Bates White: Bates White LLC
Administrative and Financial Regulations: ICSID Administrative and Financial Regulations
Arbitration Rules: ICSID Arbitration Rules
Authorization Agreements: Authorization Agreement for distribution of electricity in the departments of Guatemala, Sacatepéquez and Escuintla of May 15, 1998 and Authorization Agreement of February 2, 1999, for distribution of electricity in the departments of Chimaltenango, Santa Rosa and Jalapa.
CAFTA-DR: Free Trade Agreement between the Dominican Republic, the United States of America, and Central America
CFD: Cash flow discount (valuation method)
CNEE: Comisión Nacional de Energía Eléctrica (National Commission of Electric Energy)
Counterfactual value: Used to refer to the valuation of EEGSA, assuming that the CNEE had implemented the decisions of the Expert Commission to correct the EEGSA VAD study in 2008
CRF: Capital Recovery Factor (In original in Spanish: Factor de Recuperación de Capital "FRC").
Current value: Used to refer to the valuation of EEGSA in the actual conditions in which its shares were sold to EPM in October 2010
DCF: Discounted Cash Flow.
DECA I: Distribución Eléctrica Centro Americana S.A.
DECAII: Distribución Eléctrica Centro Americana Dos S.A.
DEOCSA: Distribuidora de Electricidad de Occidente S.A.
DEORSA: Distribuidora de Electricidad de Oriente S.A.
EDP: Electricidade de Portugal S.A.
EEGSA: Empresa Eléctrica de Guatemala S.A.
EPM: Empresas Públicas de Medellin E.S.P.
FET: Fair and Equitable Treatment.
FRC: see CRF.
Iberdrola: Iberdrola Energia S.A.
ICSID: International Centre for Settlement of Investment Disputes
ICSID Convention: Convention on the Settlement of Investment Disputes between States and Nationals of Other States
INDE: Instituto Nacional de Electrificación (National Institute for Electrification)
LGE: General Electricity Law
MEM: Ministry of Energy and Mines of Guatemala
Memorandum of Sale: Information Memorandum of Sale of EEGSA prepared by Salomon Smith Barney, 1998
Minutes of the First Session: Record of the agreements reached between the Parties and the Arbitral Tribunal during the first session of the Tribunal Arbitral, held on May 23, 2011
NAFTA: North America Free Trade Agreement
ÑERA: NERA Economic Consulting S.A.
NRV: New Replacement Value (In original in Spanish: Valor Nuevo de Reemplazo "VNR").
PA Consulting: PA Consulting Services S.A.
Parties: Together, the Claimant and the Respondent
Preliminary Memorandum: Preliminary Information Memorandum of Sale of EEGSA prepared by Salomon Smith Barney in April 1998
Purchase and Sales Agreement: Share Purchase and Sales Agreement signed between
DEC AI and the Republic of Guatemala on September 11, 1998
PW Report: The report prepared by Price Waterhouse on January 11, 1991 on the privatization of EEGSA
RLGE: Regulations of the LGE, Government Resolution No. 256-97 of March 21, 1997, with subsequent modifications
SIGLA: Association formed by the consultants Sigla S.A. and Sistemas Eléctricos y Electrónicos de Potencia, Control y Comunicaciones S.A.
TECO Energy Inc.: The parent company of the Teco group dealing with energy
Teco or the Claimant: Teco Guatemala Holdings LLC
Terms of Reference: Terms of Reference for conducting the VAD study for EEGSA in the period 2008-2013; CNEE Resolution No. 13680-2007 of April 30 as amended by Resolution No. 124-2007 of October 9, 2007 and Resolution No. 5-2008 of January, 17, 2008.
TPS: Teco Power Service Corporation de Ultramar Guatemala, S.A.
