(1) As to jurisdiction, the Tribunal declared, pursuant to Article 26 of the Energy Charter Treaty ("ECT") and Articles 25 and 41 of the ICSID Convention, that ICSID had jurisdiction and that the Tribunal was competent to decide finally the Parties' dispute in these arbitration proceedings;
(2) The Tribunal dismissed, as to liability, Electrabel's PPA Pricing Claim, Regulated Pricing Claim and G1 Unit Claim (as defined in the Tribunal's Decision);
(3) As regards Electrabel's PPA Termination Claim, the Tribunal postponed to a subsequent phase of these arbitration proceedings its final decision (as regards both liability and quantum) in regard to "net stranded costs" forming part of Electrabel's claim for compensation under Article 10(1) of the ECT (regarding Hungary's obligation to accord to Electrabel's investment fair and equitable treatment). The Tribunal otherwise dismissed as to liability all other parts of Electrabel's PPA Termination Claim;
(4) As to quantum generally (including interest), the Tribunal did not decide any issue (given the Parties' agreement on bifurcating quantum during the first phase of these arbitration proceedings); and
(5) As to the Parties' respective claims for costs, the Tribunal made no order, save to reserve in full its jurisdiction and powers to make any future order as regards all legal and arbitration costs in an award subsequent to the Tribunal's Decision.
Following the registration on 13 August 2007 of Electrabel's Request for Arbitration by the Centre ("ICSID") as ICSID Case No. ARB/07/19, the Tribunal was constituted on 5 December 2007, comprising of three members, as follows:
(1) Professor Gabrielle Kaufmann-Kohler, as Co-Arbitrator, a citizen of Switzerland, appointed by Electrabel's letter dated 26 September 2007, of Lévy Kaufmann-Kohler, 3-5, rue du Conseil-Général, P.O. Box 552, 1211 Geneva 4, Switzerland;
(2) Professor Brigitte Stern, as Co-Arbitrator, a citizen of France, appointed by Hungary's letter dated 12 November 2007, of the University Paris I, Panthéon-Sorbonne, 7 rue Pierre Nicole, 75005 Paris, France; and
(3) V.V. Veeder, Esq., a citizen of the United Kingdom, of Essex Court Chambers, 24 Lincoln's Inn Fields, London WC2A 3EG, United Kingdom, as President, appointed by the two co-arbitrators upon their proposal to the Parties of 26 November 2007, accepted by the Claimant and the Respondent by their respective letters of 28 November 2007 and 29 November 2007.
Mr Ucheora Onwuamaegbu, Mr Marat Umerov and Ms Aurélia Antonietti, all of ICSID, served in turn as Secretary to the Tribunal.
The following factual witnesses then testified orally at the First Hearing: for Electrabel, Mr Kuhl [H1D2,260x; H1D2,265 & 415xx; H1D2,395xxx], Mr Bodnár [H1D2,431x; H1D2,432xx; H1D2,530xxx] and Mr Csiba [H1D3,546x; H1D3,549xx; H1D3,585xxx]; and for Hungary, Mr Békés [H1D3,830x; H1D3.831xx...; H1D4,863...xx; H1D4,932xxx], Mr Horváth [H1D4,944x; H1D4,947xx; H1D4.1048xxx], Mr Staviczky [H1D5.1066x; H1D5.1082 & 1168xx; H1D5.1153xxx], Mr Kovács [H1D5.1181x; H1D5.1185, 1257 & 1274xx; H1D5.1247 & 1281xxx], Mr Barócsi [H1D7.1728x; H1D7.1729xx; H1D7.1782xxx]; and Mr Mártha [H1D7.1788x; H1D7.1827xx].
