(Icsid Case No. Arb/07/19) Decision on Jurisdiction

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(Icsid Case No. Arb/07/19) Decision on Jurisdiction INTERNATIONAL CENTRE FOR SETTLEMENT OF INVESTMENT DISPUTES WASHINGTON, D.C. IN THE ARBITRATION PROCEEDINGS BETWEEN: ELECTRABEL S.A. CLAIMANT V. THE REPUBLIC OF HUNGARY RESPONDENT (ICSID CASE NO. ARB/07/19) ___________________________________________________________________________ DECISION ON JURISDICTION, APPLICABLE LAW AND LIABILITY ___________________________________________________________________________ Members of the Tribunal: Professor Gabrielle Kaufmann-Kohler, Arbitrator Professor Brigitte Stern, Arbitrator V.V. Veeder, President ICSID Secretary to the Tribunal: Ms. Aurélia Antonietti Representing the Claimant: Representing the Respondent: Mr Audley Sheppard Ms Jean Kalicki Mr Gareth Kenny Mr Dmitri Evseev Ms Christina Schuetz Ms Mara V. J. Senn CLIFFORD CHANCE LLP Mr Luc Gyselen (until March 2012) ARNOLD & PORTER LLP Mr Peter Turner and FRESHFIELDS BRUCKHAUS DERINGER Mr János Katona LLP (as of March 2012) LAW OFFICE OF JÁNOS KATONA and Mr Zoltán Faludi Mr Laszlo Kenyeres FALUDI WOLF THEISS Date of dispatch to the Parties: 30 November 2012 TABLE OF CONTENTS PART I: THE ARBITRATION I-01 (01) The Parties and Other Persons I-01 (02) The Arbitration Tribunal I-02 (03) The Arbitral Procedure I-03 (04) The Parties’ Claimed Relief I-10 (05) ICSID Arbitration Rule 38(1) I-12 PART II: THE PARTIES’ DISPUTE II-01 (01) Introduction II-01 (02) The Claimant’s Case II-02 (03) The Respondent’s Case II-04 (04) The Principal Issues II-07 PART III: THE PRINCIPAL LEGAL TEXTS III-01 (01) Introduction III-01 (02) The Energy Charter Treaty (ECT) III-01 (03) Treaty on European Union (TEU) III-10 (04) Treaty on the Functioning of the European Union (TFEU) III-11 (05) The Vienna Convention on the Law of Treaties (VCLT) III-17 (06) The ICSID Convention III-20 (07) The ICSID Arbitration Rules III-22 (08) Table TFEU - Ex EC III-23 PART IV: APPLICABLE LAW(S) IV-01 (01) Introduction IV-01 ECT IV-01 EU Statement IV-01 i ICSID Convention IV-02 New York Convention IV-02 VCLT IV-02 EU BITs IV-02 EU Treaties IV-02 EU Lisbon Treaty IV-02 This Case IV-04 (02) The Claimant’s Case IV-06 (i) EU law is not applicable as law, but as fact IV-11 (ii) In any event, only EU Treaties are part of international law IV-12 (iii) EU Treaty law incorporates ECT IV-12 (iv) If there is inconsistency, the ECT has primacy IV-12 (v) EU law and ECT can be read in harmony IV-13 (03) The Respondent’s Case IV-16 (i) EU law is international law IV-19 (ii) EU law is also relevant as a fact IV-20 (iii) The Claimant’s theory of the ECT’s absolute dominance is unacceptable IV-20 (iv) EU law and ECT can be read in harmony IV-22 (04) The European Commission’s Submission IV-27 (i) State Aid IV-28 (ii) The ECT IV-31 (iii) PPA Termination Claim IV-31 (05) The Tribunal’s Analysis IV-35 (i) The Multiple Nature of EU Law IV-37 (ii) EU law is based on an international treaties IV-37 (iii) The Whole of EU law as an International Legal Order IV-38 (iv) EU law as National Law IV-39 (v) EU Law as Fact IV-40 (vi) The Relationship between the ECT and EU law IV-40 The ECT’s Genesis IV-42 ECT and EU Objectives IV-43 ECT and EU Decisions IV-44 (vii) Harmonious Interpretation IV-45 (viii) Possible Inconsistency between the ECT and EU law IV-53 Hierarchy of Legal Orders IV-56 Article 16 ECT IV-56 Article 307 EC (Article 351 TFEU) IV-57 Article 30 of the Vienna Convention IV-62 (06) The Tribunal’s Conclusions IV-62 ii PART V: JURISDICTION V-01 (01) Introduction V-01 (02) The European Commission’s Submission V-03 (i) Jurisdiction V-03 (ii) EU Law V-04 (iii) Harmonious Interpretation V-04 (iv) Unenforceable Award V-05 (03) The Claimant’s Observations V-12 (04) The Respondent’s Observations V-13 (05) The Tribunal’s Analysis and Decisions V-15 (i) The Tribunal’s Jurisdiction V-15 (ii) Article 1(6) ECT V-17 (06) Summary V-22 PART VI: PPA TERMINATION CLAIM VI-01 (01) Introduction VI-01 (02) Electrabel’s Case VI-05 (i) FET VI-05 (ii) Expropriation VI-06 (iii) Expropriation without Compensation VI-08 (iv) Other ECT Standards VI-11 (03) Hungary’s Case VI-11 (i) FET VI-11 (ii) Expropriation VI-12 (iii) Expropriation without Compensation VI-13 (iv) Other Treaty Standards VI-14 (04) The Tribunal’s Analysis and Decisions VI-14 (i) Expropriation VI-14 (ii) FET VI-20 (iii) Events before the Final Decision VI-20 (iv) The Final Decision VI-22 (v) Net Stranded Costs VI-31 (vi) Other ECT Standards VI-38 (05) Summary VI-39 iii PART VII: PPA PRICING VII-01 (01) Introduction VII-01 (02) The Claimant’s Case VII-02 (i) Summary of the Claimant’s Position VII-02 (ii) Period of Regulated Pricing (1996-2003) VII-02 (iii) Period of Deregulated