Cms Gas Transmission Company Vs. Government of Argentina

I. CMS Gas Transmission Company Vs. Government of Argentina

An arbitral tribunal has ruled against Argentina in an important case arising out of that country’s recent economic crisis. The tribunal held that emergency measures adopted by the Argentine Government violated the country’s obligations under the US-Argentina Bilateral Investment Treaty (BIT). Based on these findings, the tribunal awarded a US investor, CMS an approximately US $ 130 Million in compensation. Of the approximately 34 cases brought before the International Centre for the settlement of Investment Disputes (ICSID) in connection with Argentina’s economic crisis, this is the first to yield a merit award.

The privatization: background to the disputes

Argentine Republic in 1989, jurisdiction was made on economic and public utilities as well as participation of foreign investment. Gas transportation was one of the significant sectors to be included under this reform program. The privatization of TGN, was opened to investors by a means of public tender offer. In the claimant view, the legislation and regulation enacted as well as license, resulted in legal regime under which tariff were to be calculated in dollars conversion to pesos was to be effected at the time of billing and tariffs would be adjusted every six months in accordance with US Procured Price Index. CMS has a total participation of 29.42% of TGN shares which was purchased by government.

The Argentine Crisis

• In the late 1990s, Argentina was plunged into an economic crisis (Point 9).

• The collapse of the Argentine economy was one of the most spectacular in modern history. The issue in this case cannot be understood without an appreciation of the crisis that ravaged Argentina’s economy, society and policy prior to its adoption of the emergency measures challenged by CMS. In particular, the question whether the challenged measures were necessary to maintain public order or protect Argentina’s essential security interests and were thereby protected against liability by treaty Article XI, as well as whether Argentina complied with other treaty provisions, must be examined in light of the socio-economic disaster that befell Argentina and the social turmoil it generated. (Point 8)

Argentina’s emergency Measures

• On January 6, 2002, Argentina declared a public emergency. Law 25.561 proclaimed “a public emergency with regards to social, economic, administrative, financial, and foreign exchange matters” to ensure “public order”. In line with the advice of many domestic and foreign economists, Argentina officially repealed its decade-old currency convertibility regime, under which the peso was pegged to the US dollar and moved towards a floating exchange rate (which officially took on February 1). As particularly relevant here, the emergency measures required that tariffs for essential services, including gas transportation, be denominated in devalued pesos. The measures also established a renegotiation commission to renegotiate license terms and suspended tariff increases tied to the US producer Price Index (PPI). If gas tariffs had not been so modified, it would have taken three to four times as many pesos to pay utility bills. Skyrocketing gas prices would have forced factories and other businesses to close down, and most residents would have been unable to heat their homes or cook. According to a World Bank study, even with utility rates converted into pesos, 60% of lower income households were in arrears on utility service payments during the first half of 2002. Thus, Argentina’s emergency measures both prevented a windfall to the concessionaires at the expense of beleaguered customers and also helped overcome insurmountable obstacles to tariff collection. (Point 18)

• Although rioting subsided after adoption of the emergency measures in January 2002 (point 22)

CMS’s Arbitration claims:

• In July 2001, CMS filed a request for arbitration with ICSID. CMS was a 29.42% shareholder in TGN, as Argentine company, which in 1992 had obtained a license to transport gas. CMS alleged the Argentina’s suspension of TGN�s PPI-base tariff adjustment violated the BIT. In February 2002, CMS filed ancillary claims. CMS alleged the Argentina’s emergency laws had fundamentally altered the prior regulatory regime under which TGN’s tariff’s were calculated in US dollars, converted to pesos at the exchange rate at the time of billing and adjusted every six months based on the US-PPI. CMS alleged that the emergency measures reneged on