USAID: The United States Agency for International Development
VAD: Value Added for Distribution (in original in Spanish Valor Agregado de Distribución)
VNR: see NRV
Andrea J. Menaker
Jaime M. Crowe
Kristen M. Young
White & Case LLP
701 Thirteenth Street, NW Washington, DC 20005-3807, USA.
Tel. +1 202 626 3600
Teco Guatemala Holdings LLC
702 North Franklin Street Tampa, FL 33602, USA
Dr. Vladimir Aguilar
Attorney General of the Republic of Guatemala
Procuraduría de la República de Guatemala and
Mr. Sergio de la Torre Gimeno
Ms. Maria Luisa Flores
Mr. Alexander Cutz Calderón
Mr. Romeo López Guiterrez
Ministry of Integration and Foreign Trade
Ministry of Economy
Rodolfo Salazar Arenales & Skinner Klée 3a calle 2-60 Zona 10, 01010 Edificio Topacio Azul, Of. 701 Guatemala City, Guatemala Tel. (+1 502) 2386-9300 Nigel Blackaby Lluis Paradell Noiana Mari go Jean Paul Deschamps Lauren Friedman Michelle Grando
Freshfields Bruckhaus Deringer LLP 701 Pennsylvania Avenue N.W.
Washington, DC 20004, USA Tel. (+1 202) 7774-519
"Each Party consents to the submission of a claim to arbitration under this Section in Accordance with this Agreement."
"2. At least 90 days before submitting any claim to arbitration under this Section, a claimant shall deliver to the respondent a written notice of its intention to submit the claim to arbitration (‘notice of intent) [...].
3. Provided that six months have elapsed since the events giving rise to the claim, a claimant may submit a claim referred to in paragraph 1:
(a) under the ICSID Convention and the ICSID Rules of Procedure for Arbitration Proceedings, provided that both the respondent and the Party of the claimant are parties to the ICSID Convention [...]"
"Conditions and Limitations on Consent of Each Party
1. No claim may be submitted to arbitration under this Section if more than three years have elapsed from the date on which the claimant first acquired, or should have first acquired, knowledge of the breach alleged under Article 10.16.1 and knowledge that the claimant (for claims brought under Article 10.16.1(a)), or the enterprise (for claims brought under Article 10.16.1(b)) has incurred loss or damage.
2. No claim may be submitted to arbitration under this Section unless:
(a) the claimant consents in writing to arbitration in accordance with the procedures set out in this Agreement; and
(b) the notice of arbitration is accompanied,
(i) for claims submitted to arbitration under Article 10.16.1(a), by the claimant ’s written waiver, and
(ii) for claims submitted to arbitration under Article 10.16.1(b), by the claimant ’s and the enterprise ’s written waivers of any right to initiate or continue before any administrative tribunal or court under the law of any Party, or other dispute settlement procedures, any proceeding with respect to any measure alleged to constitute a breach referred to in Article 10.16.
3. Notwithstanding paragraph 2(b), the claimant (for claims brought under Article 10.16.1(a)) and the claimant or the enterprise (for claims brought under Article 10.16.1(b)) may initiate or continue an action that seeks interim injunctive relief and does not involve the payment of monetary damages before a judicial or administrative tribunal of the respondent, provided that the action is brought for the sole purpose of preserving the claimant ’s or the enterprise ’s rights and interests during the pendency of the arbitration."
On October 25, 2011, the Respondent confirmed that it would object to the Arbitral Tribunal’s jurisdiction, but that it considered that it would be more effective for such objections to be considered at the same time as the merits. The Respondent therefore proposed the following schedule of proceedings, which was accepted by the Claimant and adopted by the Arbitral Tribunal:
"1. Respondent’s memorial on jurisdiction and counter-memorial on the merits to be submitted on January 24, 2012.
2. Claimant’s counter-memorial on jurisdiction and reply on the merits to be submitted on May 24, 2012.
3. Respondent’s rejoinder on the merits and jurisdiction to be submitted on September 24, 2012."3
On October 235, 2012, the Arbitral Tribunal decided to remove from the record exhibits R-189, R-191, R-193, R-194, R-195, R-197, R-200 and R-202, except for the parts of document R-202 relating to the evidence of Claimant’s experts and witnesses whom the Respondent had decided to cross-examine. The Arbitral Tribunal also ordered the Respondent to remove any reference to such documents in its Rejoinder or other documents exhibited therewith.
