EUROPEAN COMMISSION. State aid No C24/2004 (ex NN 35/2004) Sweden Introduction of digital terrestrial television

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1 EUROPEAN COMMISSION Brussels, 14 July 2004 C (2004) 2671 fin In the published version of this decision, some information has been omitted, pursuant to articles 24 and 25 of Council Regulation (EC) No 659/1999 of 22 March 1999 laying down detailed rules for the application of Article 93 of the EC Treaty, concerning non-disclosure of information covered by professional secrecy. The omissions are shown thus [ ]. PUBLIC VERSION WORKING LANGUAGE This document is made available for information purposes only. Subject: State aid No C24/2004 (ex NN 35/2004) Sweden Introduction of digital terrestrial television Sir, The Commission wishes to inform Sweden that, having examined the information supplied by your authorities on the measures referred to above, it has decided to initiate the procedure laid down in Article 88(2) of the EC Treaty. 1. THE PROCEDURE 1. By letter dated 9 August 2001 a Swedish satellite operator Nordic Satellite AB (hereinafter referred to as NSAB) submitted a complaint concerning the establishment of the digital terrestrial network (DVB-T) for television transmission in Sweden 1. By letter dated 28 November 2001 a commercial satellite operator Viasat AB (hereinafter referred to as Viasat) also submitted a complaint to the European Commission concerning the same matter. By letter dated 12 April 2002 NSAB submitted additional information. A meeting with representatives of NSAB took place on 30 April The Commission services sent the first request for information to the authorities by letter dated 22 April 2002, to which the authorities replied by letter dated 10 June Two enclosures to this first reply from the authorities were provided later, in a letter dated 16 July The Commission services sent an additional 1 DVB-T stands for digital video broadcasting over a terrestrial network. Other forms of digital video broadcasting are DVB-S (Satellite) or DVB-C (Cable). In the near future, digital video broadcasting over a handheld (DVB-H), UMTS or ADSL may also become broadly available. Statradet Laila Freivalds Chef för Utrikesdepartementet Arvfurstens palats Gustav Adolfs torg 1 SE Stockholm Commission européenne, B-1049 Bruxelles / Europese Commissie, B-1049 Brussel - Belgien. Telefon: (32-2)

2 request for information to the authorities by letter dated 26 July The authorities replied by letter dated 24 September. 3. By letter dated 19 September 2002 NSAB sent a notice stating that the Commission had failed to act while referring to Article 232 of the EC Treaty. The Commission services informed NSAB by letter dated 21 October 2002 that it had diligently dealt with the case. No action for failure to act has subsequently been lodged. 4. By letter dated 2 October 2002 NSAB submitted additional comments on behalf of NSAB. 5. By letter dated 24 March 2003, the authorities informed the Commission of a proposal by the government to the parliament of a capital injection to Teracom AB. 6. On 10 April 2003 the Commission services issued a reminder of the request for information of 26 June 2002 pursuant to Article 10.2 of Council regulation 659/1999/EC since the authorities had not fully answered the Commission s request. The authorities replied by letter dated 5 June On 14 January 2004 the Commission received additional information from NSAB. The Commission met on 26 January 2004 with NSAB in order to clarify the information provided on 14 January NSAB sent further information on 28 January, 3 February and 5 May In the meantime, the Commission had asked further information to the authorities on 9 February The authorities responded on 2 March DETAILED DESCRIPTION OF THE MEASURE/AID 2.1. The undertakings and the governmental bodies concerned (1) Sveriges Television AB (hereinafter referred to as SVT) is a national public broadcaster with public service obligations. SVT is obliged under its broadcasting license to transmit on Teracom AB s analogue terrestrial network for television transmission (hereinafter referred to as ATT) and digital terrestrial network (hereinafter referred to as DVB-T) for television transmission. (2) Sveriges Utbildningsradio AB (hereinafter referred to as UR) is a national public broadcaster with public service obligations. UR has a special responsibility for educational programs. UR is a separate entity from SVT, but has a right to use a certain part of SVT s transmission capacity, transmits over the same channels and is subject to a similar regulatory regime. (3) Rundradiotjänst i Kiruna AB (hereinafter referred to as Rikab) is entrusted by the Parliament with the task of collecting TV licence fees from consumers nationwide and verifying payments of them. The company is owned by SVT, UR and Sveriges Radio (SR) which are

