In an award dated 4 May 2017 (publicly available in Spanish only) issued in Eiser
Infrastructure Limited and Energia Solar Luxembourg S.à.r.l v The Kingdom of
Spain (ICSID Case No. ARB/13/36), an arbitral tribunal found that Spain’s
legislative changes in the renewable energy sector adopted in 2013 breached its
obligations under the Energy Charter Treaty (ECT) to accord fair and equitable
treatment (FET) to foreign investments. This is the first publicly available
award in a string of investor-State arbitrations arising from Spain’s sweeping
legislative changes enacted in 2013. In 2016 another arbitral tribunal ruled in Charanne B.V. and Construction Investments S.à.r.l v
Kingdom of Spain that less intrusive changes enacted in 2010 did not
breach Spain’s ECT obligations.
Background
Eiser Infrastructure Limited, a British private equity fund,
and Energia Solar Luxembourg S.à.r.l., a company incorporated in Luxembourg,
made initial investments of around 124 million Euros in the development of
three concentrated solar power (CSP) plants in Spain. The investments were made
under a legal regime adopted by Spain in 2007 offering a number of subsidies to
generators of solar energy. Based on that legal regime, the investors obtained
financing for the initial capital costs of their investments. The claimants’
operating companies raised 640 million Euros for the three CSP plants.
The exceptionally high uptake of the incentives by renewable
energy investors led to a tariff deficit that the Spanish government opted to
address through a series of legislative measures. Effective from June 2014,
Spain replaced the entire legal and economic regime applicable to the renewable
energy sector. Under the new legal framework, Spain abandoned the old tariff
regime in force at the time the investors made their investment. The new
remuneration system was based on a hypothetical investment taking into account
the operational costs and characteristics of a model “efficient” plant. The new
system did not take into account actual costs, including debt servicing costs,
or the actual volume of electricity generated by the CSP plants designed,
financed and built under the old system. Instead, the existing solar plants
were remunerated based on their production capacity and regulatory estimates of
hypothetical capital and operational costs per unit of production capacity in a
hypothetical installation. Subsidies paid under the old legal regime were
creditable against the remuneration payable under the new regime, which allowed
the recovery of “excess” amounts received under the old tariff regime. The new
regime also fixed a regulatory useful life for solar plants.
The elimination of the old legal regime triggered nearly 30
investment arbitrations under the ECT. Amongst others, the claimants in these
cases submitted that the elimination of the 2007 legal regime was in breach of
Spain’s ECT obligation to accord FET to their investments. The claimants
demanded compensation, arguing that the new legal regime destroyed the total
value of their investments in the three CSP plants.
Decision
The tribunal found that the drastic legislative changes
adopted by Spain in 2013 and 2014 reduced the anticipated revenues of one of
the investors’ plants by 66% and, given the high leverage rate of the overall
investments, such reduction had seriously affected their investments. The
tribunal noted that Spain’s new regulatory approach, applicable retroactively
to existing CSP plants, effectively meant that the investors should have taken
different design and investment decisions in the past. For example, the new
regime did not accommodate subsidies for plants with high development costs
yielding a larger annual production capacity, because these plants would not
meet the new efficiency requirements of a hypothetical model plant.
The tribunal noted that Spain replaced a favourable
regulatory regime with an entirely different regime, which was profoundly
unjust and inequitable to the claimants’ existing investments and effectively
deprived them of the entire value of their investments.
The tribunal recalled that the Charanne tribunal
had held that “an investor…has the legitimate expectation that, upon amending
the existing regulation on the basis of which the investment was made, the
State does not act unreasonably, contrary to the public interest or disproportionately”
and that the proportionality requirement is in principle satisfied so long as “the
changes are not capricious or unnecessary and do not result in the
unpredictable and sudden removal of the essential characteristics of the
existing regulatory framework.”
Whilst the tribunal recognized that Spain was facing a
legitimate public policy issue in addressing its tariff deficit in the
renewable energy sector, it held that Spain was also under an obligation to
deal with the situation in a manner consistent with its ECT obligation to
accord FET to foreign investors. Taking into account the context and the object
and purpose of the ECT, the tribunal concluded that the FET obligation “necessarily
entails an obligation to provide fundamental stability of essential
characteristics of the legal regime which the investors relied upon in making
long-term investments. […] [the FET obligation] means that regulatory
regimes applicable to existing investments cannot be radically modified in a
manner which deprives the investors who invested on the basis of the said
regimes of the value of their investment."
The tribunal accepted the discounted cash flow method for
the valuation of the claimants’ damages, but agreed to calculate such damages
only on the basis of a 25-year useful life of the installations. Accordingly,
the tribunal awarded the claimants total damages of 128 million Euros plus
interest.
Comment
Whilst arbitral tribunals, being ad hoc bodies,
are not bound by previous decisions rendered in other cases, it is generally
accepted that, in the absence of compelling contrary grounds and subject to the
particular circumstances of each case, tribunals adopt solutions consistent
with prior decisions. The Eiser decision confirms that the regulatory
powers of host States are not absolute and that drastic legislative changes
should factor into the State’s international law obligations, including under
any bilateral or multilateral investment agreements concluded by it. It remains
to be seen to what extent this decision will be followed by the various
tribunals charged with adjudicating the renewable energy investors’ claims in
the other pending cases against Spain.
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