27.8.2009

EN

Official Journal of the European Union

L 225/53

COMMISSION DECISION

of 4 June 2008

on the State aid C 41/05 awarded by Hungary through Power Purchase Agreements

(notified under document C(2008) 2223)

(Only the Hungarian text is authentic)

(Text with EEA relevance)

(2009/609/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European Community, 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 those comments,

Whereas

1. PROCEDURE

(1)

By letter dated 31 March 2004, registered on the same day, the Hungarian authorities notified the Commission of Government Decree 183/2002 (VIII.23) (2) under the procedure referred to in Annex IV, paragraph 3, subparagraph 1(c) to the Treaty of Accession of the Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Slovenia and Slovakia to the European Union (interim procedure). The notified Decree provides for a system of compensation of the costs borne by the State-owned electricity wholesaler (közüzemi nagykereskedelmi engedélyes), the company Magyar Villamos Művek Zrt. (hereinafter referred to as MVM). The Commission registered the notification under State aid case number HU 1/04.

(2)

A number of official letters were exchanged between the Hungarian authorities and the Commission concerning the measure (3). The Commission also received comments from third parties (4). In the course of the interim procedure, the Commission discovered that the Hungarian electricity wholesale market was essentially structured around long-term Power Purchase Agreements (hereinafter referred to as PPAs) between MVM and certain power generators. Based on the information available to it at that time, the Commission suspected that the PPAs contained unlawful State aid elements.

(3)

By letter dated 13 April 2005, registered on 15 April 2005, the Hungarian authorities withdrew the notification of Government Decree 183/2002. On 4 May 2005, in line with Council Regulation (EC) No 659/1999 of 22 March 1999 laying down detailed rules for the application of Article 93 of the EC Treaty (5), (hereinafter the ‘Procedural Regulation’) the Commission registered a State aid file on its own initiative (case number NN 49/05) concerning the PPAs.

(4)

By letter dated 24 May 2005 (D/54013), the Commission requested additional information from the Hungarian authorities. The reply, dated 20 July 2005, was registered by the Commission on 25 July 2005. Further information was provided by the Hungarian authorities by letter dated 28 September 2005, registered on 30 September 2005.

(5)

By letter dated 9 November 2005, the Commission informed Hungary that it had decided to open the procedure laid down in Article 88(2) of the EC Treaty in respect of the PPAs (hereinafter referred to as the ‘Opening Decision’). The Opening Decision was published in the Official Journal of the European Union (6).

(6)

In the Opening Decision, the Commission expressed its doubts as to the compatibility of the PPAs with the common market and called on interested parties to submit their comments.

(7)

Following a request for an extension of the deadline for comments, accepted by the Commission (7), Hungary submitted its comments on the Opening Decision on 31 January 2006, registered by the Commission on 1 February 2006.

(8)

Following a number of requests for an extension of the deadline for comments, accepted by the Commission (8), the comments of third parties were registered by the Commission as follows: comments submitted by MVM on 11 January 2006; by a third party that requested its identity to be withheld on 20 January 2006; by Marta power plant on 20 January and 6 March 2006; by the bank […] on 10 February 2006; by AES-Tisza power plant on 13 and 14 February 2006; by the bank […] on 13 February 2006; by Electrabel S.A. and its subsidiary Dunament power plant on 14 February 2006; by Budapest power plant on 21 February 2006; and by Csepel power plant on 21 February 2006.

(9)

Following confirmation by the Hungarian authorities of the confidential treatment of information provided by third parties in the context of this procedure (10), the Commission forwarded the above comments to Hungary by letter of 25 April 2006.

(10)

The Hungarian authorities submitted the first part of their observations on the third parties’ comments by letter of 28 June 2006, registered on 29 June 2006, and the second part by letter of 24 July 2006, registered on 25 July 2006.

(11)

Aware of the planned legislative changes in the energy sector in Hungary, Commissioner Kroes sent a letter to Minister Kóka on 17 October 2006 urging the Hungarian Government to settle in the new legislation the question of the PPAs and potential compensatory measures in line with EU law.

(12)

The company AES-Tisza submitted further comments complaining about several aspects of the Commission’s procedure on 19 December 2006.

(13)

By letters of 21 November 2006 (registered on 23 November 2006) and 15 January 2007 (registered on the same day) and at meetings on 18 December 2006 and 8 March 2007 with the Commission, the Hungarian authorities confirmed their intention of making legislative amendments in connection with the liberalisation of the energy sector and thereby also changing the existing situation on the wholesale electricity market.

(14)

The Commission sent a request for further information on 23 April 2007. Hungary replied on 5 June 2007 and sent additional information on 6 August 2007.

(15)

By letter dated 4 May 2007 the Hungarian authorities informed the Commission that it was setting up a working committee to conduct negotiations with all the generators concerned regarding the termination or substantial amendment of the PPAs. Accordingly, on 11 May 2007 the government adopted Decision No 2080/2007 (V.11) on the long-term power purchase agreements in the energy sector (11), thereby establishing the aforementioned working committee (governed by the Prime Minister's Office) with a view to resolving without delay the matter of the PPAs in accordance with EU State aid rules and ordering the opening of official negotiations in this regard with the power generators concerned. By letter of 3 July 2007 the Hungarian Government informed the Commission of the outcome of the first negotiations that took place in June 2007.

(16)

In the context of the liberalisation process, the new Act on Electric Energy (12) was published on 2 July 2007 and entered into force partially on 15 October 2007 and partially on 1 January 2008. By letter of 25 July 2007, the Hungarian Government informed the Commission of the achievements of the new Electricity Act as regards the opening up of the Hungarian electricity market. However, the new Act did not alter the PPAs themselves, which remained in force, unchanged, between MVM and the power generators listed in the Opening Decision.

(17)

By letter dated 26 July 2007, the Commission put further questions to the Hungarian authorities.

(18)

On 7 September 2007, the Commission registered a letter from the Hungarian Government requesting more time to bring the negotiations with the generators to a successful conclusion.

(19)

On 24 September and 31 October 2007 the Commission registered Hungary's replies to its questions of 26 July 2007.

(20)

On 14 December 2007, pursuant to Article 5(2) of Regulation (EC) No 659/1999, the Commission sent a reminder to the Hungarian authorities listing the questions for which the information provided was still incomplete. The Hungarian authorities replied by letter dated 16 January 2008.

(21)

As the companies Dunament and AES-Tisza did not provide the requested data, the Hungarian authorities argued they were not able to furnish a complete answer to the Commission's questions.

(22)

Accordingly, on 15 February 2008, the Commission adopted an information injunction enjoining Hungary to supply the data listed in the decision within a period of fifteen days.

(23)

On 27 February, Dunament power plant sent to the Commission a copy of its reply to the Hungarian authorities’ questions and explained the reasons why it could not answer the questions put to it. The Hungarian authorities replied on 4 and 13 March 2008. In response to Dunament power plant's explicit request, the Hungarian authorities attached to their reply letters sent by Dunament to the Ministry of Finance and to the Hungarian Energy Office dated 14 May 2007, 21 August 2007, 13 September 2007, 7 December 2007, 14 January 2008 and 20 February 2008. The Hungarian authorities had not forwarded a copy of these letters to the Commission at an earlier stage (13); however, in their replies to the Commission's questions throughout the procedure they had included the information they found relevant.

(24)

It appears from the Hungarian authorities’ replies that AES-Tisza did not give Hungary any reply. By fax dated 10 March 2008, AES-Tisza sent a letter to Commissioner Kroes expressing its view that the Hungarian authorities were already in possession of all the data that had been requested by the Commission.

(25)

In their answer dated 13 March 2008, on the basis of the information available to them the Hungarian authorities provided the Commission with the relevant data for questions (1)(a) to (d) of Chapter III of the information injunction. However, they did not give any additional data relating to the question asked under point (1)(e) of Chapter III of the information injunction concerning the investments of the two abovementioned power generators.

(26)

A substantial part of the information exchanged since the registration of case HU 1/04 concerned the interpretation and concrete application of the Commission Communication relating to the methodology for analysing State aid linked to stranded costs (the Stranded Costs Methodology) (14). On the basis of the documents submitted in the present procedure, it seemed that the Hungarian authorities planned to introduce a system of stranded cost compensations, the assessment of which could have been included in this Decision. Consequently, substantial discussions took place throughout the present procedure between the Commission and the Hungarian authorities on the details of a compensation system which Hungary could adopt in order for such a system to meet the criteria of the Methodology.

(27)

Notwithstanding the technical discussions about a potential future compensation mechanism, the Hungarian authorities, until the date of this Decision, have not submitted to the Commission a comprehensive compensation mechanism officially confirmed by the Hungarian Government. In their letter of 13 March 2008, the Hungarian authorities explicitly confirmed that, at present, they did not wish to grant stranded costs compensation; however, they reserved their right to grant such compensation to certain power generators at a later stage.

(28)

The Commission asked for the confirmation of certain data by the Hungarian Government in a letter dated 7 April 2008. The Hungarian authorities provided the requested information by letter registered on 22 April 2008.

(29)

In their letter of 20 May 2008, the Hungarian authorities informed the Commission that the PPA of the Paks power plant had been terminated by the parties on 31 March 2008. Although the Csepel and Pannon power plants signed termination agreements in April 2008, the entry into force of the agreements is, at the date of this Decision, still dependent on approval by shareholders and banking institutions.

(30)

The Opening Decision was challenged by Budapest power plant before the Court of First Instance by way of an application lodged on 3 March 2006 and registered as case T-80/06. On 6 June 2006, Csepel power plant requested leave to intervene in the procedure in support of Budapest power plant and this was granted by an order of the Court dated 11 March 2008.

(31)

Furthermore, two international arbitrage procedures are pending before the International Centre for the Settlement of Investment Disputes in Washington, D.C, launched against the Republic of Hungary by the electricity generation companies […] and […], both shareholders of power plants under PPA in Hungary. The proceedings are based on the investment protection provisions contained in the Energy Charter Treaty.

2. DESCRIPTION OF THE MEASURE

(32)

From 31 December 1991 to 31 December 2002 the Hungarian electricity market was structured around a ‘Single Buyer’, the company Magyar Villamos Művek (MVM). MVM is a 99,9 % State-owned entity whose activities comprise power generation, wholesale, transmission and retail. Under the ‘Single Buyer’ model, the power generators could supply energy directly to MVM only (unless MVM cancelled the regional distribution companies’ contracts) and MVM was the only company authorised to supply electricity to the regional distribution companies. Under Act XLVIII of 1994 on Electric Energy (Energy Act I), MVM was required to ensure security of energy supply in Hungary at the lowest possible cost.

(33)

Act CX of 2001 on Electric Energy (‘Energy Act II’, replacing Energy Act I) entered into force on 1 January 2003. It established a dual model of the Hungarian electricity market which remained in force until 1 January 2008, when Act LXXXVI of 2007 on Electric Energy (‘Energy Act III’, replacing Energy Act II) entered into force. Under this dual model there was a public utility segment and a competitive segment, and eligible customers (the scope of which gradually enlarged) were allowed to switch to the competitive segment. On the public utility segment, MVM remained the only wholesaler, whereas in the free market segment other traders appeared. Energy Act III put an end to the existence of the public utility segment but nevertheless kept household customers and some commercial customers – as permitted by the second Electricity Directive (15) – under a universal service obligation.

