(1)

European Parliament and Council Directive 96/92/EC of 19 December 1996 concerning common rules for the internal market in electricity (1) (hereinafter referred to as “the Directive” or “Directive 96/92/EC”) laid down the principles for opening up the European electricity industry to competition.

(2)

The abovementioned Directive was incorporated into the EEA Agreement by Decision of the EEA Joint Committee No 168/1999 (2).

(3)

The gradual transition from a situation of largely restricted competition to one of genuine competition at EEA level must take place under acceptable economic conditions that take account of the specific characteristics of the electricity industry. This concern is already reflected to a very large extent in the text of the Directive itself.

(4)

In order to enable them to cope with a number of very specific situations, Article 24 of the Directive allows EFTA States to defer application of some of the provisions of the Directive for a transitional period. State aid mechanisms designed to allow electricity undertakings to adapt to the introduction of competition under favourable conditions do not fall within the scope of the derogations provided for in Article 24.

(5)

The purpose of these Guidelines is to clarify how the Authority intends, in the light of Directive 96/92/EC, to apply the rules of the EEA Agreement to State aid of this kind. These Guidelines does not prejudice the rules on State aid that result from other relevant frameworks, guidelines and notices. In particular, the Authority will continue to authorize regional aid and environmental aid in accordance with the respective guidelines. Similarly, aid that could not be authorized under Article 61 of the EEA Agreement will, where appropriate, be open to examination in the light of Article 59(2) of the EEA Agreement.

(1)

Article 24 of the Directive 96/92/EC, as adapted by Article 1(i) of Decision No 168/1999 of the EEA Joint Committee of 26 November 1999, stipulates that transitional measures derogating temporarily from the Directive may be authorized by the Authority (3):

“Those EFTA States in which commitments or guarantees of operation given before the entry into force of Decision No 168/1999 of the EEA Joint Committee of 26 November 1999 may not be honoured on account of the provisions of that Decision, may apply for a transitional regime pursuant to Article 24(1) and (2). Applications for a transitional period must be notified to the EFTA Surveillance Authority no later than six months after the entry into force of Decision No 168/1999 of the EEA Joint Committee of 26 November 1999 ”

(2)

Given the present state of play, the Authority considers that decisions taken by it pursuant to Article 24 can create a transitional regime only where it has previously found that the measures notified by the EFTA Member States pursuant to that Article are incompatible with the Directive’s provisions set out in Chapters IV, V, VI and VII. Under Article 24 of the Directive, the Authority alone may authorize derogations from those provisions.

(3)

Accordingly, a system of levies introduced by an EFTA State via a fund to offset the costs of commitments or guarantees that might not be honoured on account of the application of Decision No 168/1999 does not constitute a measure that could benefit from a Authority decision granting a transitional regime under Article 24 of Directive 96/92/EC; such a measure does not require a derogation from the relevant chapters of the Directive. It may, on the other hand, constitute State aid, which is covered by Article 61 of the EEA Agreement and Protocol 3 to the Agreement between the EFTA States on the establishment of a Surveillance Authority and a Court of Justice.

(4)

The purpose of these Guidelines is to show how the Authority intends to apply the EEA Agreement rules on State aid in the case of aid measures designed to compensate for the cost of commitments or guarantees that it might no longer be possible to honour on account of Decision 168/1999. In particular, the Guidelines do not apply to measures that could not be classified as State aid within the meaning of Article 61(1) of the EEA Agreement.

(1)

Such commitments or guarantees of operation are normally referred to as “stranded costs”. They may, in practice, take a variety of forms: long-term purchase contracts, investments undertaken with an implicit or explicit guarantee of sale, investments undertaken outside the scope of normal activity, etc. In order to rank as eligible stranded costs that could be recognized by the Authority, such commitments or guarantees must satisfy the following criteria:

(1)

The general principle laid down in Article 61(1) of the EEA Agreement is that State aid is prohibited. However, paragraphs 2 and 3 of that Article provide for a number of derogations from this general rule. Furthermore, in accordance with Article 59(2) of the EEA Agreement, “undertakings entrusted with the operation of services of general economic interest or having the character of a revenue-enhancing monopoly” are subject to the rules contained in the EEA Agreement, in particular the rules on competition, in so far as the application of those rules does not obstruct the performance, in law or in fact, of the particular tasks assigned to them. In any event, trade must not be affected to an extent contrary to the interests of the Contracting Parties.

