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Hungary prevails in first of three Energy Charter Treaty (ECT) arbitrations over power pricing disputes; arbitrators affirm that “politics” is not a dirty word
By Luke Eric Peterson
In a recent arbitral ruling, the Republic of Hungary has been absolved of any violations of its obligations under the Energy Charter Treaty (ECT), a multilateral treaty governing trade and investment in the energy sector.*
The AES energy company had turned to arbitration in 2007 following Hungary’s imposition of caps on the price charged for energy generated by AES in Hungary. The company sought upwards of $30 Million US in compensation for its losses.**
AES, which invested in Hungary’s power generation sector following a mid-1990s privatization, contended that a pair of price decrees in 2006 and 2007 served to reduce the company’s profitability and served to undermine legitimate expectations arising out of a long-term Power Purchase Agreement (PPA) which governed the sale of electricity from the Tisza II power generating station to a Hungarian state-owned power purchaser.
However, in a unanimous award issued on September 23, 2010, a three-member tribunal at the International Centre for Settlement of Investment Disputes (ICSID) dismissed all of AES’s claims on their merits. In so doing, arbitrators found no evidence of a specific, binding commitment by Hungary to the effect that it would never reintroduce price-capping during the lifetime of the power purchase arrangement.
Nor did arbitrators find that Hungary imposed the 2006 and 2007 Decrees in a fashion that could be said to breach its obligations under the Energy Charter Treaty to offer basic transparency and due process to foreign investments. Arbitrators also found that the measures by Hungary were not unreasonable, but rather a legitimate public policy response to concerns about excessive profit-making (and concomitant consumer hardship) in a non-competitive energy sector.
While the ruling clears Hungary of any responsibility for paying damages to AES, the government still faces an additional pair of ECT claims by the multinational energy companies Electrabel and EDF.*** These latter claims are understood to challenge the same measures at issue in the AES case, as well as certain other measures by Hungary, including a subsequent termination of long-term PPAs in 2008 under pressure from the European Commission. (The EC has ruled that such contracts are uncompetitive and constitute a form of prohibited state-aid to energy companies).
Indeed, in some respects, the AES claim was an easier claim for arbitrators – dealing only with certain lost profits during a finite time-period – rather than the thornier question of an outright termination of a contract by Hungary.
Arbitrators deem it natural for the issues to be politically contentious
In broad terms, the recent arbitral award is unusual for acknowledging that the politicization of the energy price issue in Hungary was not per se unreasonable or contrary to Hungary’s investment treaty obligations.
In contrast with some investment arbitration rulings which have taken rather dim views of “politically-motivated” actions, the arbitrators in the AES v. Hungary case observed that “it is normal and common that a public policy matter becomes a political issue; that is the arena where such matters are discussed and made public.”****
A fuller analysis of the major holdings by the arbitrators is contained in this separate IAReporter article.
Arbitrators and Counsel
Arbitrators in the case were Claus von Wobeser (President), J. William Rowley (claimant’s nominee), and Prof. Brigitte Stern (Hungary’s nominee).*****
Despite rejecting all of AES’s claims, the arbitrators noted that none of the claims were “frivolous” and that the parties had acted in good faith. Accordingly, the tribunal held that the costs of the arbitration – upwards of $900,000 should be split – and that each side should bear its own legal costs and expenses. For their part, the claimants spent $8.78 Million US, and Hungary spent $5.52 Million US.
While the AES claim is an unalloyed legal victory for Hungary, the budgetary costs of defending the three known Energy Charter Treaty arbitrations are not insignificant for a government which has been one of the hardest hit by the recent global economic crisis.
Hungary was represented by the law firm Arnold & Porter and Dr. Janos Katona, a Hungarian lawyer. AES was represented by the law firm Allen & Overy and Dr. Csaba Polgar, a Hungarian lawyer.
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