Enter to open, tab to navigate, enter to select
ICSID decision on relationship between ECT and EU law
Practical Law UK Legal Update Case Report 8-503-5364 (Approx. 6 pages)
ICSID decision on relationship between ECT and EU law
by Claudia Ludwig, Herbert Smith LLP
| Published on 06 Oct 2010 • European Union, International, USA (National/Federal) |
In AES Summit Generation Ltd and AES-Tisza Erömü Kft v Republic of Hungary (ICSID Case No ARB/07/22), the tribunal clarified the relationship between the Energy Charter Treaty and EU law.
Speedread
An ICSID tribunal has rejected a claim against Hungary brought under the Energy Charter Treaty (ECT). The claimants invested in the power generation sector in Hungary and claimed that, by reintroducing the administrative pricing regime for power generators (that is, fixed tariffs), Hungary breached its obligations under the ECT.
The award contains an interesting discussion about the relevance of EU law in the dispute. The tribunal held that the applicable law was the ECT, together with applicable rules of international law. If necessary, the general rules of interpretation in the Vienna Convention should be applied. EU law was just one of the elements for the tribunal to consider when determining the reasonableness of Hungary's actions.
The tribunal rejected the claimants' argument that Article 16 of the ECT applied, to require the tribunal to apply the law most favourable to the investor in case of conflict between the ECT and EU law. Article 16 of the ECT was not relevant here, as the dispute concerned whether Hungary's actions conformed with the ECT, not whether there was a conflict between the ECT and EU law. Article 307 of the EC Treaty was also irrelevant, as it only applied to agreements between member states and non-member states.
Although the tribunal's finding will make it more difficult for states to rely on EU law to avoid their investment treaty obligations, it will still be relevant when analysing compliance with those obligations. (AES Summit Generation Ltd and AES-Tisza Erömü Kft v Republic of Hungary (ICSID Case No ARB/07/22) (23 September 2010).)
Background
The UK and the Republic of Hungary are both parties to the Energy Charter Treaty (ECT). Both countries are also members of the EU and therefore bound by EU law, in particular the EC Treaty.
Article 16 of the ECT provides that, if there is a conflict between the ECT and any other treaty which deals with the subject matter covered by Part III (investment promotion and protection) or Part V (dispute settlement) of the ECT, the provisions which are more favourable to the investor or the investment shall prevail.
Article 307 of the EC Treaty provides that agreements between member states and non-member states pre-dating 1 January 1985 or, for acceding states, before the date of their accession, will not be affected by the provisions of the treaty. However, it requires member states to "take all appropriate steps" to eliminate incompatibility between such agreements and EU law. Article 307 further provides that, in applying agreements pre-dating 1 January 1985 or pre-accession, member states:
"shall take into account the fact that the advantages accorded under this Treaty by each Member State form an integral part of the establishment of the Community and are thereby inseparably linked with the creation of common institutions, the conferring of powers upon them and the granting of such same advantages by all other Member States."
Facts
Following the privatisation of the energy sector, including certain state-owned power stations, by Hungary in 1995, the first claimant, the English company AES Summit Generation Ltd (AES), acquired in 1996 a majority shareholding in the second claimant, the Hungarian company which is now called AES-Tisza Erömü Kft (AES Tisza). AES Tisza's assets consisted of three power stations in Hungary. AES invested approximately US$130 million in the original acquisition and another US$98 million in improving the power stations.
In 2004, Hungary acceded to the EU. In the same year, it terminated the administrative pricing regime for power generators (that is, it moved from fixed to flexible tariffs). However, in 2005, political debate arose in Hungary regarding the high or "luxury" profits of certain power generators. In addition, the European Commission had commenced a state aid investigation based on concerns that certain power generators were profiting from state aid which prevented new players from entering the market. Against the background of these concerns, in 2006, the Hungarian Parliament reintroduced the administrative price regime for power generation.
In the claimants' view, this new price regime violated the terms of its long-term power purchase agreements ("PPAs") with the Hungarian state-owned entity, had a detrimental impact on its investment and was in breach of Hungary's obligations under the ECT.
On 6 July 2007, the claimants filed a Request for Arbitration, alleging that Hungary had violated its obligations under the ECT by reintroducing administrative pricing. Specifically, the claimants alleged the following violations of the ECT:
- Breach of Hungary's obligation to provide fair and equitable treatment.
- Impairment of their investment by unreasonable and discriminatory measures.
- Breach of Hungary's obligation to provide national treatment.
- Breach of Hungary's obligation to provide most favoured nation (MFN) treatment.
- Breach of Hungary's obligation to provide constant protection and security.
- Expropriation.
The parties ultimately agreed that the ECT was the applicable law and that EU law had to be taken into account as a fact. However, there were issues as to:
- How the ECT should be interpreted. The claimants submitted that only customary international law as codified in the Vienna Convention (Articles 31 and 32) was relevant. Hungary argued that the ECT should be interpreted using a historical method that took into account the formation of the ECT, and therefore EU law principles, including EU competition law and provisions regarding state aid.
