Vattenfall and PSE adjust power agreements

The Sepal submarine interconnector cable between Poland and Sweden was established based on a series of contracts in the mid-1990s between Vattenfall and PSE. Vattenfall electricity -- integrated with NordPool -- is essentially hydro-based, Polish coal-based.
In essence, Vattenfall provided the finance and in exchange PSE undertook to purchase on a long-term, fixed-price basis electricity from Vattenfall. These contracts were exposed to considerable pressure from a number of change in the relevant context: Poland needed less electricity than forecast and was actually able to export. The Swedish electricity market was exposed to significant price pressures during to the occurrence of more frequent "dry periods" than originally envisaged.

PSE and Vattenfall recognized that electricity market conditions in the Nordel and UCTE areas have changed substantially since 1995; that Poland's electricity market will be liberalized, according to the Electricity Directive, when Poland joins the European Union; and that interconnectors between EU Member States should allow power to flow from low price areas to high price areas and thereby reduce price differences between the markets on either side of an interconnector. As a result both firms entered into negotiations designed to establish a new, market-responsive contractual framework for ownership and operation of the SwePol Link.
The negotiations were successful and the direction of power flow is now responsive to market conditions and to the differences among spot prices in NordPool, Gielda Energii, and the European Energy Exchange. The completed restructed contractual regimes provide for an increasing share for third-party access for the Interconnector (which, during the drafting of the original contracts, played only a minor role) in line with EU requirements and the need to recoup investments made.

Electricity customers in the Nordic region are already obtaining the benefits of market-responsive operation of the Sweden-Poland interconnector. Because NordPool spot prices during summer 2003 have been significantly higher than summer 2002, Polish power supplies have been needed in the Nordic market. Subject to operating reserve requirements, up to 600 MW of transfer capacity can be made available; for example, maximum power flow from Poland to Sweden on 23 August 2003 was 504 MW. Total daily exchange in the Nordic area is shown on the map at Development of the new contractual framework involved an innovative approach to international contract negotiation. In 2001 and 2002, attempts to implement the 1995 Power Purchase Agreement led to a dispute which might have required one of the parties to initiate an arbitration proceeding before the Arbitration Institute of the Stockholm Chamber of Commerce. However, both parties agreed to participate in a mediation process designed to identify opportunities for a "win-win" situation and to improve business relations between PSE and Vattenfall, rather than damaging those relations in an expensive and time-consuming arbitration process.

Both parties' key concern was to avoid the zero-sum implications, damage to a business relationship with considerable potential plus the cost, management effort and long time likely to be required for arbitration. They valued managerial efficiency and commercial imperatives more than rigid insistence on long-term contracts negotiated under different circumstances.
This attitude contrasts, for example, with protracted litigation over several long-term power contracts in Indonesia and Argentina where results have been long to come in, have been very controversial, have as yet not been able to achieve enforceability and have led to a complete break-down of a possibly profitable long-term business relationship.

Credit for the outstanding success of the mediation effort must be given to Jan Kowalczyk and Maciej Olejniczak at PSE and to Mats Fagerlund and Magnus Groth at Vattenfall. The creativity, wisdom, commercial acumen and perseverance of both PSE and Vattenfall management was frequently demonstrated during the difficult contract negotiations and subsequent ratification of the agreement on principles reached in the high-intensity mediation meetings set up and moderated by Thomas Waelde.
Without these qualities, it is likely they would not have reached a result and the parties would be embroiled, to everybody's loss in an uncertain, protracted and commercially inefficient litigation.

To facilitate this process the two companies, acting jointly, retained a mediation team led by Professor Thomas Waelde of the Centre for Energy, Petroleum & Mineral Law and Policy at the University of Dundee, Scotland. Professor Waelde was supported by Dr Charles F. Zimmermann, Martin Massy and John Chappell, under a contract with Nexant, a leading energy consulting firm headquartered in the United Kingdom.
Dr Zimmermann is a specialist in electricity regulation and transmission pricing. The mediation involved a series of consultations with third parties with influence and impact on the Swepol project itself, among them SwePol, Svenska Kraftnaet, the Swedish and Polish energy regulatory and governmental authorities, and the European Commission. Stephen Horvath, Regional Partner, Eastern Europe, of Dewey Ballantine acted as external counsel for PSE.

An analysis of the benefits of mediation of investment disputes, written by Thomas Waelde, is available online in issue #2 of Oil, Gas & Energy Law Intelligence (www.gasandoil.com/ogel).
A short and sanitised review of this, and other mediation cases, is available in issue # 4 of Oil/ Gas and Energy Law Intelligence (www.gasandoil.com/ogel).