Commission Decision of 19 July 2006 on the measure No C 35/2005 (ex N 59/2005 which the Netherlands are planning to implement concerning a broadband infrastructure in Appingedam (notified under document number C(2006) 3226) (Text with EEA relevance)
Date: 2006-07-19
Institutions: European Commission
Subjects: Netherlands, State aid, control of State aid, provision of services, telecommunications, telecommunications equipment, transmission network

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(Acts adopted under the EC Treaty/Euratom Treaty whose publication is not obligatory)

DECISIONS

COMMISSION

COMMISSION DECISION

of 19 July 2006

on the measure No C 35/2005 (ex N 59/2005, which the Netherlands are planning to implement
concerning a broadband infrastructure in Appingedam

(notified under document number C(2006) 3226)

(Text with EEA relevance)

(2007/175/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European Commu-
nity, and in particular the first subparagraph of Article 88(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 provision(s) cited above (1) and having regard to
their comments,

Whereas:

I.

PROCEDURE

(1)

By letter dated 2 November 2004 (and registered under CP
212/2004 on 18 November 2004), Essent Kabelcom
(hereafter: Essent), a cable operator,
filed an informal
complaint with the Commission. The complaint concerns
the public funding of a fibre access network (‘Fibre To The
Home’ or ‘FTTH’) in Appingedam, a town in the north of
the Netherlands. Essent later confirmed that the complaint
should be qualified as a formal complaint.

(1) OJ C 321, 16.12.2005, p. 7.

(2)

(3)

(4)

Essent, which is the second largest cable operator in the
Netherlands and which also operates a cable network in
Appingedam, had also lodged an appeal in a Dutch court in
September 2004 (2). The court ordered the municipality on
the basis of Article 88(3) EC Treaty to notify the plans to
build the network in Appingedam and to grant aid to the
Commission and to suspend the further roll-out of the
network.

By letter
the Dutch
registered on 3 February 2005,
authorities notified the measure to the Commission ‘for
reasons of legal certainty’, asserting that the measure did
not constitute aid. On 31 March 2005, the Commission
requested further information from the Dutch authorities.
The authorities, after an extension of the deadline, replied
by letter of 4 August 2005, registered on 16 August 2005.

By letter dated 20 October 2005,
the Commission
informed the Dutch authorities that it had decided to
investigation procedure laid down in
initiate the formal
Article 88(2) of the EC Treaty with respect to the measure
at hand (‘decision to initiate the procedure’). The decision to
initiate the procedure was published in the Official Journal of
the European Union of 16 December 2005. (3) The
Commission called on interested parties to submit their
comments on the measure.

(2) Case referred to as LJ-N AQ8920 which can be found at www.

rechtspraak.nl.
(3) See footnote 1.

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(5)

The Dutch authorities responded by letter of 3 January
2006 to the request for comments in the decision to initiate
the procedure. The Commission further received comments
from the following interested parties:

— Essent Kabelcom B.V.,
13 January 2006;

received by letter dated

— VECAI, received by letter dated 13 January 2006;

— An industry association which requested not to reveal
its identity, received by letter dated 16 February 2006;

(6)

The comments from the interested parties were sent to the
Dutch authorities on 3 May 2006. The authorities informed
the Commission on 7 June 2006 that they did not have any
comments with regard to the observations received.

II.

DESCRIPTION OF THE MEASURE

II.1.

Background

(7)

(8)

The municipality of Appingedam considers that public
intervention is needed to address the non-pervasive supply
of advanced broadband (4) services to companies and
citizens by supporting the deployment of a glass fibre
access network (‘Fibre To The Home’, ‘FTTH’) in Appinge-
dam. According to the municipality, Essent and telecom-
munications operator KPN provide broadband access in
Appingedam, but they do not provide ‘advanced broadband
services’. The municipality decided to participate financially
in the project after private investors and operators had
shown no interest to take part in the project on market
terms.

II.2.

The envisaged measure

The passive layer of the planned glass fibre network (rights of
way, ducts,
fibres, etc.) would be owned by a public
foundation (‘Stichting Glasvezelnet Appingedam’, hereafter:
‘the foundation’) set up and controlled by the municipality.
The investment
is estimated at
in the passive layer
€ 4,9 million. The municipality of Appingedam will
provide either a loan or a guarantee for a loan for that
amount. Initially, it was not foreseen that the construction
of the passive layer would be tendered out. However, the
municipality decided, as stated in the letter of the Dutch
authorities of 4 August 2005, that the construction of the
passive layer would be subject to a public procurement
procedure.

(4) Broadband services defined as ‘always-on’ communications services
allowing transmission of large volumes of data can be delivered
using various combinations of communications network technolo-
gies (‘platforms’). Technologies can feature either fixed or radio based
transmission infrastructure, and they can substitute or complement
each other according to the individual situation. Current mass-
market broadband services have generally download speeds starting
from 512Kbit/s/ - 1Mbit/s. For business users, much higher speeds
are needed.

