Memorial on Objections to Jurisdiction and Admissibility and Counter-Memorial on the Merits

274 Pages·2012·1.63 MB·English

INTERNATIONAL CENTRE FOR THE SETTLEMENT
OF INVESTMENT DISPUTES

ICSID CASE No. ARB/10/23

TECO GUATEMALA HOLDINGS LLC
CLAIMANT

V.

REPUBLIC OF GUATEMALA
RESPONDENT

MEMORIAL ON OBJECTIONS TO
JURISDICTION AND ADMISSIBILITY
AND COUNTER-MEMORIAL ON THE MERITS

24 JANUARY 2012

1
I. INTRODUCTION..........................................................................................................................5
II. TGH DOES NOT PRESENT A VALID OR ADMISSIBLE CLAIM, THEREFORE, THE
TRIBUNAL LACKS JURISDICTION....................................................................................................19
A. TGH RAISES A MERE REGULATORY DISAGREEMENT THAT CANNOT GIVE RISE TO AN INTERNATIONAL
CLAIM.......................................................................................................................................................19
1. TGH submits a mere regulatory disagreement..........................................................................21
2. TGH has failed to submit a valid international claim...............................................................32
B. THIS TRIBUNAL LACKS JURISDICTION AND THE CLAIM BROUGHT BY TGH IS INADMISSIBLE..........41
1. The Tribunal has no jurisdiction ratione materiae....................................................................41
2. The disagreement has been resolved by the local courts which did not deny justice to TGH, a
claim which is not, in any event, made by TGH..................................................................................46
C. CONCLUSION: TGH DOES NOT PRESENT A VALID OR ADMISSIBLE INTERNATIONAL CLAIM, THIS
TRIBUNAL LACKS JURISDICTION, AND THEREFORE SHOULD NOT PROCEED TO THE MERITS OF THIS MATTER
54
III. THE FACTS.................................................................................................................................55
A. THE REPUBLIC OF GUATEMALA......................................................................................................55
B. THE PRIVATIZATION OF THE ELECTRICITY SECTOR IN GUATEMALA...............................................57
1. The origin of the project to privatize the electricity sector in Guatemala.................................58
2. The General Electricity Law and its Regulations......................................................................61
3. The public auction to sell shares in EEGSA..............................................................................86
4. Setting the tariff schedule in 1998.............................................................................................86
5. Promotion of the investment and the expectations generated in Teco.......................................90
6. The process of selling the EEGSA shares..................................................................................96
C. THE FIRST FIVE YEARS OF EEGSA..............................................................................................100
1. The restructuring of EEGSA’s operations...............................................................................100
2. The economic performance of EEGSA in the first five years...................................................101
D. THE 2003-2008 TARIFF REVIEW....................................................................................................103
E. MODIFICATION OF THE RLGE.......................................................................................................106
1. The need to reform the RLGE was foreseeable and accepted by EEGSA...............................107
2. Genesis: the reform to RLGE Article 99.................................................................................108
3. The 2007 modification to the RLGE........................................................................................110
F. THE TARIFF REVIEW OF THE 2008-2013 PERIOD..........................................................................117
1. The prequalification by the CNEE of consultant firms for the performance of tariff studies..117
2. Definition of the methodology: the Original Terms of Reference............................................118
3. The CNEE strengthened the technical capabilities of the Tariff Division...............................119
4. The determination of the Final Terms of Reference................................................................123
5. The hiring of technical consultants prequalified by the CNEE and EEGSA...........................132
6. The study Bates White prepared for EEGSA...........................................................................135
7. The procedure before the Expert Commission........................................................................146
8. The Expert Commission’s delay in delivering the opinion......................................................164
9. The Expert Commission’s pronouncement confirmed that the tariff study of May 5 was not
suitable for setting the tariffs............................................................................................................164
10. The dissolution of the Expert Commission..........................................................................176
11. The CNEE set tariffs based on the Sigla study in view of the Expert Commission’s opinion
178
12. Letters by Mr. Giacchino and Mr. Bastos dated August 1, 2008........................................181
13. The report of July 28 did not incorporate the totality of the Expert Commission
pronouncements................................................................................................................................184
14. The tariffs set by the CNEE are reasonable in that they reflect the efficient cost for
electricity distribution.......................................................................................................................188
G. EEGSA AND ITS SHAREHOLDERS FULLY EXHAUSTED THEIR REMEDY TO JUDICIALLY CHALLENGE
THE TARIFFS...........................................................................................................................................196
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H. TGH’S ATTEMPTS TO “POLITICIZE” THE PRESENT DISPUTE IN ORDER TO RAISE IT TO THE
INTERNATIONAL PLANE..........................................................................................................................199
1. (Private) criminal charges filed against EEGSA executives...................................................199
2. The theft of Mr. Calleja’s laptop.............................................................................................200
IV. GUATEMALA HAS NOT BREACHED THE INTERNATIONAL MINIMUM STANDARD
