PSEG Global Inc and Konya Ilgin Ltd v Republic of Turkey

Year of the award: 2007
Forum: ICSID
Applicable investment treaty: Turkey - United States BIT (1985)

Arbitrators:
Prof Francisco Orrego Vicuna, President
Mr L. Yves Fortier
Prof Gabrielle Kaufmann-Kohler

Executive summary

As a result of the growing demand for electricity experienced by Turkey in the 1980s, it decided to liberalise its energy sector and promote the participation of foreign investors therein. As part of this initiative, Turkey passed laws authorising private companies to establish facilities for the generation of electricity and sell electricity to the State. It also provided a number of incentives, including a Treasury Guarantee and long-term energy sales agreements. In 1994, PSEG, a U.S. company, applied for and was granted an authorization to conduct a feasibility study into the building of a coal-fired power plant and an adjacent coal mine in the Turkish province of Konya. PSEG subsequently signed an Implementation Contract and a Concession Contract with Turkey. Subsequently, a dispute arose between the parties as to whether the Concession Contract included a final agreement on key commercial terms, and what those terms were. Further, the parties were not in agreement as to the appropriate corporate structure for implementation of the project, a factor which carried important tax consequences.

In the meanwhile, the legal framework also underwent a change with the enactment of Law No. 4628 in March 2001, which eliminated the possibility of the Claimants' obtaining a Treasury guarantee for the project (the relevant provision of the Law was annulled by the Turkish Supreme Court in March 2002). According to the Claimants, all these events viewed in conjunction reflected Turkey's intention to destroy the Claimant's investment. Although construction on PSEG's proposed coal mine and power plant never commenced, the company expended millions of dollars in the late 1990s on an initial feasibility study, follow-up studies and several rounds of negotiations with government agencies.

When in early 2001 the parties reached the deadlock in negotiations on the key issues of plant capacity and energy tariffs and following the enactment of Law No. 4628, PSEG initiated ICSID proceedings under the Turkey-US BIT alleging Turkey's multiple violations of the BIT due to its failure to fulfill obligations under the contract, improper handling of negotiations and changing the legal framework. PSEG argued that Turkey had failed to provide fair and equitable treatment and full protection and security, impaired the maintenance, use and enjoyment of the investment by arbitrary and discriminatory measures, failed to comply with the BIT "umbrella clause" and indirectly expropriated the investment. PSEG claimed damages, calculated alternatively as the fair market value of investment, a sum of lost future profits or, as a minimum, the actual investments it had made.

The Tribunal found that Turkey was in violation of the fair and equitable treatment obligation but dismissed all other claims. In determining the compensation payable, the Tribunal rejected the "fair market value" standard because no expropriation had been found and because there was no damage to productive assets. The Tribunal further rejected PSEG's claim for lost future profits because there was no established record of profits and performance. The Tribunal decided to award PSEG the amount it had invested in the project, after deducting some costs which had not been incurred by the actual claimants in the ICSID arbitration. The Tribunal also ordered Turkey to pay 65% of the total arbitration costs and legal fees.