RNCO recalculated, evaluated and concurs with [the Investor]’s financial analysis
that, at an exchange rate of 1.7, with no tariff relief, Enron’s share of TGS’
decrease in shareholders’ equity exceeded a. In addition, GAAP
guidance supports Enron writing off its investment in TGS under the equity
method of accounting.”

In the context of an investment, the right to recover its economic value in accordance
with the terms governing that investment is a fundamental right of the investor. In this case, the
most important asset of TGS, the License, has been dramatically altered, depriving Ponderosa of
its right to collect revenues via the tariffs.

For these reasons, OPIC has determined that Ponderosa has been deprived of
fundamental rights in the insured investment.

5. The violations of law are not remedied and the expropriatory effect continues

for_six months,

To date, the GOA has not taken any action that would provide relief or compensation.
Although it has filed an arbitration claim against GOA with ICSID, Ponderosa has not, since the
enactment of the Emergency Law in January 2002, succeeded in obtaining any compensation
from other sources. Therefore, OPIC finds that the alleged violations of law have not been
remedied and the alleged expropriatory effect has continued for the requisite six-month period.

B. Section 4.03 Exclusions and 5.04 Limitations.

The duty to pay compensation by OPIC is subject to the limitations and exclusions in
Section 4.03 and 5.04 of the OPIC Contract. None of the exclusions apply to this claim.

1. Provocation. No compensation is payable if “the preponderant cause is
unreasonable action attributable to the Investor, including corrupt
practices. 8

In this case, the cause of the Investor’s loss is GOA’s enactment of the Emergency Law.
Although Ponderosa did agree to defer the PPI-indexed increase in 2000, thereby arguably
allowing for the loss for this period, the action was reasonable under the circumstance, and the
subsequent enactment of the Emergency Law cannot be attributed to this concession. According
to Ponderosa, TGS has at all times complied with all of its obligations under the License, and
continues to operate the pipeline despite the losses incurred due to the limitation on its revenue
stream.’ Furthermore, although Enron was allegedly involved in unorthodox accounting

practices, these allegations are unrelated to the expropriation and to the Investor’s loss in

47 RNCO Memo, Section 18. The RNCO Memo goes on to state: “Enron has completely written off its
investment in TGS ... even though its 35.5% share of TGS” shareholders’ equity may have some

market value and/or fair value. RNCO considers this appropriate under GAAP.”

48 Section 4.03(a) of the OPIC Contract.

* See Application at 14.

14


iii) The Argentine Ombudsman sought and received an injunction in the Federal
Court suspending any further tariff adjustments. The Ombudsman also sought
an injunction of the ENARGAS decree on the grounds that the decree allowed
for a partial tariff adjustment in favor of the Investor.

(iv) The courts of Argentina upheld the injunction and suspended the application of
Decree 669/2000, due to the fact that it allowed for a partial tariff adjustment.

(v) The GOA enacted the Emergency Law, which suspended all tariff adjustments
and set exchange rates under public utility contracts at one peso per dollar.

Although all of these actions affected the rights of the Investor in TGS, the main expropriatory
action, and the action on which the claim is based,’ consists of the enactment of the Emergency
Law, which resulted in a change in tariff treatment in violation of the GOA’s contractual
obligation under the License to allow tariff payments in dollars and with a PPI-indexed
adjustment. The enactment of the Emergency Law was authorized and implemented by the
GOA.

2. The acts are violations of international law (without regard to the availability

of local remedies).

A state is responsible under international law for injury resulting from: “(1) a taking by
the state of the property of a national of another state that (a) is not for public purpose, or (b) is
discriminatory, or (c) is not accompanied by provision for just compensation; ... (2) a
repudiation or breach by the state of a contract with a national of another state (a) where the
repudiation or breach is (i) discriminatory; or (ii) motivated by noncommercial considerations,
and compensatory damages are not paid; or (b) where the foreign national is not given an
adequate forum to determine his claim of repudiation oF breach, or is not compensated for any
repudiation or breach determined to have occurred... 1 If, according to these principles, the
GOA bears state responsibility for injury resulting from the Emergency Law, then this provision
of the OPIC Contract has been satisfied.

(A) We take no position as to whether the GOA’s enactment of the
Emergency Law_constitutes_a “taking” by the state _of the
Investor's property.

One grounds for determining whether the enactment of the Emergency Law was a
violation of international law above is that the action constitutes a “taking.” Although traditional
interpretations of expropriation deal with “taking” as actions which force the foreign entity to
abandon operations entirely or where legal title is actually lost, the theory of indirect

° The April Letter states that “‘the sole basis of the claim is the Emergency Law.”

"© The relevant section, Section 4.01 of the OPIC Contract, also includes “material breaches of local law.” The local
law question is addressed in Section 3 of this Memorandum.

1 Restatement (Third) of the Foreign Relations Law of the United States §712 (1987) (the “Restatement”).


expropriation coverage and shall keep OPIC informed as to all recent
developments.”

The Investor has satisfactorily complied with the requirements of this provision.

7. Preservation, Transfer_and Continuing Cooperation. The Investor, in
consultation with OPIC, shall take all reasonable measures to preserve
property, to pursue available administrative and judicial remedies, and to
negotiate in good faith with the GOA. 6

Ponderosa is currently involved in arbitration with Argentina under the Bilateral
Investment Treaty at ICSID. On August 2, 2004, the Tribunal made a favorable decision on
jurisdiction on this claim, and issued an Order for continuation of the procedure in order to hear
the merits of the claim.” On February 25, 2005, the Tribunal denied GOA’s request for an
extension in filing its counter-memorial brief”! The GOA counter-memorial was filed in May
2005.

By providing OPIC with regular updates on the ICSID process, and by certifying,
pursuant to the Application, that it has and continues to pursue all available remedies, OPIC
finds that this condition of the OPIC Contract has been met.

8. Other Agreements. The Investor has not entered into any agreement with a
foreign governing authority with respect to compensation for any acts within
the scope of coverage.

Although Ponderosa did agree to allow the GOA to defer the PPI-indexed
increase in 2000, thereby arguably allowing for the loss for this period, the subsequent enactment
of the Emergency Law cannot be attributed to this concession, since the Emergency Law was
clearly enacted for reasons related to Argentina’s devaluation and inflation crisis. Therefore, any
agreement entered into with the GOA prior to the enactment of the Emergency Law would relate
to acts outside of the scope of coverage with respect to the Claim. Therefore, the Investor has
satisfactorily complied with the requirements of this provision.

