The acquisition of Alumix by Alcoa was made conditional upon the provision by ENEL, the State-owned electricity supplier, of a preferential tariff for the supply of electricity to the two smelters.

Under the arrangement under consideration, the State set the tariff to be charged to Alcoa, and ENEL, the only supplier of electricity at the time in Italy, provided Alcoa with electricity at the prescribed tariff. The prices for both smelters were established for 10 years. For Sardinia, the tariff was set at ITL 36,3/kWh in 1996, to be gradually increased to reach ITL 39,6/kWh in 2005. For Veneto, the tariff was to reach ITL 39,9/kWh in 2005. Converted into euro, these prices range between EUR 18 and EUR 20/MWh.

In these circumstances, the Commission held that a large industrial client like Alcoa had substantial bargaining power with respect to ENEL, since the closure of the two smelters, which were among ENEL’s best customers in Italy, would entail even greater overcapacity and a worsening cost structure for ENEL. Therefore it was in ENEL’s economic interest to supply the smelters in Portovesme and Fusina with electricity at a particularly low price.

The Commission considered that a rational electricity supplier would be prepared to sell at a price that covered its average marginal cost of production, calculated on the basis of the actual fuel mix used by power plants in the regions concerned, plus a small contribution towards fixed costs. The price set for Alcoa was shown to comply with these criteria. As for the modest annual increases in the Alcoa price set for the following ten years, the Commission considered them justified by the prediction that ENEL’s marginal cost of production would decrease over the years, thanks to improvements in the fuel mix and generation technologies.

The Commission thus concluded that ENEL was behaving like a rational market operator in granting the tariff and the measure was according declared not to constitute State aid within the meaning of Article 87(1) of the EC Treaty.

According to Alcoa, the tariff is meant to address a market failure, namely the failure of the recently liberalised electricity market to deliver competitive prices due to the significant market power of incumbent operators. This market failure is said to be particularly evident in Sardinia. In such circumstances, there is alleged to be a need for regulatory action, including action in the form of tariff arrangements, to accompany the transition from a monopoly to full competition.

Alcoa’s legal analysis insists on the fact that the tariff does not constitute aid within the meaning of Article 87(1) of the EC Treaty, since the circumstances which justified the 1996 Alumix decision that no aid was involved are still valid. In particular, the tariff does not confer an advantage, its financing method does not involve a transfer of State resources and, considering the peculiarities of trade in primary aluminium, the tariff does not affect intra-community trade or distort competition.

Alcoa further claims that, even if the measure were to be classified as State aid, the Sardinian tariff would be compatible under regional aid rules.

Alcoa submits that the tariff addresses a market failure, that it does not constitute State aid, that in any event it would constitute existing rather than new aid and that its recovery is precluded by the principle of legitimate expectations.

Primary aluminium is a commodity, and its world reference price is established in the London Metal exchange. The two Italian smelters in Fusina and Portovesme produce approximately 200 000 tonnes. According to Alcoa, this limited output is incapable of affecting primary aluminium prices.

Two associations of aluminium producers submit that the tariffs are necessary to prevent the relocation of the industry outside the EU until long-term solutions can be found.

Italy asked the Commission to disregard the submission as irrelevant, since Case C 13/06 does not deal with the same subject matter: the measures investigated under case C 13/06 constitute new aid, whereas the Alcoa tariff is the prolongation of an existing measure. Moreover, the third party in question is not an aluminium producer and is not concerned by the measure in favour of Alcoa.

The Commission cannot accept Italy’s request. The fact that the Alcoa tariff has a historical background different from those of the other tariffs does not make the observations at issue irrelevant, insofar as they address relevant questions such as the State aid character of the Sardinian electricity tariffs, their contribution to regional development and their impact on competition. In addition, in the framework of an investigation pursuant to Article 88(2) of the EC Treaty a third party does not have to be affected directly and individually by the measure on which observations are submitted.

Italy points out that the electricity market in the EU is not yet fully competitive, as recognised by the Commission itself. Undertakings, in particular energy-intensive ones, are unable to procure electricity on comparable terms in the various Member States.