(9) On the basis of the passive layer, an active network would be
operated which provides wholesale services to service
providers who would offer broadband services to end users
(households and businesses). The costs of the active layer
(telecommunications equipment, network management,
etc.) are estimated at € 1 to 1,3 million. The active
components have, according to the Dutch authorities, an
estimated lifecycle of 5 to 8 years.

(10) The authorities initially stated that the active layer would be
owned and financed by an entity (‘Stichting Damsternet’)
set up by private investors. Not all potential private
investors were known at the initial stage of the project.
According to the authorities, […], […] and […] had initially
shown an interest.

(11) However, in their letter of 4 August 2005, the authorities
stated that the municipality would in fact tender out the
concession for the active layer, including the operation of
the network,
to an operator (hereafter ‘the operator’).
According to the information available to the Commission,
it
is not envisaged that other providers of electronic
communications services than the operator would have
direct access to the passive layer.

(12)

It is unclear under which financial terms the concession
would be granted. The draft
concession agreement
submitted to the Commission lays down that the conces-
sion holder would pay a concession fee to the foundation
on an annual basis. The foundation would claim ‘a payment
which equals a maximum of 80 % of the generated annual
cash flow’. In case of a negative cash flow, the foundation
would not claim the payment of the fee. In that case it
would only claim a minimal payment as laid down in an
annex to the concession agreement. The annex to the
concession agreement submitted to the Commission does
however not set out the amount or conditions of the
foreseen payments.

II.3.

Product or service markets concerned

(13)

In case the FTTH network in Appingedam would be built,
providers of electronic communications services would use
the wholesale access provision to offer retail broadband
services to end users. Therefore, both the wholesale as well
as the retail markets in Appingedam are affected by the
introduction of the planned FTTH network financed by the
municipality.

(14) As regards the retail market

for broadband services in
Appingedam, both KPN and Essent offer broadband
services to end users: Essent currently offers up to 5Mbit/
s and KPN currently up to 6 Mbit/s. Both Essent and KPN
offer
internet, digital/
analogue TV). Other Internet Service Providers are also in
the position to offer broadband services based on the
wholesale offers of KPN. According to information available

‘triple play’ services (telephony,

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to the Commission, Essent will offer 8 Mbit/s and for its
high end product even 15 Mbit/s in the course of 2006 (5).
Moreover, both KPN and Essent have the technical
possibilities to further increase, on the basis of
their
existing networks, the bandwidth capacity of their service
offerings.

(15) As regards the wholesale markets, the intervention by the
municipality of Appingedam is aimed at the provision,
through the operator, of a wholesale glass fibre access
network and wholesale high-bandwidth broadband services
over fibre (6). As regards the wholesale markets identified in
the Commission Recommendation on relevant markets (7),
two specific markets seem to be — directly or indirectly —
concerned by the proposed measure. These appear to be,
the market for wholesale unbundled access to local loops
(market 11 of the Recommendation) and the market for
wholesale broadband access (market 12 of the Recommen-
dation). In Appingedam, KPN offers wholesale access to
infrastructure and services necessary for the provision of
broadband services (8).

(18) The Commission also stated that it was difficult to envisage
applications or services for citizens and businesses which
could not be deployed using broadband services delivered
over the existing networks.
It was considered that the
degree of substitutability between retail and wholesale
services delivered over the envisaged FTTH network on the
one hand and services delivered over the existing networks
on the other hand were high. Hence,
the potential
distortion of competition by the measure was expected to
remain very high for the foreseeable future.

(19) The measure foreseen by the authorities would entail a
serious risk that State intervention would crowd out
existing and future investments by market players. Accord-
ingly, it was expressed in the opening decision that it would
under these circumstances also be questionable whether the
foreseen measure and the use of the aid instrument as such
were proportionate.

III.

OBSERVATIONS RECEIVED BY THE COMMISSION

II.4.

Reasons for initiating the formal investigation

III.1.

Observations by third parties

procedure

(16)

In its opening decision,
the Commission expressed
reservations with regard to the compatibility of the measure
with the Common market on the basis of Article 87(3)(c) of
the EC Treaty. Relating to the necessity of the measure, the
opening decision questioned whether
the situation in
Appingedam could actually be described as featuring
elements of ‘market failure’.

(17)

It was stated in the opening decision that broadband access
was in fact available in Appingedam, although the broad-
band services currently provided are not entirely compar-
able with the services which could be offered over the
planned network. Consequently,
it was considered that
there is an important overlap of network coverage and
services offered between existing networks and the
envisaged measure.

(5) According to information from Essent received by the Commission.
(6) At present, a market for wholesale access to ducts or dark (unlit)
fibre is not listed in the Commission Recommendation on relevant
markets for electronic communications services. There is therefore,
at least currently, no explicit provision in the European regulatory
framework for electronic communications to offer third party access
fibre infrastructure, Commission Recommendation
to duct or
2003/311/EC of 11 February 2003 on relevant product and service
markets within the electronic communications sector susceptible to
ex ante regulation in accordance with Directive 2002/21/EC.,
OJ L 114 of 8 May 2003, p. 45 ff..