9. Modification of Agreements. Neither the Investor nor [TGS] shall agree to
modify or amend any material project agreement executed on or before the
date of this contract, which modification or amendment would have a material

° See Section 9.01.8 of the OPIC Contract.

© See Section 9.01.9 of the OPIC Contract.

© See Response to Question 6 of April Letter.

See Enron Corporation and Ponderosa Assets, L.P. v. Argentine Republic, (ICSID Case No. ARB/01/3) Decision
on Jurisdiction of August 2, 2004.

” See Enron Corporation and Ponderosa Assets, L.P. v. Argentine Republic, (ICSID Case No. ARB/O1/3) Letter
sent by Tribunal Secretary, February 25, 2005.

” See Section 9.01.10 of the OPIC Contract.

18



The theory that certain contractual breaches may constitute expropriation has other bases
in law. International arbitral tribunals have recognized that rights under contracts are property
subject to expropriation.*? Furthermore, in its definition of expropriation in the United States
Code, Congress has explicitly included impairment by a government of a contract with a foreign
investor 2* The elements of the Code, which, although reflecting US law, can be seen as well as
indicative of customary international law, are all met here: the enactment of the Emergency Law
constituted a repudiation of GOA’s contractual obligation under Section 4.5 of the License, the
repudiation was not caused by the Investor’s fault or misconduct, and the repudiation, by limiting
the Investor’s right to collect revenues from TGS’ operations, materially and adversely affected
the continued operation of the Project, and ultimately caused a write-off of the Investor’s
investment in TGS.

(1) We need not decide whether _the repudiation or breach of the
License by GOA was discriminatory.

A state is responsible for a repudiation or breach of contract where the repudiation or
breach is “discriminatory.”* Although the Emergency Law was nondiscriminatory on its face
inasmuch as it applied to Argentine as well as foreign holders of dollar-denominated obligations,
its impact on specific groups of people must be further examined in order to determine whether it
was discriminatory in substance.

Since the discriminatory nature of the act is just one of two conditions, either of which
must be met in order to constitute an international law violation, and the other of which (as
shown below) has been met, it is not necessary to decide this question for purposes of our
determination.

(2) The contractual repudiation was motivated by noncommercial
reasons, and compensatory damages were not paid, giving rise to
state responsibility for_contract repudiation under international
law.

International Jaw prohibits “a repudiation or breach by the state of a contract with a
national of another state (a) where the repudiation or breach is ... (ii) motivated by
noncommercial considerations, and compensatory damages are not paid.” OPIC finds that the
GOA’s repudiation of the License was motivated by noncommercial considerations.

All relevant events leading up to the GOA’s repudiation of the License; i.e., the initial
suspension of the PPI-indexed increase, the enactment of the ENARGAS decree, the challenge to
the indexation by the Ombudsman, and finally the enactment of the Emergency Law were all

3 Libyan Am. Oil Co. v. Libyan Arab Republic, 20 1.L.M. 1, 60 (LC.J. 1977); German Interests in Polish Upper
Silesia, 1926 P.C.1.J., Ser. A, No. 7 at 14045 (Judgment of May 25, 1926); Norwegian Shipowner’s Case, 1 R. Int’
Arb. Awards 307 (1922); see also O’Connell, 2 international Law 763-68 (2d. ed. 1970).

3499 U.S.C. § 2198(b) (where expropriation includes “any abrogation, repudiation, or impairment by a foreign
government of its own contract with an investor with respect to a project, where such abrogation, repudiation, or
impairment is not caused by the investor’s own fault or misconduct, and materially adversely affects the continued
operation of the project.”)

*° Restatement (Third) of Foreign Relations Law of the United States §712 (1987), Part (2)(a}(i).

10


need not decide this question, as the second grounds for an international law violation are much
more clearly demonstrated in the present circumstance.

(B) By application_of the Emergency Law to the Project, the GOA
repudiated a contractual agreement with TGS, constituting an
independent violation of international law.

Under certain conditions, international law imposes state tesponsibility for “a repudiation
or breach by the state of a contract with a national of another state ...”!9 Before evaluating
whether these conditions exist, however, it is necessary to determine whether there has been a
“repudiation or breach by the state of a contract.”

The first threshold question to address is whether the License constitutes a contract by the
state with a foreign national. The License was entered into in 1992 between the GOA, through
the President of Argentina via his National Executive Power, as licensor, and TGS, as licensee,
and contains various obligations and undertakings of the GOA. A contract is a legally
enforceable exchange of promises. The formation of a contract can take place “by the acceptance
of an offer.’ An exclusive license is an agreement that gives the licensee the exclusive right to
perform the licensed act and that prohibits the licensor from granting the right to other parties.”!
In this case, TGS agreed to transport gas and the GOA agreed to give TGS the right to charge a
specific amount for transporting the gas. Their negotiated exchange of promises is the essence of
any contract, and TGS accepted the licensing offer of the GOA, thereby creating a binding
contract regardless of who signed the decree.

In addition, a contract is formed by “conduct of the parties that is sufficient to show
agreement” and their intention to be bound. 2 TGS and the GOA both conducted themselves in a
manner that would indicate there was a contract between the parties. From 1992, when the GOA
granted TGS the license, through early 2000, when the GOA first attempted to limit TGS’ rights
to adjust the tariff according to the terms of the license, TGS transported gas through the pipeline
and was paid the tariffs set up by the GOA in accordance with the agreement. The conduct of
the parties is sufficient to show they had an agreement and therefore there is a valid contract.

The second threshold question is whether the License constitutes a contract “with a
foreign national.” TGS is a company incorporated under the laws of Argentina but owned
entirely by foreign nationals. In the ICSID case brought by Enron and Ponderosa, Argentina
unsuccessfully argued to the Tribunal that the claimants, the indirect shareholders of TGS,
lacked standing to pursue a claim under the Bilateral Investment Treaty between the United
States and Argentina Concerning the Reciprocal Encouragement and Protection of Investment

19 Restatement (Third) of Foreign Relations Law of the United States §712 (1987), Part (2).

20 UNIDROIT Principles Art. 2.1 (1994). The International Institute for the Unification of Private Law
(UNIDROIT) is an independent intergovernmental organization with its seat in Rome. Its purpose is to study needs
and methods for modernizing, harmonizing and coordinating private and in particular commercial law as between
States and groups of States. Both Argentina and the United States are member states in UNIDROIT.

