Enron Corporation and Ponderosa Assets, L.P. v The Argentine Republic

Year of the award: 2007
Forum: ICSID
Applicable investment treaty: Argentina - United States BIT (1991)

Arbitrators
Professor Francisco Orrego Vicuña, President
Professor Albert Jan van den Berg
Mr Pierre-Yves Tschanz

Executive summary

The dispute concerns the claims of two US investors with indirect equity participation in TGS, an Argentinean gas transportation company created during the Argentine privatization in the early 1990s. At that time, as part of incentives to attract foreign investment, Argentina established a regulatory framework that included the right to calculate tariffs for gas transportation in US dollars (with billing in pesos at the prevailing rate of exchange), as well semi-annual adjustment of tariffs by reference to the US PPI (Producer Price Index). These and other guarantees were enshrined in various legislative enactments as well as in the TGS' License signed by both TGS and the Government.

In 2000, in view of public pressure and the impending economic crisis, tariffs were at first temporarily frozen and then de facto permanently suspended. Further, in January 2002, Argentina enacted the "Emergency Law", which eliminated the calculation of tariffs in US dollars, converting tariffs to pesos at the rate of one dollar to one peso ("pesification"), and abolished PPI adjustments. Devaluation of peso followed, greatly diminishing TGS' earnings and accordingly the value of the company.

Enron Corporation and Ponderosa Assets, L.P. initiated ICSID arbitral proceedings claiming multiple violations of the 1991 Argentina-US BIT and requesting damages. The Tribunal found that the dismantling of the regulatory framework, on which the Claimants had legitimately relied at the time of making the investment, constituted a violation of the BIT fair and equitable treatment obligation. The Tribunal also found the breach of the BIT "umbrella clause" but rejected the claim of expropriation and other claims, as well as Argentina's pleas of emergency and necessity.

When dealing with compensation, the Tribunal followed the PCIJ Chorzów Factory dictum and the SD Myers approach that "compensation should undo the material harm inflicted by a breach". As a primary measure of compensation, the Tribunal took the difference between the "fair market value" of investment (Claimants' shareholding in TGS) at the time preceding "pesification" (31 December 2001) and its current value. It also awarded an additional amount for the suspension of tariff adjustments in 2000-2001.

To establish the pre-breach value of TGS as a "going concern", and of the Claimants' shareholding in TGS, the Tribunal - assisted by an independent expert - relied on the DCF method, making certain adjustments to reflect the reality of the economic crisis. The current value was determined on the basis of the price obtained by Claimants when they sold their shareholding in TGS in 2006. Both results were corrected to reflect only the regulated (tariff-based) part of the TGS' business and verified by the TGS' stock market values (TGS' shares were publicly traded). The Tribunal awarded an aggregate amount of damages of US$106.2 million and interest from 1 January 2002 to the date of the Award at the LIBOR+2% rate, compounded semi-annually.