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UAB E Energija (Lithuania) v Latvia, Award, ICSID Case No ARB/12/33, IIC 1295 (2017), despatched 22nd December 2017, World Bank; International Centre for Settlement of Investment Disputes [ICSID]

UAB E Energija (Lithuania) v Latvia, Award, ICSID Case No ARB/12/33, IIC 1295 (2017), despatched 22nd December 2017, World Bank; International Centre for Settlement of Investment Disputes [ICSID]

From: Investment Claims (http://oxia.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved.  Subscriber: null; date: 16 January 2019

Parties:
UAB E Energija (Lithuania) (Lithuania [lt])
Latvia
Judges/Arbitrators:
Paolo Michele Patocchi (President); August Reinisch (Respondent appointment); Samuel Wordsworth (Claimant appointment)
Counsel for Party One:
Mark Beeley (Vinson & Elkins RLLP, 20 Fenchurch Street, 24th Floor, London EC3M 3BY, United Kingdom); Alexander Slade (Vinson & Elkins RLLP, 20 Fenchurch Street, 24th Floor, London EC3M 3BY, United Kingdom); Agris Repšs (ZAB Sorainen, Kr. Valdemāra iela 21, LV-1010 Riga, Latvia)
Counsel for Party Two:
Ilze Dubava (Legal Adviser, Legal Department, State Chancellery, Brīvības Boulevard 36, LV-1520 Riga, Latvia); Nērika Lizinska (Legal Adviser, Legal Department, State Chancellery, Brīvības Boulevard 36, LV-1520 Riga, Latvia)
Procedural Stage:
Award
Previous Procedural Stage(s):
Procedural Order No 1; UAB E Energija (Lithuania) v Latvia, ICSID Case No ARB/12/33, 10 October 2013Procedural Order No 2; UAB E Energija (Lithuania) v Latvia, ICSID Case No ARB/12/33, 26 November 2013Procedural Order No 3; UAB E Energija (Lithuania) v Latvia, ICSID Case No ARB/12/33, 30 May 2014Procedural Order No 4; UAB E Energija (Lithuania) v Latvia, ICSID Case No ARB/12/33, 18 August 2014Procedural Order No 5; UAB E Energija (Lithuania) v Latvia, ICSID Case No ARB/12/33, 1 October 2014Procedural Order No 6; UAB E Energija (Lithuania) v Latvia, ICSID Case No ARB/12/33, 16 February 2015Procedural Order No 7; UAB E Energija (Lithuania) v Latvia, ICSID Case No ARB/12/33, 26 February 2016Procedural Order No 8; UAB E Energija (Lithuania) v Latvia, ICSID Case No ARB/12/33, 9 March 2015Procedural Order No 9; UAB E Energija (Lithuania) v Latvia, ICSID Case No ARB/12/33, 13 May 2015
Governing Law:
Agreement between the Government of the Republic of Lithuania and the Government of the Republic of Latvia on the Promotion and Protections of Investments, dated 7 February 1996 (‘BIT Latvia — Lithuania BIT’)
International law
Subject(s):
Burden of proof (and jurisdiction) — Subject matter of the dispute (and jurisdiction) — Fair and equitable treatment standard — Attribution — Dissenting opinion — Valuation

Oxford Reports on International Investment Claims is edited by:

Ian Laird, Crowell & Moring LLP, Washington, DC

Cases cited in the full text of this decision:

To access full citation information for this document, see the Oxford Law Citator record

Decision - full text

Original Source PDF

  1. III.  FACTS

  2. VII.  LIABILITY

  3. VIII.  QUANTUM

  4. IX.  COSTS

  5. X.  AWARD

i.  Frequently Used Abbreviations and Acronyms

  • BIT

    The Agreement between the Government of the Republic of Lithuania and the Government of the Republic of Latvia on the Promotion and Protections of Investments dated 7 February 1996

  • C-(…)

    Claimant’s Exhibit No. (…)

    C-1.1 means the first document in Exhibit C-1 in case the Claimant has filed several documents in one exhibit

  • CEO

    Chief Executive Officer

  • CFO

    Chief Financial Officer

  • CLA-(…)

    Claimant’s Legal Authority No. (…)

    The legal exhibits filed by the Claimant attached to Cl. Rep. Tribunal, p. 18 paragraph 58 were numbered from 1 onwards; the Tribunal renumbered such exhibits from CLA-46 (Municipalities and Local Government Act) onwards until CLA-61.

  • Council

    The Rēzekne City Council

  • Energy Crisis Committee

    The committee established by decision No. 388 (C-24) made by the Rēzekne City Council on 9 October 2007, see also footnote 299 below

  • ECT

    Energy Charter Treaty

  • Heating Supply Development Strategy, Rēzekne

    The strategy document approved by the Rēzekne City Council by decision No. 21 of 21 September 2007

    C-213

  • ICSID Arbitration Rules

    ICSID Rules of Procedure for Arbitration Proceedings (2006)

  • ICSID Convention

    Convention on the Settlement of Investment Disputes Between States and Nationals of Other States dated 18 March 1965

  • ICSID or the Centre

    International Centre for Settlement of Investment Disputes

  • ICSID Institution Rules

    Rules of Procedure for the Institution of Conciliation and Arbitration Proceedings

  • 2001 ILC Articles

    The International Law Commission’s Articles on State Responsibility

  • LVL

    Latvian Lats

  • Methodology, the

    Cabinet of Ministers Regulations No. 281 of 26 June 2001, amended in 2008 (Methodology for Calculation of Tariffs for Public Utilities in the Fields Regulated by Local Municipalities) C-35

    The original 2001 text as well as the amendments made in 2008 are set out in this exhibit; the 2008 amendments are highlighted in yellow

  • MWh

    Megawatt hour

  • p. (…) [page (…)]

    This Award contains references to the documentary evidence

    • —  to electronic page numbering in the format “[page 1]”, and

    • —  to hard copy page numbering in the format “p. 1”.

  • R-(…)

    Respondent’s Exhibit No. (…)

    R-1.1 means the first document in Exhibit R-1 in case the Respondent has filed several documents in one exhibit

  • RCC

    Rēzekne City Council

  • Regulator, the

    the Multi-industry Public Utility Regulator of the Latgale Municipalities

  • RLA-(…)

    Respondent’s Legal Authority No. (…)

  • Transcript, Day dd, page/line(s)

    Transcript of the Hearing on the Preliminary Objections and the Merits

  • Working Group

    The working group established by the Rēzekne City Council to draft the strategic plan for the development of the heat supply system (Council decision No. 188 dated 11 May 2007)

ii.  The Parties’ Submissions

  • RfA

    Request for Arbitration, 15 August 2012

  • Cl. Mem.

    Claimant’s Memorial, 6 December 2013

  • Resp. Obj. J. & C-Mem.

    Respondent’s Memorial on Preliminary Objections [to Jurisdiction] and Request for Bifurcation and Counter-Memorial on the Merits, 18 April 2014

  • Resp. Req. Bifurc.

    Respondent’s Clarificatory Statement on the Request for Bifurcation, 12 May 2014

  • Cl. Rep. Bifurc.

    Claimant’s Response to the Respondent’s Request for Bifurcation, 19 May 2014

  • Cl. Rep.

    Claimant’s Reply on the Merits and Counter-Memorial on Preliminary Objections, 10 October 2014

  • Resp. Rej.

    Respondent’s Rejoinder on the Merits and Reply on Preliminary Objections, 12 December 2014

  • Cl. Rej. J.

    Claimant’s Rejoinder on Preliminary Objections, 2 January 2015

  • Cl. Skeleton

    Claimant’s Skeleton Argument, 9 February 2015

  • Resp. Skeleton

    Respondent’s Skeleton Argument, 9 February 2015

  • Resp. Rep. Tribunal

    Respondent’s Answer to Questions Put by the Tribunal Concerning Domestic Judicial Proceedings, 25 February 2015

  • Cl. Rep. Tribunal

    Claimant’s Response to Questions Raised by the Tribunal, 20 March 2015

  • Resp. P-H (PO8)

    Respondent’s Post-Hearing Submission in Response to the Tribunal’s Questions Posed in Procedural Order No. 8, 20 March 2015

  • Resp. Rep. (PO8)

    Respondent’s Rebuttal Submission (Procedural Order No. 8 Dated 9 March 2015, point 2) — Respondent’s Applications, 10 April 2015

  • Cl. Rep. P-H

    Claimant’s Rebuttal to Respondent’s Post-Hearing Submission, 1 June 2015

  • Resp. Rep. (PO9)

    Respondent’s Response to the Tribunal’s Procedural Order No. 9, 1 June 2015

iii.  Short Titles for Certain Agreements

Short Title

Exhibit

Original Title

Agreement on the Settlement of Debt

C-80

Agreement on the Settlement of Debt dated 15 November 2005 between

  • —  Rēzeknes Siltumtīkli

  • —  Latgales Enerģija

Amended Long-Term Agreement

C-16

Agreement on Amendments to the Agreement for Lease, Renovation and Operation of the Long-Term Assets of 28 January 2005, dated 10 February 2006 between

  • —  Rēzeknes Siltumtīkli

  • —  Latgales Enerģija

Amendment Agreement

C-173

Amendment Agreement in Connection with Various Agreements Relating to Debt and Equity Investment in UAB E-energija dated 5 March 2008 between

  • —  UAB Energijos Taupymo Centras (“ETC”)

  • —  UAB E Energy Invest (“EEI”)

  • —  Mr. Virginijus Strioga (the “Sponsor”)

  • —  UAB E-Energija (the “Company”, and, together with ETC and EEI “the Obligors”)

  • —  European Bank for Reconstruction and Development (“EBRD”)

Amendment No. 1 to the Gas Supply Agreement

C-61

Supplementation 1 to Agreement No. 1580 on Construction of a New Natural Gas Infrastructure for Gasification of the City of Rēzekne Due to Long-Term Supplies of Natural Gas to the User for Combustion Facilities of Various Mutually Replaceable Fuels (Natural Gas and Oil Products) dated 29 April 2004 between

  • —  Latvijas Gāze (“LG”)

  • —  the Municipality of Rēzekne (“the RPD”)

  • —  Rēzeknes Siltumtīkli (“the User”)

Amendment No. 3 to the Gas Supply Agreement1

C-81

Supplementation 3 to Agreement No. 1580 on Construction of a New Natural Gas Infrastructure for Gasification of the City of Rēzekne Due to Long-Term Supplies of Natural Gas to the User for Combustion Facilities of Various Mutually Replaceable Fuels (Natural Gas and Oil Products) dated 29 April 2004 between

  • —  Latvijas Gāze (“LG”)

  • —  the Municipality of Rēzekne (“the RPD”)

  • —  Rēzeknes Siltumtīkli (“the User”)

2005 Assignment Agreement

C-64

Assignment Agreement dated 4 August 2005 between

  • —  AS “SEB Latvijas Unibanka” (“Assignor”)

  • —  AS “Lohmus, Haavel & Viisemann” (“Assignee”)

2006 Assignment Agreement

C-105

Assignment Agreement dated 13 December 2006 between

  • —  AS “Lohmus, Haavel & Viisemann” (“Assignor”)

  • —  Latgales Enerģija (“Assignee”)

2007 Assignment Agreement

C-159

Assignment Agreement dated 4 December 2007 between

  • —  Latgales Enerģija (“Assignor”)

  • —  LE Remonts (“Assignee”)

2008 Assignment Agreement

C-182

Assignment Agreement Nr. 100/2008 0685 dated 25 June 2008 between

  • —  Latgales Enerģija (“Assignor”)

  • —  UAB E energija (“Assignee”)

EBRD Loan Agreement

C-165

Loan Agreement dated 18 December 2007 between

  • —  European Bank for Reconstruction and Development (“EBRD”),

  • —  UAB E energija (“the Borrower”)

February 2005 Agreement

C-8

Agreement dated 10 February 2005 between

  • —  Rēzekne City Council (“the Council”)

  • —  Latgales Enerģija (“the Operator”)

February 2006 Agreement

C-17

Agreement on Mutual Operations with the Aim to Decrease Energy Rate in the City of Rēzekne, dated 10 February 2006 between

  • —  Rēzekne City Council

  • —  Latgales Enerģija

Gas Supply Agreement

C-40

Agreement No. 1580 on Construction of a New Natural Gas Infrastructure for Gasification of the City of Rēzekne Due to Long-Term Supplies of Natural Gas to the User for Combustion Facilities of Various Mutually Replaceable Fuels (Natural Gas and Oil Products) dated 29 April 2004 between

  • —  Latvijas Gāze (“LG”)

  • —  the Municipality of Rēzekne (“the RPD”)

  • —  Rēzeknes Siltumtīkli (“the User”)

Guarantee Agreement

C-43

Guarantee Agreement dated 30 December 2004 between

  • —  UAB E energija (“Guarantor”)

  • —  AS “Latvijas Unibanka” (“Creditor”)

Investment Services Agreement

C-63

Investment Services Agreement dated 4 August 2005 between

  • —  AS Lōhmus, Haavel & Viisemann (“LHV”)

  • —  UAB E energija (“the Client”)

Latvian Treasury Loan Agreement

R-20 [pages 2 ff.]

Loan Agreement dated 10 October 2007 between

  • —  The Treasury of the Republic of Latvia (Lender)

  • —  Rēzekne City Council (Borrower)

Long-Term Agreement

C-4

Agreement for Lease, Renovation and Operation of Long-Term Assets dated 28 January 2005 between

  • —  Rēzeknes Siltumtīkli (“the Lessor”)

  • —  Latgales Enerģija (“the Operator”)

October 2007 Agreement

C-26

Agreement between

  • —  Latgales Enerģija (Burkovskis)

  • —  UAB E Enerģija (Burkovskis)

  • —  Rēzeknes Siltumtīkli (Mežals)

  • —  Rēzeknes City Council (Vjakse)

  • —  Rēzeknes Enerģija (Škinčs/Melnis)

Rēzeknes Enerģija Gas Supply Agreement

C-151

Natural Gas Delivery Agreement dated 17 October 2007 between

  • —  Latgales Enerģija (User)

  • —  Rēzeknes Enerģija (Supplier)

Sampo Banka Guarantee

C-102

Guarantee dated 30 November 2006 between

  • —  JSC Sampo Banka (“the Bank”)

  • —  UAB E energija (“the Guarantor”)

Sampo Banka Loan Agreement

C-101

Loan Agreement No. SB-26/3519 dated 30 November 2006 between

  • —  JSC Sampo Banka (“the Bank”)

  • —  Latgales Enerģija (“the Borrower”)

Sampo Banka Pledge

C-103

Commercial Pledge No. SB-26/3519/1 between

  • —  JSC Sampo Banka (“the Commercial Pledgee”)

  • —  UAB E energija (“the Commercial Pledgor”)

Share Purchase Agreement

C-92

Share Purchase Agreement (with Repo Option) dated 8 June 2006 between

  • —  UAB E energija

  • —  SIA Energo Sistēmas

Shareholders’ Agreement

C-45

Shareholders’ Agreement dated 14 January 2005 between

  • —  UAB E energija

  • —  Juris Vanags

  • —  Ļevs Voronovs

  • —  Mārtiņš Lauva

  • —  SIA Energo Sistēmas

  • —  SIA Latgales Enerģija

iv.  Dramatis Personae

Name

Title

1.

Abramova, Dagmāra

Rēzeknes City Council, Councillor

2.

AS Danske Bank

Latvian branch of Danish bank

3.

AS Latvijas Gāze

Latvian company specialised in the importation, transportation, storage and sale of natural gas

4.

AS Lohmus, Haavel & Viisemann

Latvian branch of Estonian investment bank

5.

AS Rēzeknes Siltumtīkli

Latvian company owned by the Rēzekne Municipality

6.

AS SEB Latvijas Unibanka

Latvian bank

7.

Beeley, Mark

Vinson & Elkins, Partner, counsel for the Claimant as from 8 September 2017

8.

Bērziņš, Intar

Energo Sistēmas), SIA Latgales Energija, Member of the Management Board

9.

Briedis, Edgar

ZAB Sorainen, Attorney representing Latgales Enerģija in certain Latvian proceedings

10.

Burkovskis, Arnoldas

Latgales Energija, Manager

11.

Burn, George

Vinson & Elkins, Partner, counsel for the Claimant until 8 September 2017;

formerly of Salans LLP

12.

Dubava, Ilze

State Chancellery, Republic of Latvia, as from 7 September 2016

13.

E Enerģija UAB

Lithuanian company, the Claimant

14.

Hansel Realty Management Spain S.L.

Spanish company

15.

Jautakis, Aleksas

UAB E Enerģija, Chief Financial Officer

16.

Klimanovs, Ilja

Rēzekne City Council, Deputy Chairman

17.

Latvenergo

Latvian state-owned electric utility company

18.

LE Remonts

Latvian company

19.

Lizinska, Nērika

State Chancellery, Republic of Latvia, as from 7 September 2016

20.

Locis, Ivars

Rēzekne City Council, Deputy Executive Director

21.

Mēkons, Ivars

State Chancellery, Republic of Latvia, until 7 September 2016

22.

Meļņikovs, Sergejs

Latgales Enerģija, Member of the Management Board

23.

Melnis, Rihards

Rēzeknes Enerģija, Member of the Management Board

24.

Mežals, Aldis

Rēzeknes Siltumtīkli, Member of the Management Board

25.

Muceniece, Maija

Rēzeknes City Council, Councillors

26.

the Multi-industry Public Utility Regulator of the Latgale Municipalities (“the Regulator”)

Latvian authority

27.

Nikonovs, Vladimirs

Rēzeknes City Council, Councillor

28.

Patmalnieks, Arturs

Rēzeknes City Council, Head of the Legal Department

29.

Rēzeknes Vēstis

Local newspaper, Rēzekne

30.

Repšs, Agris

ZAB Sorainen, Attorney

31.

Rodl & Partner SIA

Audit Group

32.

Rogozina, Svetlana

Rēzeknes Siltumtīkli, Accountant

33.

Salans LLP

Law firm formerly acting for the Claimant

34.

Sampo Banka

Latvian branch of Finnish bank

35.

SIA AVT Nafta

Latvian company

36.

SIA Dinaburga Rosme

Latvian company

37.

SIA Energo Sistēmas

Latvian company

38.

SIA Latgales Enerģija

Latvian company controlled by the Claimant

39.

SIA Rēzeknes Enerģija

Latvian company owned by the Rēzekne Municipality

40.

SIA Rēzeknes Namsaimnieks

Latvian company, estate agent

41.

SIA Rēzekne Ūdens

Latvian water sewerage company

42.

SIA Rēzekne Siltumserviss

Latvian company active in heat supply and heat supply network

43.

Škinčs, Edgars

Rēzeknes Enerģija/ Rezeknes Namsaimnieks, Member of the Management Board

44.

Slade, Alexander

Vinson & Elkins, Attorney; formerly of Salans LLP

45.

Spradzenko, Gunars

Rēzeknes City Council, Member

46.

Strioga, Virginijus

E Enerģija UAB, Chief Executive Officer/General Manager

47.

Uškāne, Evisa

Latgales Enerģija, Chairman of the Management Board

48.

Vekšina, Velta

Rēzeknes City Council, Head of the Financial Department

49.

Vjaske, Juris Guntis

Rēzekne City Council, Chairperson

50.

Vanags, Juris

Latgales Enerģija, shareholder

51.

Vinsons & Elskins RLLP

Law firm acting for the Claimant in these proceedings

52.

Voronovs, Levs

Latgales Enerģija, shareholder

53.

ZAB Sorainen

Law firm acting for the Claimant in these proceedings

I.  Introduction and Parties

1.  This arbitration concerns a dispute submitted to the International Centre for Settlement of Investment Disputes (“ICSID” or the “Centre”) pursuant to (i) the Agreement between the Government of the Republic of Lithuania and the Government of the Republic of Latvia on the Promotion and Protection of Investments dated 7 February 1996, which entered into force on 23 July 1996 (the “BIT” or “Treaty”) and (ii) the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, which entered into force on 14 October 1966 (the “ICSID Convention”).2

2.  The Claimant is UAB E energija (Lithuania) (“E energija” or the “Claimant”). It is a limited liability company established under the laws of the Republic of Lithuania and incorporated in Lithuania.3 E energija carries out business in the energy sector and has, in particular, a number of concessions for central heating services in Lithuania, Ukraine and Latvia.

3.  E energija indirectly owns 58% of the shares in SIA Latgales Enerģija (“Latgales Enerģija”), a limited liability company established under the laws of the Republic of Latvia and incorporated in Latvia.4 E energija incorporated Latgales Enerģija as the entity through which it would invest in the concession for district heating in the Latvian city of Rēzekne (the “Rēzekne Project”).

4.  The Respondent is the Republic of Latvia (“Latvia” or the “Respondent”).

5.  The Claimant and the Respondent are hereinafter collectively referred to as the “Parties”. The Parties’ respective representatives and their addresses are listed in page (i) above.

6.  The dispute relates to the rights asserted by the Claimant under the BIT against the Republic of Latvia in connection with the Rēzekne Project.

II.  Procedural History

7.  On 15 August 2012 ICSID received a request for arbitration from the Claimant against the Republic of Latvia, together with Exhibits C-1 through C-33 and Legal Authorities CLA-1 through CLA-22 (the “Request” or “RfA”).

8.  On 15 October 2012 the Secretary-General of ICSID registered the Request, as supplemented by letters dated 14 September 2012, 4 October 2012 and 10 October 2012, in accordance with Article 36(3) of the ICSID Convention and notified the Parties of the registration. In the Notice of Registration, the Secretary-General invited the Parties to proceed to constitute a Tribunal as soon as possible in accordance with Rule 7(d) of the Centre’s Rules of Procedure for the Institution of Conciliation and Arbitration Proceedings.

9.  In the absence of an agreement between the Parties, the Claimant elected to submit the arbitration to a three-member Tribunal, as provided in Article 37(2)(b) of the ICSID Convention.

10.  On 8 March 2013 Mr. Samuel Wordsworth QC, a British national, accepted his appointment by the Claimant as arbitrator.

11.  On 22 April 2013 Prof. Dr. August Reinisch, an Austrian national, accepted his appointment by the Chairman of the ICSID Administrative Council in accordance with Article 38 of the ICSID Convention.

12.  On 12 June 2013 Dr. Paolo Michele Patocchi, a Swiss national, accepted his appointment as President of the Tribunal by the Chairman of the ICSID Administrative Council in accordance with Article 38 of the ICSID Convention.

13.  On 12 June 2013 the Secretary-General, in accordance with Rule 6(1) of the ICSID Rules of Procedure for Arbitration Proceedings (the “ICSID Arbitration Rules”), notified the Parties that all three arbitrators had accepted their appointments and that the Tribunal was, therefore, constituted on that date. Ms. Geraldine R. Fischer, ICSID Legal Counsel, was designated to serve as Secretary of the Tribunal.

14.  On 11 September 2013 the Tribunal held a first session with the Parties in London. The Parties confirmed that the Members of the Tribunal had been validly appointed. It was agreed, inter alia, that: (i) the applicable Arbitration Rules would be those in effect from 10 April 2006; (ii) the procedural language would be English, and (iii) the place of the proceedings would be London, United Kingdom. The Parties agreed on a timetable for the jurisdictional/merits phase of the proceedings, including production of documents. On 10 October 2013, after consultation with the Parties, the President of the Tribunal issued Procedural Order No. 1 which embodied the Parties’ agreements on procedural matters including the procedural timetable (the “Timetable”, Annex A to Procedural Order No. 1).

15.  In Procedural Order No. 2 of 26 November 2013 the Tribunal modified the Timetable further to the Claimant’s application.

16.  On 6 December 2013 the Claimant filed a Memorial with the following supporting documents:

  • •  Witness Statement of Mr. Virginijus Strioga (“CWS-1”);

  • •  Witness Statement of Mr. Aleksas Jautakis (“CWS-2”);

  • •  Witness Statement of Ms. Svetlana Rogozina (“CWS-3”);

  • •  Witness Statement of Ms. Evisa Uškāne (“CWS-4”);

  • •  Witness Statement of Mr. Levs Voronovs (“CWS-5”);

  • •  Expert Report on Quantum from Dr. Serena Hesmondhalgh of The Brattle Group (“ER Hesmondhalgh I”);

  • •  Factual Exhibits C-34 to C-215; and

  • •  Legal Authorities CLA-23 to CLA-42.

17.  On 18 April 2014 the Respondent submitted its Memorial on Preliminary Objections (“Preliminary Objections”) and Request for Bifurcation (“Request for Bifurcation”) and Counter-Memorial on the Merits with the following supporting documents:

  • •  Expert Report on Valuation Quantification of Damages Prepared by Mr. Michael Peer of KPMG Baltics SIA (“ER Peer I”);

  • •  Factual Exhibits R-1 to R-14; and

  • •  Legal Authorities RLA-1 to RLA-15.

18.  In its Preliminary Objections and Request for Bifurcation the Respondent requested inter alia that the Tribunal stay the proceedings.

19.  On 1 May 2014 the Claimant wrote to the Tribunal regarding the Respondent’s submission of 18 April 2014, stating that such submission did not contain an application for bifurcation. The Claimant further requested confirmation that the Tribunal would proceed in accordance with the Timetable set out in Annex A of Procedural Order No. 1 of 10 October 2013 (“Applicable Timetable if Tribunal Decides to Join Preliminary Objections to the Merits”).

20.  On 5 May 2014 the President of the Tribunal directed the Respondent to clarify by 12 May 2014 whether it sought bifurcation, and, if so, on what basis. The Tribunal also directed the Claimant to answer the Respondent’s letter of 12 May 2014 as well as the Respondent’s request for a stay of proceedings by 19 May 2014.

21.  On 12 May 2014 the Respondent submitted its Clarificatory Statement on its Request for Bifurcation stating that it sought bifurcation.

22.  On 19 May 2014 the Claimant submitted its Response opposing the Respondent’s Request for Bifurcation.

23.  On 30 May 2014 the Tribunal in Procedural Order No. 3 denied the Respondent’s Request for Bifurcation and joined the Respondent’s “preliminary objections” to the merits, stating that a further decision setting out reasons would be sent to the Parties as soon as possible in the following weeks. The Tribunal also denied the Respondent’s application for a stay of these proceedings pending a final and binding decision by the courts of Latvia on Case No. C03051107. On 21 January 2015 the Tribunal in Procedural Order No. 3bis gave reasons for its decision declining the bifurcation and the stay of proceedings sought by the Respondent.

24.  On 18 August 2014 the Tribunal ruled on the Parties’ requests for production of documents in Procedural Order No. 4.

25.  On 1 October 2014 the Tribunal decided on certain document production issues and amended the Timetable in Procedural Order No. 5.

26.  On 10 October 2014 the Claimant filed a Reply on the Merits and Counter-Memorial on the Respondent’s Preliminary Objections with the following supporting documents:

  • •  Second Witness Statement of Mr. Virginijus Strioga (“CWS-6”);

  • •  Second Witness Statement of Mr. Aleksas Jautakis (“CWS-7”);

  • •  Second Witness Statement of Ms. Svetlana Rogozina (“CWS-8”);

  • •  Second Expert Report on Quantum from Dr. Serena Hesmondhalgh of The Brattle Group (“ER Hesmondhalgh II”);

  • •  Expert Report of Dr. Dagnija Blumberga (“ER Blumberga I”);

  • •  Factual Exhibits C-216 to C-252; and

  • •  Legal Authorities CLA-43 to CLA-45.

27.  On 12 December 2014 the Respondent filed a Rejoinder on the Merits and Reply on Preliminary Objections with the following supporting documents:

  • •  Third Expert Report on Quantification of Damages prepared by Mr. Michael Peer of KPMG Baltics SIA (“ER Peer III”);5

  • •  Factual Exhibits R-15 to R-21; and

  • •  Legal Authorities RLA-16 to RLA-19.

28.  On 2 January 2015 the Claimant filed a Rejoinder on the Respondent’s Preliminary Objections.

29.  On 19 January 2015 the Tribunal held a pre-hearing organisational meeting with the Parties via telephone conference. The Tribunal then decided the points of procedure and organisation in dispute between the Parties in Procedural Order No. 6 of 16 February 2015.

30.  On 9 February 2015 the Parties filed their Skeleton Arguments.

31.  A hearing on the Preliminary Objections and the Merits took place from 23 to 27 February 2015 in London, United Kingdom (“Hearing”). In addition to the Members of the Tribunal, the Secretary of the Tribunal, the Hearing was attended by the following persons:

  • For the Claimant:

    • Mr. George Burn Vinson & Elkins

    • Mr. Alexander Slade Vinson & Elkins

    • Ms. Ciara Ros Vinson & Elkins

    • Mr. Agris Repšs Sorainen

    • Mr. Martins Paparinskis Sorainen

    • Ms. Žydruole Ažukiene UAB E energija

    • Ms. Raminta Barauskiene UAB E energija

    • Ms. Ilinca Popescu The Brattle Group

  • For the Respondent:

    • Mr. Ivars Mēkons Latvian State Chancellery

    • Mr. Ermīns Darapoļskis Attorney, the Rēzekne Municipality

32.  The following persons were examined:

  • On behalf of the Claimant:

    • Mr. Virginijus Strioga UAB E energija

    • Mr. Aleksas Jautakis UAB E energija

    • Ms. Evisa Uškāne SIA Latgales Enerģija

    • Dr. Serena Hesmondhalgh The Brattle Group

    • Dr. Dagnija Blumberga Riga Technical University

  • On behalf of the Respondent:

    • Mr. Michael Peer KPMG

    • Mr. Andris Puriņš KPMG

33.  In addition to the examination of the persons mentioned above, the Tribunal heard opening and closing arguments.

34.  An audio recording and a full transcript of the Hearing was provided to the Parties.

35.  During the Hearing, on 23 February 2015 the Claimant objected to the introduction of new documents by the Respondent. On the same day the Claimant nevertheless consented to the inclusion of Exhibit R-22. The Tribunal subsequently admitted Exhibit R-23.

36.  On 26 February 2015 the Tribunal in Procedural Order No. 7 authorised the Respondent to file a short report setting out Mr. Peer’s comments on the new points made by Dr. Hesmondhalgh at the Hearing. The Claimant was in turn authorised to file its comments on such short report.

37.  On 9 March 2015 the Tribunal in Procedural Order No. 8 confirmed the directions given to the Parties at the Hearing with respect to the specific questions on which the Parties were entitled to file short submissions.

38.  On 20 March 2015 the Claimant filed its submission to answer the questions set out in the Tribunal’s Procedural Order No. 8 including sixteen exhibits containing English translations of Latvian statutes, which the Tribunal renumbered in accordance with applicable procedural rules as follows:

  • •  Legal Authorities CLA-46 (first translation) to CLA-61 (last translation).

