II. FACTUAL BACKGROUND
A. THE ORIGINS OF THE DISPUTE
48. The facts summarised hereafter are those considered and debated in the Parties' written pleadings and oral arguments.
49. CAPSA produces oil and, via CAPEX, generates electric power in Argentina; it also markets propane, butane and gasoline. From December 2001 onward, the GOA took a series of measures which, according to the Claimant, caused considerable harm to the latter, breached undertakings assumed by the respondent State when the investments were made, rendered the investments worthless, particularly those in CAPSA and CAPEX, and prevented these companies from functioning independently. These measures were alleged to be in violation of provisions of the 1991 BIT, i.e. those on expropriation, on discriminatory treatment, on fair and equitable treatment, and on full protection and security.5
50. These assertions were vigorously objected to by the Government which argued that the measures taken by it, even if they had been contrary to provisions of the 1991 BIT, were justified under Article XI of that Treaty which allows the States Parties to take measures needed for the maintenance of public order, for the fulfilment of their obligations regarding the maintenance or the restoration of international peace or security, or for the protection of their own essential security interests.6
B. THE LEGAL SITUATION AT THE TIME OF THE INVESTMENT
1. History and General Context
51. Prior to 1990, most of Argentina's essential economic activities were State-run.
The infrastructures were unsatisfactory, however, and the public debt was high, particularly regarding the production of energy, i.e. electricity and hydrocarbons. This led the GOA to introduce, in 1989, a bill which was to become the State Reform Law, announcing a privatisation programme encompassing incentives as well as monetary and structural measures to promote foreign investment and to stabilise the country's economy.
52. Prior to these reforms, the electricity market had been dominated by the State.
Public enterprises controlled the production, transmission and distribution of energy. In addition, some provinces ran their own energy companies. The system was flawed by insufficient funding, rife with inefficiency and was in deficit. In 1988/1989, rolling black-outs were organised owing to limited power-generating capacity.
53. The oil and gas sector, too, was essentially in the hands of the State, with private business playing a secondary role. It was characterised by low productivity, excess demand and significant deficits for the State-owned companies.
54. Laws Nos. 23,696 and 23,697, referred to respectively as the "State Reform Law" and the "Economic Emergency Law," brought a radical change by de- regulating the economy and offering some public companies for sale. In addition, Law No. 23,928, the "Convertibility Law," complemented by Decree No. 529/1991, pegged the peso to the dollar at a fixed rate of 1:1, and no increase in the domestic monetary supply would henceforth be permitted without a corresponding increase in the Central Bank's foreign currency holdings. As a consequence, inflation abated and the economy grew during the period from 1991 to 1997.
55. The State Reform Law, with its measures of liberalisation and improvement of the public sector, and the call for foreign investment, aimed at the privatisation of State companies to improve production.
56. A reform of the legislation on foreign investment was mainly brought about by Decree No. 1853/1993. That Decree encouraged foreign investment by removing various restrictions, notably the three-year waiting period for the repatriation of foreign capital, allowing for such repatriation at any time; and by opening domestic credit facilities to both foreign and national businesses on an equal footing.
57. Further to improve the domestic context, Argentina concluded about 50 bilateral investment treaties (BITs), one of which was the 1991 BIT with the United States.
58. Finally, to protect investors' long-term interests, regulatory regimes were established for the electricity and hydrocarbon sectors. Together these regimes, the Electricity and the Hydrocarbons Regulatory Frameworks, formed the new "Energy Regulatory Framework."
2. Electricity Regulatory Framework
59. To improve the supply of electricity, the GOA allowed foreign investors a dominant role in the production, transmission and distribution of electric energy. They could acquire facilities and equity interests and also proceed to direct investments. Investments had to be made within the legal framework provided by Law No. 24,065 (the "Electricity Law"), by Regulatory Decree No.
1398/1992 and related regulations, and by Resolution No. 61/1992.
60. The objectives of the Electricity Law were the promotion of private investments in the production, transmission and distribution of electrical power, the setting of appropriate rates in order to further such activities, the efficient use of electricity, and the stimulation of competition.
