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Commission secures withdrawal of the unlimited guarantee granted to EDF, thereby encouraging competition in the energy sector

European Commission - IP/03/1737   16/12/2003

Other available languages: FR DE IT

IP/03/1737

Strasbourg, 16 December 2003

Commission secures withdrawal of the unlimited guarantee granted to EDF, thereby encouraging competition in the energy sector

Following the formal investigation procedure initiated by the Commission on 2 April 2003, the French Government has agreed to put an end to EDF's unlimited state guarantee by 31 December 2004 at the latest. Among the possibilities open to it for solving the problem of the guarantee, France has opted to turn EDF, which currently has public enterprise status, into a limited company governed by the ordinary rules. The fact that France has decided to change EDF's status is of no concern to the Commission, since the Treaty does not empower it to call into question the public or private ownership of enterprises or the arrangements chosen by the Member States for their state-owned enterprises. These may therefore have public enterprise or limited company status, provided that they do not receive state aid which is incompatible with the Treaty. The French Government has also submitted a draft reform of the pension scheme which the Commission has found compatible with the rules on state aid. Lastly, the Commission is requiring EDF to repay the French State €889 million (plus interest) in aid in the form of unpaid taxes on part of the reserves created for the high-voltage electricity grid.

Mario Monti, Member of the Commission with special responsibility for competition, made the following statement: "I welcome the favourable outcome reached in this highly sensitive case, in which the French authorities have also been cooperative. A competitive situation has for the first time been created for EDF, without distortions due to state aid. The introduction of conditions of fair competition and the correction of past distortions is all the more important in sectors such as energy which are in the process of being liberalised and will enable all the positive effects to be reaped from that liberalisation. The withdrawal of EDF's guarantee is part of our policy of creating a level playing field also in markets where public and private enterprises coexist; it is a line we have followed, for example, in the decisions on guarantees granted to state-owned banks in Austria, France and Germany."

The decision taken today deals with three issues: (1) withdrawal of the unlimited state guarantee enjoyed by EDF, (2) reform of the pension scheme for the electricity and gas sector and (3) reimbursement of state aid resulting from the non-taxation of a proportion of the accounting reserves created for the renewal of the high-voltage electricity grid.

Withdrawal of the guarantee

On 11 November 2003 France notified the Commission of its intention to turn EDF into a limited company, which means de facto that it would no longer have the state guarantee. It should be stressed that the Commission could have agreed to EDF retaining public enterprise status, provided that the state guarantee was withdrawn. The Commission has no objection to the public ownership of EDF's capital or the public enterprise status itself, but requires the unlimited guarantee enjoyed by EDF to be brought to an end as it distorts competition.

Reform of the pension scheme for the electricity and gas sector

Pensions for workers in the electricity and gas sector are currently managed by EDF itself and financed by employees' contributions and the balancing contribution paid by all enterprises in the sector.

The reform of the pension scheme for the electricity and gas sector involves its affiliation to the general social security scheme and transfer of the pension rights to a newly created independent pension fund called the National Fund for the Electricity and Gas Industries (CNIEG). All employees and employers in the sector will be required to join.

The French authorities have given a formal undertaking that affiliation to the general scheme will be financially neutral. The general scheme will pay basic pensions to workers in the sector in return for collecting the normal employees' and employer's contributions. The Commission has found that this change is financially neutral and does not involve any state aid.

The specific pension rights of workers in the electricity and gas sector, which entitle them to additional benefits, will remain the responsibility of the enterprises. The specific rights already acquired at the date of the reform by employees assigned to electricity and gas transport and distribution activities will nevertheless be financed by a levy on gas and electricity prices introduced by the new law, for which the chargeable event will be the existence of a connection to an electricity or gas transport or distribution network. The specific rights acquired by employees assigned to other activities, as well as future rights, will continue to be financed by the enterprises themselves.

This reform confers an advantage on the sector in comparison with the existing situation, but it is compatible with the rules on state aid since it will eliminate the barrier to entry formed by the obligation on any entrant to set aside reserves to finance the pension rights already acquired by employees throughout the sector.

Accordingly, the pensions reform is proportionate and can be deemed compatible with the Treaty rules.

Tax aid

The Commission has, on the other hand, adopted a negative final decision on a tax concession granted to EDF in 1997. In that year, Law No 97-1026 of 10 November 1997 clarified the ownership status of the high-voltage electricity grid. As a result, the reserves previously built up by EDF free of tax over the period from 1987 to 1996 became superfluous and were reallocated.

Corporation tax was correctly applied to most of these reserves, but FRF 14.119 billion was directly incorporated in EDF's capital without increasing its taxable net assets. The tax concession thus obtained by EDF amounted to FRF 5.88 billion (14.119 x 41.66%(1)), equivalent to €888.89 million.

After an in-depth analysis, the Commission came to the conclusion that this tax concession granted to EDF constituted unjustified operating aid, which had the effect of strengthening its competitive position in relation to its competitors, and consequently found it incompatible with the common market. The Commission has accordingly called on France to recover the €888.89 million in question, plus interest that has accrued since 1997.

Background

On 16 October 2002 the Commission launched an initial formal investigation into the tax aid and proposed "appropriate measures" with a view to withdrawal of EDF's unlimited guarantee. The French Government having refused this proposal, on 2 April 2003 the Commission initiated a second formal investigation into the unlimited guarantee enjoyed by EDF.

As a public enterprise, EDF is currently not subject to the general law on bankruptcy, which means that it enjoys a state guarantee, unlimited in either amount or duration, covering all its commitments. The risk of an enterprise that enjoys an unlimited state guarantee becoming insolvent is almost nil, which enables it to borrow on more favourable terms. The main rating agencies thus all regard the state guarantee as a key factor in assessing EDF's risk of insolvency.

It is essential that the rules on state aid be applied in sectors being liberalised if the beneficial effects of opening up these markets to competition are to be preserved. In particular, the existence of unlimited state guarantees occasionally enjoyed by the old state monopolies can jeopardise the favourable effects of liberalisation.

(1) Rate of corporation tax applicable in 1997.


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