(34)

Energy Act I required MVM to assess the country's total energy demand and to prepare, every two years, a National Power Plant Construction Plan (Országos Erőműépítési Terv). This Plan had then to be submitted to and accepted by the Hungarian Government and the Parliament.

(35)

It appears from Energy Act I and from the submissions of the Hungarian government (16) that the most urgent objectives on the Hungarian energy market in the mid-1990s were security of supply at the lowest possible cost, modernisation of the infrastructure with particular regard to the prevailing standards of environmental protection, and the necessary restructuring of the power sector. With a view to achieving these general objectives, long-term power purchase agreements were proposed to foreign investors that would undertake to invest in the construction and modernisation of power plants in Hungary. The PPAs were signed by the power generators on the one hand and by the company MVM on the other hand.

(36)

The PPAs entered into between MVM and individual power plants (17) established a balanced production portfolio enabling MVM to meet its obligation of ensuring security of supply. They allow MVM to satisfy both base load demand (with lignite-fired and nuclear power stations) and peak load demand (with gas-fired power plants).

(37)

The PPAs require the power generators to duly maintain and operate their generation facilities. They reserve all or the bulk of the power plants’ generation capacities (MW) for MVM. This capacity allocation is independent of the actual use of the power plant. Beyond the reserved capacities, the PPA requires MVM to purchase a specific minimum quantity of electricity (MWh) from each power plant.

(38)

Some PPAs include so-called ‘system services’ (18) in the case of power plants technically capable of providing them, which MVM provides to the system operator, MAVIR.

(39)

The PPAs signed in 1995-1996 (seven of the ten PPAs under assessment) were awarded in view of the privatisation of the power plants. These PPAs followed a model agreement drafted by an international law firm at the Hungarian Government's request. There was no tendering procedure for the signature of these PPAs. There was, however, a tendering procedure for the privatisation of the power plants. The PPAs (signed before privatisation) formed part of the privatisation package. Some of these agreements (mainly the Mátra, Tisza and Dunament agreements) were partially amended by the parties after privatisation.

(40)

The PPA of Csepel power plant was signed in 1997 and followed a somewhat different model. However, there was no tendering procedure in this case either and the signature of the PPA was similarly linked to the power plant's privatisation.

(41)

The PPA of Ujpest power plant (one of the three plants of Budapest power plant) was signed with Budapest power plant in 1997, likewise without a specific tendering procedure.

(42)

Only the PPA of the Kispest plant (another – aging – plant of Budapest power plant which was essentially rebuilt at the time) was signed in 2001 as a result of an open tendering procedure.

(43)

From 2000 to 2004, the capacities reserved by the PPAs covered approximately 80 % of total Hungarian electricity demand (MW). From 2005 to the date of this Decision, the share has been around 60-70 %. It was expected that this would gradually decrease in the period between 2011 and 2024 (19).

(44)

Of the nearly twenty PPAs signed between 1995 and 2001, ten were still in force at the date of Hungary's accession to the EU (1 May 2004).

(45)

This Decision concerns only those PPAs that were in force on 1 May 2004. It does not cover PPAs that ended before that date. Although some PPAs (see recital 28 above) were ended by the parties in April 2008, this Decision covers these and assesses their State aid nature and compatibility with the common market in the period between 1 May 2004 and their end date (April 2008).

(46)

The power plants under PPA covered by this Decision are listed in the table below. The duration shown refers to the initially scheduled end date of the PPAs as established in the PPAs themselves.

Table 1

Overview of the generation companies under PPA, the main shareholders and the duration of the PPAs

Name of generation company

Majority shareholder group

Power plant under PPA

Duration of PPA

Budapesti Erőmű Rt.

EDF

Kelenföldi Erőmű

1996-2011

Újpesti Erőmű

1997-2021

Kispesti Erőmű

2001-2024

Dunamenti Erőmű Rt.

Electrabel

Dunament F blocks

1995-2010

(signed in 1995, entered into force in 1996)

Dunament G2 block

1995-2015

(signed in 1995, entered into force in 1996)

Mátrai Erőmű Rt.

RWE

Mátrai Erőmű

1995-2022

(initial duration until 2015, extended to 2022 in 2005)

AES-Tisza Erőmű Kft.

AES

Tisza II Erőmű

1995-2016

(signed in 1995, entered into force in 1996)

([…])

Csepeli Áramtermelő Kft.

ATEL

Csepel II Erőmű

1997-2020

(signed in 1997, entered into force in 2000)

Paksi Atomerőmű Rt.

MVM

Paksi Atomerőmű

1995-2017 (20)

(signed in 1995, entered into force in 1996)

Pannonpower Holding Rt.

Dalkia

Pécsi Erőmű

1995-2010

(signed in 1995, entered into force in 1996)

(47)

In Government Decree 1074/1995 (VIII.4) on electricity price regulation, the government made a commitment that, as of 1 January 1997 (the beginning of the so-called first price regulation cycle), ‘in addition to covering the justified operating costs, wholesale and retail prices shall ensure 8 % return on equity’. The government thereby guaranteed an 8 % rate of return on capital to the power plants under PPA.

(48)

As of 1 January 2001 (the beginning of the second price regulation cycle), the official prices included 9,8 % profit on assets (eszközarányos megtérülés) for the power plants. The increase in percentage did not necessarily mean a change in actual amounts, as the bases of the two rates of return were different (the first one was calculated on equity while the second one was calculated on assets). The prices reflected changes in inflation.

(49)

The regulated prices remained in place for the power plants until 31 December 2003.

(50)

During this period of price regulation, the Hungarian Energy Office analysed the cost structure of each power plant and fixed the price for the purchase of electricity by MVM at a value that ensured guaranteed profitability.

(51)

The list of costs covered by this price-setting mechanism included the following main cost items (21):

— fixed costs: depreciation, insurance, certain fixed maintenance and operating costs, loan interest [‘hitelkamatok’], decommissioning [‘rekultivációs költségek’], fiscal costs (taxes), personnel expenditure [‘személyi jellegű költségek’], environmental protection costs, expenditures to the Central Nuclear Fund [‘Központi Nukleáris Alap befizetések’] for the nuclear power plant and extraordinary expenses [‘rendkívüli ráfordítások’];

— variable costs: fuel costs.

(52)

The Hungarian Energy Office had the task of ensuring that the costs covered were reasonable and necessary.

(53)

The official price overwrote the price established by the PPAs.

(54)

As of 1 January 2004, the prices were determined on the basis of the PPAs’ price formulae. The exact meaning of the formulae was clarified in the context of the yearly price negotiations between MVM and the power generators.

(55)

The price formulae applied in the PPAs are extremely complex; however, they follow the same principles as the methodology applied by the Hungarian Energy Office before January 2004. According to the submissions of the Hungarian authorities (22), the annex to the PPAs concerning price definition was drawn up using the formulae and definitions of the above-mentioned Government Decree 1074/1995 on electricity price regulation. (According to the submission, ‘the agreements copied in the formulae and definitions contained in the decree’.) Consequently, the price-fixing principles of the PPAs are based, similarly to the mechanism used for setting regulated prices, on the justified cost categories.

(56)

Each PPA contains two main types of fee components: the capacity fee (or fee for making capacity available) for the reserved capacities (MW) covering fixed costs + profit (cost of capital), and the electricity fee covering variable costs. The different PPAs provide for different additional charges. Depending on the PPAs, these additional fees can be bonus/malus fees applied as an incentive for the power generators to operate in accordance with the lowest cost principle, and supplementary fees for maintaining generating reserves, rescheduling maintenance at MVM's request, increasing load in peak periods and minimising load below that contracted during the minimum demand period, etc. The periodical (annual, quarterly, monthly) changes of capacity fees depend on a number of factors: activation of implemented retrofit projects, various interest categories, foreign exchange rates, inflation indices, etc. The capacity fee and the supplementary fees also cover the system services (covered by the PPA). Essentially, electricity fees are related to fuel costs and specific fuel heat utilisations (fajlagos tüzelőhő felhasználása). They are calculated on the basis of the principle of pass-through of the variable costs.

(57)

It must be noted that the definition of the covered cost categories was not necessarily identical in the price regulation before 1 January 2004 and in the PPAs. Hungary's submissions (23) show that, for example, the capacity fee of […] and Dunament power plants were higher in their PPA than under price regulation. This was because these PPAs took retrofitting into account, thereby leading to higher fixed costs. These higher fixed costs appeared gradually (following the gradual retrofitting) in higher capacity fees under the PPAs than under price regulation. Other differences due to bilateral negotiations between MVM and the generators could also be observed between regulated prices and PPA prices.

(58)

Notwithstanding such differences, in Hungary's submissions of 20 October 2004 and 20 July 2005 each power plant under PPA confirmed that the price calculation method as well as the cost categories applied after the end of price regulation were largely similar to those applied by the Hungarian Energy Office before that date.

(59)

The prices under the PPAs applied after 1 January 2004 thus remained based on the calculation of justified (fixed and variable) costs + profit.

(60)

It follows from the above that although price regulation ended on 31 December 2003, prices were not genuinely liberalised as the wholesale pricing of electricity remained driven by the principle of return on investments enshrined in the PPAs (24).

(61)

On 6 February 2006, the Hungarian Parliament adopted Act XXXV of 2006 (25) which reinstated governmental price regulation for the electricity sold to MVM under the PPAs. The first new price decree entered into force on 9 December 2006. As of that date, the price regulation of the PPAs was again overwritten by the governmental price formula for a period of approximately one year (until 31 December 2007).

(62)

As of 1 January 2008, in the context of the liberalisation of the market, Energy Act III put an end to the regulated generation prices as well as to the existence of the dual public utility and free market segments.

(63)

Consequently, as of 1 January 2008 the price of the electricity sold by the power generators to MVM under the PPAs is again defined by the price formulae of the PPAs. The underlying principles of these formulae have not been altered since their last application: they thus follow the same principles as in the period between 1 January 2004 and 8 December 2006 (see recitals 54 to 59 above).

(64)

Accordingly, pricing under PPA remains driven by the principle of return on investment.

(65)

The PPAs reserve for MVM all or a substantial part of the capacities of the generating units under PPA.

Table 2

Hungary's domestic generation capacity (26)

(MW)

Capacity

2004

2005

2006

2007

Installed total generation capacity (27)

8 777

8 595

8 691

8 986

Gross available capacity (28)

8 117

8 189

8 097

8 391

Net available capacity (29)

7 252

7 792

7 186

7 945

Peak load of the Hungarian electricity system

6 356

6 409

6 432

6 605

Table 3

Generation capacity of the power plants under PPA (30)

(MW)

Power plant

Capacity

2004

2005

2006

2007

Kelenföld

Net available capacity

90,1

97,6

97,2

78,0

Contracted capacity (31)

83,3

89,8

89,4

71,9

Ujpest

Net available capacity

106,3

106,1

106,2

106,0

Contracted capacity

99

98,8

98,9

98,7

Kispest

Net available capacity

46,1

110,2

110,2

109,6

Contracted capacity

43

102,6

102,6

102,3

Dunament F

Net available capacity

1 020

1 020

1 020

1 020

Contracted capacity

928,2

923,1

923,1

923,1

Dunament G2

Net available capacity

187,6

223,1

223,1

223,7

Contracted capacity

178,4

212,4

212,4

213

AES-Tisza

Net available capacity

638,0

824,7

824,7

824,7

Contracted capacity

[…] (32)

[…] (33)

[…] (33)

[…] (33)

Csepel

Net available capacity

348,9

331

355

349,5

Contracted capacity

323

307

329

324

Pannon

Net available capacity

25,9

25,9

25,9

25,9

Contracted capacity

20,1

20,1

20,1

20,1

Mátra

Net available capacity

593

552

552

552

Contracted capacity

496

460

460

460

Paks

Net available capacity

1 597

1 596

1 596

1 596

Contracted capacity

1 486

1 486

1 485

1 485

Total net available capacity of the power plants under PPA

4 652,0

4 886,6

4 910,3

4 885,4

Total contracted capacity

[…] (34)

[…] (35)

[…] (36)

[…] (37)

(66)

The above figures show that in the period under assessment, around 60 % of Hungarian net available generation capacity is contracted by MVM under PPAs. If the actually available capacities of the power plants (Ténylegesen igénybevehető teljesítőképesség) minus their own consumption (Önfogyasztás) are taken into account, the ratio is higher than the above.

