Dechert Onpoint: Georgia & The Energy Charter Treaty

Dechert Georgia, through the contribution of partners Archil Giorgadze and Nicola Mariani, joined by senior associates Irakli Sokolovski and Natia Lapiashvili and associates Ana Kostava and Ana Kochiashvili, is partnering with Georgia Today on a regular section of the paper which will provide updated information regarding significant legal changes and developments in Georgia. In particular, we will highlight significant issues which may impact businesses operating in Georgia.

GEORGIA AND THE ENERGY CHARTER TREATY

The 1994 Energy Charter Treaty (“ECT”) ratified by Georgia on 22 February 1995 entered into force on 16 April 1998 (the “Effective Date”). Georgia also became party to the 1994 Protocol on Energy Efficiency and Related Environmental Aspects and the 1998 Amendment to the Trade related provisions of the Energy Charter Treaty. The ECT establishes legal protections of foreign investment in the energy sector, provides for the transit of energy and energy products without discrimination as to origin, destination or ownership, as well as for transparency and competition, and aims to bring about non-discriminatory access to the sector.

In our previous edition of OnPoint, Dechert provided an overview of the main obligations of member states in the investment sphere under the ECT. This edition of OnPoint will cover the provisions of the ECT relating to trade.

MAIN OBLIGATIONS OF MEMBER STATES IN THE TRADE SPHERE UNDER THE ECT

The Trade Amendment (“TA”) to the ECT was adopted in 1998 by the Energy Charter Conference. The objective of the ECT trade regime is to forge open and nondiscriminatory energy markets through the Energy Charter process. The TA aims to create a stable, predictable and non-discriminatory regime for all energy-related trade between ECT Contracting Parties.

The World Trade Organization (“WTO”) does not have specific rules governing the energy sector. However, the WTO’s legal framework includes a number of rules that are applicable to trade in energy-related products and equipment. Accordingly, the purpose of the ECT trade regime is to extend both the benefits and obligations of WTO membership to the energy sectors of those ECT Contracting Parties who are not yet members of the WTO. In practice, this principle means that trade in the energy sector between WTO and non-WTO Members and among non-WTO Members is treated the same as if all parties were members to the WTO.

Basic Principles of the WTO Incorporated in the ECT

1.1.1 Non-discrimination – which embodies two key principles:

(a) Most-favored-nation treatment (“MFN”) guarantees that countries cannot under normal circumstances discriminate between their trading partners. A country granting a special favor regarding its imports or exports to or from any other country must extend this favor immediately and unconditionally to all other members. This obligation extends to all and any goods, services and investments in the energy sphere. The WTO and the ECT, however, allow exceptions from MFN for members of customs unions or free trade agreements or in cases involving imports from developing countries.

(b) National Treatment (“NT”) concerns treating foreign products and “like” domestic products on an equal basis. Adhering to this principle means treating imported and locally-produced energy-related products equally. NT, however, becomes applicable only once a product has entered the domestic market. Therefore, charging customs duties on an imported energy-related product is not a violation of NT, even if locally-produced products are not taxed in an equivalent manner.

1.1.2 Elimination of Quantitative Restrictions

(a) The ECT requires the elimination of all quantitative restrictions on trade, be they in the form of quotas, licensing restrictions or any other measures implying quantitative limits to trade. In principle, this applies to exports as well. Governments may, however, retain customs duties if they are below the maximum level agreed in their respective WTO commitments. Additionally, qualitative product regulations—so-called Technical Barriers to Trade (“TBTs”)—are acceptable so long as they are least trade distortive and serve a legitimate purpose.

New Elements Introduced by the TA

Apart from adopting traditional WTO stipulations, the TA specifically extended WTO rules on energy-related products and equipment to the ECT. As a result, the ECT trade regime now covers not only “Energy Materials and Products” but also a large list of energy-related equipment items.

With regards to customs duties, the TA has maintained the “best endeavors” system. Under the ECT, Contracting Parties are only required to make a “soft law” or “best-endeavor” commitment not to increase their tariffs beyond a certain level. However, the TA additionally introduced the possibility to progressively replace the soft law customs tariffs pledges with a binding customs tariff standstill regime. The member states undertook to negotiate further in order to gradually replace the “soft-law” commitments with regards to non-increase of tariffs to legally-binding commitments in this regard.

TRADE DISPUTE SETTLEMENT UNDER THE TA

The trade dispute settlement component of the ECT mirrors the WTO’s dispute settlement system. However, the TA mechanism is lighter, less detailed and simpler than that implemented by the WTO.

Under the ECT, if a trade-related dispute arises between contracting parties, those parties shall refer it to a dispute settlement panel, comprised of panelists selected by the Energy Charter Conference from a pre-agreed list of panelists. Once the panel decides upon a case, its dispute settlement report is subject to adoption by the Energy Charter Conference by a vote of three-fourths of those present and voting, provided that at least a simple majority of all contracting parties support the decision.

This is different from the WTO, where the WTO Dispute Settlement Body automatically adopts panel reports unless rejected by consensus. Therefore, the TA retains the former element of political decision-making that could serve as an additional incentive for the mutually-acceptable, out-of-court settlement of trade-related disputes.

CONCLUSIONS

The ECT and the obligations under it are of utmost important for Georgia as the country wishes to expand its influence in the regional energy market and better exploit its energy resources. In that light, we will continue to provide overviews of different aspects of the treaty in detail in upcoming editions of OnPoint.

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Note: this article does not constitute legal advice. You are responsible for consulting with your own professional legal advisors concerning specific circumstances for your business.

Dechert’s Tbilisi office combines local service and full corporate, tax and finance support with the global knowledge that comes with being part of a worldwide legal practice.

Dechert Georgia is the Tbilisi branch of Dechert LLP, a global specialist Law firm that focuses on core transactional and litigation practices, providing world-class services to major corporations, financial institutions and private funds worldwide. With more than 900 Lawyers in our global practice groups working in 27 offices across Europe, the CIS, Asia, the Middle East and the United States, Dechert has the resources to deliver seamless, high quality legal services to clients worldwide. For more information, please visit www.dechert.com or contact Nicola Mariani at nicola.mariani@dechert.com.