2009/287/EC: Commission Decision of 25 September 2007 on State aid awarded by Poland as part of Power Purchase Agreements and the State aid which Poland is planning to award concerning compensation for the voluntary termination of Power Purchase Agreements (notified under document number C(2007) 4319) (Text with EEA relevance)
Date: 2007-09-25
Institutions: European Commission
Subjects: Poland, buying group, clearing agreement, electrical energy, electricity supply, energy production

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

DECISIONS

COMMISSION

COMMISSION DECISION

of 25 September 2007

on State aid awarded by Poland as part of Power Purchase Agreements and the State aid which Poland
is planning to award concerning compensation for the voluntary termination of Power Purchase
Agreements

(notified under document number C(2007) 4319)

(Only the Polish text is authentic)

(Text with EEA relevance)

(2009/287/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 provisions cited above (1) and having regard to
their comments,

Whereas:

(2)

(3)

Following a preliminary assessment, the Commission found
the notification to be incomplete and, by letter of 27 April
2005, asked Poland to provide additional information on
the measure.

By letter of 1 June 2005, registered on 2 June 2005, Poland
submitted some of the additional information requested;
the remaining information was provided by letter of
24 June 2005, registered on 28 June 2005.

(4) On 28 and 29 June 2005, at Poland's request, a technical
meeting was organised to discuss the notification. The
meeting identified the remaining aspects still to be clarified
in writing by Poland in order to provide the Commission
with comprehensive information for its assessment.

1.

PROCEDURE

(1)

By letter dated 1 March 2005, ref. WEH/1023/6-54/05,
registered on 3 March 2005 (SG/2005/A/226), Poland gave
notification to the European Commission, under Arti-
cle 88(3) of the EC Treaty, of a bill on ‘the rules governing
the covering of costs incurred by enterprises in connection
with the early termination of Power Purchase Agreements’
(the Bill).

(1) OJ C 52, 2.3.2006, p. 8.

(5)

In the absence of a comprehensive reply, the Commission
reminded the Polish authorities by letter of 28 July 2005
(D/55776) of the clarifications requested at the meeting of
28 June 2005 and asked Poland to provide the requested
information.

(6)

By letter of 7 September 2005, registered on 9 September
2005, Poland informed the Commission that work on the
Bill had been halted as the parliamentary term had ended.

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(7)

(8)

(9)

the Commission
By letter dated 23 November 2005,
informed Poland that
it had decided to initiate the
procedure laid down in Article 88(2) of the EC Treaty in
respect of
the Bill and in respect of Power Purchase
Agreements (PPAs) in the Polish electricity sector.

authorities by letter of 23 February 2007. In reply to that
letter, by letter dated 12 March 2007, registered on the
same day, the Polish authorities informed the Commission
that it was no longer necessary to translate the remaining
comments.

The Commission decision to initiate the procedure was
published in the Official Journal of the European Union. (2)
The Commission called on interested parties to submit their
comments.

(15) The Polish authorities subsequently submitted an opinion
on the interested parties' comments by letter dated
28 March 2007, registered by the Commission on the
same day.

By letter of 16 December 2005 the Polish authorities
requested that certain information contained in the decision
to initiate the procedure not be disclosed to third parties.
The Commission replied to the request and, by letter of
25 January 2006, presented its proposal
for the non-
confidential version of the decision, which was accepted by
the Polish authorities by e-mail of 16 February 2006
registered on the same day.

(16)

In reply to the Commission's letter dated 28 April 2006,
the Polish authorities submitted additional information on
the measure by letter of 6 June 2006 registered on 8 June
2006. By letter of 13 July 2006, registered on 17 July 2006,
the Polish authorities submitted copies of the PPAs with the
corresponding annexes and appendices (609 documents in
total) in paper format.

(10) Poland provided the Commission with the first part of its
comments on the initiation of the procedure in connection
with the Bill on the early termination of Power Purchase
Agreements by letter dated 28 December 2005, registered
by the Commission on 4 January 2006, which described
the action taken to allay the concerns expressed by the
Commission on the Bill. Second, following a request for a
deadline extension which was accepted by the Commission
on 12 January 2006, the Polish authorities provided their
comments on the Commission's assessment of the PPAs by
letter dated 23 January 2006, registered by the Commission
on 26 January 2006.

(11) As a supplement to their letter of 23 December 2005, the
Polish authorities provided by letter of 5 April 2006,
registered on 6 April 2006, a further description of the
planned changes to the Bill on the early termination of
Power Purchase Agreements in order to bring it in line with
the relevant state aid rules. The annexes to that letter were
provided by letter of 6 April 2006, registered on 10 April
2006.

(12) The Commission received comments

from interested
parties. By letter dated 20 June 2006 the Commission
forwarded these comments to Poland, which was given the
opportunity to react.

(13) The decision to open the procedure was challenged by one
of the interested parties before the Court of First Instance
by way of an application lodged on 12 May 2006 and was
assigned reference number T-142/06.

(17) By letter registered on 4 May 2006 the Polish authorities
requested an interpretation of one of the points of the
Commission Communication relating to the methodology
for analysing state aid linked to stranded costs (the Stranded
Costs Methodology). (3)

(18) By letter of 27 September 2006 the Commission sent the
Polish authorities a list of points which were of crucial
the Bill on the early
importance for
termination of Power Purchase Agreements.

the drafting of

(19) Different versions of the Bill on the early termination of
Power Purchase Agreements at different stages of
the
legislative procedure in Poland were submitted by letters
registered on 17 August 2006, 5 January 2007 and 28 May
2007 and by e-mail registered on 29 May 2007 (English
version of the Bill).

(20)

In the course of the procedure, Poland provided additional
registered on
information on the measure by letters
31 January 2007 and 4 April 2007, by emails dated 2, 4,
7 and 11 May 2007 and by letter registered on 6 June
2007.

(21) By letter dated 3 April 2007 the Commission asked the
Polish authorities about progress with legislative work on
the Bill on the early termination of Power Purchase
Agreements and about the action taken by Poland further
to earlier discussions with the Commission.

(14) Following a request by the Polish authorities dated 7 July
2006, registered on 12 July 2006, most of the comments
were translated into Polish and transmitted to the Polish

(22)

the investigation
In addition, within the framework of
procedure, meetings were held with the Polish authorities
on 5 April 2006, 7 September 2006, 26 October 2006,
2 February 2007, 22 February 2007, 26 April 2007, 2 May
2007 and 14 May 2007.

(2) See footnote 1.

(3) Adopted by the Commission on 26 July 2001.

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(23) By letter of 9 July 2007 Poland submitted the final version
of the Early Termination of Purchase Power Agreements
Act, which was adopted by the Polish Parliament and
entered into force on 4 August 2007. On 18 July 2007
Poland submitted the English translation of the Act and a
list of the changes made to the Act by the Upper Chamber
of Parliament, the Senate, together with an explanatory
memorandum.

Energetyczny S.A. group (PKE), which was signed on
12 April 1995, and the PPA with Elektrownia Turów, which
was signed on 26 August 1994.. The PPA with Elektrownia
Turów was not covered by the decision to initiate the
procedure (4) and is therefore not covered by this Decision.
The following table lists the companies concerned.

2.

DESCRIPTION OF THE AID

2.1.

Power Purchase Agreements

(24)

In the mid-90s the Polish government decided to launch a
programme designed to modernise the Polish electricity
sector and bring it
into line with the technical and
environmental standards of Western Europe.

(25)

In order to implement this programme, Poland launched a
tender procedure with a view to selecting projects for new
or modernised electricity generation plants. These projects
would be awarded long-term PPAs for their generation
capacity. The decision to launch the tendering procedure
was taken by the Ministry of Trade and Industry. The
procedure was organised under the aegis of the Ministry by
Polskie Sieci Elektroenergetyczne S.A. (PSE), the publicly
owned Polish electricity network operator.

(26) Technical documents and specifications for the tendering
procedure were published in August and September 1994.
The documents indicated three objectives to be met by the
projects: procurement of cheap electricity, maintenance of a
reasonable level of security of supply and improvement of
environmental
environmental
standards/prevention of
deterioration,
the requirements of
taking into account
integration between Poland and Western Europe.

Table 1

PPAs in Poland

No

Name of recipient

1

2

3

4

5

6

7

8

9

10

11

12

13

14

BOT Górnictwo i Energetyka S.A.

Południowy Koncern Energetyczny S.A.

Elektrownia Kozienice S.A.

Zespół Elektrowni Dolna Odra S.A.

Zespół Elektrowni Pątnów-Adamów-Konin Pąt-
nów II

Electrabel Połaniec S.A.

Elektrociepłownia Kraków S.A. (1)

Dalkia Poznań Zespół Elektrociepłowni S.A.

Elektrociepłownia Rzeszów S.A.

Elektrociepłownia Nowa Sarzyna Sp. z o.o.

Elektrociepłownia Lublin Wrotków Sp. z o.o.

Elektrociepłownia Chorzów ‘ELCHO’ S.A.

Żarnowiecka Elektrownia Gazowa Sp. z o.o.

Elektrociepłownia Zielona Góra S.A.

(1) This PPA was not signed as the result of the tendering procedure.
Source: Decision to initiate the procedure.

(27) Various criteria were used to evaluate the bids, including:
the project's efficiency, the volume of capital expenditure,
pro-environmental action and the use of proven technol-
ogies and stable and secure sources of fuel.

(30) The duration of PPAs ranges from 7 to 20 years, calculated
from the date on which the power plant starts operating;
most of them have been concluded for a period of more
than 15 years. The last PPA expires in 2027.

(4)

(28) The deadline for submitting bids was 5 January 1995. 44
bids were received. The least attractive bids were eliminated.
Direct negotiations were undertaken with the remaining
bidders. These negotiations led to the conclusion of PPAs
with several companies or groups of companies.

(29) The PPAs were signed between 1996 and 1998, with the
exception of one of seven PPAs with Południowy Koncern

the Czech Republic,

the Republic of Estonia,

In the light of Annex IV to the Act concerning the conditions of
the
accession of
Republic of Cyprus, the Republic of Latvia, the Republic of Lithuania,
the Republic of Hungary, the Republic of Malta, the Republic of
Poland, the Republic of Slovenia and the Slovak Republic, and the
amendments to the Treaties on which the European Union is
founded (the Accession Act), which forms an integral part of the
Treaty of Accession of the Czech Republic, the Republic of Estonia,
the Republic of Cyprus, the Republic of Latvia, the Republic of
Lithuania, the Republic of Hungary, the Republic of Malta, the
Republic of Poland, the Republic of Slovenia and the Slovak Republic
to the European Union (the Accession Treaty)
(OJ L 236 of
23.9.2003), aid awarded before 10 December 1994 is regarded as
existing aid.

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(31) All PPAs are underpinned by the same basic principles:

(a) power generators undertake to create new capacity, to
modernise equipment and to supply PSE with a fixed
in
minimum volume of electricity from the plant
question;

(b) PSE undertakes to purchase at least that minimum

volume of electricity;

(c) the electricity purchase price is based on passing costs
on to the consumer; power generators charge PSE an
amount equivalent to all their fixed and variable costs,
plus a profit margin.

(38)

However, since the final content of PPAs is the result of an
individual set of negotiations for each project, they are not
completely identical and the details may differ.

(32) Some PPAs have been amended, some several times, since
they were signed. These amendments changed certain
aspects of the contract, but the main principles described
above were always respected.

2.2.

Bill on the early termination of PPAs in

respect of which the decision to initiate
the procedure was taken

(33) The Bill in respect of which the decision to initiate the
procedure was taken provided for the power generators
listed in Table 1 to voluntarily terminate PPAs concluded
with PSE. The power generators that opt in to the system
would be entitled to compensation under the conditions
laid down in the Bill.

(34) Compensation may cover the difference between the costs
incurred by a company for the purpose of discharging a
PPA and the share of the revenue generated by the sale of
electricity that the company can use to cover these costs.
This difference is hereinafter referred to as ‘the compensa-
table difference’. These costs also include costs directly
linked to the termination of
the PPA, such as costs
associated with early loan repayments.

(35) Compensation takes the form of an initial payment,
followed by annual adjustments until 2016 and a final
adjustment in that year.

(36) The initial payment is equal to the compensatable difference
from 2006 to 2025 or to the year in which the PPA in
question was originally to expire, whichever is earlier, based
on forecast trends in prices and market shares over that
period.

and compared against the amount originally calculated on
the basis of the forecast. If the actual value differs from the
forecast, an adjustment will be made which may be positive
or negative and will give rise either to a further payment to
the recipient or to reimbursement by the recipient, as
appropriate. For practical reasons, in particular the time
needed to collect and compile all data, computation of
adjustments will actually take place two calendar years after
the year to which the economic data refer.

In 2016 a new forecast will be established for trends in
prices and market shares covering the period from 2015 to
2025 or the year in which the PPA in question was
originally to expire, whichever is earlier (the remaining
period). The amount of the compensatable difference over
the remaining period, determined on the basis of
this
forecast, will be compared against the value calculated using
the original forecast. If these amounts are different, a final
adjustment will be made which will cover the whole
remaining period. Like the previous adjustments, the final
adjustment may be positive or negative and will give rise
either
to
reimbursement by the recipient, as appropriate.

to a further payment

to the recipient or

(39) The total compensation paid, including adjustments, may
not exceed the following maximum amount. This max-
imum amount is determined for individual companies or,
where companies belong to a single group,
the
group: (5)

for

Table 2

Maximum compensation provided for in the version of the
Bill analysed in the decision to initiate the procedure

Name of recipient

(in 1 000 PLN)

Maximum
compensation

BOT Górnictwo i Energetyka S.A.

7 554 899

Południowy Koncern Energetyczny
S.A.

5 085 101

Elektrownia Kozienice S.A.

1 610 729

Zespół Elektrowni Dolna Odra S.A.

1 106 014

Zespół Elektrowni Pątnów-Ada-
mów-Konin Pątnów II

2 173 335

Electrabel Połaniec S.A.

1 204 454

Elektrociepłownia Kraków S.A.

Dalkia Poznań Zespół Elektrocie-
płowni S.A.

84 656

132 773

1

2

3

4

5

6

7

8

(37) During the period from the entry into force of the Bill to
2014, the amount of the compensatable difference will be
recalculated annually on the basis of actual economic data

(5) NB: this table is based on the documentation provided by the Polish
authorities in Appendix 1 to their letter of 2 June 2005, which
contains more information than the original notification of the Bill.

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Name of recipient

Elektrociepłownia Rzeszów S.A.

Elektrociepłownia Nowa Sarzyna Sp.
z o.o.

Elektrociepłownia Lublin Wrotków
Sp. z o.o.

Elektrociepłownia Chorzów
‘ELCHO’ S.A.

Żarnowiecka Elektrownia Gazowa
Sp. z o.o.

9

10

11

12

13

(in 1 000 PLN)

Maximum
compensation

302 684

641 453

508 176

1 338 272

1 013 081

3.1.

Power Purchase Agreements

(44)

In its preliminary analysis, the Commission took the view
that
the PPAs were likely to provide a competitive
advantage to the contracting power generators, which
would distort competition and affect
trade between
Member States.

(45) The Commission expressed the view that PPAs did not
constitute existing aid as — on the basis of the Accession
Treaty — none of the PPAs was eligible for one of the three
categories of aid that were regarded, as of accession, as
existing aid within the meaning of Article 88(1) of the EC
Treaty. (6)

14

Elektrociepłownia Zielona Góra S.A.

540 323

(46)

Total

22 755 627

Source: Decision to initiate the procedure.

In particular, first, none of the PPAs (with the exception of
the one signed with Elektrociepłownia Turów) had entered
into force before 10 December 1994. Second,
the
Commission had not been given notice of the PPAs under
the so-called ‘interim procedure’ and, third, none of the
PPAs had been indicated on the existing aid list annexed to
the Accession Treaty.

(40) This maximum amount is equal to the compensatable
difference as calculated from 2006 to 2025 on the basis of
the hypothesis that prices on the electricity market will
increase steadily but slowly from a level even lower than at
present to the levels recorded in Western Europe. In this
scenario, average electricity prices start around EUR 22/
MWh in 2006, increase slowly to EUR 30/MWh in 2015,
then rise more steeply to around EUR 40/MWh in 2018
and stabilize around this amount, with some upward and
downward fluctuations, until
the reference
period in 2025.

the end of

(41) Compensation will be paid by PSE or a fully state-owned
subsidiary, and financed by the introduction of a levy on
consumers proportionate to their subscription to the
electricity grid. In order to finance the large initial payment,
PSE and/or its subsidiary will securitize revenue from the
levy.

3.

GROUNDS FOR INITIATING THE PROCEDURE

(42)

In its decision to initiate the procedure, with a view to
assessing the notified Bill, the Commission examined both
the state aid element of the PPAs themselves and the state
aid element of the compensation paid in the event of
termination of the PPAs. As explained in point 3 of the
decision to initiate the procedure, these two measures were
closely connected.

(47) The Commission stated that, since the PPAs had not been
notified to it under Article 88(3) of the EC Treaty, they
constituted unlawful aid within the meaning of Article 1(f)
of Council Regulation (EC) No 659/1999 of 22 March
1999 laying down detailed rules for the application of
Article 93 of the EC Treaty (7).

(48) The Commission expressed the view that the terms and
conditions of the PPAs put power generators which were
parties to a PPA in a more advantageous economic situation
than other power generators that were not parties to a PPA
and companies in other, comparable sectors in which such
long-term agreements had not even been offered to market
players. The measure was therefore found, on a preliminary
basis,
to confer a selective advantage to those power
generators.

