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Source(s) of the information:

Lawyers, other representatives, expert(s), tribunal’s secretary



1994 Electricity Act - Act XLVIII of 1994 on the Generation, Supply and Provision of Electricity.
1995 Framework Decree - GKM Decree 63/1995 (XI.24.) on the regulation of prices of electricity and hot water and steam sold by public utility electricity units and their heat generating installations.
2000 Framework Decree - GM Decree 45/2000 (XII. 24.) on the regulation of prices of electricity and hot water and steam sold by public utility electricity units and their heat generating installations.
2000 PSA Claim - The arbitration commenced by the AES Corporation (the ultimate parent company of the Claimants) and AES Summit against APV and MVM in October 2000 for breach of the PSA.
2000 Treaty Claim - The arbitration commenced by AES Summit against Hungary in November 2000 under the ECT and also under the Agreement Between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the People’s Republic of Hungary for the Promotion and Reciprocal Protection of Investments.
2001 Amendment Agreement - The agreement dated 19 December 2001 made between AES Tisza and MVM which amended and extended the original PPA as required by the 2001 Settlement Agreement.
2001 Electricity Act - Act CX of 2001 on Electricity.
2001 PPA - The Original PPA as amended by the 2001 Amendment Agreement.
2001 Settlement Agreement - The agreement settling, amongst other things, the 2000 PSA Claim and the 2000 Treaty Claim, dated 19 December 2001.
2006 Electricity Act Amendment - The amendment to the 2001 Electricity made by the Hungarian parliament on 6 February 2006, coming into force on 3 March 2006.
2006 Price Decree - Decree GKM No. 80/2006 (XI.24.) issued by GKM on 24 November 2006.
2007 Price Decree - Decree GKM No. 14/2007 (I.26.) issued by GKM on 26 January 2007.
2007 Electricity Act - Act LXXXVI of 2007 on Electricity.
AES Corp - AES Corporation, the ultimate parent company of the company of the Claimants.
AES Summit - AES Summit Generation Limited, the First Claimant.
AES Tisza - AES - Tisza Erömü Kft, the Second Claimant.
Amendment Agreement - The agreement between MVM and all generators and electricity suppliers, amending the terms of the Original PPA, dated December 18, 1995, during the privatization process.
APV - Allami Privatizációs és Vagyonkezelo Részvénytársaság (since 8 February 2006 Allami Privatizációs es Vagyonkezelo Zärtkörüen Müködö Részvénytársaság).
Availability Fee (Sometimes, Capacity Fee) - As defined in the 2001 PPA.
Borsod Project - The construction of a new power plant at Borsod.
Centre - The International Centre for Settlement of Investment Disputes.
Claimants - AES Summit and AES Tisza.
Commission - The Commission of the European Communities.
Community competition law - The body of laws of the European Community regarding competition.
Community law - The law of the European Community.
Community State Aid Rules - The body of rules of the European Community regarding state aid.
Convention - The Convention on the Settlement of Investment Disputes between States and Nationals of Other States.
Development Projects - The Borsod Project and the Tisza II Retrofit.
DG Comp. - The Competition Directorate General of the European Commission.
ECT - The Energy Charter Treaty.
EC - The European Community.
Eeckhout Report - The Expert Report dated 30 October 2008 of Professor Piet Eeckhout.
Energy Fee - As defined in the 2001 PPA.
Facilities Agreement - The € 98 million project finance loan facilities agreement dated 20 December 2002.
Fazekas Report - The Expert Report dated 7 July 2008 of Dr. Mariana Fazekas.
FIDESZ - The Conservative Party in Hungary.
First Horrocks Statement - The First Witness Statement dated 6 March 2008 of Andrew Joseph Horrocks.
GKM - The Hungarian Ministry of Economy and Transport.
HEO - The Hungarian Energy Office.
Hungary - The Republic of Hungary.
ICSID - The International Centre for Settlement of Investment Disputes.
Lithgow Statement - The Witness Statement dated 7 March 2008 of Peter Lithgow.
MVM - Magyar Villamos Müvek Részvénytársaság (since 21 October 2005 Magyar Villamos Müvek Zártkórííen Múkódó Részvénytársaság) and its wholly owned subsidiaries, including MVM Trader.
Navigant Report - The Expert Report dated 11 July 2008 of Mr. Brent C. Kaczmarek, CFA of Navigant Consulting, Inc.
Original Tisza II PPA - The Tisza II power purchase agreement dated 10 October 1995.
Petersen Report - The Expert Report dated 30 October 2008 of Mr. Asger Petersen.
Price Act - LXXXVII of 1990 on the determination of prices.
Price Decrees - The 2006 Price Decree and the 2007 Price Decree.
PSA - Purchase and Sale Agreement between MVM, ÁPV, AES Summit and the AES Corporation as guarantor, dated 4 July 1996.
Request - The Request for Arbitration dated 6 July 2007.
Respondent - The Republic of Hungary.
Salzburg Report - Expert Opinions of Professor Thomas Eilmansberger, Thomas Jaeger Mag., LL.M, and Peter Thyri Mag., LL.M on the Compatibility of Hungarian System of Long-term Capacity and Power Purchase Agreement with EU Energy and Competition Law dated 23 November 2004.
SAMO - State Aid Monitoring Office of the Ministry of Finance.
Second Horrocks’ Statement - The Second Witness Statement dated 31 October 2008 of Andrew Joseph Horrocks.
Second LECG Report - The Second Expert Report dated 31 October 2008 of Dr. Manuel A. Abdala and Professor Pablo T. Spiller of LECG LLC.
Slot Report - The Expert Report dated 4 July 2008 of Professor Piet Jan Slot.
State Aid Decision - The Commission’s decision on the state aid awarded by Hungary through Power Purchase Agreements adopted 4 June 2008.
Stranded Costs Decree - GKM Decree 183/2002 implementing the two solutions mandated by the 2001 Electricity Act, allowing consumers above a certain consumption threshold to choose their suppliers freely and go out to the liberalized part of the market.
Tisza II Retrofit - Part of the "Development Project," a defined term in the PSA: Describes a major retrofit of all four units at the Tisza II power station.
Varga Report - The Expert Report of Dr. István Varga dated 30 October 2008.
WACC - The Weighted Average Cost of Capital.


2.1 Claimants

The Claimants in this arbitration are AES Summit Generation Limited ("AES Summit") and AES-Tisza Erömü Kft. ("AES Tisza").
AES Summit, the first Claimant, is a company incorporated under the laws of the United Kingdom ("UK"). AES Tisza, the second Claimant, is a company incorporated under the laws of the Republic of Hungary. AES Summit owns 99% of, and exercises ownership and control over, AES Tisza.
AES Summit and AES Tisza (the "Claimants") are represented in this proceeding by Stephen Jagusch, Richard Farnhill, Jeffrey Sullivan, Sophie Minoprio, Orsolya Toth and Alex Hiendl of Allen & Overy, London, and Dr. Csaba Polgár of Polgár & Bebök Law Office, Budapest.

2.2 Respondent

The Respondent in this arbitration is the Republic of Hungary ("Hungary" or "the Respondent"). Hungary is an Eastern European country, which entered into the European Union in the year 2004.
Hungary is represented in this arbitration by Jean Kalicki, Luc Gyselen, Dmitri Evseev, Alessando Maggi, Suzana Medeiros Blades, and Clara Vondrich of Arnold & Porter, Washington and Brussels offices, and Dr. János Katona of the Law Office of Dr. János Katona, Budapest.


On 9 July 2007, the International Centre for Settlement of Investment Disputes ("ICSID" or the "Centre") received a Request for Arbitration ("Request for Arbitration" or the "Request") of the same date from AES Summit Generation Limited, a company incorporated under the laws of the United Kingdom, and AES-Tisza Erömö Kft., a company incorporated under the laws of the Republic of Hungary, against the Republic of Hungary.
In the Request, the Claimants invoke the ICSID arbitration provision contained in Article 26 of the 1994 Energy Charter Treaty (the "ECT" or the "Treaty").

In accordance with Rule 5 of the ICSID Rules of Procedure for the Institution of Conciliation and Arbitration Proceedings (the "ICSID Institution Rules"), the Centre acknowledged receipt of the Request on 9 July 2007, and on the same day transmitted a copy of the Request to the Respondent and counsel for the Respondent.


The Request for Arbitration was registered by the ICSID Secretary-General on 13 August 2007, pursuant to Article 36(3) of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the "ICSID Convention" or "Washington Convention") and, on the same day, the Secretary-General, in accordance with ICSID Institution Rule 7, notified the parties of the registration and invited them to proceed to the constitution of an Arbitral Tribunal as soon as possible.


On 12 September 2007, the parties agreed in accordance with Rule 2 of the ICSID Rules of Procedure for Arbitration Proceedings (the "ICSID Arbitration Rules") on the method of constitution of the Arbitral Tribunal, providing for an Arbitral Tribunal consisting of three arbitrators, one arbitrator appointed by each party (by 12 September 2007, and 12 October 2007, respectively), and the third, presiding, arbitrator to be appointed by the party-appointed arbitrators by 12 November 2007. In the event that the two party-appointed arbitrators were unable to reach agreement within the agreed time period, the presiding arbitrator was to be appointed by the ICSID Secretary-General.

By letter of the same date, i.e., 12 September 2007, the Claimants appointed J. William Rowley QC, a national of Canada, as arbitrator. Mr. Rowley accepted his appointment on 14 September 2007.
By letter of 12 October 2007, the Respondent appointed Professor Brigitte Stem, a French national, as arbitrator. Professor Stern accepted her appointment on 16 October 2007.
In accordance with the parties’ agreement, the two party-appointed arbitrators appointed, on 5 November 2007, Claus von Wobeser, a national of Mexico, as the President of the Tribunal. By letter of 14 November 2007, Mr. Wobeser accepted his appointment.

By letter of 21 November 2007, the ICSID Acting Secretary-General informed the parties that all arbitrators had accepted their appointments and that the Tribunal was deemed to have been constituted and the proceeding to have begun on that date, pursuant to Rule 6(1) of the ICSID Arbitration Rules. On the same day, Mr. Ucheora Onwuamaegbu was appointed Secretary of the Tribunal. Later, on 26 January 2010, Mr. Ucheora Onwuamaegbu was replaced as Secretary of the Tribunal by Ms. Frauke Nitschke.

