Jonathan C. Hamilton, “Energy, Law, and Politics: The Energy Charter Treaty” (2015)

From the twilight moment of the Cold War, there emerged a political consensus favoring liberalization of investment and trade that spanned Europe (and other parts of the world, notably Latin America). In this context, European States developed the multilateral Energy Charter Treaty (ECT) as a new legal framework to promote and protect investment and international cooperation in the energy sector. How has it evolved, and where will it go next? Commentator Jonathan C. Hamilton was counsel on the first ECT arbitration to proceed to a decision on the merits at the World Bank.

The fall of the Berlin Wall just over 25 years ago in 1989 marked an historic transition to post-Cold War macroeconomics. That same year, Professor Louis Henkin (born in Belarus) lectured at the Hague Academy of International Law and concluded:

"First, law is politics. Students of law as well as students of politics are taught to distinguish law from politics. Law is normative, and failure to abide by legal obligations invites legal remedies and brings other legal responses; politics suggests freedom of choice, diplomacy, bargaining, accommodation. In fact, however, the distinction between law and politics is only a part-truth. In a larger, deeper sense, law is politics. Law is made by political actors (not by lawyers), through political procedures, for political ends. The law that emerges is the resultant of political forces; the influences of law on State behaviour are also determined by political forces."

From the twilight moment of the Cold War, there emerged a political consensus favoring liberalization of investment and trade that spanned Europe (and other parts of the world, notably Latin America). In this context, European States developed the multilateral Energy Charter Treaty (ECT) as a new legal framework to promote and protect investment and international cooperation in the energy sector. As the preamble of the ECT states, it aims “to catalyse economic growth by means of measures to liberalize investment and trade in energy”. According to the Energy Charter Secretariat, “[t]he fundamental aim of the Energy Charter Treaty is to strengthen the rule of law on energy issues, by creating a level playing field of rules to be observed by all participating governments, thereby mitigating risks associated with energy-related investment and trade."

The ECT, adopted by dozens of States, provides foreign investors in the energy sector certain protections and recourse to international arbitration through investor-State dispute settlement (ISDS) - an issue at the heart of current discussions over the Transatlantic Trade and Investment Partnership (TTIP). The ECT provides for the resolution of investor-State disputes before the International Centre for Settlement of Investment Disputes (ICSID) at the World Bank or through other mechanisms.

The ECT Secretariat identified 63 investor-State disputes arising out of the ECT as of 2015. The ECT thus has yielded dozens of case studies on an energy sector in transition since the Cold War. Most recently, in 2014, the shareholders of the Yukos oil company won arbitral awards finding that Russia expropriated Yukos through politically motivated attacks. It was a sweeping victory for investors over a State.

In a sweeping victory for a State over an investor, Bulgaria achieved success in the first ECT case to reach final resolution on the merits before ICSID at the World Bank. Decided in 2008, the Plama case made waves in the legal community with its wide-ranging discussion of the ECT and related issues. A survey of international arbitration practitioners named it Best Award and Most Surprising Award of the year when it came it. The Award addresses myriad significant issues relating to international investment law and the interpretation of the ECT, including the consequences of an investment not having been made in accordance with law and the scope of the ECT’s substantive protections. The tribunal held that even if the claimant had the benefit of the substantive protections of the ECT, each of its claims was baseless and failed on the merits.

The ECT has prompted a mixed record of commentaries. Writing in Foreign Affairs, some authors bluntly concluded:

"Europe's Energy Charter Treaty has had no practical impact on energy markets, despite its bold vision for integrating the energy systems of eastern and western Europe. One problem is that the treaty violates the first rule of effective institution building: it alienates the most important player. Russia, Europe's pivotal energy supplier, sees no benefit in subjecting itself to oversight by an intrusive Western institution and so has ensured the treaty's irrelevance."

Others beg to differ, and the adoption of an “updated” Energy Charter is anticipated at a high level conference in The Hague in 2015. As the Secretariat summarized, "[t]his will be a milestone for the Charter Process, its expansion and modernisation. The process is part of the ambition of the Energy Charter to become a leading organisation of future global energy governance. The ‘updated’ Energy Charter is a political declaration mapping out common principles for international cooperation and common areas of cooperation in the field of energy."

This time, the aims are global. Is the world of today as open to globalization and multilateral cooperation as it was at the end of the Cold War? There seem to be significant cracks emerging. Time will tell how law and politics will coincide again in the energy sector.

This time, the aims are global. Is the world of today as open to globalization and multilateral cooperation as it was at the end of the Cold War? There seem to be significant cracks emerging. Time will tell how law and politics will coincide again in the energy sector.

Jonathan C. Hamilton