(67)

The above tables also show that the capacity reserved under the PPAs for MVM cover all or the bulk of the respective plants’ available capacities.

(68)

MVM pays a capacity fee for these capacity reservations (recital 56 above), irrespective of the actual use of the plant.

(69)

Import capacity in Hungary is around 1 000-1 300 MW. Around 600 MW of this import capacity is reserved for MVM under other long-term agreements.

(70)

When MVM actually makes use of its reserved capacity and buys electricity from the power plant, it then pays the energy fee for the off-taken electricity (see recital 56 above).

(71)

There is a certain minimum off-take guaranteed by the PPAs for each power plant.

(72)

The overall domestic electricity production in Hungary is between 32 and 36 TWh (= 32 – 36 000 000 GWh) a year.

Table 4

Electricity produced under PPAs (38)

(GWh)

Power plant

Produced electricity

2004

2005

2006

2007

Budapest

(including Kelenföld, Újpest and Kispest)

Total generated electricity

1 228

1 510

1 643

1 742

Own consumption

87

89

91

84

Minimum guaranteed off-take

Kelenfold:

[…]

Ujpest:

[…]

Kispest:

[…]

Kelenfold:

[…]

Ujpest:

[…]

Kispest:

[…]

Kelenfold:

[…]

Ujpest:

[…]

Kispest:

[…]

Kelenfold:

[…]

Ujpest:

[…]

Kispest:

[…]

Actual off-take

939

1 302

1 451

1 538

Dunament (39) (F + G2)

Total generated electricity

4 622

3 842

3 450

4 300

Own consumption

174

148

147

188

Minimum guaranteed off-take

F: […]

G2: […]

F: […]

G2: […]

F: […]

G2: […]

F: […]

G2: […]

Actual off-take

4 232

2 888

2 495

3 296

AES-Tisza

Total generated electricity

1 621

1 504

1 913

2 100

Own consumption

96

97

117

116

Minimum guaranteed off-take

[…]

[…]

[…]

[…]

Actual off-take

1 525

1 407

1 796

1 984

Csepel

Total generated electricity

1 711

1 764

1 710

2 220

Own consumption

48

49

48

53

Minimum guaranteed off-take

[…]

[…]

[…]

[…]

Actual off-take

1 662

1 715

1 661

2 166

Pannon (39)

Total generated electricity

673

266

237

232

Own consumption

116

52

34

29

Minimum guaranteed off-take

[…]

[…]

[…]

[…]

Actual off-take

361

206

203

203

Mátra (39)

Total generated electricity

5 688

5 698

5 621

6 170

Own consumption

675

670

667

710

Minimum guaranteed off-take

[…]

[…]

[…]

[…]

Actual off-take

3 730

3 762

3 587

4 082

Paks

Total generated electricity

11 915

13 833

13 460

14 677

Own consumption of the plant

750

821

800

848

Minimum guaranteed off-take

[…]

[…]

[…]

[…]

Actual off-take

11 112

13 012

12 661

13 828

(73)

The minimum guaranteed off-take is the quantity MVM is required to purchase irrespective of market demand. Should MVM not purchase the fixed minimum quantities, it still has to pay for the fuel costs incurred (Dunament, Kelenfold, Pécs and […]), all costs or compensation incurred by the generator on the basis of its Fuel Supply Agreement (Csepel), and all justified costs (Kispest and Ujpest).

3. GROUNDS FOR INITIATING THE PROCEDURE

3.1. The PPAs

(74)

In its Opening Decision, the Commission reached the preliminary conclusion that the PPAs constituted State aid within the meaning of Article 87(1) of the EC Treaty to the power generators parties to a PPA with MVM.

(75)

It expressed the view that PPAs were applicable after accession within the meaning of Annex IV, paragraph 3, subparagraph 1(c) to the Accession Act (40) and that they did not constitute existing aid, since they do not come under the aid categories that were regarded, as of accession, as existing aid within the meaning of Article 88(1) of the EC Treaty.

(76)

Firstly, none of the PPAs entered into force before 10 December 1994. Secondly, none of the PPAs had been included on the existing aid list annexed to Annex IV to the Accession Act. Thirdly, the Commission had not been given notice of the PPAs under the so-called ‘interim procedure’.

(77)

The Commission expressed the view that the guaranteed return on investment and the high purchase price secured by the PPAs put power generators operating under a PPA in a more advantageous economic situation than other power generators not parties to a PPA, including possible new entrants on the market and companies in other, comparable sectors in which such long-term agreements have not even been offered to market players. The measure was therefore found, on a preliminary basis, to confer a selective advantage on those power generators.

(78)

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 (41). Measures favouring particular companies in the energy sector in one Member State were therefore regarded as potentially impeding the scope for companies from other Member States to export electricity to that Member State, or favouring exports of electricity from that Member State to other Member States.

(79)

The Commission also expressed the view that this advantage stemmed from the use of state resources, because the decision to sign the PPAs was a consequence of state policy implemented via the State-owned public utility wholesaler MVM. 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 is imputable to the State, these funds should be regarded as State resources within the meaning of Article 87(1) of the EC Treaty (42).

(80)

The Commission therefore came to the preliminary conclusion that the PPAs constituted State aid to the power generators within the meaning of Article 87(1) of the EC Treaty, such aid being ‘still applicable after’ within the meaning of Annex IV, paragraph 3, subparagraph 1(c) to the Accession Act.

(81)

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 of the Opening Decision, the Commission had doubts as to the PPAs’ compatibility with the criteria set out in the Methodology.

(82)

Firstly, the Commission had doubts that the very principles governing a PPA which create a barrier to free competition on the market could be deemed compatible with the fundamental objective of the Methodology, i.e. to assist by means of State aid the liberalisation of the sector by granting adequate compensation to incumbents facing new conditions of competition.

(83)

Secondly, the Commission doubted that the State aid element included in the PPAs was compatible with the detailed criteria of the Methodology as regards the calculation of eligible stranded costs and the determination of adequate compensation.

3.2. Government Decree No 183/2002 (VIII.23) on stranded costs

(84)

In order to enable MVM to honour its PPAs and, at the same time, keep the resale prices on the public utility segment approximately at the level of the free market price, Government Decree 183/2002 (VIII.23) provided for the payment of State compensation to MVM in certain circumstances.

(85)

In their initial notification of case HU 1/04 (withdrawn on 13 April 2005), the Hungarian authorities considered that this compensation constituted State aid to MVM.

(86)

In its Opening Decision, however, the Commission concluded that the compensation payments did not constitute State aid to MVM, but that the amount received under Government Decree 183/2002 (VIII.23) formed part of the purchase price paid by MVM to the power stations under PPA and thus constituted part of the advantage the generators received from the PPAs.

(87)

Consequently, the Opening Decision opens the formal investigation procedure on the PPAs only and not on Government Decree 183/2002 (VIII.23).

4. COMMENTS BY HUNGARY ON THE OPENING DECISION

(88)

Hungary expresses its view that individual assessment of the PPAs would seem to be justified given the differences in their exact terms and conditions.

(89)

With regard to the opening of the Hungarian electricity market, Hungary takes the view that it was successful (i.e. in line with the European average) in terms of the number of consumers switching to the free market. Hungary concludes that the PPAs did not create a barrier for consumers to switch to the free market. Such a barrier would be much more likely to be constituted by Hungary's limited cross-border capacities and the consequently high prices.

(90)

Hungary furthermore considers that the long-term nature of the PPAs cannot in itself constitute a competitive advantage to generators as such long-term contracts are widespread in the electricity sector both in Europe and on other continents.

(91)

With regard to the reference price referred to in the Opening Decision, the Hungarian authorities suggest that the Commission should take into account the regional specificities of Hungary and the recent increase in fuel prices when establishing a reference price.

(92)

With regard to new entrants on the electricity market, Hungary informs the Commission that there have been none since 1 May 2004 (the date Hungary joined the EU and the date the energy market was liberalised). The Hungarian authorities point to the time-consuming nature of any such investment and, as a result, to the unlikelihood of any investment being operational before 2011.

(93)

Finally, in response to the Commission's doubts as to the compatibility of the PPAs with point 4.6 of the Methodology, Hungary confirms that it will grant no State aid for the rescue and restructuring of the companies benefitting from the PPAs under assessment.

5. COMMENTS FROM INTERESTED PARTIES

(94)

Following the publication of the decision to initiate the procedure (21 December 2005), and within the relevant deadline (in most cases following a deadline extension requested by the interested parties and accepted by the Commission), the Commission received comments from:

—

the following electricity generating companies: AES-Tisza Erőmű Rt., Budapesti Erőmű Zrt., Csepeli Áramtermelő Rt., Dunamenti Erőmű Zrt. and its main shareholder, Electrabel S.A., and Mátrai Erőmű Rt.,

—

the following banks that provided financing to the electricity generators: […] Bank, acting as Facilities Agent on behalf of twelve banks, lenders to Csepeli Áramtermelő Kft. and […] Bank acting as Facilities Agent on behalf of nine banking institutions, lenders to AES-Tisza Erőmű Kft. and

—

MVM and,

—

a third party that requested its identity to be withheld.

(95)

Most of the comments submitted to the Commission by the parties follow very similar lines of argument. For that reason, instead of describing the comments of each interested party separately, the Commission has grouped them into general categories (see points 5.1 to 5.7 below).

5.1. Comments on the individual assessment of the PPAs

(96)

The Mátra power plant and another interested party that requested its identity to be withheld expressed the view that the PPAs should be assessed individually by the Commission given the differences that exist between their exact content. Other power generators implicitly requested individual assessment of their PPA by giving the Commission details of the specific terms and conditions of their own PPA.

5.2. Comments on the existence of State aid

(97)

AES-Tisza Erőmű, Budapesti Erőmű, Csepeli Áramtermelő and Dunamenti Erőmű argue that the criteria for the existence of State aid at the time of the conclusion of the PPAs should be assessed in the context of the market conditions that prevailed at that time. Some of the comments state this requirement explicitly, while others imply it by referring to the circumstances of the conclusion of the PPAs in their assessment of the existence of State aid. Reference is made to the Court's case law in this regard (43).

(i) Wrong reference price/No advantageous prices

(98)

All the power generators argue that the PPAs do not confer any economic advantage.