(49) The Commission also noted that the electricity markets had
been opened to competition and that electricity had been
traded between Member States at least since the entry into
force of Directive 96/92/EC of the European Parliament and
of the Council of 19 December 1996 concerning common
rules for the internal market in electricity (8). Measures that
favour companies in the energy sector in one Member State
were therefore regarded as potentially impeding the scope
to export
for companies
electricity to that Member State, or favouring exports of
electricity to the second group of Member States.

from other Member States

(50) The Commission also expressed the view that

this
advantage entailed the use of state resources, because the

(43) The doubts raised in the decision to initiate the procedure
are summarised in points 3.1 and 3.2. below. For a more
detailed assessment, the Commission refers to point 3 of
the decision to initiate the procedure.

(6) Point 3(1)(i) of the decision to initiate the procedure.
(7) OJ L 83, 27.3.1999, p. 1
(8) OJ L 27, 30.1.1997, p. 20.

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decision to sign the PPAs was a consequence of state policy
implemented via the network operator PSE, which was fully
state-owned. Under the case law of the Court of Justice of
the European Communities (Court of Justice), when a state
owned company uses its funds in a way that can be deemed
then these funds should be
to constitute state action,
regarded as state resources within the meaning of Arti-
cle 87(1) of the EC Treaty. (9)

4.

COMMENTS FROM INTERESTED PARTIES

(58) Following the publication of the decision to initiate the
procedure, and within the relevant deadline or, in a few
following a deadline extension requested by the
cases,
interested parties,
the Commission received comments
from:

(51) The Commission therefore concluded that

the PPAs
probably constituted state aid to the power generators
within the meaning of Article 87(1) of the EC Treaty.

(52) The Commission went on to state that the Stranded Costs
Methodology should be used to analyse the state aid
received by the power generators. On the basis of the
documents in its possession at the time, the Commission
had doubts as to the PPAs' compatibility with the criteria set
out in the Stranded Costs Methodology.

(a) the following electricity generators: Elektrociepłownia
Rzeszów S.A. (Elektrociepłownia Rzeszów), Electrabel
SA and Electrabel Połaniec S.A. (collectively referred to
as ‘Electrabel’), Zespół Elektrowni Pątnów — Adamów
— Konin S.A. and Elektrownia Pątnów II Sp. z o.o.
(collectively referred to as ‘PAK’), BOT Górnictwo i
Energetyka S.A., BOT Elektrownia Opole S.A. and BOT
Elektrownia Turów (collectively referred to as ‘BOT’),
Elektrociepłownia Chorzów ‘ELCHO’ Sp. z. o.o. Elek-
trociepłownia Kraków S.A (ECK)., Elektrociepłownia
Zielona Góra S.A. (ECZG) and Elektrociepłownia Nowa
Sarzyna Sp. z o.o. (ENS);

(53) First,

the Commission had doubts that

the very rules
governing a PPA which foreclosed a significant part of the
market could be deemed compatible with the fundamental
objectives of
to
increase the pace of liberalisation of the sector by granting
adequate
facing unfair
competition.

the Stranded Costs Methodology,

compensation to incumbents

i.e.

(b) the

following banking institutions

that provided
financing to the electricity generators: Dresdner Bank
AG London Branch, Bank Pekao S.A., WestLB AG
London Branch (11)
and WestLB AG (collectively
referred to as ‘the Banks’);

(c) PSE.

(54) Second, the Commission doubted that the aid element
included in PPAs would be compatible with the detailed
criteria of the Stranded Costs Methodology as regards the
calculation of eligible stranded costs and the attribution of
adequate compensation.

(59) The comments submitted to the Commission by the parties
are very similar, sometimes virtually identical. For that
reason,
instead of describing the comments of each
interested party separately, the Commission has grouped
them into general categories (see below).

3.2.

Compensation in the event of early

termination of PPAs

(55)

In the decision to initiate the procedure the Commission
used the same reasoning as the one explained above to
determine whether the PPAs contained aid elements. It
subsequently concluded, on a provisional basis, that aid
elements were also present in cases of compensation for the
early termination of PPAs. (10)

(56) The Commission then analysed the compatibility of the aid
element of compensation with the criteria set out in the
Stranded Costs Methodology.

(57) The Commission doubted that

the compensation was
compatible with the detailed criteria of the Stranded Costs
Methodology as regards the calculation of eligible stranded
costs and the awarding of adequate compensation.

(9) Case C-482/99 France v Commission [2002] ECR I-04397.
(10) See point 3 (1) (ii) of the decision to initiate the procedure.

4.1.

Comments on the PPAs

A p p l i c a b i l i t y a f t e r a c c e s s i o n (12)

(60) The interested parties argue that PPAs should not be
regarded as ‘still applicable after accession’ within the
meaning of Annex IV, paragraph 3, subparagraph 1(c) to
the Accession Act. (13)

(61) The interested parties argue that measures that were
established in accordance with the law prior to accession
should not be reviewed by the Commission after accession.

(11) In the context of its request for a meeting with the Commission,
West LB AG London Branch also submitted some additional
comments by letter dated 27 December 2006 (see footnote 38
below) on the Bill on the early termination of PPAs which was
adopted by the Polish Cabinet in December 2006. A meeting with
representatives of West LB AG London Branch and the Office of the
Polish Permanent Representative to the EU took place on 14 March
2007.

(12) Comment submitted by BOT, ENS, ECZG, ECK, ELCHO and PAK.
(13) See footnote 3 above.

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is

in line with the general principle of non-
This
retroactivity. The Community state aid rules were not
supposed to apply until accession.

(68) The interested parties go on to state that the last sentence of
Article 1(b)(v) of Regulation (EC) No 659/1999 does not
apply to the PPAs for three reasons.

(62) The interested parties

to previous Commission
decisions (14)
in which the Commission stated that aid
systems which, in their view, were similar to the PPAs, did
not apply after accession.

refer

(63)

In their opinion, any aid under PPAs would have been
awarded prior to accession. Annual payments would still
have to be effected but
should not be regarded as
constituting new aid.

(64) PPAs fixed the volume of electricity to be purchased by PSE
and the purchase price for the electricity over the period in
question. In the case of certain items at least, prices were
calculated in such a way that they could not exceed a level
previously agreed between the parties or fluctuations would
be limited to a reasonable amount as compared to specified
i.e. the most objective standard possible.
market prices,
in particular
Actual prices were sometimes even lower,
because the Polish regulator kept indirect control over
them. As such, the state's maximum exposure was also
clearly determined by the PPAs prior to accession.

E x i s t i n g a i d (15)

(65) The interested parties argue that, even if one was to admit
that the PPAs constitute state aid within the meaning of
Article 87(1) of the EC Treaty, this state aid should be
regarded as existing aid within the meaning of Article 1(b)
of Regulation (EC) No 659/1999.

(66) The interested parties take the view that a decision
determining whether aid awarded prior to accession and
continued after accession should be regarded as ‘new aid’ or
‘existing aid’ should not be based solely on Annex IV to the
Accession Act. According to the interested parties, if such
aid does not qualify as existing aid under Annex IV of the
Accession Act, it should still be examined in the light of
Article 1(b)(ii) to (v) of Regulation (EC) No 659/1999.

(67) The

interested parties argue

that Article 1(b)(v) of
Regulation (EC) No 659/1999 applies to the PPAs, and
that therefore the PPAs constitute ‘existing aid’.

(69) First, in the Alzetta Mauro judgment, (16) the Court ruled
that aid that existed in a certain market which was initially
closed to competition before its liberalisation is to be
regarded as existing aid from the time of
liberalisation.
According to the interested parties, this judgment is based
directly on an interpretation of Article 88(1) of the EC
Treaty, and therefore takes precedence over Regulation (EC)
No 659/1999.

(70) Second, in any event, given that Regulation (EC) No 659/
1999 had not yet entered into force when the electricity
market was liberalised under Directive 96/92/EC or when
the PPAs were signed, the rules as set out in the Alzetta
Mauro judgment applied, not Regulation (EC) No 659/
1999.

(71) Third, a comparison of

the wording of

the different
categories in Article 1(b) of Regulation (EC) No 659/1999
leads to the conclusion that Article 1(b)(v) applies only to
state aid schemes, since individual aid was not explicitly
mentioned.

(72)

In support of this contention, the interested parties also
point to the fact that the PPAs were private-law agreements
as opposed to state measures. According to the interested
parties, it would be a perverse outcome if a contract legally
and validly concluded before Poland's accession to the EU
and liberalisation were to become illegal after accession.
The interested parties take the view that this would be an
expansive and retroactive interpretation of the EC Treaty
state aid rules which is incompatible with the internation-
ally recognised principles of legal certainty and legitimate
expectations.

I m p u t a b i l i t y o f m e a s u r e s t o t h e s t a t e

(73) The following comments were submitted by the Banks.

(74) The Banks argue that the measure cannot be imputed to the
State, but to PSE. Bearing in mind the state of the Polish
electricity sector when the PPAs were signed, PSE's only
option was to conclude long-term contracts. This would
also have been the case if PSE had been a privately-owned
market operator. It was therefore in the interest of both the
state and the parties to the agreements for the PPAs to be
concluded, rather than a case of the state imposing a policy
decision on PSE.

(14) Commission decisions CZ 52/2003 (Universal Banka), CZ 58/2003

(Evrobanka), CZ 46/2003 (Investicni a postowni banka).

(15) Comment submitted by ECZG, ECK and the Banks.

(16) Judgement of the Court of First Instance of 15 June 2000 in Joined
Cases T-298/97, T-312/97, T-313/97, T-315/97, T-600/97 to
T-607/97, T-1/98, T-3/98 to T-6/98 and T-23/98.

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E c o n o m i c a d v a n t a g e (17)

(75) Most of the interested parties argue that the PPAs do not

confer any economic advantage.

(76) The interested parties criticise the Commission's prelimin-
ary finding that the prices established under the PPAs are
higher than wholesale market prices. According to the
interested parties, the Commission did not make it clear in
the decision to initiate the procedure which market and
which prices the decision referred to. In particular, the
Polish Power Exchange was not opened until December
1999, by which time many PPAs had already been
concluded. In the opinion of the interested parties, the
interconnectors between Poland and other countries were
congested at the time. The Commission wrongly referred to
a price recorded in Greece in 2003, i.e. in a totally different
geographical and temporal context.

standards, while the latter

(77) Energy sold under PPAs cannot be compared with energy
sold outside PPAs, even in Poland. The former respect
modern environmental
is
produced by less environmentally friendly units, which
‘dump’ (18) their surplus capacity at marginal costs, under
various mechanisms, none of which ensures prices that
cover both fixed and variable costs. Power generators
operating outside PPAs were also subsidised and were not
required to modernise their equipment, unlike power
generators under the PPAs. They were in any event not
able to produce enough electricity to cover total demand in
Poland, in particular in 1997-1998.

(78) According to the interested parties, PPAs

should be
analysed in the light of the circumstances prevailing at
i.e. a centralised,
the time when they were concluded,
regulated electricity system with a single customer, rather
than a liberalised system with a wholesale market.

(79) PPAs were the only way to secure investments which met
the requirements for the electricity sector in Poland (in
particular, modernisation of the whole system, environ-
mental protection and security of supply). The Banks
required PPAs to serve as collateral for their loans. Applying
the private investor principle meant taking account of these
requirements, and the only way of meeting them was PPAs.
The interested parties note that PPAs impose investment
and availability obligations on power generators.

(17) Comments submitted by BOT, ENS, ECZG, ECK, ELCHO, Rzeszów,

the Banks, PAK, Electrabel and PSE.
(18) Wording used by the interested parties.

(80) The interested parties argue that PSE's behaviour in signing
PPAs should not be analysed in terms of whether it
achieved short-term profits but whether it ensured the
profitability of
long-term investments and — from a
network operator's perspective — whether it ensured stable
security of supply and discharged its general public service
duties. The interested parties state that the PPAs were
concluded by way of a transparent and open tender
procedure, which was conducted in a non-discriminatory
way and led to the lowest possible price. According to the
interested parties, it follows from Court of Justice case-law
that
for the granting of an
economic advantage to be ruled out. (19) Before launching
the tender procedure for the PPAs, a lowest cost analysis
was undertaken to determine a list of investment priorities
in the sector.

this is in itself sufficient

(81) The interested parties also argue that since PSE was
operating in a regulated electricity system, its behaviour
cannot be compared with the behaviour of companies
operating under normal market conditions. Accordingly,
PSE's behaviour should be assessed with reference to
objective and verifiable elements which, according to the
interested parties, are constituted by the costs incurred by
power generators. (20) PSE's behaviour is compatible with
the private investor principle because PPAs cover nothing
other than fixed costs plus variable costs and a reasonable
margin of profit.

(82)

It is said to be generally accepted practice for operators in
the sector to conclude long-term contracts like PPAs. This,
it is argued, is a normal form of risk-sharing between the
power generator and the buyer. The long duration of a
contract should not be construed as an advantage per se.
The interested parties cite a number of examples: a contract
between Electricité de France and Péchiney in France, two
contracts between Redes Energéticas Nacionais and Turbo-
gás and Electricidade De Portugal and Pego in Portugal, and
contracts concluded by Northern Ireland Electricity in the
United Kingdom. The interested parties also refer to an
‘IASB’ contract, but the references provided were incorrect
and the Commission was unable to find the document. (21)
The interested parties claim that the Commission did not
express reservations about the duration of these contracts,
even though it amounted to at least 15 years. The interested
parties state that long-term contracts are also a generally
accepted practice in the USA, but fail to provide any specific
examples.

(19) Reference to the judgment of the Court of First Instance in Joined
Cases P&O European Ferries (Vizcaya), SA (T-116/01) and Diputación
Foral de Vizcaya (T-118/01) v Commission [2003] ECR II-02957,
point 118.

(20) Reference is made to the Court judgments in cases C-83/1 P, C-93/1
P and C-64/01 P Chronopost and others v Ufex and others [2003] ECR I-
06993, paragraphs 38 and 39.

(21) The Polish authorities did not maintain this argument in their

comments.

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(83) The interested parties also claim that PPAs do not guarantee
return on investment. PSE and regulatory authorities have
retained the legal means to limit return on investment. In
particular, the regulatory authorities can review prices and
reject excessive or unjustified charges. PSE did not always
full capacity, and incorporated gains
use power plants'
resulting from efficiency improvements when calculating
electricity prices in the contracts. Power generators also
bear a number of
to financing,
relating e.g.
construction, operating and maintenance.

risks

(84) Since the PPAs do not provide any economic advantage, it is
argued, they do not constitute state aid within the meaning
of Article 87(1) of the EC Treaty.

(85)

Interested parties that are privately owned also argue that,
even if the PPAs did contain some economic advantage, the
this economic advantage would have been
value of
reflected in the sale price agreed at
the
privatisation of the power plant. PPAs were necessary in
order to carry out privatisation, being one of the basic
preconditions of
the privatisation agreements for these
plants. The interested parties argue that, further to the
Banks (22) and Falck judgments of the Court of Justice, the
circumstances referred to above rule out any element of
economic advantage from the PPAs.

the time of

areas as SGEIs which they are bound to provide. Member
States have a wide margin of discretion to determine which
services constitute SGEIs. More precisely, Directive 96/92/
EC makes it possible for security of supply to be regarded as
an SGEI, which is confirmed by the Commission's decision-
including
making practice. Environmental protection,
energy efficiency and climate protection, was also recog-
nised as an SGEI in Directive 2003/54/EC of the European
Parliament and of the Council of 26 June 2003 concerning
common rules for the internal market in electricity and
repealing Directive 96/92/EC (25). As such, the PPAs are
regarded as a legal instrument used by the State to entrust
power generators with the aforementioned SGEIs, as
confirmed by the bid assessment criteria.

(89) Second, the PPAs, including annexes, lay down precise rules
governing compensation for the costs of the SGEIs from
the outset. This is a part of the negotiations for the PPAs.
Certain PPAs were amended several
times, even after
Poland's accession to the European Union, but this did not
have a significant impact on the compensation rules or the
amounts involved.

(90) Third, the compensation paid on the basis of PPAs does not
exceed the costs of the SGEIs provided. PPAs solely cover
the costs of generating the electricity purchased (e.g.
construction costs,
fixed and variable
operating and maintenance costs, overheads) and a reason-
able margin of profit.

capital

costs,

S e r v i c e s o f g e n e r a l e c o n o m i c i n t e r e s t (23)

(86) The interested parties argue that the power generators that
are parties to the PPAs provide services of general economic
interest (SGEIs).

(91) Fourth, the SGEIs were entrusted to companies selected by
way of an open, competitive and non-discriminatory tender
procedure for the conclusion of the PPAs.

(87) state aid under the PPAs, if any, meets the four cumulative
criteria laid down by the Court in its judgment in case C-
280/00 (the Altmark judgment). (24)

(92)

In the light of the above, the interested parties conclude that
the PPAs fulfil the four cumulative criteria referred to in the
Altmark judgment and should be
regarded as not
constituting aid within the meaning of Article 87(1) of
the EC Treaty.

(88) First, the power generators that are parties to the PPAs will
be entrusted with providing SGEIs. This follows from
Article 1(2) of the 1997 Polish Energy Act, which states
that the state must secure a continuous and uninterrupted
supply of energy to end-users
is
technically and economically justifiable, with due regard
for the requirements of environmental protection. The
interested parties also consider diversification of fuel supply
and reduction of nitrogen oxide emissions close to urban

in a manner

that

(93) The interested parties also argue that even if PPAs were
deemed not to fulfil the four cumulative criteria of the
Altmark judgment, they could still be declared compatible
with the common market under Article 86(2) of the EC
Treaty.

(22) Case C-390/98 H.J. Banks & Co. Ltd v The Coal Authority and Secretary
of State for Trade and Industry [2001] ECR I-06117 and joined cases
C-74/00 P and C-75/00 P Falck SpA and Acciaierie di Bolzano SpA v
Commission [2002] ECR I-07869.

