This case concerned a reference for a preliminary ruling from an Italian Court in the context of a dispute between a number of gas undertakings and the Autorità per l’energia electtrica e il gas (the “AEEG”). The decision was given by the Grand Chamber of the Court of Justice of the European Union (the “Court”) on 20 April 2010.

The facts

The applicants in the case argued that as of 1 July 2007, the date of full liberalisation of the natural gas market, as provided for in Directive 2003/55 concerning common rules for the internal market in natural gas (the “Directive”), the price of natural gas should be determined solely by the competitive forces of supply and demand. Thus, they claimed that the “reference prices” set by the AEEG violated Union law. These reference prices were in fact binding on Italian gas undertakings and were set considerably below the competitive price.

The Courts decision

The Court began by considering article 23(1)(c) of the Directive which provides that customers must be free to buy natural gas from the supplier of their choice from 1 July 2007. The Court stated that it follows from this provision, and the stated aims of the Directive in its recitals, that the Directive was intended to bring about total liberalisation of the natural gas market in Member States. In particular the Court cited recital 23 to the Directive, which states that the Directive aims to provide customers with gas of a specified quality at “reasonable prices” This is further emphasised by article 3 which states that natural gas undertakings must be operated with a view to achieving a “competitive market in natural gas”.

However, the Court stated that this liberalisation must not affect the provision of high standards of public service, and in this context Member States are entitled to impose public services obligations if they feel it is warranted. So the Court held that, provided the conditions of article 3(2) of the Directive are met, State intervention in the setting the price of gas is permitted.

The conditions of state intervention

Intervention must be justified in the general economic interest

Having regard to the recitals of the Directive and article 106 TFEU (ex article 86 EC), the Court concluded that the Directive allows Member States to assess whether, in the general economic interest, it is necessary to impose on undertakings operating in the gas sector public service obligations in order, in particular, to ensure that the price of the supply of natural gas to final consumers is maintained at a reasonable level. In reaching this decision the Member State must balance the objective of liberalisation and that of the necessary protection of final consumers. In particular the Court cited the case of Albany, Case C-67/96 Albany [1999] ECR I-5751, where it was held that services of general economic interest (such as the natural gas undertakings) are only excused from the EU’s rules on competition insofar as the application of those rules would obstruct the performance of the service. If free competition would not obstruct the provision of the service, then it must be applied.

Compliance with the principle of proportionality

The Court stated that any obligations imposed in the general economic interest must be necessary to achieve this objective and must be limited in time. When assessing the limited duration of the reference price, the Court said that it was crucial to examine whether the national law imposing the reference price contained a mechanism for periodic re-examination of the price as the sector developed.

On the issue of whether the reference price is necessary to achieve the objective pursued in the general economic interest, the AEEG had argued that the reference price was necessary to limit the impact of increases in petroleum prices on the international markets. The Court held that, if this was accepted as a justification for the price, the requirement of proportionality would imply that the measure should be limited to the price component directly influenced upwards by these petroleum increases.

Finally the Court held that the principle of proportionality requires the reference price to be justified in its personal scope of application, ie there must be a justification for applying the same reference price to domestic consumers as to large industrial undertakings. The Court stated that, on the facts of the case, there did not seem to be any justification for treating individuals and undertakings identically, when there were objective differences between them, not least the fact that the aim of imposing reference prices was to protect individuals and not undertakings.

The public service obligation must be clearly defined, transparent, non-discriminatory and verifiable, and guarantee equal access for EU gas companies to consumers

On this condition, the Court stated that a reference price would in fact be discriminatory if, notwithstanding that it applied to all undertakings, in reality it only imposed the financial burden arising from the reference price on some of the undertakings.

Impact on Electricity Regulation

The Federutility case is significant not just in the gas sector, but also in the field of electricity regulation. This is because Directive 2003/54 concerning common rules for the internal market in electricity imposed the same obligation of liberalisation on the European electricity market as the Directive did for gas.

Thus when considering imposing a regulated price on the cost of electricity or gas in a Member State, the regulator must be conscious of the test laid down in Federutility. The regulated price may only be imposed where the conditions of free competition would obstruct the maintenance of a high standard of supply, and even then the conditions of State intervention listed above must be fulfilled.