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Will the renewable energy producers recoup it after the judgment of the Supreme Court of Cassation?

On the Eve of December 29, 2015, the Supreme Court of Cassation overjoyed a renewable energy producer by publishing its final judgment, this time on the merits, for reimbursement of the collected temporary access fee, introduced by the State Energy and Water Regulatory Commission (SEWRC) in September 2012. It is interesting whether this judgment will put an end to the continuous court battles of the renewable energy producers against CEZ, Energo-Pro, EVN and ESO, where an amount of around 300 million leva has been at stake.

To remind ourselves

The people interested in the topic are painfully aware of the story of the controversial “access fee” and the ups and downs in the case, initially made up by SEWRC. The State regulator in the field of energy (SEWRC at that time and EWRC now) adopted in September 2012 Decision Ц -33, which required only the renewable energy producers to pay temporary prices for grid access. The regulator failed to justify Decision Ц-33 and determined arbitrarily the prices to such extent, that the Supreme Administrative Court (SAC) had no choice but to annul it as unlawful a year later. Still in the grounds of its annulment judgments, SAC ruled that the annulment has retroactive effect, which encouraged the renewable energy producers to claim the reimbursement of the unduly paid access fee. Thus, some of them filed claims for compensation by the State (in the face of SEWRC), but the administrative court ruled in favour of the regulator, arguing that the damage even related to annulled decision, was not direct. More than 1000 cases were initiated against the grid operators (CEZ, Energo-Pro, EVN and ESO), most of which are still pending before the civil courts in Sofia, Plovdiv and Varna and the final instance – the Supreme Court of Cassation (SCC). The claims are based on the legal institute of unjust enrichment, which follows the natural logic that whoever has enriched with no reason at the expense of another must return to him the received. Even without interpreting the statutory provisions and case law, we will come to the conclusion that it would be fair the grid operators to return the collected fees, which SAC ruled to be unlawfully determined by the regulator. The opposite would lead to state arbitrariness in the energy sector. The first and second instance courts in Sofia, Plovdiv and Varna, however, used their imagination in complicated legal theories and with some or other arguments (some of them absurd), came to completely opposite judgments on the claims of the renewable energy producers against the grid operators. This led to the referral of the dispute to SCC by both sides of the barricade.

What does the last instance say?

The cassation control under Bulgarian law is regular, but not always possible court instance, as the SCC decides whether it is permissible for each particular case on limited grounds. One of them is a referred question of relevance to the accurate application of the law and to the development of the law. Thus, more than a year ago, the supreme instance was requested to decide whether the question for the retroactive effect of the annulled Decision Ц-33 was of such nature. In May 2015 the SCC did not allow cassation appealing by EVN, stating that there was already a practice of the courts in the country, according to which the annulment of an individual administrative act (such as Decision Ц-33) had a retroactive effect. Regrettably for the renewable energy producers this statement of the SCC has not been shared in some cases pending before the first two instances, most definitely in Varna. Moreover, other panels of the SCC consider that the same question has not been clarified so far and that there is a lacuna, leaving doubt how it should be resolved.

Namely in its judgment as of December 23, 2015, the third instance ruled for the first time on the merits regarding the temporal effect of the annulment of the temporary access fee. Not only the SCC stated categorically that the annulment occurs retroactively, but it also justified its judgment entirely in accordance with the public relations and the regulatory framework in the sector. In this case, there was a preliminary implementation of the non-effective Decision Ц-33, which established only temporary prices for grid access, whereas no final pricing was at hand. According to the SCC a general rule is that the annulment of an unlawful administrative act has a retroactive effect from the moment of its issuance (except for the normative acts), because only an act issued in accordance with the law is capable of causing the consequences intended by its issuer. The final court instance also rejected explicitly an argument often used by the grid operators that it could be “considered that the parties have agreed to the price, which is generally paid at the time of conclusion of the sale for the same type of good and in such circumstances”. The SCC found correctly that as far as the energy distribution companies in our country are natural monopolies of the respective regional market, there is no legal possibility to freely negotiate prices under market conditions in the energy sector.