(23) Comments submitted by BOT, ENS, ACZG, ECK, ELCHO, PAK and

PSE.

(24) Case C-280/00 Altmark Trans GmbH and Regierungspräsidium
Magdeburg v Nahverkehrsgesellschaft Altmark GmbH, and Oberbun-
desanwalt beim Bundesverwaltungsgericht [2003] ECR I-07747.

(94) As indicated in recital 88,

the PPAs entrusted power
generators with SGEIs, the nature of which is laid down in
Polish law. PPAs are regarded as a necessary means to
guarantee provision of SGEIs; otherwise, appropriate
sources of financing for the plants' development could
not have been found. Aid under PPAs is proportionate to

(25) OJ L 176, 15.7.2003, p. 37.

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the objective of obtaining the SGEIs since it does not cover
more than the full costs of electricity generation, plus a
reasonable margin of profit. In short, in view of the very
limited number of
interconnections between Poland's
electricity network and other electricity networks in the
European Union, the aid could not affect the development
of trade between Member States to an extent contrary to
the common interest.

92/EC was not applicable to Poland at that time. Poland
was at a very early stage of its EU membership negotiations
— there was not even a definitive timeline for accession.
Prices at the time were fully regulated, including prices for
electricity generators which were not parties to PPAs. So
PPAs could not be seen as distorting competition at that
time.

S e l e c t i v i t y (26)

(95) The interested parties consider that the PPA system does

not comprise elements of selectivity.

(96) According to the interested parties,

it cannot be auto-
matically assumed that a measure that favours only one
sector of the economy is selective. The interested parties
argue that
the Commission should always define the
relevant geographical and product market. The Commis-
sion should then identify the competitors of
the aid
measure's recipients in this market so as to determine
whether the measure is selective. In this specific case, the
tender procedure for the selection of parties to the PPAs
was open,
transparent and non-discriminatory, which
means that no selectivity was involved.

(97) The interested parties also argue that

sector-specific
measures may be non-selective if they are purely the result
of market forces. The measures examined by the Court in
the Van der Kooy judgment (27) are a typical example of non-
selective measures of this type.

(98) The interested parties also point out that the decision to
conclude PPAs was taken not by the state, but by PSE. The
selectivity criterion should be replaced by the private
investor principle.

D i s t o r t i o n o f
t r a d e b e t w e e n M e m b e r S t a t e s (28)

c o m p e t i t i o n a n d i m p a c t o n

(99) The interested parties argue that the Commission should
have examined whether the PPAs distorted competition or
affected trade between Member States at the time when
they were concluded.

(100) The PPAs were signed at a time when there was no
competition on the Polish electricity market. Directive 96/

(26) Comments submitted by BOT, ENS, ECZG, ELCHO and the Banks.
(27) Judgment of the Court of 2 February 1988, joined cases 67, 68 and
70/85 Van der Kooy BV and others v Commission [1988] ECR 00219.
(28) Comments submitted by BOT, ENS, ECK, ELCHO, the Banks and

PAK.

(101) The interested parties also note that Poland was not a
Member State of the European Union at the time the PPAs
were signed. Furthermore, connection capacity between
Poland and its neighbours was limited, and the electricity
generated under
the PPAs was more expensive than
electricity generated outside the PPAs. As such, it cannot
be argued that the PPAs affected trade between Member
States at the time when they were concluded.

C o m p a t i b i l i t y
A r t i c l e 8 7 ( 3 ) ( a ) o f

w i t h i n

t h e E C Tr e a t y (29)

t h e m e a n i n g

o f

(102) The interested parties argue that, if the PPAs were state aid,
they could be declared compatible with the common
market pursuant to Article 87(3)(a) of the EC Treaty.

(103) The interested parties argue that

is ‘aid that

the PPAs cannot be
regarded as operating aid. Operating aid (as opposed to
investment aid)
is intended to relieve an
undertaking of the expenses that it would normally have to
bear in its day-to-day management or its usual activities.’
Payments under the PPAs cannot be regarded as constitut-
ing such aid. They constitute the price payable for goods or
services supplied under a business contract. Besides, the
purpose of PPAs is to enable implementation of an
they are
investment project, which demonstrates that
investment (as opposed to operating) measures.

(104) The interested parties also take the view that

the
Commission should recognise the existence of exceptional
circumstances that could result in the operating aid being
authorised in this case. Due consideration should be given
to the state of the Polish electricity sector in the 1990s.
Clearly, Poland could be treated as one of the regions
referred to in Article 87(3)(a) of the EC Treaty. Some of the
power generators in question were located in areas where
closure would have a very significant
impact on the
community as a whole. PPAs also promoted the develop-
ment of the electricity sector in Poland and of the economy
as a whole, given the importance of this sector.

(29) Comments submitted by BOT, ENS, ELCHO and PAK.

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C o m p a t i b i l i t y
A r t i c l e 8 7 ( 3 ) ( b ) o f

w i t h i n

t h e E C T r e a t y (30)

t h e m e a n i n g

o f

(105) The interested parties argue that, if the PPAs were state aid,
they could be declared compatible with the common
market pursuant to Article 87(3)(b) of the EC Treaty.

(106) According to the interested parties, when the PPAs were
signed the state of the Polish electricity sector was creating
serious disruption in the Polish economy. PPAs, it is argued,
were a way of remedying this serious disruption.

C o m p a t i b i l i t y
A r t i c l e 8 7 ( 3 ) ( c o f

w i t h i n

t h e m e a n i n g

o f

t h e E C T r e a t y ) (31)

(107) The interested parties argue that, if the PPAs were state aid,
they could be declared compatible with the common
market pursuant to Article 87(3)(c) of the EC Treaty.

(108) In that respect, the interested parties take the view that
PPAs should not be analysed in the light of the Stranded
Costs Methodology, since they were not designed to
compensate for
should instead be
analysed directly in the light of Article 87(3)(c).

these costs. PPAs

state aid for environmental protection, (33) bearing in mind
the fact that PPAs were specifically designed to bring power
generators in Poland into line with the requirements of
Directive 2001/80/EC of the European Parliament and of
the Council of 23 October 2001 on the limitation of
emissions of certain pollutants into the air from large
combustion plants (34).

T h e P PA s s h o u l d h a v e b e e n e x a m i n e d u n d e r
t h e i n t e r i m m e c h a n i s m r e f e r r e d t o i n t h e
A c c e s s i o n T r e a t y (35)

(112) The interested parties argue that PPAs should be examined
under state aid procedure No PL 1/03, (36) which was
initiated by the Commission in application of the interim
mechanism provided for in the Accession Treaty.

(113) Case No PL 1/03 dealt with the notification by Poland of
the initial version of the bill for the abolition of PPAs. The
interested parties consider that, when it examined the
notification, the Commission probably reached the same
conclusion on the link between the PPAs and the initial bill
as on the link between the PPAs and the Bill, namely that
the PPAs and the bill are ‘closely linked.’

(109) The interested parties claim that PPAs were designed to
enable the development of the Polish energy sector by
attracting foreign investment in modern, environmentally
friendly power plants. As such, PPAs were intended to
‘facilitate the development of certain economic activities.’

(114) According to the interested parties, the logical conclusion is
that the Commission should have analysed the PPAs by
way of the same procedure that it used to analyse the initial
bill, i.e. procedure No PL 1/03, just as it did in the present
case.

(110) The interested parties also claim that PPAs had little impact
on trade in electricity between Member States. For technical
interconnections between Poland and other
reasons,
countries were limited. Imports faced technical barriers
and full use had already been made of the scope for
exports, so it cannot be claimed that PPAs introduced
restrictions in this area. According to the interested parties,
initial
in its
the
Commission did not
identify PPAs as an obstacle to
integration of the European energy markets. The interested
parties conclude that the PPAs had ‘no adverse effect on
trading conditions to an extent contrary to the common
interest.’

report on the energy market, (32)

(111) The interested parties also argue that the PPAs should have
been analysed in the light of the Community guidelines on

(30) Comments submitted by ELCHO, PAK and PSE.
(31) Comments submitted by BOT, ENS, ELCHO, PAK and PSE.
(32) http://europa.eu/comm/competition/antitrust/others/sector_inqui-

ries/energy/po_1.pdf

(115) The interested parties note that the decision to initiate the
procedure also repeals the Commission decision concern-
ing case PL 1/03. The Commission justified this repealing
decision on the grounds
that Poland had failed to
implement
the initial bill prior to accession and that
therefore the procedures laid down in the Accession Treaty
did not apply to it. The interested parties argue that this
ignores the intrinsic relationship between the initial bill and
the PPAs. Contrary to the initial bill, the PPAs would have
remained within the scope of the procedures laid down in
the Accession Treaty. The Commission should have
continued to analyse the PPAs by way of procedure No
PL 1/03, i.e. under the procedures of the Accession Treaty,
and should not have initiated a new procedure under the
EC Treaty.

(33) OJ C 37, 3.2.2001, p. 3.
(34) OJ L 309, 27.11.2001, p. 1.
(35) Comments submitted by ELCHO, the Banks and PAK.
(36) Commission Decision of 3 February 2004 in state aid case PL 1/03
— Poland — Compensations of stranded costs in Poland. Let-
ter C(2004) 167fin dated 3 February 2004.

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D e p r i v a t i o n o f r i g h t s (37)

(116) The interested parties argue that termination of the PPAs
means that they are deprived of their rights (38) (without
adequate compensation). (39)

4.2.

Comments on the Bill

(117) Only ELCHO, the Banks and PAK submitted comments on

the Bill.

(118) The interested parties reiterate their viewpoint that the
PPAs do not constitute an economic advantage (see above).
They argue that, as a consequence, the payment of fair
compensation for
an
advantage either. The interested parties refer to the Asteris
judgement. (40) Compensation paid under the Bill is, they
argue, akin to compensatory damages, and in addition is
guaranteed under private international law and Article 10
of the Energy Charter Treaty.

termination cannot

constitute

(119) The interested parties also argue that the Bill does not
involve state resources in so far as the parafiscal levy that
will fund it does not go through PSE, but through one or
more private operators or companies.

(120) The interested parties also argue that

the Bill can be
regarded as compatible with the EC Treaty in the light of
Articles 87(3)(a)-(c) and 86(2). In this respect, the interested
parties are invoking the same arguments as the ones used
when discussing the compatibility of PPAs with these
Treaty provisions.

(37) Comments submitted by Rzeszów and West LB AG London Branch
(38) Rzeszów failed to substantiate this argument
in greater detail.
However, in its additional comments, West LB AG London Branch
(cf.
footnote 11) states that; although the bill on the early
termination of PPAs provides for PPAs to be terminated voluntarily,
in practice the Act will make such termination mandatory.
In
addition, as a result of liquidation of the adjustment component of
the system charges, PSE will no longer receive funds to discharge its
obligations under the PPAs after the Act enters into force — which is
likely to result in PSE having significant difficulties in discharging its
obligations under the PPAs. Therefore, if power generators fail to
terminate the contract voluntarily, the risk of not receiving the total
amount of funding for contract implementation is greatly increased.
(39) According to West LB AG London Branch, the way in which the
compensation for stranded costs is calculated and paid practically
deprives financial institutions of the source of repayment of loans
negotiated under the PPAs. Financial institutions would be deprived
of their rights without compensation. West LB argues that the bill
should therefore — as a minimum — provide for sufficient
compensation to ensure that
institutions can obtain
immediate repayment of all funding granted to power generators.
(40) Judgment of the Court of 27 September 1988 in joined cases C-106
to 120/87 Asteris AE and others v Greece and European Economic
Community [1988] ECR 05515, paragraphs 23 and 24.

financial

(121) Regarding the Bill's compatibility with the Stranded Costs
Methodology,
this method was
the Banks argue that
conceived and adopted in a totally different context. The
objective of the Stranded Costs Methodology was to resolve
the problem of how to recover sunk costs following
liberalisation. The Bill, by contrast, took account of the
circumstances prevailing in Poland when the PPAs were
signed. The Banks criticise the fact that, in its decision to
initiate the procedure, the Commission qualified certain
power plants in Poland as ‘inefficient’ and sought to analyse
whether the Draft Law would result in the level of income
guaranteed before liberalisation being maintained. Accord-
ing to the Banks, this logic would result in any power
plants constructed before the accession of a new Member
State to the European Union being deemed inefficient, with
the consequence that any contracts concluded with these
power plants would automatically be regarded as including
state aid.
In turn, this would lead to the far-reaching
conclusion that all contracts would have to be terminated
at the date of accession and then renegotiated. This would
make no legal or economic sense. The Banks add that the
Commission has failed to provide any convincing or
tangible evidence that the power plants are inefficient.

(122) In short, according to the Banks, the Commission made a
wrong distinction between power plants that had been
completed, or nearly completed, at the time of accession,
and the others. In so doing, the Commission overlooked
that compensation must be calculated with
the fact
reference to the
established rules of domestic and
international law. According to the Banks, the price which
a new player is prepared to pay to enter the market is
irrelevant to these calculations.

5.

COMMENTS FROM POLAND ON THE DECISION

TO INITIATE THE PROCEDURE

5.1.

Comments on the PPAs

(123) Poland takes the view that the state has a duty to ensure
energy security, which includes securing energy supplies,
with due account for environmental requirements.

(124) Poland argues that PPAs were the only way of discharging
this duty in Poland at the time when the agreements were
signed. Significant investment was necessary to modernise
the Polish electricity market, and the energy companies
themselves had very limited resources. The Banks made the
granting of loans contingent on a certain level of income
being guaranteed for a specified period. PPAs were regarded
as collateral for these loans.

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(125) PSE was the only entity that was capable of implementing
the PPAs. When analysing this company's behaviour,
it
should be borne in mind that the main motive of the state
is not to generate profit but to discharge its duties in the
general interest.

(126) Poland argues that, since the PPAs were concluded by way
of an open, transparent and non-discriminatory tender
procedure, the state's participation in them should be seen
as representing the market price for discharging the duty in
the public interest, which leads to the conclusion that there
is no state aid element involved. This is compatible with the
concept of public-private partnership, which is promoted
by the Commission.

5.2.

Comments on the Bill

(133) Poland responded to the Commission's doubts on the Bill
as expressed in the decision to initiate the procedure by
proposing an amended version of the Bill. The Bill entered
into force on 4 August 2007 and is therefore referred to
hereinafter as ‘the Act’.

(134) As regards state aid, a description is given below of the
points in which the new version of the Act differs from the
original version as described in section 2.2.

(135) The list of aid recipients and the maximum amount of
compensation have been amended. The new list of
stranded costs
for potential
compensation amounts
recipients is as follows:

(127) According to Poland,

the PPAs were concluded under
market terms and their form reflected in particular the
credit terms offered by the banks to power generators.

Table 3

Compensation levels in the amended Act

(128) Furthermore, Poland argues that, since the concepts of
SGEIs and public-private partnership always refer to a
specific sector, the PPAs cannot be viewed as instruments
which are abnormally sector-specific.

(129) Poland also argues that, in cases where power plants were
privatised, the sales price took account of the value of the
PPA. This therefore rules out any element of economic
advantage, which is one of the cumulative elements for
defining state aid.

(130) Poland also takes the view that the PPAs do not constitute
aid which is still applicable after accession. Poland regards
PPAs as individual aid, and states that their implementation,
even after accession, is nothing more than the transfer of
aid awarded before accession. The PPAs also clearly indicate
the state's maximum exposure.

(131) Poland states in its opinion that

the Stranded Costs
Methodology cannot be applied to the PPAs themselves. It
is applicable only after the PPAs have been terminated.

Name of recipient

BOT Górnictwo i Energetyka S.A.

Południowy Koncern Energetyczny S.A.

Elektrownia Kozienice S.A.

Zespół Elektrowni Dolna Odra S.A.

Zespół Elektrowni Pątnów-Adamów-Konin
Pątnów II

Elektrociepłownia Kraków S.A.

Elektrociepłownia Rzeszów S.A.

Elektrociepłownia Nowa Sarzyna Sp. z o.o.

Elektrociepłownia Lublin Wrotków Sp. z o.o.

Elektrociepłownia Chorzów ‘ELCHO’ S.A.

Elektrociepłownia Zielona Góra S.A.

Elektrociepłownia Gorzów S.A.

(in 1 000 PLN)

Maximum
compensation

4 536 851

1 479 745

623 612

633 496

1 377 880

0

297 415

777 535

425 263

888 581

464 297

72 755

Source: Appendix 2 to the Act as submitted by Poland.

Total

11 577 430

(136) As compared against the list in Table 2, the amended list of

recipients:

(132) In conclusion, the Polish authorities dispute the statement
that the PPAs guarantee a certain price for the electricity
over a specified period. Poland argues that instead the PPAs
ensure that the costs of generating electricity are covered
and allow for a small profit margin to the extent necessary
to repay the debt. According to Poland, in accordance with
market economy principles, the price of a product or
the capital
service should always reflect
obtained to finance the investment.

the costs of

a) no longer includes Electrabel Połaniec S.A. and Dalkia
Poznań Zespół Elektrociepłowni S.A., because their
PPAs have expired in the meantime;

b) no longer includes Żarnowiecka Elektrownia Gazowa
Sp. z o.o., because the PPA for this power plant was
terminated before construction of the plant had been
completed;

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c) now includes Elektrociepłownia Gorzów S.A., which

became eligible for payments under the Bill.

(137) Elektrociepłownia Kraków S.A. remains eligible for pay-
ments under the Act, but with a maximum level of
compensation equivalent to zero.

(138) The main rules governing the calculation of the maximum
amount of stranded cost compensation listed in Table 3
above are laid down in Article 27 of the Act.

(139) The maximum amounts of compensation were calculated

as the difference between:

(a) undepreciated investment costs as of 2007 not covered

by investment aid, and

(b) the part of its cash flow that the company will be able

to use to recoup its investment costs.

Investment costs are the net book value of fixed assets
as per Article 27(1) of
the Act. Undepreciated
investment costs are the book value of fixed assets
after deduction of their depreciated value.

The following are subsequently deducted from this
amount:

— the residual book value of the power plant as at the
day on which the PPA was originally scheduled to
end (if any), and

(142) The Act no longer provides for a large initial payment;
instead, there are annual
instalments with a system of
advances which, in particular, take account of the power
generator's debt. The mechanism designed to adapt
compensation amounts to actual changes in electricity
prices was extended until the originally planned termina-
tion of each PPA. It corresponds to the period referred to in
recital 139 used to calculate the maximum amount of
compensation for each company.

(143) The Act states that recipients of compensation will not
receive rescue or restructuring aid for a period of ten years
after
stranded costs compensation payment
provided for by the Act.

the last

(144) The Act also provides for a new category of stranded costs
for the power generators listed in Table 3 which have
concluded a long-term gas supply contract containing a
take or pay clause relating to the plants' operation under
their PPA. Long-term take or pay contracts are contracts in
which the buyer undertakes to take a certain quantity of gas
for each year of the contract at a price set by a formula and
is liable to a fine if it fails to purchase the quantity in
question.

(145) The maximum compensation for

these categories of
stranded costs is equivalent to the maximum volume of
electricity that the generator in question can produce from
the gas contracted under take or pay conditions, multiplied
by the estimated difference between the price per unit of
energy of this gas and the average price per unit of energy
of
the coal needed to produce the same amount of
electricity, and by a coefficient reflecting the ratio between
the average cost per unit of energy of gas from Polish gas
fields and the average cost per unit of energy of the gas
used by generators not using gas from Polish gas fields (if
the generator concerned does not use Polish gas).

— the total amount of
relating to the assets.

the grants and write-offs

(146) The following table indicates the maximum payments for
compensation linked to take or pay contracts under the
Act:

This maximum amount was calculated from 2007 until
expiry of the PPA for each power plant.

(140) When the compensation amounts were calculated, only
those investments that had been completed or were on the
point of completion as of the date of Poland's accession to
the European Union were taken into consideration.
‘Investments on the point of completion’ means invest-
ments which it was more economic to complete and
operate rather than stopping construction. The assessment
was carried out as at the date of Poland's accession to the
European Union.

(141) Future cash flows were calculated on the basis of the same
type of market forecasts as the ones described in the
decision to initiate the procedure. The Polish authorities
substantiated their forecasts.

Table 4

Maximum compensation for stranded costs linked to take or
pay contracts

Generator

Elektrociepłownia Rzeszów S.A.

(in 1 000 PLN)

Maximum
compensa-
tion

124 395

Elektrociepłownia Lublin Wrotków Sp. z o.o.

191 480

Elektrociepłownia Nowa Sarzyna Sp. z o.o.

340 655

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Generator

Elektrociepłownia Zielona Góra S.A.

Elektrociepłownia Gorzów S.A.

(in 1 000 PLN)

Maximum
compensa-
tion

313 477

35 273

Total

1 005 280

European Union. Additional quantities of gas contracted
under take or pay provisions by the same power generator
after accession do not qualify for compensation. Further-
more, if the quantity of gas acquired under the take or pay
provisions is reduced after accession, then this reduction is
reflected in compensation payments.

Source: Appendix 2 to the Act as submitted by Poland.

6.

REPLY FROM POLAND ON COMMENTS FROM

INTERESTED PARTIES

(147) A mechanism has been put in place to update the actual
compensation granted each year to each of these generators
for stranded costs linked to take or pay contracts.

(151) Poland takes the view that PPAs should not be regarded as
state aid by the Commission. However, if they were to be
deemed as constituting state aid, they should be treated as
aid not applicable after accession.

(148) Actual compensation in a given year comprises two items:

a)

first, an amount equivalent to the actual quantity of
electricity produced in a given year by the generator in
question from the gas obtained under his take or pay
contract, multiplied by the difference between the
actual price per unit of energy of the gas purchased
under the take or pay contract and the actual average
price per unit of energy of
the quantity of coal
necessary to produce the same amount of electricity in
that year, minus the difference between the average
sales price per unit of energy of the electricity charged
by the generator concerned in that year and the average
sales price per unit of energy of electricity charged by
coal-fired generators in that year (when this difference
in the
is negative it
calculations). The
ratio
between the average cost per unit of energy of gas
from Polish gas fields and the average cost per unit of
energy of the gas used by generators not using gas from
Polish gas fields (if the generator concerned does not
use Polish gas) is also applied;

taken into account

reflecting the

coefficient

is not

(152) Poland notes that the exemption from the obligation to
submit tariffs to the President of the Office for Energy
Regulation for approval was intended to encourage power
generators to behave like market operators and limit energy
generation costs.

(153) Poland emphasises that

the conclusion of PPAs was
preceded by a tender procedure which was open and
non-discriminatory and addressed to all generators (public
and private alike). The Commission is also requested to
note that some PPAs were linked to privatisation and that
the price of the privatised enterprise reflected the fact that a
PPA had been concluded.

(154) Should the Commission deem PPAs to constitute state aid,
Poland considers that the aid should not be qualified as
operating aid, as in practice it was linked to the discharge of
the public duties vested in the power generators. PPAs were
designed to ensure security of supply.

b)

second, an amount equivalent to the actual fines paid
by the generator in question in that year for gas
contracted under take or pay provisions and not taken.

(155) Poland once again reiterated its standpoint

that PPAs
should not be assessed in the light of the Stranded Costs
Methodology; the Methodology should be used only for
costs arising when a Member State fails to discharge its
obligations and guarantees vis-à-vis generators.

(149) For each power generator,

the sum of actual annual
compensation as
calculated in accordance with the
methodology laid down in recital 148 may not exceed
the maximum amount of compensation provided for in
Table 4. All payments for the compensation of stranded
costs linked to take or pay contracts cease when this
maximum amount is exceeded. In any event, payments
cease at the latest when the terminated PPA was originally
scheduled to expire.

(150) The above-mentioned provisions apply only to quantities
of gas acquired under take or pay contracts that had already
been concluded at the time of Poland's accession to the

7.

ASSESSMENT BY THE COMMISSION

(156) As mentioned in recital 133, the Polish authorities have
submitted the Act to the Commission as part of the present
procedure for it to be assessed under the state aid rules. The
Act provides for compensation linked to early termination
of PPAs and cannot therefore be dissociated from the PPAs
themselves. In its decision to initiate the procedure, the

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Commission expressed doubts about possible state aid
elements and PPAs' compatibility with state aid legislation.
The PPAs are still
in force at the date of the present
Decision.. Therefore the Commission has a duty to assess
the PPAs listed in Appendix 1 to the Act.

7.1.

With regard to PPAs

7.1.1. Existence of state aid within the meaning of Article 87(1)

of the EC Treaty

(157) Below the Commission analyses

each of

four
cumulative criteria which comprise the definition of state
aid within the meaning of Article 87(1) of the EC Treaty:
the involvement of state resources, the existence of an
economic advantage, the selectivity of the advantage and
the impact on trade.

the

(158) It is important that this analysis should determine the time
at which these criteria are examined and which will, as a
result, be taken into account for the state aid assessment of
the PPAs.

(159) In their comments, the interested parties argued (with
reference to several assessment criteria) that the Commis-
sion should consider only the situation prevailing when the
PPAs were signed. The findings of this analysis would then
extend to the whole duration of each PPA, at least until it
was substantially amended.

(160) It is true that, when carrying out an analysis to determine
the existence of aid in a specific case, the Commission must
examine the situation prevailing at the time when the
measure entered into force.

(161) However, that does not mean that the assessment of the
four criteria in the definition of state aid should be limited
to the precise time at which the aid was granted. If, from
the outset, the aid was granted for a long duration in the
form of successive payments — as opposed to a one-off
payment — the Commission must determine whether the
criteria were met over the whole planned duration of the
measure.

the assessment

the Commission has reached the
(162) In the present case,
conclusion that
findings were identical
irrespective of whether the PPAs were deemed to constitute
state aid when they were concluded. If the Commission
were to take the view that the four criteria for aid were
the measure
present when the PPAs were concluded,
should be assessed in accordance with the Accession Treaty.
As a result of this assessment (point 7.1.2 below), the
measure would constitute new aid as of 1 May 2004 and its
compatibility with the common market should be assessed
as of that date. Should it be concluded, however, that the
PPAs did not constitute state aid when they were signed,

the Commission is of the view that they became state aid at
the time of accession — at the latest on the date of
accession of Poland to the EU (point 7.1.2 below). On the
the Accession Treaty and in accordance with
basis of
Article 1(b)(v) of Regulation (EC) No 659/1999,
the
Commission would conclude that the measure constitutes
new aid as of 1 May 2004 and its compatibility with the
state aid rules is to be assessed as of that date (point 7.1.2
below).

(163) Therefore the Commission is assessing whether, as of the
day on which Poland acceded to the European Union and
since that date, the measure meets all the criteria for the
existence of state aid.

(164) In this regard,

the Commission wishes to respond to
comments submitted by the interested parties to the effect
that private-law contracts cannot automatically become
void as a result of accession and liberalisation, as this
outcome would, according to the interested parties, go
against
legal certainty and legitimate
expectations.

the principles of

(165) The Commission rejects

this argument. The Europe
Agreement establishing an association between the Eur-
opean Communities and their Member States, of the one
part, and the Republic of Poland, of the other part, which
paved the way for accession, was signed on 16 December
1991. At
the time when the parties concluded these
agreements, it was clear that Poland would accede to the
EU and, for most of them, it was also clear that this would
take place before the end date of the PPA.

(166) The Republic of Poland signed the Accession Treaty on
16 April 2003. The Accession Treaty entered into force on
1 May 2004. From the date of accession, the provisions of
the original Treaties and those of the secondary legislation
became binding in Poland, in line with Article 2 of the
Accession Act. (41) Consequently,
the so-called acquis
communautaire applies to all contractual relations in the
new Member States, and any exceptions to this rule can
stem only from the Accession Treaty itself. The Accession
Act annexed to the Treaty and its Annexes do not provide
for any exception under the state aid rules that would
exempt the PPAs or the energy sector in general from the
direct application of EU state aid legislation.

(167) The Commission is duty bound to apply EU competition
law to Poland in the same way as it does to all other
Member States as regards the energy sector and all other
sectors of the Polish economy. The Commission notes that
the form of aid (private-law contract as in the case of the
PPAs) is not relevant from the state aid viewpoint; only the
the measure is relevant to the Commission's
effect of

(41) See footnote 3 above.

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analysis. The Commission therefore found no valid
arguments in the interested parties' comments to explain
why this procedure is incompatible with the principles of
legal certainty or legitimate expectations.

(175) On the basis of the assessment of the measure and in the
light of the aforementioned judgment, the Commission
concludes that the PPAs do comprise state resources.

S t a t e
s t a t e

r e s o u r c e s

a n d

i m p u t a b i l i t y

t o

t h e

(168) The guarantee of profitability, which is the basis of the
PPAs, manifests itself in practice in the obligation for PSE to
purchase electricity at a price which covers investment and
operating costs plus a certain margin of profit. The
purchase price is borne in full by PSE, a company which is
entirely owned and controlled by the Treasury.

(169) The interested parties have argued that the decision to

conclude the PPAs was made by PSE

(176) As

far as

imputability is concerned,

in the Stardust
judgment, (44) the Court stated that resources allocated to
companies that are under the control of the state are state
is also
resources. However,
necessary to examine whether the use of such resources
is imputable to the state in a concrete manner.

the Court added that

it

(177) According to the Stardust judgment of the Court of Justice,
when a publicly owned company uses its funds in a way
which is imputable to the state, then these funds should be
regarded as state resources within the meaning of Arti-
cle 87(1) of the EC Treaty.

(170) As far as state resources are concerned, the Commission
has also considered the application of the PreussenElektra
judgment, (42) in which the Court of Justice examined a
mechanism whereby privately owned companies were
compelled by the state to purchase electricity from specific
producers at a price fixed by the state which was higher
than the market price. The Court ruled that, in this case,
there was no transfer of public resources, and therefore no
state aid.

(178) It clearly appears from the comments submitted by Poland
and interested parties that
the decision to launch a
programme to attract investors to the power generation
sector was designed to promote the sector's modernisation,
update power plants so as to bring them into line with EU
standards and ensure that energy supplies fully covered
demand. This demonstrates that the PPAs were concluded
by PSE not for commercial purposes but, as acknowledged
by the Polish authorities themselves, in order to implement
a number of important policy objectives.

(171) The Polish situation is significantly different

from the
system examined by the Court
in the aforementioned
ruling. In particular, the difference lies in the ownership
structure of the companies to which the obligation to
purchase the electricity applies.

(172) In the PreussenElektra case, the company which the State
required to purchase the electricity was privately owned,
whereas PSE is entirely owned and controlled by the state.
PSE is under state control in accordance with the definition
set out
in Commission Directive 2006/111/EC of
financial
16 November 2006 on the transparency of
relations between Member States and public undertakings
as well as on financial
transparency within certain
undertakings. (43) The resources used therefore belong to
a fully state-owned company.

(173) In the PreussenElektra case, when the funds are traced from
the recipient back to the source, it emerges that at no time
were they under the direct or indirect control of the state.

(174) In contrast to the situation described in the PreussenElektra
in the Polish case the funds are under state
judgment,
control because they are transferred to a public company
(i.e. PSE) and will therefore be regarded as state resources.

(179) The state's control over the award of PPAs is evidenced in
the fact that the invitations to submit tenders were sent to
participants by the Polish Ministry of Industry and Trade.
Moreover, under the Polish Commercial Code, the Minister
of
the General
Assembly of Shareholders.

the Treasury has the full authority of

(180) The core principle underpinning the prices provided for in
they should cover investment and
the PPAs was that
operating costs and ensure a certain profit margin. This
framework is designed to ensure the necessary investments
and also reflects a decision by the state authorities
implemented via PSE.

Justice in the Stardust

(181) In the light of the above assessment, the Commission
the above elements constitute a set of
considers that
indicators which, according to the criteria laid down by the
Court of
lead to the
conclusion that the use of PSE's funds in the PPAs is
imputable to the state and that therefore, in view of the
arguments set out, the PPAs should be considered, for the
purposes of the assessment, as being financed from state
resources.

judgment,

(42) Case C-379/98 PreussenElektra AG v Schleswag AG [2001] ECR

I-02099.

(43) OJ L 318, 17.11.2006, p. 17.

(44) Judgment of the Court of 16 May 2002 in case C-482/99 France v

Commission [2002] ECR I-04397.

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(182) It seems clear to the Commission that

the state was
involved in concluding the PPAs and in defining the basic
rules governing these agreements.

E c o n o m i c a d v a n t a g e

(183) The legal form of a PPA is a contract concluded between
two parties: PSE and the power generators. As explained in
recital 172, PSE is a fully state-owned company.

(184) To determine whether the PPAs provide an economic
advantage to power generators,
the Commission must
assess whether, via the PPAs, generators obtain economic
advantages that they would not obtain from the market.

(185) PPAs provide eligible generators with an advantage if the
parties to these agreements are placed in a better economic
position than other companies.

(186) Even though the details of individual PPAs may vary, all
PPAs are structured around a core invariable principle: the
mandatory purchase by PSE of most (sometimes all) of the
electricity generated by the companies concerned, at a price
reviewed periodically in accordance with the principle that
the total costs (fixed and variable) of generating electricity,
plus a profit margin, are passed on to the consumer.

(187) The Polish electricity regulator, URE, indirectly retains the
right to check whether the costs charged to PSE are justified
and reasonable, but in practice URE uses this power only to
check that the costs were actually linked to electricity
generation. Furthermore, URE's checks are only indirect
since their purpose is to verify the cost structure of PSE
with a view to defining PSE's income from captive
customers. In the unlikely circumstance of some of the
PPA-related costs charged to PSE being deemed unjustified
by URE, it can only prohibit PSE from passing these costs
on to its captive customers. This might make it more
difficult for PSE to discharge its obligations under the PPAs,
but it would not mean they had been legally annulled.

(188) The core principle described above is applied for the whole
duration of the PPA, which lasts from 7 years to 20 years
from the beginning of operation of the plants, i.e. from 10
to 31 years following the conclusion of the PPAs and, in
the majority of cases, more than 15 years.

fuel costs,

in particular,

the risk associated with
and,
fluctuations in end-user electricity prices, and the risk
associated with fluctuation in end-user electricity demand.
These are the typical risks that any power generator
without a PPA would bear itself.

(190) This means that power plants which have concluded PPAs
(provided that they are properly managed from a technical
perspective) have guaranteed profits extending over a very
significant period equivalent to the typical expected lifetime
of the assets concerned or their depreciation. The longer
the period is, the greater the value of the guarantee, since it
protects against a risk whose occurrence is increasingly
unpredictable.

(191) The Commission considers that this guarantee, which is the
core of
the PPAs, places the beneficiaries in a better
economic situation than other companies on the market
and therefore provides an advantage to the relevant power
plants.

(192) According to both the Polish authorities and the interested
parties, the banks required the PPAs to be signed as a
precondition for awarding loans to finance the assets.
Electrabel states that ‘Financial institutions were not ready
to finance new investments in the Polish power sector
without benefiting from a special guarantee that
the
borrower will achieve a certain turnover during the period
of reimbursement of the loan.’ (45) It follows from these
requirements on the part of banks that the guarantees
awarded as part of the PPAs had a positive market value.
The financial
to finance the
institutions' agreement
investments was therefore contingent on the PPA.

(193) It follows from the above considerations that PPAs are not
a traditional form of guarantee but simply provide for
payment by the State-owned and State-controlled PSE of
the investment costs and the most important (if not all)
operating costs of the power plants which are parties to the
agreements. In practice, this ‘guarantee’ means that, over
more or less the full depreciation period or planned
lifetime of the plant, and irrespective of any changes in the
conditions obtaining on the market, PSE buys a fixed
quantity of electricity at a price that must ensure the power
plant's viability.

(189) This means that, during this period, the commercial risk
associated with operating the power plants is borne by the
i.e. PSE. This includes the risk
buyer of the electricity,
associated with fluctuations in electricity generation costs

(194) With a view to determining whether an advantage exists,
the Commission analyses several other aspects in the
following paragraphs.

(45) Electrabel's comments on the procedure, point 45, fourth sentence.

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(195) First, the Commission notes that in Poland PPAs were
concluded only with selected power generators. At the time
they were concluded, there were other electricity generators
that did not benefit from the PPA rules. More were set up in
later years, and new investments are currently under way
without PPA support.

Table 5

Estimated total costs of generating electricity in power plants
which concluded PPAs in 2005

Generator

Average generation costs in
2005 (PLN/MWh)

Elektrownia Opole (part of BOT)

[…] (*)

(196) In the first years of the PPAs, power generators without a
PPA could sell their electricity at prices controlled by the
State via URE. On 28 June 2001 a start was made on
eliminating this mechanism and these power generators
started selling their electricity at free, market-based prices.

(197) As the interested parties have indicated, none of these
mechanisms (price controlled by the state or free, market-
based price) enabled generators without PPAs to cover all
their costs. They sell their electricity at a price correspond-
ing to marginal costs, i.e. a price which only ensures that
their variable costs are covered.

friendly

(198) The interested parties have suggested that electricity
produced by power generators without PPAs is not as
electricity generated by
environmentally
as
this would justify the
beneficiaries of PPAs, and that
former receiving a lower price for their electricity. The
Commission rejects this argument. First, it is not certain
that all power plants without PPAs generate ‘dirty’
electricity. The newest plants in Poland (without PPAs)
In
produce electricity using state-of-the-art
addition, there is no economic reason why less envir-
onmentally friendly electricity would have a lower market
value than more environmentally friendly electricity. The
electricity produced is completely substitutable (it is not
even possible to distinguish physically between the two
types), and its value for
the customer is exactly the
same. (46)

technology.

Elektrownia Turów (part of BOT)

Południowy Koncern Energetyczny
S.A.

Elektrownia Kozienice S.A.

Zespół Elektrowni Dolna Odra S.A.

Pątnów II

Elektrociepłownia Kraków S.A.

Elektrociepłownia Rzeszów S.A.

Elektrociepłownia Nowa Sarzyna Sp.
z o.o.

Elektrociepłownia Lublin Wrotków
Sp. z o.o.

Elektrociepłownia Chorzów ‘ELCHO’
S.A.

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

Elektrociepłownia Zielona Góra S.A.

[…]

Average price on the Polish Power
Exchange

115-120 PLN/MWh

(*) Confidential information.
Source: Commission estimates based on data provided by Poland. For
Pątnów II, the value is for 2008, the first year in which the plant
should be operational.

(200) The figures in Table 5 above show how unlikely it is that
market prices — i.e. the price that generators without PPAs
are paid for their electricity on the market — would suffice
to provide the same type of profit guarantee as the one
PPAs offer.

(199) The Polish Power Exchange started operating in 1999.
Since 2001 the average price of electricity on the Polish
Power Exchange has remained stable and has fluctuated
within a range of 110 to 125 PLN/MWh. (47) In 2004, the
average price on the market fluctuated around 115 PLN/
MWh; in 2005 around 115-120 PLN/MWh; in 2006 it was
rather stable at around 125 and in 2007 (to 31 July 2007)
it fluctuated between 110 and 122 PLN/MWh. By way of
comparison, the information provided by Poland allowed
the Commission to estimate the full costs incurred in 2005
by the power plants entitled to compensation under the
Act as follows:

(46) Green electricity may be a limited exception since some customers
may be prepared to pay more for electricity which is certified to have
been generated from renewable energy sources. However, none of
the power plants benefiting from PPAs uses these energy sources.

(47) Source: Polish Power Exchange statistics.

(201) The example of

the Polish Power Exchange is not an
isolated one. Other Member States have also liberalised
their electricity markets and established power exchanges
in which buyers and sellers trade electricity under market
conditions.

(202) In its Sector Enquiry on electricity markets in Europe, (48)
conditions
the Commission examined in detail
governing trade in electricity in European wholesale
markets. The data gathered as part of this enquiry shows
that no liberalised market provides a guarantee to

the

(48) http://ec.europa.eu/comm/competition/antitrust/others/sector_inqui-

ries/energy/

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generators that they will cover all their costs in the long-
term. As a matter of fact, most transactions take place
within a horizon of three years.

(210) By awarding the PPAs, PSE undertook to purchase a fixed
and significant quantity of electricity (around 50 % of
Polish electricity production in 2005, (51) and up to 70 %
in the period in question).

(203) Trade in electricity on power exchanges is always based on
marginal pricing, which guarantees only that short-run
marginal costs are covered. (49) Furthermore,
the time
horizon for contracts on these markets is shorter than for
PPAs. For instance, at present the longest contracts have
been concluded for: four years in NordPool (Scandinavian
countries), three years in Powernext (France), five years in
UKPX (United Kingdom) and six years in EEX (Germany).
On some exchanges,
like OMEL in Spain, no forward
contracts are concluded. Since 1 April 2006 no forward
contracts have been concluded on the Polish Power
Exchange either.

(204) In liberalised markets, electricity can also be traded via
bilateral contracts (over the counter’ or OTC market). An
energy enquiry showed that, because of the possibility of
arbitrage between power exchanges and bilateral contracts,
trading conditions (in particular price and duration of
contracts) on the OTC market are similar
to those
prevailing on power exchanges.

(205) In the PPAs, PSE undertook to purchase a fixed minimum
volume of electricity from power generators at a price
covering their full costs until 2007 for the shortest PPAs
and until 2027 for the longest ones.

(206) This decision was

imposed on PSE by the Polish
‘the
Government. As ELCHO indicates in its comments,
Polish Minister for Trade and Industry implemented the
policy objectives of ensuring security of supply and
improving environmental standards of power generation
through PSE.’ (50)

(207) The very fact that the Polish Government had to decide in
PSE's place that new investments would take place and
would benefit from PPAs clearly shows that this decision
was mainly based on criteria other than market investor
considerations.

(208) There are two main reasons why PSE would not have had
in taking this decision without

an economic interest
government intervention.

(209) First, PSE purchased a quantity of energy that it already

knew might be surplus to its requirements.

(49) Short-run marginal costs are the costs that power generators can
avoid by choosing to stop generating electricity in the short term.
These costs are more or less equal to variable costs, since both
notions are primarily driven by fuel costs.

(50) ELCHO's comments on the procedure, paragraph 1.4.1,

third

sentence.

(211) At the very beginning (the first few years of the PPAs) PSE
was the only supplier in the Polish electricity system, so it
could sell all this electricity to its end users. However, from
the very outset, it was clear that PSE would soon cease to
be the sole electricity supplier in Poland. The PPAs were
signed between 1996 and 1998, with the exception of one
of the six PKE PPAs, which was signed on 12 April 1995. It
was already clear at the time that Poland was likely to
accede to the Union during the life of most if not all of the
PPAs (in reality, accession occurred before the end of the
first one and 23 years before the end of the last one). In
particular, during the pre-accession process, in December
1991,
the Polish government had signed the Europe
Agreement which constituted an association partnership
between the EC and the Republic of Poland. Later, in 1994,
Poland lodged its official application for EU membership.
Accession negotiations started in 1998 and ended in 2002
when the Copenhagen European Council found that Poland
fulfilled the accession criteria.

(212) As a matter of fact, the interested parties even indicated
that one of the aims of the PPAs was to ensure that Polish
power generators complied with certain EU directives on
air pollution and,
in particular, with the directives on
emissions of large combustion plants, (52) which is further
evidence that these parties were aware that Poland would
soon accede to the European Union.

(213) It was known that Poland's accession to the European
Union would entail integration into the internal electricity
market, liberalisation of which started with the adoption of
Directive 96/92/EC. (53) This meant the opening-up of the
market
to other suppliers competing with PSE, and,
accordingly, that PSE might not need all the electricity
provided for in the PPAs in the light of changes on the
electricity market.

(214) The liberalisation plans were implemented very rapidly in
Poland, with the first customers benefiting from the
the market in 1999. The Polish Power
opening-up of

(51) Source: URE. Message from the President of the Energy Regulatory
Office in the 2005 Annual Report. Second paragraph. http://www.
ure.gov.pl/index_eng.php? dzial = 1&id = 6.

(52) The latest version of this Directive is Directive 2001/80/EC (see

footnote 34).

(53) The directive was adopted on 19 December 1996 and had been
under discussion since the presentation by the Commission of its
draft proposal on 14 March 1992.

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Exchange opened in the same year. Further changes
occurred when Directive 2003/54/EC was adopted on
26 June 2003. This Directive provides for the liberalisation
of the market for all professional consumers by 1 July
2004 and for all consumers by 1 July 2007, thus gradually
reducing PSE's captive market share to zero.

these contracts and the awarding of
Portugal of
compensation for annulment, the Commission noted
that
the power
generators; (54)

they constituted an advantage for

(215) Second, even for the share of electricity which PSE actually
needed, it made no sense for PSE, as the buyer, to undertake
to pay the power plants the full costs of generating power,
plus a profit margin established such a long time in
advance even though it was already known that liberal-
isation would allow it
to choose between different
technologies and prices, including those offered by new
market entrants using more efficient technologies.

(216) Buyers have an interest in concluding long-term contracts
only if these contracts provide them some hedging against
fluctuations in the electricity market, and in particular
against changes linked to fluctuations in fuel costs. For this
reason a buyer would have an economic interest in a long-
term contract of this type only if the seller offered to take
part of the risk associated with fluctuations in fuel costs or
if the generating technology ensured stable fuel costs, as is
the case with hydropower plants, and, in certain condi-
tions, nuclear plants.

(217) This economic logic is confirmed by the fact that there
does not seem to be any example of private buyers taking
long-term contracts without state intervention with plants
using fossil fuel and covering all production costs for the
same duration as the PPAs (more than 10 years). The
Commission found none in its energy sector enquiry, and,
despite their claims to the contrary, none of the interested
parties submitted an example of such a contract to the
Commission, despite the fact that some of them belong to
very large groups with activities in several countries.

(218) The only examples quoted by the interested parties are not

adequate for the reasons indicated below:

a)

the contracts in Portugal between Redes Energéticas
Nacionais on the one hand and Turbogás, Electricidade
De Portugal and Pego on the other hand, were
concluded by a publicly owned company (Redes
It should be noted that the
Energéticas Nacionais).
Commission did not
as
regard these
compatible with the state aid rules, despite attempts
by the interested parties to prove that they were. The
Commission only issued a decision concerning their
compatibility with Article 81 of the EC Treaty. In a state
aid decision concerning the compulsory annulment by

contracts

b)

the contracts concluded by Northern Ireland Electricity
in the United Kingdom were awarded at a time when
Northern Ireland Electricity was still a publicly owned
company, at the request of the state. Northern Ireland
Electricity was subsequently privatised and the UK
Government had to put in place a support scheme to
compensate Northern Ireland Electricity for the non-
economic burden associated with these contracts;

(c) the contract between Electricité de France and Péchiney
in France covers only Electricité de France's variable
nuclear plant costs. Many other contracts of that type
were concluded in France in the 1990s. They are all
based on the principle that the generator undertakes to
deliver electricity to the buyer over a long period at a
price which only covers its marginal costs.

concluded following a
for

(219) Lastly, the Commission notes that, despite the interested
parties' claims to the contrary, it is not true that the fact
that PPAs were
competitive
procedure suffices
them to be deemed as not
constituting aid. This reasoning applies when a Member
State purchases goods or services for its own use. In the
case at issue, the purpose of the competitive procedure was
to serve policy objectives such as promotion of foreign
in Poland, environmental protection and
investment
than to
supply,
improvements
purchase goods and services required by the state. In such
cases, the fact that a competitive procedure was followed
may lead only to the conclusion that the aid is limited to
the minimum necessary to achieve the policy objectives; it
does not suffice to rule out the presence of state aid.

in security of

rather

(220) Power generators belonging to privately owned groups
have argued that any state aid under the PPAs would have
been eliminated by the privatisation process because the
price paid by the companies that purchased the power
plants would have taken account of the value of the PPAs.

(221) The Commission considers that this reasoning does not
apply in the present case. In the case at issue, privatisation
of the power plants took the form of share deals.

(222) The Court of Justice has analysed how a change in the
ownership of a company during a share deal affects the
existence of aid and the recipient of unlawful aid granted to

(54) Commission decision in state aid case N 161/04 — Portugal —

Stranded costs in Portugal. OJ C 250, 8.10.2005, p. 9.

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the company. It ruled that the unlawful aid remains and
stays with the company that benefited from the aid, despite
the change in its ownership. (55) The transfer of shares at
the market price merely ensures that the buyer did not
benefit from state aid either.

(229) The interested parties have invoked environmental protec-
tion as one of the SGEIs to be implemented by the PPAs.
More precisely,
the PPAs were supposed to support
investment designed to allow Polish plants to adapt to
EU environmental standards.

(223) In the case at issue, this means that the change in the
ownership of the power plants that benefited from the
PPAs did not alter the fact that the PPAs constitute state aid
to these power plants. In reality, the power plants benefited
from the advantages contained in the PPAs, irrespective of
their ownership structure.

(224) All

the above-mentioned elements of

the economic
advantage and the arguments developed above concern
the time of accession of Poland to the EU and remain
applicable as at the date of this Decision (in the case of
PPAs which terminated before the date of this Decision,
until the date on which they terminated).

(225) In view of the above, the Commission concludes that the

PPAs provide an advantage to the beneficiaries.

7.1.2. Service of general economic interest

(226) The interested parties have argued that the PPAs should be
regarded as implementing SGEIs for
the purpose of
securing electricity supplies and environmental protection.
They are said to fulfil the criteria laid down in the Altmark
judgment, which means that they do not constitute aid
within the meaning of Article 87(1) of the EC Treaty.

(227) The Commission has analysed these arguments and cannot

agree with them for the following reasons:

(228) Member States have a wide margin of discretion to define
the scope of SGEIs. However, the existence of this wide
margin of discretion does not mean that just any state
intervention with a policy motivation can be characterised
as an SGEI. For instance, in the Merci convenzionali porto di
Genova judgment, (56) the Court rejected the application of
Article 86(2) of the EC Treaty because ‘it does not appear
[…] that [dock] work is of a general economic interest
exhibiting special characteristics as compared with the
general economic interest of other economic activities.’ The
Commission also considers that the Member States' wide
margin of discretion in defining the scope of SGEIs is
restricted in fields where Community legislation exists.

(230) The Commission considers that the requirement to fulfil
environmental standards does not exhibit any special
characteristics as compared with the constraints imposed
on all companies active in an industrial sector. Further-
more, considering the fulfilment of environmental stan-
dards as an SGEI would go directly against the polluter pays
principle which is one of the core principles of Community
environmental
law, enshrined in primary legislation by
Article 174(2) of the EC Treaty.

(231) The Commission notes the interested parties' argument
that environmental protection is quoted as one of the
possible areas for public service obligations in Article 3 of
Directive 96/92/EC. However, the Commission takes the
view that this does not undermine the position set out
above. The fact that the Directive states that there may be
public service obligations in the field of environmental
protection does not mean that there are no requirements as
to the actual content of these public service obligations. In
particular, these obligations must exhibit special character-
istics as compared with the normal business environment
of companies in the sector, and may not be incompatible
with the principles on which Community environmental
protection policy is based (e.g. the polluter pays principle).

(232) The Commission also notes that four of the power plants
concerned by the PPAs (in Turów, Pątnów, Bełchatów and
Jaworzno) feature on the WWF's list of Europe's thirty
most polluting power stations, (57) which further relativises
the claims that they fulfil an SGEI in terms of environ-
mental protection.

(233) The interested parties also invoke security of supply as one

of the SGEIs that the PPAs implement.

(234) In its decision practice, (58) the Commission has taken the
view that security of supply could be an SGEI, subject to the
restrictions provided for in Article 8(4) of Directive 96/92/
EC (which corresponds to Article 11(4) of Directive 2003/
54/EC), that is, provided that the generators concerned use
indigenous primary energy fuel sources, and that the total

(55) Joined cases C-328/99 and C-399/00 Italy and SIM 2 Multimedia v

Commission [2003] ECR I-4035, paragraph 83.

(56) Judgment of the Court of 10 December 1991 in Case C-179/90
Merci convenzionali porto di Genova SpA v Siderurgica Gabrielli SpA
[1991] ECR I-05889, paragraph 27.

(57) http://assets.panda.org/downloads/dirty30rankingfinal260905.pdf.
(58) See Commission decisions in cases N 34/99 (OJ C 5, 8.1.2002, p. 2),
NN 49/99 (OJ C 268, 22.9.2001, p. 7), N 6/A/01 (OJ C 77,
28.3.2002, p. 26) and C 7/05 (not yet published in the Official
Journal).

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volume of energy does not exceed in any calendar year
15 % of the total primary energy necessary to produce the
electricity consumed in the Member State concerned.

viable and takes due account of environmental protection
requirements. But this Article of the Act does not entrust
any specific company with public service obligations. It
entrusts duties to the state alone.

(235) In the case at issue, the PPAs concern quantities of energy
that are largely in excess of the 15 % referred to in recital
234. Furthermore, they do not solely concern generators
using indigenous primary energy fuel sources.

(236) The Commission notes that the power plants concerned by
the PPAs do not exhibit any special characteristics that
would make them particularly well adapted to meet
security of supply objectives. In fact, they are just normal
plants connected to the network, and therefore contribute
to overall security of supply in Poland just like any other
power plant in the sector.

(237) In view of the above, the Commission takes the view that
there is no reason to deviate from its usual practice in this
field.
It must therefore reject the claim that the PPAs
implement an SGEI in the field of security of supply In any
event, no SGEI has been defined by Poland in this context
to date.

(238) In view of the above, the Commission concludes that the
EC Treaty provisions on SGEIs do not apply to PPAs.

(239) The Commission also notes that the PPAs would not fulfil
all the criteria laid down in the Altmark judgment.

(240) First, under the Altmark judgment, the recipient under-
taking is actually required to discharge public service
obligations and those obligations must have been clearly
defined.

(241) In the case at issue, the alleged public service obligations
have not been clearly defined. The interested parties
mention environmental protection and security of supply,
but
In
these objectives are of a very general nature.
addition, the view could be taken that, to some extent, any
generator
in the electricity sector contributes to the
realisation of these objectives. The interested parties failed
to submit any document providing a more tangible
definition of
the type of SGEI entrusted to individual
generators, let alone a legal document laying down their
obligations.

(242) Article 1(2) of the Polish Energy Act was also invoked. (59)
This Article indicates
secure a
that
continuous and uninterrupted supply of energy to end-
users in a manner that is technically and economically

the state must

(243) Lastly, the interested parties argue that PPAs are documents
that entrust generators with SGEIs. But PPAs do not
contain any tangible definition of SGEIs either, nor do they
even refer to these obligations or to legal provisions that
could be a basis for the state to entrust SGEIs to other
entities.

(244) Second,

the parameters on the basis of which the
compensation is calculated must have been established
beforehand in an objective and transparent manner, and
the compensation should not exceed what is necessary to
cover all or part of the costs incurred in discharging the
public service obligations, taking into account the relevant
for discharging those
revenue and a reasonable profit
obligations. (60)

(245) In the absence of a clear definition of the SGEIs to be
provided,
in particular one making a clear distinction
between the service to be rendered and the power plants'
normal business operations, it is impossible to establish
parameters for compensation and/or to determine whether
the compensation exceeds the amount necessary to cover
the costs incurred in discharging these obligations. It is not
even possible to define exactly what the compensation is.

is not equivalent

(246) The existence of certain parameters for establishing the PPA
to the existence of precise
prices
parameters for calculating compensation for SGEIs, since
the price is not equal to the compensation. Furthermore,
the fact that the price covers only the costs of generating
electricity, plus a margin for profit, does not mean that it
does not include any excess compensation, since many of
the costs of generating electricity may be the normal costs
covered by any electricity generator, as opposed to the
surplus costs associated with SGEIs.

(247) Third, where the company which is to discharge public
service obligations has not been chosen in a public
procurement procedure, the level of compensation needed
must be determined on the basis of an analysis of the costs
which a typical undertaking, well run and provided with
adequate means of production to meet the public service
requirements, would have incurred in discharging those
obligations, taking into account the associated revenue and
a reasonable profit for discharging its obligations.

(60) These are actually the second and third criteria of the Altmark

(59) Journal of Laws 1997/54, item 348, as amended.

Judgement.

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(248) The interested parties argue that these criteria should be
deemed to be automatically fulfilled because a non-
discriminatory and transparent tender procedure was held
to award the PPAs. However, the Commission notes that
various criteria were applied in the tender procedure, not
just price or criteria associated with the above-mentioned
policy objectives (environmental protection, security of
supply). The Commission considers that the application of
those other criteria not related to the price or the said
policy objectives makes it impossible to conclude auto-
matically that the level of compensation is correct. Besides,
the fact that many different criteria were used for the
purpose of assessing the bids and that no tangible objective
for the SGEIs was defined also shows how difficult it is even
to assess whether the alleged SGEIs are actually imple-
mented. For instance, mixing price and environmental
criteria could result in a bidder proposing to generate
electricity for a very low price but with lesser environ-
mental protection being chosen over one proposing to
generate electricity of better environmental quality but for a
higher price. This
the
generators actually fulfil an SGEI and, in any event, makes
it more difficult to determine the extent of the SGEIs
fulfilled.

raises doubts as

to whether

(249) Furthermore, neither

the Polish authorities nor

the
interested parties provided an analysis of the costs of the
generators in question to support the contention that they
tally with the costs incurred by a typical undertaking. As a
matter of fact, the estimates provided by Poland under the
the purpose of calculating compensation to
Act
individual power generators show that
their costs are
significantly higher than those incurred by a typical new
entrant in Poland.

for

(250) Finally, the Commission notes that in the case of the PPA
with EC Kraków no tender procedure was organised.

(251) The interested parties have argued that Article 86(2) of the
EC Treaty might apply to the PPAs even where they do not
fulfil the criteria of the Altmark judgment.

(252) The Commission takes the view that the considerations set
out above lead to the conclusion that Article 86(2) cannot
apply to PPAs.

(253) In particular, Article 86(2) can apply only to companies
which have been entrusted with providing genuine SGEIs,
which is not
instance, as
the case in this particular
demonstrated in recitals 228 to 238. SGEIs, if any, must be
entrusted to specific companies, which is not the case in
this instance, as demonstrated in recitals 240 to 243.

Lastly, compensation for providing the SGEI must be
proportionate to the costs incurred; in other words, it must
be possible to carry out an assessment of the scope of the
SGEIs in order to calculate the associated costs. This is not
the case here as is demonstrated in recitals 245 and 246.

S e l e c t i v i t y

(254) PPAs are obviously selective since they were concluded
with a limited number of companies. When these
agreements were signed,
there were companies in the
electricity sector that did not benefit from a PPA.

(255) The interested parties' reference to the imperative of
defining the relevant markets is incorrect. The concept of
selectivity includes measures that benefit a whole sector,
even when they benefit all companies within that sector
(which is not
the case in this instance since some
companies within the sector did not benefit from PPAs).

(256) As for the reference to the Van der Kooy judgment, the
Commission recalls that in this judgment, the Court did
not call into question the selectivity of the aid measure. The
assessment referred to by the interested parties in their
comments concerns the presence of an advantage but it
cannot be established whether the Court of Justice deemed,
or would deem, the measure not to meet the selectivity
criterion.

(257) Finally, in reply to the interested parties' claim that the
selectivity criterion should be replaced by the market
investor principle for measures that are not decided by the
state,
investor
principle is a test to check whether an advantage is present,
not selectivity.

the Commission notes that

the market

D i s t o r t i o n o f
t r a d e

c o m p e t i t i o n a n d i m p a c t o n

(258) The interested parties argue that the Commission should
have examined whether the PPAs distorted competition or
affected trade between Member States at the time when
they were concluded. As explained above, the Commission
is of the view that whether the PPAs constituted state aid
when they were concluded does not influence the outcome
of the present procedure. In view of its accession to the EU,
Poland opened up its market at an early stage: the first
customers became eligible to change electricity supplier in
1999 and the Polish Power Exchange opened in the same
year. On 1 May 2004 Poland joined the liberalised internal
market. The existence of long-term agreements with the

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state-owned PSE, including an electricity purchase guaran-
tee issued by that company at a price which covers the
power plants' cost plus a profit margin, has the potential to
distort competition.

(259) Measures that

favour energy-sector companies in one
Member State may impede the potential for companies
from other Member States to export electricity to that
Member State, or favour exports of electricity to the second
group of Member States. This is especially true for Poland,
which is centrally located in Europe and is connected, or
easily connectable to, several current and future Member
States.

(260) The electricity market in Poland (Polish Power Exchange)
in that same year PSE joined

was opened up in 1999;
UCTE. (61)

(261) When the PPAs were signed, trade in electricity between
Poland and its neighbouring countries was clearly taking
place. The transmission capacity of the interconnectors
capacity was not
large (2 000 MW according to the
interested parties) but was used in full, mostly for export.

(262) In 2005 Poland exported 14,3 TWh of electricity and
imported 3,1 TWh, with domestic consumption levels of
144,8 TWh; (62) however, most trade taking place with the
Czech Republic, Germany and Slovakia (interconnectors
with Ukraine and Belarus have very small capacity or are
out of order).

(263) It follows from the above that PPAs had the potential to
distort competition even before Poland's accession to the
EU. However, the criterion of the effect on trade between
Member States can be met, by definition, only after
accession. As accession and liberalisation of the energy
sector in Poland took place on the same date (1 May 2004),
the Commission concludes that, by the date of Poland's
accession to the EU at the latest, the advantages resulting
from the PPAs had the potential to distort competition and
affect trade between Member States and has this potential
throughout the life of the PPAs.

(264) On the basis of the above, the Commission takes the view
that PPAs constitute state aid within the meaning of
Article 87(1) of the EC Treaty.

(61) Union for the Coordination of Transmission of Electricity, an
association of transmission system operators cooperating within the
interconnected network of continental Europe.

7.1.3. PPAs as ‘new aid’ as opposed to ‘existing aid’ Unlawfulness

of the aid

t h e

a p p l i c a b i l i t y

O n
t h e A c c e s s i o n
T r e a t y t o P PA s c o n c l u d e d b e f o r e a c c e s s i o n
i n f o r c e a f t e r a c c e s s i o n
a n d s t i l l

o f

(265) According to Annex IV, Chapter 3 of the Accession Treaty,
the Commission was competent to scrutinise measures
(individual aid measures and aid schemes) which entered
into force prior to accession, remain applicable after that
date and constitute state aid.

(266) First, since the PPAs were signed between 1994 and 1998,
i.e. before Poland joined the European Union, they meet the
condition of having entered into force prior to accession. In
that
the present
the Commission notes that
decision concerns only those PPAs that were in force on
the date of Poland's accession to the EU (1 May 2004). It
does not cover any PPAs that were terminated before that
date.

respect,

(267) Second, the PPAs are applicable after accession. They expire
between 2006 and 2027 — i.e. after accession. The state's
exact exposure by virtue of the PPAs was not known on the
date of accession.

(268) In this context, the Commission generally considers the
following aid measures to be applicable after accession and
to constitute new aid: (63)

a) any aid schemes that entered into force before the date
of accession and on the basis of which, without further
implementing measures being required, individual aid
may be awarded to the companies indicated in the Act
in a general and abstract manner after accession;

b) aid that is not linked to a specific project and that was
awarded before accession to one or more companies
for an indefinite period of time and/or an indefinite
amount;

c)

individual aid measures for which the state's exact
exposure was not known on the date on which the aid
was granted.

T h e ‘e x a c t e c o n o m i c e x p o s u r e o f

t h e s t a t e’

(269) PPAs served to guarantee the power plants' viability.
However, they are not a classic form of guarantee: PPAs
provide for a forward-looking return on investment and
profitability through a guaranteed purchase of energy at a
guaranteed (albeit variable) price for a guaranteed period of
time, regardless of market conditions.

(62) PSE's 2005 Annual Report, available at http://www.pse-operator.pl/

(63) See, for example, Commission decision of 28 January 2004 state aid

uploads/kontener/Annual_Report_2005.pdf.

CZ 14/2003 — Czech Republic ‘Česka spořitelna, a.s.’.

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(270) The state's financial exposure under the PPAs was not
capped at a maximum amount before accession and nor
was aid to power generators definitively and uncondition-
ally granted in a given amount prior to accession.

(271) On the contrary, the state's economic exposure under the
PPAs depends on parameters the future evolution of which
was unknown at the time of accession. Moreover, the PPAs
guaranteed generators protection from fluctuations in costs
which were unrelated to pre-accession transactions or
events but concerned future developments and were
therefore unknown on the date of accession.

(272) In particular, the fact that the state's exposure under the
PPAs was not known on the date of accession and that the
state remained liable after accession is demonstrated by the
following circumstances.

(273) First, the energy prices at which the power generators sell
the electricity to PSE were not laid down in the individual
PPAs. The prices are the result of calculations made using a
formula comprising a series of parameters that fluctuate in
an unforeseeable way.

(274) For instance, these formulas include parameters such as the
Consumer Price indexes in Poland or in the USA, oil or coal
prices on world markets, average wages in Poland or the
USD/PLN exchange rate. Obviously, fluctuations in all these
parameters are not conditioned solely by events that took
place before accession. Price calculations and sometimes
the formulas themselves change continuously by virtue of a
series of annexes to the PPAs, adopted, in some cases, on an
annual or even more frequent basis.

(275) Against this background, the Commission takes the view
that the existence of the price-setting formula does not
constitute a sufficient cap on the state's economic exposure.
The very existence of a number of evolving parameters in
the formula makes it impossible to determine the potential
level of the state's exposure with sufficient precision.

(276) Furthermore, unlike classic guarantees, PPAs cover the
beneficiaries' operating costs. They provide
the
continuous purchase of a guaranteed quantity of electricity
by PSE and for permanent payment of the variable or fixed
operating costs as per the price formulas indicated.

for

It

(278) As a subsidiary argument, PSE's financial exposure under
the PPAs is very much contingent on demand.
is
equivalent to the difference between the purchase price
under the PPAs and the revenue PSE can generate by selling
the electricity to end-users. The price at which PSE sells its
electricity to end-users cannot be predicted. The price of
electricity sold on the captive market is set by the state on
an annual basis, whereas on the free market prices fluctuate
in an unforeseeable way. This increases the unpredictability
of the state's exposure under PPAs. It may even be the case
that the fixed minimum obligatory purchase of energy
volume as provided for in the PPAs will be in excess of real
PSE needs, in particular once liberalisation of the energy
market is completed in 2007. The electricity surplus may
increasing the
lead to even higher unknown costs,
unpredictability of the state's exposure under PPAs still
further.

(279) Therefore PSE's payments to the power generators after
accession are not the mere disbursement of tranches within
an overall fixed cap established before accession. Moreover,
the PPAs had been revised by subsequent annexes on
several occasions since the date on which the initial
contracts were signed.

(280) The Commission notes that — in the relevant cases —
when the assessment of the compatibility of measures with
the common market is drawn up, due account should be
taken of aid awarded before the Member State joined the
European Union and applicable after accession.

S t a t u s o f P PA s a s n e w a i d

(281) According to the above-mentioned provisions of

the
Accession Treaty, all measures which entered into force
before accession and are still applicable after that date
which constitute state aid and which do not fall under one
of the categories listed below shall be regarded, as of
accession, as new aid within the meaning of Article 88(3)
of the EC Treaty.

(282) The three categories of existing aid referred to in the

Accession Treaty comprise:

1. aid measures put
10 December 1994.

into effect

in Poland before

With the exception of one PPA with the generator
Turów S.A. (64) the PPAs were signed after 10 December
1994, and as such do not constitute existing aid within
the meaning of Article 88(1) of the EC Treaty.

(277) The Commission has also taken into account the fact that,
in view of the significant number of parameters which the
price formulas comprise, it cannot be excluded that the aid
recipient could itself influence the final price (by way of
certain operating cost elements, e.g. employees' and
managers' pay).

2. aid measures which were included in the list of existing
state aid measures attached to the Accession Treaty.

(64) With which the PPA was signed on 26 August 1994, as indicated by

BOT in its comments on the procedure.

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the
Neither the scheme covering PPAs nor any of
individual PPAs were notified to the Commission with a
view to inclusion in the list of existing aid schemes
annexed to the Accession Treaty and nor were they
included in the Appendix to Annex IV of the Accession
Treaty referred to in point 1(b), Chapter 3, Annex IV,
which contains a list of existing aid measures; as such,
they do not constitute existing aid within the meaning
of Article 88(1) of the EC Treaty.

3. aid measures which prior to the date of accession had
been assessed by the state aid authority in Poland and
had been found to be compatible with Community law
and which the Commission had not objected to
because it had serious doubts regarding compatibility
with the common market pursuant to the procedure
laid down in the Accession Treaty, the so-called ‘interim
procedure’ (cf. second paragraph, Chapter 3 of Annex IV
to the Accession Treaty).

As no PPAs were submitted to the Commission under
the so-called interim procedure, they do not constitute
existing aid within the meaning of Article 88(1) of the
EC Treaty.

(283) In view of the fact that the individual PPAs do not belong
to any of the categories of existing aid enumerated in the
Treaty, they constitute new aid as of the date of accession.

(284) The Commission notes that this categorisation is also in
line with the last sentence of Article 1(b)(v) of Regulation
(EC) No 659/1999. This Article states that where measures
become aid following liberalisation under Community law
(in this case liberalisation of the energy market pursuant to
Directive 96/92/EC, which entered into force in Poland
when Poland joined the European Union), such measures
are not deemed to be existing aid after the date fixed for
liberalisation, i.e. they are treated as new aid.

(285) With reference to the comments by the interested parties
referred to in recital 71, the Commission observes that it
treats PPAs as an aid scheme for the reasons set out in
recital 31. It also takes account of the fact that a decision by
the state offering investors PPAs which guarantee their
viability while the agreements remain in force is a common
denominator of all PPAs.

Regulation (EC) No 659/1999 concerns both aid schemes
and individual aid measures.

(287) The Commission rejects

this argument.

