France Moves Toward Ending All Regulated Tariffs for Natural Gas Sales

In Short

The Ruling: The Conseil d'État (France's Administrative Supreme Court) has ruled that the public service obligation to supply natural gas at regulated tariffs in France contravened EU law. In particular, it affirmed that no objective of general economic interest could justify the French legislation on regulated tariffs for the sale of natural gas.

The Result: This judgment lays the foundations for a fully competitive retail market for the supply of natural gas in France.

Looking Ahead: Following the Conseil d'État judgment, the French government must set an end date for regulated tariffs for the supply of natural gas in France. Households and small businesses, which are currently supplied at regulated tariffs, will therefore need to consider and compare market offers for the supply of natural gas. In addition, it is likely that regulated tariffs for the sale of electricity in France will attract scrutiny in the coming months and possibly also be terminated.

In July 2013, the Association nationale des opérateurs détaillants en énergie (National Association of Energy Retailers, or "ANODE") brought an action before the Conseil d'État. ANODE sought to invalidate the French Decree on regulated tariffs for the sale of natural gas in France (Decree N° 2013‑400). ANODE argued in particular that the legal basis of the Decree (Articles L. 445‑1 to L. 445‑4 French Energy Code) erroneously disregarded the objectives of the common rules for the EU internal market in natural gas, as set out in Directive 2009/73/EC of July 13, 2009.

As this case raised serious difficulties of interpretation, the Conseil d'État decided to stay the proceedings in December 2014, referring two questions to the Court of Justice of the European Union (CJEU) for a preliminary ruling (CJEU, 7 September 2016, Case C-121/15):

• Regarding the first question, in September 2016, the CJEU responded that State intervention in fixing the price of supply of natural gas to the final consumer is an obstacle to achieving a competitive natural gas market, even if such intervention does not prevent competing offers at prices lower than regulated tariffs. Indeed, only the incumbent suppliers (Engie and 22 local distribution companies) are allowed to sell natural gas at regulated tariffs.
• Concerning the second question, the CJEU ruled in line with previous case law that such State intervention may nonetheless fall within the framework of Directive 2009/73/EC, provided that the following three conditions are fulfilled: The State intervention must: (i) be a necessity in pursuing an objective of general economic interest; (ii) comply with the principle of proportionality; and (iii) lay down public service obligations that are clearly defined, transparent, nondiscriminatory, and verifiable, and that guarantee customers' equal access of EU gas undertakings.

No General Economic Interest Objective Can Justify Regulated Tariffs for Natural Gas Sales

On July 19, 2017, the Conseil d'État invalidated the Decree in its final judgment (CE, 19 July 2017, N° 370321), as the Decree derived from provisions of the French Energy Code that were incompatible with the objectives set out in Directive 2009/73/EC. According to settled case law, the principle of primacy of EU law requires national courts to annul administrative decisions that are contrary to EU law (even when deriving from national legislation).

Notably, the Conseil d'État annulled the Decree without conducting a proportionality test, emphasizing that the national legislation failed to pass the first step of the three-tier assessment set forth by the CJEU—the necessity test.

The Conseil d'État held that no objective of general economic interest could justify the extent to which the national legislation had hindered the achievement of a competitive natural gas market. In this respect, the Conseil d'État rejected all three of the claimed objectives of general economic interest submitted by the French State:

• Security of supply. First, the State maintained that the security of supply in France via long-term contracts with foreign producers was ensured by requiring incumbent suppliers to offer natural gas at regulated tariffs. While the Conseil d'État acknowledged that most incumbent supply resulted from long-term contracts, it pointed out that such arrangements did not arise from any legal or contractual obligations. No legislation or public service contract compels incumbents to supply natural gas via long-term contracts. Therefore, the objective of security of supply could not justify the legislation on regulated tariffs.
• Territorial cohesion. Second, the State argued that the Decree guaranteed territorial cohesion by providing harmonized prices for natural gas across the French territory. The Conseil d'État recognized that regulated tariffs allowed for an equalization (perequation) of transportation costs within each operating area. However, it found that natural gas was not a staple product (produit de première nécessité), given the availability of other substitute energy sources. Furthermore, the Conseil d'État observed that prices were harmonized only within each operating area, while significant price differences continued to exist among them. Thus, the Conseil d'État dismissed the objective of territorial cohesion.
• Reasonable supply price. Third, regarding the claimed objective of ensuring a reasonable supply price, the Conseil d'État stated that regulated tariffs acted to fully and permanently cover the incumbent suppliers' costs. In an obiter dictum, the Conseil d'État hinted that price stability for the end-consumer could be an acceptable justification in the context of wholesale price volatility. However, it found the challenged legislation unfit to achieve this objective of price stability. Indeed, in calculating regulated tariffs, the Decree did not require indexing supply costs on variables more stable than wholesale prices. Consequently, the Conseil d'État dismissed the claim that the objective of a reasonable supply price could justify the Decree.