By letters of 29 November 2007 and 3 December 2007, the Centre requested each party to make an initial advance payment to defray the cost of the proceeding in its first three to six months. The Claimants’ share was received on 12 December 2007, and the Respondent’s payment was received on 28 December 2007. An additional advance payment was requested from the parties by letter of 14 January 2009. Payment from the Respondent was received on 11 February 2009 and the Claimants’ share was received on 13 February 2009. A further advance payment was requested from the parties by letter of 12 February 2010. The Claimants’ share was received on 23 February 2010. Payment from the Respondent was received on 5 April 2010. A final advance payment was requested from the parties on 3 June 2010. Payment from the Claimants was received on 28 June 2010, and the Respondent’s share was received on 31 August 2010.
Following an agreement between the parties and the Tribunal to hold the first session in this proceeding on 9 January 2008, the parties submitted, under cover of a letter of 19 December 2007, a joint statement concerning the items of the draft agenda for the first session, which was earlier circulated by the Secretary of the Tribunal.
By agreement of the parties, the first session was held on 9 January 2008, in London. Present at the session were: Mr. Claus von Wobeser, President of the Tribunal, Mr. J. William Rowley QC, Arbitrator, and Professor Brigitte Stem, Arbitrator. Attending on behalf of the Claimants: Mr. Stephen Jagusch, Mr. Jeffrey Sullivan, and Ms. Caroline Bordas of Allen & Overy, and Mr. Benedek Sipocz of AES-Tisza Erömü Kft. Attending on behalf of the Respondent: Ms. Jean E. Kalicki and Mr. Dmitri Evseev of Arnold & Porter, Dr. János Katona of the Law Offices of János Katona, Budapest, and Mr. Peter Gordos, Head of the Energy Department at the Ministry of Economy, Republic of Hungary. The Secretary of the Tribunal, Mr. Ucheora Onwuamaegbu, attended by video-conference from Washington, D.C.
At the first session, the parties’ agreement regarding the procedural calendar was noted. Pursuant to this agreement, the following calendar was established for the further written and oral procedure:

(a) Claimants’ Memorial (together with supporting documents, witness statements and expert reports) by 7 March 2008;

(b) Respondent’s Counter-Memorial (together with supporting documents, witness statements and expert reports) by 11 July 2008;

(c) Claimants’ Reply to Respondent’s Counter-Memorial, (together with reply witness statements and supplementary expert reports) by 10 October 2008;

(d) Respondent’s Rejoinder to Claimants’ Reply, (together with reply witness statements and supplementary expert reports) by 9 January 2009; and

(e) Hearing on the merits to be held from 9 to 13 March 2009.

In accordance with the procedural calendar agreed at the first session, the Claimants’ Memorial on the merits was filed on 7 March 2008.
By letter of 17 April 2008, the Respondent filed a request for production of documents before the Tribunal, to which the Claimants objected by letter of 18 April 2008. By letter of 21 April 2008, the Respondent filed observations on the Claimants’ objection of 18 April 2008. On 6 May 2008, the Tribunal issued Procedural Order No. 1, on the Respondent’s request for production of documents.
By letter of 19 May 2008, the Respondent filed a further request for production of documents. The Claimants filed observations on this request by letter of 21 May 2008. By letter of 22 May 2008, the Respondent filed a response to the Claimants’ observations. On 9 June 2008, the Tribunal issued Procedural Order No. 2, on the Respondent’s further request for production of documents.
On 11 July 2008, the Respondent filed its Counter-Memorial on the merits, which was supplemented by a letter of 23 July 2008.

Under cover of a letter of 3 September 2008, the office of the Acting Director-General, Legal Service, of the European Commission, filed an application under ICSID Arbitration Rule 37 as a non-disputing party. By letter of 18 September 2008, the Tribunal requested the European Commission to clarify certain aspects of its application. On 3 October 2008, the European Commission filed a response to the Tribunal’s request, which was transmitted to the parties the same day, with an invitation from the Tribunal to comment on the European Commission’s application by 24 October 2008.

By letter of 18 September 2008, the parties agreed to amend the procedural calendar for the written procedure, providing for the Claimants to file their Reply on the merits by 31 October 2008, and the Respondent its Rejoinder by 13 February 2009.
By respective letters of 22 October 2009, each side filed observations on the European Commission’s application of 3 September 2008, as supplemented by its letter of 3 October 2008.
In accordance with the amended procedural calendar, the Claimants filed the Reply on the merits on 31 October 2008. This was followed on 25 November 2008, by a correction to the Reply.

On 26 November 2008, the Tribunal issued Procedural Order No. 3 concerning the European Commission’s application to file a written submission pursuant to ICSID Arbitration Rule 37(2). In its Order, the Tribunal allowed the European Commission to file a submission pursuant to ICSID Arbitration Rule 37, within certain prescribed limits, by 15 January 2009. The Tribunal further denied the European Commission’s request for copies of the parties’ written submissions in light of the fact that the parties had not reached an agreement on this issue.

By letter of 1 August 2008, the Claimants filed a request for production of documents, and also filed a renewed request for production of documents on 6 October 2008. Following several rounds of observations by both parties on the Claimants’ requests, the Tribunal issued, on 22 December 2008, and 5 January 2009, Procedural Order Nos. 4 and 5 concerning production of documents.
By letter of 7 January 2009, the Claimants filed a further request for production of documents. Having considered several written observations on this request from both parties, the Tribunal issued, on 13 January 2009, Procedural Order No. 6 concerning the Claimants’ requests for production of documents.

Under cover of a letter of 15 January 2009, the European Commission filed a written submission pursuant to ICSID Arbitration Rule 37, in accordance with the Tribunal’s Procedural Order No. 3.

By letter of 26 January 2009, the Claimants filed a further request for production of documents. Following several rounds of communication by the parties on this request, the Tribunal issued, on 4 February 2009, Procedural Order No. 7 concerning the Claimants’ request for production of documents.
On 13 February 2009, each party filed observations on the written submission by the European Commission of 15 January 2009. On the same day, the Respondent filed its Rejoinder on the merits.
In accordance with the procedural calendar agreed at the first session, the hearing on the merits was held from 9 to 13 March 2009 in Washington, D.C. At the hearing, both sides presented oral arguments on the merits of the dispute, and provided witness and expert testimony.
Following an application by the Claimants, the Tribunal ordered the Respondent during the hearing, on 11 March 2009, to produce certain documents. The Tribunal further specified that certain portions of these documents could be redacted by the Respondent. However, it was agreed by the parties and the Tribunal that any disagreement between the parties on any redactions proposed by the Respondent would be submitted to the Secretary of the Tribunal for decision, without recourse to the Tribunal. Following a number of written exchanges between the parties regarding proposed redactions by the Respondent, the parties invited the Secretary’s decision.
On 27 March 2009, pursuant to the Tribunal’s document request during the hearing, the parties jointly filed post-hearing bundles. The parties also exchanged correspondence on the suspense file produced at the hearing. Consequently, further documents were introduced into the suspense file following the hearing.
On 3 April 2009, the Secretary of the Tribunal issued his decision on the Respondent’s proposed redactions to certain documents.
On 20 April 2009, the Respondent filed a request for the admissibility of new evidence. Following several communications by the parties, the Tribunal issued, on 13 May 2009, Procedural Order No. 8 concerning the admissibility of new evidence and the further procedural calendar.
On 29 May 2009, the parties filed post-hearing briefs, in accordance with the procedural calendar set forth by the Tribunal in its Procedural Order No. 8.
Under cover of a letter of 4 June 2009, the Claimants requested to file a further posthearing submission. The Respondent filed observations on this request by letter of 5 June 2009, which Claimants replied to by letter of 9 June 2009. The Tribunal, having considered the parties’ submissions, denied the Claimants’ request on 3 September 2009.
On 24 December 2009, the Claimants filed a request for the admissibility of new evidence. Following several rounds of communications by the parties on this request, the Tribunal issued, on 4 February 2010, Procedural Order No. 9 concerning the admissibility of new evidence.

On 4 June 2010, the Tribunal declared the proceeding closed pursuant to ICSID Arbitration Rule 38(1).

By letter of 25 June 2010, the Respondent filed its final Statement of Costs incurred in the proceeding, which amounted to a total cost of US$ 5,522,883.
On 8 July 2010, the Claimants filed their final Statement of Costs, which amounted to a total cost of US$ 8,787,993.70
The Members of the Tribunal deliberated by various means of communication, including meetings in Washington, D.C. on 13 March 2009 and in New York on 1 September 2009.



This arbitration arises from an alleged violation by Respondent of Articles 10(1), 10(7) and 13 of the 1994 Energy Charter Treaty (the "ECT" or the "Treaty").1 Claimants argue that an act of the Republic of Hungary, which was the reintroduction in 2006 and 2007 of administrative pricing pursuant to two Price Decrees, after administrative prices had been abolished as of 1 January 2004, violated their rights under the ECT.