In Italy, despite the liberalisation of the sector, there are structural deficiencies (such as insufficient interconnection) which translate into high energy prices and a concentrated market structure which makes it difficult for eligible customers to select their electricity supplier. The problems are particularly acute in Sardinia, where only two suppliers exist. Therefore, Italy submits that a special tariff system reflecting demand profiles should be considered justified as a regulatory measure simulating the mechanisms that would be at play in a fully competitive market. This intervention allegedly restores the level playing field between energy-intensive undertakings operating in different Member States.

As regards Alcoa, Italy submits that the original Alumix tariff laid down in the 1995 Decree was declared by the Commission not to constitute State aid on the ground that it was objectively related to the smelter’s consumption patterns and reflected the specificities of energy supply and demand in the regions concerned.

According to Italy, the 2004 Decree is based on the same factual elements which led the Commission to conclude that there was no State aid, while also taking into account the current crisis in the metal sector in Sardinia. The difference between the old and the new system, in its view, only concerns the tariff structure. Italy maintains that these changes became necessary following the launch of the internal energy market and in order to guarantee tariff neutrality.

More particularly, Italy submits that the Alcoa tariff does not fall under the prohibition of Article 87(1) of the EC Treaty because it does not involve the transfer of State resources and is unable to distort competition and affect intra-community trade. The fact that the tariff arrangement did not constitute aid was the reason why Italy did not deem it necessary to notify the 2004 Decree. Italy argues that, at any rate, following the opening of the in-depth investigation, Italy ceased to apply the 2004 Decree in respect of Alcoa.

As regards the involvement of State resources, Italy maintains that the tariff system is entirely comparable with the arrangement which was declared by the Court not to involve State resources in the PreussenElektra case. The Equalisation Fund, as the technical accounting body for the system, cannot freely dispose of the financial resources it handles. The fact that the AEEG and the Ministry of Finance exercise a measure of control over the Equalisation Fund’s activities does not mean that the State is in a position to dispose freely of those resources.

As for the impact on intra-community trade, Italy’s line of reasoning is identical to Alcoa’s (see recitals 86 to 90).

According to Italy, the tariff applicable in Sardinia can in any event be considered compatible with the common market as regional aid, in view of the following. The imperfections of the market for electricity in Sardinia constitute a regional handicap, which the tariff seeks to alleviate. The tariff has positive repercussions on employment and the maintenance of the social and economic fabric of the island. It is proportionate to the disadvantages faced by the beneficiary, and is short-term and transitional.

Italy did not deem it necessary under the State aid rules to notify the extension of the tariff provided for by Article 11(11) of Law No 80/2005 on the ground that the measure still does not constitute State aid. Indeed Italy considers that the prolongation of a measure that is not State aid is different from the prolongation of an aid measure, in that only the latter can be viewed as new aid.

Like Alcoa, Italy also maintains that the Alumix decision was not limited in time. It says this was intentional and shows that the Commission itself acknowledged that the tariff would need to be a long-term measure. Italy substantiates this claim by referring to the paragraph in the Alumix decision in which the Commission declares that ‘the restructuring and the restoration of Alumix’s operations to viability ensures that the development of those areas is not short-lived but rather a long-term one’.

Italy maintains that the tariff does not entail an advantage, based on the same considerations developed by Alcoa and outlined in recitals 80 to 85, does not have an impact on trade (see recitals 86 to 90) or involve the transfer of State resources (see recital 115).

Italy also disputes the reference to average IPEX prices on the same grounds as those described above in recital 83.

Italy, moreover, submits that the economic underpinnings of the Alumix decision have remained unchanged over the years. Therefore, there was nothing new in the extension of the tariff and it cannot be taken to constitute new aid. It is also, in its view, incorrect to classify the measure as unlawful aid.

Italy contends that, in its assessment, the Commission should also take into account the conclusions of the first report of the High Level Group on Competitiveness, Energy and the Environment, which singled out two new factors which have constrained aluminium production in recent years, namely the globalisation of the reference market for aluminium and the launch of the internal market for energy.