As an additional argument for judging in favour of the renewable energy producer, the SCC highlights also the subsequent Decision Ц-6 as of March 2014 of the SEWRC, with which the regulator completed the administrative procedure and determined final prices of the access service. We note that the price for access should be economically justified, so as to recover the costs of the operator in relation to the management of the grid, i.e. it should reflect the actual impoverishment with the costs made and forecasted in relation to the established access. In its Decision Ц-6, SEWRC found that for the relevant price period there were no grounds for recognition of the operational costs of the electricity distribution companies (CEZ, Energo-Pro and EVN) and therefore for these operators the access fee of the renewable energy producers should be at zero values.

The judgment of the SCC is legally sound and fair. Most importantly being ruled on a matter of relevance for the correct application of the law and the development of the law, it is mandatory for the first instance and the appeal courts in the country. From now on Sofia, Varna and Plovdiv must recognize the retroactive effect of the access fee and judge in favour of the renewable energy producers. Only another panel of the SCC is allowed not accept this case law and render its own judgment to the contrary.

Author: Asya Vladimirova & Hristo Hristov
The article has been published in Bulgarian, in Capital Daily

Bucharest, 18 January 2016 At the end of last year, the Constitutional Court decided that the interdiction to dismiss the employees in eligible positions in a trade union body breaches the constitutional provisions. This is an important amendment in this field, taking into consideration that during the last 13 years as of the enactment of the Labour Code, the trade union leaders could not be dismissed.

The previous provisions of the labour code absolutely prevented the dismissal of employees in eligible positions in a trade union body, during the exercising of their mandate, regardless of the fact that there was a connection between the trade union activity carried out and the reasons for dismissal or not. These provisions created a double inequity in the relationship between the trade union leaders and the rest of the employees on one hand, and the relationships between the respective leaders and the employer on the other hand, whose activity was affected by this interdiction., explains Anca Stroiu, senior lawyer at McGregor & Partners.

By the enactment of decision 814/2015, published in the Official Gazette no. 950/22.12.2015, the Constitutional Court excluded a legal privilege regulated in favour of the trade union leaders, to the disadvantage of the other employees who do not have any position in a trade union body. Therefore, all employees shall benefit of an equal treatment in identical legal circumstances. Consequently, the trade union leaders can make the object of a dismissal decision due to reasons related to the employee (e.g. preventive arrest, physical or psychical incapacity, professional inadequacy) or due to reasons that do not relate to the employee (e.g. the liquidation of working position).

However, the dismissal of trade union leaders continues to be unenforceable for reasons regarding the observance of the mandate they received from the trade union members. The reason this interdiction is being maintained is that the removal of trade union representation capacities of the leaders or the holding them responsible for the facts committed during their trade union mandate, shall be performed exclusively by the trade union having appointed them, without the involvement of the employer, in the same conditions as the appointment was made.

By the decision of the Constitutional Court it is clearly differentiated the principle of equality of treatment of employees in identical situations from the protective measures of employees with representative responsibilities. Therefore they can fulfil in good conditions the mandate that they have been empowered with and which should operate exclusively in relation to the trade union activity actually carried out.

In the labour law projects we have been involved, we encountered cases in which the trade union leaders benefitted of the most favourable legal provisions and they have been excluded from the collective dismissal plan, due to the provisions regarding the interdiction of dismissal of the respective leaders during the exercising of their mandate. However we noted in the legal practice prior to the amendments brought by the Constitutional Court decision, even at the level of appeal courts, that there were court decisions given in favour of dismissing the trade union leaders due to reasons not pertaining to the person of the employee, and therefore anticipating and confirming some of the arguments of the Constitutional Court regarding this matter. Thus, it shall devolve on the courts invested to analyse the legality of a decision to dismiss a trade union leader, to examine if there is connection between the reason of dismissal invoked by the employer in the dismissal decision and the method of fulfilment of the mandate by the respective leader., added the lawyer Anca Stroiu.

In focus in Bulgarian legislation

Law on supplement of the Constitution of Republic of Bulgaria (SG 100 as of 16.12.2015)

The adopted constitutional amendments are characterized by a division of the Supreme Judicial Council (SJC) into two panels – judges’ and prosecutors’ panel. The Judges’ panel of the SJC consists of 14 members and includes the chairmen of the Supreme Court of Cassation and the Supreme Administrative Court, six members directly elected by the judges and six members elected by the National Assembly. The Prosecutors’ panel of the SJC consists of 11 members and includes the Attorney General, four members directly elected by the prosecutors, one member directly elected by the investigators, and five members elected by the National Assembly.