3 companies with public service obligations in Sweden. The TV charges are used to finance the public service. (4) Swedish National Debt Office ( Riksgäldskontoret ) (hereinafter referred to as SNDO) is the treasury of the Government, with a mandate to manage debt, provide cash management and issue guarantees. SNDO provides loans to back up the deficit incurred by SVT and UR for double transmission costs for the period that the broadcasters are obliged to transmit via both analogue terrestrial television (ATT) and DVB-T. (5) Teracom AB (hereinafter referred to as Teracom) is a telecommunications operator which is wholly owned by the State. It owns and operates the only ATT and DVB-T networks in Sweden. (6) Senda i Sverige AB (hereinafter referred to as Senda) Senda is jointly owned by Teracom (90%) and SVT (10%). Boxer TV-Access AB (hereinafter referred to as Boxer) is jointly owned by Teracom (70%) and Skandia (30%) 1. In 2002 Senda and Boxer merged. The undertaking is responsible for the marketing of set-top boxes needed to receive digital transmissions, it provides multiplexing, Conditional Access services (hereinafter referred to as CA) and the Electronic Programme Guide (hereinafter referred to as EPG). The company also offers customers administration and markets DVB-T and its programme packages to consumers. It furthermore administers the CA and a common EPG and it is the exclusive provider of such services in DVB-T. Finally, it performs customer administration (authorisation and de-authorisation of smart cards). It has subcontracted certain activities to Rikab, including customer support, management of customer database and billing procedures. (7) NSAB is for 75 % owned by SES Global and 25 % by Swedish Space Corporation. Swedish Space Corporation is a limited company wholly owned by the State, involved in space system activities including satellite activities. SES Global is a private operator involved in global satellite communications. Viasat is wholly owned by the Swedish private media conglomerate Modern Times Group. Viasat is a digital communications company specializing in satellite and other wireless networking technologies. Viasat designs, builds and supports satellite and other digital networking products The measures in detail Introduction 9. In the spring of 1997, the Parliament decided that digital terrestrial television should be introduced in Sweden 2. Initially, transmission would be introduced in a limited number of locations around the country. In November 1997, the Government decided to form a Digital-TV committee responsible for following 1 Skandia is an international savings, life and capital insurance group. The company was founded in 1855 and operates in more than 20 countries. 2 Prop. 1996/97:67.

4 and assessing the terrestrial TV transmissions during the first phase. The committee would also collaborate on the selection of programming companies for digital TV broadcasts. In the autumn of 2000, Parliament decided that digital terrestrial TV should be expanded to cover the entire country The actual deployment of digital terrestrial television is carried out by Teracom. As said before, Teracom is responsible for the exploitation of both the analogue and the new DVB-T network. In addition, Teracom s subsidiary Boxer/Senda provides ancillary services for digital television 4. It also sells the necessary settop-boxes (STB) which convert the analogue signal into a digital signal for today s television sets. 11. As explained further in more detail, Teracom offers distribution services to SVT, private broadcasters and other operators. Teracom charges a fee to the broadcasters who use Teracom s services. SVT s use of Teracom s services is regulated by law and licence. In addition, Teracom and SVT have concluded a contract specifying conditions of the service to be provided by Teracom. 12. The regulation of UR s transmission obligations is very similar to the regulation of SVT s transmission obligations. The activities of UR are regulated by the Act on radio and television. In addition, the structure of UR s licences is similar to the SVT instruments. Hence, reference will be made to UR 2001, UR Digital and UR Appropriations. Further, the contents of UR 2001, UR Digital and UR Appropriations are generally similar to the corresponding SVT instruments. One difference is that UR does not have its own channels, but transmits over SVT s channels. Given the limited importance of the compensation granted to UR, in the following paragraphs, the compensation for SVT and UR will be dealt with together and referred to as compensation to SVT. 13. It is the relation between SVT and Teracom, as well as the direct (financial) relation between the State and Teracom which are subject of this formal investigation procedure SVT s transmission obligations 14. The activities of SVT are regulated by a set of regulations. First of all, there are the conditions for obtaining funding ( Anslagsvillkor ) which hereinafter are referred to as SVT Appropriations. Sec. 8 of SVT Appropriations states that SVT s transmission directed towards recipients in Sweden shall be offered free of charge, provided the compulsory licence fee (see below) has been paid. In addition, SVT s operations are regulated by the Act on radio and television ( Radio- och TV-lagen ). It stipulates that a broadcaster in Sweden needs a broadcasting licence ( Sändningstillstånd ) to transmit television programs by means of a terrestrial network The broadcasting licence consists of two parts one part that covers general aspects of SVT s activities (hereinafter referred to as the licence ) and a second 3 Prop. 2000/01:1. 4 Which are so called EPG (Electronic programming guide) as well as CA (conditional access) services. 5 Act 1996:844, Chapter 2 section 1.