Pricing (2004-2005) VII-03 (iv) 2005-2015 VII-04 (v) Attribution VII-06 (vi) Breach of the ECT VII-06 (03) The Respondent’s Case VII-07 (i) Summary of the Respondent’s Position VII-07 (ii) PPA Pricing: 1997-2001 VII-09 (iii) PPA Pricing: 2001 VII-10 (iv) PPA Pricing: 2002-2004 VII-10 (v) PPA Pricing: 2005 VII-11 (vi) PPA Pricing: 2006 VII-11 (vii) No Attribution VII-12 (viii) No Breach of ECT VII-13 (04) The Tribunal’s Analysis and Decisions VII-15 (i) Applicable Rules VII-16 (ii) General Approach VII-16 (iii) Attribution VII-17 (iv) Fair and Equitable Treatment VII-20 (v) Full Protection and Security VII-22 (vi) 2006 and 2008 VII-23 (vii) Ministerial and Parliamentary Conduct VII-24 (viii) MVM VII-26 (ix) HEO November 2005 Letter VII-27 (x) The 2008 YCA VII-29 (xi) The 2006 YCA VII-30 (xii) MVM’s Conduct during the Renegotiation Meetings VII-32 (xiii) The YCA Drafts VII-36 (xiv) The FET Standard VII-42 (xv) The FPS Standard VII-43 (xvi) Unreasonable or Discriminatory Measures VII-44 (xvii) International Law Standard VII-46 (xviii) National Treatment and MFN Treatment VII-47 (05) Summary VII-48 PART VIII: REGULATED PRICING VIII-01 (01) Introduction VIII-01 (02) The Claimant’s Case VIII-02 (03) The Respondent’s Case VIII-04 (04) The Tribunal’s Analysis and Decisions VIII-05 (05) Summary VIII-11 iv PART IX: ISSUE F - THE G1 UNIT IX-01 (01) Introduction IX-01 (02) The Claimant’s Case IX-02 (03) The Respondent’s Case IX-03 (04) The Tribunal’s Analysis and Decisions IX-03 (05) Summary IX-05 PART X: SUMMARY X-01 PART XI: THE OPERATIVE PART XI-01 A: Selected List of Abbreviations (vi) B: Dramatis Personae (ix) C: Selected List of Legal Materials and References (xi) v A: List of Abbreviations 1994 Electricity Act: Hungary’s Electricity Act of April 1994, establishing general regulatory principles for the electricity sector. 1995 Decree: Hungary’s Decree 63/1995, establishing a pricing methodology for the period beginning 1 January 1997 and ending 31 December 2000. 2001 Electricity Act: Hungary’s Electricity Act of December 2001, establishing a “dual” market for electricity. 2006 Act: Hungary’s 2006 Price Regulation Act of March 2006, reintroducing administrative pricing. 2007 Electricity Act Hungary’s Electricity Act implementing full market liberalisation in the electricity sector. Act of Accession: Hungary’s Act of Accession with the European Union, effective from 1 May 2004 as a Member State. AES Tisza: AES Tisza Erőmű Kft (company operating the Tisza plant). APV: Hungary’s Privatization and State Holding Company, responsible for the management of state owned assets). BIT: The 1986 Agreement for the Promotion and Protection of Investments between the Government of Belgium and Hungary. CFI: The European Court of First Instance (now the General Court). Cooperation Agreement: The Agreement concluded between Dunamenti and MVM dated 18 March 1997. Commission Submission The European Commission’s Submission dated 12 June 2009 pursuant to Article 27(2) of the ICSID Arbitration Rules in these arbitration proceedings. Compensation Decision: The European Commission’s Compensation Decision of 27 April 2010. DG Comp: The Directorate General for Competition of the Commission of the European Communities. DSPI: Domestic Sale Price Index. Dunamenti: Dunamenti Erőmű Rt (owner and operator of the Dunamenti power plant from 1995). vi Commission: The Commission of the European Communities. F Retrofit Agreement: The 2001 Agreement between Dunamenti and MVM amending the PPA. Generators: Hungarian companies generating wholesale electricity. HEO: The Hungarian Energy Office (Hungary’s energy regulator). MAVIR: Magyar Villmosenergia-ipari Átviteli Rendszerirányító (Hungarian Transmission System Operator, MVM’s subsidiary since 2006). MOL Duna Refinery: MOL Dufi (oil refinery owned by MOL serviced by the Dunamenti power plant). MVM: Magyar Villamos Müvek Zrt (State owned electricity supply company). MVM Trade: MVM Villamosenergia Kereskedelmi Zrt (MVM’s subsidiary, assignee of the PPA from MVM). Net Stranded Costs: Stranded Costs in excess of repaid/repayable State Aid. NRI: Non-Returned Investment. London Economics: Consultants retained by Hungary to carry out a market simulation of Hungarian electricity supply. PPA: The Power Purchase Agreement dated 10 October 1995 concluded between Dunamenti and MVM (amended in 1996, 1997, 1998, 1999 and by the F Retrofit Agreement of 2001). PPI: Producer Price Index. Price Decrees: Hungary’s Price Decrees of December 2006 and January 2007 under the 2006 Act (also called “Tariff Decrees”). PSA: The Purchase and Sale Agreement dated 8 December 1995 between the Hungarian Privatization and State Holding Company APV and Powerfin S.A.
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