In particular, the issue of the high cost of electricity for aluminium production in Sardinia and Veneto, acknowledged in the Alumix decision, has not been solved since 1996. The permanence of these issues justifies the prolongation of the tariff, which was, in any event, meant to be a long-term measure to favour industrial development. Italy points out that the other circumstances which the Commission took into account in the Alumix decision have also remained unchanged, notably the specific consumption patterns of aluminium smelters and the insufficient degree of liberalisation of the electricity market.

Italy contends that, pending the full liberalisation of the market, it is necessary to prolong the preferential electricity tariffs and any similar instruments introduced by other Member States in order to safeguard and enhance the competitiveness of European industry.

The only long-term solution to reduce the cost of electricity is, according to Italy, the construction of adequate infrastructure in electricity generation and interconnection, which will effectively open the market to new entrants. Italy points to the GALSI gas pipeline which will bring Algerian natural gas to Europe via Sardinia and the SAPEI marine cable system which will enhance interconnection with the Italian mainland. This infrastructure is currently in the construction phase. Therefore, Italy submits that the tariffs must remain in place until it has been completed.

Italy also emphasises that the present case cannot be compared to case C 34/02, which was cited in the opening decision in 2006 to suggest that the Commission had already found that a lack of electrical interconnection capacity did not constitute a regional handicap for Sardinia. According to Italy, the case cited concerned aid for SMEs, which are not large energy users and therefore are less liable to suffer from the lack of adequate energy infrastructure and the imperfection of the electricity market in Sardinia than undertakings like Alcoa.

Italy provides a detailed description of the measures adopted by other Member States, notably Germany, Spain, France, Finland and Greece, to reduce the electricity costs of energy-intensive industries and stave off their relocation outside the EU. Italy points out that, while such measures may take different forms, they produce the same economic effects as the Italian preferential tariff, and emphasises that it would be desirable for the EU to harmonise such measures, so as to create a level playing field between European industries and their competitors in third countries. However, in the short term, the measures adopted by Italy should not be viewed as aid and should be assessed by the same yardstick as those introduced by other Member States.

Given the temporal overlap between the Alumix scheme and the provisions attacked in 2004, it is necessary to clarify whether the 2004 opening decision challenged the extension in time of the Alcoa tariff beyond the original duration of the Alumix scheme (from 1 January 2006 onwards) or whether it also called into question the Alumix scheme itself over the period April 2004-December 2005 due to the changes in its financing mechanism.

A careful reading of the decision itself shows that it challenges, generically, the new tariff scheme introduced by the 2004 Decree in favour of the beneficiaries concerned (Portovesme Srl, ILA Spa, Euroallumina Spa and Alcoa), and cannot be interpreted as challenging the Alumix scheme itself. This conclusion is substantiated by the following observations.

Firstly, the assessment of the measure under challenge is global and does not distinguish between beneficiaries. In particular, Alcoa’s distinct legal position as beneficiary of the authorised Alumix tariff is neither described nor assessed in detail.

Thirdly, if the 2004 opening decision had intended to challenge the original Alumix scheme, it would have mentioned the legal basis under which the original tariff had been granted (the 1995 Decree) and would have provided some explanation as to why the tariff arrangement as modified by the new regulatory framework curtailed the validity of the Commission’s findings in Alumix before the date of expiry of the scheme.

Therefore, the Commission considers that, as far as Alcoa is concerned, the 2004 opening decision challenged the prolongation of the Alumix scheme after its expiry on 31 December 2005. The temporal scope of the 2004 investigation is therefore limited to the period starting on 1 January 2006.

However, at that date the 2004 Decree had been superseded de facto by Law No 80/2005, which took effect on 1 January 2006 (see recitals 48 and 142). Therefore, the 2004 Decree is, in substance, not relevant to the present investigation.

As regards the temporal scope of the 2006 investigation, the Commission notes that, in this case, there is no overlap between the Alumix scheme, which expired in December 2005, and the challenged prolongation of the tariff, which took effect on 1 January 2006 (see recital 48). This is borne out by paragraph 132 of the Court’s judgment.