In 1995, Hungary announced an energy sector privatization as part of a modernization strategy, which included the privatization of certain state-owned power stations.
On 4 July 1996, a Purchase and Sale Agreement ("PSA")2 was signed between, on the one hand, two Hungarian state-owned entities, APV and MVM, and on the other hand, AES Summit, pursuant to which AES Summit purchased a majority shareholding in the company Tiszai Erömü Részvénytársaság (now called AES Tisza - the second Claimant in this arbitration). The assets of AES Tisza included a power station known as Tisza II as well as two older coal-fired power stations, known as the Borsod power station and the Tiszapalkonya power station. The investment made by AES Summit was approximately US$ 130 million.
As a result of the PSA, Hungary was obliged to amend and extend the term of the existing power purchase agreement with Tisza II - which had been signed on 10 October 1995 ("Original Tisza II PPA")3 - and to enter into a new long-term power purchase agreement for the Borsod power station ("Borsod PPA"). For its part, AES Summit agreed to pursue and complete a retrofit of all four units at the Tisza II power station and the construction of a new power plant at Borsod.
In October 2000, AES Corporation (the ultimate parent company of the Claimants) and AES Summit commenced an arbitration against APV and MVM regarding an alleged failure of Hungary, APV and MVM to grant the promised amendment and extension of the Original Tisza II PPA and the Borsod PPA (the "2000 PSA Claim").4
A month later, in November 2000, AES Summit commenced another arbitration against Hungary under the ECT and the Agreement Between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the People’s Republic of Hungary for the Promotion and Reciprocal Protection of Investments (the "2000 Treaty Claim").5
Both arbitrations were settled by a Settlement Agreement dated 19 December 20016 (the "2001 Settlement Agreement"), by which the Claimants granted a release by way of a full and final settlement of all claims made in the arbitration proceeding. Hungary was a party to the 2001 Settlement Agreement. The 2001 Settlement Agreement superseded all prior agreements, understandings, negotiations and discussions of the parties. Some other terms of the 2001 Settlement Agreement that concern this arbitration are the following:

(a) the 2001 Settlement Agreement contained "amendments to the 1995 Tisza PPA [Original Tisza II PPA] to be entered into pursuant to this Agreement, in the form contained in schedule 1 [of the Settlement Agreement];"7

(b) AES Summit and AES Corporation were released "from any and all obligations and/or liabilities arising under the PSA to pursue the implementation of the Development Projects."


The 2001 Settlement Agreement also contained a waiver of sovereign immunity clause, which reads as follows:


Each of APV and MVM (as to (a) through (d)) and the Republic (as to (a) only) unconditionally and irrevocably:

(a) agrees that the execution and performance by it of this Agreement constitute private and commercial acts rather than public, administrative or governmental acts;

(b) agrees that should any proceedings arising out of this Agreement be brought against it or its assets, no immunity from such proceedings shall be claimed by or on behalf of itself or with respect to its assets;

(c) waives any right of immunity which it or any of its assets now has or may acquire in the future in any jurisdiction in connection with proceedings arising out of this Agreement; and

(d) consents to the enforcement of any arbitration award against it in proceedings brought in accordance with Clause 11 in any jurisdiction (including without limitation the making, enforcement or execution against or in respect of any property whatsoever, irrespective of its use or intended use)."

The inclusion of the sovereign immunity clause indicates that the parties agreed that the execution and performance of the 2001 Settlement Agreement and its Annexes constituted private and commercial acts, which means that Hungary was acting in its private character rather than in a public or governmental character.
Pursuant to the Amendment Agreement, the existing pricing schedule in the Original Tisza II PPA (Schedule 6) was replaced by a new pricing schedule which provided, inter alia, that "... as long as the public utility generator prices are subject to administrative pricing, the prices published by Decree No. 55/1996 (20 December) of the Ministry of Economy (GM) (and any amendments thereof, including currently published GM Decree No. 46/2000 (21 December)) and determined on the basis of the cost review and price review of [the Hungarian Energy Office ("HEO")] pursuant to the rules and prescriptions set forth in GM Decree No. 45/2000 (21 December) shall be acknowledged and applied."9 The new pricing schedule also went on to set out detailed pricing formula which were to be applied "following the termination of price administration of public utility generator prices."10
In 2004, Hungary acceded to the European Union.
As of 1 January 2004, the administrative pricing regime for generators was terminated as had been foreshadowed by the 2001 Electricity Act. Thereafter, at least for a time, the specific formula established in the new pricing schedule in the 2001 PPA was used to calculate the prices paid to AES Tisza IT
By December 2004, AES Tisza had completed three of the four phases of the Tisza II Retrofit at a cost of € 98 million.11
In 2005, a political debate arose in Hungary regarding what were thought by some to be the high profits of the energy generators.
The debate included argumentations in parliamentary sessions and publication of articles in the media, which discussed the existence of alleged excessive profits being earned by the generators.12 Amongst other things, MVM was said to be charging less to the consumers than the price it was paying to the generators for such electricity.13
On 23 March 2005, during a debate before the Economic Committee of Parliament, Ferenc Horváth, president of the Hungarian Energy Office, argued that if the HEO was to meet the deadline for market pricing in 2007, a financially feasible solution for the problems of MVM’s stranded costs14 had to be found. He stated that a "reasonable" profit rate for the generators of below 10% could be acceptable.
On 10 November 2005, HEO sent a letter to AES Tisza in which it claimed that the profits of the company were "unjustifiable high" and suggested that the profits should be capped at a maximum of 7.1%.
On 28 November 2005, a first meeting took place between representatives of HEO, MVM and the Claimants. At least four more meetings took place without reaching an agreement between the parties.
On 3 March 2006, the Hungarian parliament amended the 2001 Electricity Act (the "2006 Electricity Act") by reintroducing a regime of administrative prices for electricity sold by generators to MVM.
On 6 November 2006, the GKM Decree No. 80/2006 was issued, which became effective on 9 December 2006 ("2006 Price Decree").
On 26 January 2007, the GMK issued Decree No. 14/2007, which was to remain effective until December 2007 ("2007 Price Decree").
Both Decrees provided a fixed price for each generator. Consequently, the formula established in Schedule 6 of the 2001 PPA was no longer applicable.
The Claimants allege that due to the issue of both Price Decrees, they have suffered a price cut of approximately 43% (under the 2006 Price Decree) and 35% (under the 2007 Price Decree) of the Availability Fee that MVM was obligated to pay pursuant to the 2001 Tisza II PPA.
The Claimants contend that the Price Decrees were reintroduced for political reasons and that, in addition to the direct loss of revenue for AES Tisza, their lenders have declared it in default under the loan documentation in respect to the € 98 million project finance loan facilities made to the company to finance the Tisza II Retrofit.
The Claimants filed a Request for Arbitration on 6 July 2007.


The Claimants submit that Hungary violated its obligations under the ECT by reintroducing administrative pricing through the issuance of the Price Decrees. Specifically the alleged violations are the following:

(a) breach of its obligation to provide fair and equitable treatment;

(b) impairment of AES’ investment by unreasonable and discriminatory measures;

(c) breach of its obligation to provide national treatment;

(d) breach of its obligation to provide most favoured nation treatment;

(e) breach of its obligation to provide constant protection and security; and

(f) expropriation.


The Respondent did not question the Claimants’ right to bring its claims to ICSID arbitration. Nevertheless, there are some conditions which define the jurisdiction of an ICSID tribunal. In order for the Centre to have jurisdiction over a dispute, three - well-known-conditions must be met, according to Article 25 of the ICSID Convention, to which one must add a condition resulting from the general principle of non-retroactivity:

(a) a condition ratione personae : the dispute must oppose a contracting state and a national of another contracting state;

(b) a condition ratione materiae: the dispute must be a legal dispute arising directly out of an investment;

(c) a condition ratione voluntatis, i.e., the contracting state and the investor must consent in writing that the dispute be settled through ICSID arbitration;

(d) a condition ratione temporis: the ICSID Convention must have been applicable at the relevant time.


Pursuant to Article 41 of the ICSID Convention, the Tribunal is the judge of its own competence and therefore compliance with certain preconditions must be analyzed.


6.1 The Parties (ratione personae)

The conditions for the existence of ICSID jurisdiction are stated in the Washington Convention and the Energy Charter Treaty.


The UK signed the ICSID Convention on 26 May 1965 and deposited instruments of ratification on 19 December 1966. The ICSID Convention entered into force for the UK on 18 January 1967.
The UK ratified the ECT on 16 December 1997 and the Treaty entered into force on 16 April 1998.
AES-Tisza Eromu Kft ("AES Tisza") is a company incorporated under the laws of the Republic of Hungary and has its principal place of business at H-3581 Tiszaújváros, Pf: 53, Hungary.


Hungary signed the ICSID Convention on 1 October 1986 and deposited instruments of ratification on 4 February 1987. The ICSID Convention entered into force for Hungary on 6 March 1987.
Respondent signed the ECT on 27 February 1995, ratified the Treaty on 8 April 1998, and the Treaty entered into force on 16 April 1998.

6.2 Legal Dispute Arising Directly out of an Investment (ratione materiae)


Claimants allege violations of their rights under the ECT. There are disagreements on different points of law and fact, which creates a conflict of legal views and interests between the parties, and the present dispute hence qualifies as a legal dispute under Article 25(1) of the ICSID Convention.

Claimants claim to have invested approximately US$ 130 million and € 98 million into the Hungarian electricity sector.
First, in 1996, AES Summit entered into a Purchase and Sale Agreement of approximately US$ 130 million with the Hungarian state privatization and electricity transmission companies, APV and MVM respectively, for a majority shareholding in a Hungarian electricity generation company which, after its purchase, became known as AES Tisza.
Later in 2001, AES Tisza invested approximately € 98 million to retrofit the power station.

Both actions (purchasing the company and carrying out the Retrofit of the power station) qualify as investments in accordance with Article 1(6) of the ECT and Article 25 of the ICSID Convention.16

6.3 Written Consent (ratione voluntatis)

In the Request for Arbitration, Claimants provide their written consent to submit the dispute to the jurisdiction of the Centre.

In addition, in their Request for Arbitration and in their Memorial, Claimants maintain that Hungary gave its consent to the submission of the dispute to the jurisdiction of the Centre pursuant to Articles 26(3) and 26(5)(a) of the ECT.


This statement was not disputed by Hungary in its Counter-Memorial, nor was it contested in the Respondent’s Rejoinder. Hence, the parties have consented in writing to ICSID jurisdiction in accordance with Article 25 of the ICSID Convention.

6.4 Condition ratione temporis


Hungary signed the Treaty on 27 February 1995 and expressly declared that it did not accept the provisional application of the ECT (see Article 45(2)(a) of the ECT). Nevertheless, in accordance with Article 1(6), the investments protected by the ECT include those made before the entry into force of this Treaty, provided that it shall only apply to matters affecting such investments after the Effective Date.

Consequently this Tribunal can analyze the alleged breaches of the ECT given that they are said to have occurred after the entry into force of the Treaty, and after the entry into force of the ICSID Convention.