21 See Black's Law Dictionary (7th ed. 1999).

” UNIDROIT Principles Art. 2.1 (1994).


expropriation recognizes that a government may deprive an investor of the economic value of its
investment and that such deprivation is tantamount to a “taking.”!? The Draft Convention on the
International Responsibility of States for Injuries to Aliens (1961) defines a taking as
“unreasonable interference with the use, enjoyment, or disposal of property as to justify an
inference that the owner will not be able to use, enjoy, or dispose of the property within a
reasonable time after the inception of such interference.” 13 This definition would include an act
or series of acts that deprived an investor of the benefit of its investment without compensation
from the state or a third party.

The Iran-U.S. Claims Tribunal found takings in Iran’s deprivation of fundamental
property or contract rights of several American companies notwithstanding the lack of a formal
decree of nationalization.* In numerous cases, the tribunal recognized that interference by a
state with the foreign national’s use of the property or enjoyment of its benefits may constitute a
compensable expropriation, even where legal title was not affected.'* In one of these cases in
particular, the tribunal ruled that the government of Jran’s enactment of legislation requiring the
foreign national’s land to be used for a particular purpose constituted an impairment of the
foreign national’s right to use his property “that prevents, unreasonably interferes with, or unduly
delays, effective enjoyment”"® of such property, thereby constituting a taking. In this case, the
main asset of TGS, and of Ponderosa’s investment, is the License, and the GOA is preventing
TGS from enjoying the benefits of its “property”, i.e. charging a tariff to its customers paid in
dollars and adjusted via the PPI index.

The deprivation of property is a violation of international law if prompt, adequate,
and effective compensation is not paid.!” The GOA has failed to pay or offer to pay any
compensation to the Investor. Furthermore, GOA has, through another provision of the
Emergency Law, prevented the Investor from suspending compliance with its own obligations,
thereby forcing it to endure ongoing losses.'® Ponderosa claims that the acts of the GOA
constitute a violation of international law. Indeed, there is reason to believe that the Emergency
Law went beyond the limits of commonly accepted principles of a state’s power. However, we

22 See George C. Christie, What Constitutes a Taking Under International Law?, 28 Brit. Y.B. Int'l L. 307, 309
(1962) (“[I]nterference with an alien’s property may amount to expropriation even when no explicit attempt is made
to affect the legal title to the property.”)

© Although this document is a draft and has not been accepted by any state, it reflects the opinions of experts on
customary international law in this area. “Although ... in the form of conventions requiring ratification or
accession, they have been widely accepted as generally declaratory of existing law and therefore actually given legal
effect even prior to their formal entry into force.” Oscar Schachter, International Law in Theory and Practice 71
(1991).

"* See, e.g., Starrett Housing v. Islamic Republic of Iran, 23 LL.M. 1090 (Iran-U.S. Cl. Trib. 1993).

'S See, e.g, Jahangir Mohtadi, et al. v. dran, Iran Award 573-271 -3, Case No. 271 (1996) (“It is firmly established in
the Tribunal’s jurisprudence that liability for interference with property rights may be found even where the formal
legal title to property has not been affected.”); Tippets, Abbett, McCarthy, Stratton and TAMS-AFFA Consulting
Engineers of Iran, et al, Award No. 141-7-2 (29 June 1984) (“A deprivation or taking of property may occur under
international law through interference by a state in the use of that property or with the enjoyment of its benefits,

even where legal title to the property is not affected.”).

© Restatement (Third) of Foreign Relations Law of the United States §712 (1987), cmt. g.

"7 See OConnell, 2 International Law 776-77 (2d. ed. 1970)

'8 See Article 10 of the Emergency Law: “The provisions of Articles 8 and 9 of this Law shall under no
circumstances authorize utility providers or contractors to suspend or alter compliance with their obligations.”


adverse effect on the risks borne by OPIC, without OPIC’s prior written
consent.”

When TGS agreed to allow the deferral of the PPl-indexed adjustments in 2000, such
action, in substance, constituted a waiver of a provision of a project agreement, not a
modification or amendment per se. Moreover, in order to fall under this exclusion of the OPIC
Contract, any modification would have to have a material adverse effect on the risks borne by
OPIC.

It would be difficult to argue that TGS’ forbearance had a material adverse effect on the
risks borne by OPIC. The only effect was to limit the revenues that TGS was allowed to receive.
Such limitation, absent the Emergency Law, would not be sufficient to constitute an
expropriatory event. Therefore, OPIC finds that the Investor has satisfactorily complied with the
requirements of this provision.

10. Disclosure. The Investor has provided OPIC with all available documents and
information relating to the project that would affect materially OPIC’s
interest under the contract”.

The Investor has satisfactorily complied with the requirements of this provision.

11. Worker Rights. The Investor has not taken any actions in violation of the
worker rights requirements of the OPIC Contract.”

The Investor has satisfactorily complied with the requirements of this provision.

Vv. CONCLUSION

For the foregoing reasons, OPIC concludes that the claim of the Investor is valid. The
Investor is entitled to compensation in the amount of the insured investment, $50,000,000.

OVERSEAS PRIVATE INVESTMENT CORPORATION

By

Ross Cbfittelly
Acting President and Chief Executive Officer

Date:
© A-05

7 See Section 9.01.11 of the OPIC Contract.

OPIC notes that no consent was requested or given as to the deferment of the adjustment under the License.
See Section 9.01.12 of the OPIC Contract.

7 See Section 9.01.13 of the OPIC Contract.

19


effect of nullifying these provisions, constitutes a repudiation or abrogation of GOA’s
obligations under the License.

According to the claim application by Ponderosa, the two provisions in question were
negotiated as “material parts of the deal 8 The provisions were meant to protect against both
inflation in Argentina and devaluation of the peso, both important risks that foreign investors
seek to limit to the extent possible. The application states that since TGS’ revenues rely heavily
on the tariffs, as approximately 80% of its revenues flow from them, these provisions “were
absolutely central to the deal.” ° Indeed, the mere fact that a public utility license granted by a
government explicitly provides for payment in dollars and links tariffs to a US-based adjustment
scheme indicates that a foreign investor likely negotiated these terms, since such government
contracts would otherwise, as a matter of policy, be linked to local pricing and currency.
Furthermore, the express terms of the License provide that the provisions of the License, and the
obligations created thereby, would continue for the entire term of the License, ie., thirty-five
years.