The adopted changes affect also the powers of the Inspectorate to the SJC, which is authorized to carry out examinations on the integrity and conflict of interest for judges, prosecutors and investigators, their financial statements and to establish actions that prejudice the prestige of the judiciary, and such, related to violation of the independence of the judges, prosecutors and investigators.

Last but not least, it should be noted that under the constitutional amendments, the Constitutional Court can now be referred by the Supreme Bar Council, in cases where a law infringes human rights and freedoms of the citizens.

Law on supplement of the Tax-Insurance Procedure Code (SG 94 as of 4.12.2015)

The changes provide in addition to the managers and the members of the managing bodies, liable as third parties for uncollected debts for taxes and obligatory insurance contributions, to be also procurators, sales representatives and commercial agents under certain conditions.

There is entered a deadline for conducting a tax audit, which will be no longer than six months from the date of the first procedural step. If the six-month period proves insufficient, it can be extended by another six months. For the results of the inspection a protocol will be drawn, which will be provided to the person within 7 days of its completion.

The handling of the invitation for voluntary execution of public duties drops. The public bailiff will start execution when the obligation is not paid on time – till now he/she used to take action after the expiry of the 7-day deadline for voluntary execution.

An opportunity for the public bailiffs to impose electronic distraint over debtor’s claims in a bank account is created. The changes concern also the imposition of distraint over a share of a commercial company as a garnishment notice will now be sent to the Registry Agency, which will notify the company – before the message is sent to the company.

These changes are effective as of 01.01.2016.

Law on supplement of the Law on Corporate Income Tax (SG 95 as of 8.12.2015)

News on European Union Law

Decision of the Court (Second Chamber) of 22 October 2015 at request for a preliminary ruling from the Supreme Administrative Court — Bulgaria has been published in the EU Official Journal С 414, 14.12.2015.

According to the operative part of the decision: Directive 97/67/EC, as amended by Directive 2008/6/EC, must be interpreted as meaning that a money order service by which the sender, in this case the State, transfers sums of money to a beneficiary through the postal operator entrusted with providing the universal postal service does not fall within the scope of that directive. Article 107(1) TFEU must be interpreted as meaning that, if the activity of money order operations enabling the payment of retirement pensions constitutes an economic activity, the grant by a Member State of an exclusive right to pay retirement pensions by money order to an undertaking, in so far as that service constitutes a service of general economic interest, the remuneration for which represents compensation for the services carried out by that undertaking to discharge its public service obligation.

A Notification of the Republic of Bulgaria pursuant to Article 10(2) of the Electricity Directive and a Notification pursuant to Article 10(2) of the Gas Directive have been published in the EU Official Journal – С 428, 19.12.2015, according to which Bulgaria has notified to the Commission the official approval and designation of Electricity System Operator EAD as a Transmission System Operator operating in the Republic of Bulgaria and Bulgartransgaz EAD as a Transmission System Operator operating in the Republic of Bulgaria.

Notification for preparation of new renewable energy directive (REDII) for the period 2020 – 2030 was published on the page of the European Commission (EC), in relation to which the EC invite the stakeholders and citizens to participate in a survey and to submit their contributions by 10 February 2016. The objective of the survey is to consult the stakeholders and the citizens on the new directive. In separate public consultations will be covered and elaborated documents related to the bioenergy sustainability policy, and energy efficiency.

How companies seek compensation under investment treaties of the State

A month ago, the Oman state investment fund filed an arbitration claim against Bulgaria at the International Centre for Settlement of Investment Disputes in Washington (the “ICSID Centre”) to protect its investment in Corporate Commercial Bank (”KTB”). Earlier this year, the Czech Energo-Pro approached the same arbitration institution, because of its losses in the energy sector, following the Austrian EVN, which brought its action against the State in the same sector in 2013. The previous experience of Bulgaria before arbitral tribunals in Washington was in connection with the terminated concession contracts of “Novera” for cleaning in Sofia (i) and against “Plama Consortium Limited”, the former owner of Pleven oil refinery (ii).

