EUROPEAN COMMISSION

Brussels, 04-IV-2007 C(2007) 1418 def.

PUBLIC VERSION

WORKING LANGUAGE

This document is made available for information purposes only.

Subject: State Aid – C 11/2007 [ex N 476/2006 (NN 14/2006)] – Misuse of rescue aid and compatibility of restructuring aid to Ottana –

Sir,

(1) The Commission wishes to inform Italy that, having examined the information supplied by your authorities on the aid referred to above, it has decided to initiate the procedure laid down in Article 88 (2) EC Treaty.

I. PROCEDURE

(2) On 23 February 2006, the Italian authorities notified the Commission a rescue aid to Ottana Energia Srl (Ottana) registered as case NN 14/06, which had been put into effect on 29 December 2005, i.e. before the notification.

(3) With notification of 14 July 2006, which was registered on 17 July under N 476/06, the Italian authorities notified the Commission additional information on the measure including a restructuring plan.

(4) With letter of 31 August 2006 the Commission requested from Italy additional information on the restructuring plan in case N 476/06, to which no answers where received within the given time line.

(5) On 6 December 2006, the Commission with decision C(2006)5829 (hereafter "the rescue decision") indicated that it had no objections against the rescue aid. The decision reads that "the Commission concludes that the aid fulfils the criteria to be considered compatible with the EC Treaty and so far raises no objections against the aid. The Commission can however not accept an extension of the rescue aid beyond the six months period in view of the presentation of a restructuring plan, as such plan does not justify an extension. The Commission therefore requests the Italian authorities to put an end to the (loan) guarantee for the benefit of Ottana within 15 days of the date of receipt of this letter."

(6) In a meeting of 18 December 2006 the Commission raised additional questions which however have not been answered by Italy so far. However, Italy provided its reply to the questions of 31 August 2006 by email of 20 December 2006. On 19 January 2007 the Commission was supplied with the minutes of an agreement of 9 January 2007 between Ottana and the Italian authorities concerning future restructuring of the company.

(7) With letter of 20 February 2007, the Italian authorities were requested to confirm the non-termination of the guarantee, which they had indicated in the meeting of 18 December 2007. The letter stressed that in such case the Commission would need to open proceedings under Article 88 (2) EC Treaty. With letter of 8 March 2007, Italy confirmed that the loan guarantee had not been terminated.

II. DETAILED DESCRIPTION OF THE AID

1. The beneficiary

(8) Ottana is a local utility company situated in the province of in . It is active in electricity generation and provides pressurised steam, water, nitrogen and compressed air. Ottana has a 2% share in the Sardinian electricity market.

(9) Ottana has about 115 employees and in rescue decision it was held that it can be considered SME1. Given that it has more than 50 employees it is however not a small enterprise.

(10) The power plant was constructed in 1970. In 2001 it was purchased by a subsidiary of an international energy company AES Inc. Despite a wide investment programme it underperformed because a major customer of Ottana, Montefibre Spa closed down in 2003. In 2005 Ottana was bought from AES through the acquisition of shares by the holding company SAE srl.

(11) Since 1970 no major modernisation has been carried out in the plant. The plant comprises essentially two identical boilers for the production of superheated high pressure steam and two turbo alternators for the production of electrical energy and of process steam at two different pressure levels.

(12) The company claims that the plant control system is in good condition but quite archaic requiring a rather large number of personnel for proper operation

1 In the light of Article 2 (1) in conjunction with Article 4 (3) of the Annex of Commission Recommendation of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises; OJ 2003 L 124, p.36.

2 and maintenance. It is also stated that various maintenance efforts have been deferred due to lack of funds.

(13) The power plant is currently fuelled by low sulphur fuel oil (referred to as BTZ) which constitutes up to 85% of the costs of the company. Therefore it is naturally exposed to changes in oil price and following the surge in oil price in 2005 and 2006 the company lost the ability to cover its costs. Since the site is relatively remote, the fuel is transported by road tanker.

(14) The Italian authorities claim that the liquidation of the company would seriously affect the operation of other undertakings located at the Ottana industrial site as it would stop supplying them with electricity and steam. Its bankruptcy might lead to a collapse of the whole Ottana industrial site. This would mean a loss of ca. 800 existing jobs within the site and ca. 200 jobs in co-operating companies.