For approximately eight years after the execution of the License, the tariffs charged by
TGS in accordance with the License were permitted by the GOA with the PPI-indexed
adjustment and were calculated in dollars, thereby limiting the risk to TGS of fluctuations in the
rate of exchange or inflation.

Although TGS did agree to two suspensions of the PPI-indexation under the License, no
document executed by TGS and the GOA expressly or implicitly terminates the License and all
GOA obligations thereunder. Thus, the GOA’s principal obligation to allow TGS to collect
tariffs in accordance with the License was never terminated by mutual consent. The License
explicitly states that the rate shall not be modified except “according to provisions in the Law,
Regulatory Decree, these Basic Standards and regulations of the Rate itself”?! The Emergency
Law purportedly supersedes any previous laws to the contrary by a sweeping provision which
states: “This law deals with matters concerning the overriding public interest. No person may
assert irrevocably acquired rights against it. Any other provision to the contrary is hereby
abrogated.” The Emergency Law on its face constitutes abrogation of the License; the GOA
cannot override its international law obligations to investors by enacting domestic laws that are
inconsistent with those obligations. Therefore, OPIC determines that the provisions of the
Emergency Law which contradict those of the License create a modification outside of the
allowable provisions under Section 9.2 of the License. Thus, the application of the Emergency
Law in contradiction of the explicit terms of the License is in itself a repudiation of the GOA’s
contractual obligations under the License. The fundamental obligation of the GOA to maintain
the pricing mechanisms of the License should have survived the enactment of the Emergency
Law. Therefore, OPIC finds that there has been a repudiation of by the GOA of the License.

28 See Application, page 5.

29 Id.

3° See Section 3.1 of the License.

31 See Section 9.2 of the License. “Law” refers to Law 24,076 establishing the regulatory framework for the
privatization of the natural gas industry; the Regulatory Decree is the Decree No 245 which grants TGS the License
and enters the License into law; and the Basic Standards are the provisions of the License itself.

® article 19 of the Emergency Law.


MEMORANDUM OF DETERMINATIONS

Expropriation Claim of Ponderosa Assets, L.P.
Argentina - Contract of Insurance No. D733

1 CLAIM

By a letter dated August 12, 2002 (Annex 1), supplemented by a letter dated April 10,
2003 (Annex 2) (the “April Letter”), Ponderosa Assets, L.P. (“Ponderosa” or the “Investor”)
filed an application under OPIC Insurance Contract No. D733 dated June 1, 1993 (the “OPIC
Contract”), a Form 234 KGT 12-85 (Second Revised) NS equity contract, as amended (Annex
3), for compensation in the amount of US$50,000,000 (the “Application”). The OPIC Contract
covers an equity investment in the privatization, acquisition and operation of Transportadora de
Gas del Sur (“TGS”), a gas pipeline company located in southern Argentina (the “Project”).

On August 12, 2002, Ponderosa filed the Application for the expropriation of its equity
interest in the Project. OPIC thereafter requested additional information by letter dated
November 7, 2002, and, on the basis of this request, a response was filed by Ponderosa in the
April Letter. In addition, Ponderosa requested, and received, confirmation that its claim would
continue to be processed despite the fact that Ponderosa has a simultaneous pending claim for
compensation with an arbitral tribunal (the “Tribunal”) in ICSID arbitration. Arbitration under
ICSID is still pending, and the Tribunal determined that the dispute was within the standing of
the Centre and the competence of the Tribunal on August 2, 2004.! The merits of the dispute are
still pending with the Tribunal.

Based on all the information provided and certifications made by Ponderosa, OPIC finds
that an expropriation within the meaning of the OPIC Contract has occurred. This finding is
based upon OPIC’s determination that, even if enactment of the Emergency Law can be justified
in general as a valid exercise of regulatory power, the actions of the GOA in enacting the
Emergency Law constitute repudiation of the GOA’s contract with Ponderosa, motivated by
noncommercial considerations, and for which compensatory damages were not paid, in violation
of the GOA’s responsibilities to a foreign investor under international law.

The amount of compensation due under the OPIC Contract is the full active amount of
expropriation coverage at the time of the claim, $50,000,000.

I. THE INSURANCE CONTRACT

Enron Corp. (“Enron”) was the entity that initially applied for political risk insurance
with OPIC for coverage of the Project. On June 1, 1993, OPIC and Enron executed the OPIC
Contract, which provided coverage against the risks of inconvertibility, expropriation, and

' See Enron Corporation and Ponderosa Assets, L.P. y. Argentine Republic, (CSID Case No. ARB/01/3) Decision
on Jurisdiction of August 2, 2004,


contractual obligation could not prevent the government from carrying out sovereign acts, it does
require that the government answer in damages for its conduct. Therefore, OPIC has determined
that the GOA had a continuing contractual obligation under the License to maintain a protective
environment for TGS to collect revenues through the tariffs calculated in accordance with
Section EX of the License or through some other mechanism which would allow TGS to maintain
its revenues at equivalent levels. Failure to maintain such protection constituted a repudiation of
contract and gave rise to a right to compensation. The GOA’s decision not to compensate TGS
thereby constitutes a violation of international law.

(3) Although the_Investor_has_been given _an adequate forum_to
determine his claim_of repudiation or breach, the ongoing ICSID
arbitration, Ponderosa has not to date been compensated for any
repudiation or breach determined to have occurred.

In addition, a state may held responsible for repudiation of a contract “where the foreign
national is not given an adequate forum to determine his claim of repudiation or breach, or is not
compensated for any repudiation or breach determined to have occurred.” This provision
describes a claim for “denial of justice” if the state denies the alien an effective domestic forum
to resolve the dispute and has not agreed to any other forum.” In this case, GOA has agreed to
resolve the dispute under an arbitration with ICSID, which is currently ongoing and is scheduled
to be heard late in 2005. It should be noted, however, that GOA has made consistent challenges
to the Investor’s right to arbitrate under ICSID, including a jurisdictional challenge which was
decided against GOA, requests for information on inter-shareholder settlements, numerous
requests for extensions, and public statements about defects in the ICSID process. However,
since OPIC has agreed to make a determination on the merits while the ICSID arbitration is
pending, and since no compensation has been made to date, OPIC finds that GOA has, up to the
date hereof, violated the principle outlined in the second part of this clause; since Ponderosa has
not been “compensated for any repudiation or breach determined to have occurred.”