39.  On the same day the Respondent filed its submission to answer the questions set out in the Tribunal’s Procedural Order No. 8 with the following supporting documents:

  • •  Fourth Expert Report on Quantification of Damages prepared by Michael Peer of KPMG Baltics SIA (“ER Peer IV”);

  • •  Expert Report regarding Loans and Guarantees provided in the context of Damages prepared by Michael Peer of KMPG Baltics SIA (“ER Peer IVB”);

  • •  Factual Exhibits R-22 to R-35; and

  • •  Legal Authorities RLA-20 to RLA-39.

40.  On 26 March 2015 the Claimant pointed out in a message to the Tribunal that the Respondent had disregarded the terms of Procedural Orders No. 1 and No. 8 by submitting new evidence with its submission of 20 March 2015. On 30 March 2015 the Claimant elaborated on its objection and requested that certain Factual Exhibits (R-24, R-25, R-26, R-27, R-28, R-29, R-30, R-32, R-33 and R-35) and Legal Authorities (RLA-21, RLA-22, RLA-24, RLA-34, RLA-37 and RLA-38) be struck off the record.

41.  On 10 April 2015 the Claimant filed the Third Expert Report on quantum from Dr. Serena Hesmondhalgh of The Brattle Group (“ER Hesmondhalgh III”). The Claimant further reiterated its request that the Tribunal strike the Respondent’s unauthorised documents from the record or permit the Claimant to respond to them.

42.  On the same day the Respondent sought leave to comment on the Claimant’s submissions dated 20 and 30 March 2015 and filed its Rebuttal Submission in accordance with Procedural Order No. 8, together with the following supporting documents:

  • •  Factual Exhibits R-36 and R-37.

43.  On 15 April 2015 the Claimant objected to the Respondent’s request to comment on its submissions of 20 and 30 March 2015 as well as to the filing of Exhibits R-36 and R-37.

44.  On 13 May 2015 the Tribunal in Procedural Order No. 9 authorised the Parties to file a short rebuttal to the submissions filed on 20 March 2015 and indicated that, upon the filing of such rebuttal, no further submissions would be admitted. The Parties filed their rebuttal submissions by 1 June 2015 in accordance with Procedural Order No. 9.

45.  On 21 October 2016 the Claimant informed ICSID that all the proceedings to which Latgales Enerģija had been a party before the Latvian courts had been concluded, that all funds that had been frozen had been paid out by the court and that Latgales Enerģija had not received any amount out of such funds.

46.  On 11 November 2016 the Respondent replied in accordance with the Tribunal’s directions of 26 October 2016 that (i) Case No. C03051107 had been concluded by a judgment of the Supreme Court of Latvia dated 30 November 2015 and made available in a full version on 12 February 2016; Latgales Enerģija had not challenged that judgment and therefore the Claimant had accepted the economic outcome of the whole dispute; (ii) on 11 August 2016 the bailiff had issued the calculation regarding the distribution of the seized funds, which was not challenged by Latgales Enerģija either; the Respondent confirmed in its letter “the fact that the Claimant has not received any amount back from the previously seized funds”;6 contending that such circumstance could not be relied upon against it under the Treaty; and (iii) the Respondent maintained its position on double-counting.

47.  On 11 November 2016 the Tribunal invited further comments from the Parties limited to five pages, and indicated that either Party was authorised to produce the 30 November 2015 judgment; the Parties’ comments were received on 6 and 19 December 2016 respectively.

48.  On 6 December 2016 the Claimant replied that by its previous communication it had simply intended to inform the Tribunal of the final outcome of one factual issue on which the Parties’ experts had expressed an opinion, namely that there might be a double recovery in case the Claimant or Latgales Enerģija had ever recovered part of the frozen funds. The Claimant rejected the points made by the Respondent, confirming that Latgales Enerģija had not received any funds and was not entitled to receive any; it also provided a breakdown showing that the majority of the funds were paid to Rēzeknes Siltumtīkli (more precisely EUR 1,282,246.76 out of EUR 1,571,697.66).

49.  On 19 December 2016 the Respondent sent its comments, to which it attached (i) the Supreme Court judgment dated 30 November 2015 in Case No. C03051107, (ii) the decision of the judge of the Chamber of Civil Cases of the Supreme Court dated 29 June 2016 dismissing Latgales Enerģija’s application for cassation filed against the 30 November 2015 judgment as well as two further exhibits. The Respondent first summarised the Parties’ respective cases in its submission, and then commented on the “special role attributed by the Claimant to civil case No. C03051107”. The Respondent pointed out that the 30 November 2015 judgment decided that Latgales Enerģija was under a duty to pay the full price of the natural gas supplied, and not only to the extent of the latest natural gas tariff approved by the Regulator. As to the allocation of Latgales Enerģija’s frozen funds decided by the bailiff, the figures indicated by the Respondent are not entirely in line with those indicated by the Claimant (according to the Respondent EUR 123,115.49 were allocated to a debt owed to JSC Lariva, the assignee of Explicit Consulting Group Ltd.; EUR 1,092,006.06 to Rēzeknes Siltumtīkli); that was said to be a normal distribution of the funds in enforcement proceedings and the funds were therefore to be regarded “under the Treaty, as released from injunction to the benefit of the Claimant”. The Respondent concluded that the Claimant by its conduct in relation to the Latvian proceedings as a whole expressed “[its] interest and willingness to abide by the final verdict in domestic civil procedure No. 03051107 (…)”.

50.  On 7 September 2016 the Tribunal was informed that the Respondent was no longer represented by Mr. Ivars Mēkons but rather by Ms. Ilze Dubava and Ms. Nērika Lizinska, legal advisers with the State Chancellery of Latvia. On 8 September 2017 the Tribunal was further informed that Mr. George Burn left Vinson & Elkins who continued to be instructed in the present matter. The Claimant requested all future correspondence to be addressed to Mr. Mark Beeley and Mr. Alexander Slade.

51.  The proceedings were closed on 11 October 2017.

III.  Facts

52.  In this section of the present Award the Tribunal will outline the facts of the case as far as possible in chronological order from 2004 onwards. The facts of the case are uncontested to a considerable extent.

A.  Heating in Rēzekne and the 2004 Gas Supply Agreement (2004)

53.  The city of Rēzekne, the capital of the Latvian eastern province of Latgale, is the seventh largest city in Latvia. It had a population of approximately 25,000 inhabitants in 2004 when the Parties started their talks. Rēzekne was then in a region with a high unemployment rate, low wages, a negative migration rate and low economic activity.7

54.  The Rēzekne Municipality, which at the relevant time controlled the body regulating district heating services in Rēzekne, acts through its decision-making body, the Rēzekne City Council (“RCC”), comprised of local politicians appointed in local elections.8

55.  In Latvia the heating supply for a city, town or a district is centralized; heat and hot water are piped directly into homes and businesses from a number of large boiler houses. District heating providers owned and controlled by the local municipalities and having the status of municipality undertakings supply heating to consumers and small businesses. The heating provider in any one region enjoys a monopoly in the supply of district heating.9

56.  In 2004 the heating system ran on black oil and diesel. These were amongst the most expensive fuels used for district heating in Latvia.10

57.  The Ministry of Economy of the Republic of Latvia had confirmed the need to switch from those fuels to natural gas and develop the infrastructure required in order for natural gas to be used.11

58.  Heating prices (“tariffs”) were regulated by the State in order to protect the interest of users.12

59.  The body in charge of setting tariffs for district heating services for the territory of Rēzekne was the Multi-Industry Public Utility Regulator of the Latgale Municipalities (the “Regulator”) at all relevant times for the purposes of these proceedings. The Regulator had been established by 31 Municipalities and had started to work in late August 2002.13

60.  The tariff in force when the heating system was leased to Latgales Enerģija in spring 2005 was LVL 21.50/MWh for residents and LVL 22.26/MWh for other users14 in accordance with the Regulator’s decision No. 9 dated 10 November 2003.15

61.  Prior to 2015, district heating and hot water had been provided by AS Rēzeknes Siltumtīkli (“Rēzeknes Siltumtīkli”), a public limited liability company16 wholly owned by the Rēzekne Municipality.17

62.  Rēzeknes Siltumtīkli had been operating the system at a loss, and, by mid-2004, it was in default with respect to its obligations to suppliers. The system was “highly subsidized and economically inefficient”18 also due to technical causes.19 Rēzeknes Siltumtīkli took out loans from AS “Latvijas Unibanka” (“Latvijas Unibanka”)20 and AS “Baltic Trust Bank”21 (“Baltic Trust Bank”). The loans were secured by pledges granted by Rēzeknes Siltumtīkli and the Municipality over their real estate.22 There was a risk that Rēzeknes Siltumtīkli might be unable to ensure the supply of heating services during the heating season of September 2004–May 2005.23

63.  On 29 April 2004 the Rēzekne Municipality, Rēzeknes Siltumtīkli and Latvijas Gāze entered into a long-term gas supply agreement (the “Gas Supply Agreement”)24 for a twenty-year period (Clause 19.2 of the Gas Supply Agreement). Under the terms of the agreement the Rēzekne Municipality undertook to purchase and pay a minimum quantity of natural gas each year (namely 87.5% of 24 million nm3 per year),25 and a failure to pay was sanctioned by a contractual penalty.26

64.  Clause 8.3 of the Gas Supply Agreement provides that payments for the natural gas are made by the Municipality.

65.  Clause 16.1 of the Gas Supply Agreement expressly states that the Municipality’s liability under the terms of the agreement is maintained in case the Municipality were “to authorise the User or another person to perform all the obligations or (…) part [of them] on behalf of the [Rēzekne] Municipality”.

66.  In addition to the typical sale and purchase obligations in a gas supply agreement, the Gas Supply Agreement contains further provisions relating to the infrastructure required to use natural gas. Paragraph D of the preamble states that one of the purposes of the agreement “… is [the] gasification of the City of Rēzekne requested by RPD [the Rēzekne Municipality] and the User …”. More specifically, Latvijas Gāze undertook in Clause 2.2 to “make all necessary investments in a new natural gas supply infrastructure” up to the City borders. The Gas Supply Agreement further provides in Clause 2.4 that Rēzeknes Siltumtīkli will for its part build “gas pipes and equipment regulating gas pressure” from its boiler house façade to the consumers’ or other users’ places.

B.  The Original Arrangements And Main Events (End Of 2004–2005)

(1)  The Decision by the Rēzekne Municipality to Have Recourse to a Foreign Investor in Order to Provide Heating Services (2004)

67.  In early 2004 the Rēzekne Municipality called for tenders to improve the quality and the efficiency of the district heating system. Aside from a few indications in Mr. Strioga’s first Witness Statement,27 the record contains limited information in this respect. Bidders were to submit their bids by 30 March 2004, 2:00 p.m.; the bid opening would take place two hours later.28 The committee in charge would hold a closed session on the following day to select a bidder.29 It is common ground that, in the end, no suitable candidate emerged.30

68.  The Rēzekne Municipality then entered into direct negotiations with E energija and two Latvian companies, R.S. and SIA Wesemann.31

69.  On 3 August 2004 the Rēzekne City Council adopted resolution No. 199 which authorised Rēzeknes Siltumtīkli to lease out its fixed assets, that is the heating infrastructure, for a long-term period “taking into consideration the current actual and financial status of joint stock company Rēzeknes Siltumtīkli (…)”.32

70.  On 25 November 2004 Mr. Strioga, and Mr. Arnoldas Burkovskis, E energija’s CFO, gave a presentation to the Rēzekne City Council.33 The purpose of the presentation was to persuade the Council that the privatization of the heating system was the better option.34

71.  The presentation addressed in particular the investment that would be required as a matter of urgency, in an amount of EUR 7.7 million.35 In his witness statement Mr. Strioga indicated that such investment “would have been made within 5 years (2006–2011)”; the investment was divided into three phases, the third phase being so-called cogeneration.36

72.  The presentation further dealt with Rēzeknes Siltumtīkli’s financial situation, including debts in an amount of LVL 1,190,000 and the aid from EU structural funds, which was regarded as insufficient.37 The involvement of an investor was presented as one possible solution, subject to a number of different commercial and legal arrangements.

73.  E energija’s own proposal for the Rēzekne City Council completed the presentation. According to such proposal Rēzeknes Siltumtīkli could lease its heating infrastructure to E energija for a period of 20 to 30 years, in consideration of E energija’s undertaking to invest an amount from EUR 10 to 12 million in the same period. Alternatively, the lease could relate to Rēzeknes Siltumtīkli as a whole: “lease of RS property or lease of RS itself (lease of business)”.38 The heating price would be reduced to 21.15 LVL/MWh from March 2005.39

E energija would undertake to review the heat price taking into account changes only in the prices of gas, electricity and water as well as the impact of changes in inflation and taxation. E energija would further assume Rēzeknes Siltumtīkli’s debts and treat them as rent payment. Upon expiry of the lease the value of the heating infrastructure to be returned to Rēzeknes Siltumtīkli would not be less than the value at the start of the lease period.40

(2)  The Incorporation of Latgales Enerģija (20 December 2004)

74.  Latgales Enerģija was incorporated on 20 December 2004 as a limited liability company having its registered office in Riga, Latvia.41

(3)  The Guarantee Agreement (30 December 2004)

75.  The renegotiation of Rēzeknes Siltumtīkli’s debts took place in the latter part of 2004 and required a number of meetings and discussions.42

76.  On 30 December 2004 E energija (as the “Guarantor”) entered into a Guarantee Agreement with AS “Latvijas Unibanka” (“Latvijas Unibanka”, as the “Creditor”) (the “Guarantee Agreement”)43 to provide “guarantee and security” with respect to the obligations arising under the “Main Agreements” entered into by Rēzeknes Siltumtīkli and Latvijas Unibanka. The bank held security over Rēzeknes Siltumtīkli’s assets and would not permit them to be leased without adequate security being provided, as explained by Mr. Strioga and Mr. Jautakis.44

77.  The amounts stated to be owed by Rēzeknes Siltumtīkli as of the time of the execution of the Guarantee Agreement arose under different loans or credit lines, for a total amount of LVL 2,536,256.45 E energija undertook to guarantee such debts, unconditionally and irrevocably, having waived its right to demand that the Creditor should first assert its right to payment as against Rēzeknes Siltumtīkli as the Debtor.46

The amount set out above corresponded to both Rēzeknes Siltumtīkli’s short-time debts to Latvijas Unibanka mentioned in Clause 4.4.3(a) of the Long-Term Agreement and Rēzeknes Siltumtīkli’s long-time debts to Latvijas Unibanka mentioned in Clause 4.4.4(a) of the Long-Term Agreement (see paragraphs 88 and 89 below).

The Guarantee Agreement related also to the obligations of the Rēzekne City Council as the guarantor with respect to the credit agreements mentioned in Clauses 1.6 and 1.7 of the Guarantee Agreement.

(4)  The Agreement for Lease, Renovation and Operation of Long-Term Assets (28 January 2005) (The “Long-Term Agreement”)

78.  A draft agreement was reviewed by representatives of Rēzeknes Siltumtīkli, the Rēzekne City Council and Latgales Enerģija on 27 January 2005.47

79.  On 28 January 2005 an agreement entitled “Agreement for Lease, Renovation and Operation of Long-Term Assets” was signed by Rēzeknes Siltumtīkli (as the “Lessor”) and Latgales Enerģija (as the “Operator”) (the “Long-Term Agreement”).48 The Long-Term Agreement is stated to be governed by the laws of the Republic of Latvia (Clause 11.1). The signature of the Long-Term Agreement had been authorised on the same day by Rēzeknes Siltumtīkli’s Council upon the Board’s request.49

80.  The first clause in the recitals of the Long-Term Agreement recalls the resolution of the Rēzekne City Council to “allow Rēzeknes Siltumtīkli to lease out its fixed assets for a long-term period”. The second clause in the recitals of the same agreement mentions Latgales Enerģija’s readiness and willingness “to modernise the heating supply system” and enable “a transfer from heavy oil fuel to natural gas as a resource for heating energy production”, “increase effectiveness of use of energy resources” and “fulfil the obligations of AS Rēzeknes Siltumtīkli against its creditors”.50

81.  The subject-matter of the Long-Term Agreement is set out in Clause 2.2 as follows:51

  1. 2.2  The subject of the Agreement shall be lease of the Assets and investment into the Assets located in the city of Rēzekne and currently run by Lessor. By entering into the present Agreement the Lessor shall undertake to lease to the Operator the Assets, and the Operator shall undertake to use the Assets in order to operate the Business and settle accounts with the Lessor in the order and on conditions described in the Agreement.

  2. 2.3  The Operator does not assume any liability or obligations of the Lessor and/or the Municipality other than liabilities directly undertaken under the Agreement.

82.  The term “Assets” is defined in Clause 1.1(a) of the Long-Term Agreement as “all long-term assets” owned by Rēzeknes Siltumtīkli, including land, buildings, constructions, technological equipment and machines and other fixed and intangible assets set out in Appendix No. 1 to the Long-Term Agreement. Rēzeknes Siltumtīkli represented and warranted inter alia that it was the owner of the assets and had all agreements and employees to carry on the Business as a going concern.52

83.  The term “Business” means “the heat production, supply and division business and power generation business operated by the Lessor”.53

84.  The Long-Term Agreement was entered into for a period of 30 years.54

85.  Upon expiry of the lease, all investments made by Latgales Enerģija as well as any improvements, modernization or rearrangement as well as any new structures would become the property of Rēzeknes Siltumtīkli pursuant to the terms of a deed to be executed by reference to the market price at the time of the transfer.55 The Assets would be returned to Rēzeknes Siltumtīkli in accordance with Clause 7.1.5 of the Long-Term Agreement.

86.  Latgales Enerģija had the right, in its own discretion, to execute all works for major or current reconstruction or repair of the Assets necessary to renovate or modernize such Assets and to use them freely and without hindrance to supply heat and/or power to the consumers,56 all improvements to the Assets to be transferred to Rēzeknes Siltumtīkli upon expiry of the lease.57

87.  Latgales Enerģija would own all revenue and profit received during the term of the lease and would be entitled to use such revenue and profit in its own discretion.58

88.  Latgales Enerģija undertook to pay Rēzeknes Siltumtīkli an amount of LVL 5,100,000 in total including VAT, which amount included (i) the book value as of 1 January 2005 of Rēzeknes Siltumtīkli’s short-time debts to creditors in an amount of LVL 1,448,977,59 which debts Latgales Enerģija agreed to “take over from Rēzeknes Siltumtīkli”,60 the creditors being Latvijas Unibanka, SIA “AVT Nafta” and SIA “Dinaburga Rosme”, (ii) a yearly amount of LVL 200,000 to settle Rēzeknes Siltumtīkli’s debts in the first three years61 and a yearly amount of LVL 85,185 for each year of lease except in the first three years,62 as well as (iii) a further payment by Latgales Enerģija covering depreciation and an additional five percent of the book value of the Assets upon returning such Assets to Rēzeknes Siltumtīkli.63

89.  In addition to Rēzeknes Siltumtīkli’s short-term debts, Latgales Enerģija was “entitled” under Clause 4.4.4 to “take over” Rēzeknes Siltumtīkli’s long-term debts to Latvijas Unibanka amounting to LVL 746,660 arising out of Credit Agreement No. RA 02155 and LVL 921,866 arising out of Credit Agreement No. RA 02219 (a total amount of LVL 1,668,526) as well as Rēzeknes Siltumtīkli’s long-term debts to Baltic Trust Bank in an amount of LVL 680,817.

90.  Latgales Enerģija further undertook to take over all of Rēzeknes Siltumtīkli’s employees (set out in Appendix 3) in accordance with Latvian Law.64

91.  Clause 6 of the Long-Term Agreement deals with Rēzeknes Siltumtīkli’s rights and obligations in some further detail.

92.  Clause 7 of the Long-Term Agreement deals with Latgales Enerģija’s rights and obligations in some further detail; in particular Latgales Enerģija undertook to invest not less than EUR 1.5 million in the heat supply facilities within three years of the date on which the Long-Term Agreement had entered into force in order to ensure that Rēzeknes Siltumtīkli could perform the duties owed to Latvijas Gāze and undertaken under the Gas Supply Agreement65 (Clause 7.1.1), and to increase its share capital to LVL 500,000 within two weeks of the entry into force of the Long-Term Agreement (Clause 7.7).66

93.  Clause 8 deals with Latgales Enerģija’s position as the Operator in relevant part as follows:67

  1. 8.1  For the period the Agreement is valid, the Operator shall remain to be the exclusive heat supplier and shall undertake to supply heat and power energy to all the consumers who used to be supplied heat and power by means of the Assets leased according to the Agreement before the moment such Agreement has been signed.

  2. 8.2  The Operator shall supply heat and power to the consumers and service heat, power and hot water supply systems following the technological obligations of the Operator stated by the laws. The order and conditions for servicing heat and power energy supply and systems of each consumer shall be defined in the agreement for supply of heat and power energy, consumption and payment to be signed with each consumer.

94.  The Long-Term Agreement would enter into force provided that the conditions precedent in Clause 12.4 were met, including the execution of an agreement between the Municipality and Latgales Enerģija relating to the performance of the Long-Term Agreement in accordance with Clause 12.4.3 (this agreement was entered into on 10 February 2005, see paragraph 100 below).

95.  The Long-Term Agreement contains express terms under which each party is entitled to terminate it unilaterally, provided that certain requirements are met. Clause 12.5.2 deals with unilateral termination by Rēzeknes Siltumtīkli and reads as follows:68

  1. 12.5.2  Unilaterally by the Lessor in the event

    1. a)  the licence to perform Business is revoked due to fault of the Operator, or

    2. b)  the Operator fails without any legal grounds to make the lease payments in the order set by the Agreement for more than three consecutive payments (months).

    In such a case the Lessor shall warn and notify the Operator in writing about such default of the Agreement and fix the period of time of not less than 30 (thirty) days for the Operator to cure the default. In the event the Operator fails to cure the default, the Agreement shall be deemed to have been terminated on the end of the term specified in such notification.

96.  Clause 12.7 of the Long-Term Agreement states that neither party can terminate the Agreement under Clauses 12.5.2 or 12.5.3 “during the period from July 1 to the end of the heating season next year of any calendar year”.

97.  Clause 12 further deals with the monetary consequences of termination under Clause 12.5.2 in Clause 12.6 which reads as follows in relevant part:69

  1. 12.6  Settlement of accounts between the Parties and sanctions in case the Agreement is terminated prior to its term set in Clause 4.2:

    1. 12.6.1  In case the Agreement is terminated on the basis of the clauses 12.5.2 or 12.5.3, the Lessor must within 30 (thirty) days from the day the Agreement was terminated repay to the Operator all the investment the Operator has made into the assets leased (less depreciation) and take over all rights of claiming any consumers’ unpaid amounts to the Operator for the nominal value of such debts (including interest and penalties) having accumulated within one year prior to the date of termination of the Agreement.

    2. 12.6.2  In the event the Lessor terminates the Agreement on the basis of clause 12.5.2, the Operator shall pay the penalty fee to the Lessor equal to 10 (ten) per cent of the amount the Operator has invested (less depreciation) into the assets leased.

98.  On 28 January 2005 the Rēzekne City Council approved the Long-Term Agreement.70

99.  The Long-Term Agreement was amended by the parties on 10 February 2006 (see paragraphs 166 ff. below).

(5)  The February 2005 Agreement (10 February 2005)

100.  The Rēzekne Municipality (through the Rēzekne City Council or the “Council”) and Latgales Enerģija (as the “Operator”) made an agreement on 10 February 2005 (the “February 2005 Agreement”).71 The expression “the Agreement” in the February 2005 Agreement refers to the Long-Term Agreement72 and the “Lessor” to Rēzeknes Siltumtīkli.73 As recalled in paragraph 94 above, the Long-Term Agreement itself contemplated the execution of a contract between the Municipality and Latgales Enerģija.

101.  Under the February 2005 Agreement Latgales Enerģija undertook inter alia the following duties to the Council:

  1. (i)  to provide centralized heating supply services in the city of Rēzekne (Clause 1.1);

  2. (ii)  to maintain and repair where required the heating supply system to ensure good-quality heating supply services (Clause 1.2);

  3. (iii)  to coordinate the reconstruction work relating to the heating infrastructure and to start construction work after obtaining the permit required to that effect (Clause 1.3);

  4. (iv)  to take any steps as may be required, as soon as possible, to obtain the production, distribution and transfer licences from the competent authority (Clause 1.4);

  5. (v)  to ensure that rates would be increased only due to force majeure or as a result of an increase in the prices of gas, electricity, water or other energy sources, provided that such increase had resulted in an increase of 5% in the costs of production, distribution or transfer of one unit of thermal energy, unless otherwise provided by law, rates to be adjusted in any event in accordance with Latvian law (Clause 1.6); and,

  6. (vi)  to perform its obligations to the creditors of Rēzeknes Siltumtīkli mentioned in the Long-Term Agreement (Clause 1.7).

102.  In the February 2005 Agreement the Rēzekne City Council undertook inter alia the following duties to Latgales Enerģija:

  1. (i)  not to hinder performance of the Long-Term Agreement by Latgales Enerģija (Clause 2.2) and,

  2. (ii)  in accordance with Latvian law, to take all decisions required so that Latgales Enerģija could perform the Long-Term Agreement fully and without delay (Clause 2.8).

103.  Among the terms setting out the Rēzekne City Council’s duties to Latgales Enerģija, Clause 2.10 reads as follows in relevant part:74

  1. 2.10  The Operator is and remains the only supplier of centralised heating to all consumers who received thermal energy from the Lessor at the moment that the Agreement is concluded. The Operator has the excusive rights to sell and supply centralised heating to residents, industrial consumers and cooperatives of residential houses in the city of Rēzekne. The Council undertakes not to adopt decisions and not to perform direct or indirect activities that would cause direct or indirect competition to the Operator’s business in relation to the centralised heating supply and maintenance and servicing the heating supply networks, or any other operation undertaken by the Operator under the Agreement.

    The Council undertakes to ensure that the municipality functions determined by the law with regard to provision of centralised heating services are not transferred to other persons and the municipality would not get involved in other projects of centralised heating supply, including installation of co-generation stations (…).

104.  The February 2005 Agreement refers also to the Gas Supply Agreement75 in Clause 4 which reads as follows in relevant part:76

  1. 4.  The parties agree that the Operator is entitled to enter an agreement with AS “Latvijas Gāze” on performance of Gas Purchase Agreement No 1580 [the Gas Supply Agreement, C-40]. If the mentioned agreement with AS “Latvijas Gāze” is not entered and transfer to gas heating is delayed due to the Council or third party fault resulting in failure of AS “Latvijas Gāze” to finish construction of natural gas infrastructure and preparation for operation in compliance with Gas Purchase Agreement No 1580, the Council undertakes to compensate the Operator for the losses incurred because the Operator keeps using black fuel oil instead of natural gas after the date when the natural gas infrastructure had to be constructed and prepared for operation in production of thermal energy under Gas Purchase Agreement No 1580 in the wording in force at the date of entering the Agreement.

    In any case the Council is not released from obligations undertaken by Gas Purchase Agreement No 1580 on purchase of a specified amount of gas for the needs of the city of Rēzekne, and respectively — if these obligations are not performed and AS “Latvijas Gāze” claims damages from the Council or the Lessor, or the Operator and/or a contractual penalty, the Council undertakes to pay AS “Latvijas Gāze” for these losses and pay the contractual penalties.

105.  The February 2005 Agreement further makes provision in Clause 6 for the remedies in case of breach of contract (damages as well as a penalty).

106.  The February 2005 Agreement was supplemented on 10 February 2006 (see paragraphs 169 ff. below).

(6)  E Energija’s Further Investment in the Capital of Latgales Enerģija (February–May 2005)

107.  In February 2005 E energija sold 98 out of its 200 shares in Latgales Enerģija to Levs Voronovs, Juris Vanags, Mārtiņš Lauva and SIA Energo Sistēmas, and its share in Latgales Enerģija’s capital was reduced to LVL 10,200.77

108.  Further capital was contributed by all shareholders and E energija made a further contribution in an amount of EUR 300,000 and LVL 46,022.78 As a consequence, E energija’s share in Latgales Enerģija’s capital was equal to LVL 265,200 with a majority of 2,652 shares out of 5,200 shares as of 3 May 2005.79

(7)  Loans by E Energija to Latgales Enerģija (From February 2005 Onwards)

109.  E energija granted a number of loans to Latgales Enerģija from 18 February 2005 onwards.80 In the year 2005, E energia granted eight loans to Latgales Enerģija (one of which was increased from EUR 380,000 to EUR 1 million in the same year), for a total amount of EUR 2,325,000.81

110.  The loans set out the borrower’s duty to repay the loan with interest; they contain no provision as to their purpose or the manner in which the loan is to be used by the borrower, aside from the cases in which a loan was intended to consolidate or increase the amount of previous loans and a few other exceptions in cases where E energija would directly pay a third party. Mr. Jautakis explained in his first Witness Statement that E energija granted all of these loans in connection with Latgales Enerģija’s obligations arising under the Long-Term and the February 2005 Agreements.82

111.  E energija granted three further loans to Latgales Enerģija in 2006,83 and four further loans, or amendments to pre-existing loans, were executed in 2007.84

(8)  Rēzeknes Siltumtīkli’s Assets and Employees Taken Over by Latgales Enerģija (25 February 2005)

112.  It is common ground that the Long-Term Agreement entered into force in February 2005. On 25 February 2005 Rēzeknes Siltumtīkli and Latgales Enerģija declared85 that the Assets and the Employees had been transferred to Latgales Enerģija in accordance with Clause 4.3.1 of the Long-Term Agreement.86

113.  The licences required to operate the system were granted by the Regulator on 30 May 2005 (see paragraphs 129 ff. below). The record does not, however, indicate a precise date on which Latgales Enerģija started to operate the heating system.87

114.  After taking over the heating system, Latgales Enerģija provided a continuous heating service in the city based on the tariff then in force.88

115.  The conversion of the heating system to natural gas would be ready only in November 2005 (see paragraph 156 below).

116.  As explained by Mr. Strioga in his first Witness Statement, the old boilers were not replaced, but modified in order that they could burn both heavy fuel oil and natural gas, which enabled the Claimant to modernize the existing boiler houses with a comparatively small investment. The works were implemented by UAB Energijos Taupymo Centras (“Energijos Taupymo Centras” or “ETC”), the Claimant’s parent company incorporated in Lithuania, together with the Russian producers of the boilers.89

117.  Latgales Enerģija did not enter into any written agreement with Rēzeknes Siltumtīkli for the supply of natural gas. Nor did it succeed in entering into any agreement with Latvijas Gāze or adhering to the Gas Supply Agreement existing between Latvijas Gāze, the Municipality of Rēzekne and Rēzeknes Siltumtīkli.90

The question whether Latgales Enerģija has nevertheless a duty to pay for the natural gas supplied by Latvijas Gāze is in dispute in these proceedings, as it was in dispute in proceedings before the Latvian courts. The Tribunal’s decision on this point is set out in paragraph 936 below.

