NERA Experts Contribute to Estonia’s Win in $100 Million ICSID Water Tariffs Case

By Dr. Richard Hern, Clara Segurola and Zuzana Janeckova

The Situation

In 2011, the Estonian Competition Authority (ECA) rejected a water tariff increase application from Tallinna Vesi (ASTV), the capital city Tallinn’s water and sewerage services company. The ECA dismissed the application on the grounds that it would allow the company to earn excess profits and requested that ASTV submit a tariff application for a reduction in tariffs.

In 2014, ASTV’s Dutch shareholders commenced arbitration proceedings against Estonia for allegedly breaching the fair and equitable treatment provision of the Bilateral Investment Treaty (BIT) between the Netherlands and Estonia and presented a claim for US$100 million in damages.

NERA's Role

Counsel for Estonia retained Dr. Richard Hern, a Managing Director in NERA’s London office, to deliver an assessment of ASTV’s profitability over the period from 2011 to 2014, in response to the profitability assessment presented by the Claimants’ quantum expert. Dr. Hern’s team included NERA experts Clara Segurola and Zuzana Janeckova.

NERA’s first report identified material conceptual and calculation errors in the analysis of the Claimants’ quantum expert, including a EUR 98 million mistake in the calculation of the regulatory asset base (RAB) used to assess ASTV’s profitability, which was acknowledged in the arbitral award. It also presented conclusive analysis showing that ASTV had earned returns well above its cost of capital and that it would have earned even higher profits had the requested tariff increase been implemented.

The Claimants’ expert addressed the errors identified by NERA in his second report, but he also changed his approach with respect to the relevant benchmark to assess ASTV’s returns. His second report argued that at the time of the privatization, ASTV’s investors would have expected a certain rate of return over a 15-year period.

NERA’s second report refuted these new arguments and presented an analysis of ASTV’s regulatory framework since the privatization. This analysis provided the relevant context for the Tribunal to consider the investor’s reasonable return expectations at the time. It also highlighted the contradictions in the Claimants’ expert’s first and second reports. Based on this analysis, in its award, the Tribunal concluded that “that Claimants’ case was characterised to a noticeable extent by a lack of consistency…” in respect of key elements including quantum.

Dr. Hern provided oral testimony at a hearing in Paris, which was webcast live from the ICC Hearing Centre in Paris.

The Result

The ICSID arbitration tribunal dismissed all claims brought against the Republic of Estonia and ordered the Claimants to pay more than US$750,000 to Estonia for costs incurred defending the claim.

The decision has important implications for many Central and Eastern European countries because it shows that investment treaties do not curtail a country’s rights to regulate excessive water tariffs post-privatization. It also highlights the importance of understanding the regulatory framework and the information available to investors at the time of investing in disputes involving regulated assets.

Rostislav Pekar, one of the lead partners from Squire Patton Boggs who successfully defended Estonia, commented, “It’s always a great pleasure to work with Richard, Clara, and Zuzana. They immediately identified the key weak spots in the Claimants’ business case and exposed them in their report and at the hearing. We were so impressed that we have hired the team on two other major arbitrations.”

NERA is included in Global Arbitration Review’s 2019 Expert Witness Firms’ Power Index, a listing of top consulting firms that provide expert witness services in international arbitration cases. Dr. Hern is listed in Who’s Who Legal: Arbitration and Who’s Who Legal: Consulting Experts – Quantum of Damages. Ms. Segurola is listed in Who’s Who Legal: Arbitration – Future Leaders.

Further Information

GAR: Estonia Defeats Intra-EU Claim Over Water Tariff Cap

Law 360: Water Utility's $100M Claim Against Estonia Gets Nixed

Squire Patton Boggs Secures Victory for the Republic of Estonia in US$100 Million Investment Dispute