Of course, if the ICSID arbitral panel rules in favor of Ponderosa, and GOA does honor
its obligation to pay under that arbitration, then the violation of international law will have been
remedied, Under these circumstances, however, OPIC would receive the benefit of the arbitral
award to the extent it has paid out on the Claim hereunder.

(D) Summary.

OPIC finds that there has been a violation of international law by GOA. Specifically, the
enactment of the Emergency Law repudiated a contractual obligation by GOA to allow TGS to
charge a tariff calculated in dollars and adjusted according to the PPI index. The failure to
provide adequate compensation for such repudiation constitutes a violation of international law.

a

3. The acts are material breaches of local law.

# Restatement (Third) of Foreign Relations Law of the United States §712 (1987), cmt. h.
8 See Enron Corporation and Ponderosa Assets, L.P. v. Argentine Republic (ICSID Case No. ARB/01/3) Decision
on Jurisdiction of August 2, 2004,

12


prompted by the GOA’s need, in its sovereign capacity, to deal with Argentina’s currency crisis,
and not by commercial considerations. ‘Additionally, the contractual obligation under the
License to permit TGS to charge tariffs was created as a result of the GOA’s jurisdiction over
public utilities and was therefore undertaken in the GOA’s capacity as a sovereign government,
and not as a party with a commercial interest in the License. In fact, the License was granted to
TGS by GOA in its capacity as regulator of the natural gas industry.

The prevailing view is that “international law is not implicated if a state repudiates or
breaches a commercial contract with a foreign national for commercial reasons as a private
contractor might, e.g. due to inability of the state to pay or otherwise perform, or because
performance has become uneconomical ...°°° Because there is a fine line between commercial
and policy motives where a governmental contract is concerned, this provision should be
examined in light of the actual motive of the GOA in enacting the Emergency Law. In this case,
the Emergency Law was purportedly enacted for public policy reasons, specifically to curb the
risk of inflation and devaluation and to control the flight of foreign exchange from Argentina.
The Emergency Law itself begins with GOA declaring a state of emergency and sets as its goal
“to rearrange the financial, banking and exchange market system” and “to relaunch the
economy.”* If the GOA acted “essentially on governmental motives”;** ie., the public policy
motive of curbing the risk of inflation and easing the effect of the state’s severe devaluation, it
cannot have been acting in its commercial capacity. The same consideration that might relieve
GOA of state responsibility for a “taking” for public policy purposes gives rise to state
responsibility for abrogation or repudiation of contract.

In a similar expropriation claim presented to OPIC, the Government of Jamaica
terminated a foreign enterprise’s marketing and purchasing functions designated under a specific
contract In that case, OPIC held that the government’s actions amounted to a breach of its
obligations to provide support to the foreign enterprise to maintain pricing margins. Although, in
that case, the government did not specifically undertake to allow the foreign enterprise to charge
tariffs under a certain regime, OPIC found that the government had undertaken a general
obligation to provide protection through maintaining the foreign enterprise’s pricing margins —
whether through tariffs or otherwise.  OPIC further found that the government actions were
taken for reasons related to the country’s trade liberalization policies and not for commercial
considerations.*! The government’s failure to maintain this protection and failure to pay adequate
compensation for such action were deemed expropriatory acts for which compensation under the
OPIC insurance contract was payable.

In this case, the GOA had specific contractual obligations that were abrogated due to its
enactment of the Emergency Law. As in Joseph Companies, the GOA, contrary to its
undertakings, took actions that undercut entirely its obligations under the License of allowing the
tariffs to be charged according to a PPI price adjustment and calculated in US dollars. While the

36 Restatement (Third) of Foreign Relations Law of the United States §712 (1987), Note 8.

37 article 1 of the Emergency Law.

Id.

2 See Expropriation Claim of Joseph Companies Incorporated of Minneapolis. Jamaica Contract of Insurance No.
£197,

” See Id. at 9.

"' See Id.

11


(the “BIT”). The Tribunal made its determination based on the definition of “investment” under
the BIT:

(a) “investment” means every kind of investment in the territory of one Party
owned or controlled directly or indirectly by nationals or companies of the
other Party, such as equity, debt, and service and investment contracts; and
includes without limitation: (...)

(ii) a company or shares of stock or other interests in a company or
interests in the assets thereof;?

The Tribunal concluded that “the Treaty was made with the specific purpose of
guaranteeing the rights of the foreign investors and encouraging their participation in the
privatization process”, and that therefore the shareholders ownership of TGS fell squarely within
the definition of “investment.””*

In the case of CMS Gas Transmission Company v. Argentina, also cited by the Tribunal,
an ICSID arbitral tribunal stated that “foreign control in terms of treating a company of the
nationality of the Contracting State party as a national of another Contracting State is precisely
meant to facilitate agreement between the parties, so as not to have the corporate personality
interfering with the protection of the real interests associated with the investment.””> Since TGS
would be treated as a national of a country other than Argentina for purposes of arbitrating
claims under the BIT, it can also be considered a foreign national party to a contract under
international law principles.

Another question to address is whether there has been a “repudiation or breach” by GOA
of the License. OPIC has in the past interpreted the term “repudiate” to mean an outright
disclaimer by the state of any liability under the contract.2° The GOA has not disclaimed
liability. However, GOA has materially changed the terms of the contract unilaterally, which
amounts to the same thing. OPIC finds that this unilateral and material modification of the
License constitutes a repudiation by GOA of its obligations under the License.

The main obligation of GOA under the License is that it shall “allow [TGS] to collect
Rates fixed in Chapter IX hereof in accordance with provisions of [Law 24,076, which
establishes the regulatory framework of Natural Gas activity.]”?” Chapter IX of the License sets
forth the regulatory provisions regarding the tariff rates, including the provisions that the tariff
shall be paid in dollars and shall be adjusted based on the PPI index. Since Section 4.5 creates an
actual obligation on the GOA to allow TGS to collect the tariff according to this particular
scheme, OPIC concludes that the enactment by the GOA of the Emergency Law, which had the

23 Article 1(1)(a) of the BIT.

24 See Enron Corporation and Ponderosa Assets, L.P. vy. Argentine Republic, (ICSID Case No. ARB/01/3) Decision
on Jurisdiction of August 2, 2004.

