ICSID tribunal finds Spain breached ECT obligations by failing to provide a reasonable rate of return

RREEF Infrastructure (G.P.) Limited and RREEF Pan-European Infrastructure Two Lux S.a r.l. v. Kingdom of Spain, ICSID Case No. ARB/13/30

On November 30, 2018, an ICSID tribunal determined that Spain breached the ECT by retroactively applying a new tax regime and failing to ensure RREEF Infrastructure (G.P.) Limited (RREEF) earned a reasonable rate of return on its solar investments.

Background and claims

In 2007, Spain implemented several laws governing its renewable energy (RE) power generation sector, including Royal Decree (RD) 661/2007. RD 661/2007 guaranteed above-market payments to operators in the RE industry by providing a feed-in-tariff (FiT). Throughout 2011, RREEF made several investments in Spain’s wind and Concentrated Solar Power (CSP) sectors. RREEF owned an interest in five wind farms and three CSP plants, each of which registered under RD 661/2007 to receive FiTs.

In 2012, Spain enacted Law 15/2012, which imposed a 7 per cent levy on all income obtained by generators, including those in the RE industry. Spain amended its RE regulations in 2013 and replaced FiTs with a guarantee of a reasonable rate of return, which turned out to be 7.398 per cent (pre-tax).

As a result of these changes in Spain’s regulatory regime, RREEF filed for arbitration in October 2013, alleging that these regulatory changes violated Spain’s obligations under ECT Article 10(1) to provide legal stability, FET, transparency, nondiscrimination, and proportionality and reasonableness. RREEF also alleged that Spain breached its legitimate expectations.

Applicable legal standards: FET and legitimate expectations apply, but the umbrella clause does not

The tribunal first determined that the FET standard under the ECT is the same FET standard required in international law, and that it includes commitments on transparency, protection and security, non-impairment, nondiscrimination, proportionality and reasonableness. Notably, the tribunal clarified that although the FET standard requires a state to respect the legitimate expectations of an investor, it is not reasonable for an investor to expect that the conditions surrounding its investment will not change at all.

A majority of the tribunal also rejected RREEF’s contention that the umbrella clause of the ECT should apply, which would have brought breaches of contractual obligations within the scope of the ECT. The tribunal found the umbrella clause inapplicable because it requires a contractual obligation between the investor and state, and RREEF had no contractual relationship with Spain.

Commitment to stability in the ECT

RREEF contended that the ECT stability requirement operates as a free-standing obligation whereby states must maintain a stable legal framework for the duration of an investment. In contrast, Spain argued that the stability requirement fits within the broader FET standard of the ECT.

The tribunal noted stability is not absolute and does not equate with immutability absent a clear stabilization clause. The tribunal went on to say that “the obligation to create a stable environment certainly excludes any unpredictable radical transformation in the conditions of the investments” (para. 315). Although RD 661/2007 provided that “a reasonable rate of profitability shall always be guaranteed with reference to the cost of money in the capital markets” (para. 318), the tribunal did not interpret this clause as a firm pledge to not change the conditions of the investment. Instead, the tribunal interpreted it as envisioning future adjustments to the regulatory regime.

The tribunal was thus tasked with determining whether Spain’s regulatory changes amounted to a substantial change and ultimately determined that one particular aspect of case—the retroactive application of RD 661/2007—constituted a breach of this stability principle. To the extent the contested measures applied retroactively by clawing back shareholders’ previously vested rights, the tribunal ordered Spain to pay RREEF appropriate compensation for the damage caused by the breach.

Legitimate expectations

RREEF argued that Spain’s regulatory changes were unpredictable and not in line with RREEF’s legitimate expectations. Spain responded by contending that absent a specific commitment to regulatory stability, investors cannot legitimately expect that a regulatory framework such as Spain’s will not change. The parties agreed that the investors had the burden to prove their expectations were reasonable and objective at the time the investment was made.

In determining whether RD 661/2007 violated RREEF’s legitimate expectations, the tribunal considered whether the regulatory change constituted a drastic and radical change “affecting unexpectedly the conditions of the investments” (para. 379). The tribunal determined that because Spain had guaranteed a reasonable rate of return or reasonable profitability in several laws governing its REI, the only legitimate expectation of RREEF “was to receive a reasonable return for its investment” (para. 386). Crucially, this meant that RREEF could not legitimately expect to receive a fixed rate of return for the duration of its investment, as originally provided through the FiT regime.

