On 30 November 2012, an ICSID Arbitral Tribunal rendered a much-awaited award in a dispute between Electrabel and the State of Hungary regarding early termination of a power purchase agreement (“PPA”) following a binding decision by the European Commission that such PPA contained unlawful State aid. This case is one of several arbitration cases that deal with the possible conflict between EU law and the guarantees that are offered to private investors under the Energy Charter Treaty (“ECT”).
The ECT entered into force in April 1998. It contains provisions protecting foreign investments in the energy sector (such as protection against expropriation, fair and equitable treatment of foreign investors, etc.). The European Union and the EU Member States are all parties to the ECT and are “internationally responsible for the fulfillment of the obligations contained therein, in accordance with their respective competences”1.
Following the accession of Hungary to the European Union on the 1st of May 2004, some incumbent operators were affected negatively by the liberalization of the Hungarian electricity market that was consequentially introduced as part of the ‘Acquis Communautaire’. The main question was whether European private investors could rely on the ECT to contest measures taken by Hungary by application of EU law.
We hereby shortly summarize the Arbitral Tribunal’s position on this issue.
1. Facts of the case
In 1995, Tractebel acquired a majority shareholding in Dunamenti, a newly privatized Hungarian electric-generation company. Pursuant to a power purchase agreement dated 10 October 1995, Dunamenti had to make available, on demand, a minimum capacity to Magyar Villamos Müvek Zrt (“MVM”) (the State-owned electricity supply company) in return for payment of a capacity fee. The PPA was to expire in December 2010, but was later extended to 31 December 2015. After Hungary’s accession to the European Union, the European Commission determined on 4 June 2008 that MVM’s purchasing obligations under the Hungarian PPAs provided unlawful State aid2 to the electric-generation companies (the “Final Decision”).
Consequently, Hungary adopted a legislation mandating the early termination of the PPAs (including Dunamenti’s) and a Decree for compensating the electricity-generation companies for their Stranded Costs. Any amount of Stranded Costs was to be limited to and compensated with the amount of State aid to be recovered from the electricity-generation companies. Electrabel complained chiefly that the early termination of the PPA (i) violated the standard of fair and equitable treatment (“FET standard”) and (ii) constituted an unlawful expropriation under Article 13 ECT. It must be underlined that Electrabel did not attack the validity of the European Commission’s decision, but rather complained about the alleged incorrect enforcement of the Final Decision by Hungary.
2. Applicable law
Before examining Electrabel’s termination claim, the Arbitral Tribunal first had to determine the law applicable to its jurisdiction and to the merits of the case. The Arbitral Tribunal’s starting point was that – under Article 26 ECT and Article 42 of the ICSID Convention – it was required to apply the ECT and EU law (being classified as international law). According to the Arbitral Tribunal, EU law could be presumed not to conflict or otherwise be inconsistent with the ECT because (i) the European Union was a Party to the ECT and it would have been inconsistent and nonsensical for it to subscribe to the ECT knowing this would lead to a breach of EU law, (ii) the ECT and EU law shared the same objective, i.e., to combat anti-competitive conducts, and (iii) the ECT implicitly recognized the binding character of decisions by the European Commission. Indeed, the European Union is qualified, under the ECT, as a Regional Economic Integration Organisationwhich has “the authority to take decisions binding on [its member states]” in respect of matters governed by the Treaty3.
Therefore, the Arbitral Tribunal held that the ECT could not protect a European investor from a Member State’s enforcement of a binding decision of the European Commission under EU law. If the provisions of EU law and that of the ECT contradict each other, the Arbitral Tribunal considered that, pursuant to Article 307 CE, (i) the ECT would apply when it comes to relations between EU Members and non-EU Members, but that (ii) EU law would prevail over the ECT in relations between EU Members themselves.
3. The PPA Termination
The Arbitral Tribunal dismissed Electrabel’s expropriation claim. In line with arbitral case law and doctrinal writings, the Tribunal considered that an “expropriation” implied a radical deprivation of rights or a destruction of an investment, its value or enjoyment. In the Tribunal’s opinion, Electrabel did not meet the threshold because – save for the PPA termination – its investment in Dunamenti remained intact. With regard to the FET standard, the Arbitral Tribunal found that Hungary could not be held liable for acts committed by the European Commission.
In the words of the Tribunal, “it would be absurd if Hungary could be held liable under the ECT for doing precisely that which it was required to do by a supranational authority whose decisions the ECT itself recognizes as legally binding on Hungary”. While the termination of the PPA was considered lawful under the ECT, the Arbitral Tribunal found that there was, however, a manifest and significant lack of symmetry in the Hungarian Stranded Costs compensation scheme.
Since the amount of the Stranded Costs would finally be determined by Hungary in December 2015, the Arbitral Tribunal reserved its decision on this issue. Yet, it suggested that Hungary’s scheme could amount to a breach of the FET Standard should the amount of Net Stranded Cost be significantly higher than that of the illegal State aid.
The recent decision of the ICSID Arbitral Tribunal in this sensitive case, while deprived of any weight in terms of jurisprudential precedent, can nonetheless be regarded as a long- awaited clarification on relationship between the ECT and EU law as regards the way in which both these legal frameworks should coalesce with each other. With the integration of many new EU Member states in the European Union over the last two decades and the growing importance of the ECT as regards the necessity to guarantee EU energy security of supply, this recent decision of ICSID surely brings further guidance to all non-EU and EU investors who find themselves confronted with the effects of European integration and accession.
In our view, and on all accounts, the position of the ICSID Arbitral Tribunal is balanced and fair. Various arguments support this conclusion.
Firstly the decision, while refusing to recognise and consecrate a general principle of international law following which treaties should necessarily be interpreted harmoniously, does not overlook the specificities of the case and thus acknowledges the particular bond which exists between the EU, its Members States, and the ECT. According to the Tribunal both texts should thus be, if possible, interpreted in harmony with EU law.
Secondly, the position of the Tribunal as regards the termination of the PPA and the way in which Stranded Costs should eventually be dealt with also demonstrates the delicate balance that the Tribunal strived to strike in its decision. Hopefully, this decision will not just be another brick in the growing wall of inconsistent arbitral decisions.
- European Communities’ Written Statement made pursuant to Article 26(3)(b)(ii) ECT.
- Electrabel S.A. v. The Republic of Hungary (ICSID Case No. ARB/07/19, Decision on Jurisdiction, Applicable law and Liability, 30 November 2012, available here.
- Article 1(3) ECT.
All rights reserved. Care has been taken to ensure that the content of this e-bulletin is as accurate as possible. However the accuracy and completeness of the information in this e-bulletin, largely based upon third party sources, cannot be guaranteed. The materials contained in this e-bulletin have been prepared and provided by Stibbe for information purposes only. They do not constitute legal or other professional advice and readers should not act upon the information contained in this e-bulletin without consulting legal counsel. Consultation of this e-bulletin will not create an attorney-client relationship between Stibbe and the reader. The e-bulletin may be used only for personal use and all other uses are prohibited.