(99)

They criticise the Commission's preliminary finding that the prices established under the PPAs are higher than generators’ market prices.

(100)

They argue that the reference price of EUR 36/MWh used in other decisions and referred to in the Opening Decision is inappropriate in this procedure as it originates from a completely different geographical and temporal context. They argue that the price assessment should take into account the circumstances that prevailed at the time of conclusion of the PPAs. They also stress that prices under any long-term agreement will always be lower than spot market prices. Moreover, generators that provide MVM with mainly peak load electricity also argue that their prices cannot be compared to base load prices. Most of them suggest that the Commission should take into account the substantial increase in fuel prices in recent years.

(101)

Many of the generators argue that their actual rate of return was below the rates mentioned in the Opening Decision.

(102)

The generators also emphasize that they do bear important risks (contrary to what is suggested in the Opening Decision), in particular construction, regulatory, environmental, maintenance and fiscal/financial risks. Price regulation was mentioned as one of the principal categories of regulatory risks. Generators also consider that the reservation of a significant share of their generation capacities by MVM constitutes a disadvantage, as it prevents them from using these capacities to produce energy for other potential customers. Moreover, the PPAs provide for clear obligations on the generators which, if the generators do not meet them, lead to lower payments or to damage claims.

(103)

[…] maintained that one of the advantages gained by Hungary as a result of the PPAs were the reliable balancing services which could only be offered by itself and Dunamenti Erőmű. This generator argued that it would not have entered the market and offered these services without a PPA.

(104)

The Mátra power plant argues that it has cheap mining costs because it has its own coal mine, enabling it to offer very competitive prices. It argues that its prices are even below MVM's resale prices, contrary to other PPA prices.

(ii) Privatisation price

(105)

The Dunament power plant argues that it obtained no advantage from the PPA as it paid the market value for the privatisation of the power plants and the purchase price took into account its rights and obligations under the PPA. Consequently, it paid for the PPA (and for any advantage it might confer on it) in the privatisation price.

(iii) Market investor principle

(106)

The Budapest, AES-Tisza, Mátra and Csepel power plants argue that the PPAs reflect market conditions at the time of their conclusion, both for MVM and for the generators. With regard to MVM, they argue that any private operator in MVM's position (legal obligation of security of supply as single buyer, etc.) would have chosen to enter into the PPAs. With regard to the generators themselves, they argue that their ‘advantage’ from the PPAs does not go beyond what should be considered as normal commercial advantage for any party in any commercial agreement. At the time of their conclusion, in the sector concerned, the PPAs reflected normal market conditions. Furthermore, PPAs represent normal commercial business methods and a standard form of risk allocation and management.

(107)

The PPAs were the only way to secure investments which met the requirements of the electricity sector in Hungary (in particular, modernisation of the whole system, environmental protection and security of supply). Applying the private investor principle should lead to take account of those requirements, and the only way of meeting the requirements was PPAs. The interested parties note that PPAs impose investment and availability obligations on power generators.

(iv) Service of general economic interest

(108)

The Budapest and Csepel power plants argue that generators party to PPAs provide services of general economic interest (SGEI). In their view, the PPAs serve as a tool for MVM to meet its obligation of security of supply and therefore fulfil a public service obligation. Budapest power plant argues that it can also be considered that it is actually the Budapest power plant itself that has to discharge a public service obligation imposed on it by its PPAs. Both interested parties refer to the Commission's decision of 16 December 2003 in State aid case N 475/03 (Ireland) (44) whereby the Commission accepted that the construction of new generation capacity to ensure security of supply could be considered a service of general economic interest.

(109)

The interested parties are of the opinion that, as in to the Irish case, State aid under the PPAs – if it exists – meets the four cumulative criteria laid down by the Court in its judgment in case C-280/00 (the Altmark judgment) (45). They argue as follows.

(110)

Firstly, it followed from the Hungarian Energy Acts that MVM had several public service obligations, such as security of supply at the lowest possible cost, environmental protection and efficiency. MVM's public service obligations are thus clearly defined by law and the power generators parties to the PPAs are entrusted with providing the SGEI.

(111)

Secondly, the compensations were set in advance by the government price decrees and by the price formulae of the PPAs. The compensations could thus be calculated on the basis of objective and transparent parameters.

(112)

Thirdly, the compensation paid on the basis of PPAs does not exceed the costs of the SGEI provided. PPAs are strictly cost-based and the profit margins do not exceed usual profit margins on the market. This is ensured by the fact that, as Budapest power plant argues, its PPAs were openly and transparently tendered (see below). The power plants were sold to the tenderer with the highest bid and the best business plan. It follows from the tendering procedure that the compensation under the PPAs cannot exceed what is necessary to cover all costs incurred in the discharge of the public service obligation and a reasonable profit margin.

(113)

Fourthly, Budapest power plant argues that its PPAs were all openly and transparently tendered, either as an essential part of the privatisation package or separately. Csepel power plant argues that although the plant was not chosen on the basis of a public tender, it still receives a compensation that is limited to cover costs and a reasonable profit margin. The pricing mechanisms ensure that overcompensation is avoided.

(114)

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 do not therefore constitute aid within the meaning of Article 87(1) of the EC Treaty.

(115)

The Budapest power plant also argues 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. The interested party expresses its view that the impact of its PPAs on the alleged foreclosure of the Hungarian electricity market is negligible, since they cover only 3 % of Hungarian electricity consumption. Moreover, for technical reasons, an increase in electricity imports was impossible at the time the PPAs were concluded. Consequently, its PPAs would not have any adverse effect on trade. The interested party also stresses in its comments the importance of its cogeneration technology for district heating, which meets the objectives of EU energy and environmental policy.

(116)

The Mátra power plant argues that it was required to reserve a certain minimum capacity for MVM in order to secure the energy supply in the Hungarian market using indigenous coal resources. It argues that, in line with Article 11(4) of the Electricity Directive (46), State aid should be considered as compatible with the common market when, for reasons of security of supply, it finances the generation of electricity from indigenous coal.

(v) No advantage in long duration

(117)

Csepel, Mátra and Budapest power plants argue that the long duration of a contract should not be construed as an advantage per se. The Csepel power plant argues that in a long-term agreement both parties pay a price for the certainty the long term offers. The power generators agree to offer a lower price than the spot market price and to be bound by the agreed price, whatever the spot prices are. They also agree to reserve their capacities for one company for the entire duration of the agreement. It is argued that long-term agreements therefore represent a balancing of economic risks and opportunities for both parties and cannot be seen as a pure advantage.

(118)

On the basis of the above arguments, all power generators conclude that the PPAs do not provide them with an economic advantage and that consequently they do not constitute State aid within the meaning of Article 87(1) of the EC Treaty.

(119)

AES-Tisza argues that the PPAs do not provide a selective advantage. The interested party refers to the existence of long-term agreements in the entire electricity sector, not only between the generators and MVM but also between MVM and the distribution companies and between fuel suppliers and electricity generators, as well as for the import of electricity. As far as the generators are concerned, the Energy Act I (from 1994) and Government Decree 34/1995 explicitly required generators to conclude a power purchase agreement with MVM in order to obtain a construction and operation licence. Consequently, all generators had agreements with MVM and only renewable and cogeneration plants could have shorter term agreements, as these generators have different legal guarantees (e.g. mandatory off-take).

(120)

Mátra power plant submits that only the price can be considered State aid in the PPAs. The duration of the PPAs and the guaranteed sales volumes cannot be viewed as State aid because even if they confer an advantage, they do not lead to the transfer of State resources. The third party concludes that given Mátra power plant's very competitive prices (see (i) above), there is no State aid element whatsoever in its PPA.

(121)

The company AES-Tisza argues that the PPA prices are imputable not to the State but to the parties to the PPAs. AES-Tisza criticises the imputability assessment of the Opening Decision in that it concentrates only on the imputability to the State of the actual conclusion of the PPAs and not on the imputability of the price setting, whereas at the same time the Commission argues that the unfair advantage is secured by the advantageous prices. After the period of central price setting (i.e. after January 2004, and with the exception of 2007), the prices were negotiated between MVM and the power generators and cannot be attributed to the State.

(122)

AES-Tisza, Budapest and Csepel power plants contest the distorting effects of the PPAs and their potential to impact trade between Member States.

(123)

Firstly, the power plants in question submit that this criterion should also be assessed in the light of the time the PPAs were concluded. At that time Hungary was not part of the EU and its electricity market was not liberalised. Consequently, it is argued that the PPAs could not by definition distort competition in the common market.

(124)

Secondly, they argue that competition and trade between Member States are influenced by factors other than the PPAs. Specifically, they contend that Hungary's cross-border capacities are the main factor influencing trade between Hungary and other countries. These cross-border capacities are used at their maximum. Clearly, then, trade in electricity is limited because of Hungary's restricted cross-border capacities and not because of the PPAs. Legislation is argued to be the other factor influencing trade between Member States. Under Hungarian legislation, the power generators were in any event not authorised to sell electricity abroad directly.

(125)

Csepel power plant argues that in any event it sells electricity in Hungary only, so its PPA cannot have any de facto effect on trade between Member States.

(126)

It is also argued that the Hungarian electricity market has been gradually opened up to competition in line with EU obligations. A significant percentage of consumers had switched to the free market segment within a short time. New players would be deterred from entering the Hungarian electricity market or extending their presence in that market by the unpredictability of returns, not the existence of the PPAs. Csepel power plant argues that in recent years power stations have been built in Hungary only when the State has offered some form of stability and predictability of project returns through long-term agreements or in the form of compulsory off-take, or where the use of new capacities was guaranteed by demand for the vertically integrated distribution activity. In any event, the existing PPAs were not a factor deterring new entry.

(127)

It is furthermore argued that there is no market demand in Hungary for additional capacities. This is evidenced by the fact that at electricity auctions by MVM a huge majority of the capacities offered for sale remained unsold.

5.3. Applicability after accession

(128)

This observation was submitted by Budapest power plant.

(129)

Budapest power plant argues that the PPAs cannot be regarded as ‘still applicable after accession’ within the meaning of Annex IV, paragraph 3, subparagraph 1(c) to the Accession Act.

(130)

The interested party argues that in line with the general principle of non-retroactivity, measures that were established in accordance with the law prior to accession should not be reviewed by the Commission after accession. As Community State aid rules apply only from the date of accession, only aid measures that provide an additional benefit after accession can be defined as applicable after accession. They argue that the PPAs do not provide any additional benefit after accession as their price formulae were defined before accession, and consequently the State's financial exposure was entirely known prior to accession.

5.4. Existing aid

(131)

This argument was submitted by Budapest, Csepel, AES-Tisza and Mátra power plants and by […] Bank.

(132)

The interested parties argue that even if one were to accept that the PPAs constituted State aid within the meaning of Article 87(1) of the EC Treaty, such State aid should be regarded as existing aid within the meaning of Annex IV, paragraph 3, subparagraph 1(c) to the Accession Act. They are of the view that the Commission did not object to the measure within the period of 3 months required by the Accession Act. The Hungarian authorities notified the measure on 31 March 2004. After an exchange of information, the Commission did not, the parties claim, react to Hungary's letter of 19 October 2004 within a period of 3 months, thereby ruling out classification of the measure as ‘new aid’.