2. The rescue aid

(15) The rescue measure provided for the granting of a guarantee for a loan by the Ministry for Economic Development amounts to € 5 million.2 The guarantee was supposed to be terminated 15 working days after notification of the rescue decision i.e. the latest on 8 January 2007.

3. The restructuring plan

(16) The restructuring plan of the company aims at keeping the current human resources and existing infrastructures. It identifies as a main reason for failure its dependence on fuel oil and the inability to pass on price increases in fuel oil via the electricity price. Indeed, the Sardinian Electricity reserve is made up of coal power plants which have lower costs. Therefore, Ottana aims at reducing direct costs, particularly those connected to fuel and related transport charges. The company prepared a conversion plan for the power plant.

(17) In fact, the Italian authorities provided the Commission with a perspective of the future development of the company which indicates three potential restructuring steps. Step one would be the re-powering of one boiler of the power plant to use of liquid coal ("carbone fluido") while the other continues to run on fuel oil. However, apparently this project has in the meantime been abandoned as no more funds are envisaged for this in the latest plan.

(18) Step two would be the conversion of the second generator from fuel oil to vegetable oil. In this way a reduction of the emissions is envisaged which can be utilised to acquire and sell "green certificates". This seems indispensable for the success of the plan so as to set off the higher prices of bio-fuels compared to fossil fuels, which can at least for the time being not be equalised by excise tax rebates as no authorisation to this respect has been obtained. The

2 For more details see decision C(2006)5829, published on the Commission's website at: http://ec.europa.eu/comm/competition/state_aid/register/ii/by_case_nr_nn2006_000.html#14.

3 technical restructuring envisages installing new equipment in the power plant to enable electricity generation from vegetable oil. Investment costs are estimated to be €49 million.

(19) Step three would be to use natural gas transmitted in the future via the so- called GALSI pipeline connecting Algeria with Italy via Sardinia (the completion of which is expected not before 2009). As the construction schedule has not been decided upon, this step is hypothetical and shall in any event only be implemented once implementation of step two proves to be not viable economically.

(20) Upon submission of its plan for approval to the Sardinia region and trade unions, the company had concluded an agreement with the region. It provides a commitment from the region to issue the necessary authorisations for "step two" as soon as possible.

(21) Moreover, the plan envisages also a reduction of fixed costs through employment restructuring aiming at a reduction of 45 jobs. It is envisaged to take advantage of an "early retirement" scheme. However no details are provided.

(22) The restructuring plan identifies a cash flow deficit after financing of € 44.6 million which shall by financed mainly by long term loans (€32 million), as well as by short term loans (€6 million) and equity (€6.6 million). The later shall apparently be financed by contributions of the majority shareholder and through the entrance of new shareholders. The financial structure will have a debt/equity ratio of 85/15. No further details have been indicated in the plan.

(23) Moreover, the plan indicates that the only aid to be provided should be a prolongation of a rescue loan of € 5 million which would be paid back over 12 years from cash flow generated by the new plan. No detail on any other support measures provided by the state was given. As mentioned above, the agreement with the region stipulates only that the region needs to issue the necessary permits.

(24) No information has been provided on the future development of the markets where the company will be active. Also the financial projections provided do not give a best/worse case scenario. They assume however that the company will record a profit after tax of around € 5 million as of 2008 (until 2020) whereby sales are envisaged to be around € 15 million on electricity and € 27.5 million on green certificates. No details have been provided how the sale of green certificates is projected other than that it is based on 176000 tonnes of CO2 emissions avoided per year.

(25) No information is provided on compensatory measures.

(26) It is not indicated that Italy has endorsed the restructuring plan of Ottana.

4 III. ASSESSMENT

1. Misuse of aid

(27) The assessment must be made on the basis of point 25 to 27 of the Community Guidelines on aid for rescue and restructuring of firms in difficulty3 (hereinafter “the Guidelines”) for the following reasons:

(28) According to the rescue decision the rescue period of six months laid down in point 25 (a) of the Guidelines for the rescue aid has expired. Although Italy did present a restructuring plan, which might have potentially been capable of prolonging the rescue aid in accordance with point 26 of the Guidelines, the Commission has ended the potential prolongation by the above mentioned rescue decision of 6 December 20064.

(29) Notwithstanding the rescue decision, Italy did not abide by it and did not terminate the guarantee although it should have been terminated 15 working days after notification of, i. e. the latest on 8 January 2007.

