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EU seeks CETA-style investment rules for Energy Charter Treaty

Oil pipeline in the snow © Malcolm Manners
The EU is also trying to overhaul oil and gas transit rules in the ECT – with the risk of displeasing Russia.

Having obtained the green light from the European Court of Justice for the CETA investment court, the European Commission has wasted no time in proceeding to reform the Energy Charter Treaty. The reform push also covers oil and gas pipeline transit – which will grate with Russia.

This week the Commission has asked member states to give it a mandate to renegotiate the 1990s treaty regulating energy trade on the Eurasian landmass with the stated aim of modernizing its investment protection provisions — which it considers to be outdated. The goal is to bring these in line with the EU’s new international investment protection model enshrined in the landmark trade agreement signed with Canada three years ago — CETA.

Reducing the number of ECT cases

However, bringing the ECT in line with the EU’s investment policy is not the only aim. The far more pressing concern for the Commission is the fact that EU investors continue to bring an unprecedented number of claims against EU member states, in particular against Spain, Italy and the Czech and Slovak Republics. Russia is now planning to bring a claim against the EU itself. Indeed, the ECT is the most-used investment treaty worldwide.

The Commission intends to restrict access to international investment arbitration by “excluding businesses that do not have a sufficient connection to their country of origin” – ie excluding ‘shell’ or ‘mail-box’ companies.

Moreover, the European Commission wants to narrow down the currently broadly formulated ‘fair and equitable treatment’ – or FET — standard, which is the most important investment protection standard, and replace it with the closed-list FET standard contained in CETA. This means that only investment protection breaches explicitly listed would be covered – and these breaches only cover the most gross cases of investor right violations.

Similarly, the Commission also wants to restrict the ‘indirect expropriation’ standard — as it did in CETA. This means that expropriatory measures that are taken for the alleged purpose of the protection of public goods, such as the protection of the environment or health, could in principle not be considered to be a violation of the ECT unless the measures are clearly discriminatory or otherwise patently arbitrary.

All these reforms would be very helpful for the EU and its member states in preventing or at least reducing the current flood of claims against them. They have already started to work in that direction: all EU member states except Hungary have adopted a political declaration stating that due to the ECJ’s Achmea judgment , the ECT no longer applies to intra-EU Energy Charter disputes.

Interestingly, the Commission does not intend to reform the ECT’s actual dispute settlement provisions now. In other words it is not planning to introduce a specific ECT investment court. Instead it prefers to await the outcome of the negotiations in the UNCITRAL Working Group III on ISDS reforms in which the EU’s proposal for a permanent multilateral investment court is currently under discussion. This of course does not exclude the possibility that the EU Commission will try to link up the ECT with the MIC once agreement on the MIC has been achieved.

Environmental impact of energy production

The EU is also keen on introducing specific provisions on sustainable development and corporate social responsibility into the Energy Charter. Obviously, in light of the climate change and the Paris Agreement targets, it makes sense to link the production of energy with the protection of the environment.

Reform proposals include the introduction of a specific ‘right to regulate’, which would further enhance the regulatory policy space of ECT members to adopt measures that negatively affect investors but are adopted in the name of protecting public goods and would hence be much more difficult to challenge in an arbitration court.

Granting third party access to pipelines

Finally, the European Commission also intends to modify the famous ‘transit’ chapter of the ECT. The executive body of the EU considers the text “not to be fully in line with the concept of liberalized energy markets in the EU”. Accordingly, the transit chapter should be “adapted to the requirements of integrated energy markets with third party access rights”. This means adopting the EU’s 2009 Third Energy Package principles, which are:

  1. third party access,
  2. unbundling
  3. transparency and
  4. non-discrimination.

This is a very different model from the ECT, which does not seek to determine national energy policies or prescribe a particular market model or impose privatisation or third party access to pipelines and grids.

The issue of third party access is particularly sensitive since many EU member states are highly dependent on the import of Russian gas from Gazprom. It also touches on Russia’s efforts to cut out Ukraine from its gas deliveries to Europe by way of the North Stream 2 pipeline, which is still highly disputed between the EU member states.

Outlook for the EU dealing with the ECT

The EU’s success in modernising the ECT will depend on the attitude of the other powerful parties to the treaty. Clearly, many ECT members beyond the EU have an urgent interest in reducing the number of claims by restricting access to international arbitration and lowering the protection standards. Also, the introduction of sustainable development and CSR provisions should not be controversial — as long as they remain vague and largely legally non-binding. However, EU efforts to introduce third party access could well prove to be more controversial.

Finally, the move is likely to raise internal EU competence matters. The Commission is requesting to negotiation “on behalf of the Union” — while the member states are not mentioned. This raises the issue of the scope of exclusive competence of the EU as regards the ECT.

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