(7) See footnote 6.
(8) KPN has significant market power in the markets for wholesale
unbundled access and specific wholesale leased lines. Therefore, KPN
is subject to access regulation concerning important inputs for the
provision of broadband services, such as local loops or wholesale
leased lines. Moreover, KPN provides voluntarily bitstream access, a
wholesale access product.

(20) The Commission has

from three
interested parties: Essent, Vecai and one industry associa-
tion requesting anonymity.

received comments

(21) Cable operator Essent states, referring to a report published
by the CPB (9), that there is no market failure present in
Appingedam. The CPB investigated the possible presence of
market failure in the broadband market in the Nether-
lands (10) and found that there are no significant market
failures present in the Dutch broadband market. Policy
measures can, according to the report, hardly be based on
the argument of market failure. According to Essent, the
Minister of Economic Affairs supported the conclusion of
the CPB in a letter to the Dutch parliament of 5 December
2005, which was submitted to the Commission.

(22) Essent also states that Appingedam cannot be considered a
peripheral area with socio-economic arrears. The services
the municipality wants to offer for education, healthcare
and elderly care can in fact be offered through the existing
networks. Essent states that it supports the Commission's
conclusion that it is not clear what applications or services
could be offered on the FTTH network that cannot be
offered through the existing networks. Moreover, the prices
of broadband access in Appingedam are, according to
Essent, not higher than elsewhere in the Netherlands.

(9) Centraal Planbureau (Netherlands Bureau for Economic Policy
Analysis) is a research institute which delivers independent economic
analyses. The CPB is independent with respect to content, but at the
same time is formally part of the central government.

(10) Do market

failures hamper

the perspectives of broadband?, Centraal

Planbureau, December 2005.

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(23) VECAI, the trade association of cable companies in the
Netherlands, considers the proposed state aid measure to be
incompatible with Article 87(3)(c) of
the EC Treaty.
Government funding in this sector would, according to
VECAI, directly distort competition in a highly competitive
market.

(24) There is, according to VECAI, no market failure present in
the market for broadband services in the Netherlands. To
substantiate its statement, VECAI also refers to the report of
the CPB and the letter of the Minister of Economic Affairs
also mentioned by Essent. The currently available infra-
structures are capable of supporting highly advanced
broadband services. The proposed investments would,
according to VECAI, duplicate rather than complement
existing infrastructures.

(25) VECAI also states that Appingedam cannot be considered
as a peripheral area. Moreover, according to VECAI, the fact
that the municipality is active both as an infrastructure
owner and a public authority (granting permits, rights of
way, etc.), may, under some circumstances, lead to a conflict
of interest.

(26) The industry association requesting confidentiality sub-
mitted that the Commission should encourage the deploy-
ment of open passive access infrastructures. The de-
coupling of services and infrastructure can, according to
lower barriers for entry and increase
the association,
competition as well as stimulate innovation. The associa-
tion is of the opinion that the aim of competition rules
should be to enhance overall welfare and not to protect
existing market players.

(27) The association states that

there is no need for state
intervention if the owners of the existing infrastructures
agree to make their infrastructure available to all other
providers of electronic communications
services and
provide access on a fair and cost-oriented basis. However,
if this is not the case, there is in fact a market failure present
and public authorities should be allowed to intervene.

III.2.

Observations by the Dutch authorities

(28)

In response to the request for comments in the decision to
initiate the procedure, the authorities did not refute any of
the arguments brought forward by the Commission in the
opening of the procedure. The Dutch authorities submitted
a number of documents (e.g. research reports) that would
explain the reasoning behind the measure and the possible
usage of the network.

The planned infrastructure would enable fast
connectivity, video-conferencing, video-on-demand,
active gaming/TV and IP-VPN (11) services.

internet
inter-

(30) The services and applications which can be offered over the
envisaged FTTH network are considered to be important for
the exercise of the tasks of the municipality itself (e.g.
offering e-Government services), for the healthcare sector
telemedicine and co-operation between different
(e.g.
institutions involved in healthcare), as well as education
(e.g. telelearning applications). In this context, the Dutch
authorities mention that Appingedam has a high rate of
unemployed and elderly people which need access to
advanced broadband services.

IV.

PRESENCE OF STATE AID

(31) The Dutch authorities have brought

forward several
arguments implying that the measure does not entail State
aid or that the project merely concerns the provision of a
‘public infrastructure’.

IV.1.

General infrastructure?

(32) According to the Dutch authorities, the measure at hand
does not fall within the scope of Article 87(1) EC, but
should rather be seen as a typical task of a public authority,
providing general ‘public’ infrastructure open to all parties
at similar conditions.

(33) The Commission considers that this would be the case if an
infrastructure is needed to provide a service that is falling
within the responsibility of the State towards the general
public and is limited to meeting the requirements of that
service. Moreover, it should be a facility that it is unlikely to
be provided by the market because it is not economically
viable and the way in which it is operated should not
selectively favour any specific undertaking.