(133)

Budapest power plant also takes 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 Budapest power plant, if such aid does not qualify as existing aid under Annex IV to the Accession Act, it should still be examined in the light of Article 1(b)(ii)-(v) of Regulation (EC) No 659/1999.

(134)

Budapest power plant further argues that Article 1(b)(v) of Regulation (EC) No 659/1999 applies to the PPAs and that the PPAs therefore constitute ‘existing aid’. In its view, the last sentence of Article 1(b)(v) of Regulation (EC) No 659/1999 referring to new aid does not apply to the PPAs for three reasons.

(135)

First, in the Alzetta Mauro judgment (47), 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 party, 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.

(136)

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.

(137)

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 is not explicitly mentioned.

(138)

Conversely, AES-Tisza argues that if the PPAs were to be classified as new aid, then such classification should be based on Article 1(b)(v) of Regulation (EC) No 659/1999.

5.5. Validly concluded private agreements cannot be ended by the Commission (pacta sunt servanda) — Legal uncertainty

(139)

These arguments were submitted by Budapest and AES-Tisza power plants and […] Bank.

(140)

The parties stress that they entered into the PPAs in good faith in the market circumstances that prevailed at the time. They accepted major investment obligations borne by credit institutions through financing agreements. In their view, the Commission's investigations lead to significant legal uncertainty which should be avoided. AES-Tisza questions the Commission's right to terminate, on the basis of the State aid rules and, more generally, the EC Treaty's competition rules, validly concluded commercial agreements (48).

5.6. Proportionality

(141)

The AES-Tisza power plant expresses its concerns regarding the proportionality of the Commission's request to terminate the PPAs and refers to the possibility of renegotiation of the agreements by the parties.

5.7. Comments on the compatibility of PPAs with the common market

(142)

The companies Csepel and AES-Tisza submit that the PPAs were not designed to be a compensation scheme and it is therefore inappropriate to compare them to the Stranded Costs Methodology. At the time of their conclusion, the PPAs could not be construed as a stranded cost compensation as the Methodology did not even exist at that time. In their view, the use of the Methodology is only appropriate in a situation where the PPAs were ended previously.

(143)

Conversely, […] Bank argues with regard to the Csepel PPA that the consideration paid under the PPA is limited to covering costs that are actually eligible under the Methodology (i.e. fixed costs, variable costs and a reasonable profit margin). It maintains that the Csepel PPA does not provide for compensation exceeding eligible stranded costs.

(144)

Csepel furthermore argues that the PPAs fulfil the criteria of Article 87(3) of the EC Treaty in that they significantly contribute to the security of electricity supply in Hungary and, more generally, to the overall development of the Hungarian economy.

(145)

The company AES-Tisza suggests (without giving detailed reasons) that the PPAs should be regarded as securing investment in an Article 87(3)(a) region.

(146)

Moreover, AES-Tisza notes the Opening Decision's lack of clarity with regard to the ‘benchmark’ market price to be used, the meaning of ‘inefficient investment’ and the economic scenarios and time periods applied for the Commission's assessment of compatibility with the common market.

6. REPLY FROM HUNGARY ON COMMENTS FROM INTERESTED PARTIES

(147)

In reaction to the comments of Csepel power plant, Hungary submits that, contrary to what might be inferred from Csepel's comments, its PPA also contains guaranteed minimum off-take quantities.

(148)

As regards Dunament's argument that it cannot refuse generation under conditions dictated by MVM even to the detriment of Dunament's free market sales, the Hungarian authorities point out that in 2006, MVM initiated the termination of the PPAs with regard to 4 F blocks which, as a result, could have competed directly on the free market for system services. However, Dunament refused to take this opportunity.

(149)

On the comments of AES-Tisza whereby generators without PPA mainly invested if they fell under the guarantee of mandatory off-take, the Hungarian authorities submit that important power plants and power plant blocks sell electricity on the free market without both PPAs and mandatory off-take (for instance the Dunament G1 block, the Vértes power plant and the Mátra I-II blocks).

(150)

Hungary also stresses that, contrary to AES-Tisza's comments, MVM's negotiating position is also limited by the PPAs themselves (price formulae and guaranteed off-take quantities).

7. ASSESSMENT BY THE COMMISSION

7.1. Unlawful aid

(151)

The aid contained in the PPAs was not notified to the Commission in accordance with the State aid procedural rules. The aid thus constitutes unlawful aid.

7.2. General comment on the individual assessment of the PPAs

(152)

In their comments, certain interested parties and the Hungarian authorities suggested that the PPAs should be assessed individually given the differences in their exact terms and conditions.

(153)

This Decision covers all PPAs between MVM and power generators that were in force when Hungary joined the EU (see recitals 44 and 45 above). The Commission considers that the governing principles of the PPAs present similarities which, in a State aid procedure, justify their common assessment. As shown below, the Commission is of the view that the main advantage flowing from the PPAs is common to all of them, and that the decision on their conclusion in the period 1995-2001 followed the same policy objectives and the same type of solution. In concrete terms, they all provide for a purchase obligation on the part of MVM – for a duration covering a substantial part of the lifetime of the assets – of reserved capacities and a guaranteed quantity, with a pricing mechanism allowing the generators to cover their fixed and variable costs. Furthermore, the other criteria for the existence of State aid also present similarities that justify their common assessment. Their selectivity is based on the same principles; the question of whether the PPAs lead to a transfer of State resources requires largely the same assessment for each of them; and their affect on competition and trade also follows the same economic assessment and must also take into account the coexistence of the PPAs on the Hungarian market. The Commission is thus of the view that in order for this State aid decision to accurately reflect the reality of the Hungarian power generation market, the PPAs must be assessed jointly, with a single decision closing the procedure.

(154)

This comprehensive approach does not prevent the Commission from taking into account the differences that indeed exist between the PPAs in question. This Decision thus sets out the differences between the PPAs where such differences are relevant for the purpose of this Decision.

7.3. Existence of State aid within the meaning of Article 87(1) of the EC Treaty

(155)

Below the Commission analyses each of the 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.

(156)

In their comments, the interested parties argued (with reference to several assessment criteria) that the Commission should consider only the situation that prevailed when the PPAs were signed. The findings of this analysis should then extend to the whole duration of the PPAs. In this regard, Budapest power plant refers to the Commission notice on the determination of the applicable rules for the assessment of unlawful State aid (49).

(157)

In establishing the relevant time of assessment, the Commission must first take into account the Accession Act of Hungary to the EU, the Procedural Regulation and the Court's case law.

(158)

The relevant part of Annex IV to the Accession Act reads as follows:

‘ANNEX IV

List referred to in Article 22 of the Act of Accession

[…]

3. Competition policy

1.

(a)

aid measures put into effect before 10 December 1994;

(b)

aid measures listed in the Appendix to this Annex;

(c)

aid measures which prior to the date of accession were assessed by the State aid monitoring authority of the new Member State and found to be compatible with the acquis, and to which the Commission did not raise an objection on the ground of serious doubts as to the compatibility of the measure with the common market, pursuant to the procedure set out in paragraph 2.

All measures still applicable after the date of accession which constitute State aid and which do not fulfil the conditions set out above shall be considered as new aid upon accession for the purpose of the application of Article 88(3) of the EC Treaty.

The above provisions do not apply to aid to the transport sector, nor to activities linked to the production, processing or marketing of products listed in Annex I to the EC Treaty with the exception of fisheries products and products derived thereof.

The above provisions shall also be without prejudice to the transitional measures regarding Competition Policy set out in this Act.’

(159)

The relevant part of Article 1 of the Procedural Regulation reads as follows:

‘(b)

“existing aid” shall mean:

[…]

(v)

aid which is deemed to be an existing aid because it can be established that at the time it was put into effect it did not constitute an aid, and subsequently became an aid due to the evolution of the common market and without having been altered by the Member State. Where certain measures become aid following the liberalisation of an activity by Community law, such measures shall not be considered as existing aid after the date fixed for liberalisation.

(c)

“new aid” shall mean all aid, that is to say, aid schemes and individual aid, which is not existing aid, including alterations to existing aid’.

(160)

It follows from the above provisions that measures which did not constitute State aid at the time they were granted can, in certain circumstances, become State aid measures within the meaning of Article 87 of the EC Treaty. This is without prejudice to the classification of the measure becoming State aid as existing or new aid.

(161)

Although it is true that, in analysing the existence of State aid in a specific case, the Commission must assess the situation prevailing at the time the measure entered into force, this does not mean that the assessment of the four criteria in the definition of State aid should in all circumstances be limited only to the time at which the aid was granted.

(162)

From Article 1(b)(v) of the Procedural Regulation, it clearly appears that there are exceptional circumstances, such as the evolution of the common market or the liberalisation of a sector, where substantial economic and legal changes take place in a sector or several sectors of the economy and where, owing to these changes, a measure that initially did not come within the scope of Article 87 of the Treaty may fall under State aid control. When liberalising a sector of the economy, to keep all measures which did not qualify as State aid owing to the substantially different market conditions at the time they were granted, but which as of liberalisation meet all the criteria of State aid, would de facto perpetuate a large part of the pre-competitive market circumstances. This would go against the precise intention of putting an end to such an uncompetitive situation on a market, i.e. the decision of the Member States to liberalise the given sector. The purpose of special provisions whereby a measure can become State aid is to avoid prolonging any measures which, although not constituting aid under previous economic and legal circumstances, might harm the interests of players in the new market conditions (50).

(163)

The question of whether such State aid is to be classified as existing or new aid should be assessed separately once the Commission has established the existence or otherwise of State aid.

(164)

Hungary's economy underwent a drastic change in the 1990s. The country took the decision to join the European Union, becoming a full Member State on 1 May 2004. It was well aware of its obligation to bring its existing measures into line with the competition rules of the internal market it wished to join, since the Europe Agreement (51), signed by Hungary in 1991, explicitly refers to that obligation.

(165)

In joining the European Union, Hungary also joined the liberalised internal energy market. The competition rules of the Accession Act do not provide for any exception as regards the Hungarian energy market. In the light of this, contrary to the interested parties’ comments, the Commission is of the view that the PPAs, entered into in substantially different economic conditions (as recognised by the interested parties) before accession to the liberalised internal energy market, may very well become State aid in the new legal and economic circumstances. To establish the existence of such aid, the four criteria of the existence of State aid within the measure should be assessed under the new economic and legal circumstances.

(166)

The question of the relevant time of assessment should furthermore be assessed in the light of the Accession Act. Unlike in previous accessions, the Member States agreed to introduce specific provisions to the Accession Act whereby all aid measures applicable after accession and concluded after 10 December 1994 were to be notified to the Commission before accession and reviewed by it on the basis of the acquis communautaire.

(167)

The vast majority of the countries that joined the EU on 1 May 2004 had, for historical reasons, a strong tradition of State interventionism. However, there may be measures that could not fulfil the four criteria of State aid before accession owing to the very different market conditions then prevailing. However, with the new legal and economic conditions of post-accession, these conditions may very well become fulfilled.

(168)

The relevant articles of the Accession Act aim at ensuring undistorted competition on the internal market for the period after the date of entry into force of the Treaty. Consequently, the purpose of the relevant articles of the Accession Act is to avoid distortions of competition on the common market due to incompatible State aid measures after accession. In this regard, it is irrelevant whether in the 1990s when the measure was granted, it actually fulfilled all the criteria of State aid or not. Consequently, the relevant time for the assessment of the criteria for the existence of aid as to be the time period following the date Hungary joined the EU and the liberalised internal energy market.