5 part that specifically covers digital transmissions (hereinafter referred to as the digital licence ). The licence is valid from 1 January 2002 through 31 December 2005, and can be extended for 4 more years. 16. According to the Sec. 1 of the licence, SVT is under an obligation to cover 99.8% of the population. Under Sec. 4 of the licence, SVT is obliged to transmit through the analogue network. Sec. 1 and 4 read together imply that SVT has to cover 99.8% of the population by means of analogue transmission. Although Sec. 1 does not exclude the use of satellite transmission, it requires a specific permission by the government to do so. In addition, Sec. 5. of the licence explicitly obliges SVT to use the analogue terrestrial television network (ATT) operated by Teracom. 17. Regarding the digital transmissions, it is stated in Section 4 of the licence that SVT may transmit digitally. The digital licence contains more detailed provisions in this respect. The digital licence obliges SVT to transmit via DVB-T where this network is established 6. SVT is allowed to transmit digitally via satellite, but is under no obligation to do so. Importantly, such transmission will not alleviate SVT from its obligation to transmit via Teracom s DVB-T. Until the switchover from analogue to digital transmissions is completed, SVT is thus obliged to transmit in both terrestrial networks, and hence incurs double transmission costs Financing of SVT s transmission costs 18. Every household in Sweden that owns a television receiver is obliged to pay a licence fee which is set by the Parliament. The households pay the fee to Rikab 7. Rikab collects the licence fees on a specific account, the Rundradiokontot (RRK). 19. SVT receives funding from the RRK to cover the general operation costs. According to the information from the authorities, the extra funding for digital transmission amounted to 260 million SEK for SVT (and 20 million SEK for UR in the period 1997 to 2001). In 2002 the government decided to separate the transmission costs from other operating costs. For this purpose a separate Distribution Account (DA) was created 8. After the creation of the DA, funds have each year been transferred from the RKK to the DA. There is a period of phasing in the DA, during which the amount transferred from the RRK to the DA each year will gradually increase, until the amount corresponds to the costs of SVT and UR for analogue distribution. According to Prop. 2000/01:94, these costs for SVT for analogue distribution are estimated at 460 million SEK The budget proposal for 2003 states the budgeted funding of SVT and the different accounts from 2003 onwards 10. The most relevant figures are presented in the next table (Table I). 6 Sec. 1 and 3 of the Conditions for Right of Broadcasting ( Villkor för sändingsrätten ) of the digital license. 7 Act 1989:41, the Act on television fees ( Lag om TV-avgift ) 8 Ref. Prop. 2000/01:94, para The proposal was adopted by the Parliament on 12 June Prop. 2000/01:94, para On 16 May, 2004 the exchange rate is 1 = SEK Prop. 2003/04:1 which provides the most actual figures.

6 Table I: funding of transmission costs (in million SEK) 11 Year Funds from DA to SVT Funds transferred from RRK to DA Deficit on DA Interest rate Deficit on DA (5%) 12 (accumulated) In the budget proposal the government sets out the financial planning for the introduction of DVB-T. The funds transferred from the RRK to the DA during the first years following its creation, will be lower than the payments that will be made from the DA to SVT. Consequently, there will initially be a deficit on the DA. The deficit on the DA will be covered by loans from the SNDO. In 2005, the accumulated deficit (covered by loans from SNDO) is approximately SEK 1,279 million (see table, column 6). After the ATT is closed down, the deficit on the DA will gradually be reduced: the contributions from RKK to the DA will remain at the level of the costs of ATT transmissions until the deficit has been covered and since transmissions in DVB-T are less costly than transmissions in ATT, the deficit will be gradually reduced to zero. 22. On May 26, 2004 the Parliament adopted a proposal along these lines 13. The annual transfer from the RRK to the DA for 2006 shall be SEK 480 million. This amount shall be increased by 2% per annum, until 2013 when the deficit on the DA is assumed to be fully repaid. ATT will be shut down gradually from 2006 and as of 2008, ATT will have been turned off completely. As from January 2008, no further payments will be made by SVT to Teracom for the transmission service over ATT. 23. The overall and exact figures for the period of are not known yet. If one assumes however that the repayment of the total debt of SEK 1,279 million (see Table I) will be made on the basis of equal instalments, yearly installments of SEK million are required to repay the deficit 14. In addition to this installment, SVT has to pay interest over the remaining debt on the Distribution Account to SNDO 15. The calculation made on these assumptions lead to the following results (see Table II). 11 Prop. 2003/04:1, Utgiftsområde 17, p The interest figures are taken from the budget proposal. We have however reasons which seem to suggest that these figures are not entirely correct. 13 Prop. 2003/04:118. There are some differences with earlier proposals though. 14 SEK 1,279 million divided by 8 years equals to SEK million. 15 The interest rate is set by the authorities at 5 % per annum.