OF TREATMENT UNDER ARTICLE 10.5 OF THE TREATY........................................................201
A. THE INTERNATIONAL MINIMUM STANDARD DOES NOT CENSURE REGULATORY OR CONTRACTUAL
CONDUCT THAT IS ALLEGEDLY CONTRARY TO DOMESTIC LAW, EXCEPT IN THE CASE OF DENIAL OF JUSTICE
201
1. The international minimum standard only provides protection from gross conduct, such as
conduct that is manifestly arbitrary or that flagrantly repudiates the regulatory framework..........201
2. The international minimum standard does not cover conduct that is not more than a supposed
violation of domestic law; much to the contrary, it accords the State an ample margin of
appreciation, leaving the task of redressing mere irregularities to the local courts and tribunals..205
3. When irregularities of a domestic law nature are alleged, in order to raise a valid claim of
violation of the international minimum standard, the claimant must also allege that the local courts
have denied it justice.........................................................................................................................210
4. These same conclusions have been reached by tribunals that have found that the standard of
fair and equitable treatment is an autonomous standard..................................................................213
B. IN THE ABSENCE OF ALLEGATIONS OF DENIAL OF JUSTICE, TGH’S CLAIM THAT THE SUPPOSED
IRREGULARITIES COMMITTED BY THE CNEE BREACHED THE INTERNATIONAL MINIMUM STANDARD HAS
NO BASIS.................................................................................................................................................215
1. TGH’s allegations regarding the Expert Commission relate to the interpretation of the
regulatory framework and cannot constitute a breach of the standard............................................217
2. TGH’s allegations that the CNEE mistakenly interpreted its mandate so as to include the power
to reject the Bates White study and approve the Sigla study are also regulatory in nature and do not
give rise to breach of the standard....................................................................................................223
3. Likewise, TGH’s allegations regarding the VAD’s calculation concern a regulatory question
that does not give rise to a breach of the standard...........................................................................228
4. Aware of the problems with its claim, TGH attempts to label CNEE’s conduct as “arbitrary”
without in any way defining this concept or providing support for its broad allegations.................230
5. The decisions of the Constitutional Court are correct. Moreover, TGH does not allege denial of
justice................................................................................................................................................233
C. TGH FAILS TO DEMONSTRATE THAT ITS LEGITIMATE EXPECTATIONS HAVE BEEN VIOLATED BY A
FUNDAMENTAL CHANGE TO THE REGULATORY FRAMEWORK.................................................................236
1. TGH refers to supposed legitimate expectations that it would have acquired at the time of
EEGSA’s privatization when TGH did not exist yet..........................................................................236
6. In any event, TGH’s arguments regarding legitimate expectations do not have any legal or
factual basis......................................................................................................................................239
D. CONCLUSION: GUATEMALA HAS NOT VIOLATED THE INTERNATIONAL MINIMUM STANDARD OF
TREATMENT OF TREATY ARTICLE 10.5...................................................................................................256
V. THE CALCULATION OF TGH’S ALLEGED DAMAGES.................................................258
A. THE CALCULATION METHODOLOGY USED BY MR. KACZMAREK.................................................258
B. THE PRINCIPAL ERRORS IN MR. KACZMAREK’S VALUATION.......................................................260
1. DCF Valuation (But for scenario)...........................................................................................260
2. Valuation using Comparables (but for and actual scenarios).................................................264
3. The sale of DECA II reflects the correct value for EEGSA in the actual scenario..................265
C. CORRECTED VALUATION BASED ON THE DAMAGE ALLEGED BY TGH...........................................267
D. THE REASONABLENESS OF MESSRS. ABDALA AND SCHOETERS’S VALUATION............................269
E. PRE- AND POST-AWARD INTEREST.................................................................................................271
VI. RESPONDENT’S REQUEST FOR RELIEF..........................................................................273
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The Republic of Guatemala (Guatemala) presents its Memorial on Objections to
Jurisdiction and Admissibility and Counter-Memorial (Memorial on Objections and
Counter-Memorial) in accordance with point 13 of the Minutes of the First Session of
the Tribunal, and the Parties’ agreement that the parties confirmed for the Tribunal via e-
mail of the Secretariat of the Tribunal of October 31, 2011. This Memorial of Objections
and Counter-Memorial respond to the Memorial of TECO Guatemala Holdings, LLC
(TGH or the Claimant) of September 23, 2011 (Claimant’s Memorial).
Guatemala uses the acronym “TGH” to refer to the Claimant and not “TECO” as the
Claimant did in its Memorial,1 so as to avoid confusing the Claimant with other
companies in the TECO group that are currently, or were previously, part of the corporate
structure of this investment. It is curious that TGH preferred to use the reference “TECO”
in its Memorial when in its Notice of Arbitration it elected to use “TGH.” This change
creates confusion regarding the identities of the group’s companies and the transfer of
allegedly legitimate expectations between them. TGH attempts to benefit from any such
expectations even though TGH did not exist at the time of EEGSA’s privatization in 1998
and did not come into existence until 2005, as explained below.2 Guatemala uses the
term “Teco” to refer to the other companies of the holding group that are distinct from
TGH.
Guatemala attaches to this Memorial on Objections and Counter-Memorial the witness
statements of Mr. Carlos Colóm and Enrique Moller, and Messrs. Alejandro Arnau,
Mariana Álvarez Guerrero and Leandro Torres of Mercados Energéticos S.A. In
addition, it attaches the expert reports of Mr. Mario Damonte and of Messrs. Manuel
Abdala and Marcelo Schoeters and of Dr. Juán Luis Aguilar Salguero. Finally,
Guatemala attaches 9 appendixes, 162 exhibits numbered R-1 to R-162, and 17 doctrinal
and jurisprudential exhibits numbered R-1 to R-17.

1 Claimant’s Memorial, para. 1.
2 See Section IV.C below.
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This Memorial on Objections and Counter-Memorial has been written in Spanish and
translated to English. Any discrepancy between the English and Spanish versions should
be resolved with reference to its official version in the Spanish language.
I. INTRODUCTION
1. The claim asserted by TGH is a mere regulatory complaint under Guatemalan
law, disguised as a claim under the CAFTA-DR (the Treaty). This disguise is not
convincing.
2. TGH’s claim is that, in setting the electricity distribution tariffs for the 2008-2013
period for Empresa Eléctrica de Guatemala S.A. (EEGSA), the electricity
regulator in Guatemala (the CNEE) did not properly apply the Guatemalan
regulatory framework. Since that regulatory framework provided the basis for its
original investment, TGH claims that such allegedly defective application by the
regulator frustrated its expectations as a shareholder in EEGSA. This is TGH’s
claim.
3. As stated in the case of Azinian v. Mexico, “labelling is no substitute for
analysis.”3 A simple analysis of the facts presented demonstrates that TGH has
submitted to this Tribunal a simple dispute of a regulatory nature concerning
different interpretations of certain procedural issues related to the review of tariffs
established by the General Electricity Law (the LGE) and the Regulations of the
General Electricity Law (the RLGE).4
4. TGH wants this Tribunal to decide on the proper interpretation of the regulations:
the one that TGH shares with EEGSA on one hand, or that of the CNEE on the
other. This is evidenced by the title of the section of the Claimant’s Memorial in

3 Robert Azinian et al. v. United Mexican States (ICSID Case No. ARB(AF)/97/2), Award, 1
November 1999, Exhibit RL-2, para. 90.

