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International Centre for Settlement of Investment Disputes Washington, D.C INTERNATIONAL CENTRE FOR SETTLEMENT OF INVESTMENT DISPUTES WASHINGTON, D.C. In the matter between HRVATSKA ELEKTROPRIVREDA D.D. (Claimant) and REPUBLIC OF SLOVENIA (Respondent) (ICSID Case No. ARB/05/24) ________________________________________________ AWARD ________________________________________________ Members of the Tribunal The Hon. Charles N. Brower, Arbitrator Professor Jan Paulsson, Arbitrator Mr David A. R. Williams, Q.C., President Secretary of the Tribunal Ms Milanka Kostadinova Representing the Claimant Representing the Respondent Mr Josip Lebegner Mr Mark Levy Principal Representative for the Claimant Mr James Freeman Mr Rishab Gupta and Ms Katrina Limond Mr Robert W. Hawkins Allen & Overy LLP Mr Stephen M. Sayers Ms Julie M. Peters Mr Leo Andreis Hunton & Williams LLP Date of Dispatch to the Parties: 17 December 2015 TABLE OF CONTENTS I. INTRODUCTION ..................................................................................................................1 The Parties and Their Legal Representatives .........................................................................1 Other Entities Relevant to the Dispute ...................................................................................1 Nuklearna Elektrana Krško vu ..........................................................................................1 Elektro-Slovenija, d.o.o. Ljubljana ...................................................................................1 The Basic Nature of the Dispute .............................................................................................2 II. PROCEDURAL HISTORY....................................................................................................4 Jurisdiction and Merits............................................................................................................4 Issues for Determination in Quantum Phase...........................................................................7 July 2009 Hearing ...................................................................................................................8 Appointment of Tribunal Expert...........................................................................................10 Mr Jones’ Requests for Information .....................................................................................12 Mr Jones’ Report and the Parties’ Submissions in Relation Thereto ...................................16 March 2015 Hearing .............................................................................................................19 III. SUMMARY OF FACTS ......................................................................................................19 The Governing Agreements ..................................................................................................20 The 1970 Agreement Established the “Parity Principle” ................................................20 The 1974 Pooling Agreement Continued the Parity Principle........................................21 The 1982 Annex to the Pooling Agreement Further Implemented the Parity Principle .22 The 1982 Self-Management Agreement Extended the Parity Principle .........................22 The Operation of NEK in the 1990s and the Disagreements Between the Parties ...............23 The Creation of a Decommissioning Fund .....................................................................24 The Replacement of the Steam Generators at the Krško NPP ........................................25 The Dispute on the Appointment of NEK’s Deputy General Manager ..........................26 The Dispute over HEP’s Financial Obligations towards the Krško NPP .......................27 NEK’s Financial Problems .............................................................................................30 The Nuclear Safety Concerns at the Krško NPP ............................................................30 i The Suspension of Electricity Deliveries to HEP ...........................................................31 Slovenia’s Proposals for an Agreement over Electricity Supply to HEP .......................32 The 1998 Decree .............................................................................................................33 The 2001 Agreement ............................................................................................................36 Negotiations Leading to the 2001 Agreement ................................................................36 The Content of the 2001 Agreement ...............................................................................37 Ratification of the 2001 Agreement ................................................................................41 NEK’s Offers For Sale of Electricity to HEP in 2002 ..........................................................42 IV. SUMMARY OF ISSUES TO BE ADDRESSED ................................................................42 V. THE 2002 OFFERS ..............................................................................................................44 HEP’s Initial Submissions in Advance of July 2009 Hearing ..............................................44 Slovenia’s Initial Submissions in Advance of July 2009 Hearing........................................48 Mr Jones’ Analysis of the Offers ..........................................................................................50 HEP’s Comments on the Jones Report .................................................................................51 Slovenia’s Comments on the Jones Report ..........................................................................51 Tribunal’s Analysis and Conclusions on the 2002 Offers ....................................................52 VI. PASS-ON DEFENCE ...........................................................................................................53 Mr Jones’ Analysis ...............................................................................................................53 HEP’s Comments on the Jones Report .................................................................................54 Slovenia’s Comments on the Jones Report ..........................................................................55 Tribunal’s Analysis and Conclusions on Pass-on Defence ..................................................56 VII. CALCULATION OF DAMAGES .......................................................................................61 HEP’s Initial Submissions prior to the July 2009 Hearing ...................................................62 Slovenia’s Initial Submissions prior to the July 2009 Hearing ............................................65 Mr Jones’ Analysis and Calculation of Loss ........................................................................70 NEK Production and the Cost of NEK Output During the Relevant Period ..................70 Replacement Cost Model ................................................................................................71 Impact of Fuel Contracts ........................................................................................... 73 Marginal Costs .......................................................................................................... 74 Availability and Price of Imports .............................................................................. 75 Merit Order ............................................................................................................... 76 Security of Supply ...................................................................................................... 77 ii Financial Value ...............................................................................................................79 HEP’s Comments on the Jones Report .................................................................................81 Financial Value versus Replacement Cost Models .........................................................84 Slovenia’s Comments on the Jones Report ..........................................................................85 Tribunal’s Analysis and Conclusions on the Calculation of Loss ........................................88 Valuation of the “Counterfactual” – Y Factor ................................................................88 Valuation of the “Factual” – X Factor ............................................................................91 Underlying Principles .....................................................................................................91 Replacement Cost Methodology .....................................................................................93 Replacement Energy Sources .................................................................................... 95 Reasonableness of Using TPPs and Imports in Combination ................................... 98 Proportion of TPP/Imports ..................................................................................... 104 Valuation of Electricity from TPPs ......................................................................... 109 Valuation of Imports ................................................................................................ 117 Conclusion on Compensation .......................................................................................121 VIII. BENEFIT-TO-HEP DEDUCTION ....................................................................................122 Mr Jones’ Analysis of the Benefit to HEP ..........................................................................122
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