118.  When Latgales Enerģija started to supply heating in 2005, it applied the tariff that had been granted to Rēzeknes Siltumtīkli before the Long-Term Agreement91 and the February 2005 Agreement92 were entered into (see paragraphs 60 ff. above). However, Latgales Enerģija applied for a revised tariff on 13 October 2005 (see paragraphs 152 ff. below).

119.  On 25 February 2005 the book value of Rēzeknes Siltumtīkli’s short-time debts to creditors as of 1 January 2005, stated to be in an amount of LVL 1,448,977 in Clauses 4.4.1 and 4.4.3 of the Long-Term Agreement, was reassessed at LVL 1,220,799.50.93

(9)  Rēzeknes Siltumtīkli’s Short-Term Debts Taken Over by Latgales Enerģija (From February 2005 Onwards)

120.  From February 2005 onwards Latgales Enerģija entered into a number of contracts to take over Rēzeknes Siltumtīkli’s debts in accordance with the Long-Term Agreement (see paragraph 88 above) and the February 2005 Agreement (see paragraph 101 above). The Amended Long-Term Agreement made on 10 February 200694 increased the amount of Rēzeknes Siltumtīkli’s indebtedness (see paragraph 167 below).

(A)  RēZeknes Siltumtīkli’s Indebtedness to AVT Nafta

121.  On 4 February 2005 SIA “AVT Nafta” (“AVT Nafta”) assigned the debt it owned against Rēzeknes Siltumtīkli to Latgales Enerģija in an amount of LVL 240,000; the assignment agreement mentions that AVT Nafta obtained a loan from Latgales Enerģija in an amount of LVL 200,000, an amount which Latgales Enerģija instructed its bank to pay on 7 February 2005.95

122.  On 22 June 2005 a second assignment agreement was executed between the same parties with respect to a debt owned by AVT Nafta against Rēzeknes Siltumtīkli in an amount of LVL 250,000, which amount included the previous amount of LVL 240,000.96 Under Clause 3 of such second assignment, part of the price would be paid by Latgales Enerģija by setting off its claim for payment under the 4 February 2005 loan in an amount of LVL 210,000 (which included LVL 10,000 interest). Latgales Enerģija instructed its bank to pay the balance of LVL 40,000 on 19 June 2005.97

123.  On 27 June 2005 Latgales Enerģija and Rēzeknes Siltumtīkli then agreed that “the Company (Latgales Enerģija) (….) on 22 June 2005 settled liabilities towards SIA ‘AVT NAFTA’ in the total amount of LVL 250,000”.98 Latgales Enerģija and Rēzeknes Siltumtīkli further agreed that Latgales Enerģija had therefore become a creditor of Rēzeknes Siltumtīkli for such amount. The agreement further contemplated that such amount would be paid by Rēzeknes Siltumtīkli under a separate agreement, under which Rēzeknes Siltumtīkli would set off its debt and consider that it had received an advance payment of the rent owed by Latgales Enerģija under the Long-Term Agreement.

(B)  Rēzeknes Siltumtīkli’s Indebtedness to Dinaburga Rosme

124.  On 6 April 2005 SIA Dinaburga Rosme (“Dinaburga Rosme”) assigned the debt it owned against Rēzeknes Siltumtīkli to Latgales Enerģija in an amount of LVL 128,509.99 Latgales Enerģija paid the same amount to Dinaburga Rosme in 14 instalments in 2005 and 2006.100

(C)  RēZeknes Siltumtīkli’s Indebtedness to Latvijas Unibanka

125.  On 27 May 2005 Latgales Enerģija and Rēzeknes Siltumtīkli agreed that “the Company (Latgales Enerģija) (….) on 3 May 2005 (… and) on 26 May 2005 settled liabilities towards AS ‘SEB Latvijas Unibanka’ in the total amount of LVL 65,000 and LVL 95,777.92”, that Latgales Enerģija had made such payment on behalf of Rēzeknes Siltumtīkli pursuant to the terms of the Long-Term Agreement and that Latgales Enerģija had therefore become a creditor of Rēzeknes Siltumtīkli for such amount.101 The agreement further contemplated that such amount would be set off under a separate agreement against the rent owed by Latgales Enerģija under the Long-Term Agreement.102

126.  On 14 July 2005 Latgales Enerģija and Rēzeknes Siltumtīkli made a similar agreement with respect to an amount of LVL 370,000 paid by Latgales Enerģija to Latvijas Unibanka.103 Exhibit C-56 shows that Latgales Enerģija paid Latvijas Unibanka LVL 95,777.92 and LVL 370,000, but there is no evidence of a payment of LVL 65,000. However, in the 27 May 2005 agreement Rēzeknes Siltumtīkli expressly acknowledged that Latgales Enerģija on 3 May 2005 paid LVL 65,000 to Latvijas Banka.104

127.  By July 2005 Latgales Enerģija had therefore settled Rēzeknes Siltumtīkli’s indebtedness to Latvijas Unibanka in an amount of LVL 530,777.92.

(10)  Local Elections in Latvia (March 2005)

128.  In March 2005 local elections were held in Latvia. The election results in Rēzekne were cancelled due to allegations of bribery. Further elections took place in August 2005 (see paragraphs 139 ff. below).

(11)  Latgales Enerģija’s Licences (30 May 2005)

129.  On 30 May 2005 the Regulator granted Latgales Enerģija the licence for the production of thermal energy No. 002-05 for the period from 30 May 2005 to 29 May 2025.105 The licence sets out special conditions in Appendix No. 1.

130.  On the same day the Regulator granted Latgales Enerģija the licence for the transmission of thermal energy No. 003-05106 for the same period of time, as well as the licence for the sale of thermal energy No. 004-05.107

131.  Each licence sets out special conditions in its Appendix No. 1. Aside from the fact that each licence relates to a specific kind of activity, which is reflected in the Appendix of each licence, the three Appendices contain almost identical language.

132.  Clause 1 of the licences sets out Latgales Enerģija’s duty to provide uninterrupted and good quality public utility services of production, transfer and distribution and sale, respectively, of thermal energy in accordance with applicable laws and regulations, the “development plan of the city of Rēzekne”, Regulator’s decisions as well as treaties and standards applicable in Latvia.

133.  Clauses 6 and 7 read as follows:108

  1. 6.  The Multi-Industry Public Utility Regulator of Latgale Municipalities determines the following tasks for SIA “Latgales Enerģija”:

    1. 6.1  During the licence validity term, to ensure that all the existing users of thermal energy would be equipped with measurement tools for commercial recording, to know the energy consumed by each user and to be able to predict the future consumption of heat;

    2. 6.2  To decrease heat loss at the heating mains;

    3. 6.3  To prepare a long-term development plan;

    4. 6.4.  To seek the option to participate at various tenders with projects to attract funding from the state and international financial institutions.

  2. 7.  Each year, the licence holder must submit the following documents to the Multi-Industry Public Utility Regulator of Latgale Municipalities:

    1. 7.1  By 31 December each year, a plan of activities for the following year in line with the long-term development plan of SIA “Latgales Enerģija” including data about the planned amount of production, transfer and distribution, and sale of thermal energy, measures to improve service quality and safety, to ensure environment protection, improvement of the material base (general plan for all types of heating supply services licenced — production, transfer, distribution and sale).

    2. 7.2  By the end of the quarter of the year, a report regarding the results of the previous year in provision of heating supply services in line with the priorities indicated in Clause 6 of these conditions by including the report in the general company report on fulfilment of the annual plan of operations for the previous year, as well as other information every time upon a request of the Multi-industry Public Utility Regulator of Latgale Municipalities.

134.  Clause 9 states four grounds upon which the licence may be revoked.109

135.  Clause 12 states that production, distribution and transfer and sale, respectively, of thermal energy shall be performed only at the rate approved by the Regulator.

(12)  The First Amendment of the Gas Supply Agreement with Latvijas GĀze (1 June 2005)

136.  On 1 June 2005 the Rēzekne City Council, Rēzeknes Siltumtīkli and Latvijas Gāze agreed to amend and supplement the Gas Supply Agreement110 (“Amendment No. 1 to the Gas Supply Agreement”).111

137.  Under Clause 3 of the amended Gas Supply Agreement the Rēzekne City Council agreed to start the commercial acceptance of natural gas according to Clause 3 of the Agreement at 9:00 a.m., 15 October 2005 at the latest.

138.  Latgales Enerģija, which had taken over the heating infrastructure in February 2005 (see paragraphs 112 ff. above), was not consulted.112 Latgales Enerģija received a copy of the agreement on 2 November 2005.113

(13)  Fresh Local Elections in Rēzekne (20 August 2005)

139.  As the March 2005 election results in Rēzekne had been cancelled (see paragraph 128 above), further elections took place on 20 August 2005.

140.  The elected Mayor (i.e. the chairman of the Rēzekne City Council) was Mr. Juris Guntis Vjakse.

(14)  Rēzeknes Siltumtīkli’s Long-Term Debts Taken Over by Latgales Enerģija (From August 2005 Onwards)

(A)  The Investment Services Agreement (4 August 2005)

141.  On 4 August 2005 E energija (as “the Client”) and AS Lōhmus, Haavel & Viisemann (as “LHV”) entered into an “Investment Services Agreement” (the “Investment Services Agreement”).114 The purpose of this agreement was to obtain LHV’s assistance to refinance Rēzeknes Siltumtīkli’s loans from Latvijas Unibanka contemplated by Clause 4.4.4115 of the Long-Term Agreement116 and taken over from Latvijas Unibanka.

142.  LHV would in its own name take over two loans granted by Latvijas Unibanka to Rēzeknes Siltumtīkli, on the Claimant’s account, under the terms of an assignment agreement which it would execute with Latvijas Unibanka, Clause 2.2 of the Investment Services Agreement.117 E energija undertook to transfer a sum of LVL 1,113,895 or any other amount to LHV based on the Assignment Agreement between LHV and Latvijas Unibanka (Clause 2.1 of the Investment Services Agreement) and to pay the fees set out in Clause 3 of the same agreement.

143.  LVH undertook in turn to transfer any payments received from Rēzeknes Siltumtīkli to E energija’s account (Clause 1.3 of the Investment Services Agreement).

Mr. Jautakis explained in his first Witness Statement that the reason for the resort to a third party such as LHV to take over Rēzeknes Siltumtīkli’s long-term debts was that Rēzeknes Siltumtīkli would be more likely to repay its debts.118

(B)  The Assignment Agreement (4 August 2005)

144.  On the same day, Latvijas Unibanka and LVH executed the Assignment Agreement (the “2005 Assignment Agreement”)119 contemplated by the Investment Services Agreement, the amount of Latvijas Unibanka’s claim for payment against Rēzeknes Siltumtīkli being LVL 1,125,196120 in respect of both loans under Credit Agreement No. RA 02155 (as amended by a number of covenants) and Credit Agreement No. RA 02219, Clauses 1.1 and 1.2 of the 2005 Assignment Agreement.

(C)  Payment by E Energija (12 August 2005)

145.  On 12 August 2005 E energija paid Latvijas Unibanka the amount of LVL 1,125,196.96 on behalf of LHV.121

(D)  The Agreement on Settlement of Debt (15 November 2005) and Reimbursement by Latgales Enerģija of Rēzeknes Siltumtīkli’s Debts under the Loans

146.  On 15 November 2005 Latgales Enerģija executed the Agreement on Settlement of Debt with Rēzeknes Siltumtīkli (the “Agreement on the Settlement of Debt”)122 and undertook to repay Rēzeknes Siltumtīkli’s loan debt arising under the two loans granted by Latvijas Unibanka for October, November and December 2005 as well as January and February 2006 in an amount of LVL 62,252.85 including interest (Clause 1). Clause 2 of the same agreement provides that Latgales Enerģija shall continue to pay Rēzeknes Siltumtīkli’s debts arising under those loans in accordance with the Debt Repayment Schedule attached as Appendix 1 to the Agreement on Settlement of Debt (which Appendix is not in evidence).

The Agreement on Settlement of Debt does not say to which entity Latgales Enerģija would make the payments contemplated by the agreement; such payments were to be made to LHV according to the Claimant,123 as confirmed in due course by Clause 1.2(d) of the Amended Long-Term Agreement.124

147.  Between November 2005 and November 2006 Latgales Enerģija paid LHV a total amount of LVL 141,927.125

148.  Further arrangements would be made in 2006 (see paragraphs 199 ff. and 205 ff. below) and 2008 (see paragraphs 377 ff. below).

(15)  First References to a Heat Supply Development Plan (October 2005)

149.  The first communications mentioning a “heat supply development plan” took place in late 2005. The discussion relating to this topic continued in the following years (see paragraphs 164 ff. below for 2006).

150.  On 12 October 2005 the Regulator informed the Rēzekne City Council that (i) municipalities should organise heating supply in their territory, (ii) municipalities might specify the development of heating supply within the “development plan” for their territory in coordination with the Regulator and (iii) Section 27 of the Methodology specified that the investment required was included in the calculation of the net profit for each heating supply service (production, distribution and sale) “in accordance with the heat supply system development plan as approved by the corresponding local government.”126 The Regulator asked the Rēzekne City Council to advise whether there was “an effective and coordinated development plan of the city heating supply containing planned and already made investments of ‘Latgales Enerģija’ Ltd. in development and improvement of the city heating supply”.127

No answer to the Regulator’s enquiry is in evidence on the part of Rēzekne City Council.

151.  On 27 October 2005 Rēzeknes Siltumtīkli wrote to Latgales Enerģija referring to the Regulator’s 12 October 2005 letter to the City Council and asked whether Latgales Enerģija had “specified and coordinated with local government the municipal heat supply development plan including both specified and intended investments in this field”.128

Rēzeknes Siltumtīkli letter further asked when Latgales Enerģija would start to use natural gas as a fuel.

There is no answer in evidence on the part of Latgales Enerģija to the first question;129 as to the second question, Latgales Enerģija answered on 7 November 2005 (see paragraph 156 below).

(16)  Latgales Enerģija’s Applications to the Regulator for a New Tariff (13 October 2005 and 10 November 2005) — The Regulator’s Decisions

152.  According to a statement issued by Rēzeknes Siltumtīkli for the attention of the Regulator on 13 October 2005,130 the prime cost of 1 MWh was in an amount of LVL 28.26 in 2004. According to the same statement issued by Latgales Enerģija on the same day,131 the prime cost of 1 MWh was in an amount of LVL 38.24 in the period from 15 February to 31 August 2005. The tariff then in force (see paragraph 60 above) no longer covered the costs for the production of heat.

153.  On 8 November 2005 Latgales Enerģija published a proposed tariff of LVL 32.96/MWh for residents and LVL 34.25/MWh for other users in the Rēzeknes Vēstis newspaper.132

154.  On 19 December 2005 the Regulator approved a new tariff of LVL 27.60/MWh for residents and LVL 29.02/MWh (without VAT) for other users in decision No. 19.133

155.  The Regulator’s published decision was stated to be based on Section 2.1 and Section 26 of the Cabinet of Ministers Regulations No. 281 of 26 June 2001, amended in 2008 (Methodology for Calculation of Tariffs for Public Utilities in the Fields Regulated by Local Municipalities, “the Methodology”).134

The approval was based in substance on the proposition that “[t]he approved tariff will cover the most necessary costs”, which addressed Latgales Enerģija’s argument reported in the decision that “[t]he grounds for the increase of tariffs are the growing fuel and electric energy prices” and that “the present tariffs do not cover the company’s operating costs”.135

The Regulator’s decision of 19 December 2005 did not refer to a “development plan”.

(17)  Rēzekne Heating System Converted to Use Natural Gas (November 2005)

156.  By November 2005 Latgales Enerģija had converted the heating infrastructure so that it could use natural gas. On 7 November 2005 Latgales Enerģija sent Rēzeknes Siltumtīkli and the Rēzekne City Council a notice informing them that, as of that day, they were ready to supply heating using natural gas as fuel and requesting the delivery of 5 million cubic metres of natural gas in 2005 and 21 million cubic metres of natural gas in 2006.136

157.  As there was no written agreement to which Latgales Enerģija was a party with respect to the supply of natural gas (see paragraph 117 above), Rēzeknes Siltumtīkli invoiced Latgales Enerģija for the gas supplied based on the invoices received from Latvijas Gāze. Latgales Enerģija in turn paid such invoices directly to Latvijas Gāze. In an interview given on 13 September 2007, Mr. Vjakse confirmed that this was the arrangement under which Latvijas Gāze was paid for the natural gas supplied.137

158.  It is in dispute between the Parties whether Latgales Enerģija owed Latvijas Gāze a duty to pay for the natural gas supplied (see paragraphs 586 ff. and 726 ff. below).

159.  The Claimant alleges that by December 2005 Latgales Enerģija had made the investment required to convert the heating infrastructure to accept natural gas and had started to use natural gas to produce thermal energy in Rēzekne.138

However, the actual gasification of the system was only partial as of the end of 2005, in that it related to two out of three heat sources, namely the boiler houses in Rancāna iela 1 (also often referred to as Rīgas iela) and Atbrīvošanas alejā 155a.139

(18)  The Third Amendment of the Gas Supply Agreement with Latvijas GĀze (19 December 2005)

160.  On 19 December 2005 the Rēzekne Municipality, Rēzeknes Siltumtīkli and Latvijas Gāze agreed to amend and supplement the Gas Supply Agreement140 (“Amendment No. 3 to the Gas Supply Agreement” or “Amendment No. 3”).141 Latgales Enerģija was neither consulted nor informed of this Amendment.142

161.  Amendment No. 3 to the Gas Supply Agreement increased the minimum amount of natural gas which the Municipality undertook to take or pay, from 87.5% (Clause 3.1 of the Gas Supply Agreement143) to 88.16%, and replaced the amount of 21 million nm3 in the original Gas Supply Agreement with the figure of 21,157,895 nm3, thereby increasing the minimum quantity of gas to be taken by the Municipality by 157,895 nm3.144

162.  The Parties further agreed that Latvijas Gāze would not claim from the Municipality a penalty of LVL 227,920 with respect to the year 2005.145

163.  Clause 6 of the Amendement No. 3 reiterated that the Municipality retained “liability for timely and complete payment of invoices” under Clause 8.3 of the Gas Supply Agreement,146 and Rēzeknes Siltumtīkli was authorised by the Municipality to pay the invoices for natural gas issued by Latvijas Gāze.

C.  The Operation of the Heating System by Latgales Enerģija and Main Events in 2006

(1)  Latgales Enerģija’s “Guidelines for the Development of the Rēzekne City Heat Supply System” (20 January 2006)

164.  On 20 January 2006147 Latgales Enerģija sent the Municipality a 28-page document entitled “Guidelines for the development of the Rēzekne City heat supply system”.148 The Municipality received the draft “Guidelines”, since the Mayor received comments on the draft from Ms. Adamova, Deputy Chairperson of the Council, and Mr. Zeile, Chairman of the Rēzekne City Task Force for the Supervision of Heat Energy Affairs. However, the Municipality did not acknowledge receipt of this document149 and did not contact Latgales Enerģija in this regard until 3 November 2016 after the Regulator had rejected a new tariff proposed by Latgales Enerģija (see paragraph 188 below).

165.  Latgales Enerģija’s “Guidelines” outlined the heating system in the City of Rēzekne in their introductory part. They then identified two major problems, namely excessively high costs of heat production, broken down in nine distinct aspects,150 and environmental pollution,151 for which they outlined possible solutions.152

(2)  The Amended Long-Term Agreement (10 February 2006)

166.  On 10 February 2006 Latgales Enerģija and Rēzeknes Siltumtīkli executed a contract entitled “Agreement on Amendments to the Agreement for Lease, Renovation and Operation of the Long-Term Assets of 28 January 2005” (the “Amended Long-Term Agreement”)153 which varied the terms of the Long-Term Agreement.154

167.  The amount of the short-term debts to be taken over by Latgales Enerģija was increased from a total amount of LVL 1,448,977 to LVL 2,476,773.60 (Clause 1.2 of the Amended Long-Term Agreement varying Clause 4.4.3 of the Long-Term Agreement155).156 That amount included Rēzeknes Siltumtīkli’s debts owed to the creditors mentioned in Clause 4.4.3 of the Long-Term Agreement157 as well as Rēzeknes Siltumtīkli’s long-term debt to LHV.158

168.  Clause 1.3(a) and (b) of the Amended Long-Term Agreement fixed the lease payments to be made by Latgales Enerģija in the first two years of the lease (as LVL 185,326.40 and LVL 150,000 respectively, for a total amount of LVL 335,326.40,159 which brought to total amount to be paid by Latgales Enerģija to LVL 2,812,100 (Clause 1.3(c) of the Amended Long-Term Agreement). The amount of LVL 2,476,773.60 (erroneously indicated as LVL 2,472,094.80 in Clause 1.3(c) of the Amended Long-Term Agreement) was to be considered as “the security deposit for the following payments” and would be set off160 under a separate agreement.

(3)  The Agreement on Mutual Operations with the Aim to Decrease Energy Rate in the City of Rēzekne (10 february 2006)

169.  On 10 February 2006 Latgales Enerģija and the Rēzekne City Council executed a contract entitled “Agreement on Mutual Operations with the Aim to Decrease Thermal Energy Rate in the City of Rēzekne” (the “February 2006 Agreement”).161 The recitals of the February 2006 Agreement refer to the recent increase in the rates of thermal energy and the need to minimize social tensions in Rēzekne.162

170.  The February 2006 Agreement sets out in Clause 1 the duties undertaken by the Rēzekne City Council in its capacity as Rēzeknes Siltumtīkli’s sole shareholder, in consideration of which Latgales Enerģija undertakes in Clauses 2 to 4 to decrease the thermal energy rates by the agreed amounts.

171.  More specifically, the Rēzekne City Council undertook inter alia:

  1. (i)  to review and adopt a Council decision approving the Amended Long-Term Agreement by 10 February 2006 (Clause 1);

  2. (ii)  “to coordinate and approve the guidelines for development of heating supply system of the city of Rēzekne prepared by the Operator and the Council” (Clause 1.2);163

  3. (iii)  to ensure pursuant to the Long-Term Agreement that Rēzeknes Siltumtīkli should as of 10 February 2006 accept back the black fuel oil storage business and energy boiler; and to accept the resolution of Rēzeknes Siltumtīkli’s council relating to the transfer of a 1000m3 container located at Atbrīvošanas alejā 155a for use by Latgales Enerģija, free of charge, until 30 July 2008;

  4. (iv)  to ensure pursuant to the Long-Term Agreement that Rēzeknes Siltumtīkli or a third party should take back the bath-house building as of 1 January 2006 and provide bath-house services as of 1 March 2006 and take over all employees of the bath-house preserving their social guarantees; and to ensure that Rēzeknes Siltumtīkli or the third party enter into an agreement with the Operator by 28 February 2006 for the supply of hot water in consideration of payment of the rate determined by the Regulator (Clause 1.4); and

  5. (v)  to inform the Regulator about the content of the February 2006 Agreement (Clause 1).

172.  Latgales Enerģija undertook more specifically to decrease the thermal energy rate for heating of premises by 2.05 LVL/MWh for residents and 0.43 LVL/MWh for other users in case the Council performed its obligations under Clauses 1.1, 1.4 and 1.5 of the February 2006 Agreement (Clause 2). Further decreases were contemplated by Clause 3.

173.  Clause 4 provided that in case the Council timely and fully performed the obligations undertaken under the Agreement, Latgales Enerģija would apply a further decrease in thermal energy rates until 1 October 2006 and apply a rate of LVL 25.02/MWh for residents and LVL 28.59/MWh for other users.

174.  The February 2006 Agreement further contained terms dealing with the event of a breach of contract by each party. Clause 5 dealt with Latgales Enerģija’s contractual rights in case the Rēzekne City Council failed to perform any of the obligations undertaken in Clauses 1.1 to 1.5;164 Clause 6 dealt with the Rēzekne City Council’s contractual rights in case Latgales Enerģija failed to perform the obligations undertaken in Clauses 2 to 4 of the February 2006 Agreement.

175.  The Rēzekne City Council was to perform the obligations undertaken under Clauses 1.1 through 1.5 of the February 2006 Agreement by 28 February 2006 (unless otherwise expressly provided by such clauses).

176.  There is no correspondence between the parties in February 2006, the month in which the Rēzekne City Council was due to perform the obligations contemplated by Clause 1 of the February 2006 Agreement, on the record, either confirming performance of the agreement by either side or otherwise. There is no correspondence in evidence for the period immediately following either.165

177.  From February 2006 until 1 October 2006, Latgales Enerģija applied the rates of LVL 25.02/MWh for residents and LVL 28.59/MWh for other users, i.e. the rates decreased pursuant to Clause 4 of the February 2006 Agreement.166

178.  On 19 October 2006, after the Regulator rejected Latgales Enerģija’s application for a new tariff,167 Latgales Enerģija wrote to the Rēzekne City Council in relation to the performance of the February 2006 Agreement, and more specifically in relation to the “guidelines for the city heat supply system”, pointing out that it had carried out all the activities required on its part to comply with Clause 1.2 of the February 2006 Agreement and that it had received no answer from the Council in spite of its reminders.168 Latgales Enerģija gave notice to the Council that it would have no choice but to resort to Clause 5 of the February 2006 Agreement169 unless the Council adopted the “guidelines” within the following two months.

179.  It is the Claimant’s case that the Rēzekne City Council failed in particular to approve the “guidelines for the development of the heating supply system”, and thereby failed to live up to its side of the bargain.170

(4)  Latgales Enerģija’s Application to the Regulator for a New Tariff (12 June 2006) — The Regulator’s Decision (13 October 2006) — The Decisions by the Latvian Administrative Courts (17 November 2007 and 15 April 2009)

180.  From February to the end of September 2006 Latgales Enerģija applied a reduced rate in accordance with Clause 4 of the February 2006 Agreement (see paragraph 177 above).

181.  In the meantime, Latvijas Gāze had been authorised by the Latvian Public Utilities Commission to raise the price of natural gas.171

182.  On 12 June 2006 Latgales Enerģija applied to the Regulator seeking an increased tariff in an amount of LVL 33.38/MWh for residents and LVL 33.92/MWh for other users of thermal energy (from the approved rates of LVL 27.60/MWh and LVL 29.02/MWh respectively172). In its calculations attached to its application Latgales Enerģija indicated that the new price charged by Latvijas Gāze for the natural gas had risen from LVL 83.06 to LVL 113.76 (which represented an increase of 36%), and the new price for electricity from LVL 29 to LVL 34 (which represented an increase of 17%).173

183.  On 15 August 2006 Latgales Enerģija asked the Regulator to cancel its previous application of 12 June 2006 and submitted fresh calculations for the rate applicable to residents, seeking a rate of LVL 30.91/MWh for residents, and LVL 33.92/MWh for other users of thermal energy. Ms. Rogozina explains in her first Witness Statement that such step was caused by a change in VAT rules.174

184.  On 13 October 2006 the Regulator denied Latgales Enerģija’s application by a unanimous vote.175 The reasons for this decision are discussed in paragraphs 901 ff. below.

185.  On 17 November 2006 Latgales Enerģija challenged the Regulator’s decision before the Administrative District Court.176

186.  Since the challenge of the Regulator’s 13 October 2006 decision had not been heard yet by the time the Regulator had made decision No. 12 of 11 June 2007, which was also challenged by Latgales Enerģija, on 22 June 2007 Latgales Enerģija amended its 17 November 2006 application to set aside so as to include only the Regulator’s decision No. 12 dated 11 June 2007.177 There was therefore no decision by the Administrative District Court in relation to the Regulator’s decision No. 17 dated 13 October 2006. The Administrative District Court eventually made its decision on 15 April 2009.178

(5)  Further Steps Towards a “Heat Supply Development Plan” (2006)

187.  Having been notified of the Regulator’s decision No. 17 rejecting the proposed tariff, on 19 October 2006 Latgales Enerģija complained to the Rēzekne City Council of the losses it was incurring due to the Council’s failure to reply to the “guidelines” that had been sent (see paragraph 164 above), and threatening to decrease the lease payment under Clause 5 of the February 2006 Agreement179.180

188.  On 3 November 2006 the Rēzekne City Council replied asking Latgales Enerģija to be provided with the “heat supply development plan” for the period 2006–2007 and pointing to a number of points that such plan must include.181

189.  On 15 November 2006 Latgales Enerģija answered and sent the Rēzekne City Council (i) a one-page “heat supply development plan” for the years 2006–2009182 and (ii) the “draft heat supply development concept” for the years 2006–2014.183 Latgales Enerģija did not in November 2006 refer to the document previously sent to the Municipality on 20 January 2006.184 The Council received Latgales Enerģija’s 15 November letter on 17 November 2006.185

190.  On 29 December 2006 the Rēzekne City Council acknowledged receipt of the “draft heat supply development concept 2006–2014” submitted by Latgales Enerģija.186 The Council commented that the draft was not in accordance with applicable legislation and did not correspond to the actual state of heat supply in the city of Rēzekne.

191.  One of the reasons given by the Rēzekne City Council was the following: “The claim that the Rēzekne City Council has transferred heat supply functions to Latgales Enerģija SIA does not correspond to the legal and actual situation”.187

This statement relates to the following passage in Latgales Enerģija’s draft reading as follows: “(…) the company [Latgales Enerģija] has taken over from the City Council the duties specified in Section 15 of the Law on Local Governments, i.e. ensuring provision of utilities or, more particularly, heat supply. In connection with this LLC Latgales Enerģija is performing its activities and thereby also planning and development [sic] of centralised heat supply in Rēzekne City”.188

192.  The plan was finally approved by the City Council on 21 September 2007 under the name “Heating Supply Development Strategy” (see paragraph 228 below).189

(6)  Rēzeknes Siltumtīkli’s Claims against Latgales Enerģija Relating to the Depreciation of the Leased Assets

193.  A difference of views developed in 2006 with respect to the lease payments to be made by Latgales Enerģija under Clauses 4.4.2 and 7.1.5 of the Long-Term Agreement.190

According to Rēzeknes Siltumtīkli, Latgales Enerģija had to pay an amount for depreciation of the assets every month under the terms of the Long-Term Agreement, whereas Latgales Enerģija took the view that such payment had to be made upon returning the assets to the lessor at the end of the term of the lease.191

194.  On 7 November 2006 Rēzeknes Siltumtīkli sent Latgales Enerģija a “pre-trial objection” requesting settlement of an alleged debt of LVL 563,098.69 by 20 November 2006, failing which Rēzeknes Siltumtīkli would bring proceedings to recover such amount; Rēzeknes Siltumtīkli further invoked Clause 12.5.2 of the Long-Term Agreement which entitles the lessor to terminate the agreement unilaterally in certain cases.192

195.  On 5 December 2006 Latgales Enerģija answered Rēzeknes Siltumtīkli’s claim of 7 November 2006, taking the view that any amounts to which the lessor might be entitled under Clause 4.4.2 of the Long-Term Agreement were not yet due and owing. Nevertheless, Latgales Enerģija invited Rēzeknes Siltumtīkli to negotiate a solution without prejudice which could help solve the lessor’s financial difficulties.193

(7)  Supplementing Certain Arrangements Made in 2005

196.  A number of arrangements made by the Claimant or Latgales Enerģija in 2005 were supplemented in 2006; in some respects further arrangements were made.

