Energy Charter Treaty (ECT)

picture courtesy: https://canterburypolitics.files.wordpress.com/2015/06/energy-charter-logo1.png

This article was written by Akshat Batra a student of Lloyd Law College, Greater Noida.

Abstract:

International Law plays a fundamental role in maintaining security in the Energy Sector because the concerns regarding Energy Security arise due to the global problems. International law comes into play through international mechanisms like the Energy Charter Treaty (ECT). The ECT is a multilateral treaty on energy, which is legally binding on the member States. The main purpose of the treaty is to promote long term cooperation in the energy sector by providing mutually benefitted legal framework to the members in harmonization with the objectives and principles of the Energy Charter. The ECT has a leading role for international energy co-operation. The treaty uniquely covers different types of international energy cooperation at the same time like that of trade, investment, transit and energy efficiency. It brings into picture the following aspects for the first time:

• promotion and protection of foreign investment of all vital investment issues, providing high protecting standards and a full developed dispute settlement mechanism.
• a forum for permanent discussion between the members concerning all aspects of international energy cooperation.
• Takes into consideration energy transit issues and energy efficiency.

Moreover, along with establishing International cooperation, the treaty gives respect to the domestic security of each Nation as it encourages member countries to take appropriate measures for the protection of their national security. Therefore, the ECT in every form is a commendable instrument for promoting International cooperation in the energy sector.

What is ECT?

The Energy Charter Treaty (ECT) is an international agreement which establishes a multilateral framework for cross-border co-operations in the energy industry. The treaty covers all aspects of commercial energy activities including trade, transit, investments and energy efficiency. The treaty is legally binding, including dispute resolution procedures.[1]

The historical significance of the Energy Charter can be traced back to a political proposal started in Europe in the early 1990s, during the time when the Cold War ended and offered an unique opportunity to overcome the earlier economic divisions. The point to be emphasized is that the ideas for mutually beneficial cooperation were never clear in the energy sector. Thus, a strong need was felt for establishing a foundation for enhancing the cooperation among the states of Eurasia. Therefore, the process of Energy Charter was born.

In the era of globalization, where the exporters and importers depend upon each other for business dealings, it is important to lay down multilateral rules to establish a better mechanism and fair market. The Energy Charter Treaty stands as an important element in the International endeavors to provide a legally binding foundation for the dealers in energy sector. Moreover, the treaty provides for an open, competitive and sustainable development market.

The Energy Charter Treaty and the Energy Charter Protocol on Energy Efficiency and Related Environmental Aspects were signed in December 1994 and entered into legal force in April 1998. To date, the Treaty has been signed or acceded to by fifty-two states,  the European Community and Euratom (the total number of its members is therefore fifty-four).The Treaty was developed on the basis of the 1991 Energy Charter. Whereas the latter document was drawn up as a declaration of political intent to promote energy cooperation, the Energy Charter Treaty is a legally-binding multilateral instrument.[2]

The primary aim of the Energy Charter Treaty is to reinforce the laws on energy issues, by producing certain set of rules to be observed and followed by the entire member Nations, so to mitigate the risks coupled with the energy-related issues like that of investment and trade.

The ECT brings with it the following aspects into picture:

• Reduced commercial risks in the investments by providing a non-discriminatory treatment to the investors in the energy sector.
• A good platform for trading in energy and energy products based on the WTO rules.
• Improvised efficiency in energy
• Better energy transmission.
• A proper mechanism for International dispute settlement.

The most noteworthy part of the Energy Charter Treaty is that it is the single instrument dealing in the international cooperation in the energy sector market, which covers the entire energy value chain (from the exploration to end-use of energy) and all the energy products and energy-related equipments.

Potentials of ECT:

The most important potential of the ECT is that it keeps all the values of the BITs, and does not have the problems of incoherence, imbalance and lack of uniformity as the BIT’s had problems with uniformity and incoherence. The ECT is said to carry the legal force of the equivalent of 1,275 BITs.[3]   This treaty alone cultivates a leveled and consistent relationship of mutual benefits among the oil producing countries and oil importing countries.

The Organization of Petroleum exporting Countries (OPEC) was created at the Baghdad conference on 10 – 14 September, 1960, by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela, with the primary aim of asserting it member countries legitimate rights in an international oil market dominated by the multi-national companies.[4] Other Nations also became part of the OPEC. The OPEC cut production of oil during war times thus, affecting the prices.

Another important potential of the Energy Charter Treaty is that it is a prospective tool for promoting cooperation among the OPEC member States and IEA member states, even though this potentiality is restricted by certain limits.

Most importantly, the amended trade rules of the Treaty symbolize a vital stepping stone for those Signatory states to the ECT who have not yet assented to the WTO. This permits them to acquaint themselves with the practices that the WTO members carry out.

The present provisions pertaining to the transit puts an obligation on the contracting parties to carry out the transit of energy on a fair basis keeping in picture the principle of freedom of transit.  In December 1994, the Energy Charter Protocol on Energy Efficiency and Related Environmental aspects (PEEREA) was signed along with the Energy Charter Treaty. The provisions of PEEREA mandate the participating/member states to prepare clear policy aims for improvising the energy efficiency and reducing the negative impact of the energy sector working on the environment.