Transparency and discrimination

RREEF also alleged that Spain dismantled the RD 661/2007 regime non-transparently and applied the new regime in a discriminatory manner by implementing the 7 per cent levy on RE generators but not installations. Because RD 661/2007 contemplated that an adjustment was possible and Spain made its regulatory changes in public, the tribunal determined that there was no breach of transparency. It also noted that the discrimination claim revolved solely around the 7 per cent tax, and the tribunal had previously determined it did not have jurisdiction to decide tax matters. As a result, the tribunal could not decide the discrimination claim.

Proportionality and reasonableness

Finally, RREEF alleged that Spain did not satisfy the proportionality and reasonableness test, as the new regime imposed an improper burden on RREEF in relation to the benefit sought by Spain, particularly given the alternative measures available. The tribunal determined that a government measure would meet the reasonable and proportional test so long as it was not “random, unnecessary or arbitrary” (para. 460). Because Spain only guaranteed a reasonable return, the majority held that a determination of whether Spain violated the proportionality and reasonableness principles was inseparable from an assessment of damages. As a result, the tribunal next turned to a damages assessment to determine whether RREEF earned a reasonable return after Spain modified its regime.

RREEF earned reasonable return on wind investments

In assessing damages, the tribunal determined Spain must compensate RREEF for 1) damages created by retroactively applying the modified tax and regime and 2) damages to the extent RREEF did not earn a reasonable rate of return following the regime modifications.

RREEF claimed losses of EUR 297 million using a discounted cash flow (DCF) analysis. Spain used an internal rate of return (IRR) approach and claimed RREEF’s losses did not exceed EUR 31 million. The tribunal agreed with Spain’s approach, noting that RREEF should only receive compensation “to the extent that the modifications would have exceeded the limits of what is reasonable” (para. 515).

The tribunal determined that the IRR applied is reasonable if i) it entitles the producers to a return after operating costs; ii) it provides a reasonable benefit, meaning one that is not disproportionate or irrational; and iii) the reasonableness determination is made “with reference to the cost of money in the capital market” (para. 524). Because the IRR of RREEF’s wind farms was 13 per cent and significantly over the cost of money in the capital market, the majority determined that Spain did not violate RREEF’s legitimate expectation of a reasonable return.

RREEF did not earn a reasonable return on solar investments

The tribunal determined that the guaranteed return of 7.398 per cent (pre-tax) on CSP investments under the new regime was equivalent to an IRR of 5.8 per cent (post-tax). Taking into account the Spanish 10-year bond as the risk-free rate of 4.398 per cent, a market risk premium of 5.5 per cent, a beta of 0.455 per cent, a debt/equity ratio of 60/40, and a cost of debt of 3.43 per cent, the majority calculated the weighted average cost of capital (WACC) to be 5.86 per cent. The majority added a risk premium of 1 percentage point to reflect that the “the Claimants had legitimate expectations that the return on their investment would be above the mere level of the WACC since the Respondent attracted investments in the renewable energy sector by raising hope of above-average profits” (para. 587).

The majority concluded that Spain violated RREEF’s legitimate expectations to receive a reasonable return because the WACC of 6.86 per cent on its CSP investments was higher than the IRR of 5.8 per cent guaranteed by the new regime. Spain was thus deemed liable for the difference between the IRR of 5.8 per cent RREEF earned on its CSP investments and the WACC rate of 6.86.


Ultimately, the tribunal found that the damages calculations provided by either party did not adequately represent the actual IRR per project or measure the retroactive damage to RREEF’s shareholders. As a result, it encouraged the parties to find agreement on the damages amount. Failing that, the tribunal stated it would appoint an expert of its own choosing to perform the damages valuation.

Notes: The tribunal was composed of Alain Pellet (president, appointed by the chair of the ICSID Administrative Council, French national), Robert Volterra (claimants’ appointee, Canadian national) and Pedro Nikken (respondent’s appointee, Venezuelan national). The award is available in English at https://www.italaw.com/sites/default/files/case-documents/italaw10455_0.pdf

Gregg Coughlin is a Geneva International Fellow from University of Michigan Law and an extern with IISD’s Investment for Sustainable Development Program.