State aid issues for NGA networksGinny O’Flinn23 November 2010

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Introduction

This session will cover:

• State aid rules

• Situations where there will be no State aid:

• Market economy investor principle;

• Services of General Economic Interest (SGEIs).

• Commission Guidelines on the application of the State aid rules to the broadband sector (2009/C 235/04):

• Broadband networks generally

• NGA networks

• Recent UK-related NGA cases

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State aid rulesTreaty on the Functioning of the EU

• State aid rules in Articles 107 to 109 TFEU:

• Qualification as a State aid (Article 107(1)):• Granted out of State resources (e.g. subsidies, tax rebates, state guarantees);

• Confers an economic advantage on undertakings;

• Selective and distorts or threatens to distort competition;

• Affects intra-Community trade.

• Any State aid must be pre-notified (Article 108(3)).

• NO State aid where:• Market economy investor principle – State support through equity participation or

capital injection under normal market conditions;

• Service of General Economic Interest (SGEI) (Article 106(2)) and Altmark criteria are met:• (1) Beneficiary entrusted with the provision of the SGEI and has a clear mandate;

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State aid rulesTreaty on the functioning of the EU

• Altmark criteria continued…• (2) Compensation is determined on the basis of pre-determined and transparent criteria

and does not favour the recipient over others;

• (3) Compensation cannot exceed costs plus a reasonable profit;

• (4) Where no public procurement procedure is followed, compensation to be determined on an analysis of the costs which a typical, well run organisation would have incurred plus a reasonable profit.

• The SGEI broadband infrastructure must provide universal connectivity to all users in a given area, residential and business users alike.

• The SGEI provider of the broadband network must provide wholesale access services on a non-discriminatory basis including in areas where it is not commercially profitable to do so, but not retail communication services.

• The network must be technologically neutral and allow for all possible forms of network access and for effective competition at the retail level.

• Where network infrastructure is deployed in profitable and non-profitable areas, any SGEI compensation granted should only cover non-profitable areas.

• SGEI compensation should be granted through an open, transparent and non-discriminatory tender.

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Commission Guidelines Application of State aid rules to broadband networks (2009/C 235/04)• Broadband networks generally:

• European Commission recognises that well targeted State aid in the broadband sector can reduce the ‘digital divide’.

• However, potential to ‘crowd out market initiative’ and undermine investment incentives if State aid is misapplied.

• Primary objective is to ensure that State aid will result in a higher level of broadband coverage and penetration, or at a faster rate, than would occur without the aid, and to ensure that the positive effects of aid outweigh its negative effects in terms of distortion of competition.

“… it must be ensured that State aid does not crowd out market initiative in thebroadband sector. If State aid for broadband were to be used in areas where market operators would normally choose to invest or have already invested, this could affect investments already made… and might significantly undermine the incentives of market operators to invest in broadband in the first place.”

Commission Guidelines, para 5September 2009

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Commission Guidelines Application of State aid rules to broadband networks (2009/C 235/04)• NGA networks:

• Public intervention to support the ‘provision or acceleration’ of NGA networks must comply with State aid rules.

• Easing the acquisition process of rights of way, requiring operators to co-ordinate works and/or share infrastructure, and public authorities building ducts themselves would not involve State aid if applied across all sectors (e.g. to other utility operators and not just electronic communications operators generally or individually).

• Requiring that new buildings have a fibre connection in place would not constitute State aid.

“For public authorities, direct intervention may be warranted to ensure that areas which are deemed by network operators as being unprofitable will still benefit from the substantial spill-over effects that NGA networks may bring to the economy and will not suffer a new digital, ‘NGA divide’… Member States may wish to foster NGA network[s] in areas where investments by existing broadband network operators in such networks would take several years to arrive because they are financially less attractive than certain major urban zones.”

Commission Guidelines, para 57September 2009

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Commission Guidelines Application of State aid rules to broadband networks (2009/C 235/04)

• Compatibility of State aid for NGA networks will depend on existing infrastructure in a given location:

• White NGA areas:

• No pre-existing NGA network and none likely to be built by private investors and fully operational in the next 3 years.

• May be no basic broadband infrastructure (traditional white area), only one existing provider (traditional grey area) or several such providers (traditional black area).

• Grey NGA areas:

• One NGA network already in place or being deployed in the next 3 years, but no other NGA network likely to be built in those 3 years.

• May also be traditional white, grey or black areas.

• Black NGA areas:

• More than one NGA network in place or being deployed in the next 3 years.

• May also be traditional white, grey or black areas.

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Commission Guidelines Application of State aid rules to broadband networks (2009/C 235/04)

• Assessment of compatibility with State aid rules:

• Effect of aid for NGA network on existing broadband networks given current degree of substitution between basic and NGA;

• Balancing test: positive v negative effects

• Is State aid aimed at a well-defined objective?

• Is State aid an appropriate policy instrument to achieve the objective?

• Would the investment have been made within the same timeframe without State aid?

• Is the State aid proportionate – is it the minimum necessary to achieve the objective? (detailed evidence required)

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Commission Guidelines Application of State aid rules to broadband networks (2009/C 235/04)

• White NGA areas:

• If no pre-existing basic broadband infrastructure or operators consider it would be unprofitable to deploy NGA networks, then aid will be considered compatible;

• If one basic broadband network exists, then aid compatible if: (i) services provided are insufficient to satisfy needs of business/consumers in that area; and (ii) no less distortive means (e.g. ex ante regulation) would achieve stated goals;

• Grey NGA areas:

• Risk of crowding out existing investors and distorting competition, so more detailed assessment and evidence required than for white NGA areas.

• For aid to be compatible: (i) existing or planned NGA network must be insufficient to satisfy needs of business/consumers in that area; and (ii) no less distortive means would achieve stated goals.

• Black NGA areas:

• State support for an additional publicly-funded competing NGA network likely to seriously distort competition, therefore incompatible with State aid rules.

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Commission Guidelines Application of State aid rules to broadband networks (2009/C 235/04)

• Existing traditional black areas: • In white and grey NGA areas which are also traditional black areas, existing operators

should have the incentive to upgrade their basic networks to NGA networks, so no State intervention necessary unless existing operators do not plan to invest in NGA networks in the next 3 years.

• Any State aid would be subject to the same detailed assessment as for grey NGA areas.

• To limit distortions of competition, in all areas (with the exception of white NGA areas which are also traditional white areas), the following additional requirements must be met:

• Third parties must have effective wholesale access for at least 7 years (including rights to use ducts, cabinets, passive and active infrastructure) so they can migrate customers to the new subsidised NGA network without suffering any competitive handicap;

• NRAs should be consulted on and set or approve the wholesale access conditions;

• Subsidised network should support effective and full unbundling and satisfy all different types of network access sought by third party operators.

• Recent UK-related NGA cases

For more informationplease contact:

Ginny O’Flinn

+44 020 7067 3261ginny.o’flinn@olswang.com

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