(169)

Any other approach would lead to a situation where the economic conditions of the pre-accession and pre-liberalisation period (corresponding, in the case of most new Member States, to a transition period following the communist regime) could be perpetuated long after the country's accession to the European Union. Measures which might not have constituted State aid before accession could be maintained and even prolonged as long as the Member State wished, even if they constituted State aid under post-accession conditions, as they would not fall under the Commission's State aid control.

(170)

This is precisely the intention of the interested parties’ comments in this regard. All the interested parties’ arguments concerning the relevant time of assessment aim to show that the economic and legal assessment of the PPAs in the context of the present State aid procedure should be based only on the circumstances that prevailed at the time of the signature of the PPAs (i.e. between 1995 and 2001), and to lead to the conclusion that the PPAs, because of those legal and economic circumstances, do not constitute State aid. They argue that the market economy operator test and the criteria of distortion of competition and effect on trade should be analysed in the economic context of the mid-1990s, that the Commission should take into account MVM's obligations at that time (security of supply) and the model of the energy sector prevailing at that time (‘Single Buyer’ model, etc.). In their view, the result of the assessment under these circumstances should prevail until the end date of the PPAs (2024 for the longest contract), irrespective of such changes as Hungary's accession to the EU and the subsequent mandatory liberalisation of the energy market.

(171)

The Commission cannot agree with this line of argument. The Commission is of the view that the relevant articles of the Accession Act aim precisely at avoiding such situations, by requiring the immediate application of State aid rules to the players of the economy. The Accession Act does provide for exceptions for certain sectors of the economy (e.g. provisions on transport), but no exception whatsoever is provided for operators on the electricity market. The acquis communautaire, including Directive 96/92/EC, thus applies to all contractual conditions of the Hungarian electricity market immediately as of accession.

(172)

In its assessment of the PPAs, the Commission thus takes the view that, by joining the liberalised internal energy market, Hungary agreed to apply the principles of that market's economy to all the players on its existing market, including all existing commercial relations.

(173)

The Commission must therefore assess whether, as of the day on which Hungary joined the European Union, the measure meets the criteria for the existence of State aid.

(174)

As an introduction to the assessment of the existence of an advantage, it is useful to note that most of the power generators acknowledged in their comments that they could not have invested in those plants without the guarantees offered by the PPAs. […] power plant argues in its comments that ‘The PPAs are an important element for the banks to agree to finance the investment and pre-finance the operating costs on a continuous basis. […] On […], […] asked for the consortium's [i.e. the financial institutions’] view on a potential amendment of the PPAs. However, the banks refused the decrease of both the reserved capacities and the guaranteed off-take’ (52).

(175)

In this regard, […] (as facility agent for the twelve banks, lenders of nearly […] to Csepel power plant) argues that ‘The view of the Banks is that the PPA is part of a package of closely related commercial agreements that secured and still secure the Facility Agreement that provides the financing for the project at market conditions. Thus, any change of the PPAs would automatically affect the Banks and, owing to the contractual mechanisms available to the Banks to protect their financial interests, in turn endanger the Csepel II Project as a whole’.

(176)

[…] (as facility agent for the nine banks, lenders of nearly […] to AES-Tisza) argues that ‘The principal basis for this financing was the existence of the PPA along with the other pertinent project documents (e.g. the Fuel Supply Agreement). […] The PPAs provide stability to demand risk (volume of electricity sold and pricing).’‘The demand stability feature […] is critical in giving banks the necessary security to provide long-term financing in an immature market’.

(177)

In order to assess the existence of an advantage under the PPAs, the Commission first carried out a preliminary analysis to determine what line of reasoning to follow in the assessment. As a result of the preliminary analysis, outlined in recitals 180 to 190, the Commission concluded that in order to establish whether an advantage existed, it should be ascertained whether under the conditions prevailing when Hungary joined the European Union, a market operator would have granted the generators a similar guarantee as that enshrined in the PPAs, namely a purchase obligation on the part of MVM of the capacities reserved in the PPAs (corresponding to a substantial proportion and, in many cases, to all the power plant's available capacities), a guaranteed minimum quantity of generated power over a period of 15 to 27 years corresponding to the typical expected lifetime of the assets concerned or their depreciation, at a price covering the plant's fixed and variable costs (including fuel costs) (53).

(178)

As a second step, the Commission analysed the answer to this question in the light of standard commercial practices on European electricity markets.

(179)

Finally, the Commission briefly assessed the impact of the PPAs on the market in the period following Hungary's accession to the European Union. Although this analysis is not necessary to determine the existence or otherwise of an economic advantage within the PPAs, it is useful in order to duly address certain comments submitted by interested parties.

(1) Preliminary analysis: the reasoning that should be followed in order to assess the existence or otherwise of an advantage

(180)

In the comments submitted in the course of the procedure, third parties analysed the existence or otherwise of an advantage in the light of the conditions under which the PPAs were signed in the mid-1990s. In essence, they concluded that in that period, and in the context of the privatisation of the generating companies, an average market operator would have granted similar guarantees to the generators as those enshrined in the PPAs in order to attract investors and thereby ensure security of supply in Hungary.

(181)

The Commission analysed the merits of this approach and came to the conclusion that it was inappropriate for two reasons. First, it does not take into consideration the actual beneficiaries of the measure under assessment. Second, the period considered under the approach is not relevant in assessing the existence of an advantage.

(182)

The Dunament power plant argues that it received no advantage through its PPA as it paid the market value for the privatisation of its power plants, and the purchase price took into account its rights and obligations under the PPA. Consequently, it paid for any advantage the PPA may have conferred on it in the privatisation price.

(183)

The Commission considers that this reasoning is unsound in the present case. In the case at issue, the beneficiaries of the aid are the privatised power plants (for those which were indeed privatised) and not the shareholders of those plants. The privatisation of the power plants took the form of share deals.

(184)

The Court of Justice has analysed how a change in the ownership of a company during a share deal affects the existence of unlawful aid granted to the company and its recipient. It ruled that the unlawful aid remains with the company that benefited from the aid, despite the change in its ownership (54). The transfer of shares at the market price merely ensures that the buyer itself does not benefit from State aid. However, this does not affect the existence of an advantage for the activity of the beneficiary power plant.

(185)

In the case under assessment, the beneficiaries of the aid are the Hungarian companies that operate the power plants and signed the PPAs, and not the shareholders of the power plants. Furthermore, the change in the ownership of the power plants occurred before the date from which the existence of State aid is to be assessed and is of no relevance in assessing the existence of State aid to the companies operating the power plant. The companies that signed the PPAs thus benefited from the advantages contained in the PPAs regardless of their ownership structure.

(186)

The Commission is aware that in the market circumstances of the mid-1990s in Hungary, the governing principle of the PPAs, that is the guarantee of the return on investment, was the essential condition under which the necessary investments could take place.

(187)

The fact that, owing to the characteristics of the generation sector and the political and economic context of that period in Hungary, there was the need for the State to intervene in the common interest and the best solution was to award PPAs to a number of generators, does not in any way contradict the fact that the PPAs do confer an advantage on the generators.

(188)

Most generators argue that the PPAs do not confer any advantage on the generators as they correspond to the normal market behaviour of any market economy operator in both MVM's and the generators’ position. They argue that any private actor in the position of MVM (with legal obligation of security of supply, as a single buyer) would have chosen to enter into the PPAs, and that the economic advantage from the PPAs does not go beyond what, in the circumstances of the immature energy market of the 1990s in Hungary, was a normal commercial advantage for the parties. Moreover, generators had the legal obligation to enter into an agreement with MVM in order to obtain their operating licence. The generators argue that applying the private investor principle should lead the Commission to take account of the legal requirements and economic reality of the time of conclusion of the PPAs.

(189)

With regard to the interested parties’ arguments on the private investor principle, the Commission refers to the recitals of this Decision concerning the time to be established as relevant for the assessment of the existence or otherwise of State aid under the PPAs. The Commission reiterates that it does not intend to call into question the fact that it was necessary to enter into PPAs in the circumstances prevailing at the time those agreements were concluded. However, as explained above, this does not in any way mean that the PPAs did not confer an advantage on the generators. The interested parties in fact argue only that these agreements corresponded to the market conditions prevailing at the time of their conclusion. None of the interested parties argues that they correspond to current market conditions on the internal market.

(190)

The Commission concludes that in order to assess the existence of an advantage within the PPAs, it should be ascertained whether, under the conditions prevailing when Hungary joined the European Union, the average market operator would have granted generating companies a similar guarantee to that enshrined in the PPAs, as described in recital 177.

(2) Assessment of the existence of an advantage to the power generators when Hungary joined the European Union

(191)

To answer the question referred to in the previous recital, the Commission identified the main practices of commercial operators on European electricity markets that are relevant for the purpose of this analysis, and assessed whether PPAs are in line with these practices or provide generators with guarantees that a buyer would not accept if it acted on purely commercial grounds.

(192)

As a preliminary remark, it is useful to note that traditionally, electricity markets are divided into four markets: (i) generation/import and wholesale supply, (ii) transmission/distribution, (iii) retail, and (iv) balancing services. The relevant markets for the assessment of the PPAs are the first and fourth category, as MVM purchases electricity from domestic generators, imports electricity and sells it to regional distribution companies and commercial suppliers (suppliers on the retail market). MVM also provides reserved capacities to the Transmission System Operator in order to ensure the balancing of the system.

(193)

In Hungary, the retail market is divided into two segments in the period under assessment: (i) a public-utility segment where regional distribution companies supply power at regulated prices to non-eligible consumers and consumers that do not make use of their eligibility; (ii) a free market segment where commercial suppliers provide power to eligible consumers at prices resulting from market mechanisms. Under the regime introduced by Energy Act III, the public utility segment is limited to the household and commercial consumers that are covered by a universal supply obligation.

(194)

In the period of assessment, MVM supplied power to both the regional distribution companies (suppliers on the public utility segment) and to suppliers on the free market segment. However, as outlined in recitals 221 to 231, MVM's sales to suppliers on the free segment were only intended to release the surplus quantities purchased under the PPAs and not needed by the public utility segment. It is a consequence of the PPAs themselves rather than an autonomous commercial activity. Therefore, the existence of an advantage must be analysed against the primary objective assigned to MVM, which was to supply enough power to the regional distribution companies to fulfil the needs of the public utility segment. Consequently, what needs to be verified is whether, in the absence of PPAs, a market operator entrusted with supplying the regional distribution companies with sufficient amounts of electricity, and acting on purely commercial grounds, would have offered the same guarantee as that enshrined in the PPAs. This assessment has to be carried out in the light of the operation of competitive wholesale markets. The recitals below provide first, an overview of typical commercial practices relevant for this analysis and second, a comparison between the PPAs and these practices. Finally, in the light of this comparison the Commission analysed the consequences of the PPAs that the public authorities could expect when Hungary joined the European Union, and whether they could have expected a better balance between positive and negative consequences from other types of agreements.

(2)(a) Short description of commercial practices on European electricity markets relevant for the assessment of the existence of an advantage within the PPAs

(195)

In its Sector Inquiry on electricity markets in Europe (55), the Commission examined in detail the conditions governing trade in electricity on European wholesale markets.