The proceedings under the investment claims of the Oman investment fund, Energo-Pro and EVN are confidential, thus, at this stage it is difficult to analyse whether they will be admitted to jurisdiction under ICSID and what would be the outcome on the merits. It is beyond doubt, however, that the claims of these investors indicate the increase of actions or omissions of Bulgaria, which give reason to seek its liability for breach of its obligations under international treaties and which cost to foreign investors millions of losses. Should we expect more arbitration claims against the State and which investors could raise them?

When an international arbitration is possible?

A foreign investor can bring the State before an arbitral tribunal, if the State has expressed its consent to be a party to such proceedings. In most cases, the State agrees to this form of dispute resolution in a bilateral or a multilateral investment treaty (IT). Bulgaria is party to 59 bilateral IT in force, including, among others BITs with the United States, Russia, China, Great Britain, Germany, and to the multilateral IT –the Energy Charter Treaty. Notably, earlier this year, the European Commission asked some EU Member States to terminate the IT between them as incompatible with the EU law. The outcome of the proceedings, initiated by the European Commission, is still unclear, but even if terminated, the ITs normally have sunset provisions which make them applicable long after their termination.

An IT is usually signed because a developing country wishes to attract foreign capital from a developed country. To guarantee protection for the foreign investors in the host state, some of the clauses of the IT provide obligations to comply with international standards (such as fair and equitable treatment of the investors) and dispute settlement before international arbitration. The latter is considered flexible and neutral, as the parties choose themselves independent and highly qualified arbitrators to resolve their dispute, while if the State is sued in the national court by a foreign investor, there might be bias and difficulties in the enforcement.

The arbitration clause often provides options for ad hoc arbitration, institutional arbitration (e.g. International Chamber of Commerce, Stockholm Chamber of Commerce) or ICSID arbitration. The majority of claims of foreign investors against States are brought before the ICSID Centre. The Centre is established by the Convention on the Settlement of Investment Disputes (“ICSID Convention”), prepared by the World Bank and ratified by 152 countries, including Bulgaria. When possible, the ICSID arbitration is preferred by investors, because unlike the other forms of international arbitration, it offers settlement only to investor – state disputes, the proceedings are exclusively under the auspices of the ICSID Centre and the award of the arbitral tribunal is final and binding on the parties and may be annulled only by a committee of arbitrators, but not by a national court. A substantial advantage is that the awards under ICSID are directly enforceable in any State, which has

ratified the ICSID Convention.

Which investors and investments are protected?

Only “foreign investors” from a State, which has signed an IT with Bulgaria, could bring claims before an international arbitration. Under certain conditions as foreign investors are also considered companies that are registered in the host state, but are under foreign control. In practice, it happens investors to structure their business, so as to fall within an IT which is favourable for them (treaty shopping), and thus to engage the liability of the host state when needed. However, in case that the “restructuring” happens in a late stage when the investor had already known that there were grounds to bring a claim against the State, the arbitral tribunal might not accept the jurisdiction on the dispute. Philip Morris restructured its business in Australia to fall within the IT between Hong Kong and Australia when it became aware of the Australian commitment to introduce cigarettes plain packaging. After adoption of the law Philip Morris filed an arbitration claim against Australia by its Hong Kong company (iii). It remains to be seen whether the tribunal in the pending case will accept the objection of Australia for abuse of right by Philip Morris, which restructured its business to secure the special international legal protection only after the dispute was foreseeable.

Not every foreign transaction is within ICSID jurisdiction. There must be an “investment” in the host state. This concept is interpreted broadly by the tribunals – concessions, power generation enterprises, services in the field of transport, hotel, banking, construction and intellectual property are beyond doubt accepted as investments, and in some cases, loans and financial instruments qualify as investments, too. The bonds issued by Corporate Commercial Bank would probably be considered investments.

To assess whether there is an investment, it is important to interpret the particular IT, on which the claim is based. Although there were minor differences in the provisions of the relevant ITs, two arbitral tribunals came to opposite decisions on whether government bonds were investment (Abaclat against Argentina (iv) and Ambiente against Argentina (v) unlike Postova Banka against Greece (vi). There is no precedent in international arbitration, thus, the tribunals are free to assess in each particular case whether or not there is an investment, especially when the latter is “at the edge” of the concept.

