Hrvatska Elektroprivreda d.d. v. Republic of Slovenia,Case No. ARB/05/24
An award rendered on December 17, 2015 by an arbitral tribunal constituted under the auspices of the International Centre for Settlement of Investment Disputes (ICSID) added a new—and apparently final—chapter to a nearly 20-year-old conflict between the governments of Croatia and Slovenia over the supply of electricity generated by the Krško Nuclear Power Plant (Krško NPP), located in Slovenia.
The tribunal found that Slovenia failed to resume deliveries of electricity generated by Krško NPP to the claimant, Hrvatska Elektroprivreda d.d. (HEP), the state-owned national electric company of Croatia. Thus, the tribunal ordered Slovenia to pay HEP damages of €19,987,000 plus compound interests and reimburse US$10 million in arbitration costs.
Facts and claims
In 1974, the national electricity companies of Slovenia and Croatia established a joint venture, Nuklearna Elektrana Krško (NEK), to build and operate Krško NPP, located in the Slovenian territory just 15 kilometers west of the border between the two countries. The financing, construction, operation, management and use of Krško NPP were regulated by four bilateral agreements, all based on the parity principle, according to which the co-investors were equal partners in all aspects.
Disagreements over Krško NPP began in the 1990s. HEP was convinced that some measures adopted by Slovenia were inconsistent with the parity principle embedded in the bilateral agreements. In contrast, Slovenia considered that HEP was not complying with its financial obligations towards NEK.
On July 30, 1998, NEK suspended electricity delivery to HEP, and Slovenia issued a decree which, in HEP’s view, affected its ownership rights. Over the following years, several meetings took place between the two countries in order to resolve the dispute. The negotiations led to a 2001 treaty including an investor–state dispute settlement clause (the 2001 Agreement), in which Slovenia and Croatia agreed that i) they would waive all their past financial claims related to Krško NPP, ii) HEP would be recognized as co-owner and co-manager of Krško NPP, and iii) the delivery of electricity to HEP would be resumed on an agreed upon date. The tribunal accepted HEP’s submission that June 30, 2002 was the agreed upon date.
Ratification of the 2001 Agreement met strong parliamentary and public opposition in Slovenia. It was ratified only on February 25, 2003—nearly eight months after the agreed upon date for the resuming of electricity delivery. Throughout this period, Slovenia offered to sell electricity to HEP twice—in June 2002 and November 2002 (the 2002 Offers)—in lieu of the electricity that should have been supplied under the 2001 Agreement, and twice HEP refused. Electricity deliveries to HEP resumed on April 19, 2003.
The main issues before the tribunal were i) whether Slovenia met its obligations under the 2001 Agreement by making the 2002 Offers, ii) whether HEP should have accepted the 2002 Offers to mitigate its losses, iii) whether HEP passed on any additional costs to consumers and therefore suffered no loss, and iv) if HEP incurred in losses, how the tribunal could valuate the compensation.
Although HEP advanced two alternative legal bases for its claims—the 2001 Agreement and the Energy Charter Treaty ()—the tribunal dismissed all ECT claims in the Decision on the Treaty Interpretation Issue, dated June 12, 2009. In the final award, the tribunal pointed out that the reasons for the dismissal were “necessarily implicit” (para. 580) in view of the substance of the earlier decision, but spelled them out anyway. It reasoned that, given the content of the 2009 decision, which found Slovenia liable to HEP for the claim of compensation under the 2001 Agreement—remaining for determination the issues of the 2002 Offers, mitigation, quantum of compensation, and costs—the alternative basis on which HEP had sought compensation (the ECT) “necessarily, indeed automatically, fell out of consideration” (para. 579).
The 2002 Offers and mitigation of loss
The tribunal dismissed Slovenia’s submission that, by making the 2002 Offers, Slovenia had essentially complied with its obligations under the 2001 Agreement. The decision relied heavily on the opinion of the independent expert appointed to assist the tribunal in assessing the parties’ position on damages. According to the expert’s opinion, accepted by the tribunal, the 2002 Offers were materially different, from an economic perspective, to what was agreed to in the 2001 Agreement.
