The financing regime for the social bond of electricity companies is discriminatory. This was determined by the Court of Justice of the EU in a judgment known this Thursday in response to two preliminary questions presented by the Supreme Court, in which it ruled that European legislation opposes that the cost of financing the social bond “is make it fall only to the companies that carry out the activities of production, distribution and commercialization of electrical energy, since this criterion, chosen by the national legislator to distinguish between the companies that must bear this cost and those that are totally exempted from doing so, leads to a difference of treatment between the different companies that operate in that market that is not justified in an objective way “.
The four large electricity companies (Endesa, Iberdrola, Naturgy and EDP Spain) and Repsol, which joined the group after the purchase of the gas and electricity marketer Viesgo, contributed around 93% of the financing for the electricity social bond in 2019.
The case arose in December 2014, when E.ON España, S. L. U. (E.ON, currently Viesgo Infraestructuras Energéticas, S. L.) filed a contentious-administrative appeal against the Supreme Court Royal Decree by which it develops the methodology for setting the distribution percentages of the amounts to be financed relative to the social bonus (discount that certain vulnerable consumers enjoy in the price of electricity).
In the proceeding, E.ON alleged the incompatibility of the social bond financing regime with the directive on common rules for the internal electricity market.
The Supreme Court upheld E.ON’s appeal and declared said financing scheme inapplicable because it understood that it was incompatible with the directive.
The General State Administration filed an appeal for protection against that judgment with the Constitutional Court. The Constitutional Court upheld the appeal and annulled the judgment of the Supreme Court, declaring that it had violated the right to a trial with all guarantees, enshrined in the Spanish Constitution, having ruled out the application of national regulations as it was considered incompatible with the directive on regulations. common rules for the internal electricity market without having previously sent a request for a preliminary ruling to the Court of Justice of the EU, an obligation from which it was not exempted.
In execution of that judgment, the Supreme Court forwarded the preliminary ruling to the Court of Justice of the EU, setting out in the form of questions the reasons that led it to declare that the Spanish regulations were incompatible with the European directives.
In other words, it asked “if the Spanish regulations by virtue of which the financing of the social bond is made fall on certain agents of the electricity system is compatible with European law – the parent companies of the groups of companies or, where appropriate, companies that simultaneously develop the activities of production, distribution and commercialization of electrical energy – when some of these subjects have very little specific weight in the sector as a whole, while other entities or business groups that may be in a better position to assume that cost are exempted, either because of their volume of business, or because of their relative importance in any of the activity sectors or because they carry out simultaneously and in an integrated way two of those activities “.
The Supreme Court also asked “if a national regulation is compatible with the requirement of proportionality of the European directive, from which it follows that the obligation to finance the social bond is not established on an exceptional basis, nor with a limited time scope, but indefinitely. and without return or any compensatory measure “.
In its ruling issued this Thursday, the Court of Justice of the EU in response to the first preliminary ruling of the Supreme Court, declares “that the European directive opposes the cost of financing the social bond, which constitutes a public service obligation , falls only on the parent companies of the groups of companies or, where appropriate, companies that simultaneously develop the activities of production, distribution and commercialization of electrical energy, since this criterion, chosen by the national legislator to distinguish between the companies that they must bear that cost and those that are totally exempted from doing so, leads to a difference in treatment between the different companies that operate in that market that is not objectively justified “.
According to the Luxembourg-based court, the European directive allows Member States to impose on electricity companies, in the general economic interest, public service obligations that can respond to various needs and that must meet various requirements.
The Court of Justice confirms that the obligation to pay a financial contribution to cover the cost of the social bonus is a public service obligation, within the meaning of the European directive: “This obligation consists of two inseparably linked elements: on the one hand, the discount in the price of electricity supplied to certain vulnerable consumers and, on the other hand, the financial contribution intended to cover the cost of this discount. Thus, the controversial mandatory financial contribution, as it is an integral part of the public service obligation relating to the social bonus, is included in the scope of the directive “.
According to the court ruling, “State intervention in setting the price of electricity can be admitted if, among other things, the requirement that the public service obligations established must not be discriminatory is met. Thus, the directive allows the imposition of general public service obligations ‘on electricity companies’ and not on specific companies. Therefore, the designation system for companies in charge of public service obligations cannot exclude a priori to any of the companies operating in the electricity sector. Consequently, any possible difference in treatment must be objectively justified. ”
The Court of Justice emphasizes that, “although the public service obligation related to the social bond has been imposed on all electricity companies that commercialize electricity in the Spanish market, the financial burden of this obligation, which is intended to cover the costs of the discount in the price of electricity provided for by the social bond, does not affect all these electricity companies, so the Supreme Court must verify whether the differentiation made between the companies that must bear the weight of said load and those that are exempt it is objectively justified. ”
Furthermore, the CJEU considers that “the differentiation criterion chosen by the national legislator is not objectively justified, since, in principle, in light of the objective of distributing the cost of the social bonus among the main business activities of the electricity sector, all companies that carry out at least one of these activities should help finance it. ” In particular, it considers that “it is not clear the difference between the companies that carry out the three activities of production, distribution and commercialization of electrical energy and those that carry out only the latter activity and one of the other two activities, with regard to their respective capacity to assume the aforementioned cost “.
The Court of Justice emphasizes that, “if, as indicated by the Spanish Government, the financing scheme of the social bond results in transferring more than 99% of the cost of said bond to the five most important operators in the Spanish electricity market, The criterion chosen by the legislator to distinguish between the companies that must assume, to a greater or lesser degree, this cost and those that are totally exempted from doing so leads to a difference in treatment between the different companies that operate in that market that is not justified objectively “.
Regarding the second preliminary ruling of the Supreme Court, on the time frame of the social bond, the Court of Justice of the EU declares that “the European directive does not oppose that the financing regime of the social bond is established without a time limit and without compensatory measure “, adding that” respect for the principle of proportionality cannot be interpreted in the sense that the Member States are obliged to periodically and frequently re-examine the financing scheme of a public service obligation “.
As regards the non-existence of compensatory measures, the Court of Justice emphasizes that European legislation “follows that Member States are not obliged to grant financial compensation when they decide to impose public service obligations. The same is necessarily the case for what with regard to the financing regime for these obligations, which, as has been seen, is part of these “.