{"id":8437,"date":"2021-06-24T08:40:30","date_gmt":"2021-06-24T13:40:30","guid":{"rendered":"https:\/\/cf.iisd.net\/itn\/?p=8437"},"modified":"2024-08-09T18:31:45","modified_gmt":"2024-08-09T16:31:45","slug":"tribunal-rules-in-favour-of-claimants-in-another-spanish-solar-dispute-dissenting-arbitrator-argues-that-tribunal-nonetheless-over-emphasized-spains-right-to-regulate","status":"publish","type":"post","link":"https:\/\/www.iisd.org\/itn\/2021\/06\/24\/tribunal-rules-in-favour-of-claimants-in-another-spanish-solar-dispute-dissenting-arbitrator-argues-that-tribunal-nonetheless-over-emphasized-spains-right-to-regulate\/","title":{"rendered":"Tribunal rules in favour of claimants in another Spanish solar dispute; Dissenting arbitrator argues that tribunal nonetheless over-emphasized Spain\u2019s \u201cright to regulate\u201d"},"content":{"rendered":"

In another renewables case against Spain, an ICSID<\/span> tribunal awarded over EUR 28 million to two subsidiaries of the German company RWE (jointly, RWE). The tribunal dismissed Spain\u2019s intra-EU<\/span> objection to jurisdiction and found it to be in breach of the FET<\/span> standard under Article 10(1) of the ECT<\/span>. The award was rendered on December 18, 2020.<\/p>\n

Background and claims<\/h3>\n

From 1997 to 2007, Spain enacted a set of legislative measures (\u201cinitial measures\u201d), including Royal Decree (RD) 661\/2007, to incentivize the development of the renewable energy sector by way of a special financial regime (\u201cSpecial Regime\u201d). Pursuant to these measures and subject to prior registration, renewable energy generators received a premium or, alternatively, a fixed feed-in tariff (FIT) at an above-market rate for the electricity they produced. Between 2001 and 2011, RWE acquired stakes in four hydroelectric plants and 16 wind farms in Spain to which the Special Regime was applicable.<\/p>\n

In the wake of the 2008 financial crisis, the tariff deficit of the Spanish electricity sector became increasingly unsustainable. To address this deficit, Spain enacted a series of urgent legislative measures (the \u201cdisputed measures\u201d) between 2012 and 2014. It imposed a 7% levy on all income obtained by generators, including those in the renewable energy sector (in law 15\/2012). It also replaced the FITs and premiums of the Special Regime with a guarantee of a reasonable return, which was set at 7.398% before tax.<\/p>\n

In reaction to the disputed measures, RWE filed a request for arbitration with ICSID in December 2014, contending that by enacting the disputed measures Spain had violated Article 10(1) of the ECT. RWE specifically alleged a breach of legitimate expectations, as well as a failure to provide regulatory stability, FET, reasonableness, and transparency.<\/p>\n

Tribunal dismisses Spain\u2019s intra-EU objection but upholds objection to jurisdiction on taxation measures<\/h3>\n

In its first jurisdictional objection, Spain averred that the tribunal lacked jurisdiction ratione personae<\/em>, due to the absence of investors protected under the ECT. According to Spain, contrary to what was required by Article 26 of the ECT, the claimants were not from the area<\/em> of another contracting state, as Germany and Spain had already been EU member states at the time of ratification of the ECT.<\/p>\n

The tribunal dealt with jurisdiction, liability, and some issues of quantum in its decision dated December 30, 2019. In dismissing Spain\u2019s first objection, the tribunal held that the definition of \u201carea\u201d was predicated on individual states rather than the entire EU. Nothing in Article 26 of the ECT suggested that Spain was limiting its consent to arbitration to investors from non-EU countries. Had the EU or EU member states wished to deny access to arbitration for intra-EU disputes, they could have included a disconnection clause in the ECT (quod non<\/em>).<\/p>\n

The tribunal furthermore dismissed the alleged primacy of EU law over the ECT based on the VCLT<\/span> emphasizing the principle of pacta sunt servanda<\/em>. EU law was no lex posterior<\/em> under Article 30 of the VCLT, as Article 16 of the ECT established a rule of non-derogation that applied, as it was more favourable to RWE. Further, the conclusion of the EU treaties did not amount to an implied termination or suspension of the ECT among EU member states under Article 59 of the VCLT.<\/p>\n