(2)

The State aid corresponding to the eligible stranded costs defined in these Guidelines is designed to facilitate the transition for electricity undertakings to a competitive electricity market. The Authority may take a favourable view of such aid to the extent that the distortion of competition is counterbalanced by the contribution made by the aid to the attainment of a common objective that market forces could not achieve. Indeed, the distortion of competition that results from aid paid to facilitate the transition for electricity undertakings from a largely closed market to one that has been partially liberalized cannot be contrary to the common interest where it is limited in time and in its effects, since liberalization of the electricity market is in the general interest of the EEA market and supplements moves to establish the internal market. The Authority also takes the view that aid granted for stranded costs enables electricity undertakings to reduce the risks relating to their historic commitments or investments and may thus encourage them to maintain their investments in the long term. Finally, if there were no compensation for stranded costs, there would be a greater risk that the undertakings concerned might pass on the entire cost of their non-economical commitments or guarantees to their captive customers.

(3)

Aid to compensate for stranded costs in the electricity industry can be further justified in relation to other liberalized sectors by the fact that liberalization of the electricity market has not been accompanied by either faster technological progress or increased demand and by the fact that it is hardly conceivable, in the interests of environmental protection, security of supply and the smooth operation of the EEA countries’ economies, to wait until electricity undertakings encounter difficulties before considering whether to grant them state support.

(4)

In this context, the Authority takes the view that aid designed to offset stranded costs normally qualifies for the derogation under Article 61(3)(c) of the EEA Agreement if it facilitates the development of certain economic activities without adversely affecting trading conditions to an extent contrary to the common interest.

(5)

Without prejudice to the specific provisions resulting from the Authority’s guidelines on the application of the EEA State aid provisions, including the guidelines on State aid for environmental protection (6), the Authority may, in principle, accept as being compatible with Article 61(3)(c) of the EEA Agreement aid designed to offset eligible stranded costs which satisfied the following criteria:

(6)

However, the Authority entertains the most serious misgivings regarding aid intended to offset stranded costs which do not satisfy the above criteria or which are likely to give rise to distortions of competition contrary to the common interest for the following reasons:

(1)

EFTA States are free to choose the methods of financing aid intended to offset stranded costs which they consider to be the most appropriate. However, in order to authorize such aid, the Authority will make sure that the financing arrangements do not give rise to effects that conflict with the objectives of Directive 96/92/EC or with the interests of the Contracting Parties. The interests of the Contracting Parties take into account, among other things, consumer protection, free movement of goods and services, and competition.

(2)

The financing arrangements must not have the effect of deterring outside undertakings or new players from entering certain national or regional markets. In particular, aid intended to offset stranded costs cannot be financed out of levies on electricity in transit between EEA States or from levies linked to the distance between the producer and the consumer.

(3)

The Authority will also ensure that the arrangements for financing aid intended to offset stranded costs result in fair treatment for eligible and non-eligible consumers. To this end, the annual report referred to in point (c) in section 21.4. will give the breakdown by eligible and non-eligible consumers of the sources of finance intended to offset the stranded costs. Where non-eligible consumers participate in the financing of stranded costs directly through the tariff for the purchase of electricity, this must be clearly stated. The contribution imposed on either group (eligible or non-eligible) must not exceed the proportion of stranded costs to be offset that corresponds to the market share accounted for by those consumers.

(4)

Where funds are raised by private undertakings with a view to financing aid mechanisms designed to offset stranded costs, the management of those funds will have to be clearly separate from that of the normal resources of those undertakings. Such investments must not benefit the undertakings managing them.

(1)

In examining State aid intended to offset stranded costs, the Authority takes particular account of the size and level of interconnection of the network concerned and of the structure of the electricity industry. Aid for a small network with a low degree of interconnection with the rest of the EEA will be less likely to give rise to substantial distortions of competition.

(2)

This methodology for stranded costs is without prejudice to the application, in the regions covered by Article 61(3)(a) of the EEA Agreement, of the guidelines on national regional aid (7). Pursuant to Article 59(2) of the EEA Agreement, where application of the rules on State aid to stranded costs obstructs the performance, in law or in fact, of the particular tasks assigned to undertakings entrusted with the operation of services of general economic interest or having the character of a revenue-producing monopoly, those rules may be derogated from provided that trade is not affected to an extent contrary to the interests of the Contracting Parties.

(3)

The rules laid down in this methodology for State aid intended to offset stranded costs arising from Decision 168/1999 apply independently of the public or private ownership of the undertakings concerned.’