4 General Electricity Law, Decree No. 93-96 of the Congress of the Republic, 16 October 1996
(LGE), attached to the Memorial as Exhibit R-8; Regulation of the General Electricity Law, 21
March 1997 and its modifications (RLGE), Exhibit R-36.
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which TGH explains how Guatemala supposedly breached the minimum standard
of treatment pursuant to Article 10.5 of the Treaty. Here, TGH states:
Guatemala breached its Treaty obligation to accord
TECO’s investment fair and equitable treatment when it
arbitrarily and in complete disregard of its legal
framework ignored the Expert Commission’s report and
set the tariffs on the basis of its own study.5
5. In other words, TGH plainly and simply tries to have an ICSID Tribunal – which
was constituted on the basis of an international treaty and which must judge the
international responsibility of the Republic of Guatemala – decide whether a tariff
review procedure has been properly followed. This is an eminently regulatory
issue of Guatemalan domestic law. An issue that, furthermore, has already been
raised by EEGSA before the regulatory body with jurisdiction (the CNEE) and
before the highest level of the Guatemalan courts – the Constitutional Court.
6. Despite confirmation from the Guatemalan courts that the CNEE did indeed
properly apply the Guatemalan regulatory framework, TGH asks this Tribunal to
ignore the conclusions of the regulator and of the local courts. It asks, among
other things, that this Tribunal repeat the entire tariff review, complaining that
Guatemala breached the Treaty when in 2008 it approved a Value-Added for
Distribution (VAD) for EEGSA − the component of the electricity distribution
tariff that must be paid to the distributor for its costs − that was “unlawful and
unjustifiably low.”6
7. This is not a task for an international tribunal, which is responsible for judging the
international responsibility of a State but is not competent to rule on the simple
interpretation of domestic regulatory provisions. Much less can it request that
such a tribunal determine the correct VAD or the proper tariff for EEGSA. First
of all, these are matters for the regulator, the CNEE, and, secondly, for the control

5 Claimant’s Memorial, title of Section III.C.
6 Ibid., title of Section II.F.7.
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of the Guatemalan courts and tribunals. Therefore, TGH’s claim is not justiciable
by this Tribunal.
8. It is a basic principle of international law that a disagreement over the
interpretation and application of domestic law does not automatically become an
international dispute. As the International Court of Justice stated in its decision in
the Case Concerning Ahmadou Sadio Diallo:
The Court recalls that it is for each State, in the first
instance, to interpret its own domestic law. The Court
does not, in principle, have the power to substitute its
own interpretation for that of the national authorities,
especially when that interpretation is given by the
highest national courts.7
9. This reasoning equally applies to disputes related to investment treaties. In the
case of Encana v. Ecuador, the tribunal stated:
[…] But there is nonetheless a difference between a
questionable position taken by the executive in relation
to a matter governed by the local law and a definitive
determination contrary to law. In terms of the [treaty]
the executive is entitled to take a position in relation to
claims put forth by individuals, even if that position
may turn out to be wrong in law, provided it does so in
good faith and stands ready to defend its position
before the courts. Like private parties, governments do
not repudiate obligations merely by contesting their
existence […].8
10. Furthermore, the tribunal in SD Myers v. Canada established the basic rules in
relation to the minimum standard of treatment:

7 Case Concerning Ahmadou Sadio Diallo (Republic of Guinea v. Democratic Republic of the
Congo) Decision, 10 November 2010, Exhibit RL-15, para. 70. The Court continues:
“Exceptionally, where a State puts forward a manifestly incorrect interpretation of its domestic
law, particularly for the purpose of gaining an advantage in a pending case, it is for the Court to
adopt what it finds to be the proper interpretation.”
8 EnCana Corporation v. Republic of Ecuador (LCIA Case No. UN3481, UNCITRAL Rules)
Award, 3 February 2006, Exhibit RL-9, para. 194 (Emphasis added).
7
[The] tribunal does not have an open–ended mandate to
second–guess government decision–making.
Governments […] may appear to have made mistakes,
to have misjudged the facts, […] The ordinary remedy,
if there were one, for errors in modern governments is
through internal political and legal processes, […]. The
Tribunal considers that a breach of Article 1105
[minimum standard of treatment] occurs only when it is
shown that an investor has been treated in such an
unjust or arbitrary manner that the treatment rises to the
level that is unacceptable from the international
perspective. That determination must be made in the
light of the high measure of deference that international
law generally extends to the right of domestic
authorities to regulate matters within their own borders
[…].9
11. These rules were directly applied by the tribunal in Saluka v. Czech Republic:
The Treaty cannot be interpreted so as to penalise each
and every breach by the Government of the rules or
regulations to which it is subject and for which the
investor may normally seek redress before the courts of
the host State.10
12. The tribunal ruled in the same manner in the case of Glamis Gold v. United
States:
[T]he Tribunal first notes that it is not for an
international tribunal to delve into the details of and
justifications for domestic law. […] the proper venue
for its challenge was domestic court. […] It is not the
role of this Tribunal, or any international tribunal, to
supplant its own judgment of underlying factual
material and support for that of a qualified domestic
agency.11

