Sempra Energy International v Argentine Republic

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

Arbitrators:
Professor Francisco Orrego Vicuña, President
The Honorable Marc Lalonde
Dr Sandra Morelli Rico

Executive summary

Sempra, a US investor, held an equity interest in two Argentinean gas distribution companies, CGS and CGP, which had been created during the privatization campaign in early 1990s. At that time, in order to attract foreign investors, Argentina enacted legislation which guaranteed that tariffs for gas distribution would be calculated in US dollars (paid in pesos at the prevailing exchange rate) and that automatic semi-annual adjustments of tariffs would be based on the US Producer Price Index (US PPI). The Government also undertook to reimburse to CGS and CGP the subsidies set for residential customers of Patagonia. Relevant obligations were replicated in the Licenses granted to CGS and CGP until 2027.

In the circumstances of the economic crisis that developed in Argentina in early 2000s, the Government abrogated the guarantees provided at the time of privatization, which led to a very substantial reduction in the profitability of the gas distribution business and, accordingly, returns on Sempra's investment. The Government also stopped reimbursing the subsidies. To avoid the default of CGS and CGP, in December 2001 Sempra lent them US$56 million.

In 2002, Sempra initiated ICSID arbitral proceedings claiming multiple violations of the 1991 Argentina-US BIT and requesting damages. The Tribunal found that Argentina's measures breached fair and equitable treatment standard and the umbrella clause. Other claims were dismissed. The Tribunal also rejected Argentina's plea of a state of necessity but took the circumstances of the economic crisis into account when assessing damages.

The Tribunal based its award of damages on the loss in fair market value of Sempra's equity. This loss was estimated by calculating the difference in the DCF valuations of the CGS and CGP under the "no breach" scenario and the "breach" scenario. When performing the valuation under the "no breach" scenario, the Tribunal reduced the value (and consequently compensation) on account of Argentinean economic crisis. The principal head of damages was supplemented by three others: (1) the amount of the lost loan; (2) historical damage suffered due to the suspension of US PPI adjustments (up to the date of valuation); and (3) subsidies unpaid by the Government. The Tribunal awarded interest at the LIBOR rate plus 2%, compounded semi-annually, from the date of valuation to the date of the Award. Post-Award interest was not awarded because it had not been requested in time.