(30) Consequently the procedure under point 27 of the Guidelines has to be applied. Point 27 envisages the opening of a formal investigation as it states that the Commission "will initiate proceedings" if the rescue aid is not terminated in time.

2. Compatibility as restructuring aid

(31) In case of a misuse of aid, the Commission has also to assess the compatibility on all other possible grounds. Point 20 of the Guidelines limits the grounds to those stipulated under the rescue and restructuring guidelines. That would still leave the possibility of the rescue aid qualifying as restructuring aid.

(32) The Commission acknowledges in the rescue decision that Ottana is eligible for restructuring aid. That implies that the company is according to point 33 of the Guidelines, a company in difficulty. This is the case where the company "is unable, whether trough its own resources or with the funds it is able to obtain from its owner/shareholder or creditors, to stem losses which, without outside intervention by the public authorities, will almost certainly condemn it to go out of business in the short or medium term" (point 9 of the Guidelines). In view of the fact stated above in point (22) indicating that the company is apparently now able to obtain loans to finance its restructuring, the Commission wonders whether Ottana is still in difficulty in the sense of the Guidelines.

3 OJ C 244, 1.10.2004, p. 2.

4 In the rescue decision the Commission stated that the plan did hardly qualify as a restructuring plan as it lacks a detailed analysis of the markets, a detailed description of the restructuring costs, the sources of financing and the envisaged aid measures as well as sound financial data including different scenarios of future situation of the company

5 (33) Moreover, the Commission has doubts whether the restructuring plan is compatible with the Guidelines i.e. that it provides for the restoration of long term viability (point 34 to 37), for the state aid being limited to the minimum including a real and significant own contribution (point 43 to 45) as well as for the avoidance of undue distortions of competition (point 38 to 42).

(34) Above all, it remains unclear how the restructuring plan will enable the company to restore its long term viability, as the plan lacks a coherent strategy for the future. Instead of undertaking an economic analysis of the future markets and opportunities, the plan solely lists a set of alternative solutions, some of them which seem to put into question already the measures foreseen in the plan. Such a vague plan makes any assessment of the restoration of long term viability very difficult.

(35) Second, the plan does not identify precise internal measures which are apt to redirect the activities of the firm. It is for example not clear whether employment restructuring should take place. Although foreseen in the original plan, the agreement between the company and the Italian authorities of 9 January 2007 now seems to indicate that Ottana has in the meantime abandoned the employment restructuring. In fact, as long as the archaic plant control system is operated it seems indeed that it requires a rather large number of personnel. This illustrates on the other hand that improvement of the quality of the production can hardly be achieved without modernisation of the plant control system which is apparently not envisaged. At least no such details have been communicated to the Commission.

(36) Third, also no credible forecasts pointing at restoring viability have been provided. For example, no further details are provided to back up the expectation that the selling of green gas certificates for € 27.5 million in 2008 as reported in the plan is realistic. Moreover, it is also not clear how Ottana should return to profitability already in 2008. The Commission would expect a comprehensive best case/worst case scenario to underline these findings. Also, the financing structure of the project does not seem to be sustainable with a debt/equity ratio of 85 to 15.

(37) Finally, it is not clear whether Italy has endorsed the restructuring plan as laid down in point 59 of the Guidelines.

(38) In addition, the plan puts into question that the aid is limited to the strict minimum required. If the company, according to its own forecast, notwithstanding that they may be rather optimistic, is profitable in 2008, the Commission does not see why the guarantee is to be repaid over 12 years.

(39) Moreover, the Commission has doubts whether the beneficiary has provided a significant own contribution, if any. The plan and the explanations by Italy merely indicate that the company will contribute to the restructuring from its own funds, without specifying in detail how these own funds are generated. As regards a capital injection of the majority shareholder, no commitment to the time and amount of the contributions is indicated. The same is true for any contributions from new shareholders or other external financing. In other

6 words, the Commission would require more concrete information on any kind of external financing to the restructuring plan for its assessment of the own contribution in general and meeting the threshold indicated in point 44 of the Guidelines in particular.

(40) Also, the Commission does not see that the plan provides for adequate compensatory measures as envisaged in point 38 in conjunction with point 41 of the Guidelines, as no such measures are indicated in the plan.