The tribunal also sided with the claimants in holding that the Achmea<\/em> judgment had to be distinguished. Contrary to the present case, Achmea <\/em>concerned a BIT<\/span> to which the EU was not a party. In any event, no determination of EU law was required to resolve the dispute.<\/p>\n

Spain also objected to jurisdiction on taxation measures due to the tax carve-out in Article 21 of the ECT. It contended that, pursuant to this provision, the Tax on the Value of the Production of Electrical Energy, and the Levy on the Use of Mainland Waters for the Production of Electrical Energy implemented in 2012 were exempted from the scope of the ECT. The tribunal agreed and declined jurisdiction on these specific measures.<\/p>\n

Spain did not create legitimate expectations but nevertheless breached FET by acting disproportionately, tribunal holds<\/h3>\n

The tribunal concluded that Spain had made no specific commitment to maintain the initial system of remuneration that would have been sufficient to create legitimate expectations. The FET standard in the ECT had to be construed restrictively. To establish legitimate expectations, the burden was on RWE to prove that Spain (1) had made a specific commitment (2) on which RWE de facto <\/em>relied, and that (3) such reliance was reasonable.<\/p>\n

The tribunal did not agree with RWE\u2019s allegation that the initial measures contained a specific commitment that the Special Regime would remain in place. A representation in the form of a domestic law is a norm of general application and could not be elided with a specific promise or contractual commitment. Neither could the administrative registration of the investments. The tribunal also found a lack of evidence that the claimants indeed relied on such a representation, as RWE was aware of the possibility of regulatory changes when making the investments.<\/p>\n

However, Spain had nevertheless breached the FET standard by acting disproportionately. The appropriate test to assess proportionality was whether the regulatory changes were (1) suitable and (2) necessary to achieve the legislative intent, and (3) whether they placed an excessive financial burden on the investors. In applying the test, the tribunal accorded a reasonable margin of appreciation to the state. As to the first condition, the tribunal considered that the disputed measures were suitable, and indeed successful, to address the tariff deficit. Furthermore, in finding the second criterion to be met, it rejected RWE\u2019s claim that other less restrictive means were available to Spain.<\/p>\n

The tribunal nevertheless held that claimants had to bear an excessive financial burden with respect to some plants where the internal rate of return was now well below what Spain itself had decided to be reasonable.<\/p>\n

Claim for failure to afford stable regulatory conditions dismissed<\/h3>\n

According to RWE, Spain\u2019s incremental repeal of the initial measures amounted to a failure to maintain stable regulatory conditions under Article 10(1) of the ECT. Claimants also argued that the dispute measures were retroactive in nature. By contrast, Spain contended that (1) it had maintained the essential elements of previous remuneration models, (2) was permitted to adopt reasonable and proportionate macroeconomic measures based on a public policy, and (3) the disputed measures were not retroactive (paras. 605\u2013609).<\/p>\n

According to the tribunal, the relevant test for violation of the stability commitment was \u201cwhether there has been some form of total and unreasonable change to, or subversion of, the legal regime\u201d (para. 610). To establish such a change, a key question was whether the measure had an \u201cimpermissibly retroactive effect\u201d (para. 613).<\/p>\n

Considering that the new legislation essentially maintained key elements of the initial regime, the tribunal found that the disputed measures did not amount to a violation of stability in general. However, on a specific point, it sided with claimants in finding that the de facto<\/em> request by Spain of a repayment of specific sums already paid by 10 plants was in breach of the FET standard.<\/p>\n

Claims of breach of reasonableness, transparency, and the umbrella clause rejected<\/h3>\n

Agreeing with the approaches taken by the tribunals in AES v. Hungary <\/em>and EDF v. Romania<\/em>, to test reasonableness, the tribunal had to consider whether there was \u201can appropriate correlation between the state\u2019s public policy objective and the measure adopted to achieve it\u201d (para. 644). The threshold for establishing unreasonableness being a high one, the tribunal found the disputed measures to be unreasonable only to the extent that they were also disproportionate. Further, the tribunal rejected RWE\u2019s allegation that Spain\u2019s conduct was in breach of the transparency requirement in Article 10(1) of the ECT. While accepting that this article indeed created a transparency requirement independent of legitimate expectations or stability, the tribunal also noted that the threshold for a transparency claim was a high one. It was an established principle of arbitral case law that a complete lack of transparency was required to amount to a breach of the FET standard. Given that Spain had published draft legislative texts, conducted public consultations, and made responsive changes to the disputed measures, the tribunal did not find a breach of the FET due to a lack of transparency.<\/p>\n