(34) Accordingly, the Commission is of the opinion that the
project cannot be qualified as a general infrastructure which
is outside the scope of State aid control. Contrary to, for
example, certain infrastructures in the transport sector,
which are open to all potential users on equal and non-
discriminatory terms and which are not provided (con-
structed and/or managed) by the market on purely
commercial terms, this type of infrastructure is actually
deployed by private parties which are also delivering
electronic communications services, although not necessa-
rily on the conditions foreseen by the municipality of
Appingedam for the measure at hand.

(29) The emphasis in the reports is on the possible applications
of the planned network. The Dutch authorities argue that
the choice for a glass fibre network was made based on the
fact that the infrastructure currently available does not
support the desired bandwidth capacity and service quality.

(35) As the presence of KPN and Essent in Appingedam shows,
the provision of a local access network for electronic
communications is not a typical task of a public authority,
but such networks are normally deployed by providers of

(11) Internet-protocol based Virtual Private Network services.

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electronic communications services who deliver broadband
services to households and businesses. The project thus
duplicates to a certain extent market initiatives or makes
possible the provision of
services which are already
available.

(41)

In the case of Pyrénées-Atlantiques, the direct objective of the
measure was to enable access to broadband services
through a wholesale network to the general public in a
region with limited broadband coverage. These conditions
do not apply in Appingedam where broadband services are
already provided over two networks.

(36)

Indeed, the absence of distortion of competition is not an
inherent feature of this type of facilities, but rather has to be
verified on a case by case basis. The market situation in
Appingedam is such that the measure distorts or threatens
to distort competition by competing with existing private
networks and by discouraging future private investment in
similar facilities.

(37) The Commission thus considers

in
Appingedam falls within the scope of State aid control
rather than considering it a general infrastructure which
falls within the normal responsibilities of the State towards
the public.

the project

that

IV.2.

The provision of a Service of General

Economic Interest (SGEI)?

(38) Although the Dutch authorities have not explicitly invoked
the existence of a Service of General Economic Interest, the
argument
the FTTH network in
Appingedam might represent a SGEI will be assessed.

the provision of

that

(39) Member States have in general a large power of apprecia-
tion concerning the identification of a service as SGEI,
while respecting the case-law of the EU courts which set out
the general principles to be respected (12).

(40)

In the measure at hand, the envisaged contractual relation-
ship between the operator of the active layer and the
municipality/the foundation reflects
rather a classical
private-public-partnership than the entrustment and imple-
mentation of a Service of General Economic Interest. This
can also be deduced from the communication and
documentation of the Dutch government regarding the
measure which never mentions the term ‘Service of General
Interest’ or similar notions. Unlike in cases in which the
Commission decided that public financial support consti-
tutes compensation for a SGEI — cf. decision on Pyrénées-
Atlantiques (13) – neither the foundation nor the operator
have a clear SGEI mandate to enable broadband access to
in rural and
the general public, citizens and businesses,
remote areas where no other operator
is providing
ubiquitous and affordable broadband access.

(12) As expressed by the Commission previously in the area of access to
broadband services, for instance in paragraph 46 ff. of the decision
concerning a broadband project in the French region of Pyrénées-
Atlantiques, Commission decision of 16 November 2004 in case
N381/04, ‘Pyrénées-Atlantiques’ (France), Official Journal C162/5 of
2 July 2005.
(13) See footnote 11.

(42) As the Commission finds that

the measure does not
represent a Service of General Economic Interest, it does
not deem necessary to assess the measure in light of the
other criteria laid down in the Altmark jurisprudence (14).

IV.3.

The municipality of Appingedam does not act

like a private investor

(43) The Dutch authorities claim that the investments by the
municipality and the foundation are necessary precisely
because market players are not willing to invest in the
passive FTTH network in Appingedam as the expected
to justify the
return on investment
investment on market terms.

is not sufficient

(44) According to the Dutch authorities, the municipality had
requested several banks to finance the investment in the
passive network, but all banks except
the Bank
Nederlandse Gemeenten (BNG) have refused to finance
the project. BNG is willing to grant a loan to the
municipality because, according to the municipality, BNG
only assessed the creditworthiness of the beneficiary of the
loan, i.e. the municipality, but not the setup of the FTTH
network by the foundation or the overall project as such.

for

(45) Hence, the investment by the municipality in the founda-
tion and the investment by the foundation in the passive
network do not pass the ‘market investor test’ as a market
operator would not have invested in the passive network, as
experienced by the municipality when it contacted private
investors.

IV.4.

State aid assessment

(46)

initial

submissions before the Commission's
In their
decision to initiate the procedure, the Dutch authorities
claim that there is no aid involved in this project, on any of
the four levels which can be distinguished. There would be
no advantage to the foundation and even if there were an
it would have no effect on trade between
advantage,
Member States. The authorities are further of the opinion
that there is neither aid granted to the operator of the active
layer nor to the retail service providers. The operator will
(have to) charge a wholesale price in line with market rates
to service providers that deliver retail services which they
already offered over existing infrastructures. If the Commis-
sion were to request the municipality to guarantee that the

(14) Judgement of 24 July 2003, Case C-280/00, Altmark Trans und

Regierungspräsidium Magdeburg, Rec.2003, p.I-7747.