As a preliminary remark, the Commission notes that, under the tariff arrangement laid down in Article 11(11) of Law No 80/2005, the State intervenes to maintain an electricity price which is substantially lower than that which Alcoa could obtain (and did obtain) in actual market conditions. If Alcoa had been able to obtain this price directly from one of the electricity suppliers in the regions concerned, there would have been no need for State intervention. Neither Italy nor Alcoa contests the proposition that, in the regions concerned, actual market prices are higher than the price actually paid by Alcoa thanks to the repayments made by the Equalisation Fund.

Further, if Alcoa’s proposal was followed, subsidies granted by Member States to fill the gap between a price freely negotiated between two market operators and the theoretical price at which agreement might have been arrived at in conditions of full competition would not constitute State aid. This would defeat the very purpose of State aid control.

Alcoa maintains, however, that this is the very method developed by the Commission in the Alumix case.

However, this method cannot be applied across-the-board and out of its original context, in a situation where prices are no longer set by a State-owned monopoly but are freely negotiated on the market, and the Alcoa price can no longer be construed as an ordinary business transaction, but is clearly a subsidised tariff. Following the developments described above in recitals 39 to 43, the scheme no longer constitutes a tariff in the strict sense, as it is no longer a price charged by Alcoa’s supplier ENEL, or a net price financed by ENEL, but a ‘final price’ resulting from the repayment from the Equalisation Fund and the price paid to Alcoa’s supplier. Therefore, the analysis developed in the Alumix decision, which examined ENEL’s behaviour, is manifestly devoid of any relevance whatsoever, as was borne out by the Court’s judgment, particularly in paragraph 132 thereof.

Since the Alumix criteria are irrelevant for the purpose of establishing whether the current tariff arrangement confers an advantage on Alcoa, the calculations provided by Italy and Alcoa which purport to demonstrate that the price still fulfils the Alumix criteria, in that it covers ENEL’s marginal production costs are equally irrelevant.

In any event, the Commission considers that the calculations provided by Italy and Alcoa do not accurately reflect the price that Alcoa would ‘normally’ pay on a perfectly competitive market, even assuming — which is denied — that the generator’s marginal production cost could be taken as an appropriate benchmark.

In Sardinia, where no gas is available, coal-fired plants are price-setting for 80 % of the year, whereas oil-fired plants are price-setting for the remaining 20 % of the year. Even using Alcoa’s very conservative estimates of marginal costs for coal (EUR 20/MWh) and oil (EUR 60/MWh) a time-weighted average would be in the region of EUR 28/MWh, which is higher than the EUR 26/MWh Alcoa is currently paying. Therefore, the Commission considers that, at least for Sardinia, the Alcoa tariff is below the marginal production costs of electricity generators, and that it would not, in any event, comply with the Alumix criteria, supposing — which is denied — that they were relevant.

Alcoa and Italy contend that the Commission is wrong in proposing to use average IPEX prices as a proxy for the market price that large industrial customers would normally pay in the regions concerned (see recital 83). This is, however, a misrepresentation of the reasoning of the 2006 opening decision. In that decision, the comparison between average IPEX prices was intended only to justify doubts as to the claim that electricity prices in Sardinia were substantially higher than in other Italian regions. The Commission suggested that differences in average IPEX prices between regions could be representative of differences in bilateral prices.

By contrast, the Commission never suggested that average IPEX prices could be a proxy for the market price Alcoa might have obtained. In the case at hand it is not necessary to resort to a proxy. Alcoa established a contract with ENEL at a nominal price roughly equivalent, according to available information, to the standard tariff charged by ENEL for high voltage consumption sites. This contract is the benchmark against which to assess and quantify the advantage enjoyed by the company.

Since preferential electricity tariffs in Italy are granted exclusively to Alcoa and a few other undertakings located in Sardinia, the advantage they confer is a selective one.

As described in recital 43 the tariff under challenge is financed by means of a parafiscal charge collected by the Equalisation Fund via the A4 component of the electricity tariff. This charge is obligatory, being imposed by means of decision of the AEEG implementing national legislation. The Equalisation Fund is a public body established by law, which carries out its functions on the basis of precise instructions laid down in the decisions of the AEEG.