Lastly, the tribunal disagreed with claimants\u2019 allegation that the umbrella clause in Article 10(1) of the ECT did not differentiate between contractual obligations and regulatory measures. In siding with Spain, the tribunal held that a direct consensual link was required to trigger the umbrella clause and that neither the disputed measures nor the registration of the individual plants qualified as such (para. 679).<\/p>\n

No restitution; Damages and costs awarded<\/h3>\n

The tribunal rejected RWE\u2019s request for restitution, stating that this would place a disproportionate burden on Spain and finding that full reparation could be achieved through compensation.<\/p>\n

Moreover, the tribunal dealt with the remaining issues on quantum in its award dated December 18, 2020. With regard to repayments that Spain procured from 10 plants, the tribunal held that claimants were entitled to recover the sums that had actually been paid. It accepted the amount of EU 14.82 million calculated jointly by RWE\u2019s and Spain\u2019s experts.<\/p>\n

With regard to damages for the breach of Article 10(1) of the ECT, claimants submitted that the discounted cash flow (DCF) method was the most appropriate in assessing the loss in fair market value of RWE\u2019s investments. The respondents, in turn, contended that DCF would lead to over-valuation and submitted that the tribunal should apply a method based on the cost of assets, \u201cexamining whether they are recovered and a reasonable return is obtained\u201d (para. 720).<\/p>\n

RWE alleged that the tax shield available to its investments (tax deductions relating to net operating losses, asset impairments, and depreciations) should be taken into account when calculating the damages. The tribunal agreed, stating that it had to seek to \u201creplicate the actual tax situation of the plants.\u201d<\/p>\n

The tribunal held that a qualified DCF method had to be applied. Accordingly, damages should be calculated on the basis of a \u201cbut for\u201d test but with a cap to ensure that no sums were recovered beyond the reasonable return benchmark of 7.398%. It accepted the discount rate of 7.61% that was suggested by RWE\u2019s experts.<\/p>\n

Accordingly, the tribunal awarded around EUR 28 million plus compound interest for losses caused by Spain\u2019s breach of Article 10(1). Furthermore, the tribunal ordered Spain to bear all of the arbitration costs and part of RWE\u2019s legal fees.<\/p>\n

Judd Kessler\u2019s separate opinion<\/h3>\n

In a separate opinion, arbitrator Kessler took the view that Spain had indeed breached RWE\u2019s legitimate expectations and that compensation should have been more substantial. He reasoned that Spain had entered into a specific commitment to maintain the initial regime by according financial incentives to foreign investors on specific terms such as remuneration rates and years of effectiveness. In his view, the case tribunal wrongly put an emphasis on Spain\u2019s right to regulate stating that the situation that gave rise to the dispute had \u201cnothing to do with a limitation on Respondent\u2019s regulatory powers\u201d (para. 61).<\/p>\n

Note: <\/em>The tribunal was composed of Samuel Wordsworth QC (appointed by the Secretary-General of ICSID, U.K. national), Judd Kessler (appointed by the claimants, U.S. national), and Anna Joubin-Bret (appointed by the respondent, French national). The award, dated December 18, 2021, and the separate opinion, dated December 1, 2021, are available at http:\/\/icsidfiles.worldbank.org\/icsid\/ICSIDBLOBS\/OnlineAwards\/C4065\/DS16032_En.pdf<\/a>. The decision on jurisdiction, liability, and certain issues of quantum dated December 30, 2020, is available at: https:\/\/www.italaw.com\/sites\/default\/files\/case-documents\/italaw11004.pdf<\/a>.<\/p>\n

Lukas Schaugg <\/strong>is an International Economic Law Fellow at IISD<\/span> and a Ph.D. researcher in investment law at Osgoode Hall Law School, Toronto, Canada. He holds an LL.M. in international law from King\u2019s College London.<\/p>\n