Opinion on the Energy Charter Treaty

(96/C 18/26)

On 30 March 1995, the Economic and Social Committee, acting under Rule 23(3) of its Rules of Procedure, decided to draw up an Opinion on the Energy Charter Treaty.

The Section for Energy, Nuclear Questions and Research, which was responsible for preparing the Committee's work on the subject, adopted its Opinion on 26 September 1995. The Rapporteur was Mr Lyons.

At its 329th Plenary Session (meeting of 26 October 1995), the Economic and Social Committee adopted the following Opinion by a unanimous vote.

1. Background

1.1. It was in July 1991 that the Committee adopted an Opinion on a draft of the Energy Charter (). The Charter itself was formally adopted at the Hague in December 1991. While making proposals for improving some of the provisions of the draft text available to the Committee at the time, the Committee was quite clear in its support of the concept of the Charter and the main principles on which it was constructed.

1.2. The Committee was delighted that the Charter of 1991 was, only three years later, turned into a Treaty and signed by the European Communities and by 49 countries (). This has to be one of the Union's major international successes. The Committee is pleased, therefore, to take this opportunity to comment on the progress which has been made, and on some significant questions to which this progress has given rise.

1.3. The Energy Charter Treaty

1.3.1. The Treaty comprises some 50 Articles. They create a legal framework in which to promote long term cooperation in the energy field by means of provisions on investment, trade, transit, sovereignty over resources, environment, competition, taxation and access to capital and technology. The key features are as follows:

1.3.2. Existing foreign investments must be accorded treatment no less favourable than that accorded to domestic investors ('national treatment') and that accorded to investors of any other contracting party ('most favoured nation treatment'). Provisions also cover the employment of key personnel, the transfer of capital and returns, compensation for expropriation and losses caused by war and civil disturbance.

1.3.3. For trade in energy products contracting parties who are not members of GATT will enjoy GATT rights and also undertake GATT obligations. (However, the GATT provisions on binding tariffs are unworkable in the energy sector alone. Instead there is a 'best endeavours' commitment which calls upon contracting parties not to raise tariffs above the level notified when signing the Treaty.)

1.3.4. Energy must be allowed to move unhindered across borders. The Treaty requires contracting parties not to impede the establishment of new capacity if transit in existing capacity cannot be achieved on commercial terms. It also provides for transit to continue uninterrupted in the event of a dispute until a process of conciliation has been completed.

1.3.5. Each party is required to apply and enforce competition law.

1.3.6. As far as the environment is concerned, the Treaty embodies the principle of 'the polluter pays' and promotes the objective of market oriented pricing which fully reflects environmental costs and benefits.

1.3.7. Each party has sovereignty over its energy resources and also the right to decide the geographical areas within its area to be made available for exploration and development.

1.3.8. The Treaty creates its own dispute settlement machinery for disputes over all provisions except those on competition and environment. In a dispute between an investor and a State the investor has the right to choose to submit it to international arbitration.

1.3.9. Direct taxes will continue to be governed by each country's domestic legislation, together with the provision of any relevant bilateral tax treaties.

2. Comment

2.1. Ratification

2.1.1. Only two countries (Georgia and Latvia) have ratified the Treaty so far. It is expected that the minimum requirement of 30 ratifications will be achieved during the first half of 1996.

2.1.2. Some concern had earlier been expressed that Russia may not ratify the Treaty, but that was eased when in June the Duma (the Lower House of the Russian Parliament) approved legislation allowing foreign investment in the Russian oil industry.

However, certified copies of the Energy Charter Treaty have only just been officially forwarded to the Russian government. While this should enable the Parliament to begin its debate on ratification shortly, there is now considerable doubt as to whether the process will be completed before the term of office of the existing deputies expires at the end of the year. If that is what happens, Russian ratification will certainly be delayed, and could not be assured.

