The Tribunal’s Analysis of the Liability Issues

This series seeks to create awareness among we the people of the award of the International Centre for the Settlement of  Investment Disputes (ICISD)  in favour of the Claimants, Grenada Private Power and WRB Enterprises Inc. – which own the controlling interests in GRENLEC –  in their dispute with the Government of Grenada over the change in the regulatory and legislative environment triggered by the 2016 Electricity Supply Act and the 2016 Public Utilities Regulatory Commission Act.  The Acts were passed in May 2016  which came into force on August 1, 2016,  “truncated”  GRENLEC’s 80-year monopoly licence in respect of the generation of electricity.    

1. Recap:

In March 2017, WRB wrote to the Government claiming that the new laws amounted to three separate repurchase events as provided for in its 1994 Share Purchase Agreement[1] through which it had  acquired the controlling interest of GRENLEC.  As per the Agreement, Repurchase Events obligated the Government  of Grenada to buy back WRB’s shares, at a value determined  by the formula set out in the Second Schedule of the 2014 ESA.  The Claimants “put” their shares to the Government for repurchase at EC$19/share or EC$182 mill. in total.    Via letter of May 2, 2017, the Government responded that there was a good-faith dispute as to whether the passage of the 2016Acts gave rise to any obligation to repurchase the GRENLEC shares from WRB  and requested negotiations to “resolve the matter”.  Three days later, on 5 May 2017, the Claimants filed a Request for Arbitration with ICSID.

Part 2 seeks to highlight some of the arguments put forward by the Government /Respondent in support of its counter claim and the Tribunal’s observations and conclusions re  the Government’s arguments.  These arguments are, in the author’s view, noteworthy.

• Government’s  Position:-

In defence of its position that it did not have any obligation to honour a Repurchase Agreement, the Government put forward the following arguments:-

• Allegation that the Terms of the 1994 Privatization Were Oppressive to Grenada:

• Tribunal’s Observations/View:
• The Government/Respondent alleged as follows:-
  • Extravagantly Improvident:  The 1994 package of laws and agreements made by  the prior NDC government  were  extravagantly improvident”. 
  • Poor Performance:  WRB has performed badly – they have reaped unconscionable benefits while hindering progress and in particular obstructed the development of “utility scale” renewable energy. 
  • Rewarding Mismanagement:  It  would be oppressive and unfair to reward the Claimants for their mismanagement with a grossly excessive award of compensation calculated under the Second Schedule. 
• No Request by Respondent to Set Aside SPA:   It was that the Tribunal’s view that, in its claim, the Government /Respondent did not seek to set aside the Share Purchase Agreement(SPA) or the Supplementary SPA as being unconscionable or tainted with bad faith.   It did not make any  allegation of corruption. 

• GOG Negotiating Team Lacked Expertise:

• Tribunal’s Observations/View:

The Tribunal noted the claims of the respondent:-

• Concessions to WRB:  The NDC Government team had no experience of GRENLEC’s operations or the energy sector itself. WRB and its legal team were able to extract a raft of concessions in exchange for a “bloated offer of up-front cash”[2].
• Length of Licence Granted:   The inordinate length of the licence and GRENLEC’s exclusive control of electricity generation were relics of the colonial regime left behind by the British.
• Penalty Provisions:  WRB’s expanded list of Repurchase Events included penalty provisions taken from colonial-era legislation, which, when combined with gutting any meaningful PUC “oversight” capacity, left the Government with no practical means of regulating the Claimant’s conduct. 