7 Table II Payments made after 2004 (in million SEK) Year Funds transferred from RRK to DA (1) Repayments (2) Interest (rate of 5%) on deficit (3) Annual transfer to SVT (4) (=1 (2 +3)) Deficit on DA (accumulated) As stated before, in 2006 the deficit on the account covered by SNDO loans is SEK 1,279 million. In 2006, 5% interest which will be paid on SEK 1,279 million is SEK million (see column 3). Assuming equal instalments over the period , SEK remains on the DA in order to repay the first instalment. The interest to be paid and the repayment together are thus SEK million. SVT will obtain from the DA SEK 480 million minus SEK million which equals to SEK million (column 4) THE ALLEGATIONS MADE BY THE COMPLAINANT 25. The complaints by NSAB and VIASAT concern the financing of the establishment of DVB-T in Sweden, which includes both the establishment of the network, subsidisation of the set-top boxes needed to receive digital transmissions and other elements. The complainants allege that the financing of the establishment of DVB-T in Sweden involves the granting of State aid in contravention of Article 87(1) EC and/or a measure by the State in contravention of Article 86(1) EC. Further, the complainants allege that the measures can not be accepted on grounds of public service obligations in accordance with Article 86(2) EC or any other grounds. 26. Specifically, the complainants allege that the following aspects involve the granting of State aid to the participants in DVB-T in Sweden: The use of public funds for establishing DVB-T in Sweden. The use of Teracom s resources, which derive mainly from payments by SVT for analogue transmissions for establishing DVB-T in Sweden. The credit guarantee issued by the State to Teracom for the amount of million SEK. 27. In addition, the complainants allege that the structure chosen to finance the establishment of DVB-T prevents transparency in contravention of Commission

8 Directive 80/723 of 25 June as amended by Commission Directive 2000/52/EC 17 (hereinafter referred to as the Transparency Directive). 28. Finally, the Government has informed the Commission services of a decision by the Parliament to authorise a capital injection from the State to Teracom in the amount of SEK 500 million. For this purpose, the government has provided the Commission services with a copy of the proposal of the government to the Parliament concerning the capital injection to Teracom. 18 The proposal was approved by the Parliament on May 28, The authorities consider the injection to be in line with the market investor principle. The capital injection will also be a part of the Commission s investigations. 3. ASSESSMENT OF THE MEASURE/AID 3.1 State aid within the meaning of Article 87(1) EC 29. According to the EC Treaty and consolidated case-law there is State aid in the meaning of Article 87(1) when: there is an intervention by the State or through State resources; it confers an advantage on the recipient and, it distorts or threatens to distort competition; the intervention is liable to affect trade between Member States Granted by the State or through state resources 30. The direct payments by SNDO to SVT to cover the deficit on the Distribution account are clearly also state resources. 31. The financial resources which are used by SVT to make payments to Teracom are to be considered as state resources as well. In addition, the advantages derived thereof are imputable to the State. This may be inferred from a set of circumstances: SVT is a public broadcasting undertaking entrusted with a public service task; The State controls SVT, i.e. has a decisive influence on SVT through a set of regulatory measures (law and licenses) 20 ; SVT is owned by a public foundation, and some of its members are appointed by the government. 16 OJ 1980/L195/ OJ 2000/L193/ Prop. 2002/03: Ministry of Culture, Protocol nr 2002/03:113, Rskr: 2002/03: Cf. arguments and conditions put forward by the European Court of Justice in, C-482/99 France v. Commission ( Stardust Marine ).

9 SVT is for using this DVB-T network explicitly compensated through state funding (funded through the Distribution account). 32. Secondly, one has to look at the relations between SVT and Teracom. If these relations are not based on normal market terms, Teracom may be aided indirectly by the State through the payments made by SVT to Teracom Economic advantage (a) Payments by SVT to Teracom 33. Taking into account the data submitted by the State, on the average cost of using the channels and the actual use made by SVT, SVT would have been expected to have paid to Teracom for digital transmission SEK 160 million over the last four years. The costs for analogue transmission are estimated at SEK 460 million per year. According to a report from the Digital TV Committee (a committee installed by the Government) the average costs are SEK 160 million per frequency channel per year Based on the figures provided by the authorities and the information from the budget proposal and other proposals, it however seems that SVT will pay more than the figures mentioned above seem to imply: Table III Overall overview of transactions between SVT and Teracom Year Funds from SVT to Teracom (1) ATT trans mission costs (2) DVB-T trans mission costs (3) Total trans mission costs 4 = (2 + 3) Compen sation (1-4) Accu mulated compen sation ,00-155, ,00-272, , ,54-355, , ,21-403, , ,81-547, , ,21-553, , ,58-422, , ,57-272, , ,77-104, , ,16 81, , ,75 286, , ,55 509, SVT s transmission costs for DVB-T in 2008 (ATT is closed down in 2008) are 160 million SEK. In addition, SVT pays another 131 million to Teracom. Consequently, SVT pays Teracom SEK 131 million more than seems to be necessary. In total, over the period , SVT pays an estimated extra SEK million to Teracom. 21 SOU 2001:90,