25 CMS Gas Transmission Company v. Argentine Republic, 42 Int’| Leg. Mat. 788, 796 (2003) . See also Azurix v.
Argentine Republic, (\CSTD Case No. ARB/01/12) Decision on Jurisdiction. of December 8, 2003.

26 See Matter of Revere Copper & Brass Co. and Overseas Private Investment Corp., 15 Int’| Leg. Mat. 1321, 1345
(1978).

2” See Section 4.5.1 of the License.


Ponderosa, the GOA “pressured” TGS to defer the PPI-linked tariff increase for the six-month
period from January-June 2000. Then, in July 2000, it further pressured TGS to enter into
another such agreement, providing for 30% of the previous tariff adjustment and postponing any
further adjustments until October 2000. The Argentine gas regulatory agency, Ente Nacional
Regulador del Gas (‘“ENARGAS”), issued a decree on August 4, 2000 formalizing this
agreement.® On August 3, 2000, the Argentine Ombudsman challenged the constitutionality of
the PPI-linked tariff adjustment in the License and sought an injunction in the Federal Court
suspending any further tariff adjustments. The Ombudsman also sought an injunction against
implementation of the ENARGAS decree on the grounds that the decree allowed for a partial
tariff adjustment. The injunction was granted, and ENARGAS sent a notice to TGS that it was
obliged to maintain its tariffs at the January 2000 rates. These measures are noted by way of
background, as they were voluntarily entered into and therefore cannot be the basis for an
expropriation claim. Ponderosa stated in the April Letter that its sole basis for the claim is the
passing of the Emergency Law.

IV. DETERMINATIONS UNDER THE OPIC CONTRACT

A. The actions taken by the GOA with respect to Ponderosa’s insured investment in TGS
constitute total expropriation within the meaning of Section 4.01 of the OPIC Contract.

Four issues are presented by Section 4.01 of the OPIC Contract, which sets forth the
requirements for total expropriation coverage: (1) whether the acts were attributable to a foreign
governing authority in de facto control of the part of the country where the Project is located; (2)
whether the acts constituted a violation of international law or a material breach of local law; (3)
whether Ponderosa was deprived of fundamental rights in the insured investment, and if so,
whether the stated acts directly caused such loss; and (4) whether the expropriatory effect has
continued for the requisite six-month period.

1. The acts are attributable to a foreign governing authority which is in de facto
control of the part of the country in which the project is located.

The identity of the foreign governing authority in control of southern Argentina is not in
question in this case. The OPIC Contract itself defines “foreign governing authority” as the “the
governmental authority(ies) in effective control in all or part of Argentina.” The GOA is in
effective control of all of Argentina.

There have been a number of acts attributable to the GOA that have directly affected the
rights of the Investor in its investments in TGS:

@ Through negotiations with the Investor and subsequent amendments to the
License, GOA suspended its obligation under the License to allow the tariff to
be payable using the PPI index adjustment, in January and again in July 2000.

(ii) This arrangement was formally codified into law through Decree 669/2000
enacted by ENARGAS.

8 See ENARGAS Decree 669/2000.


Argentina, and all of the financial records relating to this transaction have been fully reviewed by
OPIC’s accountant RNCO. Therefore, OPIC finds that the provocation exclusion does not apply.

2. Government Action No compensation is payable if “the action is taken by the
foreign governing authority in its capacity or through its powers as a
purchaser, supplier, creditor, shareholder, director or manager of the project
company. "50

When the License was originally granted, GOA retained a 30% interest in TGS, but this
interest was subsequently sold to TGS employees and the general public®'; therefore, GOA is not
a shareholder of the TGS. Furthermore, GOA entered into the License as a regulator and not as a
purchaser or supplier of natural gas. GOA is not a purchaser, supplier, creditor, shareholder,
director or manager of TGS.

We have already found that the repudiation was motivated by noncommercial reasons.
While the original request by GOA to defer the PPI-indexed tariff was made in its capacity as a
contracting party, the same cannot be said for the enactment of the Emergency Law. The
Emergency Law was undertaken by the GOA acting in its sovereign capacity, as it was a
legislative act. The Emergency Law was passed by the Senate and House of Representatives of
Argentina, pursuant to the Argentine Constitution. Article 8 of the Emergency Law in
particular notes that it relates solely to contracts “subject to public law. 3 Thus, since the law
was passed for reasons related to the public interest and not in GOA’s capacity as a contracting
party, and was the underlying cause of, and the channel for, the GOA’s repudiation of the
License, OPIC finds that the government exclusion does not apply.

3. Active Amount. Compensation is limited to “the Active Amount on the date the
expropriatory effect commences. nd

According to the executed Election of Political Risk Insurance Coverage for the period
from October 22, 2001 through January 21, 2002, the Active Amount (as defined in the OPIC
Contract) was $50,000,000 on January 6, 2002, which is when the Emergency Law was
enacted.*> Since the enactment of the Emergency Law has been determined to be the
expropriatory event, and the claim is for the Active Amount as of the date of such expropriatory
event, a limitation of $50,000,000 applies.

4. Insolvency. Compensation under the OPIC Contract is limited “if the
liabilities of the foreign enterprise exceed its assets as of the date the
expropriatory effect commences. ”*

5 Section 4.03(b) of the OPIC Contract,

+! See Application at 4.

» See Article I of the Emergency Law: “The state of ... emergency is hereby declared pursuant to Article 76 of the
Argentine Constitution.”

® Article 8 of the Emergency Law.

* Section 5.04(a) of the OPIC Contract.

55 See Exhibit 6 of the Application.

5 Section 5.04(b) of the OPIC Contract.

15


2. Self-Insurance. The Investor shall continue to bear the risk of loss of at least
10% of it interest in the foreign enterprise”,

As noted in B(5) above, the Investor has satisfactorily complied with the requirements of
this provision.

3. Assignment, No assignments of the OPIC Contract may be made without the
prior written consent of OPIC®.

Pursuant to the Assignment, Enron transferred its interest in the OPIC Contract to
Ponderosa in 1998 with OPIC’s written consent. Therefore, this condition has been met.

4. Accounting Records. The Investor shall maintain in the United States certain
accounting records for the foreign enterprise necessary to compute and
substantiate compensation.