Witnesses for the Claimant:
Gordon L. Gillette
Sandra W. Callahan
Carlos Manuel Bastos
Witnesses for the Respondent:
Enrique Moller Hernández
Carlos Eduardo Colóm Bickford
Rodolfo Alegría Toruño
Juan Luis Aguilar Salguero
Mario C. Damonte
Brent C. Kaczmarek
Manuel A. Abdala
On March 22, 2013, the Arbitral Tribunal decided that the Parties would submit two simultaneous rounds of post-hearing briefs. The Arbitral Tribunal did not impose page limitations but invited the Parties "to make their best efforts to contain the volume of their briefs, which should not be duplicative of the Parties’ existing memorials."7
• "Basic subsidy problem is not addressed - Subsidy problems in the power sector, although large, do not seem critical enough to rush a sale of EEGSA. This is particularly true because EEGSA is a relatively efficient operator compared to INDE, and privatizing EEGSA does not address the basic subsidy problem that would still be present in INDE’s electricity rates.
• Regulatory mechanisms are not established. - The lack of appropriate regulatory mechanisms could lead to monopoly pricing and sharp tariff increases if EEGSA were privatized at the present time.
• Expected revenue from sale of EEGSA is low - the current economic situation, with high inflation, high interest rates, and exchange rate problems makes it a poor time to privatize due to the very low values that EEGSA is likely to command under such conditions. The limited interest of foreign investors and the lack of a local equity market are also issues that reduce the value of EEGSA to investors.
• EEGSA and INDE are currently too interdependent - EEGSA’s close relationship and interdependency with INDE would have to be restructured to eliminate most subsidies and to establish power purchase contracts before any privatization. Further analysis would be required to examine the future of the entire Guatemalan electricity system, including INDE and the other electric distribution companies."17
"a) Complying with and enforcing this law and its regulations on matters within its scope of responsibility and imposing penalties on violators.
b) Watching over and ensuring performance of the obligations of the awardees and holders of concessions, protecting the rights of users and preventing conduct that is against free competition, as well as abusive or discriminatory practices.
c) Defining the transmission and distribution rates subject to regulation in accordance with this law, as well as the methodology for calculation of the same.
d) Settling disputes that arise among agents of the electrical subsector, acting as arbitrator among the parties when the latter do not reach agreement.
e) Issuing technical regulations relative to the electrical subsector and overseeing compliance with them consistent with accepted international practices.
f) Issuing provisions and regulations to ensure free access to and use of the transmission lines and distribution networks in accordance with the provisions of this Law and its regulations.''31
"The rates to end consumers for the final distribution service, in their components of power and energy, shall be calculated by [the CNEE] as the sum of the weighted price of all the distributor purchases referenced to the inlet to the distribution network and the Value Added of Distribution (Valor Agregado de Distribución - VAD) [...].
The VAD is the average cost of capital and operation of a distribution network of a benchmark-efficient company operating in a given density area."32
a) Costs associated with the user, regardless of its demandfor power and energy.
b) Average distribution losses, broken down into their power and energy components.
c) Costs of capital, operation, and maintenance associated with distribution, stated by unit of power supplied."
"The Distributor, through the consultant company, shall analyze the observations, perform the corrections to the studies, and shall deliver them to [the CNEE] within the term of fifteen days after receiving the observations. If discrepancies between [the CNEE] and the Distributor persist, the procedure stipulated in Article 75 of the Law shall be followed."48
"[The CNEE] and the distributors shall agree on the appointment of an Expert Commission made of three members, one appointed by each party and the third by mutual agreement " and the Expert Commission "shall rule on the differences in a period of 60 days counted from its appointment.''49
"So long as the Distributor does not deliver the tariff studies or does not perform the corrections to same, according to what is stipulated in the previous paragraphs, it may not modify its tariffs and the tariffs in effect at the time of the termination of the effective term of such tariffs shall continue to apply.''50
"In case of the Distributor’s failure to deliver the studies or the corrections to same, the Commission shall be empowered to issue and publish the corresponding tariff schedule, based on the tariff study the Commission performs independently or performing the corrections to the studies begun by the distributor."51
"Once the tariff study referred to in the previous Articles has been approved, [the CNEE] shall set the definitive tariff studies [sic] within a term not greater than one month as of the date on which the definitive study was approved, and shall publish them no later than April 30, in the Official Gazette. If [the CNEE] has not published the new tariffs, same may be adjusted by the distributors based on the effective adjustment formulas, save for what is set forth in the last paragraph of the previous Article. The tariffs shall apply as of May 1, immediately following the date of approval by [the CNEE]."52
"If the Commission has not published the new tariffs, the tariffs of the previous tariff schedule shall continue to be applied, with their adjustment formulas \...}In no case shall the Final Distribution activity of the electric service be carried out without an effective tariff schedule. Given the circumstance in which a Distributor does not have a tariff schedule, the National Electric Energy Commission shall be responsible for immediately issuing and making effective a tariff schedule so as to comply with such stated principle."53
"Pursuant to the provisions of the Law and the Regulations, tariffs for regulated customers [...] are set by adding (i) the average cost of energy purchased by the distribution company [...] and (ii) the valor agregado de distribución (the Value Addedfor Distribution, or ‘VAD).
Costs of energy purchased that are used to calculate tariffs for regulated consumers shall be calculated every five years and are based on a model efficient distribution company. [...] It is the duty q/'[the CNEE] to ensure that tariffs are set on a pass-through basis. "57
"VADs must be calculated by distributors using a study commissioned from an engineering firm [...]. [The CNEE] will review those studies and may make observations, but in the event of discrepancy, a Commission of three experts will be convened to resolve the differences.''58
"VADs must be calculated by distributors by means of a study commissionedfrom an engineering firm, but the Commission may dictate that the studies be grouped by density. [The CNEE] will review those studies and can make observations, but in the event of discrepancy, a Commission of three experts will be convened to resolve the differences. The Law states that for the purposes of the tariffs to be first set in May 1998, [the CNEE] may rely on VADs taken from other countries applying a similar methodology (such as Chile, Peru, and El Salvador, for example)."63
"As prescribed in Section 98 of the Rules, the CNEE shall have a period of two (2) months to evaluate the Study’s Final Report submitted by the Distributor. As a result of the evaluation, the CNEE shall make such observations as it may deem necessary. The Distributor shall analyze said observations, make any corrections it deems appropriate and send the corrected final report of the study to the CNEE within fifteen (15) days of receiving the observations.''110
"These terms of reference set forth the guidelines to follow in preparation of the Study, and for each one of its Stages and/or described and defined studies. If there are changes in the methodologies set forth in the Study Reports, which must be fully justified, the CNEE shall make such observations regarding the changes as it deems necessary, confirming that they are consistent with the guidelines for the Study.
These terms of reference do not constitute a legal or regulatory modification, and therefore, in case of a controversy between one of the provisions of these terms of reference and the Law or the Regulations, the provisions of the latter shall prevail, in all cases applying the principle of legal hierarchy. In addition, any omission of these terms of reference, relative to aspects defined in the Law and the Regulations for tariff matters, shall be understood to be incorporated into the terms ofreference."112
Although EEGSA agreed that Bates White would have to correct the study in order to reflect the Expert Commission’s pronouncements151, there was no agreement as to who would then assess whether such corrections properly reflected the Expert Commission’s views. The CNEE proposed that it would have to make such determination itself,152 while EEGSA considered that the Expert Commission would have to ascertain whether the corrections correctly reflected its views.153
"The issue is to discern whether the Consultant’s Tariff Study, considering the ToR as guidelines, has performed a task that is in accordance with the requirements of the Law and the Regulations, or otherwise determine if given the justifications of the deviations, the CNEE maintained and certifies that the requirements of the ToR better reflect the requirements of the Law."171
"Expecting the Expert Commission to decide a conflict and empowering it to issue a binding decision breaches the principle of legality of the Rule of Law, and this is because even if persons can do anything [that is] not forbidden by the law (Section 5 of the Constitution), authorities can only do what the law allows them to do (Section 154 ibidem); therefore, if we only consider the General Electricity Law, the power to approve tariff schemes is vested in the National Electricity Commission and in no way, whether directly or indirectly, in an expert commission, the nature of which has been considered.
Understanding that the members in charge of the experts’ study have a further role or that their report is binding breaches Section 154, paragraph three, of the Constitution, which forbids the delegation of duties, unless authorized by law, which is not the case under the General Electricity Law, which does not contain any provisions transferring the power to set forth or issue the tariff scheme for the five-year period to the Expert Commission.
It is evident that the National Electricity Commission, not having the obligation to be bound by the opinion issued by the Expert Commission, caused no damage to its counterparty by deciding to dissolve the Expert Commission, taking into consideration that its purpose had been fulfilled and, therefore, the right to due process invoked in the amparo action herein has been observed in all its phases. The role of the National Electricity Commission of fixing the tariff schemes is a legitimate power granted by the General Electricity Law whereby it represents the State, and regulated in Sections 60, 61, 7.1 and 73 of the mentioned law, which must restrict any discretional excess, since it refers to verifiable concepts stating that those tariffs ‘must be compatible with standard distribution costs of efficient companies, ’ structured ‘to promote equal treatment of consumers and the sector’s economic efficiency, ’ that ‘the Distribution Added Value shall be related to the average capital and operations costs of a distribution network of an efficient company of reference, ’ and, likewise that the ‘cost of operation and maintenance shall correspond to an efficient management of the reference distribution network. ’ It is estimated that tariffs fixed, when the report by the Expert Commission has not been accepted as valid to guide this policy, cannot be, within its discretion, harmful or unreasonably arbitrary, in view of the indicators of efficient operators as a reference, as the one conditioned in temporary Section 2 of the related Law, which made reference to the ‘values used in other countries applying a similar methodology. ’ However, the rationality of the tariff schemes approved was not reported as damage or as evidence in this amparo action, and the only damage reported focused on the concept of legal due process, which was already analyzed (paragraph a) of section VI of the conclusions)."201
"... it should be noted that Sections 75 and 77 of the General Electricity Law and the third paragraph of Section 98 and Section 98 bis of its Rules set forth the procedure to create the Expert Commission and the time frame for the Commission to meet and to issue an opinion on the matters submitted thereto: the discrepancies arising from the tariff study based on the terms of reference. In the case at hand, the Expert Commission was created in compliance with the relevant Law and its Rules and, within the statutory period, issued its opinion on the discrepancies found by the National Electricity Commission between the tariff study submitted by the petitioner and the terms of reference previously set by the respondent authority. It should be pointed out that the Law and its Rules—the only Guatemalan legal rules applicable in the case—empower the Expert Commission only to issue its opinion on the above-mentioned discrepancies. In submitting its opinion, the Expert Commission performed the duty imposed thereon by the Law and its Rules. Therefore, given that it had already fulfilled its legal purpose, that it was a temporary rather than a permanent commission empowered to issue an opinion enabling the competent authority to set the tariffs, and that it had to meet no other duty in the proceedings, the dissolution of the commission could by no means cause damage to the petitioner because the respondent authority merely followed the procedure established by the Law and its Rules."
As ruled on this issue by the Court [...], in relation to the nature of the experts’ opinion discussed herein, it is worthy of note that Expertise understood as wisdom, practice, experience, or skill in a science and art, has traditionally been used as an aid to which authorities resort when they need to make a decision regarding a certain subject. An expert is an assistant who provides an opinion on the best decision, although, pursuant to common legislation and Guatemalan legal practice, it is understood that scientific and technical knowledge do not constitute a judgment, but rather elements to guide the decision to be made by the authorities. Therefore, the authority making the decision has no obligation to base such decision on the experts’ opinions... ’ Additionally, in reference to the scope of opinions like this, this Court has held that: Regarding its scope, the opinion is not binding upon the body seeking the advice whenever books of authority classify it as optional—advice that the Administration is not obliged to require—or compulsory—advice that is expressly necessary pursuant to the law—unless the opinion is expressly binding, as required by law and as a basis for the administrative decision. ’[...]
Based on the above remarks, requiring the Expert Commission to solve the dispute between the petitioner and the respondent authority; granting it jurisdiction to issue a binding decision; and even empowering it to approve the tariff studies, as the Court held, would violate the well-developed legality principle of the Rule of Law and would infringe the principle of public office subject to the law, because the General Electricity Law [...] entitle[s] the National Electricity Commission, as the only responsible agency, to set distribution tariffs and to approve tariff studies [...], which constitutes a public duty that, in keeping with Section 154 of the Guatemalan Constitution, may not be delegated.
... in the Guatemalan legal system, the National Electricity Commission shall review the studies conducted by the distributor and, in the event of discrepancies, shall appoint an Expert Commission, which shall issue an opinion on the discrepancies within 60 days following its creation. The Rules provide that, if the Distributor fails to send the studies or corrections to those studies, the National Electricity Commission (governmental agency of public law) may issue and publish the related tariff scheme based on the tariff study prepared independently by the commission or making the necessary corrections to the studies prepared by the distributor. [...] In view of the above, the National Electricity Commission caused no damage to the petitioner when it dissolved the Expert Commission and when it followed the procedure to devise the tariff schemes, given that such task— a state duty, as has been pointed out—is a lawful power granted by Sections 60, 61, 71 and 73 of the General Electricity Law."202
According to Guatemala, the Claimant is now asking the Arbitral Tribunal to act as an appellate court on these issues, which, is not possible, as has been established by many investment arbitration tribunals.214 The Claimant could only have submitted an international claim if it had claimed and proved that there was a denial of justice, which it has not alleged.215
According to the Claimant, in assessing its jurisdiction, the Arbitral Tribunal needs not establish that the claims are correct in substance. It is sufficient that it establishes that the facts alleged by the Claimant, if proved, would be likely to fall within the Treaty provisions.224 This approach is supported by a long line of consistent arbitral decisions.225 The Claimant avers that its claim and the underlying facts comply with the above requirement because, if proven, they would constitute a breach of the Treaty.226
In addition, the Claimant alleges that the Iberdrola tribunal erred to the extent that it concluded it did not have jurisdiction to consider issues of domestic law in a regulatory context, as investment tribunals frequently rule on issues of domestic law in determining whether there has been a breach of an investment treaty.234
Teco avers that such representations implied an essential guarantee for the investor, assuring the latter that it would play an important role in the setting of the VAD. This was an essential part of the balancing that the LGE struck between the distributor and the regulator in the tariff review process.245
This amendment provided support to the November 18, 2009 decision of the Constitutional Court of Guatemala, in which the court approved the CNEE’s decision to apply its own tariff.250 As a matter of fact, without such an amendment, there would have been no basis in the LGE or the RLGE for the CNEE to rely upon its own VAD study to calculate EEGSA’s VAD for the 2008-2013 tariff period.251
In breach of the many representations made by Guatemala and the CNEE, the CNEE decided to ignore the Expert Commission’s report and to instead impose a VAD based on a study prepared by its own consultant Sigla, which neither EEGSA nor its consultant knew about and in preparation of which they had no input.269
• The attempt to have the CNEE decide on the incorporation of the rulings of the Expert Commission in the consultant’s study
In particular, Teco argues that the emails exchanged between the CNEE and Mr. Riubrugent show that the CNEE had devised an unlawful FRC calculation with its consultant for the specific purpose of reducing the VAD, and then provided its own appointee expert, Mr. Riubrugent, with materials to support the CNEE’s position within the Expert Commission.280
Teco argues that the fact that the CNEE has fixed the VAD too low for the 2008-2013 period has caused it considerable loss and, in particular, it claims compensation for (a) lost cash flow that its investment would have earned had EEGSA been able to collect the VAD to which it was entitled between August 1, 2008, the date the CNEE imposed its tariffs, and October 21, 2010 when Teco sold its investment in EEGSA, plus (b) the difference between the actual market value of Teco’s EEGSA shares in October 2010 with the VAD approved by the CNEE and the amount that its shares would have been worth had Guatemala not breached its Treaty obligations. In addition, Teco is also claiming (c) pre- and post-award compounded interest at a rate of 8.8 percent.301