State intervention in setting of prices of basic goods and services

Recently, there has been a strong trend in several EU Member States to correct economy imbalances through price and tariff capping measures. This is also the case in Romania, where certain industries or market segments are subject to capping and control measures. (e.g.,MTPL insurance, certain segments of the energy market, staple foods, etc.).

By Cătălin Suliman, partner at Filip & Company

To avoid infringement, Romania must make sure these measures serve a general interest, protect certain areas of social impact and are limited in their scope, including from a time perspective (for instance, they should not exceed 3 to 6 months, depending on their scope and should observe the principle of proportionality).

State intervention beyond these principles can lead to major imbalances in economy which, in the medium and long term, can offset the positive effects of the capping measures. There may be situations where, following state intervention, supply falls significantly due to market exits from players with fewer resources (usually local traders or those operating on low profit margins) or the impact on the population is negative as a result of significant price increases for products and services not covered by those included in the capping measure (as a result of cross subsidising capped areas by products / services not covered by the restrictive measure).

If the limits of economic state interventionism are exceeded, Romania may find itself facing infringement proceedings initiated by the European Commission, the ultimate effect of which will be borne by the population.

General aspects

The task of regulating the internal market is shared between the European Union and the Member States. The market economy mechanisms should be those that ensure that the interplay of supply and demand results in competitive products and services that are put on the market according to the competition rules. Member States must ensure the proper functioning of national markets (by creating a framework for exerting control that respects the principles of the TFEU), but without intervening directly in particular markets or their segments.

Recently, we have noted that, against the background of dissensions in the economy caused by various factors (pandemics, galloping inflation, exploiting shortages of production capacity or stocks), the State has shown an interest in intervening in certain segments of the market, in particular in the selling prices of certain basic products and services.

Price regulation by a Member State is not prohibited per se by the Community acquis, but it can have significant market distorting effects. The CJEU has ruled that Member States must refrain from adopting or implementing normative acts that could jeopardise the effectiveness of competition rules.

The Competition Council stated, in its 2020 report on the evolution of competition in key sectors, that a price cap measure requires a careful assessment of whether the social objectives outweigh the negative economic effects associated with price control measures and, at the same time, an assessment of whether the objectives pursued (for example, blocking speculation and ensuring procurement of essential goods at reasonable prices) can be achieved by such a measure (determining the aggregate effect by taking into account all the changes that the application of the measure generates in the market).

Thus, the State intervention must be exceptional and limited, meeting several minimum requirements: (i) the limitation must be adopted in relation to a general interest objective; (ii) even if the regulation could constitute an infringement of the free movement of goods and services, Member States retain the possibility of justifying the measure by basing it on general interest, proportional and compensatory considerations. Thus, Member States must demonstrate that it “is justified by imperative requirements in the general interest; is suitable for securing the attainment of the objective which they pursue; and it does not go beyond what is necessary in order to attain it”, and the burden of proof lies with the Member State; (iii) the mere existence of a general interest does not legitimise by itself the Member State intervention (e.g. by price capping), as Member States are also obliged to observe the principle of proportionality – any regulation must be limited to measures which are both suitable and necessary for achieving the relevant objective.

A 2010 CJEU decision also expressly stated that state intervention must be limited in time to what is strictly necessary to achieve its objective which it pursues, inter alia, in order not to result in the persistence of a measure which, by its very nature, constitutes an obstacle to the establishment of an operational internal gas market.

In various national cases (such as the increase in the prices of MTPL policies or capping energy prices), the Competition Council has ruled that “for specific economic sectors and in exceptional circumstances, such as: crisis situations, major imbalance between supply and demand and obvious market dysfunctionality, the Government may order temporary measures to fight excessive price increases or even freeze them. As regards the duration, such measures may be adopted by decision for a 6-month period, which may be extended successively for periods of up to 3 months, as long as the circumstances which led to the decision continue to exist, and the Government’s intervention is made with the approval of the Competition Council”.

In the same vein was the mechanism for analysing GEO no. 67 of 30 June 2023 on the introduction of a temporary measures to combat the excessive increase in the prices of certain agricultural and food products (GEO 67/2023), which provided for the capping of the mark upon certain food products. This normative act envisaged, for specific economic sectors, namely the agri-food sector, and in exceptional circumstances, such as obvious market malfunctioning, the introduction of temporary measures to combat excessive price increase or even price freeze.

Frequent state intervention may lead to negative effects on the market in the medium and long term as small and medium-sized players will not be able to resist in these markets and supply will be significantly reduced. Moreover, the emergence of market concentrations, as a result of state intervention, will generate harmful effects on the markets, with some negative consequences on consumers (who will ultimately pay more for less innovative products and services).

Disproportionate interventions reduce interest in investment and innovation. This leads to a restriction of competition and has a significant impact on consumers.

Last but not least, the capping can lead to an increase in the prices of products and services related to those covered by the state measure (for example, as an effect of GEO 67/2023, the price of the relevant products has decreased, but the price of other products has increased significantly) as a result of a phenomenon of cross subsidising of the activity covered by the state intervention, from the profits obtained from other activities carried out by the economic agents.

Possible consequences of disproportionate intervention

Given that each Member State has the right to regulate its national market under the TFEU, it may determine the type and duration of measures restricting competition in certain sectors, national courts being those in charge of assessing whether the duration is proportionate.

It is also for the Member State to prove that the conditions listed above are met, in particular those relating to the exceptional and limited nature of the intervention (both in terms of duration and coverage).

The TFEU provisions give the Commission the power to act against a Member State that fails to comply with its obligations under the EU law. If the Member State and the Commission fail to find a solution in line with the EU law, the European Commission may initiate formal infringement proceedings. If the Member State continues not to comply, CJEU may, based on a proposal from the Commission, impose a lump sum and/or a daily penalty payment on the relevant Member State.