ENERGY NEWS #29/2016
On 6 June 2016, an ICSID arbitral tribunal chaired by Alain Pellet confirmed its jurisdiction in an investment claim against Spain, stating that – as a matter of principle – EU law cannot “trump” public international law. Will Spain have to pay for its about-face on subsidies for renewable energies after all?
Summary
- In an investment claim brought by RREEF Infrastructure (G.P.) Limited and RREEF Pan-European Infrastructure Two Lux S.à r.l. against Spain the arbitral tribunal, chaired by Alain Pellet, has – on 6 June 2016 – confirmed its jurisdiction to hear the claim. Now the decision on the merits is eagerly awaited.
- In the first two proceedings against Spain under Energy Charter Treaty (ECT), arbitral tribunals have dismissed the investors’ claims on the merits, holding that Spain’s restriction of subsidies for renewable energies did not violate public international law.
Background
In the years before the 2008 financial crisis, both in Spain and in other European countries including the Czech Republic and Italy, statutory frameworks for supporting renewable energies were created to provide incentives for foreign utility companies and promote the expansion of renewable energies. Above all, the frameworks guaranteed fixed feed-in tariffs over a long period. In 2008, feed-in tariffs of 30 ct/kWh were still being guaranteed in Spain for a minimum term of 25 years. To prevent an excessive increase of electricity prices for end consumers, these guarantees on tariffs had to be backed by state subsidies for renewable energy sources.
Owing to the financial crisis and the subsequent sovereign debt crisis, it became impossible for Spain to maintain the high state subsidies. In 2010, the Spanish government decided to retroactively restrict the financial support, limiting it to installations commissioned prior to 2008. At the same time, the total volume of kilowatt hours that could receive financial support was capped, and a grid transmission fee introduced. The aim of these measures was to stop the country from falling still further into debt. The foreign investors affected included German companies such as RWE/Innogy, STEAG and Münchner Stadtwerke. Having invested many billions of Euros, they were now faced with losses running into the millions because of the retroactive change to the subsidies framework.
Based on the Energy Charter Treaty (ECT) concluded on 17 December 1994, which protects investments in the energy sector, a large number of investors raised claims against Spain. The ECT’s signatories include all EU Member States apart from Great Britain, and it allows foreign investors to initiate investor-state dispute proceedings under the arbitration rules of the International Centre for Settlement of Investment Disputes (ICSID), the Arbitration Institute of the Stockholm Chamber of Commerce (SCC) or under the UNCITRAL Arbitration Rules if a host country breaches an ECT provision.
Since 2011, over 30 utility companies and individuals have initiated arbitral proceedings against Spain. In these proceedings, the claimants based their claims mainly on Article 10(1) ECT, which guarantees investors fair and equitable treatment. According to this provision, states are prohibited from arbitrarily and surprisingly changing their regulatory framework in a way that violates the investors’ legitimate expectations of stable and consistent state practice. If a state violates its duty to treat investors fairly and equitably, it is obliged to compensate the investor for the damages suffered.
Procedures to date: advantage – Spain
The first arbitration – conducted under the Arbitration Rules of the SCC – was won by Spain. The claim brought by the Dutch company Charenne and the Luxembourg company Construction Investment was dismissed on the merits on 21 January 2016. Chaired by Alexis Mourre, the arbitral tribunal held that a fundamental change to a subsidy regime is permissible if such change does not put the investor at a disproportionate disadvantage. According to the tribunal, a disadvantage is only disproportionate if unnecessary action is taken that suddenly and unexpectedly changes the subsidy regime. As this was not the case, the investors did not suffer any violation of their right to fair and equitable treatment and were therefore not entitled to compensation. The arbitral tribunal imposed procedural costs of EUR 1.3 million on the investors who had lost the claim.
In a second arbitration against Spain under the SCC Arbitration Rules and chaired by Yves Derains, Dutch investor Isolux Infrastructure Netherlands and Canadian company PSP Investment were also unsuccessful. The investors had not only challenged a reduction of the fixed feed-in tariff but also the introduction of a tax on the operation of solar installations.
Spain’s victory in both these arbitrations might be seen as pointing the way for other arbitral proceedings pending against Spain on this issue. But the rulings were by no means unanimous. Dr. Guido Santiago Tawil, who took part in both arbitrations as an arbitrator, issued dissenting opinions in the claimants’ favour in each proceeding. If other arbitral tribunals were to follow the path of the first two tribunals, the chances of success for claims against Spain under the same circumstances can be considered low.
Is the tide turning in investors’ favour?
A new decision – this time from an ICSID arbitration tribunal – could reverse the direction taken to date in arbitrations against Spain. This decision concerns the claim by RREEF Infrastructure against Spain. While the merits have yet to be decided, the arbitral tribunal, chaired by Professor Alain Pellet has on 6 June 2016 confirmed its jurisdiction to hear the claim. It is noteworthy that the tribunal clearly rejected Spain’s argument that investors from EU Member states cannot bring claims based on the ECT against other EU Member States. The tribunal held that as a general rule European law cannot supersede international law: “EU law does not and cannot “trump” public international law.” In doing so, it had rejected repeated applications by the European Commission to intervene an amicus curiae in order to argue its contradictory position.
Since the decision on the merits is still outstanding, this does not yet represent a genuine reversal in investors’ favour. In times of growing criticism of investor-state dispute settlement as an illegitimate restriction of state sovereignty, applying the standard of fair and equitable treatment will be a delicate matter. The standard primarily applies to situations in which investors have been subject to arbitrary treatment, have been denied fair proceedings, or where legitimate expectations have been frustrated. Lately, however, the application of the fair and equitable treatment standard is being juxtaposed to the states’ right to regulate in the public interest.
It will therefore be interesting to see whether Professor Pellet and his co-arbitrators Pedro Nikken and Robert Volterra will follow the path taken by the two SCC tribunals that considered Spain’s actions to be legitimate, or whether they will come up with their own approach and hold Spain’s amendment of the subsidies regime to be in breach of the fair and equitable treatment standard.
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