privatisation came from the Water Framework Directive (WFD)
5
. The WFD does not in
itself obligate privatization
6
or liberalisation
7
of the water sector, as no economical
sanctions are attached to it. However, it can be used as an instrument of pressure leaning
towards privatisation and liberalisation if the water sector is carried out inefficiently from
the viewpoint of economic analysis.
8
The aforementioned economical analysis is
explicitly mentioned in the WFD, which comprise of (i) cost recovery principle under
Article 9 of the WFD, (ii) amount, price and costs of water services as well as investment
and future planning of water services in Attachment III, para. A, and (iii) data protection
for efficent measures of water processing and services in Attachment III para. B of the
WFD. Cost recovery principle can be used as an instrument to press for liberalization as
the elements of cost recovery (which consist of personal, material/energy, management,
administration, amortisation, interests, charges for ground and wastewater) are the
elements which is also used in competition law. If the incumbent company is proven to
be inefficent based on these analysis in comparison with other companies (the so called
“yardstick competition”), then privatisation or more effective means of delivery by
introducing competition could be sought.
9
Pressure for privatisation and liberalisation also came from the EC Treaty, both implicitly
and explicitly.
10
Article 82 of the EC Treaty calls for the end of monopoly structure and
in practice this article has been broadly interpreted. Many services has been found to
breach Article 82. Furthermore, the relationship between the state and competition law
5
Directive 2000/60/EC of the European Parliament and of the Council establishing a framework for the
Community action in the field of water policy, Preamble. Official Journal (OJ L 327) on 22 December 2000
6
Privatization is ‘the deliberate sale by a government of state-owned enterprises (SOEs) or assets to private
economic agents’ . See William L. Megginson and Jeffry M. Netter, ‘From State to Market: A Survey of
Empirical Studies on Privatisation’, 39/2 Journal of Economic Literature 1 (2001).
7
Liberalisation can be roughly described as the opening up of market to competition in order to create
efficiencies, done by breaking up the public sector and permitting new entrants.
8
Rehberg, Jo ̈rg. Wasserrahmenrichtlinie und Privatisierungsfolgenrecht Auswirkungen der
Wasserrahmenrichtlinie der EU vom 23.10.2000 auf das Privatisierungsfolgenrecht in der
Wasserwirtschaft. Aktuelle Beiträge zum o ̈ffentlichen Recht, Bd. 11. Herbolzheim: Centaurus-Verl, 2005.
p.45
9
Rehberg, Jörg.p. 47
10
Bohmann, Kirsten. Privatisierungsdruck des Europarechts. Jenaer Schriften zum Recht, Bd. 27.
Stuttgart: Richard Boorberg, 2001. p 157-158
2
under the EC Treaty, must be read with two provisos:
11
(i) Member States must not
legislate to create or protect agreements or give previleges in breach of Article 81 or 82,
as it is contrary to Article 10 of the Treaty and (ii) undertakings do not escape Article 81
or 82 just because of state actions affecting their market. This means, although the state
intervened by restricting competition, it is not an excuse for them under competition rule.
Only if the state action leaves no room for manouvre, and that they are compelled to
abuse competition rule, then it may provide them with sufficient defence before the
Commission. In addition to that, if Member States are not ready to take action in
dismantling monopoly structures, the Commission is obligated under Article 86(3) to
conduct investigation or bring the case to ECJ.
The EC Treaty also put heavy pressures for public undertakings
12
and undertaking
granted with special or exclusive rights.
13
Article 86 stresses that public undertaking must
adhere treaty rules
14
, not only competition but also other general internal market rule as
well, such as Article 31, 39, 43 and 49. Public undertaking
15
is normally enabled to
finance its operation through several mechanisms, such as (i) reserved market, which are
used to cross subsidy unprofitable sectors (ii) direct and indirect financial assistance, and
11
DG Goyder. EC Competition Law, 4th ed, Clarendon Press, Oxford 2003, p 475-479
12
‘any undertaking over which the public authorities may exercise directly or indirectly a dominant
influence by virtue of their ownership of it, their financial participation therein or the rules which govern it.
A dominant influence is to be presumed when the public authority holds the major part of the undertaking’s
subscribed capital, controls the majority of votes attached to the shares issued or can appoint more than half
of the members of the undertaking’s administrative, managerial or supervisory body’ Commission
Directive 80/723/EEC of 25 June 1980 on the transparency of financial relations between Member States
and public undertakings Official Journal L 195 , 29/07/1980 P. 0035 – 0037, Article 2. This definition is
acknowledged by the ECJ in the Transparency Directive Case, Cases 188-190/80, France, Italy and the
United Kingdom v. Commission [1982] ECR 2545.