The tribunal also accepted HEP’s position that it was reasonable to reject the 2002 Offers due to the “substantial differences between the terms of the  Offers and those of the 2001 Agreement” (para. 214) and that there were non-financial matters that also reasonably influenced HEP’s decision, such as the concern that accepting the offers could lead to a disincentive for Slovenia to ratify the 2001 Agreement.
Tribunal analyzes pass-on defence brought up by independent expert
The independent expert pointed out in his report that “based on his experience […], he would expect a monopoly entity like HEP to adjust its tariffs so as to reflect its costs” (para. 220). Said differently, HEP could have passed any increase in costs onto consumers; therefore, HEP itself would not have incurred any recoverable loss. If successful, the consequences of the pass-on defence would be considerable: it would mean that HEP did not have any damages to recover.
Even though the pass-on defence was not raised by Slovenia, the tribunal decided it would analyze it. The defence is typical of competition law cases, but the tribunal saw no obstacle to consider it under international law. However, the tribunal’s analysis ended up focusing on the procedural aspect of the pass-on defence. As an affirmative defence, the burden of proving that the costs had been passed onto consumers lied with Slovenia. As no evidence of this was adduced, the tribunal found it was “not in a position to conclude that no loss occurred in the present case” (para. 245).
Calculation of damages
The tribunal relied mainly on the findings of the independent expert when ruling on the valuation of damages. The parties and the expert were far from agreeing on the appropriate methodology for calculating HEP’s losses, but the basic approach all of them adopted may be summarized as X minus Y—“X” being the factual scenario, namely, “the cost incurred by HEP in replacing the Krško electricity that should have been supplied under the 2001 Agreement” (para. 359), and “Y” being the counterfactual, namely, “[the cost] of the electricity that should have been supplied to HEP under the 2001 Agreement” (para. 349).
The epicenter of the disagreements was the valuation of “X.” As the non-supply prolonged a situation that had already endured four years (since July 30, 1998), the tribunal could not merely look into HEP’s books to find what the company had done to replace the electricity that should have been supplied by Krško NPP from June 30, 2002 onwards. In order to solve this puzzle (how HEP replaced the Krško electricity), the tribunal relied on the evidence presented by the parties, witness’ testimonies and the independent expert’s opinion.
The tribunal accepted that HEP used a combination of energy that was imported and generated in national thermal power plants to replace the electricity from Krško NPP. Although the imports were cheaper than the electricity from thermal plants, and although HEP could have imported all replacement energy, as Slovenia argued, the tribunal found that HEP had valid concerns about supply security to not want to rely entirely on imports. In other words, the tribunal found that, by using the combination of imports and thermal plants, HEP acted in a reasonable manner. To rule on the proportion of replacement energy from thermal plants versus imports, the tribunal once again preferred the methodology used by the independent expert.
To the €19,987,000 in compensation, the tribunal determined that interest, compounded at six-month intervals, should be added from the date Slovenia breached its obligations under the 2001 Agreement (July 01, 2002) until the date of payment in full.
Reimbursement of HEP’s costs
The tribunal acknowledged that the prevailing trend in investment treaty arbitration is the use of the “costs follow the event” approach, according to which the successful party is entitled to recover some or all of its costs. Having considered that HEP was the successful party in this case, and that the costs claimed (US$13,300,000) were “reasonable in the circumstances” (para. 610), the tribunal ordered Slovenia to reimburse US$10 million to HEP for its arbitration costs and legal expenses.
Notes: The ICSID tribunal was composed of David A. R. Williams (President appointed by the co-arbitrators, New Zealand national), Charles N. Brower (claimant’s appointee, U.S. national), and Jan Paulsson (respondent’s appointee, Swedish national). The award is available at http://www.italaw.com/sites/default/files/case-documents/ITA LAW 7012.pdf. The Decision on the Treaty Interpretation Issue is available at http://www.italaw.com/documents/Hrvatska-Interpretation.pdf.
Inaê Siqueira de Oliveira is a Law student at the Federal University of Rio Grande do Sul, Brazil.