6.5 Procedural requirements pursuant to Article 26 of the ECT.


Regarding Article 26(1) and (2) of the ECT,17 the Tribunal observes that communications between the Claimants and the Respondent regarding negotiations of the dispute began in January 2007. Furthermore, in April 2007, the parties conducted in person negotiations without reaching a resolution of the dispute.


Therefore, the Tribunal considers that the three month "cooling-off period" was respected and that the Claimants had the right to submit the dispute to resolution according to Article 26(2) of the Convention.


Based on the evidence provided in the proceeding, there is no record that Claimants chose to submit their dispute before Hungary’s courts or administrative tribunals. Therefore, it is clear to this Tribunal that the dispute does not fall within the scope of Article 26(2)(a) of the ECT.

Similarly, there is no evidence that either party used any applicable or previously agreed dispute settlement procedure in order to settle the dispute.18

Consequently, the Tribunal concludes that Article 26(3)19 of the ECT applies to this case.


7.1 Claimants’ Applicable Law Arguments as Presented in the Memorial


On 7 March 2008, Claimants filed their Memorial, asserting that the law applicable to the dispute was found in Article 26(6) of the ECT, which provides that "[a] tribunal established under paragraph (4) [referring to ICSID arbitration] shall decide the issues in dispute in accordance with this Treaty and applicable rules and principles of international law." This was not further developed.

7.2 Respondent’s Applicable Law Arguments as presented in the Counter-Memorial

In its CounterMemorial, Respondent highlighted the inconveniences and the negative consequences of a ruling under the ECT, which, in its opinion, requires Hungary to act inconsistently with mandatory laws of the EU.
It is Hungary’s contention that the ECT must be read in light of one of its own objectives, which is to promote the European Union’s key energy objectives, market liberalization and free competition, and not as if it was entirely independent of critical EU laws and developments.
Consequently, Hungary states that "it defies logic to suggest, as Claimants do, that the ECT can be read as entirely divorced from EC competition law." It argues that when a state has obligations under two different treaties involving overlapping subject matter, those obligations should - to the extent possible - be read in harmony and be interpreted to minimize conflict.
In addition, Respondent says that the fact that Claimants’ 2001 PPA was governed by the law of Hungary, now an EU member state, further underscores the need to take European Community ("EC") competition law into account in determining whether any modification of the 2001 PPA transgressed the limits set forth in the ECT. Hungary relies on part of a text that Bernard Hanotiau wrote in 1995 which states that: "if the applicable law... is the law of a state of the European Union, such law includes the rules of Community law, and these rules should therefore be applied..."
Finally, Hungary alleges that there is no true conflict between the provisions of the ECT and the mandatory public policy reflected in the EC competition law (incorporated in Hungarian law governing the 2001 PPA), because:

"Accepting the notion that "legitimate expectations" is the bedrock on which many of the ECT’s investor-protection provisions rest, this notion fully supports a finding that Hungary honored its commitments. As set forth below, Claimants could have had no "legitimate" expectation that Hungary would blithely ignore EC demands to minimize or eliminate prohibited State aid. Nor could they legitimately expect that Hungary would never consider, as a rational vehicle for addressing these concerns, the temporary reintroduction of administrative price controls, predicated on the very notions of "reasonable return" upon which Claimants originally invested."

7.3 Claimants’ Applicable Law Arguments as Presented in the Reply


According to the Claimants, this is so because the ECT is to be interpreted in accordance with customary international law as codified in the Vienna Convention, Articles 31 and 32. They maintain that the principles set out in the Vienna Convention require that the ECT "be interpreted in accordance with the Law of Nations, and not any municipal code."


Claimants state that Respondent argues that, under Article 32 of the Vienna Convention, there is some unidentified provision of the ECT which is either ambiguous or absurd, and therefore recourse should be had to supplementary means of interpretation, including the preparatory work or the circumstances surrounding the conclusion of the ECT. Nevertheless, in their opinion, Hungary fails to point to any specific provision of the ECT which it believes to be ambiguous or absurd.

In addition, Claimants argue that the ECT was not solely a European initiative, because Russia, Canada, USA, Japan, and other countries were each heavily involved in its inception.
Claimants also mention that their "legitimate expectations" are irrelevant to the interpretation of the ECT and they underscore that Hungary did not identify any provision of either the Vienna Convention or customary international law which suggests that this Tribunal should interpret the ECT by reference to the expectations of an investor.

Claimants further claim that Community law is not a defence to Hungary’s breaches of the ECT, because Article 27 of the Vienna Convention provides that a "Party may not invoke the provisions of its internal law as justifications for its failure to perform a treaty."

Regarding Respondent’s alleged "conflict" between Community Law and the ECT, Claimants posit that the EC is a signatory to the ECT and is thus bound by its provisions, including those as to the choice of law. Claimants conclude that it is clear that the "EC institutions are bound by the provisions of an international treaty concluded by the EC, and that all acts of those institutions should comply with such treaties."
Claimants point out that despite not articulating any legal basis for its Community competition law defence, and despite the established legal principle that a state cannot invoke its own internal law as a defence to its violations of international law, Hungary suggests that any finding by this Tribunal that Hungary should be held accountable for its violations of international law would "seriously undermine the integrity of EC State aid law."

In answer to this point, Claimants assert that Respondent’s argument ignores the parties’ express choice of law in Article 26(6) and the provisions of the ECT on investor protection that flow, automatically, from that choice.

Furthermore, Claimants say that the ECT has addressed this issue and determined that, while the notion of state aid covers all aid granted by a member state to undertakings which might have the effect of distorting trade, it is fundamentally different in its legal nature from the damages which Hungary may have to pay as a result of this arbitration.
In their view, all Community institutions, including the Commission, must, as a matter of Community law, respect any award issued by this Tribunal.
Claimants’ conclusion is that Hungary’s alleged "circularity" problem does not exist as a matter of fact or as a matter of Community law, and that the alleged "circularity" problem has been invented by Hungary in an effort to avoid responsibility for its internationally wrongful acts. The Eeckhout Report confirms that this is the case.

7.4 Respondent’s Applicable Law Arguments as Presented in the Rejoinder

On 13 February 2009, Hungary filed its Rejoinder and clarified that it never contended, as Claimants asserted, that EC law rather than the ECT governs this arbitration. Hungary insists that it has always acknowledged that the ECT supplies the decisional standards that this Tribunal must apply. But it argues that in applying these standards, the EC law framework as well as the illegality of the 2001 PPA under Hungarian law have to be considered as facts.
The Respondent notes that Claimants themselves admitted that issues of national law are frequently factual predicates for the application of ECT decisional standards.
Consequently, the Respondent concludes that there is thus no real dispute between the parties on this issue.

7.5 Arguments Expressed During the Hearing

During the hearing, Claimants argued (on 9 March 2009) that Hungary had retreated from its previous position as set out in the Counter-Memorial, and thus that this Tribunal no longer had to determine the conflict regarding the applicable law (Transcript, p. 170:5-8). Claimants further asserted that there is "no dispute between the parties that the ECT is the applicable law" (Transcript, page 346:8).
During the hearing (on 13 March 2009), both parties and experts agreed that:

(a) the ECT was the applicable law;

(b) the EC law is relevant as a fact (Transcript, Slot: p. 1469: 8-11), (Transcript, Eeckhout: p. 1415: 6-9).


Even though there was a consensus between the parties that the ECT is the applicable law to this dispute, and that the EC law is to be taken into account as a relevant fact, the parties maintained different interpretations regarding the following issues:

(a) should the ECT be interpreted due to ambiguous provisions? And, in such case, should the interpretation method be a historical interpretation of the formation of the ECT, or the Vienna Convention?

(b) does Article 16 of the ECT apply to this dispute?

(c) should Article 307 of the EC Treaty be applied to this dispute?

Interpretation of the ECT

The Respondent alleged that the ECT should be interpreted using a historical method that takes into account the formation of the ECT, and therefore the EC law principles. Claimants disagreed, stating that any interpretation of the ECT had to be made in accordance with the Vienna Convention.

Application of Article 16 of the ECT


Claimants also noted that the Respondent failed to make reference to Article 16 of the ECT, which states that if there is a conflict between the ECT and any other treaty which deals with the subject matter of ECT Part III or Part V, then according to the law expressly chosen by the parties, the provisions which are more favourable to the investor or the investment prevail. The Respondent denied that Article 16 of the ECT was applicable to the dispute.20

Application of Article 307 of the EC Treaty


During the hearing, Claimants’ expert Professor Eeckhout stated that, in his opinion, Article 307 of the EC Treaty is a "crucial provision which enables member states to honor international obligations under an agreement they signed and concluded before joining the European community, and that insofar as there are those obligations, Article 307 of the EC Treaty authorized Hungary to ignore the Commission’s order for the benefit of a EU member state company."21

For its part, Respondent argued that as the admitted purpose of Article 307 was to protect non-member states, Article 307 of the EC Treaty should be read as authorizing Hungary to ignore the Commission’s binding order for the benefit of an EU member state company "even though AES’s home state (from which its ECT rights derive) by no means could be deemed a beneficiary of Article 307."22

7.6 Findings of the Tribunal


Article 41(2) of the ICSID Convention provides that this Tribunal shall decide the dispute "in accordance with such rules of law as may be agreed by the parties."


Article 26(6) of the ECT provides that "a tribunal established under paragraph (4) shall decide the issue in dispute in accordance with this Treaty [ECT] and applicable rules and principles of international law."


Given that this Tribunal is established under paragraph (4) of Article 26 of the ECT, it is Article 26(6) of the ECT which contains the rules of law agreed by the parties and the ones that this Tribunal will use to decide the dispute.

Interpretation of the ECT

Application of Article 16 of the ECT

Application of Article 307 of the EC Treaty

In summary, the Tribunal determines that the Respondent’s acts/measures are to be assessed under the ECT as the applicable law but that the EC law is to be considered and taken into account as a relevant fact.



The Tribunal starts its analysis of the substantive issues before it by dealing first, in Section 9 below, with Hungary’s obligation to provide fair and equitable treatment to Claimants and their investment(s). This is followed, successively, by the Tribunal’s analysis of Claimants’ claim regarding unreasonable and discriminatory measures (Section 10), national treatment (Section 11), most favoured nation treatment (Section 12), constant protection and security (Section 13), and, finally expropriation (Section 14).