(A)  Further Loans by E energija to Latgales Enerģija

197.  E energija granted three further loans to Latgales Enerģija in 2006 in connection with the Rēzekne Project for a total amount of EUR 1,150,000. This amount was not all paid in cash; the Claimant also paid sums directly to Rēzeknes Siltumtīkli’s creditor Dinaburga Rosma and to its parent company Energijos Taupymo Centras, and took over debts owed to Energijos Taupymo Centras.194

(B)  Further Investment by E energija in Latgales Enerģija (8 June 2006)

198.  On 8 June 2006 E energija purchased 364 shares in Latgales Enerģija from Energo Sistēmas for an amount of EUR 70,000 under the terms of a Share Purchase Agreement.195

(C)  Loan from JSC Sampo Banka to Latgales Enerģija — E energia’s Guarantee and Pledge (30 November 2006)

199.  On 30 November 2006 JCS Sampo Banka (“Sampo Banka”) granted Latgales Enerģija a loan amounting to LVL 2 million (the “Sampo Banka Loan Agreement”).196 According to Clause 2.1 of such agreement the purpose of the loan was to enable Latgales Enerģija to purchase LHV’s claims against Rēzeknes Siltumtīkli (referred to in Clause 1.2(d) of the Amended Long-Term Agreement197), and to make further investments into the modernization of the heating infrastructure of the city of Rēzekne.

200.  The disbursement of the loan was subject to a number of conditions set out in Clause 5.2, including the condition that parent company guarantee be issued under which E energija would guarantee performance of Latgales Enerģija’s duties to Sampo Banka under the Sampo Banka Loan Agreement.

201.  The Sampo Banka Loan Agreement was subsequently amended on 26 April 2007.198

202.  E energija signed the Guarantee provided to Sampo Banka on 30 November 2006 (the “Sampo Banka Guarantee”) and undertook to pay any amounts as may be due and payable under the Sampo Banka Loan Agreement, as a principal debtor and irrespective of the validity and legal effect of said Loan Agreement, having waived “all rights of objection and defence” under the same Loan Agreement, and any right to set off, counterclaim or deduce any amounts (first and third paragraphs of the Sampo Banka Guarantee).199

203.  On 30 November 2006 E energija also executed a Commercial Pledge Agreement with Sampo Banka to secure any claims the bank might have under the Sampo Banka Loan Agreement, pledging all the shares owned in Latgales Enerģija up to an amount of LVL 2.6 million.200

204.  Latgales Enerģija was eventually unable to repay the loan to Danske Bank which succeeded to Sampo Bank, and which in turn claimed payment under the Guarantee Agreement against the Claimant.201

(D)  Rēzeknes Siltumtīkli’s Long-Term Debts Taken Over by Latgales Enerģija

205.  On 13 December 2006 Latgales Enerģija took over the debt owned by LHV against Rēzeknes Siltumtīkli under the terms of an Assignment Agreement.202 LHV’s claim for payment against Rēzeknes Siltumtīkli arose under the two loan agreements referred to in Clause 4.4.4 of the Long-Term Agreement (see paragraph 89 above) and was then in an amount of LVL 1,103,097.82, including cumulated interest and a premium (Clause 1.2 of the 2006 Assignment Agreement).

206.  Latgales Enerģija paid that amount in two instalments in December 2006 and 2007.203

D.  The Energy Crisis Declared by the Rēzekne City Council and Other Main Events In 2007

(1)  Further Steps Towards a “Heat Supply Development Plan” or “Strategy” (January-September 2007)

207.  On 2 February 2007 Latgales Enerģija answered Rēzekne City Council’s letter of 29 December 2006,204 and to some extent addressed the criticism voiced by the Council in relation to the “draft heat supply development concept” that Latgales Enerģija had sent to the Council on 15 November 2006 (see paragraph 189 above).205

208.  On 19 February 2007 the Rēzekne City Council indicated that it was creating a working group to resolve the matter and asked Latgales Enerģija to delegate two representatives to the meetings of the working group,206 which Latgales Enerģija did on 28 February 2007.207 The working group was not established until 11 May 2007 (see paragraph 213 below).

209.  On 6 March 2007 Latgales Enerģija gave notice to the Rēzekne City Council that it would not be able to perform its obligation to invest not less than EUR 1.5 million in accordance with the Long-Term Agreement208 due to the Council’s failure to comply with its duty to develop a “heat supply development concept” in accordance with the February 2006 Agreement209 and to the absence of any reply by Rēzeknes Siltumtīkli, which was copied in, as to Latgales Enerģija’s repair and investment proposals.210

The Arbitral Tribunal notes that the investment proposals relied upon by Latgales Enerģija are not in evidence.

210.  On 18 April 2007 Latgales Enerģija gave substantially the same notice to Rēzeknes Siltumtīkli and copied in the Rēzekne City Council.211

211.  On 13 July 2007 Latgales Enerģija sent Rēzeknes Siltumtīkli a further reminder that Rēzeknes Siltumtīkli’s failure to answer affected in particular (i) the installation of two heating boilers with a total capacity of 30 MW and (ii) the installation of cogeneration facilities at Rīgas iela/Rancāna iela 1 (4–5 MW) and Atbrīvošanas alejā 155a (2 MW).212

212.  There is no answer to either letter in evidence by the Rēzekne City Council or Rēzeknes Siltumtīkli; Latgales Enerģija sent further reminders in 2008 (see paragraphs 329 ff. below).

213.  On 11 May 2007 the Rēzekne City Council established a working group (the “Working Group”)213 to draft the strategic plan for the development of the heat supply system and present an interim report by 1 July 2007.214

214.  On 29 May 2007 Latgales Enerģija again reminded215 the Rēzekne City Council that it was in breach of its contractual obligation to agree and approve “guidelines for the development plan of the heating supply system” in accordance with the February 2006 Agreement,216 pointing out that it was entitled under Clause 5 of that agreement to decrease the lease payments to be made to Rēzeknes Siltumtīkli.217

215.  On the same day Latgales Enerģija applied for a new tariff to the Regulator (these developments will be dealt with separately in paragraphs 230 ff. below, save insofar as they are relevant to the “heat supply development plan”). On the following day the Regulator asked Latgales Enerģija to provide “information regarding the approved Rēzekne City heat supply development plan, which must be in place” in accordance with the Methodology.218 On 6 June 2006 Latgales Enerģija answered that the approval of such plan was exclusively a matter for the Rēzekne City Council, to which the Regulator should therefore turn, adding that to the best of its knowledge the plan had not been adopted.219 On 11 June 2007 the Regulator denied Latgales Enerģija’s application for a new tariff.220

216.  On 12 June 2007 the Rēzekne City Council answered Latgales Enerģija’s 29 May 2007 letter, pointing out that the Working Group in charge of developing the “strategic plan for the development of the Rēzekne city heat supply system” had repeatedly221 requested Latgales Enerģija to provide information on whether the introduction of new facilities and technologies would affect the thermal energy tariff, but had not received any answers.222 The delay had therefore been caused by Latgales Enerģija, and Latgales Enerģija’s allegation that the Council was responsible for such delay was unjustified. The Council further denied that Latgales Enerģija was entitled to reduce the amount of the lease payments owed under the Long-Term Agreement without an amendment of the same, which had to be made in writing.

217.  On 4 July 2007 Latgales Enerģija claimed in a letter sent both to Rēzeknes Siltumtīkli and the Rēzekne City Council that the Regulator’s refusal to approve a new tariff223 had been ultimately caused by the Rēzekne City Council’s failure to approve a “heat supply system development plan”.224 Relying on the Rēzekne City Council’s obligations under Clause 1.2 of the February 2006 Agreement with particular respect to the approval of the “heat supply system development plan”,225 Latgales Enerģija reiterated that it was under no obligation to decrease the heat energy tariff under the terms of the February 2006 Agreement and presented a calculation of the amount of LVL 138,069.24 which it was entitled to deduct from the lease payments owed to Rēzeknes Siltumtīkli under Clause 5 of the February 2006 Agreement.226

218.  On 9 July 2007 Rēzekne City Council rejected Latgales Enerģija’s complaints and claim for compensation, stating it had performed all its obligations and met all the requirements in order for the thermal energy tariff to be reduced by Latgales Enerģija, having recalled its criticism of the “guidelines” received from Latgales Enerģija on 17 November 2006.227 The letter addressed the tasks to be undertaken by the Council and Latgales Enerģija within the Working Group and criticised Latgales Enerģija for failing to provide sufficiently clear and detailed information, without which it was impossible to evaluate the situation and forecast the necessity and scope of the investments required for the period 2007–2013.228 A 19-page document was attached to that letter which is not in evidence.

219.  On 18 July 2007 Latgales Enerģija replied that the development of the “heat supply development plan” was an obligation on the Municipality under the Energy Act (Section 51, Part 1) and the Municipality’s rejection of Latgales Enerģija’s claim for compensation was contrary to the provisions of the February 2006 Agreement.229 Latgales Enerģija did not, however, answer the Council’s criticism in relation to the alleged failures of its representatives to provide information required by the working group in charge of the “heat supply development plan”.

On 19 July 2007 the Rēzekne City Council reiterated that the Working Group had received only partial information from Latgales Enerģija, which was requested to provide the following by 24 July 2007 on five key items set out in the letter.230 The draft “strategic plan” would be submitted for approval by 14 September 2007, the letter indicated.

220.  On 19 July 2007 Latgales Enerģija complained to the Council that it had been notified of a Working Group meeting on that very day at 10:20 a.m. after the meeting had started at 10:00 a.m.; adequate notice was requested for future meetings.231

221.  On 23 July 2007 Latgales Enerģija answered the Council’s 19 July 2007 request as follows:232

  1. (i)  as at July 2007 there was no updated information regarding the investments planned; a survey of the prices of potential suppliers would be required which would take between five to seven weeks, to update the information in relation to the heat supply main network, the scope of boiler reconstruction, the measures to improve energy efficiency etc.; expected prices had increased, but the volume of investment had not changed;

  2. (ii)  there had been no changes in the schedule of the planned investments; however, the timing of the schedules depended on the timing of their approval so that if approval was delayed, completion of the works would be delayed;

  3. (iii)  the sources of the planned investments would be as follows: up to 90% bank resources, and 10% equity capital; and

  4. (iv)  as to the question how the planned investments would affect the energy efficiency measures, the answer was provided to Mr. Vjakse on 1 July 2007 and during the meetings of the Working Group. Within two years of obtaining the investments:

    • —  self-consumption in the boilers would decline to 8.1% (in 2006 it was 11.3%);

    • —  losses in the heat transmission network would decline to 17.2 (currently 18.1%);

    • —  the amount of fuel consumed for the production of 1 MWh heat would decline to 136 kg of the assumed fuel (currently 151.2 kg); and

    • —  the energy consumption would fall to 22.9 kWh (currently 24 kWh); the number of employees at the boiler houses would fall by 15% while the salaries will increase by 20% as employees would have to have higher qualifications; the heat energy tariff was expected to grow by 7% (at the inflation of 0 from July 2007).

222.  On 30 July 2007 Latgales Enerģija sent a two-page “investment plan” covering a seven-year period starting from the date of the approval of the “Rēzekne city heat supply system development strategic plan”.233

223.  On the following day the Council replied that the information provided by Latgales Enerģija on 23 July 2007 was insufficient as it failed to reflect essential cost items. The letter stated that an expert had been involved to develop the “Rēzekne city heat supply strategic plan” and additional information was requested.234

224.  On 11 September 2007 a meeting of the Working Group took place. Latgales Enerģija had announced that it would be unable to attend.235 As indicated in the minutes of the meeting, a draft Development Plan was available by then.236

During that meeting Ms. Abramova, sitting on the Working Group as an invited specialist and a member of the City Council, suggested to make “editorial comments” to the draft Development Plan: “when talking about future development, to use the word ‘operator’, without mentioning SIA Latgales enerģija as the only possible operator of thermal energy”.237 The minutes indicate that Mr. I. Locis, head of the Working Group and Vice-Executive Director of the City Council, would make the editorial changes by 13 September 2007 and prepare the document for review.238 The record does not show whether the minutes of this particular meeting were provided to Latgales Enerģija.

225.  On 13 September 2007 the Rēzekne City Council sent Latgales Enerģija a 54-page document setting out the “strategy for the development of the Rēzekne city heat supply” further to Latgales Enerģija’s request.239 Latgales Enerģija was invited to participate in an unscheduled session of the City Development, Infrastructure and Public Order Committee in the morning of the following day, and the meeting of the subsection of the Rēzekne City Council in the afternoon,240 but informed the Mayor that it was unable to attend and requested a postponement.241 It is not clear whether a meeting took place on 14 September 2007 as there are no minutes of such a meeting on the record and it is recalled that no witnesses have been put forward by the Respondent.

226.  On 17 September 2007 the Rēzekne City Council invited Latgales Enerģija to participate in the meeting of its deputies that would take place on 19 September 2007 on the “development strategy [for the] heat supply” in Rēzekne for 2007–2013.242 Latgales Enerģija indicated on the very same day that it would attend.243

227.  On 19 September 2007 the Working Group met.244 No representative from Latgales Enerģija attended. One of the items discussed was the manner in which the Development Plan in the making should refer to Latgales Enerģija. Ms. Abramova reiterated her suggestion that Latgales Enerģija should not be mentioned “as the only possible operator”;245 another member of the City Council, Mr. Petkevičs, concurred and suggested that Latgales Enerģija should be mentioned “only in the descriptive part, when characterising the current situation”.246 The record does not show whether the minutes of this particular meeting were provided to Latgales Enerģija.

228.  On 21 September 2007 the Rēzekne City Council approved the heat supply development strategy for the city of Rēzekne for 2007–2013.247 The document entitled “Rēzekne Heating Supply Development Strategy for 2007–2013” is in evidence as Exhibit C-213.

229.  As the next sub-sections will recall, the finalization of the Rēzekne Heating Supply Development Strategy for 2007–2013 was not, by far, the sole event worth recalling in the second part of 2007. By 21 September 2007 a number of equally significant events had taken place:

  1. (i)  the Regulator had denied Latgales Enerģija’s application for a new tariff;

  2. (ii)  Latvijas Gāze had stopped deliveries of natural gas;

  3. (iii)  Rēzekne’s Mayor had given an interview indicating that Latgales Enerģija might no longer be the exclusive supplier of thermal energy in spite of the express terms contained in the Long-Term Agreement and the February 2006 Agreement; and

  4. (iv)  Rēzeknes Siltumtīkli had sued Latgales Enerģija in the Latgale Regional Court and had obtained an injunction freezing Latgales Enerģija’s bank account.

The following sub-sections will deal with those developments.

(2)  Latgales Enerģija’s Application to the Regulator for a New Tariff (29 May 2007) and the Regulator’s Decision (11 June 2007) — Latgales Enerģija’s application to the Regulator for a New Tariff (5 November 2007) and the Regulator’s Decisions (9 November 2007 and 7 December 2007)

230.  The tariff in force in 2007 (LVL 27.6/MWh for residents and LVL 29.02/MWh for other users) had been approved by the Regulator on 19 December 2005.248

From February to October 2006 Latgales Enerģija had applied a reduced tariff of LVL 25.02/MWh for residents and 28.59/MWh for other users (see paragraph 177 above) in accordance with Clause 4 of the February 2006 Agreement.249

On 19 October 2006 the Regulator had denied Latgales Enerģija’s application for a new tariff.250 In 2006 the price charged by Latvijas Gāze in accordance with the decision by the Public Utilities Commission had risen by some 36%.251

231.  On 28 March 2007 the Public Utilities Commission authorised Latvijas Gāze to increase the price of natural gas.252 By reference to the tariff issued by the Regulator on 19 December 2005, the increase in the price of natural gas was of the order of 55% up to 129%.253

232.  On 29 May 2007 Latgales Enerģija applied to the Regulator seeking a tariff ranging from LVL 32.67/MWh to LVL 41.62/MWh from 1 September 2007 onwards.254

233.  On 11 June 2007 the Regulator denied Latgales Enerģija application by a unanimous vote.255 The reasons for the decision are discussed in paragraphs 904 ff. below.

234.  On 22 June 2007 Latgales Enerģija challenged the Regulator’s decision before the Administrative District Court in the same proceedings which it had brought against the Regulator’s prior decision of 13 October 2006.256

235.  The Administrative District Court eventually made its decision on 15 April 2009 and dismissed Latgales Enerģija’s application.257

236.  On 28 September 2007 Latgales Enerģija applied again to the Regulator seeking a new tariff from 1 November 2007 onwards.258 The proposed tariff ranged from 35.95 LVL/MWh to 44.16 LVL/MWh depending on the natural gas rate. Reliance was placed on changes in the natural gas rates and in the minimum salary as well as other factors.

237.  In the autumn of 2007 a number of significant events took place which the Tribunal will discuss in the following sub-sections of this Award:

  1. (i)  on 11 September 2007 Latvijas Gāze stopped the supply of natural gas (see paragraph 248 below); as a consequence, Latgales Enerģija experienced difficulties in providing heating to certain areas of the city of Rēzekne;

  2. (ii)  on 4 October 2007 the Regulator warned Latgales Enerģija that it might revoke the three licences issued to Latgales Enerģija (see paragraph 262 below);

  3. (iii)  the Municipality declared an energy crisis in the city of Rēzekne on 9 October 2007 (see paragraph 264 below);

  4. (iv)  the heat supply development strategy for the city of Rēzekne for 2007–2013 had just been approved by the Municipality on 21 September 2007259 (see paragraph 228 above); and

  5. (v)  on 11 October 2007 the Regulator decided to take over Latgales Enerģija’s zone (see paragraph 274 below).

238.  On 5 November 2007 Latgales Enerģija wrote to the Municipality announcing that if the Regulator approved the new tariff proposed by Latgales Enerģija, Latgales Enerģija would apply reduced rates as set out in that letter.260

239.  On 9 November 2007 the Regulator unanimously approved new tariffs.261 Latgales Enerģija submits that the approved tariffs would have enabled it to pay the increased prices for natural gas.262

240.  However, on 7 December 2007 the Regulator revoked its previous decision No. 28 dated 9 November 2007 and dismissed Latgales Enerģija’s application for a new tariff dated 18 September 2007.263 The decision does not state whether it is a majority decision or a unanimous decision.

241.  The decision states that on 29 November 2007 Rēzeknes Enerģija had written a letter to the Regulator (not in evidence) stating that the amount of natural gas which Latvijas Gāze was to supply was 21,000 nm3 whereas Latgales Enerģija’s application contained a smaller amount, which proved in the Regulator’s opinion that the calculations on which Latgales Enerģija’s application was based were not in accordance with “the actual situation” and that the rates submitted were therefore to the detriment of the public interest. Such information had been knowingly supplied by Latgales Enerģija and the Regulator’s decision was therefore to be reviewed. The Regulator found that Latgales Enerģija had obtained a new tariff “by illegal means” and that the approved tariff was “unreasonably high”.264

242.  The decision does not state that Latgales Enerģija’s comments were sought on Rēzeknes Enerģija’s 29 November 2007 letter before reviewing the Regulator’s decision dated 9 November 2007.

243.  On 12 December 2007 Latgales Enerģija challenged the Regulator’s decision before the Administrative District Court.265 The court dismissed Latgales Enerģija’s application on 30 October 2009.266 Latgales Enerģija appealed against that judgment and the Administrative Regional Court dismissed the appeal on 23 September 2010.267

244.  Latgales Enerģija had started to charge users according to the revised tariffs approved by the Regulator on 9 November 2007 as it took the view that the effects of the Regulator’s decision of 7 December 2007 were stayed pending the resolution of Latgales Enerģija’s challenge.268 However, the Rēzekne City Council did not accept Latgales Enerģija’s position (see paragraphs 324 ff. below).

(3)  Towards the Declaration of an Energy Crisis by the Rēzekne City Council (9 October 2007)

245.  Owing to the Regulator’s refusal to approve a new tariff in 2006 (see paragraph 184 above) and in 2007 (see paragraphs 233 and 240 above) and to the increase in the gas prices charged by Latvijas Gāze allowed by the competent authority in 2006 and 2007 (see paragraphs 181 and 231 above) Latgales Enerģija felt that it would no longer be in a position to pay the amounts which Latvijas Gāze was invoicing Rēzeknes Siltumtīkli. On 2 July 2007 it informed Rēzeknes Siltumtīkli that, as of 11 June 2007, it would pay for the natural gas supplied by Latvijas Gāze in accordance with the tariff applied by the Regulator when the heating tariff was approved, namely “LVL 83.60/1000 m3”.269

246.  On 25 July 2007 Latgales Enerģija informed Rēzeknes Siltumtīkli that it paid less than Latvijas Gāze had invoiced Rēzeknes Siltumtīkli for June 2007, by some LVL 10,000.270

Latgales Enerģija did not pay the outstanding balance to Latvijas Gāze. Neither did Rēzeknes Siltumtīkli and the Rēzekne City Council which were the contracting parties to the Gas Supply Agreement with Latvijas Gāze.271

247.  On 29 August 2007 Latvijas Gāze warned the Rēzekne City Council and Rēzeknes Siltumt#x012B;kli that it would suspend supplies of natural gas unless the Rēzekne City Council paid in full for the natural gas supplied to Rēzeknes Siltumt#x012B;kli until the end of July 2007.272 On 10 September 2007 Latvijas GGāze sent the Rēzekne City Council and Rēzeknes Siltumt#x012B;kli a second warning.273 On 11 September 2007 the Rēzekne City Council asked Latvijas Gāze not to interrupt supplies of natural gas.274

248.  On 11 September 2007 Latvijas Gāze stopped its natural gas supply just before the beginning of the heating season.

249.  In its letter to the Rēzekne City Council and Rēzeknes Siltumtīkli dated 14 September 2007 Latvijas Gāze stated that the City Council had not paid for the natural gas received in July 2007 in full and the City Council’s request to maintain supplies had been rejected by its Board; the amount claimed by Latvijas Gāze was of approx. LVL 148,000 plus an advance payment of LVL 400,000 for October 2007 and interest on delayed payment, to be calculated.275

250.  As a consequence of the interruption in the supply of natural gas, Latgales Enerģija had to switch back to its reserves of heavy fuel oil, which it did, in order to provide heating and hot water.276

251.  On 13 September 2007 the Mayor of Rēzekne gave an interview that was published on 15 September 2007 in the local paper Rēzeknes Vēstis.277 In his answer to the question put to him278 the Mayor reportedly answered as follows:

First of all I want to reassure residents and to confirm that supply of hot water and heating would be provided.

And now I will explain how this difficult situation occurred. Everybody knows that the lease agreement with company Latgales enerģija is disadvantageous for the city. The same can be said about the agreement with Latvijas Gāze. The agreement on gas supply has been concluded among AS Latvijas Gāze, AS Rēzeknes siltumtīkli and Rēzekne Council, instead of concluding directly with the producer of thermal energy. Latvijas Gāze issues an invoice for gas consumption to Rēzeknes siltumtīkli, and the latter, in its turn, issues an analogous invoice to Latgales enerģija that serves as the final link in the chain of payments for gas. After all, this company uses gas and receives payment from the heat consumers. However, if a single santims remains unpaid for the consumed gas, the council bears the liability, as the municipality is the guarantor for payments under the agreement with Latvijas Gāze. So far, Rēzeknes siltumtīkli prevented occurrence of debts. However, two months ago, when the Regulator rejected a project to increase the thermal energy tariffs (considering them to be unreasonably high), Latgales enerģija begun to pay only a part of the accrued amount, that is, failed to pay the difference between the current rate and the increased rate they desired, which was rejected by the Regulator. Thus, a debt of LVL 29,164 occurred.

Latgales enerģija took the following position: you, the council, hinder and cause obstacles for the Regulator to increase the tariffs.

We would like to note that the council does not determine and does not influence the tariffs, this is in the power of the Regulator, not the council. Apparently, Latgales enerģija is thus trying to impose a pressure on the Regulator…

The City Council can easily pay the debt to Latvijas Gāze. The debt amount is small. The best variant how to do it is by amending the budget in the end of the year to transfer this money to Rēzeknes siltumtīkli increasing its share capital, thereafter these funds would cover the debt. Therefore we addressed the management of Latvijas Gāze with a request to extend the payment term of the invoice for the gas until 1 January 2008. This issue will be discussed at a board meeting of AS Latvijas Gāze on Friday (14 September).

Of course, we are interested in a direct agreement between Latvijas Gāze and the operator, heating company. However, with regard to Latgales enerģija, Latvijas Gāze has a categorical position: there will be no direct agreement with this company…

The situation reached a critical point. This cannot go any further. Therefore, last week the board of AS Rēzeknes siltumtīkli made a decision to instruct board member Aldis Mežals to hire a law office from Riga to draft documents that are required to bring a claim to court against SIA Latgales enerģija.

On 14 September, a claim will be brought to the administrative court to collect the debt from Latgales enerģija at three positions: for the continued delay in payment of depreciation to akciju sabedrība Rēzeknes siltumtīkli (in the amount of 75 thousand lats); for the failure under the agreement to take over the debt of Rēzeknes siltumtīkli, in the amount of one million lats; for failure to pay the invoices of Latvijas Gāze for the consumed gas.

I will explain that as of the beginning of operations Latgales enerģija did not pay a santims for depreciation (however, according to law, deductions should be done annually). In relation to taking over the debt of Rēzeknes Siltumtīkli, Latgales enerģija did not take it over, it assigned the debt (that is, did not take over the debt itself, but the right of claim, to collect the debt); as a result, this million lats was distributed across the entire remaining lease term and counted in the rent payment.

Therefore, company Rēzeknes siltumtīkli faced limited cash income that would allow the payment.

What will be our further steps? Tomorrow (14 September), six companies that provide heating in Latvia will receive letters with a description and analysis of the situation with the heating supply in Rēzekne and an offer to take up provision of heating in our city. I am sure, there will be persons who would want to take this up. Then we will announce a tender and choose a company that would meet our requirements. The main and mandatory condition would be: conclusion of a direct agreement between Latvijas Gāze and the operator; also requirements that the tariff of the heating in Rēzekne would not exceed 30 lats for five years.

I can tell that the future of Latgales enerģija in our city will be decided on 25 September. By this date, the regular payment for the gas should be paid, and in case Latgales enerģija fails to pay it, then I would bring a question to deputies regarding termination of the agreement with this company. In case the payment is made, then the question of gas payment is removed, and we sit down at the table of negotiations to discuss issues of heating supply in the city.

In conclusion I would like to address the residents of our city: don’t panic. There will be no interruption in supply of hot water and heating. I can ensure that much has been done to solve the problem, but it has not been publicly advertised. For three months, I have been negotiating with several companies persuading them that Rēzekne has a future. And I can guarantee that in case of necessity a new company, large, serious and reliable, would appear here. Previously we did not have alternatives. Now we have them.

252.  On 19 September 2007 Latgales Enerģija wrote to the Mayor with reference to the interview published in Rēzeknes Vēstis, asking whether it was accurate that a letter had been, or would be, sent to six Latvian heat supply companies with a proposal to supply thermal energy in Rēzekne, and whether in such case Latgales Enerģija would be able to take part in the competition.279 No answer to that letter is in evidence.

253.  On 20 September 2007 the differences of opinion between Rēzeknes Siltumtīkli and Latgales Enerģija regarding the time when payment of depreciation was owed by Latgales Enerģija (see paragraphs 193 ff. above) suddenly came to a head. Rēzeknes Siltumtīkli sued Latgales Enerģija in the Latgale Regional Court seeking inter alia payment of certain amounts (see paragraph 302 below). Rēzeknes Siltumtīkli finally sought, and obtained, the attachment of Latgales Enerģija’s funds held by banks and payments owed by any third parties.

254.  The Claimant takes the view that the claims were spurious280 and the application for an attachment was calculated to prevent Latgales Enerģija’s from using its bank account to make and receive payments and to disrupt Latgales Enerģija’s business operations and create further difficulties in order for stable and uninterrupted heating to be provided just before the heating season began.281

255.  On 21 September 2007 the Latgale Regional Court granted the attachment sought to secure the claimant’s claims for an amount up to LVL 880,354.02 with immediate effect.282

256.  Latgales Enerģija’s operations were almost completely halted by the attachment.283

257.  In the week of 24 September 2007284 the Board of Education of the Rēzekne City Council made a request in writing to Latgales Enerģija in order that the schools and nursery schools in the city should be heated. The Social Care Directorate made a similar request in relation to the Social Care Centre for the Retired.285

258.  On 28 September 2007 the Rēzekne City Council decided to establish SIA Rēzeknes Enerģija (“Rēzeknes Enerģija”) as a Municipality-owned company according to www.rezekne.lv.286 The Respondent has neither denied this piece of information nor disproved it by documentary evidence filed in rebuttal.

259.  On 1 October 2007 www.rezekne.lv reported that there was no heating in two secondary schools and three nursery schools of the Rēzekne Northern District.287 On the same day the Board of Education of the Rēzekne City Council sent the Regulator a statement complaining of the current heating problems.288 Latgales Enerģija has admitted that the supply of heating services was interrupted in the city of Rēzekne, especially in the northern district.289

260.  On 2 October 2007 Rēzeknes Enerģija was incorporated by the Rēzekne City Council with a paid-in capital of LVL 2,000, subsequently increased to LVL 4,002,000 on 30 October 2007 relying on a loan from the Treasury (see paragraphs 261 and 271 below).290

261.  On 3 October 2007 the Local Government Loan and Guarantee Control and Monitoring Council approved the decision by the Rēzekne City Council to apply for a loan from the Treasury for an amount of LVL 4 million to invest in the share capital of Rēzeknes Enerģija.291 On 4 October 2007 the Rēzekne City Council applied to the Treasury for such loan.292 On 9 October 2007 the Rēzekne City Council decided to pay an amount of LVL 4 million for Rēzeknes Enerģija’s capital increase.293

262.  On 4 October 2007 the Regulator sent Latgales Enerģija a warning294 stating that the licences were at risk of being revoked, but not before 4 January 2008.295 Latgales Enerģija was requested to submit explanations to the Regulator by 7 November 2007 on the breaches of the conditions of the licences mentioned in the warning;296 Latgales Enerģija answered the Regulator’s warning on 30 October 2007.297

263.  On 8 October 2007 the Board of Directors of the Latvian Public Utilities Commission met. According to the account made by the Mayor of Rēzekne the Commission determined that an emergency situation was to be announced.298

264.  On 9 October 2007 the Rēzekne City Council made a unanimous decision declaring that there was an energy crisis in the city of Rēzekne and to establish an “energy crisis centre” (the “Energy Crisis Committee”).299

265.  Latgales Enerģija was not heard or consulted before that decision was made.300

266.  On the same day the Rēzekne City Council notified Latgales Enerģija of its decision and informed Latgales Enerģija that a meeting of the Energy Crisis Committee would take place at 5:00 p.m. that day, asking that a Latgales Enerģija representative attend.301 Latgales Enerģija acknowledged receipt of that decision on 9 October 2007.302

In the same letter the Rēzekne City Council asked Latgales Enerģija to supply heating and hot water in the city within 24 hours, schools and nursery schools to be given priority.

