EU Commission proposes negotiating directives for ECT modernization

The EC released on May 14 a set of draft negotiating directives setting out its proposed approach in “modernizing” the Energy Charter Treaty (ECT).

The ECT is an agreement among over 50 contracting parties that has been in force since 1998 that aims to foster improved international cooperation on energy in areas such as investment protection and international trade. In October 2017, the Energy Charter Strategy Group created a Subgroup on Modernization to discuss the potential update of the ECT, seizing the opportunity of the 2019 review provided for in Article 34.7 of the treaty.

In November 2018, the ECT’s governing and decision-making body adopted the “Bucharest Declaration.” The Energy Charter Conference, as this body is known, said that modernizing the ECT is “essential to properly address developments in the energy sector, especially in light of the rapid changes that have occurred in recent years,” along with reflecting updated standards related to investment protection and revised rules on transit.

The Energy Charter Conference also approved at that time the list of topics that they would address in the modernization effort, including several investment provisions, following consultations with ECT observer states and the energy industry. Formal negotiations are expected to begin in 2019.

The EC’s proposed directives for these negotiations still require the endorsement of the Council, meaning that these could change. The EC argues that the ECT’s investment protections “do not correspond to modern standards as reflected in the EU’s reformed approach on investment protection,” and stresses that this discrepancy should be the focus of upcoming negotiations.

The EC adds that these negotiations should not cover any provisions on pre-investment, but if they do come up in the talks, then the ECT’s dispute settlement terms should not apply.

Brussels is calling for the ECT to incorporate a “right to regulate” provision, along with revising its existing terms on expropriation, which among other changes would be “appropriately defined to clarify the nature of indirect expropriation.” Other areas where the EC is calling for clearer standards for investor and investment protections include MFN and national treatment provisions, FET and denial of benefits.

On the subject of sustainable development and corporate social responsibility, the EC argues that the ECT should “include provisions on sustainable development, including on climate change and clean energy transition,” and that its contracting parties should also undertake commitments on transparency and responsible business conduct that would help ensure that human rights and internationally recognized labour standards are respected.

Also notable in the EC’s proposal is the recommendation that any ECT modernization efforts on ISDS hold off until after the process to revise the ICSID arbitration rules and discussions on the EU’s proposed MIC have “deliver[ed] tangible results.”