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the municipality
operator charges these market prices,
would lay this down in the agreement between the
foundation and the operator.

(47) Finally, the authorities claim that contrary to the ATLAS
case (15) the network in Appingedam will be mainly used to
provide services
to households/citizens who do not
perform economic activities. If there is aid to undertakings
the allowed aid
in Appingedam,
intensity laid down in Regulation 69/2001 (‘de mini-
mis’) (16).

remains under

this

(48) The Commission already noted in its opening decision (17)
that the Dutch authorities had not provided information to
substantiate these arguments. Following the decision to
open the procedure, the authorities have not provided any
further evidence supporting their reasoning concerning
these points.

(49) According to the Treaty and consolidated case law there is

State aid within the meaning of Article 87(1) if:

Economic advantage

(51) The loan or guarantee to be provided by the municipality

confer an advantage to several actors:

Advantage to the foundation

(52) The municipality has set up and controls the foundation
which will own the passive layer of the network. In turn,
the foundation makes the passive layer available to the
operator. The construction and rental of the passive layer
can be considered as an economic activity and the
foundation can therefore be qualified as an undertaking
within the meaning of Article 87(1) EC.

(53) Based on the information available to the Commission, the
passive layer is financed by the municipality without any
contribution from the foundation. The foundation does not
seem to pay a remuneration for the use of the network
either. As outlined above, the investment by the munici-
pality of Appingedam in the passive network does not seem
to be in line with the Market Economy Investor principle.
Therefore, the state funding provided by the municipality
represents an economic advantage to the foundation within
the meaning of article 87(1) EC Treaty.

— there is an intervention by the State or through State

resources;

Advantage to the operator of the active network

— it confers an economic advantage on the recipient;

— it distorts or threatens to distort competition and

— the intervention is liable to affect

trade between

Member States.

State resources

(50) The municipality of Appingedam will provide either a loan
or a guarantee for a loan. Therefore, at least part of the
resources for financing the passive layer of this network
would come from the municipality of Appingedam. These
funds thus have to be considered as State resources (18).

(15) Cf. Commission decision of 9 September 2004 in case N 213/2003
— United Kingdom Project ATLAS; broadband infrastructure
scheme for business parks (Corrigendum).

(16) OJ L 10 from 13.01.2001, p. 30.
(17) In paragraph 10.
(18) As set out

in point 2.1.2. of

the Commission Notice on the
application of Articles 87 and 88 of the EC Treaty to State aid in the
form of guarantees, OJ C 71 of 11.3.2000, p. 14, there may be State
aid under Article 87(1) of the EC Treaty even if no payments are
made by the State under a guarantee. Moreover, even though there
has not been a direct and clear transfer of State resources, State
resources are involved, cf. case C-200/97, Ecotrade v. AFS [1998]
ECR-I-7907, par. 43, Joined cases T-204/97 and T-270/97, EPAC
[2000] ECR-II-2267, par. 80 and 81.

(54) The authorities have confirmed that the concession for
operating the passive infrastructure will be tendered out. If
the concession is tendered out,
in principle, the tender
could minimize the economic advantage for the successful
supplier within the meaning of Article 87(1) EC Treaty.

(55) However, although as a result of the tender, the operator
would not obtain an excessive return from the project it
would, nevertheless, have access to the passive network at
conditions which will — for the reasons set out above —
most likely not reflect the underlying costs incurred by the
municipality and/or
the foundation for building this
network and which are not set to maximise the revenues
from the project for the municipality. Although it is unclear
terms the concession would be
under which financial
granted, as indicated above, it is likely that the pricing of
this access may be below the underlying costs due to State
intervention and will probably not be based on market
rates for access to a comparable passive network.

(56) Therefore,

the operator would be able to establish its
business based on the government-funded network and
enter the market for wholesale services on conditions not
otherwise available on the market. The intervention of the
State therefore confers an economic advantage to the
operator.

Advantage to providers of electronic communications services

(57) Even if access to the optical network via the operator is
provided to all interested providers of electronic commu-
nications services at transparent and equal conditions, it is
likely that the pricing of this access may be below the

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underlying costs due to State intervention and will probably
not be based on market rates for comparable wholesale
broadband services. Hence, the service providers will be
granted an advantage since they have the possibility of
entering the market
for high speed retail broadband
services, operating their business on conditions not
otherwise available on the market.

Advantage to the end-users

(58) The above-mentioned elements suggest that the advantage
granted to the operator, service providers and other
telecommunication service providers may also translate
into an advantage for the households and enterprises in
Appingedam. Whereas residential users are not subject to
State aid rules, businesses in the targeted geography may
benefit from service coverage beyond and prices below
what would be provided purely on a commercial basis like
currently offered leased line offers or satellite connections.
In addition, they may enjoy an advantage in comparison to
businesses located in other regions of the Netherlands. The
Dutch authorities have in addition brought forward that the
end-users are all small to medium sized enterprises (SME)
but they have not motivated why aid to this group would
be justified. In addition, the aid measure is not only limited
to the end-users.

Effect on trade

(61)

Insofar as the intervention is liable to affect
telecom
operators and service providers from other Member States,
the measures have an effect on trade. The telecommunica-
tions markets are open to competition between providers of
electronic communications services and service providers,
which generally engage in activities that are the subject of
trade between Member States. For example, several cable
operators and Internet service providers active in the
Netherlands are part of international groups which operate
on a pan-European basis and have investments in the
Netherlands but also in other countries.

Conclusion

(62)

In view of the above, the Commission considers that the
project
funded by State resources grants an economic
advantage to the foundation, the operator and the service
providers, which could at least partially translate into an
economic advantage for businesses in Appingedam. The
project furthermore distorts competition and has an effect
on trade between Member States.

(63) Having considered that the project involves aid within the
meaning of Article 87(1) of the EC Treaty, it is necessary to
consider whether
the measure can be found to be
compatible with the common market.

(59) The authorities have reiterated that if there is an aid to
undertakings in Appingedam, the level of the aid remains
under the allowed aid intensity laid down in Regulation
69/2001 (‘de minimis’)). The Commission acknowledges that
the advantage for each of the business end users could be
below de minimis aid thresholds. However,
it cannot be
excluded that the aid exceeds the limits set out in that
Regulation or violates the non-cumulation requirements.

V.

COMPATIBILITY ASSESSMENT

(64) Article 87(1) of the EC Treaty provides for the general
principle of prohibition of State aid within the Community.
the EC Treaty provide
Article 87(2) and 87(3) of
exemptions to the general
incompatibility principle as
stated in Article 87(1).

Distortion of competition

(60) The envisaged intervention by the State alters the existing
market conditions in Appingedam by enabling subsidised
entry into the wholesale market for fast broadband services
(the operator) as well as allowing service providers to enter
in the downstream markets of, inter alia, retail broadband
and retail telecommunications services. In making their
decisions regarding network investment and maintenance,
the existing providers Essent and KPN have based their
calculations on the assumption that other providers of
electronic communications services would have had to bear
the full costs of a new network or pay a market price for
access to wholesale services, which appears to be no longer
the case after the envisaged State intervention. The fact that
a new network becomes available, prima facie at conditions
below market prices, has the effect of distorting competi-
tion also in the downstream markets of retail broadband
and other electronic communications services.

(65) Article 87(2) stipulates automatic exemptions to the general
prohibition of State Aid in Article 87(1). None of the
exemptions foreseen in Article 87(2) can apply to the
present case. With regard to Article 87(2) (a), the project
can not be deemed to have a social character and the aid is
not granted solely to individual consumers.

(66) The derogations provided for in Article 87(3)(b) and (d) EC
are not applicable either. It needs to be mentioned though
that Appingedam is located within an area eligible for
regional aid (19), and is therefore in principle eligible for
regional aid on the basis of Article 87(3)(c) EC. The
Commission established guidelines for regional aid (here-
inafter: Guidelines) (20) on the basis of Article 87(3)(c) EC.
The measure can nevertheless not be justified under these
Guidelines for the following reason:

(19) National regional state aid map for the Netherlands 2000-2006
(State aid N 228/2000, ref. SG (2000) D/106075 of 8.8.2000).

(20) Guidelines on national regional aid, OJ C 74, 10.03.1998.

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(67) The measure is not based on a defined regional aid scheme
and, in addition, favours only a certain sector in one town
in that region. As stated in the Guidelines, ‘an individual ad
hoc aid confined to one area or activity may have a major impact
on competition in the relevant market (in this case: impact on the
third party operators) and its effects on regional development are
likely to be too limited. The Commission considers therefore that
such aid does not
in the
Guidelines (21).’

requirements

set out

fulfil

the

(68) The Commission has further laid down other guidelines and
frameworks defining rules for aid that may fall under the
exemption foreseen in Article 87(3)(c). None of
these
guidelines applies to the present case. Since the intervention
does not fall under any of the other existing frameworks or
guidelines
the
assessment of the compatibility of the measure with the
common market needs to be based directly on Article 87(3)
(c) of the EC Treaty (22)
(hereinafter: Article 87(3)(c) EC)
which states that:

the Commission considers

either,

that

(69)

‘aid to facilitate the development of certain economic activities or
of certain economic areas, where such aid does not adversely affect
trading conditions to an extent contrary to the common interest’
may be considered to be compatible with the common
market.

(70)

In order to be compatible with Article 87(3)(c) an aid must
pursue an objective of common interest in a necessary and
proportionate way.

(71) Hence, the Commission will assess:

(a) Whether the proposed aid is aimed at a well-defined
objective of common interest, i.e. whether it remedies
a market
failure or pursues another objective of
common interest such as cohesion.

In this case, it shall also be assessed whether

(b)

the aid is well-designed to deliver the objective of
common interest and in particular:

(i)

Is the aid measure an appropriate instrument, i.e.
is the aid capable of meeting the objective and
are there other, clearly superior, instruments to
achieve the same result?

(21) Cf. Guidelines, Chapter 2, scope, p. 10.
(22) This approach was also followed by the Commission in other cases,
see for instance: State aid decisions for the UK: N126/04 ‘Broadband
for SMEs in Lincolnshire’ of 14.12.2004, N199/04 ‘Broadband
business fund’ of 16.11.2004, N307/04 ‘Broadband in Scotland —
remote and rural areas’ of 16.11.2004
(See: http://europa.eu.int/comm/secretariat_general/sgb/state_aids/).

(ii)

Is there an incentive effect,
change the behaviour of firms?

i.e. does the aid

(iii)

Is the aid measure proportional, i.e. could the
same change in behaviour be obtained with less
aid or with less distortive means?

(3) Are the distortions of competition and the effect on
trade limited, so that the overall balance is positive?

Market failure

(72) The Commission needs to assess whether there is a market
failure in the broadband market in the Netherlands, and,
more specifically, in Appingedam, which could be remedied
by State aid. Recent data (23) confirm the high degree of
competition and the multitude of broadband offers in the
Dutch market, which has the highest broadband penetra-
tion rate in the EU (about 30 % in mid-2006 and rapidly
increasing further).

(73) The Dutch broadband market is a fast-moving environment
and providers of electronic communications services, cable
operators and Internet Service Providers will
introduce
very-high capacity broadband services in the Dutch market
in the near future (24) and it is likely that ‘next-generation
networks’ will be deployed over the next years without state
support. (25) Moreover, third-generation mobile operators
are currently rolling out mobile broadband services in the
Netherlands, and around 70 % of the Dutch territory is,
according to the information available to the Commission
already covered by these services (26). These market-driven
roll-out plans show that public intervention risks crowding-
out private initiative.

(23) European Commission (2006), European Electronic Communica-
tions Regulation and Markets 2005 (11th Report) COM (2006)68 of
20.02.2006.. According to the data of October 2005, the fixed
incumbent's market share of fixed broadband retail lines is approx.
lines is approx. 72 %.
44 %, and its market share of DSL retail
Moreover,
lines is
the incumbent's market share of DSL retail
decreasing further; The OECD broadband statistics of December
2005 also show that the Netherlands are one of the leading countries
in broadband: www.oecd.org/sti/ict/broadband.

(24) According to information in the possession of the Commission,
Essent
is testing a symmetrical Ethernet-to-the-Home solution
providing 100Mbit/s, UPC plans to introduce a 50 Mbit/s product
in the Netherlands in 2006 and KPN is rolling-out VDSL with a
speed of >50 Mbit/s.

(25) See for instance OPTA: KPN's Next Generation Network: All-IP, Issue

Paper, 22 May 2006.

(26) Cf. http://145.7.218.175/covcheck/main.asp and

http://umtscoveragetool.vodafone.nl/UMTSdekking.html#. The web-
site of KPN mentions that UMTS is available to 9 million people in
130 cities in the Netherlands:
http://www.kpn.com/kpn/show/id=716554.

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L 86/9

(74) Based on the factual information available to the Commis-
sion (CPB report, Commission report, OECD analysis, etc.),
there are strong indications that market forces do deliver
appropriate coverage and the desirable amount of services
in the broadband market in the Netherlands (27). Further-
the proposed intervention in terms of public
more,
investment risks having a crowding out effect on private
initiatives and fails to enhance the overall supply of
broadband services.

(78)

In other cases of state support for broadband assessed by
the Commission so far, the Commission indeed considered
that State aid for wholesale networks could be an
appropriate and proportionate instrument
tackling
elements of market
equity problems.
in those cases, concerning generally ‘white’ or
However,
‘grey’ areas (31), the market did not support a competitive
supply of broadband services or there were structural
impediments to the roll-out of broadband (32).

failure and/or

for

(75) The CPB report states explicitly that there is generally no
market failure in the broadband markets in the Netherlands,
that firms have adequate incentives to invest in broadband
and that the best government policy would be to rely on
market forces. The report states that existing market failures
are limited and mainly related to market power and minor
production externalities. According to the report, regula-
tion by Dutch regulator OPTA and specific subsidies for
research and development seem to address both issues in an
appropriate manner (28).

(79) The Dutch authorities present the argument that ‘future
content services and applications’ need networks with a
capacity which is higher than the speed offered over by
existing copper or hybrid copper-fibre cable networks.
However, according to research reports,
it is difficult to
envisage mass-market applications in the near to mid-term
future which cannot be delivered over
the existing
networks (33). This means that the degree of substitutability
between services delivered over ‘next generation networks’
vis-à-vis existing networks
is high and therefore the
potential distortion of competition by the measure will
remain high for the foreseeable future.

(76) Concerning more specifically Appingedam, as regards the
retail market, as stated before, KPN and Essent both offer
retail broadband services. Essent currently offers up to
5Mbit/s and KPN up to 6 Mbit/s. Both Essent and KPN offer
‘triple play’ services (telephony,
internet, digital/analogue
TV). Both KPN and Essent have the technical possibilities
and will further increase, on the basis of their existing
networks, the bandwidth capacity of their service offerings,
should there be sufficient demand for such services. Other
Internet Service Providers also have the possibility to offer
broadband services, based on the wholesale offers of KPN.

(77) Concerning the wholesale markets, the Dutch regulator
OPTA has imposed regulatory remedies for certain markets
upon the operator with significant market power, KPN.
KPN also offers wholesale access to its network and services
necessary for the provision of broadband services (29).
Certain cable operators, notably Essent, also offer a form of
wholesale broadband access to third parties in the Dutch
market (30).

(27) There is still a small percentage of the Dutch population which does
not have access to broadband, for instance because they live too far
from a local exchange to be able to use Digital subscriber line (DSL)
services and/or have no access to a cable TV network.

(28) CPB report, p. 103.
(29) KPN has significant market power in the markets for wholesale
unbundled access and specific wholesale leased lines. Therefore, KPN
is subject to access regulation concerning important inputs for the
provision of broadband services, such as local loops or wholesale
leased lines. Moreover, KPN provides voluntarily access to certain
wholesale broadband services.

(30) For example, Essent is providing WBA to the ISP Introweb (although
limited to business customers), the cable operators Stichting CAI
Harderwijk and Kabel Noord are providing WBA to the ISP Chello
and the cable operator Cogas is providing WBA to the ISP @Home;
cf. case NL/2005/0281 Wholesale Broadband Access
in the
Netherlands — Comments pursuant to Article 7(3) of Directive
2002/21/EC of 2 December 2005.

(80)

In summary, it can be concluded that there is no market
failure present in the broadband markets in Appingedam
which would require financial state support.

Cohesion policy considerations

(81) Although Appingedam is located in a peripheral region of
the Netherlands, the intervention is taking place in a town
where retail and wholesale broadband services are already
available via various providers of electronic communica-
tions services and networks at service conditions and prices
comparable to other regions.

(31) ‘White areas’ have no broadband provision at all,

‘grey areas’ are
similar to a natural monopoly where the network is controlled by a
single operator not granting access to its basic infrastructure.
Appingedam, however, can be considered a ‘black area’ in which the
market situation is characterized by the availability of different
broadband services over at least 2 competing infrastructures (such as
telephone and cable TV networks). For projects covering ‘black areas’
only, there is a high risk that state intervention crowds out existing
and future private investments.

the

roll-out of open wholesale

(32) In the recent Irish case N284/05 ‘Regional Broadband Programme —
Metropolitan Area Networks (MANs), phases 2 and 3’, Commission
decision of 8 March 2006, the Commission accepted State support
for
including
geographic areas where the historic operator already provided basic
broadband services, in view of the serious ‘broadband gap’ and the
peculiarities of the Irish market (lack of alternative infrastructures,
population distribution patterns, very late introduction of broadband
by the incumbent, etc.).

infrastructure,

(33) See, for instance, UK Broadband Stakeholder Group, Predicting UK
Future Residential Bandwidth Requirements, May 2006; IDATE, Etude sur
le développement du très haut débit en France, March 2006.

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consumers

(82) The CPB report, referred to above states that there is no
evidence ‘for a substantial geographical or social digital divide in
the Netherlands. Broadband is available in almost all regions.
Most
can choose between roughly 80 Internet
subscriptions in densely populated areas and between approxi-
mately 30 in remote areas’. The report mentions that there is
perhaps a social divide (elderly persons are underrepre-
sented in broadband usage), but
the government may
stimulate Internet usage by these persons via demand-side
measures, for instance awareness-raising measures (34).

(83) Consequently, the measure concerned does neither address
a market failure nor a cohesion objective. The aid is not
necessary to promote the supply of broadband services in
Appingedam and distorts competition in a disproportion-
ate way. Therefore, in view of the absence of an objective of
Common interest, the measure does not fulfil the criteria
for compatibility under Article 87(3)(c).

HAS ADOPTED THIS DECISION:

Article 1

The State aid which the Netherlands are planning to implement
for the development of a broadband network in Appingedam is
incompatible with the Common market.

The measure may accordingly not be implemented.

Article 2

inform the Commission, within two
The Netherlands shall
months of the notification of this Decision, of the measures
taken to comply with it.

VI.

CONCLUSION

Article 3

(84) For the reasons set out above, the Commission concludes
that the measure entails State aid to the foundation, the
operator of the fibre access network and to providers of
retail broadband services. Since the aid does not facilitate
the development of certain economic activities or of certain
economic areas without adversely affect trading conditions
to an extent contrary to the common interest, the aid
cannot be justified under Article 87(3)(c) EC Treaty and is
therefore not compatible with the Common market.

This Decision is addressed to the Kingdom of the Netherlands.

Done at Brussels, 19 July 2006.

For the Commission

Neelie KROES

Member of the Commission

(34) Page 14 of mentioned CPB report.