(4)  The Energy Crisis in Rēzekne (From 9 October 2007 Onwards)

267.  After the Rēzekne City Council declared the existence of an energy crisis in Rēzekne on 9 October 2007, there was an acceleration of events in October 2007 as follows:

  1. (i)  on 9 October 2007 the members of the Energy Crisis Committee met for the first time (see paragraph 268 below);

  2. (ii)  on 10 October 2007 Latgales Enerģija was requested again to supply heating within 24 hours to six schools and nursery schools in the Rēzekne Northern District (see paragraph 269 below);

  3. (iii)  on 11 October 2015 Latgales Enerģija’s zone was taken over by the Regulator’s decision of that day (see paragraph 274 below);

  4. (iv)  on 11 October 2007 the members of the Energy Crisis Committee met for the second time (see paragraph 272 below);

  5. (v)  on 12 October 2007 Rēzeknes Enerģija was appointed by decision of the Rēzekne City Council as the person in charge of providing thermal energy in Rēzekne (see paragraph 275 below);

  6. (vi)  on 13 October 2007 the members of the Energy Crisis Committee met for the third time in an enlarged meeting (see paragraph 276 below);

  7. (vii)  on 15 October 2007 the Rēzekne City Council ordered the Municipal Police to guard the boiler houses (see paragraph 280 below);

  8. (viii)  on 17 October 2007 Latvijas Gāze resumed the supplies of natural gas and entered into a gas supply agreement with Rēzeknes Enerģija (see paragraphs 281 and 283 below);

  9. (ix)  on 17 October 2007 the Latgale Regional Court lifted the attachment of Latgales Enerģija’s funds (see paragraph 282 below);

  10. (x)  on 25 October 2007 Latgales Enerģija, UAB E Enerģija, Rēzeknes Siltumtīkli, the Rēzekne City Council and Rēzeknes Enerģija made an agreement setting out the action to be taken promptly by the contracting parties in order to deal with the current problems (see paragraph 286 below);

  11. (xi)  on 26 October 2007 Rēzeknes Siltumtīkli appealed against the decision lifting the attachment (see paragraph 290 below); and

  12. (xii)  on 30 October 2007 Latgales Enerģija answered the Regulator’s warning of 5 October 2007 (see paragraph 297 below).

These events will be recalled in some detail in the following sub-sections.

(A)  Towards the Regulator’s Decision Taking over Latgales Enerģija’s Zone (11 October 2007)

268.  The first meeting of the Energy Crisis Committee took place on 9 October 2007.303 The meeting ended with the Mayor proposing to send Latgales Enerģija a request in writing to supply heating to the six schools and nursery schools within 24 hours as of receipt of the letter and to inform the Regulator and a number of Ministries of the decision made.

269.  The request that heating be provided within 24 hours was confirmed by the Mayor in a letter dated 10 October 2007.304

270.  On 10 October 2007 the Rēzekne City Council submitted an application to the Regulator; that application is not in evidence, but it is mentioned in the Regulator’s decision No. 26 dated 11 October 2007.305

271.  In the meantime, on 10 October 2007 the Rēzekne City Council had signed the Loan Agreement with the Treasury of the Republic of Latvia (the “Latvian Treasury Loan Agreement”) which it had entered into in order to fund the increase in the share capital of Rēzeknes Enerģija (see paragraph 261 above).306

272.  The next meeting of the Energy Crisis Committee took place on 11 October 2007.307 The meeting ended with a decision to apply to the Latvian Public Utilities Commission. Asked by the Mayor to comment on the situation, Mr. Meļņikovs stated that the northern boiler was not running at all, Latgales Enerģija was seeking to buy fuel without using funds and to have its bank account unblocked.

273.  On 11 October 2007 the Rēzekne City Council submitted an application to the Regulator, which is not in evidence, but is mentioned in the Regulator’s decision No. 26 dated 11 October 2007.308

274.  On 11 October 2007 the Regulator decided to take over Latgales Enerģija’s zone forthwith.309 On 31 March 2010 Latgales Enerģija’s application to have that decision set aside was dismissed by the Administrative Regional Court, then it was dismissed anew on 24 November 2011.310

(B)  The Appointment of Rēzeknes EnerģIja as the Person Responsible to Provide Heating Services in Rēzekne (12 October 2007)

275.  On 12 October 2007 the Rēzekne City Council appointed Rēzeknes Enerģija “as the person in charge of provision of thermal energy in in the administrative territory of Rēzekne”.311

276.  The third meeting of the Energy Crisis Committee took place on 13 October 2007 and lasted five hours and fifteen minutes.312 The meeting ended with the decision to execute the Council’s decision of the previous day to delegate the task to provide heating to the Municipality to Rēzeknes Enerģija.313

277.  After summarizing recent events the Mayor presented two options; the minutes of the meeting do not reflect the discussion on those two options clearly,314 but those options are clearly outlined in a document prepared by the Mayor.315 At the hearing, only the Claimant brought witnesses to testify on what was said at that meeting.316

278.  According to Option No. 1, Latgales Enerģija’s activity would be limited to the production of thermal energy; Rēzeknes Enerģija would be in charge of the transmission and distribution, as well as the sale of thermal energy. According to Option No. 2, Rēzeknes Enerģija would take over production, transmission and distribution as well as the sale of thermal energy and Latgales Enerģija would drop out of the picture altogether, save for any legal proceedings which it might bring, as such an event was expressly identified as a risk.317

279.  Both options thus excluded that Latgales Enerģija would keep the position that had been agreed upon under the agreements made with the Rēzekne City Council on the one hand (see paragraphs 100 ff. and 169 ff. above), and Rēzeknes Siltumtīkli on the other (see paragraphs 78 ff. and 166 ff. above).

280.  On 15 October 2007 the Rēzekne City Council ordered the Municipal Police to guard the property of Rēzeknes Siltumtīkli in the three boiler houses.318 This was the Municipality’s reaction to an apparent belief that Latgales Enerģija had brought in private security to protect the premises, a point that was briefly discussed in the 13 October 2007 Energy Crisis Committee meeting.319

281.  On 17 October 2007 Latvijas Gāze resumed the supplies of natural gas.320

282.  On 17 October 2007 the Latgale Regional Court revoked its previous decision of 21 September 2007321 granting an attachment on Latgales Enerģija’s assets (for more details see paragraph 305 below).322

(C)  The Rēzeknes Enerģija Gas Supply Agreement (17 October 2007)

283.  On 17 October 2007 Latgales Enerģija (as “the User”) entered into a gas supply agreement with Rēzeknes Enerģija (as “the Supplier”) (the “Rēzeknes Enerģija Gas Supply Agreement”).323

284.  Clauses 2.2 and 4.2 of the Rēzeknes Enerģija Gas Supply Agreement provide that Latgales Enerģija has a duty to pay the invoices for actual consumption of natural gas issued by Rēzeknes Enerģija.

(D)  The October 2007 Agreement (25 October 2007)

285.  On 23 October 2007 a meeting took place which paved the way for the execution of a contract two days later.324

286.  On 25 October 2007 an agreement was made between Latgales Enerģija, UAB E Energija, Rēzeknes Siltumtīkli, the Rēzekne City Council and Rēzeknes Enerģija (the “October 2007 Agreement”).325 The October 2007 Agreement contemplated the actions to be taken by each party, subdivided into three distinct stages as follows:

  1. (i)  Stage I, covering the period from 25 October to 28 October 2007;

  2. (ii)  Stage II, covering the period from 25 October to 30 November 2007; and

  3. (iii)  Stage III, covering the period until 30 May 2008.

287.  Stage I (Clauses (a) to (e)) in essence contemplated five points as follows:

  1. (a)  the parties undertook to take all necessary actions in relation to bailiffs in order to remove the attachment of Latgales Enerģija’s accounts in the shortest possible time to ensure free flow of funds; Rēzeknes Siltumtīkli was entitled to challenge the court decisions only in order to have the attachment removed; the parties would then reach a settlement by 30 May 2008 on the claim brought by Rēzeknes Siltumtīkli; no new proceedings would be brought and no new claims would be made within the proceedings currently pending;

  2. (b)  Latgales Enerģija undertook to grant discounts to users as from the date when the Regulator would approve new rates;

  3. (c)  Latgales Enerģija would submit its calculations relating to a new rate to the Rēzekne City Council ten days before submitting them to the Regulator (see paragraph 291 below);

  4. (d)  the parties undertook to sign a statement of acceptance and delivery upon the installation and commissioning of a Witomax boiler at Atbrīvošanas alejā 155a; and

  5. (e)  Rēzeknes Siltumtīkli would give approval by 15 November 2007 in order for a sub-lease agreement to be signed with SIA “LE Remonts” (“LE Remonts”) and with SIA LE Koģenerācija (“LE Koģenerācija”) and would issue the documents required in order for an application for the installation, commissioning and operation of a cogeneration plant to be submitted to AS Latvenergo.

288.  Stage II (Clauses (f) to (i)) in essence contemplated four further points as follows:

  1. (f)  Rēzeknes Siltumtīkli would agree with E energija and Latgales Enerģija on certain annotations to be cancelled in the Land Registry in relation to Rēzeknes Siltumtīkli’s assets; a separate agreement was concluded between the Claimant and Rēzeknes Siltumtīkli on 25 October 2007 to this effect; 326

  2. (g)  the parties would prepare and submit to each other a list of complaints relating to the Long-Term Agreement (see also paragraph 294 below);

  3. (h)  the parties undertook to refrain from public announcements and complaints unless previous agreement had been reached in that respect; and

  4. (i)  Rēzeknes Enerģija undertook to supply natural gas to Latgales Enerģija in accordance with the Rēzeknes Enerģija Gas Supply Agreement; Rēzeknes Enerģija and Latgales Enerģija would agree on a more detailed agreement within one month as of the conclusion of the October 2007 Agreement.327

289.  Finally, Stage III (Clauses (j) to (k)) in essence contemplated two points as follows:

  1. (j)  Rēzeknes Siltumtīkli undertook to submit proposed amendments for the revision of the Long-Term Agreement by 29 February 2008; and

  2. (k)  Latgales Enerģija would submit its own suggestions and objections in relation to the proposed amendments submitted by Rēzeknes Siltumtīkli by 25 March 2008, which the parties would start to review within 15 days; the parties would coordinate their amendments to the Long-term Agreement by 30 May 2008.

290.  On 26 October 2007 however, Rēzeknes Siltumtīkli filed an ancillary complaint against the Latgale Regional Court’s judgment of 17 October 2007 that had revoked the attachment on Latgales Enerģija’s assets328.329 As a consequence, Latgales Enerģija’s bank account remained frozen. That was a breach of the October 2007 Agreement on the part of Rēzeknes Siltumtīkli and the Municipality (see more in detail paragraphs 964–967 below).

291.  On 5 November 2007 Latgales Enerģija offered the Rēzekne City Council reduced rates (see paragraph 238 above).330 The reason for which Latgales Enerģija proposed reduced rates to the Rēzekne City Council rather than the Regulator lies in paragraph (c) of the October 2007 Agreement (C-26, see also paragraph 287 above), in spite of the fact that the letter does not expressly refer to the October 2007 Agreement.331

292.  On 7 November 2007 Latgales Enerģija wrote to the Rēzekne City Council, Rēzeknes Siltumtīkli and Rēzeknes Enerģija with respect to the performance of their obligations under the October 2007 Agreement, pointing out that funds in its bank account were still frozen by the attachment, requesting explanations as to the reasons why the provisions of the October 2007 Agreement had not been complied with and expressing its concerns that it would not otherwise be able to perform its own obligations under the October 2007 Agreement.332

There is no answer to that letter on the record, either by the Rēzekne City Council, Rēzeknes Siltumtīkli or Rēzeknes Enerģija.

293.  On 29 November 2007 Latgales Enerģija informed the Regulator that it might be unable to provide heat services.333 On 7 December 2007 the Regulator asked whether Latgales Enerģija’s statements should be understood as an application in order for the Regulator to revoke Latgales Enerģija’s licences.334 On 12 December 2007 Latgales Enerģija answered that its 29 November letter was sent simply to inform the Regulator of the existing difficulties.335

294.  On 30 November 2007 Latgales Enerģija sent the Rēzekne City Council and Rēzeknes Siltumtīkli the list of its claims in relation to the Long-Term Agreement in accordance with Clause (g) of the October 2007 Agreement.336 The list included claims against the Rēzekne City Council337 and claims against Rēzeknes Siltumtīkli.338

On 30 November 2007 Latgales Enerģija wrote to Rēzeknes Enerģija that it was under no obligation for the time being to pay for the natural gas supplied since its bank account had been attached and the Rēzekne City Council, Rēzeknes Enerģija and Rēzeknes Siltumtīkli were in breach of their contractual duties under the October 2007 Agreement,339 in particular with respect to the duty to lift the attachment. Reliance was placed by Latgales Enerģija on Article 1591 of the Latvian Civil Code.340

The letter is not in evidence; it was referred to in Rēzeknes Enerģija’s statement of claim before the Riga Regional Court341 and the judgment made by the same court on 2 March 2010.342

No answer to those letters is in evidence either on the part of Rēzeknes Enerģija.

Rēzeknes Enerģija’s position in this respect is summarised in the judgment by the Riga Regional Court dated 2 March 2010.343 Rēzeknes Enerģija took the view that the sole provision of the 2007 October Agreement which gave rise to a contractual duty binding on it was Clause 1, Stage II (i) 344 with which Rēzeknes Enerģija had complied; Latgales Enerģija was not entitled to rely on the alleged breach of contract of other contracting parties to withhold performance of a duty owed to Rēzeknes Enerģija.

295.  On 10 December 2007 the Rēzekne City Council replied to Latgales Enerģija’s letter dated 30 November 2007 pointing out that on 28 February 2006 “the Council did not have any document that could have been approved” as Latgales Enerģija had sent the Council its proposed guidelines only on 19 December 2006 and that “[u]pon such conditions” the Council began to hold meetings of the Working Group for the development of the strategic plan.345

296.  In a letter to Rēzeknes Siltumtīkli dated 27 December 2007 Latgales Enerģija pointed out that Rēzeknes Siltumtīkli had failed to comply with its obligations under the October 2007 Agreement by filing its complaint against the decision of the Latgale Regional court on 26 October 2007 (see paragraph 290 above and paragraph 306 below). Latgales Enerģija asked Rēzeknes Siltumtīkli to tell the court at the hearing scheduled to take place on 3 January 2008 that it did not maintain its complaint as far as the revocation of the attachment of Latgales Enerģija’s bank account was concerned.346

(E)  Latgales Enerģija’s Answer to the Regulator’s Warning (4 October 2007)

297.  On 30 October 2007 Latgales Enerģija answered the Regulator’s warning dated 4 October 2007347 explaining the situation and applying for a discharge of the warning (see more in detail at paragraph 990 below).348

(F)  The 2007 Assignment Agreement (4 December 2007)

298.  On 4 December 2007 Latgales Enerģija assigned its claims for payment for heating and hot water supplied to Rēzekne residents to LE Remonts (the “2007 Assignment Agreement”),349 one of the Claimant’s wholly-owned subsidiaries according to the Claimant.350 The assignment related to an amount of LVL 379,480.94 owed to Latgales Enerģija for heating and hot water supplied to Rēzekne residents in the period from 1 to 20 November 2007.

The purpose of such assignment was to enable Latgales Enerģija to continue to operate and supply heat despite the attachment affecting its bank account.

299.  On 11 December 2007 the Regulator took the view that Latgales Enerģija was in breach of the conditions of the licence and the applicable law and requested Latgales Enerģija to explain the situation.351

300.  On 19 December 2007 Latgales Enerģija answered the Regulator’s letter denying any breach.352

(5)  The Proceedings Brought by Rēzeknes Siltumtīkli against Latgales Enerģija (20 September 2007) and the Attachment of Latgales Enerģija’s Bank Account (21 September 2007)

301.  Differences of opinion between Rēzeknes Siltumtīkli and Latgales Enerģija regarding the time when payment of depreciation was owed by Latgales Enerģija had emerged in 2006 as recalled in paragraphs 193 ff. above. In his interview given on 13 September 2007 the Mayor had referred to that dispute in some detail, indicating that Rēzeknes Siltumtīkli had instructed counsel from Riga the week before in order to sue Latgales Enerģija.353

302.  On 20 September 2007 Rēzeknes Siltumtīkli brought an action against Latgales Enerģija before the Latgale Regional Court354 under the terms of the Long-Term Agreement355 seeking payment of the amounts of LVL 778,415.41 for the lease of the assets, LVL 72,774.20 for a contractual penalty and LVL 29,164.41 for an outstanding debt for gas delivered, in total LVL 880,354.02 and recovery against Latgales Enerģija.356

Rēzeknes Siltumtīkli further sought a declaration that the Long-Term Agreement was terminated as of the date of the judgment to be made and that Rēzeknes Siltumtīkli was entitled to recover the possession of the leased assets, as well as a declaration that Latgales Enerģija was bound to pay in full the invoices presented by Latvijas Gāze.

Finally, Rēzeknes Siltumtīkli sought the attachment of Latgales Enerģija’s assets and funds in cash held by banks and payments owed by any third parties.

303.  On 21 September 2007 the Latgale Regional Court granted Rēzeknes Siltumtīkli’s application and attached funds held in Latgales Enerģija’s bank account, including debts owed by third parties to Latgales Enerģija, for an amount up to LVL 880,354.02, with immediate effect.357

304.  On 5 October 2007 Latgales Enerģija applied to the Latgale Regional Court to have the attachment cancelled.358

305.  On 17 October 2007 the Latgale Regional Court revoked its decision granting the attachment dated 21 September 2007, upheld Latgales Enerģija’s jurisdictional objection and transferred the case to the Riga Regional Court on jurisdictional grounds.359

306.  On 26 October 2007 Rēzeknes Siltumtīkli brought an ancillary complaint against the Latgale Regional Court’s judgment of 17 October 2007 before the Supreme Court, asking the Supreme Court to set aside the judgment revoking the attachment of Latgales Enerģija.360

307.  This complaint was filed one day after the October 2007 Agreement361 was executed. The Claimant contends that this was a breach of the October 2007 Agreement by the Rēzekne City Council and Rēzeknes Siltumtīkli.362

308.  As a result of that complaint, Latgales Enerģija’s bank account remained blocked.363 The Supreme Court made its decision on 3 January 2008 upholding Rēzeknes Siltumtīkli’s appeal, so that the attachment remained in force.364

309.  The first decision on the merits was made by the Riga Regional Court on 9 July 2009.365

(6)  The Proceedings Brought by Rēzeknes Enerģija Against Latgales Enerģija (27 December 2007)

310.  On 27 December 2007 Rēzeknes Enerģija brought an action against Latgales Enerģija in the Riga Regional Court seeking payment of an amount of LVL 810,819 plus interest, and post-judgment interest, for deliveries of natural gas made to, and accepted by, Latgales Enerģija.366 Rēzeknes Enerģija further sought the attachment of Latgales Enerģija’s movable assets, an injunction restraining Latgales Enerģija from dealing in emission allowances and the registration of a prohibition in the greenhouse gas emission register with respect to Latgales Enerģija’s allowances for 2008–2012.367 Rēzeknes Enerģija rested its claim on the Gas Supply Agreement entered into with Latgales Enerģija.368

311.  Rēzeknes Enerģija supplemented and increased its claim in 2008 (see paragraph 368 below) and in 2009 (see paragraph 381 below).

(7)  Supplementing Certain Arrangements Made in 2005 and 2006 — New Arrangements

(A)  Further Loans by E energija to Latgales Enerģija

312.  On 21 January 2007 E energija amended the loan granted to Latgales Enerģija on 21 August 2006 by extending the date of reimbursement.369

313.  On 16 October 2007 E energija granted a further loan to Latgales Enerģija in an amount of EUR 150,000.370 Then on 1 December 2007 E energija agreed to extend the date of reimbursement of this loan.371

314.  On 16 November 2007 E energija granted a further loan to Latgales Enerģija in an amount of LVL 100,000.372

(B)  Restructuring of E Energija’S Loans to Latgales Enerģija (24 August 2007)

315.  At the end of September 2006 the amounts owed by Latgales Enerģija to the Claimant under various loans amounted to EUR 1,454,864 including interest.373 On 24 August 2007 the loan was restructured and was taken over by Sampo Banka.374 This arrangement lasted only a few months according to Mr. Jautakis’ evidence, since the loan was transferred back from Sampo Banka to the Claimant in February 2008.375 The Claimant’s allegations and the explanations contained in Mr. Jautakis’ first Witness Statement were not challenged by the Respondent; Mr. Jautakis was not cross-examined at the Hearing.376

(C)  Contracts between the Claimant and the European Bank for Reconstruction and Development (September/December 2007)

316.  A Subscription Agreement was entered into by E energija and the European Bank for Reconstuction and Development (“the Subscription Agreement”) on 26 September 2007.377

317.  The Claimant further relies on a Loan Agreement it concluded with the European Bank for Reconstruction and Development (“EBRD”) on 18 December 2007 (“the EBRD Loan Agreement”).378

318.  Both exhibits contain an unsigned version of such agreements.379 It is not in dispute, however, that the Claimant concluded these agreements with the EBRD.380

319.  According to Section 2.01 of the EBRD Loan Agreement, an amount of EUR 3.189 million was allocated for the Rēzekne Project.381

320.  The Claimant drew on the loan in 2008,382 but admits that it did not draw on the loan in connection with the Rēzekne Project.383

(D)  The Agreement between the Claimant and Rēzeknes Siltumtīkli (25 October 2007)

321.  An agreement was entered into by the Claimant and Rēzeknes Siltumtīkli on 25 October 2007 pursuant to Clause (f) of the October 2007 Agreement384.385

322.  The purpose of this agreement was to free Rēzeknes Siltumtīkli’s property in the Land Register from the encumbrances then recorded for the benefit of the Claimant in consideration of payment by Rēzeknes Siltumtīkli of the debt owed to the Claimant (Clauses 1 and 2 of the October 2007 Agreement).

323.  It is the Respondent’s case that Clause 3 of this agreement contains a general waiver of “any commercial claim directly and indirectly (including, through its subsidiary Latgales Enerģija) against Rēzeknes Siltumtīkli”.386

E.  Main Events in 2008

(1)  Towards the Revocation of Latgales Enerģija’s Licences by the Regulator (3 June 2008)

(A)  The Dispute as to the Applicable Rates

324.  Latgales Enerģija in fact continued to provide heating despite the Regulator’s decision taking over its zone and the appointment of Rēzeknes Enerģija as the person in charge of providing heating services (11/12 October 2007, see paragraphs 274 ff. above). After mid-December 2007 Latgales Enerģija had started to charge users in accordance with the revised tariff approved by the Regulator on 9 November 2007 as it took the view that the effects of the Regulator’s decision of 7 December 2007 were stayed due to Latgales Enerģija’s application for review (see paragraph 244 above).

In January 2008 the Rēzekne City Council wrote to users indicating (i) that the rate applicable was the tariff approved on 19 December 2005 (see paragraph 154 above) and (ii) that this was the sole rate which Latgales Enerģija was entitled to apply.387 The same information was provided in the press.388

325.  There was widespread confusion in the public as to the applicable rates. The local newspaper echoed users’ anger and frustration.389

326.  The Mayor himself received the inhabitants and answered question on the recalculation of rates according to the local newspaper.390 The Claimant alleged that the Municipality provided template letters for consumers to write to Latgales Enerģija refusing to pay Latgales Enerģija’s invoices.391 This allegation is based solely on Ms. Uškāne’s Witness Statement;392 however, the Claimant has not referred to or produced any specific templates or letters based on such templates. The Tribunal finds that the Claimant has failed to prove such allegation.

327.  On 25 January 2008 Latgales Enerģija issued a press release answering the criticism to which it had been subjected in the press and elsewhere and recapitulated the difficulties in having new rates approved.393

328.  On 31 March 2008 the Rēzekne City Council asked Latgales Enerģija to invoice the Rēzekne residents in accordance with the rates approved by the Regulator on 19 December 2005 (see paragraph 154 above) and to recalculate the invoices issued in the previous months.394 On 7 April 2008 Latgales Enerģija objected.395

(B)  The Wider Dispute between Latgales Enerģija, The RēZekne City Council and the Companies Controlled by the Council

329.  On 16 April 2008 Latgales Enerģija reminded the Mayor that Rēzeknes Siltumtīkli still had not granted the permit for the reconstruction of the Northern boiler house at Atbrīvošanas alejā 155a in accordance with the Heating Supply Development Strategy396 approved by the Rēzekne City Council on 21 September 2007.397 No answer to that letter is in evidence.

330.  On 25 April 2008 Latgales Enerģija wrote again to the Mayor, copying in the Regulator, reiterating its request that the permit for the reconstruction be issued.398 No answer to that letter is in evidence.

331.  On 6 May 2008 Latgales Enerģija asked Latvijas Gāze to issue technical specifications for gas supply in the Northern boiler.399 No answer to that letter is in evidence.

332.  These reminders followed up earlier reminders sent to Rēzekne City Council400 and Rēzeknes Siltumtīkli401 back in 2007. Whereas in 2007 the investment relating to the Northern boiler was hampered by the absence of a “heat supply development plan”, in 2008 the “Heating Supply Development Strategy” 402 had been in place for more than six months; yet the permit for the works had not been delivered.

333.  On 15 May 2008 Rēzeknes Siltumtīkli wrote to the Regulator pointing out that Latgales Enerģija had failed to invest a minimum of EUR 1.5 million in the first three years in which the Long-Term Agreement403 had been in force in breach of Clause 7.1.1 of such agreement and complaining about the condition of the heating infrastructure.404

Latgales Enerģija was not copied in on this letter.

334.  On 19 May 2008 the Regulator wrote to the Rēzekne City Council that Latgales Enerģija had failed to comply with the conditions of the licences405 and that the licences could therefore be revoked as a consequence. The letter is not in evidence, but it is referred to in the Council’s letter to Latgales Enerģija dated 20 May 2008.406

335.  On 20 May 2008 the Rēzekne City Council wrote to Latgales Enerģija pointing out “several circumstances” which in its view called into question Latgales Enerģija’s ability to “solve issues concerning the heat supply”.407 The letter referred on the one hand to the Regulator’s letter of 19 May 2008 and the opinion expressed therein by the Regulator (see paragraphs 334 ff. above) and, on the other, to difficulties reported to the Council by Rēzeknes Siltumtīkli408 and Rēzeknes Enerģija.409

The letter stated that the Council did not wish to interfere with the process of heat production and distribution, and ended with an invitation to Latgales Enerģija to establish a constructive partnership with Rēzeknes Siltumtīkli and Rēzeknes Enerģija.

336.  On 2 June 2008 Latgales Enerģija rejected the criticism expressed in the Council’s letter.410

(2)  The Revocation of Latgales Enerģija’s Licences by the Regulator (3 June 2008)

337.  On 3 June 2008 the Regulator revoked Latgales Enerģija’s three licences to produce, transmit and sell thermal energy411 in its decision No. 10.412 The decision stated that it would come into force as of its adoption, that it should be enforced as a matter of urgency and that its enforceability would not be prevented in case an application for judicial review had been filed against it. The reasons for this decision are discussed in paragraph 996 below.

338.  On 5 June 2008 Latgales Enerģija challenged the Regulator’s 3 June 2008 decision.413 The District Court of Administrative Cases dismissed the application on 16 June 2009.414 A further appeal by Latgales Enerģija was dismissed on 6 May 2010.415

339.  On 5 June 2008 Rēzeknes Siltumtīkli sent Latgales Enerģija a notice requesting Latgales Enerģija to rectify its breaches of contract within thirty days, failing which the Long-Term Agreement would be “deemed terminated”.416 The notice mentioned a breach of Clause 7.3 of the Long-Term Agreement417 and added that an accurate account of the violations of laws and regulations was provided in the Regulator’s decision revoking the licences. Rēzeknes Siltumtīkli’s notice of termination followed on 10 September 2008.418

(3)  The Rēzekne City Council’s Temporary Appointment of Rēzeknes Siltumtīkli and Rēzeknes Enerģija as the Producer and the Distributor/Seller of Thermal Energy (13 June 2008)

340.  On 13 June 2008 the Rēzekne City Council appointed its deputy executive director, Mr. Ivars Locis, as the person in charge of organising the provision of heating in the city of Rēzekne.419

341.  On the same day Mr. Locis, acting as the person in charge under the Council’s decision No. 270, appointed (i) Rēzeknes Siltumtīkli as the temporary new producer of thermal energy and (ii) Rēzeknes Enerģija as the temporary new provider, distributor and seller of thermal energy; the decision is stated to have been made as a matter of urgency.420

342.  The decision further stated that as from 3 June 2008 Latgales Enerģija was no longer entitled to provide any services of thermal energy, including hot water supply and heating.

343.  The Claimant alleges that decision No. 1 by Mr. Locis was communicated to Latgales Enerģija in a letter dated 27 June 2008.421 The Claimant alleges that it appealed both 13 June 2008 decisions on 4 July 2008.422 Such appeal is not in evidence; neither are any decisions as may have been made further to such appeal.

(4)  Rēzekne City Council’s Request to have the Leased Assets Transferred to Rēzeknes Siltumtīkli and Rēzeknes Enerģija (27 June 2008)

344.  On 27 June 2008 Mr. Locis, acting as the person in charge, wrote to Latgales Enerģija.423 The letter first recapitulated Mr. Locis’ decision No. 1 of 13 June 2008 (see paragraph 341 above), adding that a new provider of heating services would have to be appointed by 1 November 2008.

345.  Having reiterated that Latgales Enerģija had been no longer entitled to provide heating services as from 3 June 2008, Mr. Locis requested Latgales Enerģija to appoint a representative by 7 July 2008424 “to transfer the assets (premises, boilers and others)” to Rēzeknes Siltumtīkli and Rēzeknes Enerģija “to ensure the function of thermal energy provision”.