13
Special right is defined in the telecommunication context as: ‘the rights granted by a Member State or a
public authority to one or more public or private bodies through any legal, regulatory or administrative
instrument reserving them the right to provide a service or undertake an activity’. See Council Directive
90/387/EEC of 28 June 1990 on the establishment of the internal market for telecommunications services
through the implementation of open network provision, Official Journal L 192 , 24/07/1990 P. 0001 –
0009. Special or exclusive right is not intself a violation of EC Treaty.
14
DG Goyder, p 483
15
State run corporation could be both non profit or for profit but they are different from ordinary company
which were set up under corporate law. State-run Corporation is oftentimes governed by a different act.If
they consisted of shares, their shares are not sold and loans have to be approved by the government. In
many cases the government is directly liable for their actions, although their assets may be separated from
the state budget.
3
(iii) budgetary policies.
16
However, reserved market is made difficult through article 82
and 86 of the EC Treaty, direct and indirect financial assistance must qualify very
restrictive assessment under Article 87 and budgetary policiy is strongly supervised due
to Article 101. As a result, public undertaking might be forced to change its form into
ordinary corporations under corporate law with the government probably holding the
majority of its shares, which means that they are practically privatised and will be
governed by private law.
Water and sewerage provision is conducted in most Member States through public
undertaking or undertaking granted with special or exclusive right. Due to the above
pressures, they will only have few means of exclusion from competition and general
treaty rules, namely through Article 30 and Article 86(2). Article 86(2) is then, the
primary defence mechanism for water and sewerage industry.
Article 86 (2) reads: “Undertakings entrusted with the operation of services of general
economic interest or having the character of a revenue-producing monopoly shall be
subject to the rules contained in this Treaty, in particular to the rules on competition, in so
far as the application of such rules does not obstruct the performance, in law or in fact, of
the particular tasks assigned to them. The development of trade must not be affected to
such an extent as would be contrary to the interests of the Community.”
Article 86 (2) is the exception toward the application of treaty rules. As an exception, it is
narrowly constructed and must be interpreted strictly.
17
However, it is worth to note that
Tony Prosser regards the exception contained in Article 86 (2) is broadly construed, in
terms that it applies not only towards undertaking, but also other state measures such as
the grant or maintenance of exclusive rights.
18
This paper will discuss the application of Article 86(2) to the water sector, by focusing on
the elements of Obstruction of Performance in a water undertaking. Ideally, when
discussing a network industry, there are generally 6 (six) steps that need to be discussed:
(i) to what extent is natural monopoly prevalent in the network and what type of
16
Bohmann, Kirsten. p 149-150
17
DG Goyder, p. 486-487.
18
Prosser, Tony. The Limits of Competition Law: Markets and Public Services. Oxford studies in European
law. Oxford: Oxford University Press, 2005., p. 133
4
competition could be introduced (in/for the market), (ii) the extent of unbundling, (iii)
definition of public or universal service obligation applicable to the sector, (iv) financing
of the USO/PSO, (v) network access rule, and (vi) cross border access.
19
However, not
all of those elements will be discussed. This paper will only address four questions,
namely (i) the specifities of the water sector, (ii) to what extent is competition viable in
this sector (iii) what are the criterion for “obstruction of performance” under Article
86(2) and (iv) how can obstruction of performance be argued in water sector. Article
86(3) and State Aid will not be discussed throughly.
This paper will be structured as follows. Part II will explain the water and sewerage
industry and its characteristics. Part III will elaborate the concept obstruction of
performance under Article 86 (2) and Part IV will discuss the interpretation method for
Article 86(2) and Part V will elaborate scenarios for obstruction of performance in the
water sector.
2. The characteristics of Water and Sewerage Industry
2.1. Economies of Scale: Natural Monopoly
Water is often perceived as a “natural monopoly”
20
. That is to say, this industry follows
the pattern of the economies of scale: more than one seller in the industry could mean a
higher price.
21
From this definition, it can be argued that when there is “natural
monopoly”, application of competition might even jeoperdize the service. There is
disagreement with respect to the range of the natural monopoly in water service. A study
suggested that the economy of scale is prevalent in large diameter of bulk transmission
mains, smaller diameter distribution or reticulaton network, bulk water collection, water
treatment and wastewater treatment operation. There are, however, individual cases
19
Pelkmans, J. Making EU Network Markets Competitive. Oxford Review of Economic Poliy, Vol 17
No.3, Oxford University Press, 2001 p. 243-456
20
Ephraim Clark and Gérard Mondello, “Regulating Natural Monopolies: The Case of Drinking Water in
France”. Journal of Contemporary Water Research and Education, Issue No. 121: January 2002, p. 72-78
21
Richard Posner. Natural Monopoly and Its Regulation. Cato Institute, Washington, DC, 2001
5
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