In the PreussenElektra case, the Court considered that a purchase obligation imposed on private electricity supply undertakings to purchase electricity from renewable sources at minimum prices higher than the real economic value of that type of electricity did not constitute State aid because the measure did not involve any direct or indirect transfer of State resources. According to Italy and Alcoa, the present case is comparable to PreussenElektra in that the funds are also transferred from private entities (electricity consumers) to a private entity (Alcoa), with the State exercising no control over the resources in question.

The Commission recalls that, in PreussenElektra, the resources required to finance the measure were provided directly by the electricity suppliers to the producers of renewable energies without transiting through any public body. Within that system, the sums to be transferred could never be at the disposal of the Member State’s authorities. In the case at hand, however, the monies transit through a public body, the Equalisation Fund, before being channelled to the final beneficiary. Therefore, the PreussenElektra case-law addresses different factual circumstances and is not relevant to the present case.

The judgment in Pearle provides guidance of more direct relevance to this case. However, the Commission’s interpretation of it differs from that put forward by Italy and Alcoa. In Pearle, the Court found that, under certain specific conditions, the resources of a levy which transit through a public body do not constitute State resources. In Pearle, the measures were financed entirely by an economic sector at the sole initiative of that sector. The monies were collected via a parafiscal levy transiting through a public body which could not, at any time, dispose of the funds. In addition, there was a correspondence between the entities which paid the levy and those which received the benefits of the measure.

Italy and Alcoa consider that the key criterion in Pearle is whether the State has a right to dispose of the funds otherwise than in implementation of the statutory scheme. They contend that the Equalisation Fund does not have any discretion in the disbursement of the funds, which are earmarked for the financing of the tariffs and never come within ‘the perimeter of public finance’. Therefore, according to Italy and Alcoa, the State cannot freely dispose of the funds, which consequently do not constitute State resources.

Before examining the role played by the Equalisation Fund, the Commission has ascertained whether any of the other criteria enumerated in Pearle are met. It is clear that, unlike in Pearle, the Alcoa tariff was established at the initiative of the State, not at the initiative of an economic sector. Moreover, in Pearle the beneficiaries of the measure were also the sole contributors of the resources, so that the intervention of the public body did not tend to create an advantage which would constitute an additional burden for the State. In the case at hand, the beneficiary Alcoa does not bear the financial burden of the levy, which rests solely on electricity consumers. Therefore, the Pearle case-law cannot validly be relied upon irrespective of whether merit can be found in Alcoa’s and Italy’s argument concerning the role of the Equalisation Fund as a mere accounting intermediary.

However, the analysis cannot be limited to the powers of the Equalisation Fund in its quality as a public body. What should be ascertained is rather whether, more generally, the State, either directly or through any other body designated by it, can exercise control over the funds used to finance the tariff. The same test would have to be applied if the Equalisation Fund was a private body.

The similarities with the case at hand are evident. The surcharge on the electricity price used to finance the Alcoa tariff is imposed, as in Essent, by law. The Equalisation Fund plays the same role as SEP, as it centralises and manages the proceeds of the parafiscal charge, and is subject to the same constraints, as it cannot use the proceeds from the charge for purposes other than those provided by law (the financing of preferential tariffs). The State is capable of controlling and orienting the use of the resources at issue: the Equalisation Fund discharges its accounting functions on precise instructions from the AEEG, which acts within its statutory regulatory powers and/or in implementation of national legislation (see recitals 26 and 27 above). Therefore, the resources handled by the Equalisation Fund remain under public control at all times.

Italy’s Court of Cassation had already ruled (judgment No 11632/03 of 3 April 2003) that the legal personality of the Equalisation Fund was not separate from that of the Italian State, and that the monies transferred to the Equalisation Fund should be considered as State property, even if they derived from private entities and were intended for private undertakings. In the Iride case, the applicants Iride SpA and Iride Energia SpA brought an action in the Court of First Instance challenging a decision whereby the Commission had categorised as State resources the sums administered by the Equalisation Fund in the A6 account. The arguments put forward by the applicants were very similar to those of Alcoa. The applicants disputed the reasoning of the Court of Cassation’s ruling, contending that the role of the Equalisation Fund was merely that of an accounting intermediary between private citizens subject to a financial obligation and the beneficiaries of the sums concerned, a role which did not allow the Equalisation Fund to make use of the monies deposited even for a short period of time. The applicants likewise claimed the applicability of the PreussenElektra case-law.