(41) In sum, the Commission continues to have doubts that the restructuring plan is compatible with the Guidelines.5

3. Other grounds for compatibility

(42) Where a measure cannot be authorised in the light of the exceptions of Article 87(2) and Article 87(3) of the EC Treaty, it may still be compatible with the EC Treaty pursuant to Article 86 (2) EC Treaty in circumstances where it is necessary for the fulfilment of a service of general economic interest. Apparently Ottana has an essential function in providing steam to other companies situated at the Ottana site. However, the Commission does not have currently any information enabling it to assert that the criteria laid down in the Altmark jurisprudence are complied with.6

IV. CONCLUSION

(43) This decision shall be regarded as a decision to initiate the formal investigation procedure within the meaning of Article 88 (2) EC Treaty and Council Regulation (EC) No 659/1999. The Commission, acting under the procedure laid down in Article 88(2) of the EC Treaty, requests Italy to submit its comments and to provide all such information as may help to assess the aid, within one month of the date of receipt of this letter. In view of the insignificant answers to the Commission's previous information requests, the Commission would enjoin Italy to provide the following information:

For the restoration of ling term viability

(a) a detailed analysis of the potential markets,

(b) a clear decision for a restructuring strategy discussing the benefits and disadvantages of the envisaged solution,

(c) a more detailed description of the restructuring (are for example also the plant control systems renewed?),

5 In the rescue decision the Commission has already stated that the plan did hardly qualify as a restructuring plan (see above fn. 4).

6 Judgement of 24.07.2003, case C-280/00, Altmark trans Gmbh, Regierungsprasidium Magdeburg and Nahverkehrsgesellschaft Altmark Gmbh, ECR [2003] I-7747.

7 (d) confirmation that the GALSI gas pipeline will be constructed as well as information as to the timing of the construction,

(e) a more detailed description of the restructuring costs (the restructuring costs and the financing do not match),

(f) precise forecasts of energy production costs in case when step two will be implemented (calculations should specify state aid measures applicable in Italy for the alternative fuels),

(g) a more detailed explanation on the revenue generated from green certificates and in particular any evidence to support the assumptions made,

(h) sound financial data including different scenarios of future situation of the company so as to demonstrate the restoration of long term viability; failing in particular such sound forecasts including detailed information as to the calculation of the sales revenue (electricity and green certificate price indication) the Commission must assume that the plan does not enable the company to restore viability,

(i) clarification of the employment restructuring as well as of its financing,

For the state aid being limited to the minimum

(j) a clear and concrete indication of the sources of financing and of any envisaged aid measures; in the absence of such explanation the Commission cannot see that the beneficiary has provided a significant own contribution,

(k) an explanation why the prolongation of the rescue loan for 12 years is necessary and could not be repaid earlier in view of the envisaged profits; failing any such plausible explanation the Commission must assume that the restructuring aid goes beyond the minimum necessary,

For the avoidance of undue distortions of competition

(l) information as to the existence of compensatory measures,

For the existence of a service of general economic interest

(m) more information and evidence for the argument that Ottana provides a service of general economic interest in compliance with the existing case law; in the absence of such information the Commission must assume that this is indeed not the case.

(44) The Commission requests Italy to immediately forward a copy of this letter to Ottana Energia.

(45) The Commission wishes to remind Italy that Article 88(3) of the EC Treaty has suspensory effect, and would like to draw the attention to Article 14 of

8 Council Regulation (EC) No 659/1999, which provides that all unlawful aid may be recovered from the recipient.

(46) The Commission warns Italy that it will inform interested parties by publishing this letter and a meaningful summary of it in the Official Journal of the European Union. It will also inform interested parties in the EFTA countries, which are signatories to the EEA Agreement, by publication of a notice in the EEA Supplement to the Official Journal of the European Union and will inform the EFTA Surveillance Authority by sending a copy of this letter. All such interested parties will be invited to submit their comments within one month of the date of such publication.

If this letter contains confidential information which should not be published, please inform the Commission within fifteen working days of the date of receipt. If the Commission does not receive a reasoned request by that deadline, you will be deemed to agree to publication of the full text of this letter. Your request specifying the relevant information should be sent by registered letter or fax to:

European Commission Directorate-General for Competition State Aid Greffe B-1049 Brussels Fax No: +32-2-296.1242 Yours faithfully, For the Commission

Neelie Kroes Member of the Commission

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