What are the breaches by the State?

The ITs provide investment standards that the host state is obliged to observe towards the foreign investors. In the vast number of cases the obligations for fair and equitable treatment and expropriation are breached. The first is applicable in the cases of denial of justice, lack of transparency in an administrative process and failure to meet the investor’s legitimate expectations grounded on representations by the State on which he has relied in making the investment. The examples include withdrawal of licence or introduction/changes to legal framework, which caused losses to the investor. Lately, in Bulgaria there have been indications of breach of the standard of fair and equitable treatment towards the investments in renewable energy sources. Arbitrary decisions of the Energy and Water Regulatory Commission, constantly changing legislation which negatively affects the investors in renewables, and controversial practice of the civil courts in clear-cut cases outline obvious grounds for an investment claim against the State.

Direct expropriation (nationalization) is a taking by the State of investor’s property. The expropriation is considered legitimate when it is based on laws in the interest of society and the State has compensated the investor for the full amount of the investment. In case that these conditions are not met, the expropriation is unlawful. Subject to arbitration claims is usually the indirect expropriation in which the investor has not physically lost his property, but he has been substantially deprived of the economic value, use or enjoyment of its investment (CMS v Argentina (vii)).

Other standard obligations of the State under ITs are full protection and security and national treatment and most favoured nation treatment, i.e. that the foreign investors should be treated at least as favourably as the locals and the investors from other states with which Bulgaria has an IT.
Enforcement of arbitral awards

The proceedings under ICSID usually take from 3 to 5 years. The arbitral award is binding on the parties and if any of them does not comply with its terms, the other party may seek its enforcement in each Member – State of the ICSID Convention, which will be obliged to treat the award as if it were a final judgement of its national courts. Practically this means that if the investor succeeds in a claim against Bulgaria before the arbitration in Washington, he may seek enforcement against assets of the State in Switzerland.

(i) Accession Eastern Europe Capital AB and Mezzanine Management Sweden AB v. Republic of Bulgaria (ICSID Case No. ARB/11/3); Novera AD, Novera Properties B.V. and Novera Properties N.V. v. Republic of Bulgaria (ICSID Case No. ARB/12/16)

(ii) Plama Consortium Limited v. Republic of Bulgaria (ICSID Case No. ARB/03/24)

(iii) Philip Morris Asia Limited v. Commonwealth of Australia (PCA Case No. 2012-12) (iv) Abaclat and Others v. Argentine Republic (ICSID Case No. ARB/07/5) (v) Ambiente Ufficio S.P.A. and Others v. Argentine Republic (ICSID Case No. ARB/08/9) (vi) Poštová banka, a.s. and ISTROKAPITAL SE v. Hellenic Republic (ICSID Case No. ARB/13/8) (vii) CMS Gas Transmission Company v. Argentine Republic (ICSID Case No ARB/01/8)

The article is published in Bulgarian, in Capital Daily

In focus in Bulgarian legislation

Law on supplement of the Excises and Tax Warehouses Act (SG 92 as of 27.11.2015)

Review of the legislative changes:

the specific excise duty on cigarettes is reduced from 101 leva to 70 leva for 1000 pieces, while the proportional excise duty in 2016 will be increased, namely 38% of the purchase price, for 2017 – 40%, and in 2018 . – 42%;
the excise duty on gas oil and kerosene will be increased for 2016 from 50 leva to 646 leva for 1000 liter, and on heavy fuel oils and heating – from 50 leva to 400 leva for 1000 kg.

Bill of the Law on Amendments and Supplements of the Value Added Tax Act as of 17.09.2015

The Bill proposes the introduction of differentiated tax rate at 8 per cent for the medicinal products for human use, which are subject to medical prescription.

The arguments are that the changes will lead to a significant reduction of the prices of medicines in the pharmacies, which in turn will enable households to increase their spending to other goods and services.