346.  On 7 July 2008 Latgales Enerģija answered Mr. Locis’ letter of 27 June 2008 explaining that it did not see any grounds to transfer the property leased from Rēzeknes Siltumtīkli; having challenged in judicial proceedings both the Regulator’s decision of 3 June 2008425 and Mr. Locis’ decision No. 1 of 13 June 2008,426 Latgales Enerģija explained that it saw no reason to comply with Mr. Locis’ decision of 27 June 2008; any attempt to enforce such decision in the circumstances would be unlawful.427

(5)  Rēzekne City Council’s Order that Latgales Enerģija Provide Access to the Boiler Houses and Surrender the Leased Assets (14 July 2008)

347.  On 7 July 2008 Mr. Locis, a Board Member of Rēzeknes Siltumtīkli and a bailiff went to Latgales Enerģija’s offices in Rēzekne and demanded that Latgales Enerģija hand over the leased assets. Latgales Enerģija admits that it refused to do so,428 but that no enforcement took place there and then.429

348.  Latgales Enerģija alleges that it received on 11 July 2008 the court decision ruling that the court did not have jurisdiction to review either the Rēzekne City Council’s decision of 13 June 2008430 or the decision made by the person in charge of providing thermal energy in Rēzekne on the same day431.432 The court decision is not in evidence.

349.  On 14 July 2008 the Rēzekne City Council ordered Latgales Enerģija immediately to provide access to all assets at all three boiler houses and transfer all other means required for the provision of heating to Rēzeknes Siltumtīkli and Rēzeknes Enerģija.433

350.  On or about 24 July 2008 Latgales Enerģija applied to the Administrative District Court to have this decision set aside;434 the court decided on 25 May 2010.435

(6)  The Claimant’s Notice of Dispute (1 September 2008)

351.  On 1 September 2008 the Claimant sent the Respondent a Notice of Dispute under Article 7(1) of the BIT436.437

352.  In the Notice of Dispute, the Claimant contended that the requirement of a dispute concerning investment between one of the Parties to the BIT and the investor of the other Party was met. The Notice added that there were no temporal issues regarding the applicability of the BIT in the present case.

353.  Claimant relied on five principles under the BIT: (i) Article 4(1) on expropriation, (ii) Article 3(1) on fair and equitable treatment, (iii) Article 3(1) on full protection and security, (iv) Article 3(2) on arbitrary or discriminatory measures and (v) the most-favoured nation clause in Article 3(3) in connection inter alia with Articles 2(2) and 3(1) of the Latvia-Romania BIT.438

354.  The Notice of Dispute contains a statement of facts subdivided in four parts, setting out (i) the situation of heating services in Rēzekne before the Claimant’s investment, (ii) the individualised invitation made by the Rēzekne Municipality to the Claimant with the long-term legal guarantees surrounding the investment, (iii) the result of the Claimant’s investment on the heating services provided and (iv) the volte-face by the Rēzekne Municipality and its instrumentalities when they saw the emergence of an efficient and profitable business, and the concerted effort of the Rēzekne Municipality, its instrumentalities, the police and the bailiffs to drive out the investor and take over its business.

355.  As to quantum, the Claimant argued that the breach of international law caused a damage in an amount of LVL 7,141,757.08, as well as lost profits in an amount of LVL 5,018,252, amounting to LVL 12,160,009.08 altogether.439

(7)  Termination of the Long-term Agreement by Rēzeknes Siltumtīkli (10 September 2008)

356.  On 10 September 2008 Rēzeknes Siltumtīkli sent Latgales Enerģija a notice of termination under Clause 12.5.2 of the Long-Term Agreement440.441

(8)  The Taking over of the Leased Assets by Rēzeknes Siltumtīkli and the Further Course of the Dispute

(A)  Rēzekne City Council’s Decision Authorising the Use of Force to Enforce the 14 July 2008 Decision (15 September 2008)

357.  On 15 September 2008 the Rēzekne City Council authorised the use of force to enforce the 14 July 2008 Council’s decision,442 with which Latgales Enerģija refused to comply of its free will (see paragraph 1041 below).443

The decision was stated to be enforceable forthwith, and any appeal would not operate so as to stay its enforceability.

(B)  The Forcible Recovery of the Leased Assets (16 September 2008)

358.  On 16 September 2008 Latgales Enerģija’s administrative building (unlike the customer service centre) was taken over, as well as the boiler houses. All assets of Latgales Enerģija were taken over including those leased to Latgales Enerģija under the Long-Term Agreement. Latgales Enerģija challenged this decision without success (see paragraph 396 below).

359.  Personal assets were handed back on 6 October 2008 (see paragraph 362 below).

360.  Latgales Enerģija’s personnel were able to continue to work from the customer service centre for a few days.444

361.  From 16 September 2008 onwards, Latgales Enerģija’s assets as well as the leased assets came into possession of Rēzeknes Siltumtīkli and Rēzeknes Enerģija which started to operate the heating system. They have remained the operators of the heating system ever since.445

(C)  The Deed of 6 October 2008

362.  On 6 October 2008 two Rēzeknes Siltumtīkli representatives and certain Latgales Enerģija representatives signed a document entitled “Deed” reading as follows:446

Drawn up in the presence of AS Rēzeknes Siltumtīkli reg. No 40003215480 and SIA Latgales Enerģija reg. No 40003717325 representatives confirming that SIA Latgales Enerģija has received all the property located in the office at Rīgas iela 1, in Rēzekne and all the property belonging to SIA Latgales Enerģija, including all the documents, computer hardware, fixed assets and low value items.

SIA Latgales Enerģija verifies that all the property is received and SIA Latgales Enerģija has claims neither of material character, nor of legal character against AS Rēzeknes Siltumtīkli regarding the transfer of property located [at] the office at Rīgas iela 1, in Rēzekne.

This Deed is drawn up in 2 counterparts.

(D)  The First Meeting between the Parties (5 December 2008)

363.  On 5 December 2008 a first meeting took place between the Parties in order to seek an amicable solution to the dispute. Further meetings would take place in 2009 and 2010, and a final meeting took place on 1 April 2011.447

(9)  The Proceedings Brought by Rēzeknes Siltumtīkli Against Latgales Enerģija

364.  On 4 June 2008 Rēzeknes Siltumtīkli increased the amount of its original claims (see paragraph 302 above) against Latgales Enerģija. Such amendments are not in evidence, but are referred to in the decision by the Riga Regional Court448 and the Supreme Court of Latvia.449

(10)  The Proceedings Brought by Rēzeknes Enerģija Against Latgales Enerģija

365.  On 3 January 2008 the Riga Regional Court granted an attachment on Latgales Enerģija’s moveable property for an amount up to LVL 815,690.51 and enjoined Latgales Enerģija to refrain from dealing with any emission quotas as Latgales Enerģija may have been allocated.450 Such interim relief was granted further to Rēzeknes Enerģija’s application of 27 December 2007, which had been made in connection with the action brought to claim payment of unpaid invoices relating to the delivery of natural gas.451

366.  On 11 February 2008 Latgales Enerģija sought a declaration by way of counterclaim that the Rēzeknes Enerģija Gas Supply Agreement452 was null and void. The counterclaim is not in evidence, but it was referred to in the decision of 16 April 2008 (see paragraph 369 below).

367.  On 27 February 2008 Latgales Enerģija applied to the Riga Regional Court to have the 3 January 2008 decision set aside;453 the application was supplemented on 3 April 2008 on the point of emission quotas.454

368.  On 10 April 2008 Rēzeknes Enerģija supplemented its statement of claim; the amount of the debt sought to be enforced was increased to LVL 2,528,766.10 excluding interest based on further deliveries of natural gas made and invoiced by Rēzeknes Enerģija after 27 December 2007.455 A further supplement was filed in 2009 (see paragraph 381 below).

369.  On 16 April 2008 the Riga Regional Court granted Latgales Enerģija’s application in part, revoking the 3 January 2008 injunction relating to the emission quotas; the application to have the attachment revoked altogether was dismissed.456 Latgales Enerģija’s counterclaim for a declaration that the Rēzeknes Enerģija Gas Supply Agreement was null and void was held in abeyance pending payment of the full court fee.

370.  On 1 July 2008 the Riga Regional Court extended the attachment to Latgales Enerģija’s bank accounts, including the accounts with AS Hansabanka and AS Parexbanka, for an amount up to LVL 2,534,237.10.457

(11)  The Proceedings Brought by Rēzeknes Siltumtīkli Against Latgales Enerģija and the Claimant (13 August 2008)

371.  On 13 August 2008 Rēzeknes Siltumtīkli brought an action against Latgales Enerģija and the Claimant before the Riga Regional Court. The document initiating the proceedings is not in evidence; Rēzeknes Siltumtīkli’s claims are summarised in the judgment made by the Supreme Court of Latvia on 7 March 2013.458

Rēzeknes Siltumtīkli sought a declaration that its duties and its debts arising under Credit Agreement Nos. RA 02155 and 02219 (as amended by several covenants) signed with Latvijas Unibanka (and referred to in the Guarantee Agreement459 and Long-Term Agreement460) had been discharged461 and that the pledges registered in the Land Registry pursuant to such agreements had therefore also been discharged as a consequence, and any entries in the Land Registry in relation to such pledges were to be deleted; and, finally, a declaration that the 2008 Assignment Agreement462 was invalid.463

372.  The Riga Regional Court dismissed the action on 23 September 2010. The judgment is not in evidence, but its reasons and findings are summarised in the judgment by the Latvian Supreme Court of 7 March 2013.464

(12)  Supplementing Certain Arrangements Made in the 2005–2007 Period — New Arrangements

(A)  Contracts between the Claimant and the European Bank for Reconstruction and Development

373.  The Claimant alleges that the EBRD loan (see paragraphs 317 ff. above) “would have ensured that Latgales Enerģija could make the further necessary investments in the heating system”.465

374.  Mr. Strioga explains in his first Witness Statement that the EBRD loan was drawn in 2008,466 which is confirmed by Mr. Jautakis’ first Witness Statement.467

375.  However, the Claimant further states that the part of the loan marked for Rēzekne was never drawn, and the planned investments were never made; it is also admitted that the Claimant did not pay interest to the EBRD on this part of the loan.468 The Claimant alleges that nevertheless a considerable portion of the expense of organising and negotiating the loan from the EBRD was incurred in relation to the part allocated to Rēzekne.469

376.  On 5 March 2008 the Amendment Agreement in Connection with Various Agreements Relating to Debt and Equity Investment in UAB E Enerģija (the “Amendment Agreement) was entered into by ETC, UAB E Energy Invest (“EEI”, a company incorporated in Lithuania), Mr. Virginijus Strioga (the “Sponsor”), UAB E-Enerģija (the “Company”, and, together with ETC and EEI “the Obligors”) and the EBRD.470 This agreement amended inter alia the Subscription Agreement471 and the EBRD Loan Agreement.472 EBRD’s shareholding in the Claimant was increased to 23,5%.473

Exhibit C-173 contains an unsigned version of the Amendment Agreement. The Respondent raised no objections in this respect.

(B)  Rēzeknes Siltumtīkli’s Long-Term Debts Taken over by the Claimant (25 June 2008)

377.  In February 2008 the Claimant took over from Sampo Banka the loan granted by the bank to Latgales Enerģija on 24 August 2007 (see paragraph 315 above) in an amount of LVL 1,135,028.474

378.  On 25 June 2008 Latgales Enerģija assigned to the Claimant the debt of Rēzeknes Siltumtīkli, which it had purchased from LHV in 2006 (see paragraph 205 above), under the terms of an assignment agreement (“the 2008 Assignment Agreement”).475 The amount which Latgales Enerģija owed the Claimant under the outstanding loan was set off against the purchase price which the Claimant owed Latgales Enerģija under the 2008 Assignment Agreement under the terms of an agreement of even date (the “Supplement to the Assignment Agreement dated 25 June 2008”).476

379.  On 13 August 2008 Rēzeknes Siltumtīkli challenged the validity of the 2008 Assignment Agreement before the Latvian courts (see paragraph 371 above). On 7 March 2013 the Supreme Court held, on appeal, that the 2008 Assignment Agreement was valid, but it also decided that Latgales Enerģija no longer owned a debt against Rēzeknes Siltumtīkli on the basis that Latgales Enerģija owed itself a debt to Rēzeknes Siltumtīkli under the Long-Term Agreement which gave rise to a merger of rights and liabilities.477 Mr. Jautakis in his first Witness Statement refers to a Latvian decision of 2009 holding that the assignment was invalid, but no such decision is in evidence.478

380.  Further arrangements were made in 2009 (see paragraph 411 below).

F.  Main Events in 2009 and Beyond

(1)  The Civil Proceedings Brought by Rēzeknes Enerģija against Latgales Enerģija

381.  On 14 January 2009 Rēzeknes Enerģija filed a second supplement to its claims against Latgales Enerģija.479 The supplemented claim takes into account supplies of natural gas made by the plaintiff and the payments made by the defendant, the plaintiff claiming payment of an amount of LVL 2,434,423.01 excluding interest.

382.  On 2 March 2010 the Riga Regional Court made a judgment for Rēzeknes Enerģija and dismissed Latgales Enerģija’s counterclaim.480 Latgales Enerģija appealed this decision, but the appeal was dismissed;481 neither the appeal nor the decision on the appeal is in evidence.

(2)  The Civil Proceedings Brought by Rēzeknes Siltumtīkli against Latgales Enerģija

383.  Rēzeknes Siltumtīkli had brought an action against Latgales Enerģija on 20 September 2007 and the Latgale Regional Court had granted an attachment on Latgales Enerģija’s funds on the following day (see paragraphs 301 ff. above).

Rēzeknes Siltumtīkli had not applied to the court in order that the attachment should be lifted despite the undertakings contained in the October 2007 Agreement and Latgales Enerģija’s complaints.482

384.  Rēzeknes Siltumtīkli amended its claims on the merits twice, first on 4 June 2008483 and then on 17 June 2009.484

385.  On 30 June 2009 Latgales Enerģija filed its answer to Rēzeknes Siltumtīkli’s statement of claim.485

386.  On 9 July 2009 the Riga Regional Court granted Rēzeknes Siltumtīkli’s claims in substantial part as follows:486 (i) the court “revoked” the Long-Term Agreement;487 (ii) the court awarded the claim for payment of the lease with respect to depreciation488 as well as (iii) the claim for payment of gas delivered and used. However, the court dismissed (iv) the claim for payment of a contractual penalty and (v) the request for a declaration that Latgales Enerģija was bound to pay the invoices issued by Latvijas Gāze.489

387.  On 29 July 2009 Latgales Enerģija appealed against this judgment before the Supreme Court of Latvia.490

388.  On 20 April 2012 the Court Panel for Civil Matters of the Supreme Court of Latvia dismissed Latgales Enerģija’s appeal.491

389.  Latgales Enerģija filed an application to have this judgment set aside in cassation proceedings. On 7 April 2014 the Supreme Court allowed the application, set the judgment aside and remitted the case to another court of appeal in order for a fresh decision to be made.492 On 30 November 2015 the Chamber of Civil Cases of the Supreme Court of Latvia found that the Long-Term Agreement had been unilaterally terminated on 16 September 2008 and awarded Rēzeknes Siltumtīkli its claim for payment of the rent and for unpaid gas (judgment filed by the Respondent in this arbitration on 19 December 2016).493

(3)  Dismissal of Latgales Enerģija’s Challenge against the Regulator’s Decision to Revoke the Licences (3 June 2008) and the Judgment of 16 June 2009 (6 May 2010)

390.  On 16 June 2009 the Administrative District Court dismissed Latgales Enerģija’s application494 to have the Regulator’s decision No. 10 dated 3 June 2008495 set aside by which the Regulator had revoked the three licences granted to Latgales Enerģija.496 Latgales Enerģija appealed against that decision.497

391.  On 6 May 2010 the Administrative Regional Court498 dismissed Latgales Enerģija’s appeal against the 16 June 2009 decision.499

(4)  Dismissal of Latgales Enerģija’s Challenge against the Regulator’s Decision No. 12 dated 11 June 2007 (15 April 2009)

392.  On 15 April 2009 the Administrative District Court dismissed Latgales Enerģija’s application500 to have the Regulator’s Decision No. 12 dated 11 June 2007501 set aside (by which the Regulator had rejected the new tariffs proposed by Latgales Enerģija on 29 May 2007502).503 The reasons given by the court are recalled and discussed in paragraph 906 below.

393.  On 14 May 2009 Latgales Enerģija appealed against the 15 April 2009 decision by the Administrative District Court and applied to the court in order to be granted a fresh time limit in which to bring its appeal. The appeal and the application are not in evidence.504

394.  On 27 May 2009 Latgales Enerģija’s application was denied and the appeal was dismissed. This decision is not in evidence.505

395.  Latgales Enerģija appealed against the decision of 27 May 2009, and the appeal was dismissed on 24 September 2009.506

(5)  Dismissal of Latgales Enerģija’s Complaint against the Enforcement of the Council’s Decision No. 316 of 14 July 2008 by Forcible Means (2 July 2009)

396.  On 2 July 2009 the Administrative District Court dismissed Latgales Enerģija’s complaint against the Rēzekne City Council and the State Police that the enforcement of Rēzekne City Council’s decision No. 316 dated 14 July 2008507 by forcible means was unlawful.508 Latgales Enerģija’s complaint is not in evidence.

(6)  Dismissal of Latgales Enerģija’s Challenge against the Council’s Decision No. 316 of 14 July 2008 (25 May 2010)

397.  On 25 May 2010 the Administrative District Court dismissed Latgales Enerģija’s challenge against the Rēzekne City Council’s decision No. 316 dated 14 July 2008509 (by which the Council had decided that Latgales Enerģija was immediately to provide access to all assets at all three boiler houses and transfer all other means required for the provision of heating to Rēzeknes Siltumtīkli and Rēzeknes Enerģija).510

398.  The Administrative District Court considered that the Regulator’s decision revoking the licences had to be enforced as a matter of urgency as the Rēzekne City Council had a duty to decide how to organise the heat supply services for the residents of the city. The Council’s assessment was reasonable in that the restriction of Latgales Enerģija’s private rights had to give way to the public interest represented by the interest of the 25,000 residents of Rēzekne to be provided with heat supply services.

399.  The Court finally dismissed Latgales Enerģija’s complaint that the Council’s decision amounted to a forced taking of Latgales Enerģija’s property which was not based on law and did not provide for a fair compensation; the Court stated that it was true that the Council had not considered the issue of the value of Latgales Enerģija’s investment in its decision, and Latgales Enerģija was therefore entitled to proceed in accordance with the terms of the Long-Term Agreement and claim the market price of the investments made.

(7)  Dismissal of Latgales Enerģija’s Challenge against the Regulator’s Decision No. 35 Dated 7 December 2007 and the Judgment Dated 30 October 2009 (23 September 2010)

400.  On 12 December 2007 Latgales Enerģija had challenged the Regulator’s decision No. 35 of 7 December 2007511 by which the Regulator had annulled its previous decision of 9 November 2007 approving the draft tariffs proposed by Latgales Enerģija; the challenge was dismissed by a decision of the Administrative Regional Court of 30 October 2009512.513

401.  Latgales Enerģija appealed against that judgment; the appeal was dismissed by the Administrative Regional Court on 23 September 2010.514

(8)  Dismissal of Latgales Enerģija’s Challenge against the Regulator’s Decision No. 26 Dated 11 October 2007 and the Judgment Dated 31 March 2010 (24 November 2011)

402.  On 31 March 2010 the Administrative District Court dismissed Latgales Enerģija’s application to have the Regulator’s decision No. 26 of 11 October 2007515 set aside.516 Latgales Enerģija appealed against this judgment. The appeal was dismissed by the Administrative Regional Court on 24 November 2011.517

403.  The Administrative Regional Court stated that it was not in dispute that Latgales Enerģija had failed to provide heat supply to the entire Northern housing estate of Rēzekne including six schools.518 The court then considered Latgales Enerģija’s defence that the failure to provide heat supply had been caused by coordinated action on the part of the Rēzekne City Council and Rēzeknes Siltumtīkli, which it dismissed as unproven. The court dealt with three distinct points.

First, the court found that it was Latgales Enerģija’s failure to pay in full the amounts for which Latvijas Gāze issued invoices to Rēzeknes Siltumtīkli in June, July, August and September 2007 which gave rise to the Council’s debt to Latvijas Gāze and the suspension by Latvijas Gāze of the natural gas supply. As a consequence, the Council announced the energy crisis which was the basis for the Regulator’s decision.519

Secondly, the court held that Latgales Enerģija’s argument that the Regulator’s decision was affected by a conflict of interest on the basis that deputies of the Council had taken part in its making was without foundation.520

Thirdly, the court examined Latgales Enerģija’s defence that the attachment of funds obtained by Rēzeknes Siltumtīkli on Latgales Enerģija’s bank account (see paragraphs 253 to 255 above) was the cause of Latgales Enerģija’s inability to pay. The court found that such might have been the case; however, even in such case Latgales Enerģija was not released from its duty to provide its services on a continuous basis throughout the period of validity of the licences and in accordance with the terms thereof.521

(9)  The Civil Proceedings Brought by Rēzeknes Siltumtīkli against Latgales Enerģija and the Claimant

404.  Rēzeknes Siltumtīkli appealed against the judgment made by the Riga Regional Court on 23 September 2010 dismissing the action brought against Latgales Enerģija and the Claimant on 13 August 2008 (see paragraph 371 above).

405.  On 7 March 2013 the Latvian Supreme Court allowed the appeal.522

(10)  Supplementing Certain Arrangements Made in the 2005–2008 Period — New Arrangements

(A)  Payment by the Claimant under the Parent Company Guarantee Delifered to Sampo Banka/Danske Bank

406.  On 30 June 2009 Danske Bank (formerly Sampo Banka523) requested the Claimant to pay an amount of LVL 1,218,056.16 under the Sampo Banka Guarantee524.525 Danske Bank stated in its request to the Claimant that Latgales Enerģija had failed to pay its debt under the Sampo Banka Loan Agreement.526 According to Mr. Jautakis’ first Witness Statement, the Claimant paid the principal amount (LVL 1,118,056.16) as well as interest (LVL 184,091.68), and thus a total amount of LVL 1,302,147.84 to Danske Bank. Reliance is placed on Exhibit C-196.527

407.  On 5 August 2009 Danske Bank and the Claimant agreed on a repayment schedule contemplating ten instalments;528 the repayment schedule was amended twice, first under the terms of an agreement dated 17 May 2010529 and then under the terms of an agreement dated 26 April 2011.530

408.  On 9 November 2012 Danske Bank confirmed to the Claimant’s auditors that the Claimant had no outstanding obligations to the bank.531

409.  The payment by the Claimant of a total amount of LVL 1,302,147.84 to Danske Bank was alleged by the Claimant in its first memorial of 6 December 2013;532 such evidence was not disputed by the Respondent in its first Counter-Memorial. Mr. Jautakis’ evidence was not challenged by the Respondent at the Hearing (see paragraph 315 above). However, the Respondent challenged that there was evidence that the Claimant paid the amount of the guarantee to Danske Bank for the first time in a post-Hearing submission on March 2015.533

410.  The Tribunal dismisses that objection based on the documents in evidence in relation to the guarantee provided by the Claimant to Danske Bank, as amended, and Danske Bank’s request for payment.534 If the Respondent intended to challenge the statement made by Danske Bank to the Claimant’s auditors,535 it should have raised this point in its pleadings and called the auditors and cross-examined them at the Hearing.

(B)  Arrangements Following the 2008 Assignment Agreement

411.  The circumstances in which the 2008 Assignment Agreement was made are summarised in paragraphs 377 ff. above.

412.  Mr. Jautakis’ first Witness Statement536 explains that the Latvian courts held in 2009 that the 2008 Assignment Agreement between the Claimant and Latgales Enerģija was invalid; however, no such decision is in evidence, as noted in paragraph 379 above. In the same passage of his first Witness Statement, Mr. Jautakis refers to Exhibit C-190, which states that on 30 June 2009 the Claimant and Latgales Enerģija “cancelled the agreement and cession was left in SIA Latgales Enerģija”.537 That allegation is not supported by documentary evidence.

413.  Mr. Jautakis further explains in his first Witness Statement that the Claimant then assigned its right to claim from Latgales Enerģija to Hansel Realty Management Spain S.L., a Spanish company.538 This assignment refers to a debt of Latgales Enerģija in an amount of EUR 1,386,967.69 (without interest and penalties) arising under a loan agreement dated 30 June 2009 which is not in evidence. Mr. Jautakis explains that no monies have been recovered to date from Latgales Enerģija in spite of a judgment by the Vidzeme Urban District Court of the city of Riga.539

(C)  The EBRD Loan (29 October 2009)

414.  On 29 October 2009 the EBRD Loan Agreement540 was renegotiated.541 Mr. Jautakis explains that this revision was made upon the EBRD’s request, and the interest rate charged on tranche 2 was increased from 1.95% to 5% per annum.542

G.  The Lithuanian Decisions Relied on by the Respondent (From 2005 to 2011)

415.  The Respondent contends that the Claimant should have taken certain precautions before entering into the Long-Term Agreement in order to avoid contentious issues, such as the question of who was responsible to devise a “heat supply development plan”.

Reliance is placed by the Respondent on Exhibit R-19 which includes news published in Lithuania as well as twelve decisions made by Lithuanian judicial authorities, in support of the allegation that “it is actually Claimant’s (its ultimate beneficiary—Mr. Virginijus Strioga’s) common practice to enter into deals with high potential that serious contentious issues will later arise (mainly, due to lack of precisely defined rules of cooperation) and subject to tedious litigation proceedings (…) rather than properly arranging for future cooperation in advance by all involved parties”.543

416.  The Tribunal will examine that aspect in due course in light of Exhibit R-19 and the Parties’ pleadings (see paragraphs 547 ff. below).544

H.  The Negotiations between the Parties from 1 September 2008 Onwards

417.  The present account of the negotiations between the Parties is based inter alia on the correspondence filed by the Respondent with the ICSID Secretary-General attached to its letter dated 6 September 2012 by way of two attachments (filed electronically as “Enclosure 1” and “Enclosure 2”). Such correspondence was not re-filed before the Tribunal in accordance with the requirements of Procedural Order No. 1 and it will therefore be identified simply by reference to the original electronic file in which it was filed designated by the expressions “Enclosure 1” and “Enclosure 2”.

418.  The Claimant’s Notice of Dispute dated 1 September 2008 was received by the Respondent on 25 September 2008.545 On 24 November 2008 the State Chancellery of Latvia invited Mr. Strioga to a meeting with Mr. Mēkons, the representative of the State Chancellery in charge of the matter.546 The meeting took place on 5 December 2008; thereafter, Mr. Mēkons put a number of questions to the Claimant’s representatives,547 which the Claimant answered on 22 December 2008.548

419.  The Parties then agreed between the end of 2008 and the beginning of January 2009 to have a conference call for further discussions which took place on 9 January 2009, as confirmed by Mr. Mēkons’ email of the same date.549

420.  On 11 March 2009 Latvia’s Prime Minister Mr. Ivars Goldmanis informed the Claimant that the suggested action plan prepared by the State Chancellery would be transferred to the new Prime Minister, once appointed, which was not to be construed as an acknowledgement that any applicable provisions of law had been breached by the Republic of Latvia.550

421.  On 27 April 2009 Latvia’s Prime Minister Valdis Dombrovskis informed the Claimant that the Government had asked a third neutral party having knowledge of the circumstances in dispute to give his views about particular aspects of the Notice of Dispute, which was not to be construed as an acknowledgment of any liability on the part of the Respondent.551

422.  The Parties agreed to meet again on 27 August 2009, but they failed to reach agreement.552

423.  On 23 September 2009 Mr. Mēkons sent the Government’s proposal to counsel for the Claimant and Mr. Strioga,553 which the Claimant rejected on 29 September 2009, calling it a “zero compensation proposal” and pointing out that it was entitled “to move the dispute to international arbitration”.554

424.  A meeting was then scheduled for 1 October 2009555 and a further meeting for 19 October 2009.556

425.  On 27 October 2009 the Respondent made a further proposal for a settlement involving no monetary compensation.557 That communication is relevant to the interpretation of the Claimant’s Board Minutes dated 1 December 2009 and will therefore be quoted verbatim:558

Dear Aleksas [Mr. Jautakis],

As I expressed to you this morning, and, in line with last week’s discussion, I wish to outline in writing the view of the Rēzekne municipality concerning the settlement model.

The Rēzekne municipality, after carefully [sic] analysis of the financial position of SIA “Latgales Enerģija”, namely, the claims of the creditors and different charges and interest over the assets of the company, considers that a fair solution would be a solution not involving additional payment from any of the parties.

In addition to waiver of claims against the company, all assets of SIA “Latgales Enerģija” attached for the benefit of the Rēzekne municipality would be lifted by virtue of an application of the Rēzekne municipality to the relevant court, thus releasing the frozen funds of the company. As a reciprocal commitment from SIA “Latgales Enerģija” and UAB “E energija”, we expect all claims against the State and the Rēzekne municipality to be waived accordingly.

If, unfortunately, you deem such a solution unacceptable, the State Chancellery will immediate put forward its alternative proposal for the settlement model, namely, the mediation pursuant to the Latvian-Lithuanian BIT. As a dispute pursuant to a BIT emanates from a certain set of factual circumstances (no BIT contains abstract obligations of the State apart from actual State behaviour within its territory), we consider it proper to bring to the attention of the mediator or the mediation panel all claims surrounding the circumstances (that is, claims of E energija and claims of the Rēzekne municipality). With due regard to international practice, the State Chancellery is of the view that mediation is an expedite, confidential and cost-efficient solution.

426.  The Claimant rejected the Respondent’s proposal on 6 November 2009. That communication is also relevant to the interpretation of the Claimant’s Board Minutes dated 1 December 2009 and it reads as follows:

Dear Mr. Ivars Mēkons,

Referring to your proposal sent by e-mail correspondence dated 27th October 2009, we are informing that such resolution is not acceptable to us, because, as we understand it, the resolution proposal does not include monetary compensation to us.

As indicated in our claim and through all the subsequent communication, we are of a position that our investment in Latvia was expropriated without proper compensation for the incurred losses of the investor. Consequently, fair resolution of the dispute cannot in our view be achieved if no compensation is offered.

As far as mediation is concerned, we could have seen its benefit at the early stage of our attempts to resolve the dispute amicably. However, taking into consideration that our intensive mutual attempts to reach a settlement already last 14 months and have not resulted in any approximation of the positions of the parties, we do not see how at this stage the mediation procedure can lead to the settlement of the dispute.

Based on that, regretfully we have to conclude that we are left with no other alternative but to bring this matter to arbitration.

427.  On 25 November 2009 the Respondent took note of the rejection of its proposal by the Claimant and suggested mediation again in the following terms:559

(…)

Therefore, as I already explained to you, as an alternative to a “zero-zero payments” solution, as a feasible alternative I deem the mediation process, whereby the parties, pursuant to the BIT, would have an impartial professional evaluation on the merits of their claims. Mediation, of course, generally is not binding and the parties are free to accept or reject the proposals from the mediation panel. However, and the practice increasingly confirms this, especially in the BITs disputes, that the disputing parties can beforehand freely enter into a contractual commitment to abide by the resolution of the mediation panel. As the mediation panel should be chosen from the pool of arbitrators and energy experts, the mediation package which I propose is actually akin to the arbitration process with much more efficient (the merits would be considered from both legal and professional aspects), expedite and cheaper solution.