In addressing each claim, the Tribunal summarizes briefly the scope of Claimants’ and Respondent’s positions as advanced in their initial pleadings, written memorials, during the course of oral argument and in their written post-hearing submissions. The Tribunal also acknowledges the efforts made by the European Commission to explain its own position to the Tribunal and has duly considered the points developed in its amicus curiae brief in its deliberations. After having thus thoroughly examined the whole file, the Tribunal presents its analyses and conclusions.


9.1 Claimants’ Position

Regarding the obligation of Hungary to provide fair and equitable treatment, the Claimants advance four main arguments which are summarized under the relevant descriptive headings below.

Contractual Obligations


The Claimants state that the obligation of Hungary to provide fair and equitable treatment includes the obligation of honouring contractual obligations, upon which the investor reasonably relied.23 These are said to include promises by Hungary "not to interfere with Claimants’ PPA," "not to frustrate...[the 2001 Settlement Agreement’s] purposes and intent" and to require another overall price and cost review prior to the introduction of any new pricing mechanism.24

Specifically, Claimants allege that with the March 2006 amendment of the 2001 Electricity Act and the introduction of the 2006 and 2007 Price Decrees, Hungary caused and encouraged MVM to refuse to fulfill its contractual commitments to AES Tisza under the 2001 PPA, and refused to fulfill its own contractual obligations to the Claimants as set out in the 2001 Settlement Agreement.25

Breach of the Obligation to Act in Good Faith and to Respect Legitimate Expectations

Claimants argue that, by amending the 2001 Electricity Act in 2006 and by introducing the Price Decrees, Hungary failed to act in good faith and in accordance with the basic and legitimate expectations (described above) upon which the Claimants relied when making their investments in Hungary in 1996 and following the 2001 Settlement Agreement and the execution of the 2001 PPA.

Stability and Predictability of Business


Claimants say that Hungary agreed to provide a certain level of financial and legal stability to the Claimants’ investment by way of the 2001 PPA. The ECT also expressly requires Hungary to provide "stable, equitable, favourable and transparent conditions" for Claimants’ investment.26 But Claimants argue that the promised stability was short-lived, as the organs of the state began accusing AES of earning luxury profits and tried to force a re-negotiation of the PPA, and the Hungarian parliament finally amended the 2001 Electricity Act which would reintroduce administrative pricing. This action eviscerated the legal framework upon which the Claimants had legitimately relied.27

The Reintroduction of the Price Decrees was Arbitrary, Non-Transparent and Lacking in Due Process

Claimants also contend that Hungary’s conduct was non-transparent, arbitrary, lacking in due process, and discriminatory.28
In support of this claim, they argue that the 2006 Electricity Act Amendment was adopted for purely political reasons (arising out of the political debate about the generators’ "excessive" and "intolerable" profits), and was aimed specifically at reducing the profits being earned by generators such as AES Tisza. Claimants note that even minister Kokka acknowledged that it was a measure that would "effect centralization or take over by the state."
In addition, Claimants allege that the manner in which the Price Decrees were issued demonstrates a lack of transparency, lack of due process and inherent arbitrariness in Hungary’s actions.
Claimants point out that the maximum profit figure of 7.1% set forth by the HEO was based on the profit figure used for distribution companies, which bears no rational relationship to generation companies.
Moreover, the HEO gave no explanation as to how it actually arrived at the prices set out in the Price Decrees. Unlike previous administrative prices, AES Tisza was given no opportunity to comment on the prices before the Price Decrees were issued. Hungary is also said to have demanded that Claimants comment on the draft language of the draft Price Decrees within four business days, and on the language of the Price Decrees themselves within one business day.29 And Hungary failed to perform a costs and assets’ review prior to issuing the Price Decrees.

9.2 Respondent’s Position

Hungary’s defence may be summarized as follows:

(a) Claimants can have had no legitimate expectations that administered prices would not be reintroduced;

(b) Hungary’s decision to do so was neither arbitrary, nor an abuse of state power;

(c) Hungary’s dealing with Claimants prior to the decision to reintroduce administered pricing were both reasonable and in good faith having regard to the concerns being expressed in various quarters about the generators’ PPAs;

(d) there were no due process failings (i.e., there was nothing arbitrary or unfair in HEO’s methodology or its procedures) which led to the adoption of the Price Decrees themselves.

Legitimate Expectations

Hungary says that Claimants invested originally in the full expectation of administrative price regulation. Even though Claimants rely on the 2001 expectations, the expectations that should count are the ones that Claimants had at the moment of deciding to make the investment, which was in 1996.
Hungary accepts that there were limitations on the future regulation, i.e., (a) prices would be set at levels sufficient to provide a "reasonable return" on investment; and (b) returns of 8% on equity had been targeted, but it was understood that this figure might change.
For these reasons, Hungary contends that no legitimate expectations were created that administrative prices would never be reintroduced. Hungary points out that, in their submission to the EC, Claimants themselves stated that the price controls were simply "suspended for a brief interlude" commencing 1 January 2004.
In order for legitimate expectations to exist, Hungary says that two elements are necessary:

(a) the existence of government representations and assurances. In this regard, Hungary maintains that the 2001 Settlement Agreement mentioned nothing in connection with prices and that although the 2001 PPA contained a pricing schedule for when the regulatory prices regime ended, it contained no representations by MVM or anyone else that the pricing regime would never change again in the future; and

(b) the reliance of the investor on such assurances to make its investment. Hungary claims that the fact that clause 3.7 of the 2001 PPA referred to a change in the law shows that the investor knew that there could be changes as regards regulatory pricing, amongst other changes in the law.

Hungary accepts that "[a]s of 2001, based on the new 2001 Electricity Act, it did appear that administrative price caps would be phased out beginning 2004."30 However, it says that this did not create legitimate expectations because those were created in 1996 and not in 2001.
But even if expectations could have been created by the 2001 PPA, in the absence of stability agreement or the like (e.g, an undertaking that the government would never again regulate prices), Claimants could have had no such legitimate expectation in 2001.
Hungary argues that even if new "expectations" were created, this did not create objective rights because the expectations were not "legitimate." In order for the expectations to be legitimate, they have to be based on affirmative government representations or assurances and these were not made. Some tribunals say that the investor’s expectations are legitimate if the investor received an explicit promise or guaranty from the host state.31

No Abusive or Arbitrary Behaviour

Hungary says that, in the absence of legitimate expectations, only "manifestly arbitrary conduct" or the "abuse of state power" can provoke a violation of the fair and equitable treatment obligation.
Hungary contends that its decision temporarily to restore administrative pricing was neither arbitrary nor an abuse of state power. It places special emphasis on the fact that countries which are in the process of becoming members of the European Community are likely to have legislative changes.
Hungary further says that Claimants did not show that the temporary reintroduction of administrative price caps was either an abuse of state power or manifestly arbitrary.
Hungary points out that Claimants submitted no expert opinion on Hungarian law regarding the power of the state to regulate maximum prices.
Regarding Claimants assertion that the Price Decrees were enacted for "purely political reasons" and without any "rational public policy" objective of the state, Hungary notes that the generators’ PPAs had been a concern to Hungary since 2002 and that "it was under serious pressure from the EC to take action at least to minimize the effects of what the EC considered to be unlawful state aid, if not to terminate the PPAs outright. In these circumstances, it tried to increase the pressure on the generators (including AES Tisza) to renegotiate the PPAs. Hungary insists on the fact that AES Tisza refused any renegotiation of the PPA which created great difficulties for Hungary in its endeavour to develop a free market, in line with the European Community standards. When the authorities were unable to renegotiate the PPAs, they took the next step, which was the least drastic of the alternatives available. They temporarily restored the system of administrative price caps, based on notions of reasonable return that had long been used in Hungary.
Hungary responds to Claimants’ argument, that the expiration of the 2007 Price Decrees demonstrates that it "could not have been related to any rational policy goal," by stating that, to the contrary, there were rational and legal reasons why administrative price regulation could not be continued in 2008, because it was contrary to the notion of full liberalization which had been introduced by the 2001 Electricity Act and which entered into effect on 1 January 2008. Hungary had also become legitimately concerned about the profit levels generators enjoyed under noncompetitive PPAs, at the expense of consumers, as well as by the failure of generators to agree to any reductions in contracted PPA capacity, to free up electricity for direct sale to the parallel free market. These were thus transitional measures, put in place while Hungary sought to negotiate with the generators to find alternative commercial arrangements that would meet the EC’s competition law concerns and address its own political issues.

Dealings were Reasonable and in Good Faith

As regards Claimants allegation that Hungary threatened AES Tisza to terminate the PPA, Hungary contends that Hungarian officials were simply acknowledging what the EC had indicated, that there was a possibility that the PPAs would have to be terminated.
Hungary did not violate fair and equitable treatment in its consultations with Claimants. Hungary says that Claimants equate a notion of a failure to act in good faith with Hungary’s unwillingness to capitulate to Claimants’ unilateral demands that they receive the full value of PPA pricing, notwithstanding the EC’s condemnation of that pricing as illegal state aid. In fact, Hungary argues, it was Claimants who acted unreasonably in the negotiations which preceded the reintroduction of administered pricing, by refusing even to acknowledge the new realities imposed by the EC's position and by market liberalization.