The following expert witnesses testified orally at the Hearing: for Electrabel, Professor Sir David Edward [H1D3,591x; H1D3,615xx; H1D3,684 & 708xxx] and Mr Shuttleworth [H1D5.1287x; H1D5.1306...xx; H1D6.1403...xx; H1D6.1495xxx]; and for Hungary, Professor Slot [H1D3,714x; H1D3,719...xx; H1D3,785xxx], Mr Jones [H1D6.1504x; H1D6.1519...xx] and Mr Kaczmarek [H1D6.1581x; H1D6.1600 & 1681xx; H1D6.1663 & 1684xxx].
[11.2] Jurisdiction: The Tribunal declared, pursuant to Article 26 of the Energy Charter Treaty and Articles 25 and 41 of the ICSID Convention, that the International Centre for Settlement of Investment Disputes has jurisdiction and that this Tribunal is competent to decide finally the Parties' dispute in these arbitration proceedings;
[11.3] The PPA Termination Claim: The Tribunal postponed to a subsequent phase of these arbitration proceedings its final decision (as regards both liability and quantum) in regard to net stranded costs forming part of Electrabel's claim for compensation pleaded as the PPA Termination Claim and made under Article 10(1) of the Energy Charter Treaty in regard to Hungary's obligation to accord to Electrabel's investments fair and equitable treatment. The Tribunal dismissed as to liability all other grounds advanced by Electrabel for this PPA Termination Claim and all other parts of its claim for compensation under this PPA Termination Claim;
[11.4] The PPA Pricing Claim: The Tribunal dismissed as to liability Electrabel's claim for compensation pleaded as the PPA Pricing Claim;
[11.5] The Regulated Pricing Claim: The Tribunal dismissed as to liability Electrabel's claim for compensation pleaded as the Regulated Pricing Claim;
[11.6] The G1 Unit Claim: The Tribunal dismissed as to liability Electrabel's claim for compensation pleaded as the G1 Unit Claim;
[11.7] Costs Claims: The Tribunal made no order as regards costs, save to reserve in full its jurisdiction and powers to make any order as regards all legal and arbitration costs in an award subsequent to the Tribunal's Decision; and
[11.8] Quantum: The Tribunal's Decision did not decide any issue relating to quantum (including interest).
Electrabel: In the first phase of the arbitration, as pleaded in paragraph 431 of its Post-Hearing Submissions, Electrabel claimed the following principal relief from the Tribunal:
a) A declaration that the termination of the Agreement ("PPA"):
(i) Constitutes unlawful expropriation in breach of Article 13(1) of the Energy Charter Treaty ("ECT") and full compensation has not been paid;
(ii) Alternatively, constitutes lawful expropriation pursuant to Article 13(1) of the ECT but prompt, adequate and effective compensation has not been paid;
b) A declaration that termination of the PPA and/or failure to pay full/adequate compensation constitutes a breach of Articles 10(1) and 10(7) of the ECT;
c) A declaration that HEO's letter of 10 November 2005 and the instructions of the Government (in particular Minister Kóka) demanding that Dunamenti agree to a reduction in its tariffs of 34% and MVM's implementation of that instruction constitute a breach of Articles 10(1) and 10(7) of the ECT;
d) A declaration that the Tariff Decrees imposing a reduction in the availability fee in respect of the F and G2 Units of approximately 40% constitute a breach of Articles 10(1) and 10(7) of the ECT;
e) A declaration that the exclusion of the G1 Unit from the Mandatory Off-Take Decree and the mandatory off-take pricing regime constitute a breach of Articles 10(1) and 10(7) of the ECT;
f) A declaration that consequent upon one or more of the breaches of the ECT, set out above, Electrabel is entitled to compensation to be determined in a further phase of these arbitral proceedings; and
g) An order for Electrabel's costs of the arbitration.
"426. In its oral opening statement, Hungary suggested that Electrabel had waived its right to pursue the other claims that were raised in its Memorial [Footnote 271: T1,109 (Respondent's opening)]. Electrabel does not agree with that categorisation. However, Electrabel confirms that it no longer intends to pursue those claims for the following reasons.
