DUKE ENERGY WINS ARBITRATION WITH GOE; ECUADOR

C O N F I D E N T I A L QUITO 000784 SIPDIS TREASURY FOR MEWENS E.O. 12958: DECL: 08/26/2018 TAGS: EINV ENRG ECON EC SUBJECT: DUKE ENERGY WINS ARBITRATION WITH GOE; ECUADOR CALLS IT A "PARTIAL VICTORY" REF: A. QUITO 314 ¶B. 07 QUITO 1816 Classified By: Ambassador Heather Hodges for Reasons 1.4 (b & d). ¶1. (C) Summary: An ICSID arbitration panel largely ruled in favor of U.S. electricity company Duke Energy in its case against Ecuador, and ordered an award of roughly $12 million. However, the GOE portrayed the decision to the media as a partial victory by emphasizing that the award was for $5 million and comparing that to Duke's initial claim of $25 million, conveniently overlooking the large interest payment it will also have to make. End summary. ¶2. (C) On August 18, an arbitral tribunal established under the International Center for the Settlement of Investment Disputes (ICSID) ruled in favor of U.S. firm Duke Energy in its international arbitration case against Ecuador. It ruled that the GOE breached the U.S.-Ecuador Bilateral Investment Treaty (BIT) in wrongfully imposing penalties against Electroquil for alleged violations of its power purchase agreements, and awarded a settlement of $5.6 million plus interest. It also ruled that the GOE owed Electroquil interest on late payments. ¶3. (U) Electroquil is a thermal electricity generator located in Guayas province. In 1996, Ecuador's state electricity company INECEL began levying a series of fines against Electroquil for violations of its power purchase agreements with INECEL. According to arbitration documents, Electroquil was fined 15 times for $8.18 million between 1996 and 2002. U.S. firm Duke Energy acquired Electroquil in 1998, and contested the fines. It initiated international arbitration against Ecuador under the BIT in 2004. ¶4. (C) According to Gustavo Larrea, Executive President of Electroquil, the company is pleased with the result of the arbitration. In the arbitration, Duke sought $25 million, which included the wrongful penalties and interest. The ICSID panel established the award at $5.6 million plus interest. Larrea estimates the interest at about $6 million, for a total award of roughly $12 million, or almost half Duke's initial claim. Larrea noted that prior to initiating arbitration, the company came close to a settlement with the GOE for $7 million, which Duke/Electroquil would have accepted, but the GOE pulled back. ¶5. (C) Ecuador's Prosecutor General stated that the current award is "under analysis" and may not be acceptable. Larrea opined that the GOE would seek additional clarification from the ICSID panel on its ruling, but did not speculate whether it would appeal. In the end, he expects that the GOE will honor the award. "After all," he commented, "they paid Oxy" (ref A). COMMENT -------------- ¶6. (C) Although the ICSID tribunal largely ruled in favor of Duke Energy/Electroquil, the story was portrayed by the government to the Ecuadorian media as a partial victory, by emphasizing that the panel awarded Duke only $5 million as opposed to the headline $25 million in its claim. The headline in El Comercio newspaper August 21 read "Ecuador obtains a partial victory in the ICSID." This positive spin follows an earlier arbitration ruling in favor of Ecuador over a U.S. company, when an ICSID panel dismissed MCI Power Group's arbitration in July 2007 for lack of jurisdiction (ref B). This may undermine some local assertions that ICSID is biased in favor of foreign investors, and may give the GOE cover to pay the award and continue with other ongoing arbitrations. Hodges