(196)

Depending on the delivery period, bulk electricity can be traded on spot and forward markets. Spot markets are mainly day-ahead markets, on which electricity is traded one day before physical delivery takes place. Trade in power on spot market exchanges is always based on marginal pricing, which guarantees only that short-run marginal costs are covered (56).

(197)

On forward markets, power is traded for delivery further ahead in time. Forward products include weekly, monthly, quarterly and yearly products. Both spot and forward products can be traded on power exchanges or over-the-counter (OTC) markets. As a result of continuous arbitrages, prices of identical products on power exchanges and OTC markets tend to converge. Therefore, power exchanges tend to set reference prices for all spot and forward products, and therefore for the entire wholesale market.

(198)

Furthermore, the price of forward products results from the expectations of market players with regard to future price development on spot markets. Since market players engage in forward contracts because they prefer price certainty to unknown spot prices in the future, forward prices also include a risk element. In practice, prices of forward products include a central element which reflects market players’ expectations with regard to the development of spot prices and, depending on whether they attach a high value to price certainty, a risk premium or discount, though in practice it often appears to be a premium. Consequently, spot prices constitute references for all electricity prices. If a spot market exchange is in place, prices on that exchange constitute references for the whole market. In many wholesale markets, buyers usually try to cover a large share of their expected needs with forward contracts in order to have visibility over their costs. The needs additional to those met with forward contracts are covered by purchases on spot markets.

(199)

The Energy Sector Inquiry noted that apart from standardised exchange and OTC trading there are also ‘bespoke bilateral transactions’. These contracts can be very different in terms of products delivered or services and the prices of such transactions are usually not reported. However, in competitive market conditions, the existence of standardised power exchanges and OTC trading necessarily influence such transactions, as a generator or importer would not agree to engage in a bespoke bilateral contract that would offer clearly worse conditions than a standardised spot or forward contract. Therefore, standardised spot and forward contracts on European wholesale markets constitute a relevant basis for comparison in assessing the existence of an advantage conferred on generators by PPAs.

(200)

On forward markets the longest delivery period is one year. The longest duration between the conclusion of the contract and the beginning of the actual delivery period is 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. A standardised forward contract places on the supplier the obligation to provide a certain amount of energy at a price agreed in advance, over a maximum period of one year starting within at maximum 6 years of the conclusion of the contract. The order of magnitude of these timeframes is significantly below the usual depreciation and lifetime of any power generation station. Consequently, in normal market conditions and even if they trade most of their output in the form of forward contracts, generators have no visibility on prices and sales volumes over the depreciation and lifetime of power generation assets. Furthermore, as prices are fixed in advance, generators run the risk that their costs will exceed the agreed prices. This risk is not negligible, owing in particular to the volatility of fuel costs, which is for most generation technologies the main component of variable costs. Furthermore, generators are faced with competitive pressure as they have to renew their forward contracts a significant number of times during the lifetime of their generation assets, and therefore adapt their offers to evolving competitive conditions.

(201)

Contracts involving the reservation of generation capacities may also be encountered on wholesale markets in the form of ‘drawing rights’, which are therefore worth comparing with the PPAs. Acquiring drawing rights consists in reserving part of the generation capacities of a given power plant, usually for the expected lifetime of the power station, and paying a ‘capacity fee’ to the plant operator, corresponding to the capital and fixed costs linked to the reserved capacities. The technical risks are borne by the operator of the plant. The holder of the drawing rights can decide on the level of use of the reserved capacities and pays to the power plant operator a price corresponding to the variable costs incurred for the energy generated from the reserved capacities.

(202)

In order to further assess the existence or otherwise of an advantage within the PPAs, it is also useful to consider the situation of large business or industrial end-consumers, even though they act not on wholesale markets but on retail (downstream) markets. As generators sometimes directly supply power to large business or industrial consumers, the comparison with the PPAs is relevant.

(203)

The Energy Sector Inquiry has shown that it was common practice for electricity suppliers to sign fixed-price contracts with large business or industrial consumers. The duration of such contracts is usually limited to one to two years. They usually provide for a delivery schedule based on historical consumption. The price is derived from wholesale prices on forward markets and contains other cost components such as expected costs of balancing or the supplier's margin. Deviation from the delivery schedule entails the application of a ‘take or pay’ clause, which compels the buyer to pay for energy which it does not need, or to pay an excess charge. In this respect, such contracts may be regarded as based on a minimum guaranteed off-take combined with the reservation of capacity (57).

(204)

Another type of agreement has to be considered for the purpose of assessing the advantage within the PPAs, namely contracts concluded for the provision of balancing services to the Transmission System Operators (TSOs). As electricity cannot be stored, demand and supply must be matched at each point in time. If demand or supply deviate from forecasts and result in a need for additional generation, it is the responsibility of the Transmission System Operator to call on certain generators to increase production at short notice. In order to ensure the availability of generation capacities to face such situations, TSOs reserve capacities in generation units which are capable of modifying their production level at short notice. In Hungary, as there is no pump storage plant, natural gas fired plants have the most appropriate technical characteristics to provide these services.

(205)

The Energy Sector Inquiry has provided an overview of European TSOs’ practice with respect to capacity reservation contracts for the provision of balancing services. This overview shows that capacities are reserved by means of tenders. One year may be regarded as a standard duration, which grants flexibility to TSOs to adjust the amounts of reserved capacities to their actual needs. The contracts generally specify the technical characteristics of the required service, the reserved capacity and a price either for the energy provided or for both energy and capacity.

(2)(b) Comparison of the PPAs with standard commercial practices

(206)

The Commission has compared the purchase obligation enshrined in the PPAs with the main features of standard forward and spot contracts, ‘drawing rights’ contracts, long-term contracts concluded by large end-consumers, and contracts concluded between generators and TSOs for the provision of balancing services.

(207)

It follows from the description presented in recitals 195 to 200 that the combination of long-term capacity reservation, a minimum guaranteed off-take and price-setting mechanisms covering variable, fixed and capital costs do not correspond to usual contracts on European wholesale markets and that they shield generators from more risks than standard forward and spot contracts.

(208)

Trade in power on spot-market exchanges is always based on marginal pricing, which guarantees only that short-run marginal costs, and not all fixed and capital costs are covered. Furthermore, on spot markets, a power generating company has no assurance as regards the level of utilisation of its generating capacities. This risk is much higher than for most manufacturing sectors and is due to the fact that it is impossible to store electricity economically, a very specific feature of that industry. If at a given point in time enough power to meet demand is offered at lower prices than those offered by a given generator for one of its power generation units, that unit will not be despatched, which means that its generation capacities will be lost for the concerned period of time.

(209)

Therefore, sales on spot markets entail a significant degree of uncertainty concerning the remuneration of fixed and capital costs and the level of utilisation of generation capacities.

(210)

Nor do forward markets, whose prices are derived from spot prices, provide assurance to generators that all their fixed and capital costs are covered by their sales, because prices are fixed in advance. If fuel costs increase unexpectedly over the period of delivery, the costs of producing electricity may exceed the price set in advance. On forward markets, the risk concerning the use of the production capacities is lower than in the case of spot products owing to the longer time horizon of forward contracts. However, even if a generator is able to sell most of its output through forward contracts, it enjoys visibility over the utilisation rate of its power generation units over a limited period of time compared to their lifetime.

(211)

Interested parties emphasize that the generators do bear important risks under their PPAs, in particular constructional, regulatory, environmental, maintenance and fiscal/financial risks. The Commission recognises that the PPAs do not eliminate all risks linked to the operation of a power plant. Indeed, these risk elements listed by the generators in their comments are certainly borne by the generators themselves. However, this corresponds to normal risks any market player on the electricity generation market would need to bear, including in the case of sales in the form of standard spot or forward markets. However, the commercial risks associated with fluctuations in electricity generation costs and, in particular, fuel costs, the risk associated with fluctuations in end-user electricity prices, and the risk associated with fluctuation in end-user electricity demand are born by MVM on a substantial part (or entirety) of the lifetime of the assets under PPA.

(212)

Interested parties also argued in their comments that the reservation of capacities for MVM entailed a disadvantage for them, because they could not use these capacities for other purposes than for sales to MVM. However, the system of guaranteed minimum off-take mitigates that constraint to a large extent. The system of minimum guaranteed off-take should be regarded as a guarantee for generators that they will not be prevented from using their capacities for energy production and sale should MVM not make use of its reserved capacities. As a matter of fact, as shown by the following table, the minimum guaranteed off-take corresponded to a utilisation rate of the reserved capacities exceeding the average utilisation rate of the total available capacities in Hungary.

Table 5

Minimum guaranteed off-take and reserved capacities

2004

2005

2006

Guaranteed off-take (GWh)

23 234

23 528

23 516

Reserved capacities (MW)

4 242

4 460

4 481

Ratio between minimum guaranteed off-take and reserved capacities (number of hours per year)

5 477

5 275

5 248

Ratio between net electricity generation and net available generation capacities for all Hungarian power generation units (number of hours per year)

4 272

4 225

4 601

(213)

Therefore, spot and forward contracts entail a much higher level of risk for generators than the PPAs, which provide certainty both as regards the remuneration of fixed and capital costs and the level of use of the generation capacities.

(214)

As regards drawing rights, the main difference between this form of agreement and the PPAs is that drawing rights are normally not associated with minimum guaranteed off-take. The holder of the drawing rights bears commercial risks linked to the sale of the energy produced out of the reserved capacities. However, it has the assurance that it will be able to sell all that energy at prices covering at least variable costs, because it can decide not to generate energy if prices fall below variable costs. That assurance is not provided by the PPAs to MVM, owing to the existence of the minimum off-take obligations on MVM for the benefit of the generators.

(215)

As regards standard long-term purchase contracts concluded by large consumers, it is clear that they are much more advantageous for the buyer than the PPAs are to MVM because the price, which is usually fixed for the whole duration of the contract, is normally not indexed on parameters such as fuel costs whose development over the duration of the contract is unpredictable, and is not designed in such a way as to cover fixed and capital costs, as it depends on price quotations on wholesale markets. Indeed, buyers have an interest in concluding long-term contracts only if these contracts provide them with 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 conditions, nuclear plants. Furthermore, these contracts are usually concluded for much shorter periods than the PPAs and therefore give buyers the option to change suppliers if better prices are offered by competitors. In order to obtain the lowest prices possible, buyers often use tendering procedures.

(216)

Balancing services contracts are relevant to the assessment of the existence of an advantage between the PPAs because a minor part of the capacities reserved under PPAs is assigned by MVM for the provision of balancing services to the TSO (58). In practice, MVM sells capacities to the TSO on an annual basis as a package and uses part of the capacities reserved under the PPAs for that purpose. In practice, it means that the generators do not bear the risk attached to the annual tenders (59) and to the uncertainty concerning the amount of energy that they will provide. From their point of view, the contractual conditions governing the provision of balancing services are those of the PPAs. However, as shown in recital 204, the specifications of the PPAs, especially their long duration and the existence of minimum guaranteed off-take, cannot be justified on commercial grounds even for the provision of balancing services. The Commission recognises that in Hungary, few generation units may be able to provide the necessary balancing services to the TSO, as claimed by interested parties, but has come to the conclusion that even in such circumstances the conditions offered by the PPAs go further than what a TSO may consider acceptable on commercial grounds.