News on European Union Law

An Action, brought on 14 September 2015 has been published in the EU Official Journal С 389, 23.11.2015, as Applicant is the European Commission and Defendant is the Republic of Bulgaria (Case C-488/15). On the basis of the latest annual report on air quality and also of the responses of the Bulgarian authorities to the reasoned opinion, the Commission takes the view that, at present, the Republic of Bulgaria has not fulfilled its obligations under Article 13(1) concerning compliance with the annual and daily limit values for the presence of micro-dust particles in the air (PM10) and under the second subparagraph of Article 23(1) of the Directive 2008/50/EC of the European Parliament and of the Council of 21 May 2008 on ambient air quality and cleaner air for Europe (OJ 2008 L 152, p. 1) with regard to the obligation to draw up air quality plans in order to keep the exceedance period as short as possible.

The Commission considers it necessary for the Court of Justice of the European Union to declare that the Republic of Bulgaria has infringed those provisions of the Directive.

In focus in Bulgarian legislation

Bill of the Law for tax on public health

The bill introduces a tax on public health, by taxing four groups of foods, as follows: (1) foods containing partially hydrogenated vegetable oil; (2) certain foods with high salt content; (3) certain foods and drinks containing caffeine or taurine; (4) certain foods and drinks high in sugars and sweeteners.

The tax shall be payable in proportion to the amount of product (in liters or kilograms), placed on the market. This approach achieves a permanent tax based on the quantity of products.

The tax is imposed once at launching on the market of objects of taxation, independently whether the sale is carried out on the end-user or distributor.

The individuals required to declare and pay the tax are the producers, the importers from third countries and the individuals, introducing foods in the territory of the Republic of Bulgaria from other Member States of the EU. The tax on public health has the character of an indirect tax, i.e. the taxpayers pay the tax, but the financial burden of the tax is borne by the end user.

In order to avoid double taxation, the bill provides certain cases of exemption from payment of tax and reimbursement of paid tax.

It is envisaged the control on the application of the law to be implemented by the National Revenue Agency and the regional health inspections at the Ministry of Health.

On 21 October 2015 the bill was published for public consultation on the website of the Ministry of Health and the interested parties could submit their proposals within 14 days. The next step is the submission of the bill in the Bulgarian government.

News on European Union Law

On October 6, 2015 the European Court of Justice (ECJ) published its judgment in the case of Schrems v Data Protection Commissioner (C-362/14) ruling that the Safe Harbor data-transfer agreement which lets American companies use a single standard for consumer privacy and data storage in both the US and Europe is invalid.

The Safe Harbor decision allowed companies to self certify to provide “adequate protection” for the data of European users to comply with the European data protection directive, and with fundamental European rights such as the right to privacy (under Article 8 of the European Convention for the Protection of Human Rights).

Currently, the main impact of the ECJ’s ruling is: (i) Individual European countries can now set their own regulation for US companies’ handling of citizens’ data, vastly complicating the regulatory environment in Europe. (ii) Countries can choose to suspend the transfer of data to the US — forcing companies to host user data exclusively within the country. (iii) The Irish data regulator will examine whether Facebook offered European users adequate data protections and as a result it could suspend the transfer of personal data of Facebook users to the USA.

COMMISSION IMPLEMENTING DECISION (EU) 2015/1842 of 9 October 2015 on the technical specifications for the layout, design and shape of the combined health warnings for tobacco products for smoking is published in the EU Official Journal – L267 14.10.2015, which establishes rules on the layout, design and shape of combined health warnings for tobacco products for smoking

COUNCIL DECISION (EU) 2015/1848 of 5 October 2015 on guidelines for the employment policies of the Member States for 2015 is published in the EU Official Journal – L268 15.10.2015. The guidelines for the employment policies of the Member States, as set out in the Annex, are hereby adopted. These guidelines shall form part of the Europe 2020 integrated guidelines. The guidelines set out in the Annex shall be taken into account by the Member States in their employment policies and reform programmes, which shall be reported in line with Article 148(3) TFEU.

A request for a preliminary ruling from the Supreme Administrative Court (Bulgaria) lodged on 24 July 2015 is published in the EU Official Journal – C337 12.10.2015. With the questions referred to, the Bulgarian court requests an interpretation by the European Court of Justice whether or not international and EU community provisions contained in the Convention on the Rights of Persons with Disabilities and Directive 2000/78/EC permit legally established in a Member State specific prior protection from dismissal only to persons with disabilities who are employees, to be applied also to civil servants with the same disabilities.