Enron utilized the equity method of accounting, which, according to the RNCO memo, is
acceptable under US GAAP.© Although as noted above, OPIC has identified certain deficiencies
in the accounting records and financial statements submitted by Ponderosa, OPIC finds that these
deficiencies did not render the representations and allegations made in the OPIC Contract and the
Application materially misleading. Specifically, and with RNCO’s support, OPIC finds that (1)
Enron’s initial investment in TGS, both at execution of the OPIC Contract and at execution of
the Amendment, was greater than that initially provided by Enron; (2) Enron and subsequently
Ponderosa’s total investment in TGS, using the equity method of accounting, was substantially
less than what was represented in the Application; and (3) the total write-off of Ponderosa’s
investment was justified using the equity method of accounting. Ponderosa has provided
extensive additional information as necessary for OPIC to compute and _ substantiate
compensation.

5. Reports and Access to Information. The Investor shall furnish OPIC with such
information related to the Project as OPIC may reasonably request. 6

Through numerous requests, correspondence, and a formal meeting at the Investor’s
headquarters in Houston in March 2004, OPIC and RNCO have received all the necessary
information to make the determinations contained herein. OPIC therefore finds that the Investor
has satisfactorily complied with the requirements of this provision.

6. Compulsory Notice The Investor shall notify OPIC promptly of any acts or
threats to act in a manner which may come within the scope of the

® See Section 9.01.3 of the OPIC Contract.
° See Section 9.01.4 of the OPIC Contract.
“ See Section 9.01.6 of the OPIC Contract.
° See RNCO Memo, Section 1.

§ See Section 9.01.7 of the OPIC Contract.

17


On December 18, 1998, Enron entered into an Assumption and Consent with OPIC and
Ponderosa (the “Assignment”), whereby Enron transferred all of its interests in the OPIC
Contract to Ponderosa, and OPIC consented to such assignment.

Ii. FACTUAL SUMMARY

As part of the privatization of its gas industry, Argentina divided and sold its state gas
company, Gas del Estado, into numerous smaller companies, including TGS, one of two
transportation companies that was formed and privatized. CIESA acquired 70% of TGS capital
stock. In turn, 25% of the CIESA’s shares were owned by each of the four investors, giving
each, indirectly, a 17.5% interest in TGS. As described above, Enron acquired an additional 25%
interest in CIESA in 1996 and amended the OPIC Contract accordingly, increasing its indirect
equity interest in TGS to 35%.

The government of Argentina (the “GOA”) granted TGS its rights to transport gas
through a gas transportation license (the “License”) dated December 18, 1992 with a term of
thirty-five years. The License allows TGS to collect revenues for transporting gas through tariffs
set by GOA. However, the License specifies that the tariffs will be calculated in U.S. dollars and
expressed in Argentine pesos and that the tariffs shall be adjustable every six months in
accordance with variations in the US Producer Price Index (“PPI”). These provisions were
meant to protect the Investor against the respective risks of devaluation of the peso and of
inflation in Argentina. TGS’s main source of revenue is the tariffs.

The GOA enacted the Public Emergency and Exchange Regime Reform Law No. 25,561
(the “Emergency Law”) on January 6, 2002. Article 8 of the Emergency Law provides that “in
contracts entered into by the public administration and subject to public law, including contracts
for works and public services, dollar ... adjustment clauses and indexation clauses based on the
price indexes of other countries, as well as any other indexation mechanisms shall no longer be
effective. The prices and rates resulting from such clauses shall be fixed in pesos at a ONE PESO
($1) = ONE DOLLAR (US$1) exchange rate.”

As a result of the enactment of the Emergency Law, TGS’ revenues have been (1) frozen
at the January 2000 rate and an adjustment to the PPI index has not been permitted, and (2)
limited to the peso equivalent of the US dollar amount which should have been paid. These two
elements have resulted in a decrease in the revenues of TGS so great that it justified a total write-
off by the Investor of its investment in TGS.

Beginning in 2000, the GOA attempted through various other measures to limit TGS’s
rights to adjust the tariff, culminating in the Emergency Law. In January 2000, according to

5 See Section 9.2 of the License, which states that “[rJates have been calculated in United States dollars. Adjustments
... shall be calculated in United States dollars.”

© See Section 9.4.1.1 of the License, which states: “Transportation rates shall be adjusted semiannually pursuant to
PPT’s variation.” “PPI” is defined as “’Producer Prices’ Index — Industrial Goods’ (1967=100) published by the
Bureau of Labor Statistics of the Labor Department of the United States of America, or by that agency which may
replace it, or, should that publication be discontinued, such industrial prices statistics as might be comparable.”

” Article 8 of the Emergency Law.


political violence. The OPIC Contract covered Enron’s equity in the Project, contributed in the
form of capital contributions; Enron acquired 99.99% of the shares in Enron Pipeline Company —
Argentina, $.A. (‘EPCA”), which acquired 25% of the shares in Compania de Inversiones de
Energia S.A. (“CIESA”), which acquired 70% of the shares in TGS, resulting in an initial
indirect investment by Enron in TGS of 17.5%.

Due to the complexities of the financial statements, the numerous intermediate
subsidiaries involved, and the various charges of accounting fraud associated with Enron, OPIC
hired an independent forensic accounting firm, Russel Novak & Company LLC (“RNCO”), to
review the various financial representations in the OPIC Contract and Application.

The first item RNCO assessed was the initial and subsequent investments that Enron
made in TGS in connection with the issuance of the OPIC Contract. Although the OPIC Contract
states that the total amount of the equity investment “contributed or to be contributed” was
SMM, RNCO determined that the actual cavity investment made in conjunction with
execution of the OPIC Contract was $}

Moreover, the OPIC Contract was amended on September 30, 1997 (the “Amendment”)
to reflect Enron’s increased investment in the Project. At the time of execution of the
amendment, Enron had acquired an additional 25% of CIESA’s share holdings through EPCA,
thereby increasing its percentage ownership of TGS to 35%. The Amendment states that Enron
contributed an aggregate amount of — to EPCA and EACH. Neither Enron nor
RNCO has been able to reconcile this amount, but a careful audit of the financial records reveals
that the actual investment by Enron in TGS at the time of execution of the Amendment was
$EEEEEE, which is well over the SIRE originally represented.’

