ENERGO-PRO initiates procedure against Republic of Bulgaria for settlement of investment dispute

The Czech company ENERGO-PRO approached the Republic of Bulgaria with a proposal for voluntary settlement of an investment dispute through mutual understanding and negotiations in connection with the project for new regulation of electricity prices and related reduction of operating costs of electricity distribution companies and compensation of legally imposed costs for the purchase of “green energy”. The company's claims are based on violations of international law and are based on the European Energy Charter and the Treaty between the Republic of Bulgaria and the Czech Republic on the Promotion and Mutual Protection of Investments. If the dispute cannot be resolved voluntarily by negotiation, under this contract, the investor concerned may, at its option, initiate an international arbitration procedure.

Since 2000, ENERGO-PRO has been investing heavily in the Bulgarian energy sector. Through a consistent policy of purchasing power capacities in the period 2002 - 2013, the company became the largest private owner of hydroelectric power plants (HPP) in Bulgaria. At the beginning of 2011, ENERGO-PRO expanded its energy business in the country by registering a subsidiary — a licensed electricity trader. In December 2011 ENERGO-PRO acquired from E.ON Bulgaria the ownership of the companies that distribute electricity and supply electricity to customers in North-Eastern Bulgaria.

The dispute between the Czech investor and the Bulgarian state arose as a result of the policy of the State Commission for Energy and Water Regulation (EWRC) on pricing of electricity and compensation of obligations for the purchase of electricity from renewable sources. The pricing policy implemented by DCEVR in the period after July 1, 2012, which is aimed at reducing final consumer prices of electricity at the expense of the revenues of the companies - network operators and final suppliers, decapitalized and worsened to the extreme the financial situation of the companies of the ENERGO-PRO group.

Since the beginning of July 2012, ENERGO-PRO has repeatedly stated publicly that the pricing decisions of the energy regulator are causing significant damage to the company and its subsidiaries in Bulgaria, and has called for the pricing policy to be adjusted in a timely manner because it puts the electricity distribution and supply companies in a difficult financial situation. Since the beginning of March 2013, the state regulator proceeded to further worsen the price conditions for ENERGO-PRO's activities, and in the following months a number of decisions of administrative and judicial authorities related to the policy of the DCEFR led the companies of the group to final decapitalisation. The EBRD expert report on the validation of new prices in the Electricity sector, published on 18 July 2013, showed the specific parameters of the price decisions prepared by the Regulator for the period after 1 August 2013, which will not only not correct the financial deficits accumulated in recent years, but will further aggravate some of them.

Before taking this step - to initiate arbitration proceedings, ENERGO-PRO made great efforts to negotiate with the Bulgarian government and state institutions for adjustment of regulatory policies in the energy sector in order to avoid the application of dispute resolution procedures under international agreements. Unfortunately, the company's efforts did not lead to a positive result.

ENERGO-PRO retained until the last possible moment its claims on the international investment protection mechanisms with the confidence that the State Regulator and the competent institutions will urgently take steps to improve the financial situation in the electricity sector, which will be realized in the new price period 2013-2014. The EBRD expert report on new prices in the electricity sector, published on 18 July 2013, showed that the Regulator did not take into account the arguments repeatedly expressed by the companies operating in the sector and intends to continue its current policy, which leads to the non-covering of necessary costs for the activity and the creation of critical financial deficits in the companies of the ENERGO-PRO group. The published projects for price regulation in the electricity sector and the practically expired technological deadlines for their correction forced ENERGO-PRO to apply to the Government of the Republic of Bulgaria with a proposal for voluntary settlement of the investment dispute in accordance with the European Energy Charter and the Treaty between the Republic of Bulgaria and the Czech Republic for the Promotion and Mutual Protection of Investments. If the investment dispute cannot be settled by mutual understanding within the prescribed time limits, ENERGO-PRO will file a claim for arbitration with the International Center for Settlement of Investment Disputes of the World Bank (ICSID).