427. The claim for the forced assignment of the PPA no longer has any relevance given the fact that Hungary has terminated the PPA pursuant to the PPA Termination Act.
428. The CO2 allowance claim concerned a draft allocation that was in circulation at the time of submission of Electrabel's Memorial. Hungary has since introduced a final allocation that is satisfactory to Electrabel.
429. The requirement to nominate gas requirements in advance is no longer a part of the regulation.
430. Dunamenti's category of gas limitation remains the least secure. However, there have been no restrictions on gas supply to date."
In the second phase of this arbitration, as pleaded in paragraph 138 of its Submission on the PPA Termination Claim and paragraph 166 of its Reply Submission on the PPA Termination Claim, Electrabel requested that the Tribunal:
(1) declare that:
(a) the Respondent has breached Article 10(1) of the ECT; and
(b) Electrabel is entitled to full compensation;
(2) reserve its decision on damages until a subsequent phase of this proceeding; and
(3) order such further relief as it deems appropriate.
(a) an order rejecting Electrabel's claims in their entirety; and
(b) an appropriate order of legal and arbitration costs in the light of such decision in favour of Hungary.
(a) reject Claimant's remaining claim in its entirety;
(b) find that Hungary did not violate ECT Article 10(1), including its fair and equitable treatment obligation;
(c) reject any and all requests for an award of damages;
(d) reject any and all requests for an award of interest, compound or otherwise; and
(e) award Hungary its appropriate costs and fees in light of such decision.
By letter dated 28 October 2015, the Tribunal declared the second phase of these arbitration proceedings completed as at 30 October 2015 as regards matters to be finally determined in this Award, by reference to or by analogy with ICSID Arbitration Rule 38(1).
Hungary's scheme was necessarily based upon the Commission's established methodology for stranded costs, namely its Stranded Costs Methodology of 25 July 2001.32 The Commission there described its methodology, inter alia, materially as follows:33 " ... The State aid corresponding to the eligible stranded costs defined in this Notice is designed to facilitate the transition for electricity undertakings to a competitive market. The Commission may take a favourable view of such aid to the extent that distortion of competition is counterbalanced by the contribution made by the aid to the attainment of a Community objective which market forces could not achieve... [4.4] The degressive nature of aid intended to offset stranded costs will be viewed favourably by the Commission when making its assessment; it will, in fact, help the undertaking concerned to speed up its preparations for a liberalised electricity market. [4.5] The maximum amount of aid that can be paid to an undertaking to offset stranded costs must be specified in advance... For present purposes, the "undertaking" is of course Dunamenti (not Electrabel).
The Commission's Final Decision dated 4 June 2008 refers to two judgments of the European Court of Justice: Case 94/87 Commission v Germany  ECR-175 and Case C-348/93 Commission v Italy  ECR-673.39 As both Electrabel and Hungary explained at the Second Hearing, in materially similar terms, these paragraphs refer to a general principle of EU law expressed in Article 4 of the TEU (ex Article 5 of the ECT) which imposes a duty on Member States and Community institutions to work together in good faith with a view to overcoming difficulties, whilst fully observing the treaty provisions and, in particular, the provisions on State aid.40
As addressed in the Tribunal's Decision and also for reasons apparent below, the Tribunal does not consider the Commission's methodology or EU law as being decisive on the principal issues addressed in this arbitration. Although both form important background materials to the decisions made by Hungary as regards its scheme for net stranded costs in regard to Dunamenti, those decisions were made within a broad discretion by Hungary, alone, consistent with EU law at that time. Those decisions must therefore stand or fall by reference to Electrabel's claim that Hungary breached, by itself, its obligation under Article 10(1) of the ECT "to accord at all times to Investments of Investors of other Contracting Parties fair and equitable treatment."44 That is also Electrabel's position, as noted above.
As already described above, the Tribunal expressly left undecided in its Decision all relevant issues arising from the application of the ECT's FET standard to Electrabel's claim for stranded costs. In Article 10(1) of the ECT, as already recorded above, this FET standard required Hungary "to accord at all times Investments of Investors of the other Contracting Parties fair and equitable treatment."
Micula v Romania:55 As already noted above, based on the Micula award and the Commission's responses to its recognition and enforcement, the Parties made several submissions before and during the Second Hearing on the question whether or not EU law on State aid would preclude an award of damages against Hungary. Electrabel saw no bar under EU law as regards its PPA Termination Claim in this arbitration.56 This submission was disputed by Hungary.57 The Tribunal notes that, even now, Electrabel does not seek in this arbitration compensation beyond "the level allowed by EU law"; that its actual loss (as alleged) exceeds the maximum amount of net stranded costs permitted under the Commission's methodology; that Electrabel nonetheless limits its claim to the maximum payment allowable (as it claims) under EU law;58 and, further, as also asserted by Electrabel at the Second Hearing: "This Arbitral Tribunal need not concern itself with whether or not its Award would fall afoul of EU State aid rules."59 The Tribunal also notes, conversely, that Hungary maintains that the Tribunal must apply EU law on State aid, as part of the applicable law (which it was not in Micula) and have regard to EU public policy.60 Following these submissions, by letter dated 15 September 2015, Hungary sent to the Tribunal the European Commission's published Decision of 30 March 2015 on State aid SA 358517 (2014)/C) (ex 2014/NN). It would be possible to extend and analyse these submissions and materials at very considerable length; but it is unnecessary to do so for present purposes.
In the circumstances, the Tribunal decides that it does not need to address in this Award, still less resolve, any of the issues arising from the Micula award61 or its effect under EU law . Nor does it.
• Section 55(1) of the 1994 Electricity Act123, which provides that "[t]he producer [sic], transfer, distribution and supply price (fee) of electricity shall include the recovery of reasonable investments and the costs of the efficiently operating licence holders, as well as the profit necessary for ongoing operation."
• Paragraph 10.2.5 of the Industry Information Memorandum of 9 October 1995124, stating that "[t]he Act provides for the introduction by 1st January 1997 of a pricing system designed to compensate investors for reasonable capital and operating costs in generation, transmission and supply of electricity as well as to provide investors with a reasonable level of profits to ensure the long-term operation of the industry."
• Paragraph F(i) of the HEO's Stated Position of 21 November 1995125, which states: "The post-2000 price mechanism can only be established within the framework of the Hungarian legal system (in particular, on the basis of Section 55 of the Electricity Act); on the basis of the regulatory experiences that will have accumulated by then both in Hungary and Europe. Based on our current knowledge and experience, the HEO does not expect radical changes, although prior to the introduction of any new pricing mechanism, another overall price and cost review would be required."
• Section 3.8.1 of the Notice of Forthcoming Tenders for Shares of Companies within MVM of 31 July 1995126, which stated that "[t]he PPAs will remunerate the Power Generation Companies through an availability fee for the capital costs and an energy fee for the operating costs."
Stranded Costs: As an objective test, it was publicly well known before 1995 that significant changes were coming with Hungary's approach towards membership of the European Union. Later, in its "Privatisation of the Power and Natural Gas Industries in Hungary and Kazakhstan" of 1999, the World Bank noted that new owners (following privatisation) "indicated that they accounted for, particularly in their mid and longer term marketing strategies and plans, the expected changes due to [Hungary's] EU accession."134 As to such changes, the 1999 International Energy Report, "Energy Policies of IEA Countries: Hungary 1999 Review", recorded: "Since market participants already know that competition is likely to be introduced soon, they have an opportunity to avoid stranded costs by refraining from building above-market, expensive capacity or concluding contracts at excessive costs now."135 In the Tribunal's view, there is no credible evidence adduced in this arbitration that Electrabel and Dunamenti held any different views.
Accordingly, from long before the PPA's termination on 1 January 2009, Electrabel and Dunamenti cannot reasonably have expected to escape the possible consequences of Hungary's membership of the European Union, including market deregulation and liberalisation and the application of EU law on State aid and stranded costs. As was decided by the tribunal in AES v Hungary, "... any reasonably informed business person or investor knows that laws can evolve in accordance with the perceived political or policy dictates of the times..." and "... the fact that an issue becomes a political matter,. does not mean that the existence of a rational policy is erased."136
In the Tribunal's view, this balancing exercise is aptly illustrated by the figures referred to in paragraph 104 above, as displayed by Hungary's demonstrative exhibit RD3 submitted at the beginning of the Second Hearing. In its earlier Decision, the Tribunal had noted an apparent lack of symmetry in Hungary's scheme as regards its effect on calculating compensation for Dunamenti's net stranded costs. The Tribunal there noted: "The scheme's first stage is now complete; whilst the second stage lies in the future... On Hungary's own calculations, however, it is clearly possible that Dunamenti will not recover compensation in the sum of HUF 22,171,991 for its net stranded costs under the second stage of Hungary's scheme. As finally calculated by Hungary, this figure could of course be lower, non-existent or even negative; but it could also be significantly higher."145 If higher, there would be no payment (or other compensation) by Hungary, leaving Dunamenti with eligible stranded costs.
First, the Tribunal rejects Electrabel's allegation that Hungary breached the ECT's FET standard in not preparing and successfully submitting to the European Commission a more generous scheme for Dunamenti. This was a scheme proposed in the PPA Termination Act 2008 for an industrial sector in Hungary; it could not be tailored to meet only Dunamenti's particular demands; and there is no cogent evidence that the Commission would have approved a more generous (or less ungenerous) scheme. In any event, as decided in paragraph 173 above, that is not the decisive issue. Hence, in the Tribunal's view, the relevant time for the correct test for irrationality must include the Commission's Compensation Decision dated 27 April 2010 and Hungary's subsequent responses.
In the Tribunal's view, as already indicated, it could not pre-date the Commission's Compensation Decision dated 27 April 2010 which approved (or, rather "decided not to raise any objections" to) Hungary's scheme for stranded costs as regards (inter alia) Dunamenti.155 Accordingly, the Tribunal considers that it is appropriate for the Tribunal to take into account events subsequent to the PPA Termination Act 2008 and the Commission Compensation Decision 2010, even where both events post-date the commencement of this arbitration. In order to explain the Tribunal's approach, given the controversy raised by this issue, it is next necessary to re-examine the Parties' respective submissions made during this arbitration's first phase, read together with the Tribunal's Decision, even if it means going over several matters which have already been considered above.
In response, Hungary submitted that a breach of the ECT's FET standard could not be evaluated with hindsight in the light of subsequent events.171 Hungary contended that the relevant time for assessing rationality is the time at which the State acted with the knowledge that it had at the time: "a State can't be penalized for acting rationally based on the information that it had just because events subsequently unfolded in a different way."172 However, the Tribunal notes that such is not the issue here, where a State's conduct at the relevant time can be understood better by a subsequent event, namely the Commission's Compensation Decision dated 27 April 2010.
Third, in these circumstances, the relevant time for addressing the issue of whether or not Hungary violated the ECT's FET standard is the date when Hungary implemented its scheme towards Dunamenti, namely following its receipt of the Commission's Compensation Decision dated 27 April 2010 approving that scheme. It was not 2008. Until the Commission had approved that scheme, it was effectively writ in water notwithstanding the termination of Dunamenti's PPA, with effect from 1 January 2009 under the PPA Termination Act 2008.