10 Conclusion 36. Finally it seems that, based on the facts and figures provided by the government, Teracom receives more from SVT than SVT is expected to pay to Teracom. Although according to these calculations the aid becomes apparent only in 2008, there are indications to believe that this could be different: Judging from these figures, SVT is not fully compensated for its public service obligations during the years It is nevertheless rather unlikely that SVT is under compensated for its public service obligations. The Commission has doubts whether additional compensation has been granted and what the level of the compensation has been. It is stated in the proposals that SVT received extra payments in the initial phase of the roll out of DVB-T 22. It is not known what the compensations and especially the costs were at that stage; SVT s transmission costs for digital transmission are estimated at SEK 160 million. Nevertheless, SVT has not always used the same amount of channels. In the initial phase SVT used only two channels out of four. The question is thus whether the transmission costs for digital television were actually SEK 160 million as of 2002? It is likely that these costs were lower in the beginning of the roll-out; The exact numbers with regard to ATT for 2006 and 2007 cannot be given. ATT will be closed down gradually as of 2006, but how this affects the total transmission costs is unclear. If the relevant authorities will decide to close down first ATT in the areas with a very low population (and thus relatively many transmitters), the extra payments by SVT to Teracom might be even higher. It is assumed that the scaling down of the ATT network will take place gradually over two years (50 percent per year). However, it is likely that the switch off is taking place at a faster pace and that the costs in the last year will be much lower. 37. The Commission requested the authorities to provide information regarding the fees to be paid by SVT to Teracom. 23 The authorities initially did not answer the question while referring to the confidentiality of the information. After the Commission reiterated the question in the letter from 10 July 2003 the authorities answered that Teracom uses the same pricing model for all broadcasters using DVB-T. It has stipulated the different components of the pricing model, but not all components have been specified. In addition, the figures available to the Commission reflect only the situation from In addition, these figures do neither entirely match with the figures which are public. For example, SVT paid according to the information provided in this letter SEK [ ] for the DVB-T transmission in SVT received however in 2002, SEK 485 million for ATT and DVB-T transmission. If the costs for ATT are 460 million (as stated by the authorities and the Digital TV Committee), the 22 According to the information from the Swedish authorities, the extra funding amounted to SEK 260 million for SVT and 20 million SEK for UR in the period 1997 to Cf. letter from 26 July 2002.

11 compensation for the year 2002 is at least [ ] SEK too high. The Commission thus needs more and more accurate information with regard to the exact fees which have been paid and will be paid during the period Other advantages 39. It seems that the government granted direct advantages to Teracom. The state has both obtained an approval for a state guarantee for Teracom and has granted capital to Teracom as well. These advantages will be discussed subsequently. (b) The credit guarantee 40. The Parliament approved a proposal from the Government to give Teracom a credit guarantee of 2,000 million SEK until 31 October It is a decision to allow the Government to grant the credit guarantee 24. The proposal furthermore states that Teracom must pay a risk-related fee, which includes the administrative cost for the Government, as a consideration for the credit guarantee. According to the information that the Government has provided, the credit guarantee has not been invoked by Teracom. 41. The government has explicitly asked for an approval to the Parliament to grant a guarantee to Teracom. The Parliament has after a lengthy debate, approved this proposal. Although the extended credit guarantee has not been issued, it is not excluded that there is an element of state aid in the guarantee. At any moment, Teracom could have called upon the guarantee. As of the moment of approval, the monies are potentially available to Teracom if it needs the guarantee. Therefore, this guarantee may confer an advantage. 42. The Commission has clarified the application of Article 87(1) EC on guarantees by a Member State in a Commission notice. 25 Only when all of the following conditions are fulfilled will a guarantee not be regarded as State aid: The borrower is not in financial difficulty: One of the reasons why the government asked for approval was that Teracom had clearly a lack of capital. According to an audit by an expert, Teracom needed roughly SEK 825 million. Teracom could not obtain the capital from the market, even if it were for a short term, because its solvency ratio was too low 26. It seems therefore that this condition has not been met The borrower is in principle able to obtain a loan on market conditions from the financial market without any intervention by the State: With reference to the first bullet point, it is questionable whether Teracom could have obtained a loan from the market The guarantee is linked to a specific financial transaction, is for a fixed maximum amount, does not cover more than 80% of the borrowed amount, and is limited in time: The guarantee is limited in amount and in time, 24 Prop 2001/02:76, page Commission notice regarding the application of Articles 87 and 88 EEC to State aid in the form of guarantees, OJ 2000/C71/ Prop. 2001/02:76, page 5. KPMG did an assessment of Teracom which is referred to in the Proposal.