It has been
demonstrated that all the criteria governing the existence
of state aid were met on the date of Poland's accession to
the EU. In particular, it has been demonstrated that energy
was traded between Poland and its neighbouring countries
at this time and that the Polish Power Exchange has been
operating since 1999. In any case, there were no doubts
that, on the date of accession, Poland would immediately
join a sector that had been opened to competition. The
Commission takes the view that the purpose of the state
aid provisions contained in the Accession Treaty was
precisely to ensure that measures which might distort
competition between Member States as of the date of
accession were reviewed.
to the accession
treaties prior to 1 May 2004, the Accession Treaty signed
by Poland and nine other countries is designed to restrict
measures deemed to constitute existing aid to the three
specific cases described above. The Alzetta Mauro judgment
does not concern a measure caught by the Accession Treaty
and cannot therefore be deemed applicable in this regard to
the PPAs under assessment. Lastly, the Commission also
takes the view that the Alzetta Mauro judgment concerns
the actual situation as described in the Commission
decision dated prior to the entry into force of Regulation
(EC) No 659/1999.

In contrast

(288) Therefore, on the basis of

the
Commission concludes that the PPAs constitute new aid.

the Accession Treaty,

U n l a w f u l a i d

(289) Given that the PPAs were not notified to the Commission
in accordance with the state aid procedural rules, the
Commission takes the view that they constitute unlawful
aid.

7.1.4. Applicable Treaty provisions

(290) The interested parties have argued that the Commission
should have analysed the PPAs in the light of the interim
mechanism of the Accession Treaty, together with state aid
case PL 1/03. (66)

(291) The Commission rejects this assertion.

(286) The interested parties argue that the PPAs did not constitute
state aid when they were concluded and cannot therefore
not be regarded as new aid. They invoke the Alzetta Mauro
judgment, (65) arguing that aid awarded in a market which
was initially closed to competition before its liberalisation is
to be regarded as existing aid from the date of liberal-
the above, Article 1(b)(v) of
isation.

Irrespective of

(292) Under

the Accession Treaty's interim mechanism the
Commission's powers were limited to endorsing or
objecting to decisions taken by the competition authorities
in the accession countries concerning measures had been
put into effect and were still applicable after accession. Case
PL 1/03 concerned a decision by the Polish competition

(65) See footnote 16.

(66) PL 1/03 — Stranded costs — Poland, cf. footnote 36.

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authority on the draft law on state compensation for the
termination of PPAs. It did not cover aid within PPAs
themselves and the Polish authorities did not give
notification of PPAs under the interim procedure; nor did
the relevant decision of the Office for Competition and
Consumer Protection cover individual PPAs. The Commis-
sion did not have powers to decide unilaterally to extend
the scope of the case on the basis of the interim procedure.

been awarded to the economy of certain areas of the
Federal Republic of Germany affected by the division of
that country.

(298) Further exemptions are laid out in Article 87(3) of the EC

Treaty.

(293) In addition, even if the Commission had had powers to
extend the scope of the case unilaterally, this would not
have been possible in this particular instance because the
law reviewed under the interim procedure provided for the
mandatory termination of all PPAs before Poland acceded
to the EU. Since the Commission review could only address
state aid issues still applicable after accession, the PPAs
could not have been included within its scope.

(299) Article 87(3)(a) states that ‘aid to promote the economic
development of areas where the standard of
living is
abnormally low or where there is serious underemploy-
ment’ may be declared compatible with the common
market. Most if not all of Poland can be regarded as such an
area.

they do not prohibit

(294) As regards the other bilateral treaties or the Energy Charter,
the Commission notes that
the
termination of such contracts but recommend appropriate
compensation which does not alter the state aid nature of
PPAs. The purpose of these treaties is to ensure a balance
between the objectives of liberalisation and the obligation
to maintain investments. With regard to the interested
parties' comments on deprivation of rights, the Commis-
sion takes the view that if the PPAs were to constitute
unlawful and incompatible state aid, they would be illegal.
Accordingly, the termination of these agreements cannot
be regarded as constituting deprivation of rights. If such
termination is deemed to constitute deprivation of rights,
the Commission takes the view that compensation can be
laid down in the
the conditions
awarded and that
Methodology will ensure that compensation is fair.

7.1.5. Compatibility assessment

(295) Article 87(1) of the EC Treaty provides for the general

prohibition of state aid within the Community.

(296) Articles 87(2) and 87(3) of the EC Treaty provide for
exemptions to the general rule that such aid is incompatible
with the common market as stated in Article 87(1).

(300) The Commission has adopted guidelines for the assessment
of such aid. When Poland acceded to the EU the guidelines
on national regional aid (67) (the Regional Guidelines) were
in force. These guidelines also governed the assessment of
regional aid in the light of Article 87(3)(c) of the EC Treaty.

(301) Under the Regional Guidelines, state aid could in principle
be authorised only for investment costs. Operating aid was
normally prohibited (point 4.15 of the Regional Guide-
lines), but could exceptionally be authorised in specific
regions provided it was limited in time, and progressively
reduced. (68)

(302) The aid cannot be regarded as investment aid. Investment
aid is defined using a list of potential eligible costs which
are indicated in points 4.5 and 4.6 of
the Regional
Guidelines. Payments under the PPAs clearly cover other
costs as well. The most striking example is that PPAs
guarantee the fuel costs associated with operating the
power plants. Staff costs are also covered by the PPAs.
Clearly, these costs are not eligible for investment aid. On
the contrary, they correspond to the operator's current
expenses and must as such be included in operating costs
as defined in point 4.15 of the Regional Guidelines.

(303) Aid awarded under the PPAs is not subject to a reasonable
time framework. PPAs are concluded for very long periods,
similar to the expected lifetime of a typical power plant.
Furthermore, PPAs do not include any provisions for a
gradual reduction in the amount of aid. The guaranteed
volumes of purchased electricity are not degressive, and
prices are indexed, which means that they increase rather
than decrease. The profit guarantee and its scope do not
reduce over time either.

(297) The exemptions in Article 87(2) of the EC Treaty do not
apply in the present case because this measure does not
have a social character, has not been awarded to individual
consumers, is not designed to make good damage caused
by natural disasters or exceptional occurrences and has not

(67) OJ C 74, 10.3.1998, p. 9.
(68) An exception to this rule was provided for in point 4.16 of the
Regional Guidelines, but only for outermost regions and regions of
low population density, which excludes the regions in which the
power generators benefiting from PPAs are located.

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(304) In view of the above, the Commission concludes that the
aid is not eligible for the derogation provided for in
Article 87(3)(a) of the EC Treaty.

(313) The interested parties have invoked the application of the
Regional Guidelines and of the Environmental Guidelines.

(305) Article 87(3)(b) of the EC Treaty states that ‘aid to promote
the execution of an important project of common
European interest or to remedy a serious disturbance in
the economy of a Member State’ may be declared
compatible with the common market.

(306) The Commission notes that the aid in question is not
designed to promote the execution of an important project
of common European interest.

(307) Nor has the Commission found any evidence that it is
designed to remedy a serious disturbance in the Polish
economy. The Commission acknowledges that electricity is
an important product for any Member State's economy,
and that there was a need to modernise this sector in
Poland in the 1990s.

(308) However, the Commission takes the view that the notion of
‘serious disturbance in the economy of a Member State’
refers to much more serious cases. A mere reference to the
potential consequences for the economy of a Member State
as made by the interested parties is not sufficient for the
above-mentioned Treaty provisions to be deemed applic-
able to a given measure. As a minimum, a more detailed
description and analysis of
such
disturbance occurring and of the scale of its consequences
would be required.

the probability of

(314) Recitals 300 to 304 indicate the reasons why the aid
cannot be deemed compatible with the common market in
application of the Regional Guidelines. (69)

(315) The Commission notes that the Environmental Guidelines,
like the Regional Aid Guidelines, primarily allow invest-
ment aid. Operating aid is limited to specific objectives. The
first is aid for the management of waste and for energy
saving (section E.3,1), which is limited to a maximum
duration of 5 years. The second is aid in the form of tax
reductions or exemptions (section E.3.2). The third is aid
for renewable energy sources (section E.3.3). Clearly, none
of these provisions apply in the present case.

(316) The fourth and last type of operating aid that can be
authorised is aid for the combined production of power
and heat (section E.3.4). Some of the generators concerned
produce heat and power. However, neither Poland nor any
of the concerned producers has demonstrated that these
plants fully meet the efficiency criteria laid down in the
Environmental Guidelines. Indeed, Poland has provided the
Commission with data showing that only a limited part of
the production could be deemed to meet these efficiency
criteria. In the Commission's view, this means that aid that
covers the whole production of the entities in question
cannot be authorised on the basis of these provisions.

(309) Lastly, the Commission notes that this concept includes
some notion of urgency which is incompatible with the
time-consuming cycle of tendering and negotiating the
PPAs.

(317) Of the documents referred to in recital 312, the only one
which could apply in the present case is the Stranded Costs
Methodology. The Stranded Costs Methodology concerns
aid granted to incumbents that built power plants prior to
liberalisation of the electricity sector and that may have
difficulties in operating them in a liberalised market.

(310) In view of the above, the Commission concludes that the
aid does not qualify for the derogation enshrined in
Article 87(3)(b) of the EC Treaty.

(318) In the decision to initiate the procedure, the Commission
raised a number of doubts as to the possibility of PPAs
being authorised on the basis of
the Stranded Costs
Methodology.

and heritage

(311) Article 87(3)(d) of the EC Treaty states that aid to promote
culture
conservation may be declared
compatible with the EC Treaty where such aid does not
affect trading conditions and competition in the Commu-
nity to an extent that is contrary to the common interest.
This Article obviously does not apply to the PPAs.

(312) Article 87(3)(c) provides for the authorisation of state 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. The Commission has developed
several guidelines and communications that explain how it
will apply the derogation contained in this Article.

(319) One of these doubts arose from the fact that the Stranded
Costs Methodology indicates that the Commission enter-
tains the most serious misgivings regarding aid that is
intended to safeguard all or some of the income pre-dating
the entry into force of Directive 96/92/EC, without taking
strictly into account the eligible stranded costs that might
result from the introduction of competition. (70)

(69) The Regional Guidelines are based on both Article 87(3)(a) and
Article 87(3)(c) of the EC Treaty. They provide for the same type of
assessment for both Articles. The difference in the application of
these two Articles is linked to the areas where they apply and the
admissible aid intensities.

(70) Point 4.8 of the Stranded Costs Methodology.

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(320) The PPAs were precisely designed to safeguard most of the
income pre-dating the entry into force of Directive 96/92/
EC obtained by the power generators and the plants
concerned. Furthermore, they concerned plants with a very
important share of the market and for a very long duration,
largely exceeding the time necessary for a reasonable
transition to the market.

7.2.

With regard to the Act

(327) The Commission has analysed the four cumulative criteria
for the existence of state aid within the meaning of
Article 87(1) of the EC Treaty.

(321) In the light of the above, the Commission concludes that
the PPAs are incompatible with the criteria laid down in the
Stranded Costs Methodology. They go against its funda-
mental principles, which were designed to enable a
progressive but genuine transition to the market.

(322) The interested parties have argued that the PPAs could be
authorised directly under Article 87(3)(c) of the EC Treaty.
They indicated that PPAs facilitated the development of the
Polish energy sector by attracting foreign investment in
modern, environmentally-friendly electricity generation
capacity. As such, PPAs were intended to ‘facilitate the
development of certain economic activities.’

(323) The Commission notes that

the two policy objectives
mentioned above: i.e. attracting investment and promoting
environmentally-friendly electricity generation capacity, are
precisely the policy objectives referred to in the Regional
Guidelines and the Environmental Guidelines. The Com-
mission has analysed the PPAs in the light of these two sets
of guidelines and concluded that they are not compatible
with these rules. The Commission takes the view that the
possibility of invoking Article 87(3)(c) to authorise the
PPAs has been exhausted.

(324) In view of the above, the Commission concludes that the

PPAs are incompatible with the common market.

7.1.6. The specific case of Żarnowiecka Elektrownia Gazowa Sp.

z o.o.

(325) The PPA with Żarnowiecka Elektrownia Gazowa Sp. z o.o.
terminated by PSE on 17 May 2006, before
was
construction work on the power plant
reached the
advanced stage. (71) Given that the power plant was not
operational at the time, it did not benefit from the PPA. It
did not, therefore, benefit from any state aid.

(326) The Commission therefore takes the view that this PPA did
not provide any aid to Żarnowiecka Elektrownia Gazowa
Sp. z o.o.

(71) Letter from the Polish authorities of 6 June 2007.

S t a t e
S t a t e

r e s o u r c e s

a n d

i m p u t a b i l i t y

t o

t h e

(328) The Commission has carried out an analysis to determine
the source of the funds to be used for the payments
provided for in the Act. It concluded that these funds
would be the proceeds of a parafiscal levy established by
virtue of the same Act.

(329) The levy is imposed on all consumers (Article 8 of the Act),
the amount thereof being contingent on the size and
characteristics of their connection to the grid (Articles 10
and 11 of the Act). The amount of the levy is established by
the URE (Article 12 of the Act). The proceeds of the levy
collected by suppliers are paid into an account in the name
of Zarządca Rozliczeń S.A. This is a special purpose
company, fully owned and controlled by the State, founded
under Chapter 7 of the Act. Zarządca Rozliczeń S.A uses
the funds to make payments to eligible generators pursuant
the administrative
the Act, under
to Chapter 4 of
supervision of URE.

(330) The Commission has analysed the characteristics of this
levy in the light of its decision-making practice (72) and
Court of
It made the following
observations.

Justice case-law. (73)

(331) First,

the levy is a mandatory contribution which is

imposed on all consumers by the state.

(332) Second, the proceeds of the levy are paid into an account in
the name of Zarządca Rozliczeń S.A. Of
the seven
members of Zarządca Rozliczeń S.A's supervisory board,
four, including the Chairman, are nominated by ministers,
two are nominated by presidents of public bodies (URE and
the Office for Competition and Consumer Protection) and
one is nominated by the General Assembly of Shareholders,
i.e. by PSE. The Commission concludes that Zarządca
Rozliczeń S.A is fully under state control. This conclusion
is reinforced by the fact
that Zarządca Rozliczeń S.A
operates under the aegis of URE, which is a state body. The
proceeds of the levy are therefore managed by a body
which is completely controlled by the State.

(72) See for instance case N 161/04 — Portugal (OJ C 250, 8.10.2005,

p. 9).

(73) See for instance the judgment of 2 July 1974 in case C-173/73 Italy v
Commission [1974] ECR 709 and the judgment of 22 March 1977 in
case C-78/76 Steinike & Weinlig v Germany [1977] ECR 595.

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(333) Third, Zarządca Rozliczeń S.A uses the funds raised to
make payments to the benefit of certain generators,
in
accordance with the provisions adopted by the state in the
Act. In accordance with the Act, Zarządca Rozliczeń S.A.
disburses the funds to power generators to cover stranded
costs in the form of advances for such costs for a given year
and in the form of annual adjustments.

Europe and is connected, or easily connectable to, several
Member States.

(340) The competitive advantage resulting from the Act may
trade between Member

distort competition and affect
States

(334) From the three observations above,

the Commission
concludes that the proceeds of the levy constitute state
resources.

(341) In the light of the above, the Commission takes the view
that the compensation system provided for in the Act
constitutes state aid.

E c o n o m i c a d v a n t a g e

7.2.1. Award of aid in accordance with the law

(335) The Act provides for payments to the power plants that opt
to apply its mechanism. These power plants will receive the
payments in exchange for terminating their PPA with PSE.

(336) Payments under the Act allow the entitled power plants to
alleviate the burden of costs incurred. The formula for
calculating these payments provides in particular for the
state to cover the losses associated with certain types of
cost, plus depreciation and fuel costs,
the revenue
collected on the market is not sufficient for that purpose,
subject to certain conditions which are likely to be fulfilled
in a normal economic scenario. This implies that state
payments cover the costs normally borne by generators
under normal market conditions. These payments therefore
constitute an economic advantage.

if

(337) The interested parties argue that the payments do not
constitute an advantage because they are only fair
compensation for
the PPAs. This
the termination of
reasoning is based on the premise that the PPAs themselves
do not constitute an economic advantage, which is not the
case, as was explained in point 7.1.1.

S e l e c t i v i t y

(338) Since the beneficiaries of the Act are the same power plants
that benefit from the PPAs, the same reasoning as set out in
recitals 254 to 257 applies.

D i s t o r t i o n o f
t r a d e

c o m p e t i t i o n a n d i m p a c t o n

(339) The Act provides an advantage to many companies
operating on the energy production market. This market
is liberalised in the EU. Measures that favour energy-sector
companies in one Member State may impede the potential
for companies from other Member States to export
electricity to that Member State, or favour exports of
electricity to the second group of Member States. This is
especially true for Poland, which is centrally located in

(342) The Act entered into force on 4 August 2007. The
Commission takes the view that, under Article 6(1) of the
Act, power generators which decide to benefit from the
scheme receive funds to cover stranded costs only after the
terminating agreement has been concluded. In addition,
under Article 22(4) of the Act, the first instalment of the
advance to cover stranded costs is paid to the eligible
power generators by the fifth day of the month after a
period of 120 days has elapsed, starting on the day on
which the early termination of the PPAs took place by
virtue of the terminating agreements. In the light of the
above, the date on which the Act enters into force cannot
be deemed to be the date on which aid is granted to the
power generators, i.e. the date on which the beneficiary
received a legally binding aid authorisation. The Commis-
sion therefore does not take the view that the entry into
force of the Act prior to the adoption of this Decision
constitutes a failure to comply with the obligation referred
to in Article 88(3) of the EC Treaty.

7.2.2. Compatibility assessment

(343) Article 87(1) of the EC Treaty provides for the general

prohibition of state aid within the Community.

(344) Article 87(3)(c) provides for the authorisation of state aid
to facilitate the development of certain economic sectors,
where such aid does not adversely affect trading conditions
to an extent contrary to the common interest. The
Commission has developed several guidelines and com-
munications that explain how it will apply the derogation
contained in this Article.

(345) The Stranded Costs Methodology is designed to analyse aid
granted to incumbents in the electricity sector in a context
where certain decisions taken by these incumbents prior to
liberalisation no longer make business sense after liberal-
isation.

