. be granted through State resources;

2. distort or threaten to distort competition by favouring certain undertakings or the production of certain goods;

3. affect trade between Contracting Parties.

These conditions would be fulfilled if Statkraft (the seller) were obliged to enter into 52-contracts containing conditions that are more advantageous for the enterprises (the buyers) than market conditions, i.e. if the 52-contracts confer a financial advantage on the buyers. The Authority therefore has to identify and quantify possible elements of State aid in the 52-contracts.

The adoption of St. prp. No 78 (1999-2000) (see point I.5) means that termination clauses have been withdrawn from the 52-contracts. This implies that existing contracts and leases will run, with no alterations, to the respective expiry dates. This encompasses contracts with 11 enterprises and the three mentioned leases.

The price in the 52-contracts commencing 1 January 2001 will be fixed at 15,88 øre/kWh (1999 prices) and adjusted for annual inflation. Contracts that commence thereafter will have higher prices, reflecting expectations that electricity prices will rise in real terms. If prices in the electricity market develop differently from expectations, the contracts provide for price adjustments from 1 January 2011 onwards. In addition, the enterprises will be obliged to pay the spot price if the average spot price exceeds 30 øre/kWh for more than 168 hours in a row.

The price in the leasing contracts is 15,75 øre/kWh in real terms for the period between 2001 and 2020. In nominal terms this price will also be adjusted for inflation. The price between 2021 and 2030 will (in real terms) be equal to the average spot price in the period from 2016 to 2020.

Enterprises accepting the 52-contracts and the leasing contracts are required to contribute to power control and dry year buffer. The values of these obligations are reflected in the contract prices.

The Authority has received comprehensive information from the Norwegian authorities regarding prices on long-term contracts. The Norwegian authorities have gathered information from a variety of sources (brokers) in the electricity market. The Authority has also gathered information from different sources. It appears from this information that the market prices for long-term electricity contracts have gone down since St. prp. No 52 (1998-99) was presented to Stortinget. It is now possible to obtain 20-year contracts in the open market at a price of around 19 øre/kWh. This price is fixed in nominal terms for the whole contract period and consequently not subject to inflation adjustment. Bellona claimed that a corresponding price would be 21 øre/kWh.

The Authority agrees with the view of the Norwegian authorities that it is incorrect to make a direct comparison between the prices of contracts contained in St. prp. No 52 (1998-99) and contracts not containing service obligations and having a constant volume throughout the contract period. Furthermore, prices in the 52-contracts are expressed in real terms (15,88 øre/kWh) while the actual prices to be paid will be adjusted for inflation. The price claimed by Bellona is a price that will be maintained in nominal terms throughout the contract period and not adjusted for inflation. If the economic value of a contract with a given nominal price should be similar to the economic value of a contract with an increasing nominal price, the former price would naturally be higher at the outset, while the latter would be higher at the end of the contract period. The compare the economic values of two such sets of contracts it would be necessary to make assumptions of inflationary developments and a rate of discounts.

The Authority has made such comparisons between different fixed nominal prices using different discount factors and a price of 15,88 øre/kWh indexed with 2,25 % over a period of 20 years. With a discount factor of 7 %(7), the Authority has estimated the Ministry's indexed price of 15,88 øre/kWh to be higher than the present fixed nominal market price of 19 øre/kWh. In addition it has to be taken into account that enterprises entering into the 52-contracts are subject to the service obligations. The Authority therefore cannot conclude that the 52-contracts contain State aid.

III. CONCLUSION

In view of the above facts and considerations, the case is closed without further action by the Authority,

HAS ADOPTED THIS DECISION:

The EFTA Surveillance Authority's examination of the complaint received and registered on 27 May 1999 (Doc. No 99-3867 A), concerning alleged State aid to certain enterprises through the contract conditions for electricity ("Kraftkontrakter på myndighetsbestemte vilkår") (Aid No 020.500.032), is closed without further action.

Done at Brussels, 26 July 2000.

For the EFTA Surveillance Authority

Knut Almestad

President

(1) Hereinafter referred to as the EEA Agreement.

(2) Hereinafter referred to as the Surveillance and Court Agreement.

(3) Procedural and Substantive Rules in the Field of State Aid (State Aid Guidelines), adopted and issued by the EFTA Surveillance Authority on 19 January 1994. Published in OJ L 231, 3.9.1994, p. 1, and in the EEA Supplement to OJ L 32, 3.9.1994, The Guidelines were last amended 12 April 2000, not yet published.

(4) Saudavassdraget, Tyssovassdraget, and Bremanger.

(5) Innst. S. No 233 (1998-99) "Innstilling fra energi- og miljøkomiteen om Statkrafts industrikontrakter og leieavtaler og om Kraftkontrakter med industrien".

(6) Innst. S. No 251 (1999-2000) "Innstilling fra energi- og miljøkomiteen om andringer i vilkårene for Statkrafts industrikontrakter og leieavtaler".

(7) 7 % is used by the Norwegian authorities. See St. prp. No 52 (1998-99). p. 14.