The legitimate government policy sought by Hungary was the alignment of its electricity sector with the EU market and the elimination of distortions to competition within and without Hungary. As set out by the Commission's Final Decision on State Aid, which has now been confirmed by the General Court and the ECJ, this required the termination of the PPAs. Under the Commission's Methodology, Hungary was also allowed to compensate generators for stranded costs, but it was not required to do so. The choice fell squarely on Hungary. In deciding how much of those stranded costs it would compensate, Hungary carried out a balancing exercise between the interests of generators and those of tax-payers; and it decided to pay 85% of Dunamenti's stranded costs through a set off of those costs against the State aid that Dunamenti was required to repay. In doing so, Hungary forewent a cash payment of 125 billion HUF in State aid that it was entitled to request from Dunamenti.
Fifth, on the evidence, the Tribunal does not accept Electrabel's submission that Hungary, with the Commission's approval, could have procured under EU law at any time an upwards adjustment favouring Dunamenti as regards future events in regard to stranded costs (other than a relevant judgment from Luxembourg invalidating the Commission's Final Decision on State Aid dated 4 June 2008 - which did not occur). Moreover, under Article 4(3) of the TEU, the principle of co-operation could not be deployed to modify Hungary's scheme; and, in effect, the figure of 22 billion HUF could not be revised upwards whatever the future held for Dunamenti in Hungary.
For all these reasons, the Tribunal dismisses Electrabel's remaining case as to liability under the ECT's FET standard in respect of its PPA Termination Claim. As regards the Parties' respective prayers for relief set out above, the Tribunal therefore declares that Hungary has not breached Article 10(1) of the ECT; and that Electrabel's PPA Termination Claim is therefore dismissed.
The Tribunal notes that its decision in regard to the PPA Termination Claim might be considered to be at variance with the recent award in E.D.F. v Hungary ("E.D.F. UNCITRAL award").185 The Tribunal has considered the Parties' written submissions to different effects of 4 March 2015 (Electrabel) and 26 June 2015 (Hungary). By letter of 3 July 2015, Electrabel waived its right of reply to Hungary's written submissions. It would of course be inappropriate for this Tribunal to dissect the E.D.F. UNCITRAL award in search of the evidence and arguments addressed to that tribunal. This Tribunal is required to decide the arguments advanced by the Parties in this arbitration based on the evidence adduced by the Parties in these proceedings. It cannot be influenced therefore by the result of a different arbitration, where an investor's claim appears to have been formulated differently and decided on different arguments and evidence: the Tribunal refers, for example, to paragraphs 465-467 and 637 of the E.D.F. UNCITRAL award, with paragraphs A1-7 of Hungary's submission of 26 June 2015.
Decision: Taking all the circumstances of this case into account, pursuant to its discretion under Article 61(2) of the ICSID Convention and ICSID Arbitration Rules 28 and 47(1)(j), the Tribunal decides that the Parties shall each bear their own legal costs and expenses, save that Electrabel shall bear and pay for all the other costs of these arbitration proceedings (without recourse to Hungary). Accordingly, Electrabel must bear in full the administrative costs of the ICSID Secretariat, together with the fees and expenses of the Tribunal, the exact amount of which shall be subsequently notified in writing to the Parties by the Centre.187
(1) Save as expressly otherwise set out below, the Tribunal's Decision on Jurisdiction, Applicable Law and Liability of 30 November 2012 is here repeated and confirmed, as if that Decision were here expressly set out and formed part of this Award;
(2) All the Claimant's substantive claims are hereby dismissed in their entirety, together with all the Claimant's claims for interest and costs;
(3) The Parties shall each bear their own legal costs and expenses, subject to paragraph 4 below;
(4) As to other arbitration costs (i.e. the administrative costs of the ICSID Secretariat and the fees and expenses of the Tribunal), the Claimant shall bear (as between the Claimant and the Respondent) all such costs in full, the exact amount of which shall be subsequently notified in writing to the Parties by the Centre, and shall accordingly reimburse the Respondent its share of these costs; and
(5) All other claims by any Party are hereby dismissed.
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