Slim Pickens in #NAFTA Case

A claim for $700 million over Canada’s wind energy policies was dismissed by a trio of arbitrators in a decision unearthed last week by IAReporter.

Alexandra Stevenson reports on the origins of the dispute:

T. Boone Pickens made billions drilling for oil and gas and squaring off in bare-knuckled corporate takeover bouts.

Now the 87-year-old tycoon is embroiled in what may be the last big battle of his career. Only this one is aimed thousands of miles north of his Texas home. And it is over wind power.

As part of his attempt to show he could move to green energy, Pickens moved north. Stevenson writes:

When Ontario enacted a Green Energy Act in 2009, both [Pickens’ company] Mesa Power and [Florida company] NextEra saw an opportunity. As part of its policy change, the government created a program to provide incentives for companies to invest in renewable energy projects. Companies that were awarded contracts would be paid premium guaranteed prices set by the government. In one auction, more than 500 applications were submitted, exceeding the government’s expectations, according to statements filed with the court.

“It was a very, very attractive price,” said Cole Robertson, who was vice president of finance for Mesa Power at the time, noting that the government’s set price in 2011 was double that in Texas at time.

Mesa Power submitted several project proposals through the program. But when the first rankings came out in late 2010, its executives disputed the assessments, arguing that Mesa Power’s projects should have been higher.

Pickens maintains that NextEra and other companies were treated favorably at his expense:

The province of Ontario granted NextEra $3.8 billion in energy contracts. Mesa Power contends that $18,600 in donations that NextEra made to the ruling Liberal Party in Ontario before elections in 2011 had undue influence on the auction…

Mesa Power’s notice of arbitration also includes allegations of favoritism toward two Korean companies, Samsung C&T and Korea Electric Power Corporation, that entered a separate energy deal with the government…

Pickens brought a claim under NAFTA, claiming $700 million in damages from Canada’s alleged failure to provide fair and equitable treatment, national treatment, most-favored nation treatment. He also insisted that Ontario requirements to source a certain percentage of the product locally was a violation of NAFTA rules on performance requirements.

In March, an investor-state dispute settlement (ISDS) tribunal composed under NAFTA issued its decision. It was composed of Gabrielle Kaufmann-Kohler (a Swiss arbitrator chairing the case), Toby Landau (a British arbitrator picked by Canada), and Charles Brower (a U.S. arbitrator picked by Mesa).

Their award has only been available for reading in the last few days. The three arbitrators agreed that Canada had excluded government procurement from most NAFTA investment rules, and so the bulk of the claims must fail. Moreover, they ordered Pickens’ company to pick up much of Canada’s arbitration and legal costs.

The tribunal split, however, on the obligation to provide fair and equitable treatment (FET), from which procurement was not excluded. Kaufmann-Kohler and Landau argued that FET is a demanding standard for investors to prove, and only ensnares particularly egregious behavior. Investor appointee Brower saw things differently. In a dissenting opinion, he wrote that Ontario – after inviting bids – basically made it impossible for Mesa to succeed.

I’ll have more to say about the specifics of the FET claim in a future post, but the decision makes clear that “precision rules.” When governments are very clear about what sectors they want to exclude from a trade agreement, arbitrators (even investor appointees) have a hard time going against that. These carve outs are so effective that they can excuse substantial restrictions with markets and trade flows (such as Ontario’s requirement that renewable producers source a percentage of their purchases locally.) But when governments leave pockets of treaty imprecision like FET, it is easier for arbitrators to see matters through their own personal lens.

This introduces highly variable tribunal decision-making. Indeed, the only reason Pickens’ largely quixotic claim makes any sense is as a bet on FET. He might have gotten a different set of arbitrators that would have been more receptive. Unfortunately for him, he bet wrong.