Due Process Observed in Implementing Price Regulation

Hungary asserts that neither HEO’s methodology and procedures for implementing maximum prices, nor the resulting prices were arbitrary or irrational.
According to Hungary, no "due process" or transparency rights were violated because, even though Claimants allege that there was no explanation as to how the HEO actually arrived at the prices set out in the Price Decrees, AES Tisza was well aware that the HEO was planning to use the 7.1% profit level as the target for determining appropriate prices, and knew that the HEO had drawn that figure from the level used to set maximum prices for distribution companies.
Hungary argues that the 7.1% rate of return on assets is comparable to the 8% return on equity target in place at the time of privatization, particularly given the fact that return on assets is a more favorable measure than return on equity. It also contends that there was nothing wrong in applying the same Weighted Average Cost of Capital ("WACC") calculation to different players in the regulated electricity market. Hungary says that, according to Navigant’s report, AES Tisza could have paid all its debt prior to 2007.
As to Claimants’ allegation that, unlike in previous administrative price cycles, AES Tisza was given no opportunity to comment on the prices set out in the Price Decrees before they were issued, Hungary responds that Claimants were invited to comment on the appropriateness of this approach, and did so, in November 2005 and in May 2006.
In addition, Hungary says that, as Dr. Fazekas discusses in her expert report, the obligation of the state to address petitions for review of individual price levels arises only after their publication and not prior to it and that AES Tisza did not submit any request for price review during 2006 and 2007. In addition, Hungary recalls that Dr. Fazekas also said that the AAP (administrative proceeding) rules do not apply because it is a lawmaking function and not an administrative case or proceeding.
Hungary argues that even if the Tribunal finds that there were imperfections in the execution of the state’s obligation of transparency, this is not enough to determine that a violation of fair and equitable treatment occurred.32

In connection with a state’s obligation to act in a transparent manner, Claimants maintain that the ECT imposes its own transparency obligations, separate and apart from the requirements of national law. In this regard, Hungary says that Article 10(1) does not impose a particularly high threshold for transparency.33

Hungary also says that the general investment treaty jurisprudence does not require states to comply with ideal notions of transparency, in which every single consideration in policy making is first publicly announced.

9.3 Findings of the Tribunal

Findings Concerning Contractual Obligations

The Tribunal makes it clear at the outset that it only has jurisdiction over Treaty claims. In connection with the alleged breach of contractual rights and consequently the violation of fair and equitable treatment obligation, the Tribunal considers that it cannot hear this claim as such.
Therefore, this Tribunal cannot rule on the scope of contract obligations and consequently cannot determine if the Claimants’ contract rights under the 2001 Settlement Agreement - and the 2001 PPA - were eviscerated because it has no jurisdiction to do so.
Nonetheless, the Tribunal considers that it has the right and duty to determine whether Hungary’s conduct - which include acts that could have breached contractual obligations - violated a specific Treaty obligation. In making this assessment, the Tribunal should not be considered to be analyzing the performance of contractual obligations as such.

Findings Concerning Legitimate Expectations

In connection with the reintroduction of administrative prices in 2006 and 2007, and the context in which such reintroduction took place, Claimants allege a breach of the basic and legitimate expectations upon which they relied when making their investment and consequently a violation of the fair and equitable treatment standard.
As stated above, the Respondent argues that no new expectations could be created in 2001 due to the fact that the original investment was made in 1996, and that legitimate expectations can only be created at the moment of the investment, which, in its eyes, was 1996.

The above interpretation was confirmed by the Tecmed Tribunal, which concluded that "this provision of the Agreement, in light of the good faith principle established by international law, requires the Contracting Parties to provide to international investments treatment that does not affect the basic expectations that were taken into account by the foreign investor to make the investment."

This then leaves for consideration Claimants’ contention that, as a party to the 2001 Settlement Agreement, Hungary, by reason of clause 21, "expressly promised... not to frustrate the purposes and intent" of the agreement, which promise it breached through the reintroduction of regulated pricing which was said to be directly contrary to the object and intent of that agreement.
Again, the Tribunal concludes that Claimants' reliance on frustrated legitimate expectations based on clause 21 is unavailing.
Clause 21 of the 2001 Settlement Agreement provides as follows:

"Each of the Parties agrees to execute and deliver all such further instruments and documents and to do and perform all such acts and things as may be necessary and any Party may reasonably request to enable it to carry out the provisions of this Agreement and/or to effect the purposes and intent of this agreement" (Emphasis added).

Findings Concerning Stable Legal and Business Framework

The analysis of the duty to provide a stable legal and business framework has to be made in light of the ECT and the applicable rules and principles of international law.38

Specifically, article 10(1) of the ECT provides that "each contracting Party shall, in accordance with the provisions of this Treaty, encourage and create stable... conditions for investors of other Contracting Parties..."

Moreover, it is clear from clause 3.7 of the 2001 PPA that the parties to the agreement were aware that a change in the law could occur that could make the obligations under the agreement become illegal, unenforceable or impossible to perform.
Mechanisms were established in clause 3.7 of the 2001 PPA, which dealt with the possible actions that could be taken by the parties in the event that a change of law, as defined, occurred. Consequently, the Tribunal concludes that the investment(s) by the Claimants in 2001 and thereafter were made in the knowledge that a change in law could occur that could make the obligations of the 2001 PPA illegal, unenforceable or impossible to perform.

Findings Concerning Due Process / Arbitrariness / Transparency

In their unfair and inequitable treatment case, Claimants rely both on the irrational and unreasonable character of Hungary’s decision to reintroduce administrative pricing, as well as the arbitrary and unfair manner (failures in due process) in which the Price Decrees were issued.

For reasons which are set out in Section 10 below (dealing with Unreasonable and Discriminatory Measures), the Tribunal has concluded that there was nothing so irrational or otherwise unreasonable in Hungary’s policy decision to reintroduce administrative prices in 2006 as would constitute a breach of its Treaty obligation to ensure that Claimants were treated fairly and equitably and that their investments were not impaired by unreasonable or discriminatory measures.

For this reason, the Tribunal limits its analysis here to the manner or methodology in or by which the Price Decrees were brought into force, with a view to assessing whether "process" failures existed which were such as would constitute a failure to provide Claimants with fair and equitable treatment.
And for the reasons noted below, the Tribunal does not believe the process of implementing the Price Decrees was so flawed as to amount to a breach of the fair and equitable standard of the ECT.
It is also to be noted that Mr. Békés was not cross-examined. This was, of course, Claimants’ right. Mr. Jagusch made the point during the hearing that, in international arbitration, it is not necessary for a party to cross-examine a witness with whose testimony that party may disagree. While this may be so, Mr. Békés was not confronted by Claimants on his evidence and his relevant testimony on process also stands un-contradicted by other testimony or contrary documentation.
Mr. Békés recalled that, following the Hungarian parliament’s authorization of a return to administrative pricing for generators in early March 2006, the Ministry expected a proposal for an implementing decree from HEO by the end of May, which it intended would go into effect by July 2006.
Mr. Békés explained that for HEO to have done a bottom up cost study in the spring of 2006, in the time frame the Ministry had in mind to issue a decree, was impractical.
On 17 November 2006, AES wrote to Mr. Horvath complaining about there having been no comprehensive cost review and asserting a right to participate in a price determination process.
The final text of the draft Decree was adopted by the Ministry on 24 November 2006 for the 2006 year.
HEO replied to AES’s cost review complaint on 30 November 2006, expressing its position that such a cost review was not required.
With the 2006 Price Decree about to take effect, on 5 December 2006, HEO wrote to AES and the other generators to propose that the prices fixed for each generator for 2006 would be adjusted upward (to the same extent the relevant generator’s 2007 PPA price was predicted to exceed the relevant generator’s 2006 PPA price) for use in 2007. A two-day comment period was given. AES did not comment.
The 2006 Price Decree went into effect on 9 December 2006.
The 2007 Price Decree was adopted on 26 January 2007, and came into force on 1 February 2007.
AES also had the opportunity to seek to review the process under which the Price Decrees were introduced by proceedings in the Hungarian courts, but did not do so.
Thus, pre-warned as it had been, AES found it possible to respond to HEO’s 11 May 2006 letter requesting comment on the draft 2006 Price Decree within the very short (in the Tribunal’s view, over-short) time specified. AES did not apparently consider it necessary to seek an extension of the deadline. Moreover, it supplemented and amended its comments four days later.

AES’s 'late’ amendments were not only accepted by HEO as being timely; HEO also acted on some of them. This is not conduct that can substantiate in this case allegations of such a degree of arbitrariness, a lack of transparency, or a lack of due process that amounts to unfair or inequitable treatment.


10.1 Claimants’ Position

To support these claims, Claimants say that a return to regulated pricing was irrational, if it was aimed at state aid concerns, because:

(a) Hungary did not believe, at the time, that there was a state aid problem;

(b) there is no obligation under Community law to introduce profit caps - profitability having no direct relationship to state aid;

(c) Hungary had promised to respect civil law contracts; and

(d) Hungary never consulted the State Aid Monitoring Office of the Ministry of Finance ("SAMO"), which was the state agency responsible for dealing with state aid issues.

On discrimination, Claimants point to the fact that HEO’s letter of 10 November 2005 was sent to just four generators, indicating that they should voluntarily give up their contractual rights and reduce their PPA prices. And when the 2006 Price Decree was issued on 24 November 2006, it affected only these four generators. Discrimination is thus evident having regard to the fact that the Commission was concerned that all generator PPAs contained state aid.

10.2 Respondent’s Position

Hungary contends it is well settled that states may implement regulatory change as long as they do so for rational, non-arbitrary reasons, and that such regulatory changes do not discriminate unlawfully against a foreign investor that is protected by an applicable investment treaty.
The standard for examining a state’s reasons for acting is not a testing one. States have a broad discretion in deciding whether and how to regulate and the burden is on the challenger to demonstrate irrationality, arbitrariness, or a lack of a reasonable relationship to some rational policy.
As regards Claimants’ allegations that Hungary’s decision to re-regulate prices was a "money grab" to help MVM, based on nothing more than domestic policy grandstanding about "luxury profits," Hungary says that there were legitimate and inter-related reasons for temporarily reintroducing price regulation in 2006:

(a) Hungary was legitimately concerned about the failure of generators to agree to negotiate any reductions in contracted PPA capacity, to free up electricity for sale to the free market;

(b) Hungarian policymakers were well aware of the Commission’s state aid investigations and of the Commission’s concern that generator PPAs contained state aid and prevented new market entrants; and

(c) the Hungarian authorities were legitimately concerned about the profit levels that some generators were enjoying under non-competitive PPAs.