12 however, as far as known by the Commission not related to a specific transaction The borrower pays a market price for the guarantee: Teracom had to pay indeed a fee, which should reflect the risk passed on the state. Whether this fee was adequate, given the financial status of Teracom, is not known. 43. Consequently, it seems that these conditions have not been met. The Commission has especially doubts whether the risk-related fee is adequate. It is therefore not excluded that the guarantee constitutes an aid to Teracom, provided that there is a distortion of competition and an effect on trade (cf. paragraph 55 and further of this decision). The Commission therefore needs more information to make an assessment. 44. Finally, the government has informed the Commission (but has not formally notified the Commission) about a capital injection in Teracom 27. (c) Capital injection to Teracom 45. The Parliament has authorised capital injections from the State to Teracom in the amount of 500 million SEK. 28 The Commission must assess whether this capital injection is in accordance with the private investor principle, i.e. that it would be acceptable to a private investor operating under normal market economy conditions. 46. According to the financial forecasts that the Government presented in the proposal, the reason for the authorised capital injection is that Teracom is in a temporary difficult position due to high investment expenditure and operating costs. However, in the long run, Teracom is a viable company with a strong market position, and a sustainable business model. It will be able to pay dividend over the capital injections. A total foreseen investment in the DVB-T network in Sweden of 1,500 million SEK, 1,300 million SEK has already been carried out 29. Also, to a large extent the investment in digital radio and other planned networks had been carried out. In addition, the company has been through a process of restructuring, which the Government believes will result in a reduction of the operating costs for Teracom of 150 million SEK per year According to the authorities, both the operating profit and the solvency ratio of the company will improve in the coming years. According to the government s proposal, for 2002 the solvability was just 20%. However, the external creditors demand a solvency ratio of 25% (for Teracom as a concern even a ratio of 30%). With the capital injection, the solvency was meant to reach a ratio of 30% for The Government believes Teracom will be able to pay dividend over the capital injection starting from Therefore, considered on its own, the capital injection seems according to the government to be in accordance with how a 27 Letter of 24 March The Parliament approved the proposal on 28 May 2003, Snabbprotokoll 2002/03: See Prop. 2002/03: See Prop. 2002/03:64, p Prop. 2002/03:64, p. 6

13 private market investor would have acted. It refers to case law developed by the Court which states that the market investor behaviour should be measured based on long term perspectives. 48. Nevertheless, the Commission has doubts whether there is no element of state aid in the capital injection. 49. In general, it is in this case difficult to make a distinction between the role of the State as public authority and its role as owner of Teracom. The solvency ratio was at the time of the injection below the requirements made by the private investors. According to the information provided, Teracom s creditors required a solvency ratio of at least 25%. The fact that before the injection of the capital, the solvability ratio was below the creditor s requirements is an indication that this transaction did not take place at market terms. It is very unlikely that external creditors would have injected capital at that stage with such ratios. In addition, it is very unlikely that private investors would have invested in a company which was making substantial losses for at least three years in a row 31. Teracom s financial situation was poor and critical Distortion of competition 50. Teracom and its subsidiaries are active in various fields of what generally may be described as distribution and transmission of television services. 51. First of all, the function of Teracom as an operator of the DVB-T network is to provide a connection between broadcasters and viewers. Teracom is therefore active on the upstream market for the provision of distribution services to broadcasters. On the downstream market it is active for the provision of TV services to individual viewers and/or intermediaries, such as landlords or owners of apartment buildings. 52. On the downstream market, it seems that cable, DTH (satellite or in other words direct-to-home) and even DVB-T, although some technical and commercial differences exist between the different distribution methods, are substitutable. With the introduction of digital services, offerings by DTH, DVB-T and cable could change and thereby increasing the incentive for consumers to switch. The aforementioned development of digital services will make the different distribution systems even more substitutable. Finally, consumers will asses the offering by a cable, DVB-T or satellite operator by the ability to supply an attractive and broad range of services at an attractive price. They will most likely have no preference for any technical means of delivering the new digital services, whether by DTH, DVB-T broadband cable or by cable/satellite in combination with a return path for interactive services. 53. In the upstream market, the distributors acquire the rights to distribute content. Although broadcasters wish to be as widely distributed as possible (and therefore 31 Cf. for example, Case 234/84, Belgium v. Commission [1986] ECR 2263, para , C-328/99, Italy and SIM2 v. Commission, [2003] ECR I-4035, para. 48. The losses for Teracom were SEK 283 million in 2001 and 232 million in For 2003 it was estimated that the losses would be SEK 100 million.