(…)

In my last email I did not have the opportunity to explain in details the mediation package. Therefore, I would indeed appreciate if you consider this and engage in further talks regarding this proposal.

428.  On 27 November 2009 the Respondent answered two questions from the Claimant in relation to the proposed mediation, indicating (i) that the Republic of Latvia would enter into “a legally binding agreement on the process of settlement …” and (ii) that the ICSID Conciliation Rules could be used.560

429.  It is in this context which the Claimant’s Board made the resolution evidenced by the Board Minutes dated 1 December 2009.561

430.  On 25 January 2010 the Respondent made a further proposal for a settlement,562 which the Claimant rejected on 5 February 2010.563 On the same date, the Claimant answered a further email by the Respondent, indicating what its minimum requirements for a settlement would be in financial terms,564 whereupon the Respondent proposed that the Parties turn again to the mediation proposal.

431.  On 8 February 2010 the Claimant answered as follows: “As we informed [the] State Chancellery by our letter dated on 6/11/2009 No. 186, we do not see how at this stage the mediation procedure can lead to the settlement of the dispute. We do not have ground on changing our decission [sic]”.565

432.  On 25 February 2010 the Respondent volunteered to draft “a settlement agreement as regards mediation”.566 No answer to that email is in evidence.

433.  On 25 June 2010 the Claimant enquired with the Respondent whether all the possibilities to resolve the dispute amicably had been exhausted in light of the fact that their upcoming Board meeting would have the investment dispute on the agenda.567

434.  On 14 July 2010 the Deputy Director of the State Chancellery answered suggesting a meeting in person or a conference call to be attended by the Claimant, the State Chancellery and the Rēzekne municipality and asking the Claimant to contact Mr. Mēkons.568

435.  Thereafter, negotiations halted. The final meeting took place on 1 April 2011 which followed a meeting on 18 March 2011.569 The following correspondence was exchanged by email between the Parties after the 18 March 2011 meeting.

436.  On 21 March 2011 the Claimant wrote the following to the Respondent:570

Following your meeting with Mr. Virginijus Strioga, E energija CEO last Friday, I am writing to agree on the date and time convenient for you for the meeting in Riga this week to further discuss the Rēzekne case and potential international arbitration.

(…)

437.  The Legal Adviser to the Latvian Prime Minister followed up with her own email confirming the meeting for 1 April 2011 and had pointed out the following in her email to the Claimant:571

Let me also emphasise that this meeting shall not be considered as a meeting under the auspices of the Latvian-Lithuanian investment protection treaty. For certain factual and legal reasons the Republic of Latvia sees the investment dispute as closed, and, consequently, the meeting shall be deemed solely as a good faith effort of Latvia outside the scope of the State’s international obligations and with no negative legal or financial consequences arising out of it to Latvia.

438.  The Claimant’s answer confirms its intention to attend the meeting of 1 April 2011. It does not express any agreement or disagreement with the passage set out in the preceding paragraph.

IV.  The Parties’ Requests for Relief

A.  The Claimant

439.  In its Request for Arbitration the Claimant seeks the following relief:572

(…) the Claimant respectfully requests the Arbitral Tribunal to:

  1. (a)  declare that the Respondent has breached Articles 4(1), 3(1) and 3(2) of the BIT;

  2. (b)  order the Respondent to pay damages for the material loss incurred in an amount to be established, but which the Claimant currently estimates will represent in excess of EUR 7 million, an amount which the Claimant reserves the right to quantify at a subsequent stage in this arbitration by expert evidence;

  3. (c)  order the Respondent to pay the costs of this arbitration, including all expenses that the Claimant has incurred or shall incur herein in respect of the fees and expenses of the arbitrators, the International Centre for the Settlement of Investment Disputes, legal counsel, experts and consultants, as well as its own internal costs;

  4. (d)  order the Respondent to pay interest at a rate to be established on the amount of the award; and

  5. (e)  order such other and further relief as the arbitrators shall deem just and proper.

440.  In its first Memorial the Claimant amended the relief originally sought on three points:573

  1. (i)  the amount in point (b) in the preceding paragraph was increased to EUR 9,820,000; and

  2. (ii)  point (d) on interest, set out in the preceding paragraph, was replaced by two paragraphs reading as follows:

    1. (d)  order the Respondent to pay interest, compounded quarterly, at the rates set out in paragraph 366 above on the amount of the damages awarded from the date of expropriation until the date of the award;

    2. (e)  order the Respondent to pay interest, compounded quarterly, at the rates set out in paragraph 366 above on the amount awarded from the date [of] the award until payment by the Respondent; and

441.  In its Reply on the Merits and Counter-Memorial on Preliminary Objections the Claimant requests that the Tribunal deny the Respondent’s “preliminary objections” to jurisdiction. The Claimant decreased the amount sought on the merits to EUR 8,300,000,574 then increased such amount to EUR 8,390,000 in its Skeleton Argument.575

442.  In its Response to Questions Raised by the Tribunal the Claimant seeks an award of costs in a total amount of EUR 3,083,279.25, which includes a success fee.576 The breakdown of such amount is as follows:

  1. (i)  EUR 1,835,005.31 for legal fees and expenses of Salans/Vinson & Elkins (including a success fee of EUR 1,298,900);

  2. (ii)  EUR 604,768.73 for legal fees and expenses of Sorainen;

  3. (iii)  EUR 263,474.72 for expert costs (Brattle Group and Dr. Blumberga); and

  4. (iv)  EUR 380,030.49 for ICSID/Tribunal costs.

443.  In the alternative, should the Tribunal consider that success fees should not be awarded as part of any award on costs, the Claimant seeks an award of costs in a total amount of EUR 1,688,928.85.577 The breakdown of such amount is as follows:

  1. (i)  EUR 744,945.98 for legal fees and expenses of Salans/Vinson & Elkins;

  2. (ii)  EUR 300,477.66 for legal fees and expenses of Sorainen;

  3. (iii)  EUR 263,474.72 for expert costs (Brattle Group and Dr. Blumberga); and

  4. (iv)  EUR 380,030.49 for ICSID/Tribunal costs.

B.  The Respondent

444.  In its Memorial on Preliminary Objections and Request for Bifurcation, and Counter-Memorial on the Merits the Respondent seeks the following relief:578

(…) the Respondent kindly requests the Tribunal to:

  1. 1)  declare that, in accordance with Article 41(6) of the ICSID Arbitration Rules, the dispute is not within the competence of the Tribunal because of aspects mentioned in Section 4.1) and 4.2) of this document;

    or

  2. 2)  declare that, in accordance with Article 41(6) of the ICSID Arbitration Rules, this arbitration proceeding is to be suspended pending the final and binding adjudication in Latvian courts of the local judicial civil proceeding No. C03051107,

    or

  3. 3)  declare that the Respondent has not breached the Treaty; and

  4. 4)  deny all Claimant’s requests for relief (as specified in the Claimant’s Memorial, paragraphs 370 to 371):

    but, in any case,

  5. 5)  order the Claimant to compensate all expenses incurred by the Respondent pertaining to this arbitration proceeding (together with the Latvian statutory interest rate of 6% a year until payment), as well as the fees and expenses of the Honorable Members of the Tribunal.

445.  The Respondent’s Rejoinder on the Merits does not contain a section setting out the relief sought.

446.  The Respondent maintains in its Skeleton Argument that it sought the dismissal of all of the Claimant’s claims and an award of costs covering its fees, costs and expenses as well as the Tribunal’s fees, costs and expenses, and that it sought the stay or the termination of the proceedings (and an award of costs also in such case).

447.  In its Post-Hearing Submission in Response to the Tribunal’s Questions the Respondent seeks an award of costs in an amount of no less than EUR 162,556.28.579 The breakdown of such amount is as follows:

  1. (i)  EUR 12,247.27 for the legal fees and expenses of the State Chancellery;

  2. (ii)  EUR 114,035 for consultancy fees (in connection with the expert report);

  3. (iii)  EUR 17,069.86 for translation costs;

  4. (iv)  EUR 2,121.37 for courier services; and

  5. (v)  EUR 17,082.78 for the legal fees and expenses of the Rēzekne Municipality.

448.  In its Response to the Tribunal’s Procedural Order No. 9 the Respondent increased the amount claimed for legal fees and expenses from EUR 12,247.27 to EUR 16,246.27 and therefore the Respondent seeks an award of costs in an amount of no less than EUR 166,555.28.580

V.  Jurisdiction

449.  The Tribunal will summarise the Parties’ submissions before stating the reasons for its decision on the Respondent’s “preliminary objections” to jurisdiction.

A.  The Parties’ Prayers for Relief on Jurisdiction and the Respondent’s “Preliminary Objections”

(1)  The Respondent

450.  In its Memorial on Preliminary Objections and Request for Bifurcation, and Counter-Memorial on the Merits the Respondent seeks the following relief:581

Considering the above mentioned factual and legal description of the situation, the Respondent kindly requests the Tribunal to:

  1. 1)  declare that, in accordance with Article 41(6) of the ICSID Arbitration Rules, the dispute is not within the competence of the Tribunal because of aspects mentioned in Section 4.1) and 4.2) of this document;

    or

  2. 2)  declare that, in accordance with Article 41(6) of the ICSID Arbitration Rules, this arbitration proceeding is to be suspended pending the final and binding adjudication in Latvian courts of the local judicial civil proceeding No. C03051107;

    or

    (…)

451.  The Respondent’s Reply on Preliminary Objections does not set out a prayer for relief.

452.  In its Skeleton Argument the Respondent requests the Tribunal “under the Tribunal’s discretionary competence, to suspend or terminate the proceedings on grounds enumerated in Respondent’s pleadings”.582

(2)  The Claimant

453.  In its Reply on the Merits and Counter-Memorial on Preliminary Objections the Claimant requests the following relief:583

The Claimant therefore respectfully requests the Arbitral Tribunal to:

  1. (a)  deny the requests for relief set out by the Respondent in section 5 of the Counter-Memorial on the Merits and Preliminary Objections on Jurisdiction;

  2. (b)  (…)

454.  In its Rejoinder on Preliminary Objections the Claimant restates substantially the same relief.584

B.  The Claimant’s Position on Jurisdiction

(1)  Jurisdiction Ratione Personae

455.  In its Memorial the Claimant refers to the arguments made in its Request for Arbitration regarding the Tribunal’s jurisdiction ratione personae in which the Claimant submitted the following:585

  1. (i)  both Parties have consented to arbitration in accordance with the ICSID Convention and the BIT;

  2. (ii)  the Claimant is an “investor” under the BIT, and

  3. (iii)  the Claimant is a national of the Republic of Lithuania.

(A)  Consent of both Parties to ICSID Arbitration

456.  The Claimant submits that both the Republic of Lithuania and the Republic of Latvia are Contracting States to the ICSID Convention as they signed and ratified the ICSID Convention on 6 July 1992 and 7 September 1997 respectively.586

457.  The Claimant contends that the Respondent consented to ICSID jurisdiction under Articles 7(1) and 7(2) of the BIT587 on 23 July 1996 when the BIT entered into force.588

458.  The Claimant further submits that it attempted to settle the dispute with the Respondent amicably on several occasions through written correspondence and meetings held with the Respondent’s representatives of Respondent after the written Notice of Dispute589 given in accordance with the BIT was served on the Respondent on 2 September 2008. No amicable settlement could be reached despite all efforts on the part of the Claimant.590

(B)  Claimant as an Investor under the BIT

459.  The Claimant contends that it is an investor within the meaning of Article 1(2)(a)(ii) of the BIT591 as it is a “company constituted under the laws of the Republic of Lithuania and registered in the territory of Lithuania in conformity with its laws and regulations”.592

(C)  Claimant as a National of the Republic of Lithuania

460.  The Claimant further contends that it is “a national of another Contracting State” within the meaning of Article 25(2)(b) of the ICSID Convention since it is a legal entity and registered tax payer incorporated in, and a national of, Lithuania on the date that the Request was submitted.593

(2)  Jurisdiction Ratione Materiae

461.  In its Memorial the Claimant refers to the argument set out in its Request for Arbitration with respect to the Tribunal’s jurisdiction ratione materiae, in which the Claimant made the following submissions on the Tribunal’s jurisdiction ratione materiae:594

  1. (i)  the Claimant made an “investment” within the meaning of the BIT;

  2. (ii)  the Claimant made an “investment” within the meaning of Article 25 of the ICSID Convention;

  3. (iii)  the dispute between the Claimant and the Respondent constitutes a “dispute” within the meaning of the BIT; and

  4. (iv)  such dispute constitutes a “legal dispute arising directly out of an investment” within the meaning of Article 25 of the ICSID Convention.

(A)  An “Investment” within the Meaning of the BIT

462.  The Claimant submits that it made an “investment” within the meaning of Article 1(1) of the BIT,595 which investment includes the following in the present case:596

  1. (i)  the shares in Latgales Enerģija (Article 1(1)(b) of the BIT);597

  2. (ii)  the provision of loans to Latgales Enerģija to fund Latgales Enerģija’s operations (Article 1(1)(c) of the BIT);598

  3. (iii)  the guarantee of a loan to Rēzekne Municipality (Article 1(1)(c) of the BIT);599

  4. (iv)  the guarantee of a loan to Latgales Enerģija to fund Latgales Enerģija’s operations (Article 1(1)(c) of the BIT);600

  5. (v)  the know-how and expertise in heating services which the Claimant provided to Latgales Enerģija (Article 1(1)(d) of the BIT);601 and

  6. (vi)  the provision of operational management expertise (Article 1(1)(d) of the BIT).602

463.  In its Request for Arbitration the Claimant substantiated the allegation of the investment made in Latvia by relying on a number of further elements, in addition to those summarised in the preceding paragraph.603 However, the Claimant did not maintain these elements in its Memorial.

(B)  An “Investment” Within the Meaning of Article 25 of the ICSID Convention

464.  The Claimant contends that it has made an “investment” also within the meaning of Article 25 of the ICSID Convention as it made both a long-term604 and substantial605 commitment to take over the Municipality-owned district heating system, which required an assumption of risk606 and was significant for the development of the Republic of Latvia.607

(C)  A “Dispute Concerning Investment” Within the Meaning of the BIT

465.  The Claimant contends that its dispute with the Respondent constitutes a “dispute concerning investment” within the meaning of Article 7(1) of the BIT608 as such dispute concerns breaches of the BIT that arose directly out of the Claimant’s investment, such as the expropriation of Claimant’s investmentDispute Concerning InvestmentequitableWithin The Meaning Of Thee breach of the full protection and security obligation, the arbitrary and discriminatory treatment of Claimant’s investment and the breaches of the most-favoured nation treatment obligation.609

(D)  A “Legal Dispute Arising Directly out of an Investment” Within the Meaning of Article 25 of the ICSID Convention

466.  Finally, Claimant submits that its dispute with the Respondent constitutes a “legal dispute arising directly out of an investment” within the meaning of Article 25 of the ICSID Convention as such dispute concerns the existence of legal rights and obligations as well as the breaches of the BIT by the Respondent which relate to the investment made by Claimant in Latvia.610

C.  The Respondent’s Objections to Jurisdiction

(1)  Jurisdiction Ratione Personae

467.  The Respondent has not specifically challenged the Claimant’s submissions on jurisdiction ratione personae.

(2)  The Parties’ Consent to ICSID Arbitration

468.  In its Memorial on Preliminary Objections the Respondent submits its “preliminary objections to jurisdiction”.611 Further to the Claimant’s comment that such objections were “probably issues of admissibility rather than jurisdiction”, the Respondent replies that Article 41 of the ICSID Arbitration Rules covers both issues of jurisdiction and admissibility.612

469.  The Respondent’s “preliminary objections” are as follows.

(A)  Lack of a Condition Precedent for the Submission of the Request for Arbitration

470.  The Respondent objects that the Claimant’s decision dated 1 December 2009613 allegedly authorising the Request for Arbitration requires mediation to be started prior to arbitration; such condition precedent is not met in the present case.614

The Respondent states that such a document has legal effects for potential respondents; any ambiguities in such documents are to be interpreted and construed in the interest of the party which did not draft the documents.615

(i)  Lack of Consent by the European Bank for Reconstruction and Development

471.  The Respondent objects that all actions required in order for the Request for Arbitration to be filed were not completed since the Claimant’s internal document dated 1 December 2009616 allegedly authorising the Request for Arbitration required approval by the EBRD as a shareholder; such approval is not in evidence.617

(3)  Jurisdiction Ratione Materiae

(A)  Lack of a Dispute within the Meaning of Article 25 of the ICSID Convention

472.  The Respondent submits that there is a lack of a dispute within the meaning of Article 25 of the ICSID Convention relying on the international law principles of acquiescence, extinctive prescription and estoppel, as well as the Claimant’s bad faith.618

473.  The Respondent contends that the pursuit of an international investment claim is barred if there is undue delay or if a potential claimant by its clear conduct induced a potential respondent to rely on the fact that a potential claim would no longer be pursued; reliance is placed on a number of awards on the principles of acquiescence, estoppel and prescriptive extinction619.620

The Respondent argues that by its voluntary and unconditional conduct the Claimant caused the Republic of Latvia to rely on the fact that the investment claims would not be pursued beyond negotiations since:

  1. (i)  42 months lapsed after the expiry of a time limit after which a claim may be brought to ICSID under Article 7(2) of the BIT;621

  2. (ii)  the Claimant did not send the Respondent any communication after negotiations had been conducted from 1 September 2008 to 14 June 2010, the date of the latest letter by the State Chancellery of Latvia calling on the Claimant to proceed with the negotiation in case the Claimant deemed that any of its rights had been breached; and

  3. (iii)  there had been isolated communications on 21, 24 and 28 March 2011 and 1 April 2011, in which the Government of Latvia expressly stated that such communications would be made outside the investment protection treaty and that the Government regarded the Claimant’s claims as time barred; the Claimant confirmed its participation in the 1 April 2011 meeting, but no further communication followed;622

474.  According to the Respondent, the submission of the Claimant’s Request for Arbitration 42 months after a period authorised in the BIT, 25 months after the Claimant did not respond to the Respondent’s express request to proceed with the negotiation process and 17 months after the Claimant agreed to participate in a meeting held outside the investment protection treaty shows the Claimant’s bad faith.623

475.  The Respondent objects that there is a “reasonable doubt” that the Claimant brought this arbitration in good faith to influence the Lithuanian authorities or show that certain legal remedies lie in case of an expropriation of the Claimant’s assets in light of the fact that two municipalities in Lithuania, Prienu and Ukmergė, terminated their cooperation with the Claimant in connection with district heating services to be provided by the Claimant relying on the Claimant’s improper conduct and a “series of events” which took place between 2010 and 2012; reliance was placed by the Respondent on Exhibits R-11 to R-14.624

(B)  Lack of a Dispute Concerning Investment within the Meaning of the BIT

476.  In its first letter to the ICSID Secretariat dated 27 August 2012 the Respondent takes the view that the basis for the claims asserted by the Claimant in its Request for Arbitration was not the alleged breach of a bilateral investment protection treaty, but the alleged breach of a private contract.

477.  This objection was elaborated upon by the Respondent in due course and the Respondent argues in particular that the Claimant “loads the Tribunal with typical commercial issues that, according to the Vivendi doctrine (…), are essentially contractual claims outside the scope of international investment law”.625

D.  The Claimant’s Reply to the Respondent’s “Preliminary Objections” to Jurisdiction

(1)  General Comments on the Respondent’s “Preliminary Objections”

478.  The Claimant contends that the Respondent does not challenge (i) consent under the BIT and the ICSID Convention, (ii) that the Claimant is an investor of Lithuania under the BIT and a national of Lithuania for the purposes of the ICSID Convention, (iii) that the Claimant has made an investment for the purposes of the BIT and the ICSID Convention, and (iv) that there is a dispute within the meaning of the BIT and the ICSID Convention.626

479.  Therefore, the Respondent does not, in the Claimant’s view, challenge “the Tribunal’s standing to consider claims brought by E energija under the terms of the BIT and the ICSID Convention”; Latvia rather argues that the Tribunal is precluded from considering the claims which it otherwise has jurisdiction to entertain.627 The Respondent’s objections go to the admissibility of such claims rather than the Tribunal’s jurisdiction.628

480.  According to the Claimant, the Respondent has the burden of proving that its objections prevent the Tribunal from considering the Claimant’s claims and the threshold must be a high one; for example, see the interim award in Chevron v. Ecuador629.630

(2)  The Claimant’s Reply to the Respondent’s Objection Based on the Lack of Internal Authorisation

481.  The Claimant submits (i) that the jurisdiction of this Tribunal is governed solely by Article 25 of the ICSID Convention, the requirements of which are met in the present case, (ii) that Article 36(2) of the ICSID Convention and ICSID Institution Rules 2(1)(f) and 2(2) do not deal with the jurisdiction of ICSID or the Tribunal and (iii) that a failure to comply with Article 36(2) and Institution Rules 2(1)(f) and 2(2) could, at the most, constitute only a procedural defect in the Request for Arbitration, but not a bar to jurisdiction.631

482.  The Claimant’s argument may be summarised as follows:

  1. (i)  the Request for Arbitration complies with ICSID Institution Rule 2 as it was filed with the power of attorney appointing Salans LLP and Sorainen as the counsel acting for the Claimant, signed by the Claimant’s CEO Mr. Strioga,632 which meets the requirements of Institution Rules 2(1)(f) and 2(2); that was the only “necessary internal action” required;633

  2. (ii)  moreover, Mr. Strioga subsequently confirmed in his letter dated 3 October 2012634 that “all necessary internal actions” had been taken “to authorise the filing of the Request for Arbitration”, and that is in itself sufficient, since Mr. Strioga has authority to act alone on behalf of the Claimant as recorded in the Register of Legal Entities in Lithuania;635

  3. (iii)  no board decision was required;636 the minutes of the Claimant’s Board meeting of 1 December 2009 attached to Mr. Strioga’s letter of 3 October 2012 were provided “by way of further support”,637 but they need not be examined since they are irrelevant in order to decide whether the Claimant authorised the filing of the Request for the purposes of Institution Rules 2(1)(f) and 2(2);638

  4. (iv)  in any event, the Claimant contends that the Respondent misreads the minutes of the Claimant’s Board meeting of 1 December 2009 in two respects:639

    1. (1)  the Respondent relies on the minutes of the Claimant’s Board meeting of 1 December 2009, in particular on the sentence “Decided: Apply to international arbitrage in case Latvian Government rejects the proposed UAB E energija scenario: SIA ‘Latgales Enerģija’ cash should be released from the executor’s account then the case would be brought to the mediation panel” and concludes that resort to mediation was a condition precedent to the institution of arbitration proceedings; and

      the Respondent’s construction of that sentence is inaccurate; that sentence indicates that the Claimant would apply to arbitration in case Latvia rejected a certain proposal made by the Claimant; such proposal contemplated a resort to mediation in case Latgales Enerģija’s funds, which had been attached, had been released;640 however, those funds were not in fact released641 and the Board’s decision to commence arbitration was, and remains, valid;642 and

    2. (2)  the Respondent relies on the minutes of the Claimant’s Board meeting of 1 December 2009643 to object that arbitration could be commenced only with the EBRD’s approval; and

      the Respondent’s submission is without foundation as no Board decision was required to bring this arbitration; in any event, the reference to the EBRD is not contained in the part of the minutes that sets out the decision, but in a “commentary”;644 the EBRD was in fact approached by the Claimant “for support in relation to an arbitration”, which it provided in the form of a letter to Latvia;645 Ms. Göransson, the EBRD representative on the Claimant’s Board, attended the Board meeting of 1 December 2009 and approved the decision.646

(3)  The Claimant’s Reply to the Respondent’s Objections Based on Estoppel, Acquiescence and Extinctive Prescription

483.  The Claimant’s reply to the Respondent’s objections may be summarised as follows:

  1. (i)  on estoppel: the Claimant disputes that it is estopped from asserting its claims; reliance is placed on Pope & Talbot v. Canada with respect to the three ingredients of estoppel;647 the Claimant replies (i) that the Respondent has failed to show that the Claimant ever made any statement that it would not pursue the claims set out in the Notice of Dispute,648 and (ii) that the Respondent failed to show any reliance on its part on such alleged statement, and any detriment suffered as a consequence of such alleged reliance; no issue of estoppel can therefore arise;649

  2. (ii)  on acquiescence: the Claimant submits that the doctrine of acquiescence has two constituent elements, namely (i) inaction on behalf of a State or a failure to assert a claim, (ii) such failure must have extended over a certain period of time, and (iii) there must have been circumstances that would have required action (reliance was placed by the Claimant on the commentary on The Law of International Responsibility650); the Claimant submits that cogent evidence of a tacit intention to withdraw a claim must be required in a case, such as the present case, in which the investor has submitted a Notice of Dispute;651

    in the Claimant’s view, the Respondent has provided no evidence that the circumstances required action on the part of the Claimant in the present case; the BIT contains no time limits in order for claims to be brought and the Claimant submitted a detailed Notice of Dispute652;653 and

    in particular, the Claimant argues that Latvia’s letter of 12 July 2010654 answered the Claimant’s letter of 15 June 2010;655 in its 15 June 2010 letter the Claimant had informed the Respondent that it contemplated arbitration proceedings since amicable negotiations had failed; the Respondent answered proposing a meeting or a telephone conference; admittedly, the Respondent’s letter was followed by a few months in which the negotiations between the Parties halted; however, the circumstances at the time did not require action by the Claimant and the Claimant was under no obligation to bring an arbitration immediately, and the Respondent has failed to show that the duration of the silence on the part of the Claimant was sufficient to amount to an abandonment of the claims set out in the Notice of Dispute and that the circumstances required action on the part of the Claimant;656

  3. (iii)  on extinctive prescription: the Claimant acknowledges that prescriptive extinction may apply even if a State has not acquiesced in the extinction of a claim, but replies (i) that the BIT does not contain any time limits within which a claim is to be brought, (ii) that there is no general agreement as to any actual time limits in international law and (iii) that the mere lapse of time is not sufficient to extinguish a claim; extinctive prescription has been applied only where the lapse of time has put the respondent at a disadvantage (reliance was placed by the Claimant on the commentary on The Law of International Responsibility657);658 the overall delay of less than 4 years between the Notice of Dispute and the Request for Arbitration is not an unreasonable period such as to bar a claim and the Respondent has suffered no prejudice;659 and

  4. (iv)  on bad faith: the Claimant denies that it brought the present arbitration against Latvia in bad faith to in order to influence the Lithuanian authorities in relation to the termination of district heating concessions in two Lithuanian municipalities and wonders how proceedings brought against one State could possibly influence the authorities of another State.660 The Claimant further points out that, on the one hand, the concession in Prienu had not been terminated, and, on the other, the Ukmergė concession was terminated after the local authorities attempted to negotiate an agreed termination with the Claimant; those facts therefore bore no relation to the present dispute.661

E.  The Reasons for the Tribunal’s Decision on Jurisdiction

484.  The Claimant contends that the Tribunal has jurisdiction under the BIT and the ICSID Convention, whereas the Respondent raised the following “preliminary objections” to the Tribunal’s jurisdiction, which the Tribunal joined to the merits in Procedural Order No. 3bis:

  1. (i)  lack of the Claimant’s internal authorisation for instituting these proceedings (“First Objection”); and

  2. (ii)  lack of “dispute” under Article 25(1) of the ICSID Convention (“Second Objection”).662

485.  In this section of the present Award the Tribunal will examine (1) its jurisdiction ratione personae, (2) the Parties’ consent to ICSID arbitration (including the Respondent’s First Objection) and (3) its jurisdiction ratione materiae (including the Respondent’s Second Objection).

(1)  Jurisdiction Ratione Personae

486.  The Republic of Lithuania signed and ratified the ICSID Convention on 6 July 1992 which entered into force in the Republic of Lithuania on 5 August 1992.663

487.  The Republic of Latvia signed and ratified the ICSID Convention on 8 August 1997 which entered into force in the Republic of Latvia on 7 September 1997.664

488.  The BIT665 was ratified by the Republic of Lithuania on 19 July 1996666 and by the Republic of Latvia pursuant to an Act of the Latvian Parliament dated 2 May 1996.667

489.  The BIT entered into force on 23 July 1996.668

490.  Article 1(2) of the BIT reads as follows:

Article 1  Definitions

For the purposes of this Agreement:

  1. 1.  (omitted)

  2. 2.  The term “investor” means:

    1. a)  in respect of the Republic of Lithuania:

      1. (i)  natural persons who are nationals of the Republic of Lithuania according to the laws of the Republic of Lithuania;

      2. (ii)  any entity constituted under the laws of the Republic of Lithuania and registered in the territory of the Republic of Lithuania in conformity with its laws and regulations;

        (…) (omitted)

491.  The Claimant is a limited liability company incorporated in Lithuania and having its registered office in Vilnius, Lithuania.669 The Claimant is therefore an “investor” of Lithuania within the meaning of Article 1(2)(ii) of the BIT.

492.  Article 25(2)(b) of the ICSID Convention provides:

  1. (2)  “National of another Contracting State” means:

    1. (b)  any juridical person which had the nationality of a Contracting State other than the State party to the dispute on the date on which the parties consented to submit such dispute to conciliation or arbitration….

493.  As a limited liability company incorporated in Lithuania and having its registered office in Lithuania on the date the Request was submitted to ICSID, the Claimant is also a “juridical person which had the nationality of a Contracting State other than the State party to the dispute on the date on which the parties consented to submit such dispute to conciliation or arbitration” within the meaning of Article 25(2)(b) of the ICSID Convention.

494.  The Respondent has not challenged these points.

495.  The Tribunal therefore finds that there is no lack of jurisdiction ratione personae under the BIT and the ICSID Convention.

(2)  The Parties’ Consent to ICSID Jurisdiction

496.  The Tribunal will determine whether (i) the Parties consented to ICSID jurisdiction under Article 7 of the BIT and Article 25(1) of the ICSID Convention and (ii) whether the alleged lack of compliance by the Claimant with its internal requirements to initiate these proceedings has any effects on the Claimant’s consent to ICSID jurisdiction.

497.  Article 25(1) of the ICSID Convention reads as follows:

Chapter II  Jurisdiction of the Centre

Article 25 

  1. (1)  The jurisdiction of the Centre shall extend to any legal dispute arising directly out of an investment, between a Contracting State (or any constituent subdivision or agency of a Contracting State designated to the Centre by that State) and a national of another Contracting State, which the parties to the dispute consent in writing to submit to the Centre. When the parties have given their consent, no party may withdraw its consent unilaterally.