Thus, Hungary says that there were rational reasons that led it to reintroduce the price regulation for a transitional period, pending full market liberalization and while awaiting the EC's Final Decision on the legality of the PPAs’.
Hungary also argues that there was nothing irrational about the government’s use of its right to exercise supervisory authority over generator prices by setting certain maximum levels, for generators that were not under market conditions. Moreover, the fact that the methodologies for implementing the policy evolved over the intervening decade does not suggest that the underlying policy itself was no longer rational.
As to Claimants’ discrimination case, Hungary says that Claimants must show there was: (a) differential treatment between parties similarly situated; and (b) no justification for such differentiation.
In this regard, Hungary argues that Claimants cannot succeed because there was no differential treatment at all. This is because prices (and especially capacity fees) were never uniform across generators in Hungary - they were always set in relation to each power plant’s underlying costs, and the generators’ cost structures varied substantially. Also, Tisza Il's capacity fee had always been lower than that of other generators, whether under administrative or PPA pricing, because of its lower fixed costs.
In addition, Hungary maintains that price caps were set by a uniform methodology which was applied to all generators and was based on a uniform measure of reasonable return (i.e., a 7.1% return on assets). It was simply the fact that each plant had a different starting point of prior returns that made the resulting price outcomes different.43
In response to Claimants’ allegation that only four generators were targeted and affected by the Price Decrees, Hungary relies on Mr. Békés’s uncontradicted explanation that the HEO reviewed financial performance data for all generators and determined that only four had exceeded the identified target return of 7.1%. The fact that only those generators whose returns exceed a maximum permitted level would be affected by a price cap does not constitute unlawful discriminatory targeting.

10.3 Findings of the Tribunal

Hungary has argued that it had three main reasons for introducing the Price Decrees.44
First, Hungary was concerned about the failure of generators to agree over several years to any reductions in contracted PPA capacity, to free up electricity for direct sale to the parallel free market, that had to be developed during the period of transition from the centralized economy to a liberal market.45
Therefore, the Tribunal cannot consider it to have been reasonable for Hungary to have issued the Price Decrees because of Claimants’ failure to agree to, or even to negotiate for, a reduction in the capacity to which it was contractually entitled under the 2001 PPA.
Hungary’s second stated reason for the introduction of the Price Decrees was the pressure of the EC Commission’s investigations and the foreseeable obligation to correct (recover) state aid that the Commission’s decision would impose.
During the hearing, it became clear to the Tribunal that SAMO, the Hungarian agency in charge of dealing with state aid issues, had not even been consulted when the government reintroduced regulated pricing in March 2006. Another important fact is that the use of the 7.1% cap on profits had no direct relation with state aid, because state aid occurs when the entity is receiving above-market prices. The elimination of above-market prices is not achieved by a cap on profits. To address such price concerns requires a general market price analysis.
Consequently, the majority concludes that Hungary’s decision to reintroduce administrative pricing was not motivated by pressure from the EC Commission.
Arbitrator Stem considers that it was not exclusively so motivated, but that the enquiry and subsequent pressures from the Commission certainly was in the Hungarian authorities’ mind when they decided to reintroduce price regulation. In her view, it appears from the record that the high prices were also a serious problem for the Commission and it is quite evident that even before Hungary was under a legal obligation to follow the Commission’s decision, it had been made abundantly clear to Hungary that the PPAs raised considerable concerns at the European level, as being in contradiction with the European free market policies. For example, in a meeting with the Commission in Brussels on 15 July 2004, concerns were expressed by the Commission that the stranded costs mechanism of Decree 183/ 2002 constitutes state aid to the generators, stating that "it must be ensured that none of the power plants reaches extra profits under the PPAs." In other words, the EC position on the PPAs cannot be separated from the motivation that was behind the Price Decrees. It is noticeable that it is on 10 November 2005, one day after a European Commission’s decision strongly critical of the PPAs, that HEO sent the letter to AES Tisza in which it claimed that the profits of the company were "unjustifiable high" and suggested that the profits should be capped at a maximum of 7.1%. Several factors - the state aid investigation, the obstacles to liberalization and the generators’ excessive returns - were clearly interrelated, in the minds of the Hungarian government and regulators, when faced with the high profits of the generators. To arbitrator Stem, the evidence is overwhelming that the decision to reintroduce maximum administrative prices was a rational, non-arbitrary response to a complex set of legitimate policy concerns.
In 2005, HEO made calculations that showed that several generators were earning returns in excess of the WACC level for the regulated electricity sector as a whole. After a series of unsuccessful attempts at PPA renegotiations, HEO presented the data regarding the generator’s returns to the parliament’s Energy Subcommittee.46
In the meantime, the level of the generators’ returns became a public issue and something of a political lightning rod in the face of upcoming elections.
Eventually, an amendment to the 2001 Electricity Act and the Price Act, to enable the reintroduction of regulatory pricing, was proposed to parliament by Mr. Podolák on 5 December 2005. The objective of the amendment was that "the transmission and distribution of electricity, the controlling of the system, the selling of electricity contracted for public utility purposes by generators, trading between the public utility wholesaler and the public utility service provider and the electricity sold to consumers in the public utility sector are subject to the regulatory pricing stipulated under the act on the determination of prices."47

This amendment proposal contained a general explanation in the following terms:

"This act shall be enacted by the Parliament to include the generators’ price of electricity contracted for public utility purposes in the scope of regulatory pricing.

During the privatization of power stations in 1995-96, long-term power purchase agreements were concluded between power stations and MVM Rt. State revenue resulting from the conclusion of long-term power purchase agreements represented revenue from privatization. By way of the agreements stable and foreseeable returns are ensured to those investors who secure the availability of electricity generation capacities necessary to meet domestic demand through the modernization of existing power stations (or the construction of new ones).

Price formulas had been identified in the agreements but the application of these formulas was abrogated by regulatory pricing.

In the Government Decree 1074/1995 (4th August) on the regulation of electricity prices and price correction to be in effect until 1st January 1997 the Hom Cabinet guaranteed an 8% return on capital by way of regulatory pricing during the conclusion of privatization agreements. Pursuant to the above decree an administrative price regulation scheme came into effect for a period of 4 years (JKM Decree No. 63/1995 (24th November) Annex 1).

In 1997 the generators’ average profit was 8.23%, a percentage that steadily increased until 2000 as a result of the efficiency improvement of power stations. By 2000 the average profit of generators was 15.71%.

In 2000 PriceWaterhouseCoopers International consulting company, upon engagement by the Orbán Cabinet, indicated in its report titled "Energy Market Opening Program" that the long-term agreements are impeding the liberalization of the energy market as the agreements contract nearly all domestic power station capacities until 2010-2015 and as such there is no free marketable electricity remaining in the market. Due to the above the international consultant proposed to the Orbán Cabinet to reduce regulatory prices during the new price regulatory period using this as an additional measure to encourage generators to renegotiate the agreements.

Had the Orbán Cabinet given consideration to the proposal presented by the international consultant engaged by it, then the Hungarian Energy Office (lead by Director General Péter Kaderják, appointed by Gyorgy Matolcsi Minister of Economy) would have been required to propose an administrative price determination that would have repeatedly reduced the generators’ profit to 8% in relation to the on-coming 4-year price regulation period to be determined in 2000. On the contrary the administrative price decree (No. 45/2000 (21st December) issued by the Ministry of Economy) abrogated the regulation concerning the 8% profit margin and introduced new price formulas.

As a result of the decision made by the Minister of Economy on the Orbán Cabinet, the 2001 profit of power stations was 22.83% as opposed to the expected 8%. This price regulation was in effect until the end of 2003 ensuring a steadily high profit level to power station investors. Act 110 (in its final clauses, Section 117 paragraph (2)) on electricity presented by the Orbán Cabinet and approved by the Fidesz-FKGP MPs on 18th December 2001 terminated administrative price regulation for generators as of 1st January 2004. Therefore the previously unapplied price formulas that are based on administrative pricing and are stipulated in the agreements came into effect.

The margins generated by power stations between 1997 and 2004 were as follows:

1997 1998 1999 2000 2001 2002 2003 2004
8.23% 12,73% 12.70% 15.71% 22.83% 21.62% 14.49% 22.36%

This draft legislation includes a proposal for correcting the regulatory error by the Orbán Cabinet and allows for the Government to exercise the measure of administrative pricing in the absence of agreement between the parties, which measure also affects the sale prices stipulated in long-term power purchase agreements providing high profit levels."

For its part, the FIDESZ presented an independent representative proposal,48 which did not propose the reintroduction of the Price Decrees but requested the government, among other things, to review the PPAs, to create the conditions of fair competition in the national electric energy market and to ensure affordable prices.
The reasoning behind the FIDESZ proposal was similar to Mr. Podolák’s proposal, as it indicated that:

"the prices of electric power are unfairly high compared to the price level of countries around us. For the security of the people and in order to lighten the financial burden of families and to increase the competitiveness of enterprises and with the intention to perceivably reduce the price of electric energy and to create honest competition in the market, the National Assembly passes the following resolution...


Of all new EU members states, it is we, Hungarians, that pay the most for electric energy. A Hungarian household and family pays twice as much for electricity as the Baltic States, 40% more than the Polish and the Czech and 20% more than Slovaks. The price of electric energy turned out like this despite of the fact that there is official price setting giving the State the opportunity to set a more favorable price..."49

On 3 March 2006, the Electricity Act was amended by the Hungarian parliament, reflecting the amendment proposed by Mr. Podolák on 5 December, 2005.50 The FIDESZ abstained from voting on the proposal.
This is because virtually all of the debate in parliament at the relevant time was about "profits." Indeed, government minister Mr. Tibor Kovács specifically asked the opposition parties if they were prepared to support the proposal, which he said "gives tools for the government to limit the alleged and so-called luxury profits."52
There is also no reference to be found to EC state aid or negotiations with EC in the official reasons for Act XXXV.
The regulatory regime in place at the time of the privatization was provided by the 1994 Electricity Act. Under the 1994 Act, the HEO would issue detailed rules on pricing, based on which the minister would determine prices to be announced in the form of a decree.53 The 1994 Electricity Act also provided, in Article 55(3), that the HEO should review the price levels and actual prices on the basis of the initiative of any interested party, and shall make the results of the process public. This provision is understood by the Tribunal as providing the right to any interested party (obviously including generators) to request a costs review of the prices, but only after they have been issued by the minister.
In addition, the Original PPA provided that payment was to be made by reference mainly to both the Availability Fee which is "paying the need for capacity to be in place in case it is needed" and the Electricity Fee which is "the cost of the power it actually requires to have generated."54 Both fees’ values to be specified in the Annual Commercial Agreement should be considered based upon the order of the Ministry of Industry and Trade.
The HEO issued a detailed framework pertaining to the pricing every four years, beginning in 1997. Under the 1994 Electricity Act, there were two pricing frameworks:

(a) the 1995 Framework Decree. Both parties agree that with this decree, the profit was supposed to be an 8% return on equity, approximately;55

(b) the 2000 Framework Decree. The starting point of the price regulation mechanism was provided by the base prices on 1 January 2001 and the preceding assets and cost reviews carried out by HEO. A mechanism of yearly price correction was established, and inflation was also taken into account.