61. Within the Electricity Regulatory Framework, a competitive system, the Wholesale Electricity Market (WEM), was established in order to organise the sale of energy by its generators. The two markets established within the WEM were: (i) the term market, where producers and buyers could freely agree on sales, conditions and prices; and (ii) the spot market, where energy was supplied, on an hourly basis, for a uniform price linked to the short-term marginal cost of the energy produced.
62. Distributors were, however, entitled to buy energy at a "seasonal price" fixed by the Compañía Administradora del Mercado Mayorista Eléctrico SA (CAMMESA) and approved by the GOA's Energy Secretariat. This was achieved by establishing a fixed monthly charge which was to remain stable for the first three months of the six-month seasonal price; that price was based on predictions of demand and supply in the seasonal period. After three months, adjustments would have to be made if the seasonal price, instead of reflecting the average spot-market price, significantly differed from it. This was to be done by providing compensation out of a "Seasonal Stabilisation Fund," yet another measure to protect investors.
63. The Electricity Regulatory Framework was managed by three agencies. The first was the GOA's Secretariat of Energy, endowed with regulatory powers to implement the Framework. It was to govern dispatch within the WEM and to set seasonal prices. The scheduling and physical dispatch by generators and the management of the WEM were handled by CAMMESA, an independent entity representing all WEM agents but subject to the veto of the Energy Secretariat.
Thirdly, there was the Ente Nacional Regulador de la Electricidad (ENRE), an independent governmental body with regulatory and jurisdictional power over the electricity industry.
64. The spot price was the price paid at any hour to all participants in the WEM. It was uniform, based on the short-term marginal cost incurred by the least efficient generator dispatched at any given hour. This Variable Cost of Production (VCP) had to be indicated in US dollars. The most efficient producer, i.e. that with the lowest VCP, was dispatched first and enjoyed the largest profit, as the spot price would be set on the basis of the VCP of the last generator dispatched. Accordingly, the spot price determined by CAMMESA was not arbitrary: the most efficient generator's VCP was below the spot price, and the difference between that price and the VCP incurred by the last generator dispatched was the margin of the most efficient producer. In other words, not all producers enjoyed the same margin.
65. The competitive system described above rewarded efficient power generators such as CAPEX and Costanera by the manner in which spot prices and margins were fixed. This, together with the security offered by the Electricity Regulatory Framework, provided an incentive for El Paso to invest.
66. By contrast, contractual energy sales could be freely negotiated. As a rule, they were made in US dollars and for one year, prices being set proportionally to the spot price and somewhat above it.
67. In addition to the sales proceeds, since 1994 power generators received "capacity payments" amounting to 10 US dollars per megawatt-hour (MWh). These payments were intended to encourage operators to upgrade and expand the electricity system. Capacity payments, with the proceeds from the sales, were the two pillars of the new Framework; according to the Claimant, the capacity payments received by CAPEX and Costanera amounted to about 27 and 92 million US dollars per year, respectively.7 The Claimant also alleged that, on the basis of these payments, investors could legitimately expect that if a devaluation of the peso were to occur, capacity payments would continue to be paid in US dollars or, if paid in pesos, be adjusted to attain the same value;8 and that adjustments would also be made in the pricing system.
68. The Claimant's assertions were vigorously objected to by the respondent State.9 According to the latter, the establishment of capacity payments, and their decrease in terms of US dollars, did not, from the legal and economic viewpoint, entail an undue prejudice. The Electricity Law, while providing for such payments, left the determination of the currency and of the mode of calculation to Argentina's Department of Energy. Initially, in 1992, capacity payments were fixed at US$ 5 dollars/MWh, this figure being subsequently raised to US$ 10 dollars. In 2002, payments decreased to AR$ 10 pesos, to be raised again to AR$ 12 pesos three months later. At the same time, the Energy Secretariat detached payment from actual dispatch, a measure favourable to the producers. There were not, accordingly, any vested rights in those respects.