2.1.2.1. In 1992 the former Soviet Union provided the European Union with nearly 16% of its natural gas, 11% of its crude oil, and 3% of its solid fuel supplies. In total, the Union receives around 10% of its energy supplies from the former USSR. Very large percentages of energy are also provided to the Association Agreement countries of central and eastern Europe, a number of which are due to become members of the Union in a few years' time.

2.1.2.2. For Russia, maintaining and increasing its energy exports and income is possible the single most important factor in stabilizing the Russian economy. The export of fuels and raw materials currently provides 66% of the country's foreign earnings. The real challenge Russia faces may be gleaned from a recent authoritative estimate that an investment of $50 billion will be needed just to stabilize Russian oil production at the current level of 6 million barrels a day, while twice that sum would be required if production were to be increased to 1988 levels.

2.1.2.3. Thus, Russian ratification is not only vital to the ultimate success of the Treaty, it must be of major importance to Russia's own efforts to modernize its economy and establish itself as a stable democracy. The European Union must make every effort open to it to assist the process of ratification, since the outcome cannot be taken as certain.

2.1.2.4. It is hopeful, in the above context, that Russia has recently signed up to play a full role on NATO's Partnership for Peace programme, and that pressure within NATO to extend its security guarantees as far east as Russia's western border has apparently lessened. A serious disruption of relations with Russia over security matters would almost certainly jeopardize the prospects of Russian ratification of the Treaty. It is essential that this central consideration is taken fully into account by those responsible for handling diplomatic and intergovernmental relations between Russia on the one hand and the European Union and the United States on the other.

2.1.3. The situation with the United States is quite different. The United States did not and will not sign the Treaty, so the question of ratification does not arise.

2.1.3.1. Various reasons are advanced for the United States' position. One is that acceptance of the Treaty would raise the question of Federal versus States' rights in the US, when this is currently a particularly sensitive issue.

2.1.3.2. Another is that signature would contravene the still existing legislation that Most Favoured Nation (MFN) Treatment cannot be granted to countries which are former members of the Soviet Union (introduced in response to Soviet discrimination against Jews). It is true that eventual signature by the United States is not ruled out; but it is not, on the other hand, expected to arise as a political possibility for some years to come.

2.1.4. Apart from the United States only Canada (among the countries which signed the original Charter) had not signed by the 16 June deadline. In all, 49 countries plus the EU had signed the Treaty by that date. The signatories included Norway, an important energy-producing country whose willingness to sign had been in some doubt before hand. In Canada's case, the Federal Government strongly favoured signing the Treaty, but not all Canada's Provincial Governments could sign it before the due deadline. It seems likely that the Canadian Government will in due course apply formally for accession to the Treaty, which will require the unanimous consent of the existing 50 signatories.

2.1.5. The area of the Middle East and North Africa is, of course, also of great importance to the EU, and not least in the energy context. However, the countries concerned were never signatories to the original Energy Charter, and it is not considered that any of them is likely to seek accession to the Treaty in the near future. It is encouraging, nevertheless, that a dialogue has now been established between these countries and the EU about the desirability of establishing closer and more cooperative relationships in a wide range of political, economic and social areas of activity, including the area of energy, in which there are shared interests.

2.1.6. The Committee is particularly pleased that at the important conference for European and Mediterranean countries being held this year in Barcelona the EU is inviting the Mediterranean countries to foster an association between themselves and the Energy Charter Treaty. The European Union must press ahead with vigour and imagination in seeking the active practical identification of these countries with the aims and objects of the Energy Charter Treaty.

2.2. Protocols and Declarations

2.2.1. Article 33 of the Treaty authorizes the negotiation of a number of Protocols or Declarations in order to pursue the objectives and principles of the Charter. Article 1(13)(a) states that Protocols can be entered into in order 'to complement, supplement, extend or amplify the provisions of this Treaty...' and that they can also be adopted to cover '... areas of cooperation pursuant to Title III of the Charter'.

2.2.2. The reference to Title III of the Charter is significant since Title III listed a number of topics which might be considered for specific agreement (under, for example, the Protocol procedure) at a later date.

2.2.3. So far, one Protocol has been agreed. This is the Protocol on Energy Efficiency and Related Environmental Aspects, which was signed on the same date as the Treaty (i.e. 17 December 1994) and will come into operation when the Treaty is formally ratified sometime next year.

2.2.4. Work on a second Protocol, dealing with the subject of the peaceful purposes of nuclear energy, was started in 1991 but this has ended up as a proposed Declaration (see 2.2.5 below). Work on another Protocol, on the subject of hydrocarbons, was also started, but subsequently suspended indefinitely.

2.2.5. The proposed Declaration on Nuclear Energy was begun in 1991 with the intention to draw up a legally binding Protocol. Work on this was interrupted in 1992 when the International Atomic Energy Authority (IAEA) decided to draft an international convention on nuclear reactor safety. The IAEA completed this task successfully in the summer of 1994. This raised the question of whether the proposed Charter Treaty Protocol on nuclear energy should still be made legally binding. There was considerable debate about this, and the matter was only finally resolved at a meeting in May this year when it was decided to drop the concept of a Protocol on nuclear energy and embody the work that had been done in a non-legally binding Declaration. However, four countries (Russia, Ukraine, Belarus and Armenia) opposed this. They favoured a wider content, and wished to retain legal enforceability. These differences were considered but not resolved at the September Charter Conference, and will be addressed again in November.

2.2.5.1. While, therefore, the IAEA Nuclear Safety Convention is legally binding and the intended Declaration on nuclear energy is not, the latter is a good deal wider in scope than the IAEA Convention. The Convention applies only to land-based civil nuclear power plant (though including storage). The Declaration covers those areas of activity but in addition it deals with the non-proliferation of nuclear weapons and the safeguards of nuclear material related to this; with the physical protection of nuclear material; with civil liability for nuclear damage on an international scale, and with the safe transport of radioactive materials and waste.

2.2.5.2. It needs to be borne in mind, of course, that even the language used in the legally binding Nuclear Safety Convention is broadly stated: that is to say, there is much room for detailed interpretation as well as for differences of approach as to timing as between one signatory and another. It will be enormously difficult to enforce any of it in the event of non-compliance and, to take a practical view, it could hardly be otherwise.

2.2.5.3. There is another difference between the Convention and the Declaration, and that is in the provision in the Convention that the implementation of its requirements will be subject to a three yearly review. In this way the broad legal basis of the Convention will be complemented by peer pressure. There is no provision in the Declaration for any review of the way (or indeed whether) its requirements will be carried out by its signatories.

2.2.5.4. It is perhaps unsatisfactory that there are now two international agreements dealing with nuclear safety - one, the narrower in scope, having a legal underpinning and subject to regular peer review, and the other considerably wider in scope but without legal underpinning and not subject to review. It may be, however, that it was thought it would be even more unsatisfactory to have two international agreements on nuclear safety, partly covering the same territory, but not in exactly the same way, and both legally binding, and that was the reason why the originally envisaged protocol on nuclear energy ended up as a Declaration.

2.2.5.5. A possible resolution of the difference between the two agreements over the course of time might well be to widen the scope of the IAEA Convention to cover the full range of issues covered by the nuclear energy Declaration. It will be surprising if international opinion does not press for such an eventual solution once it understands the implications of what has happened. In the Committee's view there has to be one set of minimum international safety standards for civil nuclear energy, and the IAEA has pointed the way forward.

2.3. The extension of the Treaty

2.3.1. Article 10 of the Treaty deals extensively with the protection of existing investments. New investments (or, to use the Treaty's own wording 'the making of investments') are not covered in the same way. It is intended that new investments should be treated in the same way as existing investments but the Treaty [Articles 10(2) and 10(3)] accepts that this can at present only be done on the basis of exhortation to use 'best endeavours'.

2.3.2. It is provided in Article 10(4) that a supplementary Treaty will be drawn up to put all investments on the same basis 'with a view to concluding it by 1 January 1998', and work on this has begun. The Committee fully supports this objective. It is vital that a proper legal framework for new investments is put in place as soon as possible, and no effort should be spared to bring this about.

2.3.3. One question still to be settled is whether the United States should participate in the Supplementary Treaty negotiations. The United States was granted observer status, with a right to take part in the negotiations, at the first meeting of the Working Group on new investments. Unfortunately, the United States has informed the Conference that budgetary constraints now prevent it from continuing with its financial contribution. The possibility of granting the United States observer status, but without a right to take part in the negotiations, is now under discussion. The Committee urges that a compromise should be sought, provided the United States contributes to its own costs.

2.3.4. Privatization is seen as possibly a difficult issue to resolve in respect of the 'making of investments'. Governments do not necessarily see the need to open up publicly owned assets to foreign investors at the time of privatization. Some have developed the concept of the 'Golden Share' to maintain control of a privatized organization.

2.3.5. It is foreseen as inevitable that there will be exceptions to the principle of 'equal treatment' in the making of investments in the intended Supplementary Treaty. Nevertheless, there is no doubting the significance of a broadly satisfactory conclusion being reached about future investment rights since, if it is not, one of the primary purposes of the Treaty will be undermined.

2.3.6. One matter missing altogether from the Treaty is any provision dealing with industrial relations. The importance of good industrial relations in ensuring the safe production of nuclear energy is self-evident. But good relations between the social partners involved in all the enterprises and activities to which the Treaty applies are just as necessary. The Committee recommends strongly that a suitable reference to good established practice (as e.g. provided by the text of the 'OECD Guidelines for Multinational Enterprises', published again only last year), should be included in the Supplementary Treaty being drawn up for incorporation in the main Treaty in 1998.

2.4. Resources

2.4.1. The expenditure of the Treaty Secretariat in 1994 was MECU 2,3. The Committee is aware that there was a proposal to expand this expenditure to MECU 4 once the Treaty was signed at the end of 1994. This proposal was based on the view that once there was a Treaty to administer there would need to be some increase in the staff of the secretariat. However, the proposal was turned down. It was decided instead that the 1995 budget should be MECU 2,7 and that the staff numbers should remain virtually unchanged.

2.4.2. The Charter Conference decided at its September meeting that the Secretariat would be located as an independent entity in Brussels. It also approved the organization of the Secretariat and its staffing as was proposed. The Conference was also informed of a letter from its Secretary-General, Mr Clive Jones, stating that he would not be seeking re-appointment when his term of office expires at the end of the year.

2.4.3. The Committee regards it as essential that the adequacy of the structure, staffing and resources of the Secretariat is reviewed at the time the ratification process is approaching its conclusion.

3. Summary

3.1. The Committee regards the Energy Charter Treaty as potentially one of the European Union's major international successes.

3.2. It is essential to its prospects of success that Russia should ratify the Treaty, and that this factor is taken fully into account in the consideration given to extending NATO's security responsibilities eastwards. Consideration now has to be given to the implications of ratification being put back for decision by the new Duma next year.

3.3. The Union must press ahead vigorously in its efforts to develop cooperative relationships in the energy field with the Middle Eastern and North African countries.

3.4. There has to be one set of minimum internationally agreed safety standards for nuclear energy. These have to be established through the IAEA's legally binding Convention, but this should be expanded to cover the full range of issues embraced in the Declaration shortly to be adopted by the Energy Charter Treaty Conference.

3.5. It is desirable that the United States should at least have observer status in the negotiations intended to draft a supplementary Treaty. An accommodation, as proposed, should be reached if possible.

3.6. A suitable reference should be incorporated in the Supplementary Treaty to the need for good industrial relations practices to be followed in the enterprises and activities to which the Treaty applies.

3.7. The adequacy of the structure, staffing and resources of the Secretariat needs to be reviewed at the time that the ratification process is approaching its conclusion.

Done at Brussels, 26 October 1995.

The President

of the Economic and Social Committee

Carlos FERRER

() OJ No C 269, 14. 10. 1991, p. 79.

() OJ No L 380, 31. 12. 1994.