Repercussions for Gas Consumers and Suppliers

In principle, annulments of administrative decisions have retroactive effect. As a result, the Conseil d'État judgment should have voided contracts entered into on the basis of the annulled Decree. However, the Conseil d'État recognized that the Decree had led to more than nine million consumers entering contracts at regulated tariffs. In light of the adverse effects of a retroactive annulment and resulting legal uncertainty, the Conseil d'État exceptionally held that the Decree's past effects would be irrevocable. In practice, this means that at present, contracts for the sale of natural gas at regulated tariffs remain valid.

The French government must now move forward in setting an end date for regulated tariffs for the supply of natural gas to households and small businesses. When this day comes, these customers must change their contracts—or the financial clauses thereof—and compare competing market offers. They will then enter new supply contracts, either with the incumbent suppliers or their competitors.

Whether the end of capped regulated tariffs for incumbents will lead to an increase in natural gas prices in France is unknown. While some French consumer associations and trade unions fear this, the fact is that natural gas prices are presently lower in countries without regulated tariffs, such as Germany, the United Kingdom, and Italy. Also, since 2015, market offers in France generally have been made at prices lower than regulated tariffs.

The End of Regulated Tariffs for the Sale of Electricity?

It would seem logical that the next move would be to end France's regulated tariffs for the sale of electricity to households and small businesses as well, particularly to address the newly arisen distortion of competition between the natural gas and electricity sectors.

However, unlike natural gas, electricity is a staple product under the French Energy Code. Thus, the Conseil d'État's views on the objective of territorial cohesion may not fully apply to the electricity sector. In fact, legislation on regulated tariffs for the sale of electricity could, perhaps more so than for natural gas, be found to provide for an equalization of transportation costs across the French territory.

Compliance with EU Law—One Step Beyond the European Commission's Requirements

Remarkably, the impetus behind the clear move toward the end of all regulated gas tariffs was the Conseil d'État itself, not the government under pressure from the European Commission. Until now, the French government had been the lead player in debating the issue of regulated energy tariffs with the Commission.

In April 2006, the Commission initiated infringement proceedings against France, along with other Member States, for its failure to correctly implement the "Second Energy Package" liberalization directives for electricity and natural gas (respectively, Directives 2003/54/EC and 2003/55/EC). It thought that regulated energy tariffs for non-household customers, as provided for in the French Energy Code, impeded new entries into the market and prevented the free choice of supplier.

To address the Commission's criticisms, France adopted legislation limiting eligibility to benefit from regulated electricity tariffs to only households and small businesses whose subscribed power was below 36 kVA (Law n° 2010-1488 of 7 December 2010 on the New Organisation of the Electricity Market). As a result, the Commission closed the infringement procedure pertaining to regulated electricity tariffs in January 2012.

Subsequently, in May 2012, the Commission issued a further reasoned opinion, considering France's regulated gas tariffs for all non-household customers, regardless of their size and situation, to be disproportionate and called on France to promptly comply with its legal obligations. In March 2014, France finally adopted legislation limiting eligibility to benefit from regulated gas tariffs to only households and small businesses consuming less than 30 MWh/year (Law n° 2014-344 of 17 March 2014), which prompted the Commission to close the infringement procedure pertaining to regulated gas tariffs a few months later.

The Conseil d'État judgment of July 19, 2017, therefore, clearly exceeds the requirements (and expectations) of the Commission itself, whose infringement proceedings against France had never dared to challenge regulated tariffs for the sale of energy to the smallest customers—households and small businesses.

The Conseil d'État judgment can be found on its website.

Three Key Takeaways

1. The Conseil d'État judgment is a decisive step in bringing French law into compliance with EU law for the achievement of a fully competitive natural gas market. Remarkably, it goes one step beyond the Commission's own requirements for France, by imposing the termination of regulated tariffs for the sale of natural gas to all customers (including households and small businesses).
2. The French government must now take into account the Conseil d'État judgment and set an end date for the validity of regulated tariffs for the supply of natural gas in France. Households and small businesses, which are currently supplied at regulated tariffs, will then face choosing among competing market offers for the supply of natural gas.
3. It is likely that regulated tariffs for the sale of electricity to households and small businesses in France will attract scrutiny in the coming months and possibly also be terminated.

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