69. Nor was there any undue prejudice from an economic point of view. The value of the capacity payments determined by the Secretary of Energy was, according to the GOA, compatible with the operation of the electricity market in the context of the crisis and with what would have happened, in that context, in a competitive market, given the macroeconomic circumstances prevailing at the time in the Argentine economy. At that time, a significant decrease in the demand for reliability of the electricity supplies was expected as a result of the drop of the economy's gross product and household income: "if an income drop occurs, a lower quality product at a lower price is preferred."10
70. At the beginning of the crisis, the electricity generation system enjoyed a high reserve margin. Despite the fact that, during the last years, no new producers had appeared, the existing ones were capable of satisfying a 12.3% increase in the peak demand. This shows that the system had excess capacity; accordingly, the reduction of capacity made perfect sense in a competitive market.
71. The Claimant considered that the capacity payment had to cover their capital costs and that the reduction in it to an amount equivalent to four dollars did not fulfill that requirement. The GOA rejected El Paso's arguments11 linking the Claimant's capacity payments to its capital costs: there was no rule under which the main ground for capacity payments was the protection of capital costs or the recovery of investments, and in fact such payments distorted the operation of the WEM; there was no document justifying economically that the payment had to be 10 US dollars and to remain at that level; if capacity payments were to defray capital costs, they should have been detached from dispatch, which was not what happened in the past decade.
72. The alleged link between the reduction of capacity payments and the lack of investments after 2001 was also belied by the fact that the last decision to invest in the field of power generation was taken in 1996, five years before the crisis, when capacity payments still amounted to 10 US dollars/MWh.
73. Accordingly, the decline of investments in power generation resulted from the performance of the economy as such and, more specifically, from the conditions of the energy market, explained by the crisis of emerging economies followed by the economic crisis of Argentina in 2001. Thus, it cannot be maintained that, despite the crisis, the electricity market would have continued to receive investments if the capacity payments had remained at the same level.
3. Hydrocarbon Regulatory Framework
74. Initially, the hydrocarbon trade in Argentina was governed by Law No. 17,319 of 1967, which allowed for the grant of concessions to private businesses. Until 1990, this possibility was not used, however, and the near-totality of crude oil and gas production remained in the hands of Yacimientos Petrolíferos Fiscales (YPF), a State company.
75. This changed in 1989 with the adoption of a privatisation programme, which brought many changes and offered private entrepreneurs the opportunity to conduct activities in new, unexplored areas as well as in areas formerly exploited by YPF. Deregulation was implemented by a series of legislative acts, including Decrees Nos. 1055/1989 of 10 October 1989, 1212/1989 of 8 November 1989 and 1589/1989 of 27 December 1989.
76. These acts removed import and export restrictions on crude oil, and abolished withholdings and duties. At the end of 1991, the domestic oil industry was deregulated, including prices, and at the beginning of 1994 natural gas prices were deregulated as well.
77. The centre-piece of the de-regulation process was the right "freely to dispose" of extracted resources, on domestic and foreign markets, and the exemption from export duties or withholdings.
78. Additional regulation in the hydrocarbon sector included Decree No. 2411/1991 ("Reconversion Decree"), Decree No. 2178/1991, as amended by Decree No. 1271/1992 ("Plan Argentina"), Law No. 24,076 ("Gas Law") and implementing Decree No. 1738/1992. These texts, together with those cited above in paragraph 75, formed the "Hydrocarbon Regulatory Framework."
79. The Gas Law made it possible to privatise "Gas del Estado" (GdE). Practically all of that company's assets were transferred to eight distribution and two transportation companies, a majority participation in each being sold to a consortium of private companies. These measures were intended to promote competition and to stimulate foreign investment in the oil and gas industry.
80. Regarding incentives for obtaining investments, the following rights and advantages were offered to entities such as CAPSA/CAPEX: (i) the right to export crude oil without the GOA's prior approval; (ii) an exemption from fees and duties, except royalties; (iii) the right to negotiate hydrocarbon sales in the open market; (iv) the constitutional protection of investments as property or contractual rights, including those of CAPSA/CAPEX, for the sale of liquid hydrocarbons; (v) the duty, for the Federal Executive, to give twelve months' notice before restricting the export of crude oil, and the requirement that the producer receive a price not below that of similar, imported crude oil and petroleum products; and (vi) the freedom for producers to sell their production.
