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Altering the energy market and the rise of the state. Legal safeguard for foreign owners of energy assets?

The Hungarian state is well on track to implementing one of its primary energy policy goals: strengthening its position in the Hungarian energy market. It is well established that every state plays a major and central role at the operation of a national energy market. The state has two major instruments for strengthening its influence: ownership of strategical energy assets and energy regulation.

Dr. András Lovas, Partner, Sárhegyi and Partners Law Firm

In the last couple of years, the state and some government-friendly businessmen have purchased important energy assets, and made deals across a multibillion-dollar range. Even if we do not count the extraordinarily heavyweight Paks2 nuclear power plant project, then the list of other state executed M&A transactions is long enough: acquiring the Russian-owned stock purchase in MOL in 2011, the purchase of MOL gas storage and EON’s wholesale gas portfolio – including its gas storage –in 2014, and the purchase of the Hungarian electricity and gas distribution subsidiaries of French and German energy giants between 2016-2017.

These acquisitions were often made under very interesting circumstances and the former foreign owners were not always happy about the sale. Interestingly, most of the foreign owners opted for an amicable settlement in their commercial disputes. Hence, they preferred to make a suboptimal deal and avoid lengthy and costly legal disputes. However, we must address the legal question of whether there would have been any legal measures to withstand the heavy acquisition activity of the state.

International investment protection

It was well established so far that international investment protection law provides an effective legal regulation against expropriatory and bad faith driven sate measures.

Currently, there are 54 bilateral investment treaties (BITs), as well as the Energy Charter Treaty (ECT) in force in Hungary. Both the BITs and the ECT contains so-called dispute settlement clauses, which allow the (energy) investors to submit the matter to an ad hoc international tribunal constituted under the terms of the given treaty.

Energy companies fairly often use this legal possibility, and several energy sector participants remember the famous long-term power purchase cases heard before the International Centre for Settlement of Investment Disputes (ICSID) and UNCITRAL. The ECT provided the legal basis for these cases (Electrabel S.A., AES Summit and EDF vs Hungary) and in the latter case a EUR 107 million award was rendered against Hungary in 2014.

Likely this award played a major role for the decision makers of the French energy giant Engie (formerly GDF Suez), when they decided to submit a claim against Hungary before the ICSID under the ECT, over the acquisition negotiations with the state about the Hungarian subsidiary in 2016.

A judgment rendered by the European Court of Justice (ECJ) in the case C-284/16 Slowakische Republik v. Achmea BV. at March 2018 was not as shocking for the French as for the rest of the foreign investors. Engie had dropped the legal dispute just a month before the Achmea judgment came out, and had closed the sale of Égáz-Dégáz with the state owned Nemzeti Közművek.

The Achmea decision stated that all intra-EU BITs are against acquis communautaire (the rules of the EC) and the tribunal awards based on these BITs are neither valid nor enforceable in the EU. This was particularly bad news for EU-based investors; leading legal analysts are almost sure that the next target will be awards rendered under the ECT. It is, as yet, still unknown how the ECJ will decide on the compatibility of EU law with tribunal awards based on ECT. However, the investment arbitration community has already delivered its answer. In the ICSID case of Vattenfall vs Germany, the tribunal published a decision on the Achmea issue on August 31 and dismissed all of Germany’s jurisdictional objections in the light of the Achmea judgment too.

This probably means that the ECT’s dispute settlement mechanism is still alive and, henceforward, there is a legal possibility for foreign energy companies to legally challenge any Hungarian state measures that they think to be unfair or that constitute expropriation.