14 could see distribution systems as complementary rather than alternative) have indicated that they regard cable and DTH as competing distribution channels. Given the technical and commercial features of DVB-T it can be assumed that DVB-T is also to be considered as a competing infrastructure. Therefore, it can be concluded that from the viewpoint of the broadcasters, a certain degree of substitutability between cable, DVB-T and DTH exists. 54. The government has nevertheless, contrary to the Commission Communication on the Switchover opted for state funding of the specific technology DVB-T, rather than DVB-S, DVB-C or even DVB-H 32. Cable and satellite providers are able to deliver the same or a very similar service to the broadcasters and the consumers, but do not receive funding. Consequently, there is a distortion of competition. 55. Secondly, it is not unlikely that the money from SVT has (partially) been channelled through Teracom to its subsidiaries Boxer and Senda (in the meantime these undertakings have been merged). Boxer is active on the market for conditional access (CA), electronic programming guides (EPG) and the selling of set-top-boxes (STB). The market for administrative and technical services for pay-tv and digital TV is emerging, but apparent 33. It is not unlikely that if this is the case (money flows from SVT to Teracom to Boxer) also here the competition has been distorted Effect on trade 56. The Court has acknowledged that when state aid strengthens the position of an undertaking compared with other undertakings competing in intra-community trade, the trade between Member States must be regarded as affected by the aid. Moreover, the undertakings affected are internationally active satellite operators in Sweden (Viasat, NSAB and Canal Digital). In addition, UPC, an American cable operator which has established its headquarters in The Netherlands is also active in Sweden as a cable operator. The other active cable operator (ComHem) is owned by EQT Northern Europe, a risk capital investor active in Scandinavia. 57. One may therefore assume that there is both a distortion of competition and an affectation of trade. 3.2 Compatibility 58. In the case that the measure constitutes aid within the meaning of article 87(1) EC, it is doubtful whether the State aid granted Teracom by these means is compatible. 32 The Commission published a Communication on the switchover from analogue to digital television, COM (200) 541 final. DVB-H stands for DVB over Handheld (mobile applications). Cf. Commission decision 2001/98/EC, Case IV/M.1439 Telia/Telenor, 13 October 1999, paragraph Cf. for example Commission Decision BiB/Open IV/36.539, 15 September 1999, MSG Media Service, IV/M.469. The market covers the provision of an adaptor for decryption (decoder), conditional access technology and subscriber management systems. These services are both provided at a retail (offering of smart cards) and wholesale level (the making available of decoders, the handling of conditional access, and settlements of accounts).

15 59. The aid measures do not seem to fulfil the conditions for any of the derogations provided for in Article 87(2), 87(3) or 86 (2). As for compatibility under Article 87(3)(c) it can not be established whether the conditions for applying this Article are met. 60. Even if the measure were found to facilitate the development of certain economic activities, the Commission nevertheless has to take into account that the authorities have opted for a non-neutral technological intervention, i.e. they have opted for the specific development of a terrestrial network. This is not in line with the Communication on the Switchover. The authority has so far not come up with any convincing arguments why only DVB-T is a real alternative for providing a digital signal in Sweden. Neither has it been argued why the coverage of over 90 % percent is necessary. Furthermore, according to the Communication on the Switchover, the Commission will assess if the measure is transparent, justified and proportionate. In this context, the Commission has to assess whether the aid is justified by a public policy objective in the interest of society as a whole. Finally, it has to assess whether this aid was necessary in order to permit an immediate switchover. At this stage, the Commission does not have the necessary information to make such an assessment. 61. More generally, the measure is operating aid insofar as it is intended to relieve the recipient undertakings of all or part of the expenses which they would normally have had to bear in their day-to-day management of their usual activities and therefore in principle distorts competition Finally, the guarantees seem not to be in line with the Commission s notice on guarantees. The capital injection could perhaps be considered as a rescue or restructuring aid. The Community guidelines on state aid for rescuing and restructuring firms in difficulty set out the conditions for such aid. In any event, it is difficult to apply these conditions since the aid has not been notified nor has it been followed by a restructuring plan. 63. So far the authorities have not invoked any of the derogations spelled out in Article 87(2), 87 (3) or 86 (2) EC. The authorities have answered that, upon explicit request of the Commission, Teracom is not entrusted with a SGEI and has to operate as a commercial undertaking. It is therefore not possible to assume that Teracom is an undertaking entrusted with a SGEI The application of the Transparency Directive 64. It is clear that Teracom, Senda and Boxer are public undertakings within the meaning of the Transparency Directive, as Teracom is wholly-owned by the State and Senda and Boxer are majority-owned subsidiaries of Teracom, and as such must implement accounting separation in accordance with the directive. 65. The Government refers to that since 1999, the Ministry of Culture has demanded the implementation of a so-called owner s directive (Sw.: Ägardirektiv ) for the 34 See Case C-301/87 France v Commission [1990] (Boussac Saint Frères) ECR I-307, Case C-86/89 Italy v Commission [1990] ECR I-3891 and Case C-156/98 Germany v Commission [2000] ECR I-6857.