(217)

This comparison shows that PPAs structurally provide more guarantees to generators than standard commercial contracts. The generators are thus in a more advantageous situation that the one they would face on the free market without their PPA. In order to complete the assessment of the existence of an advantage, it is necessary to assess the positive and negative effects that the public authorities could expect from the PPAs when Hungary joined the European Union and to verify whether they could have expected a better balance between the positive and negative effects from other approaches based on standard commercial practices.

(2)(c) Foreseeable consequences of the PPAs for the public authorities in the light of the comparison with buyers’ standard commercial practices on European electricity markets

(218)

The public authorities could expect from the PPAs that MVM would be able to find enough energy to fulfil the needs of the public utility market over a long period of time.

(219)

However, they had no assurance concerning the level of price that would have to be paid by MVM over that same period because the PPAs do not provide hedging against risks of price fluctuations, which are due in particular to fluctuation in fuel costs.

(220)

Furthermore, the combination of long-term capacity reservation and the associated minimum guaranteed off-take deprives the public authorities of the possibility of benefiting from more attractive prices offered by other generators and importers. The capacities and minimum guaranteed off-take of the PPAs, the long-term import contracts concluded by MVM and the quantities purchased by it under the mandatory off-take system (60) were sufficient to cover its needs. MVM could thus not diversify its supply portfolio, although alternative generation capacities were available. In 2004, several power generators were not engaged in long-term power purchase agreements. The PPAs of two power plants accounting for 470 MW of installed capacity expired at the end of 2003, which significantly increased the supply capacity outside PPAs. Around 700 MW of import capacities are not covered by long-term import contracts and could have been used by MVM to import electricity if it had not been bound by the system of reserved capacities and minimum guaranteed off-take.

(221)

As shown in the following recitals, it was clear when Hungary joined the European Union in 2003 and 2004 that the system of reserved capacities and minimum guaranteed off-take, which was designed under a Single Buyer Model whereby all electricity consumed in Hungary transited through MVM, entailed significant risks that the PPAs would require MVM to purchase energy beyond its needs.

(222)

An important element to be taken into consideration in this respect is the partial opening of the electricity market in 2003. On 18 December 2001 the Hungarian Parliament adopted Energy Act II, which allowed large consumers, defined as those which consumed more than 6,5 GW/year, to become ‘eligible consumers’ and therefore be allowed to choose their supplier of electricity. This legislative measure, which came into force on 1 January 2003, led to the creation, alongside the pre-existing public utility segment, of a free market where prices resulted from the confrontation of supply and demand. The foreseeable effect of that measure was to reduce the quantities needed by MVM for supply to the regional distribution companies for the fulfilment of demand on the public utility segment. The following table shows the continuous increase in quantities actually sold on the free market between 2003 and 2006 and the corresponding decrease in quantities actually sold on the public utility segment through regional distribution companies.

Table 6

Sales on the retail market (regulated segment and free segment)

(GWh)

2003

2004

2005

2006

Total consumption

33 584

33 836

34 596

35 223

Sales on the free segment

3 883

7 212

11 685

13 057

Sales on the regulated segment

29 701

26 624

22 911

22 166

Source: Statistical data of the Hungarian power system, 2006 ().

(223)

Between 2003 and 2006 the quantities sold on the public utility segment, which correspond to MVM's actual purchase needs, decreased by 25 %. The decrease of MVM's needs was largely foreseeable at the time when Hungary joined the European Union, particularly in the light of the significant difference between the official prices on the public utility segment (prices paid by consumers to regional distribution companies) and the prices observed on the free segment in 2003 and 2004.

Table 7

Price differences between the regulated segment and the free segment on the retail market in 2003 and 2004

(HUF/kWh)

2003

2004

Average price on the free market

11,1

12,7

Average prices on the public utility sector (62)

19

21,1

Source: Statistical data on the Hungarian power system, 2006

(224)

Prices on the free market indeed constituted clear incentives for eligible consumers to make use of their eligibility rights. It was also well known in 2003 and 2004 that the forthcoming accession of Hungary to the European Union would entail the entry into force of the Second Electricity Directive (63), and consequently the rights of all consumers to become eligible as from 1 July 2007, which would lead to a further reduction of MVM's needs over a much shorter period of time than the remaining validity of the PPAs.

(225)

Consequently, it was clear in 2003 and 2004 that the PPAs, which had been designed in the context of a Single Buyer Model whereby all electricity needed by the Hungarian market transited through MVM, would not only prevent MVM from diversifying its supply portfolio and obtaining more favourable prices by fostering competition between its suppliers, but was also likely to result in the obligation on MVM to purchase more energy than it actually needed.

(226)

This risk had actually been identified by the public authorities. In 2002, the Hungarian Government issued a Decree (64) which required MVM to initiate a renegotiation of the PPAs with all generators with a view to adjusting the amount of reserved capacity. Although that Decree did not require the termination of the PPAs, it is in itself a clear indication that the amounts of capacity reserved under the PPAs (and subsequently, the minimum guaranteed off-take) were too high in the light of the gradual liberalisation of the retail market. That Decree also introduced the possibility for MVM, in the event of failure to complete negotiations with generators, to sell capacities and energy which prove to be in excess of the amounts actually needed to supply the regulated segment, through three ‘release mechanisms’: capacity auctions, capacity tenders and sales on a virtual Internet-based trading platform called ‘the Marketplace’ (Piactér). Although the form of these three mechanisms vary, all three of them in essence consist in MVM offering for sale on the free market, in the form of a variety of forward delivery products, the surplus energy that it does not need to supply the public utility sector but that it has to purchase in accordance with the terms of the PPAs.

(227)

The following table displays data concerning the first three auctions carried out by MVM. It shows that the prices received by MVM for the energy sold through the release mechanisms were significantly below the prices paid for that same energy under the PPAs.

Table 8

MVM's three first auctions

First auction June 2003

Second auction December 2003

Third auction June 2004

Baseload products

Quantities of electricity sold (GWh)

375

240

133

Sale prices on auctions (HUF/kWh)

8,02

9,5

8,4

Off-peak load products

Quantities of electricity sold (GWh)

259

421

Sale price on auctions

5,6

3,5

Average annual PPA prices

2003

2004

11,3

11,7

(228)

The Hungarian legislation had actually anticipated that effect and provided for a compensation to be paid by the Hungarian State to MVM for the losses incurred owing to the difference between the price paid for the quantities released through capacity auctions and the sales prices obtained on the market. The compensation paid to MVM amounted to 3,8 billion HUF in 2003 (65). According to MVM's annual report for 2004, the compensation increased by HUF 2,4 billion in 2004.

(229)

From the point of view of the public authorities, it is clear that such a system cannot be justified on commercial grounds as it amounts to subsidising the sales of generators for supply to the free market segment.

(230)

The following table shows the total quantities of energy sold by MVM through the release channels between 2003 and 2004 on the basis of the information provided by Hungary on 24 September 2007 and 21 April 2008.

Table 9

Quantities sold by MVM through the release mechanisms

(TWh)

Year

2003

2004

2005

2006

Total sales by MVM through the release mechanisms (66)

0,6

1,9

6,5

6,5

(231)

It is clear that under normal market circumstances buyers do not engage in contracts which entail a significant risk of being compelled to buy more electricity than needed and incurring substantial losses when reselling that energy. This risk is theoretically present in forward contracts and long-term contracts concluded by large end-consumers, but to a much lower degree.

(232)

The duration of forward contracts is significantly less than that of the PPAs. The buyer has a much better overview of its needs for such timeframes than for a period ranging from 15 to 27 years. Furthermore, buyers tend to cover only part of their expected needs with forward contracts, buying any additional quantities needed on spot markets.

(233)

Long-term contracts concluded by large end-consumers also entail only a limited risk of excess purchase because of their limited duration, and also because the consumption of large industrial and business end-consumers entering into such contracts is as a rule stable and predictable, which is not the case for MVM for the reasons outlined above.

(234)

Furthermore, it is useful to recall that under forward contracts or long-term purchase contracts concluded by end-consumers, buyers commit to buying a certain amount of energy several months or years before actual delivery takes place because their purchase contract provides hedging against price fluctuations. This benefit is not present in the PPAs because prices cover variable costs, which owing to variation in fuel costs may increase in unpredictable proportions.

(235)

The Commission concludes that the benefits obtained by the public authorities from the PPAs do not provide the hedging on energy prices that the average market operator would expect from a long-term contract and entail significant risks of being compelled to purchase energy in excess of actual needs and incurring losses when reselling the surplus quantities. These risks were well known by the Hungarian authorities when Hungary joined the European Union. The comparison between PPAs and standard commercial practices on European electricity markets shows that a buyer acting on purely commercial grounds would not have accepted such detrimental effects and would have adopted other purchase strategies and entered into different types of agreements in line with standard commercial practice.

(236)

In the light of the above, the Commission concludes that the core principles of the PPAs entail an advantage to the power generators beyond normal commercial advantage. In this respect, it is essential to stress that the main principles of the PPAs, i.e. the long-time capacity reservation, minimum guaranteed off-take and pricing mechanisms based on a capacity fee and an energy fee to cover fixed, variable and capital costs, cannot be isolated and assessed separately. The existence of an advantage lies in the combination of these elements. As shown above, the long duration of the PPAs contributes to a great extent to the existence of an advantage.

(3) The impact of the PPAs on the market in the period following Hungary's accession to the European Union

(237)

Interested parties argue in their comments that the prices applied under the PPAs are not higher than wholesale market prices. The Mátra power plant especially stresses that is prices are competitive because it has its own coal mine, so it has low mining costs. Consequently, they conclude that they do not benefit from any advantage.

(238)

The Commission cannot agree with this line of argument.

(239)

First, as discussed in detail above, the price actually paid under the PPAs is one consequence of the PPAs but it does not constitute the core of the advantage entailed in them. The comments by the banking institutions referred to above (see in particular recitals 175 and 176) also confirm that all the elements of the PPAs guaranteeing the generating units the return on the investment of the assets and shielding the generators from the commercial risks of their operation constitute together the core of the advantage of these agreements.

(240)

Second, the price difference compared to market prices depends on a great number of factors linked to market evolution which are independent of the PPAs and can only be assessed a posteriori. The PPA prices are unit prices at a certain point in time; they do not take into consideration the advantage flowing from all other elements of the PPAs, such as the capacities and quantities which the generators could have sold if their sales depended on market demand. As discussed above, the Commission is of the view that there is an economic advantage for generators inherent to all PPAs under assessment, whether or not they actually lead, at a given period of time, to prices above market prices.

(241)

For the sake of completeness of the Commission's answers to the comments received and to better understand the consequences of the PPAs in this regard, the Commission nevertheless compared the PPA prices actually applied with prices achieved on the part of the wholesale market not covered by PPAs.

(242)

In this comparison, the Commission does not take into account 2007 prices as in that year (more precisely, from 9 December 2006 to 31 December 2007) the PPA prices were overwritten by official prices. Accordingly, the applied prices do not necessarily reflect the exact prices to which the application of the PPA price formulae would have led.

(243)

Consequently, the Commission compared the applied PPA prices with free market prices for 2004 to 2006.

Table 10

The average price of electricity sold to MVM under the PPAs (67)

HUF/kWh

Power plant under PPA

2004

2005

2006

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