9 SD Myers Inc v. Canada (UNCITRAL Case) First partial award, 13 November 2000, Exhibit CL-
41, paras. 261 and 263 (Emphasis added).
10 Saluka Investments B.V. v. Czech Republic (UNCITRAL Case) Partial award, 17 March 2006,
Exhibit CL-42, para. 442.
11 Glamis Gold Ltd. v. United States of America (UNCITRAL Case) Award, 8 June 2009, Exhibit
CL-23, paras. 762, 779.
8
13. In the 2008 EEGSA tariff review process, the CNEE applied the same basic
principles provided for in the LGE and the RLGE, under which TECO made its
investment. Naturally, the CNEE acted as the regulator and implemented this
procedure based on its interpretation of the regulatory framework, in accordance
with its jurisdiction. TGH may disagree with this interpretation. It is common for
a regulated company to be in disagreement with decisions made by the regulator.
These disagreements are put before local courts and tribunals. The mere
interpretation of a regulatory framework is a matter of domestic law.
14. EEGSA and TGH clearly understood this when they resorted to the courts in
Guatemala to challenge the same regulatory decisions about which TGH
complains in this arbitration. On that occasion, EEGSA and TGH took their claim
up to the Constitutional Court, the highest court of Guatemala and the body that
safeguards the interpretation of the Constitution and the laws.
15. The Constitutional Court decided on the contested points of the tariff procedure
and ruled in favor of the CNEE. Having obtained well-founded decisions from the
Constitutional Court that rejected its claims, TGH now, under the guise of a claim
based on the Treaty, wants this Tribunal to become a court of last instance in the
matter. This is not the function of this Tribunal. As the tribunal observed in
Azinian v. Mexico:
The possibility of holding a State internationally liable
[…] does not, however, entitle a claimant to seek
international review of the national court decisions as
though the international jurisdiction seised has plenary
appellate jurisdiction.12
16. This was confirmed by the tribunal in Generation Ukraine v. Ukraine with respect
to the application of regulatory provisions of Ukrainian law, in highly technical
matters, by the local authorities:

12 Robert Azinian et al. v. United Mexican States (ICSID Case No. ARB(AF)/97/2), Award, 1
November 1999, Exhibit RL-2, para. 90.
9
[…] This Tribunal does not exercise the function of an
administrative review body to ensure that municipal
agencies perform their tasks diligently, conscientiously
or efficiently. That function is within the proper domain
of domestic courts and tribunals that are cognisant of
the minutiae of the applicable regulatory regime. […]
the only possibility in this case for the series of
complaints relating to highly technical matters of
Ukrainian planning law to be transformed into a BIT
violation would have been for the Claimant to be
denied justice before the Ukrainian courts in a bona fide
attempt to resolve these technical matters.13
17. Only if the Guatemalan justice system had denied justice to EEGSA/TGH could a
valid international claim come to exist.14 But TGH does not claim denial of
justice. Nor could it, because at no time was justice denied by the Guatemalan
courts.
18. TGH naturally attempts to raise the language of its claim, aware that the facts do
not justify a claim under the Treaty. It claims that the position that a domestic
regulator takes within the scope of its jurisdiction is an “alter[ation of] the legal
and business environment,”15 simply because the regulated entity disagrees with
the regulator’s position. But, as indicated previously, this is an implausible
proposition. If one were to accept this thesis, any country that has attracted
foreign investors to its regulated sectors would be forced to defend itself in an
international investment arbitration whenever the investors disagree with a
regulatory decision or with the decisions of its domestic courts regarding the
proper interpretation of those regulations. Fortunately, this Pandora’s Box has not
been opened. International case law has consistently rejected these types of
arguments.16

13 Generation Ukraine, Inc. v. Ukraine (ICSID Case No. ARB/00/9) Award, 15 September 2003,
Exhibit CL-26, paras. 20.33.
14 E.g., Robert Azinian et al. v. United Mexican States (ICSID Case No. ARB(AF)/97/2) Award, 1
November 1999, Exhibit RL-2, paras. 82-84, 87, 96-97, 100.
15 E.g., Claimant’s Memorial, para. 270.
16 See Sections II.A.2 and IV.A below.
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