16 activities of Teracom. The owner s directive calls for a division of the activities of Teracom into four different categories, one of which is a core activity (Sw.: kärnvärksamhet ). This core activity shall comprise transmission to the public of radio and TV-programs that are available in the greater part of the country without cost. The core activity comprises both ATT and DVB-T activities. The definition of a core activity consequently is not appropriate to avoid crosssubsidies between ATT and DVB-T activities or to attain accounting separation. 66. The owner s directive also specifically demands that Teracom should implement the Transparency Directive in its activities and in addition clarify (Sw.: belysa ) the relationship between the competitive and non-competitive activities. The annual report of Teracom indicates that the company has introduced accounting separation 35. The accounting separation shows clearly which part of the company s profits (or losses) that relate to the competitive, respectively noncompetitive, activities of the company. The accounting separation also shows how much of the company s assets relate to the competitive and non-competitive activities, respectively. 67. However, the accounting separation does not explain the methods by which the profits, losses, assets and liabilities are assigned to the different activities. Consequently, it does not allow the Commission to control whether for example funds derived from the ATT activity have been used to establish the DVB-T network as alleged by the complainants. 68. As concerns the financing of Boxer, the start-up costs were originally financed exclusively by Teracom. Boxer is now jointly owned by Teracom (70%) and Skandia (30%). The Government states that Boxer s activities are performed entirely on a commercial basis. The complainants submit that Teracom subsidises the set-top boxes that Boxer markets, and that this is not done on normal market terms. 69. The annual report of Teracom for 2001 states that Boxer subsidises set-top boxes according to a model similar to the one employed by the mobile telephone operators. 36 This model implies that the hardware is subsidised, and the subsidy later recouped through subscription fees. However, the information available to the Commission suggests that the subsidies given by Boxer have been too high, and may not have been allocated on market terms 37. The information available to the Commission further suggests that Teracom s poor economic performance is in part due to the subsidising of the set-top boxes by Boxer, and that this is a reason behind the authorised capital injection of 500 million SEK to Teracom As concerns the financing of Senda, the company s start-up costs were financed by shareholder contributions from Teracom and SVT. The Government has indicated that the costs of the day-to-day operations of Senda related to the DVB- T network, in particular the CA and EPG activities, are financed by charges levied on the subscribers. This statement implies that after the start-up 35 Teracom Annual reports 2001, p See p Boxer annual report for 2001, p. 1 and Prop 2002/03:64 p. 5.

17 contributions, no funds have been transferred from SVT or Teracom to Senda, and that the activities of Senda are performed on normal market terms. 71. As a final point, the Commission has lodged an action against Sweden for not implementing the Transparency Directive. The case is currently pending before the Court of Justice Conclusion 72. In the light of the foregoing considerations, the Commission, acting under the procedure laid down in Article 88(2) of the EC Treaty, requests Sweden to submit its comments and to provide all such information as may help to assess the measures, within one month of the date of receipt of this letter. The European Commission requests your authorities to forward a copy of this letter to the potential recipients of the aid immediately. The Commission wishes to remind Sweden that Article 88(3) of the EC Treaty has suspensory effect, and would draw your attention to Article 14 of Council Regulation (EC) No 659/1999, which provides that all unlawful aid may be recovered from the recipient. The Commission 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 Directorate H, State Aid Rue Joseph II, 70 B-1049 Brussels Fax No: Yours faithfully, For the Commission Mario Monti Member of the Commission 39 C-141/03, Commission v. Sweden.