The investors, which boast assets totalling $4 billion (around €2.85 billion), chose to be represented by the multinational law firm Allen & Overy, which has formed a working group led by Stephen Jagusch, Arbitration Partner in London. Renewable Energy Magazine caught up with two of this firm’s lawyers – Jeffrey Sullivan, Counsel in London, and Antonio Vázquez-Guillén, Partner in Madrid – to find out what legal action the investors are taking to defend their interests in the Spanish solar PV market after the Spanish government introduced retroactive cuts to the solar feed-in tariff through Royal Decree-Law 14/2010.
According to Sullivan and Vázquez-Guillén, on 8 March, Allen & Overy prepared a so-called "trigger letter"; a formal, written communiqué established in the international Energy Charter Treaty, notifying the Spanish administration of the existence of damages to the aforementioned investors and the possible commencement of legal action.
The Energy Charter Treaty is a multilateral treaty to protect cross-border energy investments, and the investors are in a position to file for arbitration under the Treaty because Spain has been a signatory of the Treaty since 1997, while the applicants (the investors) have made investments within the geographical scope of the Treaty – in this case Spain – and are a citizen or have been incorporated in one of the Signatory States.
Under the terms of the Treaty, the issuance of a trigger letter kicks off a three-month negotiation period, after which the international investors are entitled to initiate arbitration procedures against the State if negotiations are unsuccessful.
No response from Government
Has there been contact with the Government since the letter was sent out? Sullivan says that to date, “the Government is keeping quiet”, and if it does not respond to the trigger letter and engage in negotiations by 8 June, the investors will be entitled to put in a request for arbitration with the International Centre for Settlement of Investment Disputes (ICSID) of the World Bank, the Arbitration Institute of the Stockholm Chamber of Commerce (SCC) or an “ad hoc” arbitration under the United Nations’ arbitration rules, which will lead to the start of the formal arbitration procedure.
Ultimately, the investors will be the ones to decide whether or not to submit the dispute for arbitration, and the State cannot object unless there is a territorial exception, which the lawyers from Allen & Overy believe is not the case.
If the investors chose to go down the arbitration route, Sullivan and Vázquez-Guillén explain that the arbitrators would have to analyse whether or not the State’s action has contravened the requirements of the Treaty such as the obligation of the State to compensate an investor in the event that the State expropriates an investment or takes measures which have a similar impact to expropriation. The Treaty also establishes a series of standards for treating investments, the most relevant being to treat investments “fairly and equally”.
In other words, as a Signatory State Spain is obliged to respect an investor’s reasonable and legitimate expectations of its investment, and ensure the stability of the economic and regulatory framework of the investment. “If an investor has made an investment based on a certain framework and certain economic and financial returns, this framework has to be respected throughout the life of the investment,” say the lawyers.
To look at this differently, does this mean the Spanish government’s retroactive cuts are not permitted under the Treaty? Sullivan and Vázquez-Guillén explain that the regulatory framework established by Royal Decree 661/2007 (under which the investors initially opted to finance PV projects in Spain) defined two concepts: a feed-in tariff for a period of 25 years and then 80% of this feed-in tariff from year 25 onwards for the life of the facility. “These are the economic and financial conditions on which the investment was established”, explain the lawyers. “What was being bought was state risk, country risk. It's much like if you buy treasury bills, with an economic framework for a certain period and interest rate. It would not be logical, reasonable or consistent with the principle of ensuring the stability of the regulatory framework if by the third or fourth year of investing in treasury bills I were to be told that the interest rate had changed from that agreed. By introducing a cap on the number of hours during which the PV feed-in tariff can be earned, Royal Decree-Law 14/2010 changes the economic regulatory framework affecting the investment established in 2007, which was the one on which the investors based their decision to invest in solar PV plants in Spain rather than invest in something else.”
Compensation and even amendment to RDL possible
Sullivan and Vázquez-Guillén therefore estimate that should arbitrators conclude that the Spanish government’s changes to this regulation do not comply with the Energy Charter Treaty and have damaged investors, it would be not only liable to pay the investors compensation, but may also mean the Government has to eliminate the regulatory action causing the damage, otherwise they would be in breach of international law.
In effect, going to arbitration under the Energy Charter Treaty is a way of announcing that a state has breached its international obligations, while at the same time enabling foreign investors to receive compensation, but what about Spanish investors who have been also seen the returns on their investments in solar PV damaged by Royal Decree-Law 14/2010?
“We are not assessing the legality or illegality of the regulation,” say the lawyers. “What we are looking at is whether or not a State has fulfilled its obligations under international law… under the Energy Charter Treaty, because had this Treaty not been in place and Spain had not been a signatory, many of these investments would not have been made in Spain. It is a framework that protects international investors. This type of treaty ensures international investments flow by promoting and protecting foreign investment.”
Thus, Spanish investors would not be entitled to compensation; however, the lawyers from Allen and Overy reveal that the arbitration could go beyond just fixing an indemnity for the investors, and may even result in the Spanish government having to amend Royal Decree-Law 14/2010, which would benefit Spanish investors in the long run.
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