Changes in the Energy & Gas Sectors in Romania as Implemented by EGO 114/2018*

30.01.2019

Changes in the Energy & Gas Sectors in Romania as Implemented by EGO 114/2018*

What is EGO 114/2018

On 29 December 2018 the Emergency Government Ordinance 114/2018 (“EGO 114/2018”) was published in the Romanian Official Gazette establishing, amongst others, budgetary and tax measures across different industries. In particular as regards the energy sector, EGO 114/2018 provides for new taxes and a return to a regulated market, as summarized below:

Power Sector:

• Increase in taxes:
     - Annual turnover tax: Raised to 2% (from 0.1%) for companies holding licenses in the
       electricity sector and companies holding cogeneration licenses in connection to
       electricity-related activities.
     - Monopoly tax: Extended until 31 December 2021.
• Return to regulated market:
     - Tariffs applicable by suppliers of last resort for household consumers will be determined
       and approved by the National Agency for Energy Regulation (NAER) from 1 March 2019
       to 28 February 2022.
     - Electricity producers will be obliged to sell the quantity necessary to cover household
       consumption at regulated prices to the suppliers of last resort from 1 March 2019 to
       28 February 2022.
     - Breach of those obligations will be sanctioned with a fine of 10% of annual turnover.

Gas Sector:

• Increase in taxes:
     - Annual turnover tax: Raised to 2% (from 0.1%) for companies holding licenses in the
       natural gas sector issued by the National Agency for Energy Regulation (NAER).
     - Monopoly tax: Extended until 31 December 2021.
• Return to regulated market:
     - Gas producers and their subsidiaries and/or affiliates carrying out exploitation and sale of
       natural gas in Romanian territory will be obliged to sell domestic gas at a price of
       RON 68/MWh (approx. EUR 15) and to sell with priority to suppliers to ensure that
       household consumption is covered from 1 April 2019 to 28 February 2022.
     - Gas producers and their affiliates are not allowed to enter into contracts for sale of gas to
       be delivered in the Romanian market for a price in excess of RON 68/MWh.
     - Breach of those obligations will be sanctioned with a fine of 10% of annual turnover.

Why it has been enacted

According to Romanian media, the measures are aimed at raising an additional €2.1bn in order to tackle the budget deficit in Romania which was the result of a series of tax cuts and wage hikes in the public sector. EGO 114/2018 is inspired by principles of social justice with social protection as an intention declared in its preamble. The ordinance has been enacted against the backdrop of an anti-foreign political discourse in which foreign companies have been attacked for allegedly failing to contribute enough in taxes.
 

How it has been enacted

EGO 114/2018 has been harshly criticised for being adopted in the absence of impact studies and without public debate or consultation with stakeholders. The business community and some political leaders have expressed their concerns regarding the adoption process of EGO 114/2018. Romania’s President Klaus Iohannis described the measures as very serious and worrisome and criticized them for not being discussed with partners and for lacking any prior analysis. The Foreign Investors Council (FIC) expressed its disappointment at the public and political discourse against foreign companies underlying the adoption of EGO 114/2018. The FIC has also criticized the Government’s abuse of legislation through emergency ordinances with limited consultation periods. The Chamber of Commerce and Industry of Romania (CCIR) issued a public statement disapproving of the manner in which the EGO 114/2018 was adopted, namely without a public debate and without consultation with the business community, criticising its negative effect on the investment climate.

The measures have also been questioned for risking infringement procedures by the European Commission.
 

Potential implications for your company

EGO 114/2018 has imposed over-taxation and the return to a regulated market after being fully liberalised in January 2018. As a consequence, it has been reported that the financial results of several companies operating in the energy and gas sectors will be negatively affected. Others will reconsider their investments in Romania, now threatened by artificially established prices. The European Federation of Energy Traders (EFET) has called on the Romanian government to suspend EGO 114/2018 as a matter of urgency due to the devastating effects that the measures will have on the companies, as well as on consumers and Romania’s social welfare.

Against this background and provided the measures lead to an impairment, Romania may be violating its obligations under the Energy Charter Treaty and/or applicable bilateral investment treaties (BIT).

Prima facie, Romania may be breaching its obligations towards foreign investors to accord fair and equitable treatment (FET), amongst others. In this regard, Romania may be in violation of its obligation to act in good faith and respect investors’ legitimate expectations of a liberalised market. Additionally, Romania may have impinged upon the FET as the introduction of the EGO 114/2018 appears to have been arbitrary, non-transparent and lacking due process.

Romania is also obliged to avoid discriminatory measures to its foreign investors. Yet, the political discourse seems to be biased against foreign investment. In particular, the leader of the ruling Social Democratic Party (PSD), Mr Dragnea, has publicly attacked multinationals for failing to pay taxes in Romania. Whether the legislation is ultimately aimed at foreign companies, however, remains to be seen.
 

How we can support your business

We can provide you with a thorough analysis of EGO 114/2018 and its implications on your company from an investment protection perspective. This analysis is aimed at providing your business with an optimal, resource-efficient response to the measures adopted through EGO 114/2018, including the plausibility of pursuing an arbitration claim against Romania. Individual impact on your business would need to be determined by an expert.

Our Arbitration Team is uniquely positioned to support your business in securing investment protection and in representing you in arbitration. Having represented investors in numerous cases against states, we are familiar with the positions and strategies typically adopted by states. Moreover, we are experienced in coordinating the often simultaneous work streams and have in-depth economic understanding that allows us to properly present the implications of government measures on your business.

*This analysis is a prima facie assessment of EGO 114/2018 based on a free translation from the Romanian language and on media reports.
 

Dr. Richard Happ Rechtsanwalt Partner richard.happ@luther-lawfirm.com Telefon +49 40 18067 12766

Trinidad Alonso, LL.M. Abogada (Madrid) Associate trinidad.alonso@luther-lawfirm.com Telefon +49 40 18067 12192