At the time of submission of the claim, the active amount of expropriation coverage
under the OPIC Contract was $50,000,000. The Investor is claiming the full amount, as it claims
that its loss exceeds the active amount of coverage. Although in the Application Enron
represented that its total investment over time was $ , RNCO has found, and Enron
has confirmed, that its actual investment from the date of the initial investment through the date
of the Emergency Law, using the equity method of accounting, was SHE * 1: is the total
write-off of this amount that demonstrates the effect of the Emergency Law (defined below), and
justifies a finding of expropriation.

execution of the OPIC Contract, Enron had contributed $ to CIESA through the purchase of Argentine
Government bonds, and had contributed an initial $} in the purchase of common shares in CIESA, for a
total investment of SIREN. Over the course of 1993, Enron also contributed to the payoff of debt (through a
guarantee) of CIESA in an amount of $9. It is unclear whether Enron intended to include this contribution
as part of its initial investment in tbe June 1993 contract, but at any rate the amount of the investment excluding this
amount still exceeds the stated amount of $}

3 See RNCO Memo, Section 12. The RNCO Memo states: “.., it does seem that Enron’s promise (1) that it
contributed zz (directly or indirectly) to EPCA and EACH, (2) that it owned (directly or indirectly) 50%
in CIESA and (3) that it contributed those sums to acquire a 70% equity interest in TGS was substantially correct.”
Although normally the extent to which the investment was “underinsured” would be subject to an additional
premium, in this case OPIC was only to serve as a first loss layer, and private market participation was to cover the
remaining investment. Therefore, no underinsurance premium was assessed.

* See RNCO Memo, Section 15.

? See Memo to OPIC from Michael Pakter, RNCO, dated _ 16, 2004 (the “RNCO Memo”), At the time of


Ponderosa further argues that the enactment of the Emergency Law violates Argentine
law. Since the tariff provisions in the License refer to law 24,076, the law deregulating the gas
industry and to the ENARGAS regulations, both of which explicitly provide for the PPI
adjustment and the dollar-calculated tariffs, Ponderosa argues that an abrogation of these
provisions is a material breach of Argentine Law.” Ponderosa further argues that a fundamental
principle of Argentine administrative law provides that “the government cannot unilaterally
change or terminate a public contract without duly compensating the other party for losses
generated by such changes or termination.”

The Emergency Law has thus far sustained heavy attack in the Argentine courts. The US
Embassy in Buenos Aires has informed OPIC of a series of claims alleging the
unconstitutionality of the provisions of the Emergency Law that converted accounts originally
denominated in US dollars into peso accounts. Thus far, lower Argentine courts have
consistently held that it was unconstitutional for the GOA to convert these accounts and that the
conversion scheme constituted an impermissible use of state power. The GOA’s authority to
implement the Emergency Law for this purpose has been challenged before the Argentinean
Supreme Court. However, this challenge is entirely separate from the aspect of the law
concerning public contracts. Such a challenge has not yet been made by the Investor, due to the
fact that ICSID arbitration precludes the simultaneous pursuit of local remedies. Although there
appears to be a strong case for the assertion that the Emergency Law may violate local law, given
the fact that this case has not been tested, in addition to the fact that a separate basis for
violations of international has been found, we determine that such an investigation is not
necessary in the instant case.

4. The_acts deprived the Investor of fundamental rights in the insured
investment.

A determination under Section 4.01(c) of the OPIC Contract raises the issue of whether
Ponderosa was substantially deprived of fundamental rights in the Project.

As discussed in Part (2) above, not all of the investor’s rights with respect to the insured
investment need be affected for an Investor to be fundamentally deprived of the benefits of its
investment. In determining whether total expropriation has occurred, OPIC will examine the
significance of the rights in question in the context of the overall investment.

Ponderosa, together with its fellow consortium members, retains full control of the assets
of TGS, including the License. However, the revenue stream of TGS has been reduced so
drastically as a result of the provisions of the Emergency Law that it resulted in the total write-
off of the investment under the equity method of accounting. Ponderosa argues that “the
abrogated provisions of the License were necessary to ensure that Ponderosa received a
reasonable return on its investment.”“° Without such provisions, Ponderosa argues, its investment
in TGS is rendered worthless and therefore justified a total write-off. RNCO, after extensive
financial analysis, concurred, stating:

“ See Application at 9.
* Application at 10,
46 Application at 13.

13


According to TGS’ audited financial statements presented with the Application, TGS
had, as of December 31, 2001, a book value of a of which Ponderosa’s share was
35%. Therefore, despite the fact that Ponderosa’s decrease in equity exceeded its investment,
TGS’ assets exceeded its liabilities as of the date immediately preceding the Emergency Law,
and this limitation does not apply.

5, SelfInsurance. Compensation under the OPIC Contract is limited by “the
maximum amount which could be received by the Investor from OPIC without
breaching 9.01.3. 58

Section 9.01.3 provides that “the Investor shall continue to bear the risk of loss of at least
10% of the book value of its interest in the foreign enterprise.”

The Application asserts that “the book value of Ponderosa’s 35% stake in TGS dropped
from . to nil.*? As mentioned above, the true amount of the investment according
to RNCO, and confirmed by the Investor, using the equity method of accounting, was
SHEEN. Nonetheless, this amount far exceeds the coverage election of $50,000,000. While
it is true that private market participation would decrease the Investor’s risk of loss, that
participation was later voided ab initio and thus, at the time of the expropriatory event, the
Investor bore the entire risk of loss in excess of OPIC’s first loss, approximately | of its
interest in TGS. Therefore, the Investor has satisfactorily complied with the requirements of this
provision.

C. Procedural Issues.

There are no procedural issues that require discussion in connection with this claim
determination.

D. Investor's Duties.
Contract.

The Investor has complied with its duties under the OPIC

1. Qwnership_and Eligibility. Investor shall remain at all times the beneficial
owner of the insured investment.

Although Enron assigned its ownership interest to Ponderosa pursuant to the Assignment,
OPIC consented to such Assignment and Ponderosa represented that it too satisfied all of the
ownership and eligibility requirements set forth at Section 9.01.2 of the OPIC Contract.®!
Therefore, OPIC has determined that the Investor has complied with the requirements of Section
9.01.2.

57 See Exhibit 10 of the Application, page 2. The book value was obtained by adding the Shareholder’s Equity under
US GAAP for end year 2000 and the 2001 net income (for Argentine GAAP, since the US GAAP value included the
effect of the Emergency Law), minus 2001 dividends paid.

58 Section 5.04(c) of the OPIC Contract.

* Application at 2.

© See Section 9.01.2 of the OPIC Contract.

6! See Section 1(a) of the Assignment.

16