498.  Article 7 of the BIT reads as follows:

Article 7  Disputes between One Contracting Party and an Investor of the Other Contracting Party

  1. 1.  Notice of a dispute concerning investment between one of the Parties and an investor of the other Party shall be given in writing. This shall include a detailed statement by the investor to the Contracting Party in whose territory the investment was made. The Parties shall, if possible, endeavour to settle their differences by means of a friendly agreement.

  2. 2.  If such dispute cannot be settled amicably within six months from the date of the written notification provided in paragraph 1, the dispute, at the request of either party and at the choice of the investor, shall be submitted to:

    • —  an ad hoc court of arbitration, for arbitration in accordance with the Arbitration Rules issued in 1976 by the United Nations Commission on International Trade Law (UNCITRAL); or to

    • —  the International Center for the Settlement of Investment Dispute (ICSID) established under the 1965 Convention on the Settlement of Investment Disputes between States and Nationals of Other States, for arbitration under ICSID Rules of Procedure for Arbitration Proceedings if both of the Contracting Parties have acceded to the Convention.

  3. 3.  The arbitral decisions shall be final and binding on both parties to the dispute. Each Contracting Party shall execute them in accordance with its laws and in accordance with the 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), if the Contracting Parties are members of that Convention. The arbitration shall take place in a State that is a party to the New York Convention.

    (footnotes omitted)

(A)  The Parties’ Consent to ICSID Jurisdiction

499.  The Tribunal finds that the Respondent offered to submit certain disputes to ICSID arbitration under Article 7 of the BIT provided (i) that the investor gave the host State a notice of dispute in writing including a detailed statement (Article 7(1) of the BIT), and (ii) that the Parties endeavoured to settle their dispute amicably in the six months following the notification of the notice of dispute (Article 7(2) of the BIT).

500.  The Respondent did not dispute that these requirements were met.

501.  The Tribunal concludes that the two requirements in Article 7(1) and 7(2) of the BIT were met in the present case. First, the Claimant delivered its Notice of Dispute on 2 September 2008 to the Respondent, thereby complying with Article 7(1) of the BIT. Secondly, the Respondent accepts that negotiations with the Claimant started on 1 September 2008670 and continued until 14 July 2010 with a final meeting on 1 April 2011 without any settlement being reached.671 The Parties therefore tried to settle their dispute amicably for more than six months before the Claimant submitted the dispute to ICSID, as required by Article 7(2) of the BIT.

502.  The Tribunal also finds that the Claimant accepted the Respondent’s offer contained in the BIT to settle the dispute by ICSID arbitration by filing its Request for Arbitration on 15 August 2012. The Tribunal therefore concludes that the requirement of consent under Article 7(2) of the BIT was met, as was the requirement of “consent in writing” under Article 25(1) of the ICSID Convention.

This conclusion, however, is subject to the determination by the Tribunal of the Respondent’s First Objection that the Claimant’s internal documents authorising the request show an alleged lack of compliance with a condition precedent (i.e. mediation) and a failure to obtain the required EBRD approval before instituting these proceedings.

(B)  The Respondent’s First Objection — Lack of Internal Authorisation to Initiate these Proceedings

503.  As part of the Secretary-General’s screening process, the ICSID Secretariat requested the Claimant’s confirmation that it had “taken all necessary internal actions to authorise the request” pursuant to ICSID Institution Rule 2(1)(f). In a letter dated 3 October 2012 the Claimant confirmed that “UAB ‘E energija’ has taken all necessary internal actions to authorise the filing of the Request” and attached UAB’s Board Meeting Minutes dated 1 December 2009.672

504.  The Respondent’s First Objection is based on these Board Minutes. According to the Respondent, such Minutes demonstrate a “[l]ack of compliance with Article 36(2) of the ICSID Convention [and] ICSID Rules of Procedure for the Institution of Conciliation and Arbitration Proceedings, Rule 2(1)(f) and Rule 2(2)”.673 No other authorities aside from these provisions are relied upon by the Respondent in support of this preliminary objection.

505.  In the Tribunal’s view, whether the authorising documents provided by the Claimant in the present case were such as to warrant the registration of the request is a matter for the ICSID Secretary-General.

506.  Article 36(2) of the ICSID Convention (and Institution Rule 2) deal with the registration procedure, not with the jurisdiction of a tribunal constituted under the ICSID Convention. Jurisdiction is dealt with in Article 25 of the ICSID Convention. Insofar as the Respondent’s “preliminary objection” is based on Article 36(2) of the ICSID Convention and Institution Rule 2, such objection must therefore fail.

507.  As the Claimant argues that it consented to ICSID arbitration by filing the Request, a lack of authorisation to file the Request, if established, could operate so as to taint the Claimant’s consent in the Tribunal’s view. The Tribunal will therefore examine the Respondent’s contention that the Board Minutes contain conditions precedent to the initiation of arbitration that were not met, which vitiated the Claimant’s consent.

508.  The passage of the Claimant’s Board Minutes674 relied upon by the Respondent reads as follows:

  1. 5.  Discussed. Decision to apply with SIA “Latgales enerģija” case to arbitrage.

    Decided: Apply to international arbitrage in case Latvian Government rejects the proposed UAB E energija scenario: SIA “Latgales energija” cash should be released from the executor’s account then the case would be brought to the mediation panel.

    Commentary. UAB E energija will issue letter to the Latvian government regarding the decision of the board. E energija will also apply to EBRD regarding approval of the decision to apply to international arbitrage.

(i)  Board Minutes — The Reference to Mediation

509.  Based on the wording of the Board Minutes, the Tribunal finds that this resolution by the Claimant’s Board, made on 1 December 2009, is a decision to apply to international arbitration in case the Government of Latvia rejected a proposal made by the Claimant in order that the Claimant’s funds be released.

510.  In its submissions, the Claimant explained the meaning of the sentence set out above after “Decided” (see paragraph 482 above), and the Respondent did not specifically challenge that explanation.675

511.  Having considered the Parties’ position in this respect, the Tribunal determines that in order for mediation to take place, the Government of Latvia would have had to accept the proposal made by the Claimant, on any plain reading of the resolution set out in paragraph 508 above.

512.  The Tribunal concludes that the Respondent has failed to discharge its burden of proof with respect to the allegation that mediation was a condition precedent to arbitration.676

(ii)  Board Minutes — The Reference to EBRD Approval

513.  The Respondent further contends that approval by the EBRD was a condition precedent to the Claimant commencing arbitration, which the Claimant denies. The passage relied upon by the Respondent in the Claimant’s Board Minutes dated 1 December 2009 is reproduced in paragraph 508 above.

514.  In the Tribunal’s view, the operative part of the Claimant’s Board Minutes of 1 December 2009 is set out after the word “Decided”. The two sentences set out after the word “Commentary” appear to indicate what the Board would do, the decision to go to arbitration having been adopted.

515.  If approval by the EBRD had been a condition precedent to the institution of these arbitration proceedings pursuant to arrangements made by the EBRD, the reference to the EBRD would likely not have been inserted under the “Commentary” section.

516.  In the Tribunal’s opinion, the Claimant’s Board Minutes of 1 December 2009 are insufficient to prove that the EBRD’s approval was a condition precedent to arbitration, and the Respondent has failed to discharge its burden of proof in this respect. The Respondent’s “preliminary objection” based on the EBRD’s lack of approval must therefore be dismissed.

517.  As a general note, the Tribunal finds that general denials (such as that contained in the Respondent’s Rejoinder on the Merits and Reply on Preliminary Objections677) are insufficient and must fail.

The Tribunal therefore finds that (i) the Respondent has failed to discharge its burden of proof in relation to any alleged conditions to the Claimant’s consent and the First Objection is therefore dismissed, and that (ii) the Parties consented to ICSID arbitration, the Claimant met the notice and amicable settlement requirements in Article 7 of the BIT and there was therefore valid written consent for the purposes of Article 25(1) of the ICSID Convention.

(3)  Jurisdiction Ratione Materiae

518.  In this section the Tribunal will deal with the Respondent’s Second Objection and determine whether it has jurisdiction ratione materiae under the BIT and the ICSID Convention. Specifically, the Tribunal will decide (i) whether there is a “dispute concerning an investment” under Articles 1(1) and 7(1) of the BIT; (ii) whether there is a “legal dispute arising directly out of an investment” according to Article 25(1) of the ICSID Convention or (iii) whether there is no “dispute” under Article 25(1) of the ICSID Convention having regard to the principles of estoppel, acquiescence, extinctive prescription and good faith (Second Objection).

(A)  Articles 1(1) and 7(1) of the BIT — A “dispute concerning investment”

519.  Article 1(1) of the BIT reads as follows:

Article 1  Definitions

For the purposes of this Agreement:

  1. 1.  The term “investment” shall mean every kind of asset, invested by an investor of one Contracting Party in the territory of the other Contracting Party, provided that the investment has been made in accordance with the laws and regulations of the other Contracting Party, and shall include in particular, though not exclusively:

    1. a)  movable and immovable property as well as any other property rights, such as mortgages, liens and pledges, and similar rights;

    2. b)  shares, bonds and other kinds of interest in companies;

    3. c)  claims to money which has been used to create an economic value or claims to any performance having an economic value;

    4. d)  copyrights, industrial property rights (such as patents, trade marks, industrial designs and models, trade names), know-how and good-will;

    5. e)  any right to conduct economic activities conferred by state authorities, including concessions to search for, extract and exploit natural resources.

    (…)

520.  It is undisputed that the Claimant made an investment in the territory of Latvia in accordance with the local laws and regulations. The Respondent called no fact witnesses to challenge Mr. Jautakis’ first Witness Statement, which contains detailed explanation as to the various transactions forming part of the Claimant’s investment, and Mr. Jautakis was not cross-examined at the Hearing.678 The Respondent also expressly acknowledged the existence of an investor and an investment as part of its argument advanced that the Energy Charter Treaty should apply.679

521.  Specifically, after reviewing the documentary evidence, the Tribunal concludes as follows:

  1. (i)  the shares and statutory capital in Latgales Enerģija constitute an investment under Article 1(1)(b) of the BIT;

  2. (ii)  the loans provided by the Claimant to Latgales Enerģija to fund Latgales Enerģija’s operations in Rēzekne; the guarantee provided in relation to the loans granted by Latvijas Unibanka to the Rēzekne Municipality and the guarantee provided in relation to a loan granted by Sampo Banka to Latgales Enerģija constitute an investment under Article 1(1)(c) of the BIT;680 and

  3. (iii)  the know-how and expertise in heating services681 as well as the operational management expertise682 provided by the Claimant constitute an investment under Article 1(1)(d) of the BIT.

Latgales Enerģija is not an investor for the purposes of Article 1(1) and 1(2) of the BIT and is also not a “national of another Contracting State” within the meaning of Article 25 of the ICSID Convention as there is no agreement between the Parties that it should be treated as the investor. As such, Latgales Enerģija’s assets are not, therefore, “the investment”; it does not follow, however, that they are irrelevant, since for example the value of the shares in Latgales Enerģija depends on the value of such assets that include inter alia the right to operate the heating system in the city of Rēzekne under the Long-Term Agreement and the three licences.

522.  Moreover, the Tribunal finds that the Claimant’s invocation of various BIT breaches meets the condition of a “dispute concerning investment” under Article 7(1) of the BIT.

523.  The Tribunal emphasizes again that general denials, such as those contained in the Respondent’s Rejoinder on the Merits and Reply on Preliminary Objections, are insufficient in the Tribunal’s view.683

524.  The Tribunal therefore finds that it has jurisdiction ratione materiae under the BIT.

(B)  Article 25(1) of the ICSID Convention — “a legal dispute arising directly out of an investment”

525.  The Tribunal notes that the Respondent has not challenged the Claimant’s submission that its investment qualifies as an investment under Article 25(1) of the ICSID Convention (quoted in paragraph 497 above) as understood by analysing the features discussed in Prof. Schreuer’s commentary.684 Nor has the Respondent denied the relevance of those features. Moreover, the Respondent has itself contended that there is an investment in the present case, albeit with reference to the Energy Charter Treaty as the Tribunal has just recalled in paragraph 520 above.

526.  After examining the features of an investment discussed in Prof. Schreuer’s commentary, with the understanding that they are not meant to be taken as a list of jurisdictional requirements, the Tribunal concludes that they are met in this case.

527.  In particular, the Tribunal finds there was a long-term investment as, among other factors, the Long-Term Agreement was entered into for a period of thirty years,685 and the February 2005 Agreement was entered into for the same period as the Long-Term Agreement.686 Moreover, the Claimant alleges to have made a significant monetary investment that includes LVL 3.4 million and EUR 2.821 million investments in 2005 and 2006,687 which the Tribunal deems to be a substantial monetary commitment. The Tribunal further finds that the investment was not devoid of risk, a circumstance on which the Respondent has expressly relied by contending that the Claimant failed to conduct a proper risk assessment prior to its decision to invest.688 Finally, the Tribunal concludes that the project was significant for the development of the Republic of Latvia due to the importance of district heating and the supply of hot water as a critical public service, and to the need to switch from expensive and polluting fuels to natural gas, as acknowledged by the Respondent.

528.  It is plain from all the above that the Claimant made an investment in Latvia for the purposes of Article 25 of the ICSID Convention.

529.  As the Claimant has alleged various breaches of the BIT in relation to Latvia’s treatment of its investment, the Tribunal finds that there is a “legal dispute arising directly out of an investment” as required by Article 25(1) of the ICSID Convention, subject to the Tribunal’s decision on the Respondent’s Second Objection.

(C)  The Respondent’s Second Objection — Lack of a “Dispute” under Article 25(1) of the ICSID Convention

530.  The Tribunal will now consider the Respondent’s challenge that there is no dispute under Article 25(1) of the ICSID Convention due to estoppel, acquiescence, prescriptive extinction and due to the Claimant’s alleged bad faith.

(i)  Estoppel

531.  Both Parties have relied on the Pope & Talbot interim award.689 According to this decision, estoppel requires three elements: (i) “a statement of fact which is clear and unambiguous”; (ii) a statement that “must be voluntary, unconditional and authorised”; and (iii) that “there must be reliance in good faith upon the statement either to the detriment of the party so relying on the statement or to the advantage of the party making the statement”.690

532.  The Tribunal has reviewed the Parties’ correspondence relating to their negotiations subsequent to the Notice of Dispute.691 The Respondent relies on the Claimant’s alleged “voluntary and unconditional conduct” which is said to be “of such a nature as to cause a reasonable reliance in Latvia that the investment claims, as outlined in the Request, will not be pursued beyond negotiations (…)”.692 However, no relevant conduct or statement by the Claimant has been shown to exist. To the contrary, the communication sent by the Claimant to the Respondent immediately prior to the Parties’ last meeting to discuss settlement opportunities expressly mentioned the “potential international arbitration”.693 Reliance on a mere lapse of time is insufficient to give rise to a preclusion based on estoppel.

533.  The Respondent has failed to discharge its burden of proof with respect to the first factual requirement of an estoppel defence. The Respondent has also failed to show its reliance on the Claimant’s alleged conduct or statement that the investment claims would not be pursued beyond negotiations. The Tribunal therefore finds that no issue of estoppel arises on the facts of this case.

(ii)  Acquiescence

534.  The Tribunal considers that the Respondent has not shown that the time which lapsed after the Claimant sent the Respondent its Notice of Dispute is such that the Claimant must be deemed to have accepted by conduct that its claims were extinguished.

535.  Neither Article 7 nor any other provisions of the BIT contains a time limit by which a claimant must bring arbitration proceedings. It was therefore entirely a matter for the Claimant to decide when to bring arbitration proceedings.

536.  The fact that the Claimant took part in the 1 April 2011 meeting after receipt of the Respondent’s email dated 24 March 2011 stating that the meeting would not be held “under the auspices of the Latvian-Lithuanian investment protection treaty” on the basis that the Government of Latvia regarded “the investment dispute as closed” does not give rise to acquiescence, not least since such communication was preceded by a communication by the Claimant indicating that the objective of the meeting would be “to further discuss the Rēzekne case and potential international arbitration”.694 Moreover, the Claimant did not express any agreement to the proposition that the investment dispute was “closed”. The Respondent’s objection based on acquiescence must therefore be dismissed in such circumstances.

(iii)  Extinctive Prescription

537.  The Respondent’s objections based on prescriptive extinction are rested on the same bases as the Respondent’s estoppel and acquiescence objections.

538.  The Respondent did not rebut the Claimant’s reply that the BIT contained no time limits (see paragraph 483 above). Similarly, the Respondent did not rebut the Claimant’s contention that prescriptive extinction had been applied in cases in which the respondent had been put at a disadvantage by the lapse of time and that the Respondent had shown no disadvantage in the present case.

539.  The Tribunal therefore concludes that the absence of a time limit in the BIT is dispositive in the present case and that the lapse of less than four years from the date when the Notice of Dispute dated 1 September 2008 was sent to the Respondent to the date of the Request for Arbitration dated 15 August 2012 is insufficient to attract the application of the doctrine of prescriptive extinction.

540.  The Respondent’s objection based on prescriptive extinction must therefore be dismissed.

(iv)  Bad Faith — Reasonable Doubt as to a Lack of Good Faith

541.  The burden of proof in relation to allegations of bad faith on the part of the Claimant is squarely on the Respondent.695 The Tribunal takes the view that the standard of proof should be appropriately high considering, first, that as a general matter bona fide conduct must be presumed in principle;696 secondly, that the Respondent’s allegations include matters and parties which are not before this Tribunal; and, thirdly, that such allegations are based mostly on news reports. The Respondent appears to acknowledge the difficulty in discharging its burden of proof as it stops short of making an allegation of bad faith and states that there is “reasonable doubt” that the Claimant acted in good faith.

542.  The Tribunal has considered the documentary evidence relating to the events in Prienų and Ukmergė initially filed by the Respondent (Exhibits R-11 to R-14).

543.  Exhibit R-11, dated 5 October 2010, is another similar printout stating that the Regulator suspended the licence of Miesto energija pending the state of emergency and that the contract with Miesto energija was terminated by the Municipality due to high prices.

544.  Exhibit R-12, dated 4 November 2010, is the printout from a news portal quoting another news service, Lietuvos rytas. As a consequence of the Claimant’s decision to raise heating prices again, the Prienų authorities reportedly decided to take over district heating, following the example of Ukmergė. The report does not exclude a political motivation for the decision in both cities, since entrepreneurs are quoted in Exhibit R-12 as saying that “the politicians of Ukmergė and Prienų are simply preparing for municipal elections”.

545.  Exhibit R-13, dated 12 January 2012, is also a printout from a news portal quoting Lietuvos rytas. One concrete element in this report about Prienų relates to the negotiations that were underway between the local authorities and the operator. This exhibit also mentions the city of Ukmergė, reportedly the only one in Lithuania to have taken over heating completely from the private operator in charge.

546.  Exhibit R-14, dated 17 October 2012, reports that E energija will seek compensation in an amount of 15 million litas before the courts against the Ukmergė municipality; the present arbitration proceedings are recalled in the closing paragraph.

547.  The Tribunal further considered the documentary evidence subsequently filed by the Respondent (namely Exhibit R-19) attached to its Rejoinder on the Merits and Reply on Preliminary Objections. The Tribunal takes the view that the filing by a party of an exhibit containing one hundred odd pages attached to a submission in which the exhibit is not discussed in any detail is of very little assistance to it.

548.  In fact, Exhibit R-19 is mentioned only once in the whole submission697 in support of one allegation relating to what could be briefly described as Mr. Strioga’s reckless way of doing business in the eyes of the Respondent.

549.  The Tribunal has taken the various press reports698 contained in Exhibit R-19 into consideration, some of which were briefly referred to by counsel for the Respondent in its opening argument.699 However, the Tribunal will not embark, unassisted by counsel on both sides, on an analysis of the Lithuanian decisions in Exhibit R-19, none of which were referred to in the pleadings.

550.  The Tribunal is driven to the conclusion that the Respondent has not discharged its burden of proof in relation to the allegation that the Claimant brought these arbitration proceedings to influence the authorities in Lithuania. The Respondent’s objection based on the Claimant’s alleged bad faith, or the reasonable doubt that the Claimant may not have acted in good faith, must therefore be dismissed.

551.  As far as concerns the Respondent’s allegation that it is the Claimant’s and Mr. Strioga’s common practice to enter into deals without defining clear rules of cooperation, the Tribunal considers that the Respondent has not discharged its burden of proof by filing documents relating to the Claimant’s contractual arrangements with certain Lithuanian municipalities and the difficulties which arose out of such contracts. Moreover, the Claimant’s alleged common practice has not been shown to be relevant to the Tribunal’s jurisdiction.

552.  Therefore, the Tribunal concludes that Respondent’s objection based on an absence of good faith must be dismissed.

F.  The Tribunal’s Decision on Jurisdiction

553.  The Tribunal has jurisdiction to hear the Claimant’s claims under Article 25 of the ICSID Convention and Article 7 of the BIT. The Respondent’s “preliminary objections” are dismissed.

VI.  The Respondent’s Application for Termination, and, Alternatively, for a Stay of the Proceedings

554.  The Respondent’s application to have these arbitration proceedings stayed was first filed on 18 April 2014 as part of the Memorial setting out the Respondent’s objection to the Tribunal’s jurisdiction (see paragraph 450 above).

A.  The Parties’ Prayers for Relief on the Stay of Proceedings

(1)  The Respondent

555.  In its Memorial on Preliminary Objections and Request for Bifurcation, and Counter-Memorial on the Merits the Respondent seeks the following relief:700

Considering the above mentioned factual and legal description of the situation, the Respondent kindly requests the Tribunal to:

  1. 1)  (…)

    or

  2. 2)  declare that, in accordance with Article 41(6) of the ICSID Arbitration Rules, this arbitration proceeding is to be suspended pending the final and binding adjudication in Latvian courts of the local judicial civil proceeding No. C03051107;

    or

    (…)

556.  In its Skeleton Argument the Respondent requests the Tribunal “under the Tribunal’s discretionary competence, to suspend or terminate the proceedings on grounds enumerated in Respondent’s pleadings”.701

(2)  The Claimant

557.  In its Reply on the Merits and Counter-Memorial on Preliminary Objections the Claimant requests the following relief:702

The Claimant therefore respectfully requests the Arbitral Tribunal to:

  1. (a)  deny the requests for relief set out by the Respondent in section 5 of the Counter-Memorial on the Merits and Preliminary Objections on Jurisdiction;

  2. (b)  (…)

558.  In its Rejoinder on Preliminary Objections the Claimant restates substantially the same relief.703

B.  The Respondent’s Position

559.  The Respondent rested its original application for a stay on the 7 April 2014 judgment by the Supreme Court of Latvia, allowing Latgales Enerģija’s application for review against a judgment dated 20 April 2012 and remitting the case to a new court of appeal for a fresh decision.704 The Respondent argues that the Tribunal should “follow the Vivendi doctrine and allow adjudication of the underlying civil dispute by Latvian courts …”.705 The Respondent contends that Latgales Enerģija’s conduct should be attributed to the Claimant and regarded as an acknowledgment by the Claimant of the fact that the Latvian courts were properly dealing with the matter pending these arbitration proceedings; the Claimant’s attempt at forum shopping trivialized both these proceedings and the Latvian proceedings in which Latgales Enerģija had actively and selectively sought procedural remedies. The Respondent suggests that the Tribunal could only gain from allowing the Latvian courts to hear all factual and legal issues, which were numerous and technical, in relation to the termination of the Long-Term Agreement (referred to as the “Concession Agreement” by the Respondent); reliance is placed by the Respondent on Impregilo v. Argentina706.707

560.  In its Clarificatory Statement on Bifurcation the Respondent goes a step further, arguing that the Claimant has pursued the same issues in the Latvian courts and these arbitration proceedings.708

561.  In its Skeleton Argument the Respondent also seeks a termination of the proceedings on procedural grounds, submitting that the Tribunal had discretion to decide whether to stay the proceedings or terminate them on procedural grounds.709

C.  The Claimant’s Position

562.  The Claimant’s position may be summarised as follows:

  1. (i)  the Latvian proceedings relied upon by the Respondent in support of its application for a stay of proceedings were brought by the Municipality through Rēzeknes Siltumtīkli against Latgales Enerģija in September 2007; the argument that these arbitration proceedings should be stayed pending proceedings brought by Latvia itself against the Claimant’s investment in Latvia cannot be sustained and the accusation that Latgales Enerģija has in bad faith engaged in forum shopping to the detriment of the Respondent is similarly without foundation;710 the Respondent appears to suggest that Latgales Enerģija should not defend itself against Latvian proceedings lest this get in the way of the Claimant’s claims under the BIT, which is a flawed argument;711 and

  2. (ii)  in any event, Latgales Enerģija’s defences in the Latvian proceedings relied upon by the Respondent and the Claimant’s claims in these arbitration proceedings are entirely different since the claims presently under consideration arise out of the BIT; the outcome of the Latvian proceedings is irrelevant to the Tribunal’s mission since the value of the Claimant’s investment in Latvia has already been irreparably destroyed; a Latvian decision on whether the Long-Term Agreement was properly terminated could make no difference to such value and could not determine whether Latvia is in breach of any of its obligations under the BIT, and the issues of lease payments and gas debt are not part of the Claimant’s case in these arbitration proceedings;712 the Respondent’s reliance on the distinction made in Impregilo713 between legitimate expectations and contractual rights is unclear;714 the Claimant is not a party to the Latvian proceedings, it is not a party to the contracts forming the basis of those proceedings and the Claimant’s claims in these arbitration proceedings are not claims for breach of contract so that there is no reason for the Tribunal to stay these proceedings as a consequence of the Latvian proceedings.715

D.  The Reasons for the Tribunal’s Decision on the Respondent’s Application for a Stay and Termination of the Proceedings

563.  The Respondent’s application was denied by the Tribunal in Procedural Order No. 3bis dated 21 January 2015 (see paragraph 23 above).

564.  The Respondent made a fresh application to have these proceedings stayed or terminated on procedural grounds in its Skeleton Argument dated 9 February 2015 referring to the “grounds enumerated in the Respondent’s pleadings” (see paragraph 452 above).

565.  The point was then argued at the Hearing by both Parties.716

566.  In the Tribunal’s view the Respondent’s application for a stay is without foundation, as the Tribunal has already found in Procedural Order No. 3bis.

567.  First, the parties to the Latvian proceedings and the parties to these arbitration proceedings are not the same. The Latvian proceedings relied upon by the Respondent in support of its application for a stay were brought by Rēzeknes Siltumtīkli against Latgales Enerģija (see paragraphs 302 ff. above).

568.  Secondly, the issues arising in these proceedings are not the same as those arising in the Latvian proceedings. The proceedings relied upon by the Respondent in support of its application for a stay were brought under the Long-Term Agreement. They do not relate to the standards of protection under the BIT with which this Tribunal is concerned; that much has been expressly admitted by the Respondent and such admission contradicts the Respondent’s contention that the issues pending before the Latvian proceedings and this Tribunal are the same.

569.  Thirdly, the fact that there may be an overlap between contract claims and treaty claims is not sufficient per se to warrant a stay of proceedings.

570.  Fourth, this Tribunal has already observed in Procedural Order No. 3bis that the Respondent’s complaint that the Claimant has been actively and selectively seeking procedural remedies in the Latvian courts is without foundation, since the Latvian proceedings relied upon by the Respondent were brought by Rēzeknes Siltumtīkli. Other proceedings were subsequently brought by Rēzeknes Enerģija against Latgales Enerģija (see paragraphs 310 ff. above), and by Rēzeknes Siltumtīkli against Latgales Enerģija and the Claimant (see paragraphs 371 ff. above).

571.  There are therefore in the Tribunal’s opinion no sound and cogent reasons to stay these arbitration proceedings.

572.  As there are no reasons to stay these proceedings pending the outcome of the Latvian proceedings, there are, a fortiori, no reasons to terminate these proceedings.

E.  The Tribunal’s Decision the Respondent’s Application for Termination, and, Alternativey, a Stay of the Proceedings

573.  Therefore, the Respondent’s application for termination, and, alternatively, for a stay of proceedings must be denied.

VII.  Liability

574.  In this section, the Tribunal will restate the Parties’ prayers for relief on liability (A) before summarizing the respective cases on liability submitted by the Claimant (B) and the Respondent (C). The Tribunal will then state the reasons for its decision on liability (D) before issuing its decision (E).

A.  The Parties’ Prayers for Relief on Liability

(1)  The Claimant

575.  In its Memorial, the Claimant requests the following relief:717

The Claimant therefore respectfully requests the Arbitral Tribunal to:

  1. (a)  declare that the Respondent has breached Articles 4(1), 3(1) and 3(2) of the BIT,

  2. (b)  (…)

576.  In its Reply on the Merits and Counter-Memorial on Preliminary Objections, the Claimant requests substantially the same relief.

(2)  The Respondent

577.  In its Memorial on Preliminary Objections and Request for Bifurcation, and Counter-Memorial on the Merits the Respondent seeks the following relief:718

Considering the above mentioned factual and legal description of the situation, the Respondent kindly requests the Tribunal to:

(…)

or

  1. 3)  declare that the Respondent has not breached the Treaty; and

  2. 4)  deny all Claimant’s requests for relief (as specified in the Claimant’s Memorial, paragraphs 370 and 371);

    but, in any case,

  3. 5)  (…)

578.  The Respondent’s Rejoinder on the Merits does not set out a prayer for relief.

B.  The Claimant’s Case on Liability

579.  The Claimant submits that Respondent has breached Articles 3(1), 3(2) and 4(1) of the Lithuania-Latvia BIT.

580.  Some of the Claimant’s claims under the BIT are contingent upon certain specific issues that are in dispute between the parties.

581.  The Tribunal will summarise the Claimant’s arguments relating to these issues (see paragraphs 582 ff. below) and will then summarise the Claimant’s position regarding Latvia’s liability under the Treaty in the following order:

  1. (i)  attribution (i.e. whether the conduct of the Municipality, the Regulator, Rēzeknes Siltumtīkli and Rēzeknes Enerģija can be attributed to the Respondent as a matter of international law, see paragraphs 621 ff. below);

  2. (ii)  expropriation (i.e. whether the Respondent is liable for unlawfully expropriating the Claimant’s investment without compensation, see paragraphs 648 ff. below);

  3. (iii)  fair and equitable treatment (i.e. whether the Respondent breached the standard of fair and equitable treatment, see paragraphs 663 ff. below);

  4. (iv)  full protection and security (i.e. whether the Respondent breached the standard of full protection and security, see paragraphs 691 ff. below);

  5. (v)  arbitrary or discriminatory measures (i.e. whether the Respondent took arbitrary and discriminatory measures against the Claimant, see paragraphs 694 ff. below); and

  6. (vi)  breaches of the most favoured nation clause (i.e. whether the Respondent breached an obligation on which the Claimant is entitled to rely by virtue of the most favoured nation clause, see paragraphs 706 ff. below).

(1)  Specific Issues

582.  The Tribunal will in turn summarise the Claimant’s position relating to the following issues: