The European Commission is stepping up efforts to root out intra-EU investment arbitration cases. Brussels feels it should have sole power over EU investment policy. Yet by doing so it is also putting pressure on the international Energy Charter Treaty, on which many of these cases are based. As a result, while the Commission wants the ECT to expand internationally, it is undermining support for it at home. Italy recently even pulled out of the ECT. Iana Dreyer of Borderlex, a specialised blog and newsletter on EU trade and investment policy, has the story.
Investor-state arbitration will figure prominently in the European Union’s agenda in the coming months. Political and media attention is likely to continue to focus on the investor-state dispute settlement provisions – ISDS – in the ongoing transatlantic TTIP negotiations with the United States. Yet perhaps an even more important political battle over ISDS is being fought between Brussels and the member states over intra-EU ISDS cases. Now the European energy sector is being dragged into it, with potential ramifications for global energy governance.
In April 2015, the International Centre for the Settlement of Investment Disputes (ICSID) revealed that more than two thirds of ISDS cases in the EU are brought by EU investors against other EU member states. A quarter of these arbitration proceedings are initiated under the 1994 Energy Charter Treaty (ECT). Spain is facing around fifteen claims for financial compensation by investors after it put an early end to its subsidies for solar power in the wake of its dramatic economic crisis. Italy, until recently not known as respondent in investor-state cases is currently facing at least three ECT-related ones. The number of ECT cases is rising across the EU.
Intra-EU investor-state arbitration under fire
The Commission is intensifying efforts to root out intra-EU ISDS cases. The body is asserting what it considers the Community’s full competency over investment policy since the Lisbon Treaty came into force in 2009. It considers intra-EU investor-state arbitration incompatible with the bloc’s legal order. In June 2015 the Commission initiated so-called ‘infringement proceedings’ for violation of EU law against Austria, the Netherlands, Romania, Slovakia and Sweden. The Commission chides these countries for keeping their mutual ‘intra-EU’ bilateral investment treaties (BITs) in place.
Those BITs are the legal basis for arbitration proceedings that have pitted Dutch, Swedish and Austrian companies against Romania and Slovakia and led to controversial arbitral awards in recent years. These treaties, like many other EU BITs between Western European and Eastern European member states, were signed before Romania and Slovakia became EU member states in 2007 and 2004 respectively – and have remained in force since then. The dispute between the Commission and national goverments over whether these treaties should be kept in force will likely be resolved by the Court of Justice of the European Union.
The Commission’s move, however, is also having effects on the bloc’s relationships with the ECT. The treaty was initially conceived – but failed – to become the basis for a ‘World Trade Organization’ of energy. Twenty-eight EU member states and the EU qua EU are among the 54 signatories, along with countries such as Kazakhstan, Ukraine, Azerbaijan, Ukraine, to mention the most important providers of hydrocarbons to Europe. Russia signed but did not ratify the treaty. The ECT has long been seen as a regional treaty that has never really found its footing on the global stage.
Italy’s decision came as a shock to many in Brussels. Some critics say that this is “a present to Russia”, or a “present to ENI”
In May 2015, ECT members and eight other countries – including China – adopted the International Energy Charter declaration in The Hague, in the Netherlands. This should be viewed as a political commitment, or declaration of intent, to apply the principles of the Treaty. Many hope it will set the stage for a more coherent global governance structure for energy markets under the ECT – and make the ECT the international benchmark for others to follow.
The ECT prescribes, among other things, free and non-discriminatory energy trade, transit and investment for all forms of energy. It promotes market-based principles for running the energy sector and international government cooperation on issues such as sustainable development. The text includes an investment protection chapter with standard ‘fair and equitable treatment’ rules, protection against illegal expropriation, and investor-state dispute resolution consistent with international conventions (1965 ICSID Convention and UNCITRAL rules).
ECT: Italy opts out
The The Hague declaration might herald an expansion of ECT principles globally. But will these survive on the very continent where the ECT was born? This question has become urgent with Italy’s decision announced in early 2015 to pull out of the ECT as of 2016. Potentially other EU member states could follow.
Italy’s decision came as a shock to many in Brussels and in the European arbitration milieu. Some critics say in private that this is “a present to Russia”, or a “present to ENI”, Italy’s biggest state-owned energy company, famous for nurturing good relationships with the Kremlin.
“For the Italian authorities the fact that Russia decided not to finally engage in the Energy Charter Treaty has deprived the treaty of its importance”, Anna da Luca, Research Fellow in International Law at Bocconi University in Milan, told Borderlex. “But Italian authorities should consider that new energy investments of Italian companies will not be protected when the withdrawal will become effective next year”, she added.
Moscow was always reluctant to ratify the ECT. Its transit provisions put in question the state-owned company Gazprom’s monopoly over gas transmission in Russia. When in 2009 an international tribunal ruled that Russia was bound by the ECT’s investment protection clauses, Moscow pulled the plug on the treaty, announcing it would never ratify it. The 2009 ruling cleared the way for an ISDS case that led to the world’s biggest arbitral award ever in 2014 – US $50 billion in damages for having illegally expropriated foreign investors of the Yukos oil company dismantled by Moscow in 2005. Attempts to renegotiate the ECT on terms more palatable to Russia have not been fruitful.
“We are in discussion currently with Italy telling them that it would be better for them to change their mind”
Officials in Rome point to their consistency in abiding by EU law, which they see, like the Commission, as inconsistent with intra-EU ISDS. They say the ECT move is in line with Italy’s 2011 decision to terminate its bilateral investment treaties with former non-member countries that joined the EU afterwards (Italy is the only country to have heeded the Commission’s calls to do so).
In Rome’s view, investors are urged not to worry as to the protection extended to them in Italy, as the ECT binds Italy through the EU’s ECT membership. Rome also says that scarce financial resources force it to reduce its involvement in selected international organizations. Yet it has recently signalled this decision could be reversed before it comes into force in January 2016.
Commission faces dilemma
The EU Commission faces a clear dilemma in the face of Rome’s pull-out. It is keen on promoting ECT rules to ensure European investors continue to be protected internationally. “We are in discussion currently with Italy telling them that it would be better for them to change their mind”, an EU official told Borderlex.
At the same time, however, Brussels does not want the ECT to rule over intra-EU cases. “The legal service of the Commission takes the view that if an investor from one member state has a problem with another member state then this cannot be done on the basis of the ECT”, the Commission official added.
But the Commission as of today cannot stop ISDS cases under the ECT from being initiated.Law experts say that for intra-EU ISDS cases to end, a political agreement among the 28 member states, for instance under the form of a declaration invalidating ISDS between them, would be necessary. But there is no consensus among member states to do so. The Commission is believed to have tried to convince the EU28 to come up with such a declaration ahead of the May Hague Energy Charter summit but was rebuffed.
A complicating factor is that other ECT members would need to agree to the EU members’ move, because the deal is multilateral and affects third countries from outside the EU. Such a declaration could lead other ECT members to question their commitment to the ECT’s investment provisions – something Brussels would certainly want to avoid as it tries to promote ECT principles globally.
Iana Dreyer (@BorderlexEditor) is founder and editor of the independent website Borderlex, which publishes news articles, analytical features, opinion pieces by external experts, exclusive interviews with EU leaders and blogs on EU trade policy. This article was first published on Borderlex and is republished here with permission.