That conclusion concerned the Equalisation Fund’s A6 account, used to finance the stranded costs of Italy’s electricity sector. It can, however, logically be extended to the A4 component, which finances the disputed tariff. The judgment of the Court of Cassation was based on an analysis of the legal personality of the Equalisation Fund, and its finding with respect to State property therefore applies to all of the monies deposited with the Equalisation Fund. The same is true of the finding by the Court of First Instance that the State can control the resources administered by the Equalisation Fund. There is no difference between the A6 account and the A4 component other than the purpose of the resources collected (covering stranded costs in the case of the A6 account and financing preferential tariffs in the case of the A4 component). The sums transferred to Alcoa from the A4 component must also therefore be categorised as State resources.

Consequently, the Commission is required only to demonstrate the possible negative impact of the measure on intra-Community trade and competition.

The Commission has considered Alcoa’s and Italy’s argument that the tariff does not have an impact on trade and does not distort competition, since there are no actual trade flows between Member States, it is unlikely that such trade flows will develop in the foreseeable future (see recitals 86 to 88), and due to the peculiarities of the aluminium sector the tariff does not harm Alcoa’s European competitors (see recital 89).

Moreover, the pattern of decreasing EU production and increasing imports from third countries, with limited or no trade flows between Member States, is not unusual: it is fact typical of sectors which are experiencing structural difficulties and/or are subject to high competitive pressure. Such sectors are particularly sensitive to measures taken by Member States to improve the competitive position of their domestic industries.

The fact that the modest production of primary aluminium in Italy may be unable to affect the reference price is irrelevant. The existence of a reference price for aluminium which is not easily influenced by conditions of production in a single Member State does not rule out the existence of keen competition between undertakings based in the EEA and selling on the worldwide aluminium market. It is conceivable that aid to Alcoa’s Italian smelters does not enable Alcoa to reduce the world price for aluminium and squeeze competitors out of the market, and that other European producers may remain in business as long as they can sell profitably at the world price. However, the profits obtained by Alcoa in Italy thanks to the subsidised electricity tariff strengthen the company’s competitive position in a general sense. For example, accumulated capital reserves can be used to take over competitors and increase market share.

Alcoa’s recent decision to build a smelter in Iceland (which is an EEA country) seems to contradict directly Alcoa’s argument that capacity shut down in Italy would not be replaced elsewhere in the EU/EEA.

In the light of the above, the Commission has come to the conclusion that the preferential tariff granted to Alcoa on the basis of Article 11(11) of Law No 80/2005 and of the 2004 Decree (insofar as the same measure may have resulted from the application of the 2004 Decree over the period January 2006-June 2007) constitutes State aid within the meaning of Article 87(1) of the EC Treaty and can be authorised only if it qualifies for one of the derogations laid down in the Treaty.

The Alumix decision was based on the Decree of 19 December 1995, which established the tariff for a period of 10 years. It explicitly stipulated that the tariff would be abolished after 31 December 2005. In the Alumix case, the Commission carried out a complex assessment of prices and trends in the electricity sector over 10 years, as shown in the tables which form an integral part of the decision and set the Alcoa tariff until 2005 only. Such prices and trends are in the nature of things subject to change, and the Commission could not stated that there would be no State aid indefinitely, especially in view of the progressive liberalisation of the energy markets.

Italy’s claim that the Alumix decision was intentionally unlimited in time in recognition of the need for a long-term measure (see recital 119) must also be dismissed. The paragraph in the Alumix decision relied upon by Italy (‘the restructuring and the restoration of Alumix’s operations to viability ensures that the development of those areas is not short-lived but rather a long-term one’) does not refer to the tariffs which were found not to constitute aid, but to other restructuring aid measures for Alumix. Moreover, the paragraph in question merely states that the continued presence of Alumix will contribute to the long-term development of the areas, and cannot be construed in the way suggested by Italy.