4. Argentina's Drive to Attract Foreign Investment
81. The GOA made it clear that the new Energy Regulatory Framework was aimed at attracting investments, especially foreign investments. Argentina was prepared to provide certain guarantees to domestic and foreign investors. The privatisation policy in the energy sector was carried out, on the federal level, by the Executive and Legislative Powers which agreed that foreign investors were important to achieve privatisation successfully.
82. That result was reached by emphasising three principles - credibility, certainty and legal stability - the core requirement for attracting foreign investment being foreseeability, to be obtained especially through legal stability.
83. The privatisation drive of the Menem administration and its Energy Secretariat was supported by intergovernmental agencies such as the World Bank (IBRD), the International Finance Corporation (IFC), the UN Development Programme (UNDP), and the Inter-American Development Bank (IADB) through loans and measures of technical assistance. This institutional support obviously encouraged private foreign investment.
84. With the help of its Energy Secretariat, of its Privatisation Under-Secretariat and the above-mentioned intergovernmental organisations, the GOA thus actively invited investments from abroad and, to that end, organised seminars and other promotional meetings ("road shows") in the United States, in Europe and in South-East Asia; at least part of them were financed by the UNDP. In these meetings, the new-found openness of Argentina's economy and the stability of the new investment framework were emphasised. Potential investors were led to assume that prices would be determined by market mechanisms and that costs and capacity payments be denominated in dollars.
85. The privatisation of the energy sector was successful. The electricity industry was modernised, power production almost doubled, and domestic demand rose by more than one half; equipment was renewed and upgraded; power and transmission failures became rare; and transmission lines for power export to Chile and Brazil were installed.
86. The same can be said of the hydrocarbon industry: crude oil and natural gas outputs rose by half or more, and so did the reserves of hydrocarbons. Despite the increase in production, the known natural gas reserves also rose by one third. Exports of crude oil grew from almost nothing to 15.6 million m3, and exports of natural gas from zero to about 9.3 million m3 per day. Energy exports now amounted to 13% of Argentina's total exports, the country thus being transformed from an energy importer into an exporter. The distribution network was improving as well, pipelines being installed to connect Argentina with Chile, Brazil and Uruguay.
87. The Claimant argued that the privatisation drive, the circumstances surrounding it and its consequences were evidence of the GOA's intention to establish a stable framework for attracting foreign investment to the energy sector, thereby raising legitimate expectations. This view was contested by the GOA which pointed out that, whatever efforts may have been deployed by it to develop the energy sector, such development, and the rights allegedly infringed, arose not from contracts but from Argentinian law. Law is not immutable, however, be it in the field of investment or elsewhere; and States are entitled, on the strength of their sovereignty, to change them. This is particularly true in emergency situations such as that in which Argentina found herself in 2001.12
88. As pointed out earlier, in paragraph 57, another element in the GOA's investment strategy was the conclusion of some 50 BITs, among which was the Treaty with the United States of 14 November 1991. While such treaties are meant to cover investments of both sides, the 1991 BIT with the United States could, of course, have been viewed as an additional protection for investments to be made in the energy sector of Argentina.
VIII. DECISION OF THE TRIBUNAL
752. For the foregoing reasons, the Tribunal decides as follows:
A) Argentina breached Article II(2)(a) of the BIT by failing to accord fair and equitable treatment to El Paso's investment.
B) Argentina's defence of necessity to El Paso's claims is rejected.
C) Within 30 (thirty) days of the date of dispatch to the Parties of this Award, Argentina shall pay to El Paso compensation in the sum of US $ 43.03 million, increased by semi-annually compounded interest on that amount at the rate of LIBOR plus 2% from January 1, 2002 until the date of payment in full of this Award.
D) The Parties shall bear all their own legal costs and expenses, without recourse to each other.
E) The Parties shall bear equally the costs and expenses of the Tribunal and ICSID.
All other claims by either Party are rejected.
Footnotes omitted from this introduction