Vattenfall vs. Germany: Power Plant Battle Goes to International Arbitration

In the early stages, the tone was still friendly enough. In a letter dated Nov. 22, 2007, Lars Göran Josefsson, the CEO of the Swedish energy giant Vattenfall, thanked Hamburg Mayor Ole von Beust for the "constructive talks." But the days of such niceties are now over.

In April, Vattenfall brought an action against the German government before the International Centre for Settlement of Investment Disputes (ICSID), an institution of the World Bank group based in Washington, DC. The company is charging Germany with violating the Energy Charter Treaty.

The conflict revolves around the issue of the coal-fired power plant being built along the Elbe River in Hamburg's Moorburg neighborhood. The plant's construction is a hotly contested issue in Germany's second-largest city. The company is accusing Germany of illegally standing in the way of its investment plans. Now the international court of arbitration is to rule on the dispute. More than €1 billion ($1.4 billion) is at stake.

In its 27-page complaint, Vattenfall is asking the arbitration body to rule:

that by approving the construction of the power plant, the Hamburg Senate acted in a way that was "incompatible" with international treaties;

that Germany must pay Vattenfall compensatory damages for investment delays of "€1.4 billion plus interest";

and that the German government must assume responsibility for paying all legal and court fees.

In bringing the case, Vattenfall hopes that the international arbitration body will overturn the significant environmental restrictions that have been imposed upon its contested power plant.

The charges have enraged German politicians. "It's really unprecedented how we are being pilloried just for implementing German and EU laws," says Michael Müller, Germany's deputy environment minister and a member of the center-left Social Democratic Party (SPD).

Vattenfall is also currently facing political heat over a recent accident at its Krümmel nuclear power plant in northern Germany.

Germany in the Dock -- Next to Turkmenistan

Vattenfall's opponent in this legal face-off is formally the German federal government, which will be represented by officials from the Federal Ministry of Economics. To represent its interests, the German government has retained the services of a law firm based in Paris. Citing the "confidential nature of the proceedings," German Economy Minister Karl-Theodor zu Guttenberg has refused to comment on the legal standoff in Washington.

But things are a little less tight-lipped in Germany's Foreign Ministry, where people haven't been shy about voicing their bewilderment. How can Germany of all places, they ask, stand accused of being an unreliable business partner for investors? And the fact that Germany is suddenly sitting in the dock with countries like Turkmenistan and Zimbabwe doesn't make things any easier to swallow.

The legal complaint, which has not been made public, is officially known as a "request for arbitration." It is an explosive document. For example, it reveals how an internationally active major corporation evaluates a particular German city government. And it shows just how helplessly and hesitantly city officials can react in their implementation of environmental restrictions.

A Tortured History

The story goes like this: In 2004, after having purchased HEW, Hamburg's long-established electricity provider, from the city, Vattenfall began making plans to build a new coal-fired power plant in Hamburg. At first, the company had planned to build a smaller power plant for heat and energy production on the grounds of an aged gas-and-oil power plant in the city's Moorburg neighborhood.

To the surprise of Vattenfall executives, Hamburg's then-Environment Minister Michael Freytag, a member of the center-right Christian Democratic Union, and Herlind Gundelach, a senior ministry official, suggested that the company build a power plant that was twice as large and that had two generating units putting out approximately 1,600 megawatts of power. As it says in the legal complaint: "Vattenfall accepted Hamburg's suggestion."

Gundelach, who has since gone on to become Hamburg's minister of science and research, disputes Vattenfall's claims and says that plans for a mega-power plant were "jointly" developed with Vattenfall executives. As she remembers it, politicians in Hamburg involved in environmental policies were trying to further expand the district heating network as well as to quickly shut down the antiquated coal-fired power plant in the town of Wedel, which lies just 17 kilometers (11 miles) west of the city.

At the time, the fact that even modern coal-fired power plants emit climate-damaging carbon dioxide was not an issue high on the list of priorities for CDU politicians. But two years later, in 2006, the 700-page Stern Review on the Economics of Climate Change was published and the UN released startling new figures on the environmental effects of global warming. Climate-change skeptics in the CDU and in industry were shocked. All of a sudden, the power plant planned for Moorburg looked like a relic of a bygone age.

All the same, Vattenfall felt that it had the city's tacit approval for the massive project. In the fall of 2006, the company filed the necessary applications relating both to air pollution, as regulated by the Federal Emissions Control Act, as well as to drawing 64.4 cubic meters per second of cooling water out of the Elbe River in accordance with water-protection laws.