The Tribunal observed as follows: –

• Piper Commission of Enquiry:   The Commission of Inquiry set up by the NNP Government itself in 1997 reported:-   Price Waterhouse produced a Privatization Project in June 1993, a valuation of GRENLEC in June 1993, a review of its valuation in May 1994, an analysis of the best and final offers in December 1993, a summary of the finalists’ proposals in December 1993, and a comparison of the best and final offers in December 1993.   While critical of some of the ultimate terms of the privatization  –  referring to them as “thought-provoking” – the Commission concluded that the Government made the deal with its eyes wide open. 
• No Credible Evidence of Impropriety:   There is no credible evidence of impropriety or victimization in the negotiation of the SPA. The terms of the SPA negotiated do not look as attractive to the present NNP Government as they did to the 1994 NDC Government, but that is no basis for concluding that the Government was the victim of a lopsided or unfair negotiation

• GRENLEC’s Monopoly Was an Anomalous “Colonial-Era” Monopoly Tribunal’s Observations and View:
• Natural Monopoly:  The NDC Government’s initial Request for Proposals presented GRENLEC as a “natural monopoly.”
• Government Intervention and Public Interest:   The NNP Government now says that scope, exclusivity and 80-year term of the monopoly granted to GRENLEC under the 1994 ESA inappropriately carried forward the 1960 model and fettered the Government’s ability to intervene in the energy sector in the public interest, and adversely affected development of Grenada’s abundant renewable energy resources.  
• Public Policy Options:  There is no doubt the 1994 privatization reduced the GOG’s public policy options. 
• Trade Off:  The NDC Government made a trade-off between continuing state control and private investment. 
• Monopoly Status:  The evidence is that monopolies are prevalent in small island energy markets in the Caribbean. 
  • The International Monetary Fund reviewed the Caribbean energy markets in 2016 and concluded that “[f]or the most part, electric utilities are vertically integrated monopolies that hold exclusive licenses for generation, transmission, distribution and sale of electricity.”
  • The grant of a monopoly was important to profitability and affected the price that investors (including WRB) were prepared to offer for shares in GRENLEC.
• Rejection of Argument:  The Tribunal does not accept this aspect of the Respondent’s attack on the 1994 privatization

• The GOG Regulator, the Public Utilities Commission Established Under the 1994 Regime was “Inoperative” because the “Claimants had Designed [it] to be Toothless, in the Contract and Legislation they Drafted in 1994”

The Government/Respondent claimed that the restructured PUC, 1994 was “toothless” because the PUC Act did not permit effective government oversight of GRENLEC or grant adequate powers to curb its mismanagement.

• Tribunal’s Observations and Views: 
• PUC Established Prior to Bidding:  The evidence is that design of the PUC was established by the Government itself before the bidding began.
• Limited Role of PUC:  It is true that the role of the PUC in rate setting adjustments was largely limited to whether the proposals complied with the 1994 ESA formula but the limited role (which caused the resignation of some PUC Commissioners) gave potential investors security and a margin of protection once their investment had been made. 
• Regulation vs. Maximizing Investment:  In this particular trade-off between   regulation and maximizing investment the NDC government chose investment, and this choice factored into the price the bidders were prepared to pay for GRENLEC shares.
• Claimants Masterminded a “toothless” 1992 Act:  The allegation was not supported by any evidence of impropriety in the 1994 negotiations and is not consistent with the bid records. 
• Resignation of PUC Members: 
  • No Qualified Individuals:   When some members of the PUC resigned after the 1994 changes to the PUC, Minister Bowen did not replace them.  The Tribunal does not accept the Respondent’s submission that no qualified individuals in Grenada could be found to accept an appointment to the PUC which had a role in respect of all utilities in Grenada including but not limited to the electricity sector.
  • Government’s Failure to Appoint Members:  It was the Government’s failure to staff the PUC (whether “toothless” or not) rather than any action by the Claimants that led it to be “inoperative”.  As a result, for example, the PUC complaint procedure was not only unavailable to electricity rate payers but also to the customers of the other utilities in Grenada as a whole.
  • PURC 2016 Regulations:  It is of interest that new regulations are expected to be passed by the Public Utilities Regulatory Commission (the “PURC”) under the 2016 PURC Act but there is no evidence that this has yet been done.  

