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