- Whether Article 16 of the ECT applied to the dispute. The claimants argued that, if there were a conflict between the ECT and EU law, Article 16 of the ECT required the tribunal to apply the law which was more favourable to the investor or the investment.
- Whether Article 307 of the ECT applied to the dispute. The claimants relied on Article 307 of the EC Treaty to argue that Hungary was authorised "to ignore the Commission's order for the benefit of a EU member state company".
Hungary's position was that the reintroduction of the administrative pricing was necessary under EU law and that the claimants could not have expected it to "ignore EC demands to minimize or eliminate prohibited State aid".
The European Commission intervened in the proceedings to support Hungary's position by way of an amicus curiae brief submitted under ICSID Arbitration Rule 37, claiming that the PPAs between the investors and the Hungarian state-owned entity violated EU law as they could restrict competition. The tribunal states in its award that it took this brief into account in reaching its decision but does not discuss it.
Decision
The tribunal rejected all of the claimants' claims.
Applicable law
The tribunal held that the ECT was the applicable law, together with the applicable rules and principles of international law. It considered that, if interpretation of the ECT was required, the general rules of interpretation of the Vienna Convention, as established in Articles 31 and 32, should be applied because, although Article 32 provides for the use of historical interpretation, this is only a complementary method of interpretation.
Regarding the EU competition law regime, the tribunal held that it:
"has a dual nature: on the one hand, it is an international law regime, on the other hand, once introduced in the national legal orders, it is part of these legal orders … It will be considered by this Tribunal as a fact, always taking into account that a state may not invoke its domestic law as an excuse for alleged breaches of its international obligations".
The tribunal rejected the relevance of Article 16 of the ECT, on the basis that it would only be relevant if there were a conflict between the ECT and EU law. That was not the case here: the dispute concerned whether Hungary's actions conformed with the ECT. Those actions had to be analysed in the light of the ECT, to determine whether the measures, or the manner in which they were introduced, violated the treaty. The question whether Hungary was, or may have been, or felt obliged to act as it did under EC law, was just one element to be considered by the tribunal when assessing the reasonableness or otherwise of reintroducing the administrative pricing.
The tribunal also rejected the application of Article 307 of the EC Treaty. It held that this Article applied only to agreements between member states and non-member states, whereas Hungary and the UK were both member states.
The merits
The tribunal then assessed Hungary's acts against the protections afforded to investors under the ECT. It found that Hungary had not breached its obligation to provide fair and equitable treatment, especially since Hungary had not made any representations or given assurances to the effect that, following the termination of price administration at the end of 2003, regulated pricing would not again be introduced. Furthermore, the tribunal held that there was nothing "irrational or otherwise unreasonable" in Hungary's policy decision to reintroduce administrative prices in 2006 so as to constitute a breach of its ECT obligation to ensure that investors were treated fairly and equitably and that their investments were not impaired by unreasonable or discriminatory measures.
The tribunal also found that Hungary's reintroduction of administrative pricing in 2006 was motivated principally by widespread concerns relating to (and was aimed directly at reducing) excessive profits earned by the generators and the burden on consumers. It held that it was a "perfectly valid and rational objective for a government to address luxury profits". Comparing it to the recent widespread concerns about the profitability levels of banks, it found that "excessive profits may well give rise to legitimate reasons for governments to regulate or re-regulate".
Comment
The tribunal's finding that the ECT should be interpreted independently of EU law will make it more difficult for states to rely on EU law to avoid their investment treaty obligations. This should particularly be so in the light of the tribunal's confirmation that EU law, "once introduced in the national legal orders … is part of these legal orders" and "a state may not invoke its domestic law as an excuse for alleged breaches of its international obligations". However, the tribunal also held that EU law should be considered by the tribunal when determining whether the state's measures are rational, reasonable, arbitrary or transparent. EU law was therefore given considerable weight in the tribunal's analysis of Hungary's compliance with its investment treaty obligations.
The case was ultimately decided on the ground that Hungary's conduct did not give rise to any legitimate expectation. The tribunal found that no legitimate expectations were created that would preclude the reintroduction of administered prices. The decision is therefore a reaffirmation of the host state's right to regulate economic activities within its territory.
It will be interesting to see whether the tribunal in Ioan Micula, Viorel Micula and others v Romania (ICSID Case No ARB/05/20) will come to the same conclusions as to the relationship between investment treaty and EU law. In that case, Romania has been arguing that the withdrawal of certain incentives it had earlier extended to investors was necessary for it to comply with its EU law obligations and that measures adopted by it in furtherance of EU law should therefore not be interpreted as being in violation of the state's investment treaty obligations. The European Commission has intervened in that matter as well, to state its position that a state is entitled to take necessary steps to bring its actions into conformity with EU law.