• The Electricity Rate-Setting Framework [RPI-X] Meant that “Virtually Any Increase in Costs was Directly Passed on to the Grenadian Consumer”

• Tribunal’s Observations and View:
• Contravention of Statutory Formula:  The Respondent does not claim that any of the GRENLEC rate increases since 1994 contravened the statutory formula.  
• Formula Presented in the Request for Proposals:  The evidence is that the “RPI-X” formula is common in regulated industries.   The evidence is that the rate-setting methodology in the 1994 ESA was presented by the Government in its offering memorandum during the RFP process.  The Government advised bidders that the specified rate structure would “form the basis to compare bids and begin negotiations.”
• Cost Efficiencies:  Ultimately, in terms of non-fuel charges, the Claimants agreed to the formula of RPI-2 (i.e. “x” equals 2) which required GRENLEC to achieve cost efficiencies substantially in excess of increases in the retail price index [RPI] in order to justify a real rate increase
• Claim not Supported:  The Tribunal finds that the Government has not established that the RPI-X formula is either unusual or worked unfairly to Grenada’s disadvantage. 

• GRENLEC’s Electricity Rates in Grenada are Excessive

• Tribunal’s Observations and Views:
• Excessively High Rates:   The Respondent alleges that GRENLEC’s electricity rates are higher than can be justified.
• Consistent with Caribbean Rates:  According to the Claimant’s expert, rates in Grenada were consistent with that obtaining in Caribbean markets, particularly those which operated without Government subsidies.
• Unhelpful Exercise:  The Respondent’ expert compared Grenada’s  rates with U.S. rates.

Comparison of Grenada’s electricity rates with US rates was an unhelpful exercise.

• Rates in Accordance with Agreed Formula:  The Respondent did not dispute that the rates were calculated in accordance with the SPA formula  agreed by  the prior Government.
  • The Failure of GRENLEC, under WRB’s Direction, to Develop Grenada’s Ample Resources of Renewable Energy 

• Tribunal’s Observations and View:
• National Interest:  The Respondent claims that the 2016 restructuring laws[3] were in the national interest because GRENLEC was squandering Grenada’s renewable energy potential.
• No Incentives for Renewables:  The Responded asserted that the rate-setting structure did not provide any incentive for GRENLEC to switch to renewables from expensive imported diesel fuel, the cost of which constitutes a significant drain on Grenada’s foreign reserves. 
• Constraining Legal Framework:  The Inter-American Development Bank observed that development of energy resources in Grenada was “hampered” by the regime created by the 1994 ESA.
• Lost Opportunities:  The Respondent listed what it regarded as lost opportunities – solar development, wind energy development; geothermal development
• Neither the Respondent nor the Claimant:  The Tribunal concludes on the evidence that neither the Claimants nor the Government pursued renewable energy proposals with as much vigour as they now assert. 
• Contractual Obligations:  The Respondent was unable to identify any statutory or contractual obligation on the part of GRENLEC (or the Claimants) to   develop renewable energy.
• Failure to Set Performance Standards:  The root of the problem  was the decision of the NDC Government in 1994 to create the regulatory framework which the NNP Government now considers “toothless” and the 1994 failure to set performance standards for renewable energy which, with the benefit of hindsight, would have promoted its development.

Part 3 will deal with the claim of Wilful Malfeasance, put forward by the Government/Respondent  as grounds for the rejection of its obligation to pay  even if the 2016 Acts constituted a Repurchase Event.

[1] The Share Purchase Agreement of 1994, negotiated by the National Democratic Congress administration through which  WRB Inc. acquired the controlling interests in the Grenada Electricity Services; the agreement agave GRENLEC exclusive  licence to generate and distribute electricity over an 80-year period..  It also provided for Repurchase Events – the obligation of the Government to  buy back the shares of WRB in the event of certain changes which would alter significantly the policy and regulatory environment under which GRENLEC would operate. 

[2] WRB bought out the 50 percent shares for EC$15 mill.

[3] Electricity Supply Act  2016 and Public Utilities Regulatory Commission  2016