The Commission has examined Alcoa’s argument that there never was a ‘change in circumstances’ that might have put an end to the effectiveness of the Alumix decision, since neither the liberalisation of the market nor the role entrusted to the Equalisation Fund affected the price paid by Alcoa. That price remained in line with the Alumix criteria, so that the Commission’s finding that there was no aid remains fully valid (see recital 93).

An examination of the facts shows, however, that the tariff arrangement which the Commission had cleared in Alumix underwent a fundamental change, which Alcoa tries to dismiss as a mere administrative detail, that is, the shift from a tariff granted by an electricity supplier on market terms to one that remains so in name only and is subsidised by the State.

It is difficult to view this change as being of a ‘purely formal nature’ and ‘not altering the substance of the approved tariffs’, since the new financing mechanism altered the very economic conditions on which the Alumix decision was based.

It will suffice to recall that, in Alumix, the focus of the assessment was the behaviour of the electricity supplier, ENEL. The preferential price did not provide an advantage to Alcoa because the Commission considered, on the basis of the market economy operator test, that it was rational for ENEL to sell electricity at the price in question. However, the market economy operator test becomes meaningless in a situation where the tariff is no longer willingly offered by ENEL (which receives the ordinary price) but is the result of a compensation payment made by the State. In the new arrangement the conduct of the electricity supplier is no longer an issue.

Moreover, the introduction on 1 January 2006 of an indexation mechanism with a 4 % cap in the yearly increase of the Alcoa price (see recital 49) constitutes an additional substantive alteration of the original tariff arrangement, and one that can hardly be taken as in conformity with the market, considering that as of 2005 onwards electricity prices on wholesale markets were constantly increasing.

For similar reasons, the Belgian Coordination Centres judgment, relied upon by Alcoa, is not a valid basis on which to request the application of the same procedural safeguards that would apply to existing aid. That judgment refers to cases in which the Commission changes its appraisal of a scheme which had previously been found not to constitute aid. In paragraph 77, the Court established the principle that, in such cases, the Commission must follow the procedure for the monitoring of existing aid. However, this principle can apply only if the regime has not been materially altered. In the present case, the Alcoa tariff arrangement has been materially altered by the Member State, as shown in recitals 205 to 208. Therefore, in the present instance, the Commission is not departing from its previous assessment of the same measure, but is rather assessing a new and different measure.

In the light of the above, the Commission considers that the prolongation of the Alcoa tariff at issue constitutes new aid as from 1 January 2006, the date when Law No 80/2005 took effect.

According to point 4.15 of the guidelines, operating aid can be granted exceptionally, provided that (i) it is justified in terms of its contribution to regional development and its nature and (ii) its level is proportional to the handicaps it seeks to alleviate. It is for the Member State to demonstrate the existence of any handicaps and gauge their importance. In line with point 4.17 of the guidelines, operating aid must be both limited in time and progressively reduced.

Italy submits (see recital 125) that the persistent problem of high electricity costs for aluminium production in Sardinia and Veneto, acknowledged in the Alumix decision, justifies the prolongation of the tariff.

The Alumix decision did not approve the tariff for the period 1996-2005 as regional aid, but found that it did not constitute aid. It cannot be argued, therefore, that in Alumix, the Commission acknowledged that the grant of operating aid was justified on the basis of regional considerations.

According to Article 2 of the guidelines, ‘an individual ad hoc payment made to a single firm, or aid confined to one area of activity, may have a major impact on competition in the relevant market, and its effects on regional development are likely to be too limited … Consequently, the derogations in question [from the general prohibition of aid] will normally be granted only for multisectoral aid schemes open, in a given region, to all firms in the sectors concerned’. An electricity tariff which is granted selectively to a few individual undertakings in the metal sector is manifestly not in line with the spirit of regional aid, which is meant to be multisectoral. However, since there is no absolute prohibition on ad hoc aid, the Commission has considered whether there are exceptional circumstances that would warrant the granting of the tariff.

The Commission has considered, in particular, the deficiencies of the Sardinian electricity market, as documented by Italy and Alcoa.

It has been argued by Italy and Alcoa that the Alcoa tariff serves the purpose of remedying the shortcomings of the electricity markets, which have not yet delivered competitive prices. High energy prices are said to threaten the competitiveness of energy-intensive industries, including the production of primary aluminium. It is claimed that the aid will prevent the relocation of the company outside Europe. The aid is said to have an incentive effect, since, in the contrary scenario, in the absence of aid, the company would close down its smelters in Sardinia and Veneto.