Purpose of ECT:

 Article 2 of the Energy Charter Treaty explains its main purpose:

This Treaty establishes a legal framework in order to promote long-term co-operation in the energy field, based on complementarities and mutual benefits, in accordance with the objectives and principles of the Charter.

It is emphasized that the word “Charter” in Article 2 is a reference to the EEC.[5]  One of the main motives of the ECT is to establish a standardized protection for the Investments of the Investors in the energy market. The core intention behind Energy Charter process is to improvise the ‘securitization of the energy supply’.

Dispute Settlement:

In the ECT, article 27 states that the disputes need to be resolved between the contracting states. Article 26 of the ECT lays down express provision for determining and deciding the disputes that arise between the Investor of one state and another State. The dispute should be settled affably; if no affable settlement is possible than the provision allows an investor the following three optional choices, to put forward the dispute for resolving:

Either to a national court or an administrative tribunal of the contracting party to the dispute, or in accordance with some other previously agreed procedure or to the Arbitration under the treaty[6]

ECT is not an EU Instrument:

The ECT is not just an extension of the European Union policies in the energy sector as explained in the following points:

• Firstly, even if EU considers the ECT to be an instrument of EU energy policy but has actually no significance in the matters of interpretation of the ECT. The intentions of a single contracting party to a treaty, not expressed in the text of that treaty, are not relevant to its interpretation. There is no room under the VCLT provisions, to revert to the intentions of a single contracting party to a multilateral treaty.[7]
• Secondly, even though European Union took the initiative of establishing the Energy Charter Treaty (ECT). This however, does not specify that ECT is an instrument of the EC.
• Thirdly, ECT is a multilateral instrument whose membership extends beyond the Europe. There are number of Asian countries which are part of the ECT.
• No terms in the ECT refer to the EC or EU law or policies; the only connection is mentioned in the preamble of ECT which refers to the principles of the European Energy Charter which states to give assured support from the European Union.

Conclusion

The ECT makes available firm measures for settling disputes between countries or between the private investors and the country where the investment has been made.

In the case of a dispute between an investor and a country, the investor may decide to submit the dispute to international arbitration. In the case of a dispute between countries, and if diplomacy is unsuccessful, an ad hoc arbitration tribunal may be set up. The settlement solutions provided by these mechanisms are binding.[8]

The Treaty lays the provisions on the following issues:

On Competition:

The contracting parties should take steps to struggle the market twists and barriers to the competition in the energy sector. The parties must ensure that their legal structure contains the provisions to address any uncompetitive or concentrated activities in the economic activities in the energy sector.

On Transparency:

There is a mandate on the contracting parties to nominate one place for inquiry, where information on laws, rules & regulations, general decisions related to energy sector may be addressed.

On Sovereignty:

All the contracting parties or member nations are required to exercise sovereignty on their energy resources as per the terms and conditions of the International Law.

On Environment:

As per the ECT, contracting parties should reduce harmful impacts on the environment due to the energy cycle in their boundaries that too in an efficient manner. Moreover, the polluter pays principle is also laid in the treaty.

 On Taxation:

The contracting parties are taxed as per their domestic legislation or as per their bilateral trade agreement as the ECT has not laid any new norms on the financial/fiscal issues.

It is to be noted that not all the ECT provisions apply instantly to all the signatories after ratification. The Countries with changeover economies do benefit from some of the provisional arrangements. The Treaty is endowed with the provision for the withdrawal of any Contracting Party in conformity with a deadline of five years from the entry into force of the Treaty.

Therefore, it is emphasized upon at the last that he ECT has all the potential of standing as the most powerful International agreement on the issues of global energy security.

[1] http://europa.eu/legislation_summaries/energy/external_din

[2] http://www.encharter.org/index.php?id=7

[3] A. Konoplyanik, ‘Energy Security: the Role of Business, Governments, International Organisations and

   International Legal Framework’ (2007)6 IELTR 85

[4] A brief History of OPEC’ www.opec.org/aboutus/history/history.htm

[5] Article 1(1) of the ECT defines “Charter” as “the European Energy Charter adopted in the Concluding Document of the Hague Conference on the European Energy Charter signed at The Hague on 17 December 1991; signature of the Concluding Document is considered to be signature of the Charter.” The European Energy Charter is a political declaration, which provided the impetus for the subsequent ECT.

[6] A.F.M MANIRUZZAMAN, ‘Energy Charter Treaty Arbitration (Investor-State) In the Asia Pacific

Context: An Overview OGEL 4 (2005), URL: www.ogel.org/article.asp?key=2023

[7] Cf. WTO Appellate Body, EC- Computer Equipment (WT/DS62/AB/R, WT/DS67/AB/R and WT/D568/AB/R, 5 June 1998), at pam. 84:  “The purpose of treaty interpretation under Article 31 of the Vienna Convention is to ascertain the common intentions of the parties. These common intentions cannot be ascertained on the basis of the subjective and unilaterally determined “expectations” of one of the parties to a treaty.”

[8] http://europa.eu/legislation_summaries/energy/external_dimension_enlargement/l27028_en.htm