The public sector, made up of public undertakings, joint ventures and undertakings controlled by the public authorities by means of holdings, varies in size from one EU country to another. The larger the public sector, the more difficult it is for the public authorities to resist the temptation to make the companies controlled by them the instrument of their economic policy, giving them, in return, a privileged position in various respects. Although the interpenetration of the Member States' economies reduces the effectiveness of that instrument, an exceptional situation for public undertakings would constitute a serious danger for the free competition in the single market.
While remaining neutral with regard to the legal position on ownership in the Member States, the Treaty on the functioning of the EU stipulates, in Article 106 (ex Article 86 TEC), that "in the case of public undertakings and undertakings to which Member States grant special or exclusive rights, Member States shall neither enact nor maintain in force any measures contrary to the rules contained in the treaties ...". Such undertakings therefore have the same obligations as private firms, including those laid down in Article 18 (prohibition of discrimination on grounds of nationality) and 101 to 109 inclusive (rules on competition). Still, the distinction is difficult to draw between an operation to salvage and replenish capital used up by losses, which is permitted under Article 345 of the TFEU (ex Article 295 TEC), which declares that the treaties shall in no way prejudice the rules in Member States governing the system of property ownership, and an aid operation, disguised, for example, as non-remunerated acquisitions of holdings or as other advantages, prohibited by Article 107 paragraph 1 of the TFEU (ex Article 87 § 1 TEC). Article 106, paragraph 3 of the TFEU (ex Article 86 § 3 TEC) confers on the Commission the task of ensuring the application of these provisions and the power to address directives or decisions to Member States where necessary.
However, Article 106 § of the TFEU (ex Article 86 § 2 TEC) allows exceptions to the rules of competition of the Treaty in favour of public utility undertakings, entrusted with the operation of services of general economic interest (water, energy, transport and telecommunications) or having the character of a revenue-producing monopoly, so as not to obstruct the performance, in law or in fact, of the particular tasks assigned to them. Nevertheless, the development of European trade must not be affected by aid to these undertakings to such an extent as would be contrary to the interests of the Union.
Indeed, governments grant certain public enterprises statutory monopoly protection. Such exclusive monopoly rights are awarded for various public policy reasons, such as ensuring security of supply, providing a basic service to the whole population or avoiding the costs of duplicating an expensive distribution network. Such practices are common, notably for utilities (energy and water), postal services, telecommunications and to some extent in broadcasting, transport (air and maritime), banking and insurance. These exclusive rights could prevent, however, the creation of a real internal market in the sectors in question, if Member States could protect from competition their monopolistic enterprises. Member States must, therefore, not take measures, which could lead their public enterprises enjoying monopoly rights to infringe European rules on competition or the free movement of goods and services.
In any case, greater transparency of the financial relations between States and their public undertakings is needed, in order to enable the Commission to decide whether transfer of public funds to those undertakings are compatible with the rules laid down in the Treaty. That is precisely the aim of a Commission Directive, which obliges Member States to supply the Commission, at the latter's request, with information on public funds made available directly or indirectly to public undertakings, thus covering not only "active transfer" of public funds, such as the provision of capital and the covering of losses, but also "passive transfers", such as the forgoing by the State of income of profits or of a normal return on the funds used [Directive 2006/111].
The Commission recognises that the operation of services of general economic interest - in the sense of Article 106 § 2 of the TFEU - must not be prejudiced. However, it is examining on a sector-by-sector basis whether less restrictive practices are possible, how to limit statutory monopoly rights to the essential activities and whether competing services could use existing networks or new technologies would permit the construction of alternative networks.
Commission directives have paved the way for liberalisation in the satellite telecommunications sector, thus helping the development of trans-European networks in this sector and facilitating the European information society. The Commission Directive on free competition on the European markets in telecommunications terminal equipment (modems, telex and telefax terminals, private satellite stations, etc.) prohibits any exclusive rights to import, market, connect, bring into service and maintain such equipment [Directive 2008/63, see section 17.3.6.]. Similarly, the Commission Directive on competition in the markets for electronic communications networks and services aims at: the abolition of existing exclusive and special rights; the prohibition of the granting of new rights in the electronic communications sector; and the guarantee of the right of firms to benefit from freedom of establishment and freedom to supply services within an undistorted competitive framework [Directive 2002/77]. In any case, according to the Court of justice, the regulatory prerogatives enjoyed by national telecommunications organisations must be dissociated from their commercial activities [Joined cases C-46/90 and C-93/91].
A judgment of the Court of justice clarified the concept of State aid in relation to public undertakings [Case C-39/94]. The Court found that the provision of logistical or commercial assistance by a public undertaking to its private-sector subsidiaries can be regarded as aid within the meaning of Article 92 of the EEC Treaty (Article 106 TFEU) if the remuneration received in return is less than that which would have been demanded under normal market conditions. In another judgment the Court, after observing that, in the context of competition law, the concept of "undertaking" encompasses any body engaged in an economic activity, regardless of its legal status or the way in which it is financed, held that social security schemes cannot be considered to be undertakings, because they do not exercise an economic activity but fulfil an exclusively social function. They are therefore not subject to the competition rules of the Treaty [Joined Cases C-159/91 and C-160/91].
The Court of Justice acknowledges that public utility undertakings, unlike others, have to subsidise their less viable activities from their more profitable business if they are to provide their services in balanced economic conditions. On the other hand, the exclusion of competition is not justified, according to the Court, in the case of specific services, which are dissociable from the service operated in the general interest and meet the special needs of economic operators [Case C-320]. The Court recognises also the public service mission of electricity distribution companies, even if they operate regionally and have no exclusive rights, but holds that account must be taken of the economic conditions in which the undertaking operates [Case C-393/92].