The following general observations can be made with regard to such statements. The imperfect functioning of electricity markets cannot be considered, stricto sensu, a market failure: that concept refers to the incapacity of a competitive market alone to deliver a socially optimal result, whereas the problem here is that the markets concerned are not sufficiently competitive. The solution can lie only in more – and not less – competition, through the creation of a genuinely integrated energy market. Electricity tariffs set by the State generally have the opposite effect, i.e. they create foreclosure and barriers to new entry, thus hindering market integration. Therefore, the Commission considers that operating aid in the form of artificially low electricity tariffs is not the appropriate instrument to remedy the imperfections of electricity markets.

In the current situation of low aluminium prices on world markets (caused by the drop in world demand prompted by the economic crisis), Alcoa’s Italian smelters may not be profitable or may operate at a loss in the absence of the tariff. Their closure cannot be ruled out, even if other factors may influence such a decision, including, for example, the social and environmental costs arising from closure, or the costs and timeframe for installing the new capacity potentially required to avoid losing market share.

The 2007 letter stipulated that an appropriate VPP should enable around 25 % of Sardinian electricity demand to be covered by the virtual generating capacity of third party suppliers for a period of at least five years. The letter further suggested that the Directorate-General for Competition should rapidly start to work together with the Italian authorities in order to determine the practicalities of the VPP.

With considerable delay, on 9 July 2009, Italy adopted the legislative provisions necessary to grant the AEEG the power to establish such a mechanism. On 17 August 2009, the AEEG adopted Decision ARG/elt 115/09 laying down the provisions for implementing the VPP. The practicalities of the VPP are in line with the criteria established in the 2007 letter. The tariff is to be abolished three months after the launch of the VPP and by 31 December 2009 at the latest.

In the light of the above, the Commission considers that the tariff applied to Alcoa’s smelters in Veneto and Sardinia cannot benefit from any of the derogations laid down in Article 87 of the EC Treaty. The derogations in Article 87(2) are not applicable, since the aid is not of a social character, is not designed to make good the damage caused by natural disasters or exceptional occurrences and was not granted to compensate for the economic disadvantages caused by the division of Germany. The derogations in Article 87(3)(b) and (d) are also inapplicable, since the measure is not aimed at promoting the execution of an important project of common European interest or remedying a serious disturbance in the economy of a Member State nor at promoting culture and heritage conservation. As for the derogation in Article 87(3)(a), the analysis carried out above in recitals 220 to 240 demonstrates that the tariff cannot be approved as aid aimed at promoting the economic development of an area where the standard of living is abnormally low or where there is serious unemployment. With respect to Article 87(3)(c), the analysis shows that the tariff, even coupled with a VPP, cannot be considered compatible on the basis of that derogation (see in particular recitals 216, 217, 241 to 245 and 253 to 259).

Therefore the extension of the preferential tariff in favour of Alcoa introduced by Article 11(11) of Law No 80/2005 and by the 2004 Decree (insofar as the same measure may have resulted from the application of said Decree over the January 2006-July 2007 period) should be declared incompatible with the common market.

The purpose of recovery is to restore the competitive situation of the beneficiary prevailing before the grant of the incompatible aid. In order to quantify the amounts to be recovered, it is therefore necessary to establish the price Alcoa would have paid on the market for its electricity supplies if the tariff had not been prolonged.

For the sake of completeness, the Commission has examined – and rejected – the argument that, in the absence of the State subsidy, Alcoa would have negotiated a better price with the utility, and that therefore recovery should be based on a different, supposedly more realistic benchmark.

Therefore, after the Commission opened formal investigation proceedings into the tariff in 2004 and 2006 and Alcoa was required to provide a parent company guarantee to cover the risk of recovery, the company had a clear incentive to negotiate the best possible terms of supply with ENEL. There are, therefore, no indications that the contractual price freely negotiated between Alcoa and ENEL misrepresents the market price Alcoa would have paid in the absence of the aid.