The 2000 Framework Decree was valid until 1 January 2004, which was the date established in the 2001 Electricity Act for the abolishment of regulated prices.
Therefore, starting on 1 January 2004, the formula established in Schedule 6 of the 2001 PPA was applied to AES Tisza’s payments.
The Price Decrees provided a 7.1% pre-tax return on assets.
Turning finally to Claimants’ case based on discrimination, the Tribunal observes that the Price Decrees, which were applicable to all the generators, established a specific price per KHUF/MW/YR to be paid for the Availability Fee (Capacity Fee) depending on the generator.
Claimants contend that this constitutes discrimination, given that the price fixed for AES Tizsa was the lowest of all the generators (including foreign and local).
However, the Tribunal finds that the price established for each of the generators was reached using the same methodology. The fact that the price for each generator was different was simply the result of the use of a different starting point of prior returns which was fed into the methodology.57
Moreover, to suggest that AES’s low capacity fee ranking (in comparison to other generators) is indicative of discrimination is misleading. AES’s capacity fees were always at the bottom of the scale (see Appendix C, Respondent’s post-hearing brief) in each of the three relevant price cycles. But, as Mr. Békés explained, that was because capacity fees were based on cost structure, and the Tisza II plant had relatively low fixed costs per unit of capacity.
By contrast, energy fees (Electricity Fees) were based on variable operating costs, which were relatively high at Tisza II. This resulted in AES Tisza always receiving amongst the highest energy fee of any of the generators.
The same can be said for Claimants’ assertions of discrimination based on the fact that only four generators were affected ("targeted") by the reintroduction of price regulation. This is because the notion of a cap on prices based on a starting target of "reasonable returns" means that generators that are already earning below that return will not be affected by the regulation.
And having regard to the objective of 2006/2007 price cap regulation, of protecting consumers from having to fund so-called "excessive profits" of generators, it is perfectly logical that generators whose returns were not "excessive" at the time of re-regulation would not be affected by the cap.
Discrimination necessarily implies that the state benefited or harmed someone more in comparison with the generality. In this case, on the uncontradicted facts, the Tribunal finds that there has been no different treatment of AES Tisza in comparison with the other generators and, thus, that it was not the subject of discriminatory treatment.


11.1 Claimants’ Position

11.2 Respondent’s Position

The Respondent denies a breach of the ECT’s national treatment obligation and asserts that the Price Decrees "only overrode contractual pricing when it exceeded the "maximum" level set by the uniform 7.1% return-on-assets methodology" and that such situation did not happen in the case of Paks because, based on contractual formula in its PPA, its actual return was significantly lower than the target level.59

11.3 Findings of the Tribunal


Article 10(7) of the ECT obliges each signatory party to accord "treatment no less favorable than that which it accords to Investments of its own Investors or for the Investors of any other Contracting Party or any third state and their related activities."

The alleged breach of the obligation to provide national treatment is based on the same facts that Claimants alleged amounted to a discriminatory measure,60 where the Tribunal found that no discriminatory measure was taken by the government. Indeed, Claimants’ admitted that the generator with the highest capacity fee was, like itself, foreign.
Therefore, as was concluded in Section 10 above, the Tribunal finds that Hungary did not breach its ECT obligation to provide national treatment to AES Tisza.


12.1 Claimants’ Position

12.2 Respondent’s Position

The Respondent claims that "the application of a uniform methodology to all power plants with PPAs, based on the objective of capping returns at prescribed rates of reasonableness, is not rendered discriminatory simply because some plants had previously exceeded the "reasonable" level by more than others."

12.3 Findings of the Tribunal


Article 10(7) of the ECT obliges each signatory party to accord "treatment no less favorable than that which it accords to Investments of its own Investors or for the Investors of any other Contracting Party or any third state and their related activities."

Therefore, as was concluded in Section 10, the Tribunal finds that Hungary did not breach its ECT obligation to provide most favoured nation treatment to AES Tisza.


13.1 Claimants’ Position

In their opinion, Hungary breached the standard when it failed to ensure the legal security of the investments through the 2006 Electricity Act Amendment and the ensuing implementation of the Price Decrees, given that such acts have substantially devalued their investment.

Relying on the duty identified by the Tribunal in CME, Claimants say that the 2006 Electricity Amendment Act and the Price Decrees eviscerated their rights under the 2001 Settlement Agreement and the 2001 PPA. Hungary thus made it "impossible to preserve and continue contractual arrangements underpinning the investment" and has therefore breached the most constant protection and security provisions of Article 10(1).62

The requirement to provide constant protection and security is a duty:

"to use the powers of government to ensure the foreign investment can function properly on a level playing field, unhindered and not harassed by the political and economic domestic powers that be."63

And the level playing field here, which Hungary itself destroyed, was the pre-existing, freely negotiated contractual relationship that the generators enjoyed with MVM.

13.2 Respondent’s Position

To the contrary, Hungary argues that the obligation to provide constant protection and security cannot be understood as a treaty-based stabilization clause, tantamount to a guarantee of a "legal security" under which a state will take no action that interferes with the "contractual arrangements underpinning [an] investment." Respondent says that the standard imposes a duty of "due diligence" that requires the state to afford reasonable protection to investors against foreseeable harm from third parties. It adds that there can be no credible suggestion that the Price Decrees were designed to destroy a "level playing field on which Claimants could properly function unhindered and not harassed by the political and economic powers that be" when their very purpose was to ensure a reasonable return for all generators with PPAs.
Respondent admits that some tribunals have recently expanded the scope of protection beyond the two traditional areas (i.e., physical protection and the provision of reasonable legal avenues to enforce investors’ rights) to include general references to legal security. But even under such an expansive reading, the protection is not absolute, and applies only in exceptional circumstances.

13.3 Findings of the Tribunal


In addition to the fair and equitable standard, Article 10(1) of the ECT establishes that the "investments shall also enjoy the most constant protection and security and no Contracting Party shall in any way impair by unreasonable or discriminatory measures their management, maintenance, use, enjoyment or disposal."

In the words of Brownlie, the duty is no more than to provide "a reasonable measure of prevention which a well-administered government could be expected to exercise under similar circumstances."65
The Tribunal finds that there can have been no breach of the obligation to provide constant protection and security as a result of Hungary’s reintroduction of regulated pricing in 2006-2007, such reintroduction being based on rational public policy grounds.


14.1 Claimants’ Position

In this regard, Claimants state that, as it has been decided by numerous arbitral tribunals, an act tantamount to expropriation occurs when the state deprives an investor of its contractual rights even when the act does not involve a taking of physical property.68
In addition, Claimants maintain that the expropriation may be indirect when there is an interference with the use of property, even if is incidental and even if the state does not benefit from such interference.69
Moreover, Claimants contend that a state’s measures can amount to expropriation even when they are in force for only a limited period. Reliance is placed on Wena Hotels v. Arab Republic of Egypt (ICSID Case No. ARB/98/4), in which the Tribunal determined that an expropriation can take place even when the interference was executed only during a limited period of time.70

14.2 Respondent’s Position

Respondent contends, in brief, that Claimants have no legal basis to claim an expropriation (direct or indirect) given that Hungary’s acts did not deprive the Claimants from the use and control of their investment and the investment was not deprived of all meaningful value.71 Respondent says that such requirements are preconditions to a finding of an expropriation by the Tribunal. Furthermore, the Respondent argues that Claimants do not contend that AES suffered harm remotely equivalent to a traditional expropriation and that they cannot expand the doctrine of indirect expropriation to cover acts which may lead to the temporary diminution of their profits. According to the Respondent, Claimants themselves acknowledged to the EC that regulating prices was more the rule than the exception in Hungary: in a letter dated 13 February 2006, Claimants described price controls as having been simply " suspended for a brief interlude commencing 1st January 2004."72

14.3 Findings of the Tribunal


15.1 Claimants’ Position

On 8 July 2010, the Claimants filed their final Statement of Costs which amounted to a total cost of US$ 8,787,993.70 and included legal fees and expenses. To date, Claimants have paid an advance on costs to ICSID and the Tribunal in the amount of US$ 459,945.00.

15.2 Respondent’s Position

For its part, on 25 June 2010, Respondent filed its final Statement of Costs which amounted to a total cost of US$ 5,522,883.00 which included legal fees and expenses. To date, Respondent has paid an advance on costs to ICSID and the Tribunal in the amount of US$ 460,000.00.

15.3 Findings of the Tribunal

The cost of the arbitration, which includes, inter alia, the arbitrators' fees, the expenses of the Tribunal, the Secretariat's administrative fee and the charges for the use of the facilities of the Centre, at the time of the award, amounts to US$ 887,839.04.73

Pursuant to Article 61(2) of the ICSID Convention, as well as Rule 28 of the ICSID Arbitration Rules, the Tribunal has the discretion in the absence of a prior agreement between the parties to decide the allocation of the costs and the legal fees and expenses between the parties.


On the basis of the foregoing reasons, this Tribunal ORDERS AND AWARDS as follows:

(a) The Tribunal has jurisdiction over all the ECT claims presented in this arbitration;

(b) The Respondent did not breach Articles 10(1), 10(7) and 13 of the ECT;

(c) The parties shall bear the costs of the arbitration in equal shares;

(d) The parties shall bear their own costs and legal fees;

(e) All other claims are dismissed.

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