(346) The first paragraph of section 3 of the Stranded Costs
Methodology explains that stranded costs ‘may, in practice,

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forms:

long-term purchase contracts,
take a variety of
investments undertaken with an implicit or explicit
guarantee of sale,
investments undertaken outside the
scope of normal activity, etc.’ In this particular case, the aid
is earmarked for investments in the modernisation or
expansion of power plants with the PPAs as an explicit
guarantee of sale. It also addresses the consequences of
long-term gas purchase contracts concluded by gas-fired
generators. The Commission therefore takes the view that
the aid falls within the remit of
the Stranded Costs
Methodology. Accordingly, it analysed the aid in the light of
the Methodology.

(347) The Stranded Costs Methodology provides for a two-stage
assessment of aid earmarked for compensation of stranded
costs. The first stage, which is referred to in section 3 of the
Methodology, concerns the definition of eligible costs,
which involves in particular calculating the maximum
compensation that can be awarded. The second stage,
the Methodology,
which is dealt with in section 4 of
concerns
actual
compensation to be paid for the stranded costs, taking
the development of competition on the market
into
account.

the mechanism for

calculating the

(348) The Commission first analysed whether the aid met the
conditions laid down in 3.1 to 3.12 of the Stranded Costs
Methodology.

(349) Under point 3.1 of

the Stranded Costs Methodology,
maximum compensation payments take account only of
investments completed before the entry into force of
Directive 96/92/EC in Poland, i.e. the date on which Poland
joined the EU, and of the volume of gas contracted in
accordance with the take or pay rule before that date. In
exceptional cases, investments contracted before the date of
Poland's accession but which were not yet completed as of
accession were also taken into account, but only in so far as
Poland could prove to the Commission that completing
these investments and generating revenue from them
would result in smaller stranded costs than would halting
construction work altogether.

(350) In line with point 3.2 of the Stranded Costs Methodology,
there is no doubting the existence and validity of the
guarantees granted to the power generators, as they are
explicitly mentioned in the PPAs.

(351) In line with point 3.3 of the Stranded Costs Methodology,
the investments involved are very significant and may
generate very large losses. This also applies to long-term
take or pay contracts. The Commission takes the view that,
were these losses not to be compensated in any way, they
might, in the light of their size, jeopardise the continued
viability of the companies in question. This conclusion is
further reinforced by the reaction of the institutions which

financed the investments, which informed the Commission
that
failure to provide proper compensation could be
deemed to constitute default under the financing arrange-
ments because of the significant risk of bankruptcy facing
the company in question.

(352) The Commission has also taken account of the fact that the
impact of stranded costs is calculated with reference to the
consolidated groups. This allows due account to be taken
of all the effects of liberalisation, negative or positive, on
the group. This mechanism will exclude new investments if
investments. The
they are not
Commission also takes the view that new investment in
the sector is vital if the market is to operate properly, and
that compensation for stranded costs should not constitute
a deterrent.

clearly replacement

(353) In accordance with point 3.4 of

the Stranded Costs
Methodology, the amounts earmarked by the beneficiaries
are committed on an irrevocable basis. There is no other
way to recoup the costs of investment in a power plant
than to operate it or sell it at a price that cannot exceed the
the power plant generates by selling its
revenue that
electricity on the market. The take or pay contracts may not
be revoked unilaterally by the generators either.

(354) In accordance with point 3.5 of the Methodology, stranded
costs associated with investments in power plants are not
linked to bilateral agreements. There is therefore no point
in checking whether these stranded costs result
from
guarantees binding two companies within the same group.
Stranded costs associated with take or pay contracts do not
bind companies belonging to one and the same group.

(355) In accordance with point 3.6 of

come

to the

conclusion that

the Stranded Costs
the Polish authorities have provided the
Methodology,
Commission with a list of costs
to be covered by
compensation where a power plant's income is insufficient
for that purpose. Having analysed these cost categories, the
the
Commission has
compensation will not exceed what is necessary to cover
the shortfall in investment return over the lifetime of the
new assets, including where necessary a reasonable profit
margin. The calculation of the maximum value of the
compensation is based on a number of economic
assumptions, including in particular a base market price
equal to the price that a new entrant in Poland would be
prepared to offer. The assumption is that this new entrant's
primary source of energy would be coal. The Commission
has checked that this assumption regarding the energy
source is consistent with present trends in new investments
in the sector in Poland, and that Polish coal reserves are
sufficient for this trend to continue in the future. If the
actual market price is lower than the forecast base market
price, the base market price will be taken into account for

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the purpose of calculating compensation. The Commission
takes the view that this formula for calculating stranded
costs, which is identical to the formula used in its constant
practice, (74)
that
correspond to the actual amounts invested. Compensation
for take or pay contracts was calculated on the basis of the
actual volumes contracted and the best possible estimate of
price trends in the contracts.

account of

economic

takes

costs

(356) In accordance with point 3.7 of

the Stranded Costs
Methodology, the method used to calculate compensation
takes account of the revenue generated by the assets in
question. The maximum amount of compensation is the
amount following deduction of the revenue generated by
the assets in the past and which is available to cover
investment costs and the cash flow of the power plant
from 2007 until the expiry date of the PPA which is
available to cover investment costs. All this revenue is
taken into account as of the day on which the PPA was
concluded, and all state aid received as of 1 May 2004 is
included in the deducted amounts.

(357) In accordance with point 3.8 of

the Stranded Costs
Methodology, the value of aid awarded in the past for the
assets concerned, in particular investment aid, has been
deducted from the maximum compensation.

(358) In accordance with point 3.9 of

in compensation will

the Stranded Costs
Methodology, the method used to calculate the stranded
costs takes due account of real trends in electricity prices.
The periodical adjustment
take
account of the difference between the forecast electricity
the maximum amount of
price used to calculate
compensation and the actual electricity price. Compensa-
tion payments for take or pay contracts will take into
account actual gas use and actual gas prices, but also the
actual price at which the electricity generated by the
companies was sold.

power generators to actually operate the plant to mitigate
the overall stranded costs, rather than stop generation and
incur the full penalties, which would result in much higher
stranded costs. The Commission analysed several scenarios
provided by Poland with a view to determining whether
this mechanism helps to reduce the overall amount of
compensation. Lastly, should the volume of gas contracted
under take or pay agreements be renegotiated and reduced
during the compensation scheme, the actual amount of the
compensation payments will be decreased accordingly.

(361) In accordance with point 3.12 of

in footnote 5 of

this methodology.’ However,

the Stranded Costs
the payment period for compensation
Methodology,
extends until 2027. Point 3.12 of
the Stranded Costs
Communication states that ‘costs which some undertakings
may have to bear after the time horizon indicated in
Article 26 of the Directive (18 February 2006) cannot, as a
rule, constitute eligible stranded costs within the meaning
of
the
Stranded Costs Methodology the Commission states that ‘it
must be understood that investments which cannot be
recouped or are not economically viable as a result of the
the internal market in electricity may
liberalisation of
constitute stranded costs within the meaning of
this
in
methodology,
principle, to extend beyond 2006. Furthermore, commit-
ments or guarantees which must absolutely continue to be
honoured after 18 February 2006 because failure to do so
might give rise to major risks concerning protection of the
environment, public safety, social protection of workers or
the security of the electricity network may, if duly justified,
constitute
according to this
stranded costs
methodology.’

including in cases where they are,

eligible

(359) In accordance with point 3.10 of

the Stranded Costs
Methodology, maximum compensation is calculated with
reference to costs depreciated before the entry into force of
Directive 96/92/EC in Poland.

(360) In accordance with point 3.11 of

the Stranded Costs
Methodology, compensation has been calculated on the
basis of the least expensive solution for the state. For assets
the construction of which started before Poland joined the
European Union but which were not completed by
accession, Poland has demonstrated that the maximum
compensation was calculated on the basis of the cheapest
of the two possible scenarios: completing construction and
operating the new assets to generate revenue, or halting
construction work. The compensation mechanism for
stranded costs associated with take or pay contracts was
also devised in such a way as to provide an incentive for

(74) See in particular case NN 49/99 — Stranded costs in Spain (OJ

C 268, 22.9.2001, p. 7).

(362) The stranded costs referred to in the Act are closely linked
to investments in power plants that cannot be recouped as
a result of liberalisation of the internal market in electricity.
This also applies to take or pay contracts, which were
concluded with a view to supplying power plants
benefiting from PPAs to an extent consistent with the
volume of electricity covered by the PPAs. In view of the
aforementioned footnote 5, the Commission may authorise
the extension of compensation beyond the deadline if it
regards this as justified in the light of the circumstances of
the case.

(363) The Commission notes that the investments in question are
investments in power plants. These are particularly long-
term investments (from 15 to as much as 30 years), which
are very sensitive to electricity price trends that are difficult
to predict,
in particular during the transition to a fully
liberalised market. The costs of these investments cannot
be recouped in cases where electricity prices are lower than
the prices provided for when the power plants were built.

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(364) Under these circumstances, the Commission takes the view,
as it did in previous files concerning Greece (75) and
Portugal, (76)
the Stranded Costs
Methodology applies to these specific stranded costs and
justifies the award of compensation after 2006 and until
the end of the original PPAs.

footnote 5 of

that

be paid to a given company is fixed in advance. This takes
account of beneficiaries'
future profits resulting from
productivity gains. The notification of the aid specified in
particular how stranded cost calculations will take account
of changes in various economic factors (like prices, market
shares or other relevant factors indicated by the Member
States and listed in the Methodology).

(365) In the light of the above, the Commission concludes that
the Act complies with the criterion laid down in points 3.1
to 3.12 of the Stranded Costs Methodology. The maximum
stranded costs compensation does not exceed the level
allowed by the Stranded Costs Methodology. They should
therefore be regarded as eligible within the meaning of the
Methodology.

(366) The Commission analysed whether the aid fulfilled the
conditions laid down in points 4.1 to 4.6 of the Stranded
Costs Methodology.

(367) In accordance with point 4.1 of

the Stranded Costs
Methodology, the maximum amounts of compensation
were calculated on the basis of clearly defined, individual
power plants and take or pay contracts. The compensation
actually paid will not exceed these maximum amounts.

(368) In accordance with point 4.2 of

the Stranded Costs
Methodology, the compensation actually paid will take
account of actual trends in underlying economic data, in
particular electricity prices and volumes of gas purchased
under take or pay contracts. For instance, should actual
electricity prices differ from the base market price referred
to in recital 355, the amount of actual compensation will
be amended accordingly. The actual amounts of compensa-
tion for take or pay contracts will also take account of the
actual conditions in which the power generators concerned
purchase their gas and sell their electricity on the market.

(369) In accordance with point 4.3 of

the Stranded Costs
Methodology, the Polish authorities have undertaken to
provide the Commission with an annual
report on
implementation of the Act.

(370) In accordance with point 4.4 of

the Stranded Costs
Methodology, the base market price considered in recital
355 increases significantly over time, as a result of which
the amount of compensation payable will decrease to a
certain extent, which the Commission views favourably.

(371) In accordance with point 4.5 of

the Stranded Costs
Methodology, the maximum amount of compensation to

(75) State aid case N 133/2001 — Stranded costs in Greece (OJ C 9, 15.1.

2003, p. 6).
(76) See footnote 72.

(372) In accordance with point 4.6 of

the Stranded Costs
Methodology, the Polish authorities have undertaken not to
restructuring aid to beneficiary
grant any rescue or
companies under the Act for a period of ten years after
the last payment to the companies concerned. This period,
which extends until 2037 for certain companies,
is
time’ principle as
compatible with the ‘one time last
the
interpreted by the Commission in point 73 of
Community guidelines on state aid for
rescuing and
restructuring firms in difficulty. (77) The Commission takes
the view that
sufficient
assurance that undue cumulation of aid does not occur
within the framework of the Stranded Costs Methodology.

solution also provides

this

(373) In the light of the above, the Commission concludes that
the Act complies with the criteria laid down in points 4.1
to 4.6 of the Stranded Costs Methodology. The method for
disbursing actual stranded cost payments is therefore
compatible with the Stranded Costs Methodology.

(374) In view of the above, the Commission concludes that the
Act is compatible with the Stranded Costs Methodology.
Aid designed to offset eligible stranded costs complies with
the criteria set out in the Methodology and can therefore be
declared compatible with the common market.

(375) Eligible power generators were authorised to receive aid in
accordance with the Stranded Costs Methodology as of
1 May 2004. The Act provides for a system of future
compensation, but when maximum amounts of compen-
sation are calculated, amounts of aid received by power
generators in the past is also taken into account. According
the maximum amount of
to Annex 2 to the Act,
compensation is the amount following deduction of the
revenue generated by the assets in the past and which is
available to cover investment costs. As pointed out in
recital 356, all state aid received as of 1 May 2004 is
included in the deducted revenue. In deeming the Act to be
compatible with the common market, the Commission
also deems the amounts of aid received by beneficiaries as
of 1 May 2004 compatible with the common market.

(77) OJ C 244, 1.10.2004, p. 2.

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7.2.3. Specific case of Dalkia Poznań Zespół Elektrociepłowni

S.A. and Electrabel Połaniec S.A.

(376) The two PPAs concluded with Dalkia Poznań Zespół
Elektrociepłowni S.A. and Electrabel Połaniec S.A. elapsed
on 31 December 2006. For that reason, these power
stations are not covered by the Act. Since neither of these
PPAs is covered by the Act, they are not caught by the
present Decision either and the Commission will issue a
separate decision on the two companies concerned.

8.

CONCLUSION

(377) The Commission concludes that:

(a) the PPAs constitute state aid within the meaning of
Article 87(1) of the EC Treaty, with the exception of the
PPA with Żarnowiecka Elektrownia Gazowa Sp. z o.o.,
this state aid is incompatible with the
and that
common market;

(b) the Act constitutes state aid within the meaning of
Article 87(1) of the EC Treaty, and that this state aid is
compatible with the common market in application of
Article 87(3)(c) of the EC Treaty.

(378) As was explained in point 7.1.1, the state aid element
provided for in the PPAs consists principally of the fact that
the PPAs guarantee the purchase by PSE of a certain volume
of electricity at a price covering all generation costs.

(379) Since the state aid is incompatible with the EC Treaty, it
must be ended. Since the guaranteed collection and cost-
covering guarantee provisions are the core provisions of
the PPAs, the Commission concludes that ending the state
aid can only be achieved by ending the PPAs themselves.

(380) The Commission takes the view that ending the PPAs will
entail
the parties,
significant work on the part of
particularly as regards agreement on the terms governing
the termination of the PPAs. The Commission takes the
view that it is necessary to allow a reasonable time for this
process to take place in order to ensure that security of
electricity supply remains adequate and that the transition
to a fully liberalised market in Poland takes place in good
conditions. These objectives are also in the interest of the
Community.

(381) While drafting the Act within the framework of its national
the interested
legislative process, Poland consulted all
parties on technical matters linked to the voluntary
termination of the PPAs. As a result, the deadline laid
down in the Act for concluding termination agreements for
the PPAs is 150 days as of the entry into force of the Act,
i.e. 1 January 2008. The Commission takes the view that
this period is also adequate for the purpose of winding up

the PPAs as required by this decision. The Commission
takes the view that, pursuant to Article 5 of the Act, the
PPAs will be actually terminated on the first day of the
month after a period of 210 days has elapsed, starting on
the day on which the Act entered into force (i.e. 1 April
2008).

(382) Accordingly, as indicated in recitals 356 and 375, amounts
of aid received by beneficiaries as of 1 May 2004 are caught
by the Act and are therefore deemed compatible with the
common market,

(383) In the specific case of Żarnowiecka Elektrownia Gazowa
Sp. z o.o. the Commission concludes that the plant did not
benefit from any aid under its PPA.

(384) The two PPAs concluded with Dalkia Poznań Zespół
Elektrociepłowni S.A. and Electrabel Połaniec S.A. are not
caught by the present Decision. The Commission will deal
with those two companies in a separate decision,

HAS ADOPTED THIS DECISION:

Article 1

1. The Power Purchase Agreements between Polskie Sieci
Elektroenergetyczne S.A. and the companies indicated in Annex 1
to the Act on the rules governing the covering of costs incurred
by enterprises in connection with the early termination of Power
Purchase Agreements constitutes state aid within the meaning of
Article 87(1) of the EC Treaty to electricity generators.

2. The state aid referred to in Article 1(1) was awarded
unlawfully and is incompatible with the common market.

Article 2

1.
Poland shall
referred to in Article 1.

terminate the Power Purchase Agreements

termination agreements

2. The
the Power Purchase
Agreements shall be concluded by 1 January 2008 and shall
enter into force not later than 1 April 2008.

for

Article 3

The Power Purchase Agreement between Polskie Sieci Elektroe-
nergetyczne S.A. and Żarnowiecka Elektrownia Gazowa Sp. z
o.o. does not constitute state aid within the meaning of
Article 87(1) of the EC Treaty.

Article 4

1. The compensation provided for in the Act constitutes state
aid within the meaning of Article 87(1) of the EC Treaty to the
electricity generators listed in Appendix 2 to that Act.

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2. The state aid referred to in Article 4(1) is compatible with
the common market on the basis of
the Stranded Costs
Methodology.

2. The Polish authorities shall submit
annual reports on implementation of the Act.

to the Commission

3. The maximum amount of compensation provided for in the
Act shall be the amount following deduction of the total revenue
generated by the assets under the PPAs and which is available to
cover investment costs.

Article 6

This Decision is addressed to the Republic of Poland.

Done at Brussels, 25 September 2007.

Article 5

1. The Polish authorities shall
inform the Commission by
31 January 2008 of the measures taken by Poland to implement
this Decision.

For the Commission

Neelie KROES

Member of the Commission