Investors triumph over Spain in a claim concerning Spain’s regulatory overhaul for clean energy

Eiser Infrastructure Limited and Energía Solar Luxembourg S.à r.l. v. Kingdom of Spain, ICSID Case No. ARB/13/36

In an award rendered on May 4, 2017, a tribunal at the International Centre for Settlement of Investment Disputes (ICSID) ruled that Spain’s new regulatory regime for renewable energy, adopted in the wake of an economic meltdown, breached its obligations under the Energy Charter Treaty (ECT) to accord fair and equitable treatment (FET) to foreign investments. In particular, the tribunal held that Spain “crossed the line” and violated its FET obligation by replacing its regulatory regime by an entirely new one (para. 458).

Background and claims

Aiming at establishing itself as a global leader in clean energy, Spain provided for grants, tax incentives, soft loans and loan guarantees to subsidize new renewable energy investments. Between 2007 and 2011, London-based private equity fund Eiser Infrastructure Limited (Eiser) and its Luxembourg-based subsidiary Energía Solar Luxembourg S.à.r.l. made initial investments of around €126 million in the construction and operation of three thermos-solar power plants in Spain.

However, starting 2008 Spain began to reduce incentives to address a significant tariff deficit as revenue from the state-subsidised prices failed to cover costs, leading to a total elimination of these incentives in solar power sector. It subsequently adopted a new methodology for remuneration based on the amount invested. With the application of the new methodology to existing investments, Eiser’s revenue fell below the value of what was required to cover financing and operating costs or provide a return on investment. On December 9, 2013, Eiser and its subsidiary initiated arbitration against Spain contending that it violated several of its ECT obligations, including the articles on expropriation and FET.

The intra-EU objection

Spain contended that the ECT does not apply to disputes involving investments made within the EU by investors from other EU countries and that therefore the tribunal lacked personal jurisdiction. Spain pointed out that ECT Article 26 on arbitration covers disputes between “a Contracting Party” and “an Investor of another Contracting party,” and argued that as both Spain and the European Union are parties to the ECT, this “inevitably implies the exclusion of the said Article” in intra-EU disputes. Relying on the jurisdictional ruling in RREEF v. Spain, the claimants contended that the ordinary meaning of Article 26 demonstrates that Spain has consented to arbitration of their claims and that the claims fall within the treaty, which contains no exceptions for intra-EU disputes.

The tribunal relied on RREEF and concluded that had there been an implicit exception for intra-EU disputes, it would have been made clear in the text, rather than being a “trap for the unwary” (para. 186). Thus, it concluded that the ordinary meaning of the relevant provisions of the ECT, construed in accordance of the rules of the Vienna Convention on the Law of Treaties, support the claimants’ ability to assert their claims, and dismissed the objection accordingly.

Shareholder claims for damages

Another objection was that the tribunal lacked subject-matter jurisdiction to entertain claims for alleged damage directly incurred by the operating companies in which the claimants held minority shareholdings. Spain argued that shareholders’ claims for alleged damages suffered by companies in which they have invested are barred by public international law and by advanced national systems of commercial law. In response to this, the claimants, relying on the decisions of investment tribunals such as Azurix v. Argentina, contended that the definition of covered investments under the ECT includes both their rights to ownership of their shares and their indirect rights in the assets of the Spanish operating companies. Accepting the claimants’ contention, the tribunal noted that it would account for the value of the companies in which claimants held interests while assessing damages.

No jurisdiction over taxation measures

In December 2012, Spain adopted a law imposing a 7 per cent tax (TVPEE) on the total value of all energy fed into the National Grid by electricity producers. Spain contended that TVPEE was a taxation measure and that under ECT Article 21(1) the tribunal lacked jurisdiction to hear FET claims allegedly resulting from taxation measures.

The tribunal noted that the power to tax is a core sovereign power and that ECT Article 21(1), like corresponding provisions in various other investment treaties, reflects states’ intent to save tax matters from arbitration, save in carefully limited circumstances. Therefore, the tribunal concluded that damages flowing from the TVPEE cannot be considered in any possible award of damages.

The tribunal also accepted Spain’s objection that the claimants failed to refer their claim regarding the alleged expropriatory effect of the TVPEE law to competent tax authorities as required by ECT Article 21(5)(b)(i).

Tribunal finds that Spain breached FET

Taking into account considerations of judicial economy and relying on SGS Société Générale v. Paraguay, the tribunal concluded that the FET claim provided the most appropriate legal context for assessing the complex factual situation and multiple alleged breaches.

Asserting that FET under the ECT is an autonomous standard which must be construed in light of the ECT’s object and purpose, the claimants contended that the drastic regulatory overhaul by Spain defeated their legitimate expectations of stability and the promised characteristics and any possible advantages of the old regime. In response, Spain contended that the claimants could not reasonably expect the freezing of the regime for 40 years, and that they failed to conduct a “proper due diligence” which could have informed them about a potential regulatory shift.

In its analysis, the tribunal acknowledged that the fair and equitable standard does not give rise to a right to regulatory stability per se. However, it clarified that the question here was the extent to which FET under the ECT may be engaged and give rise to a right to compensation as a result of the exercise of a state’s right to regulate.

To determine the extent of FET under ECT, the tribunal distinguished the present case from Charanne BV v. Spain, in which the tribunal rejected the investors’ claims that other changes to Spain’s regulatory regime violated the ECT. It asserted that the factual and legal situations in the two cases are fundamentally different, with the measures challenged in Charanne having only marginally decreased the profitability of investors whereas the measures in the present case created “a new regulatory focus” and were applied in a manner which “eliminated the financial bases” of existing investments (para. 367).

Next, the tribunal agreed with the claimants that in interpreting the FET obligation under the ECT, the interpreters must be mindful of the context, object and aim of the ECT and the agreed objectives of legal stability and transparency. Relying on several investment tribunal decisions, most notably the decision in CMS v. Argentina, the tribunal affirmed that the FET obligation means that “regulatory regimes cannot be radically altered as applied to existing investments in ways that deprive investors who invested in reliance on those regimes of their investment’s value” (para. 382).  The tribunal observed that the claimants were entitled to expect that Spain would not drastically and abruptly revise the regime, in a way that destroyed the investment’s value completely.

Damages and costs

The tribunal agreed with the claimants’ request to use a discounted cash-flow (DCF) analysis in the calculation of damages. It awarded €128 million in lost profits as per the calculations by claimants’, with pre-award interest at Spain’s borrowing rate, 2.07 per cent, compounded monthly from the date of the breach (June 2014), and post-award interest at 2.5 per cent, also compounded monthly.

Notes: The tribunal was composed of John Crook (President appointed by the Chairman of the ICSID Administrative Council, U.S. national), Stanimir Alexandrov (claimants’ appointee, Bulgarian national) and Campbell McLachlan (respondent’s appointee, New Zealand national). The award is available in English and Spanish at

Gladwin Issac is a final year undergraduate student of Law and Social Work at the Gujarat National Law University, India.